More on Services PEs--What Is a Connected Project?

From the earliest days of tax treaties, it was agreed generally that business profits earned by a resident of one state in another state would be taxed in the source state only if the resident earned those profits through a permanent establishment (PE) in that source state. Until the 1970s, a PE generally meant an actual, physical, establishment. Starting in 1969, the United Nations started to consider the possibility of expanding the "permanent establishment" concept to include the mere provision of services for a certain length of time. In most (although not all) cases, treaties that contain such an expansion require that the services be provided in respect of a project or a "connected project." This article attempts to analyze the history, purpose, and meaning of the term "connected project." The article concludes that the connected project requirement serves two separate but related purposes: (1) to limit a source state's right to tax profits earned from the provision of services, and (2) to prevent foreign residents from splitting up and shortening service contracts artificially so as to avoid providing services for the period of time required under the treaty to create a PE.