Rethinking the concept of permanent establishment in the digital economy: comparative legal analysis and proposals for tax reform

The paper examines the modern transformation of the concept of permanent establishment (PE) in the context of the digital economy. It reveals the historical evolution of approaches to defining PE in international tax law and analyzes methods of profit attribution in accordance with the OECD Model Tax Convention, in particular the arm’s length principle and the functionally separate entity approach. Special attention is paid to the challenges posed to the classical PE model by the rapid development of digital business models, which enable non-residents to generate substantial income in foreign jurisdictions without physical presence. The study highlights the approaches of the OECD, the European Union, and individual countries in addressing the taxation of digital companies, including the introduction of the concept of significant digital presence and the digital services tax. The national tax legislation of Ukraine is analyzed in terms of PE regulation, with its limitations identified in light of digitalization. The paper substantiates the need for legislative reform to ensure tax fairness and fiscal sovereignty. It proposes criteria for determining digital PE, such as income thresholds, number of users, and number of online contracts. Recommendations are provided on the implementation of international initiatives, updating transfer pricing approaches in the digital dimension, and introducing reporting requirements for global digital companies. The findings have theoretical and practical value for modernizing tax regulation in Ukraine.

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Publication Details

Journal
Economics Finances Law
Published
2025-07-30
DOI
https://doi.org/10.37634/efp.2025.7.1
Primary Topic
Corporate Taxation and Avoidance
Type
article
Field-Weighted Citation Impact
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article

Rethinking the concept of permanent establishment in the digital economy: comparative legal analysis and proposals for tax reform

Олександр Олександрович Бобошко
Economics Finances Law
Corporate Taxation and Avoidance
article

Rethinking the concept of permanent establishment in the digital economy: comparative legal analysis and proposals for tax reform

Олександр Олександрович Бобошко
article en

Abstract

The paper examines the modern transformation of the concept of permanent establishment (PE) in the context of the digital economy. It reveals the historical evolution of approaches to defining PE in international tax law and analyzes methods of profit attribution in accordance with the OECD Model Tax Convention, in particular the arm’s length principle and the functionally separate entity approach. Special attention is paid to the challenges posed to the classical PE model by the rapid development of digital business models, which enable non-residents to generate substantial income in foreign jurisdictions without physical presence. The study highlights the approaches of the OECD, the European Union, and individual countries in addressing the taxation of digital companies, including the introduction of the concept of significant digital presence and the digital services tax. The national tax legislation of Ukraine is analyzed in terms of PE regulation, with its limitations identified in light of digitalization. The paper substantiates the need for legislative reform to ensure tax fairness and fiscal sovereignty. It proposes criteria for determining digital PE, such as income thresholds, number of users, and number of online contracts. Recommendations are provided on the implementation of international initiatives, updating transfer pricing approaches in the digital dimension, and introducing reporting requirements for global digital companies. The findings have theoretical and practical value for modernizing tax regulation in Ukraine.

Economics Finances LawVol. 7/2025(-)
Leonid Yuzkov Khmelnytskyi University of Management and Law (UA)
Openalex Percentile: Top 65%
Corporate Taxation and Avoidance
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