Due to the increasing activity from international corporations across borders, tax rules are at risk of being exploited in the form of profit being moved to low or no-tax locations. In response the OECD initiated a 15-point plan to stop international tax evasion. The Inclusive Framework on Base Erosion and Profit Shifting (the BEPS-project) has brought massive changes to the existing OECD Model Tax Convention, more specifically the rules governing permanent establishments.

The new anti-fragmentation rule in art. 5.4.1 aims to address situations where a corporation has divided its activities in order to avoid taxation in the source state. In accordance with the new provision, the list of exceptions in art. 5. 4 is no longer applicable if the combined activity in the source states is of more than preparatory or auxiliary character. Previously this rule has only been applicable if one single company used fragmentation to avoid source state taxation, but now the provision can be used in a wider spectrum. Companies now only have to be closely related in order to fall under the jurisdiction of art. 5.4.1. In addition, the exceptions of art. 5.4 is now required to be of only preparatory or auxiliary character in order for the provision to be applicable.

According to the Danish selskabsskatteloven art. 2.1.a all income that can be related to a permanent establishment in Denmark must be taxed there. The definition of a permanent establishment is interpreted in accordance with the OECD Model Tax Convention and its commentary. This is verified through jurisprudence and administrative practice. The legality of this practice has been widely discussed, and the extend of the prohibition in art. 43 of the Danish constitution, by which it is illegal to delegate tax legislation matters to others than the Danish parliament, is uncertain.

In conclusion the changes provided by the BEPS-project regarding permanent establishment are too great for the Danish court to interpret the Danish rules in accordance with the new Model Tax Convention. In order for the Danish provisions regarding permanent establishments to be interpreted as it has been the last many years, a law implementation is required. Until then the term must be interpreted in accordance with the OECD definition prior to the BEPS-project.