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4.3. PE Force of Attraction Principle

Under domestic law, taxable income of local branches is, as a general rule, determined on the basis of separate accounting. Income attributable to a PE is that resulting from specific activities conducted directly by the PE in Argentina or abroad. As a result, Argentine-source income as well as foreign-source income would be included in the PE’s taxable base to the extent it is attributable to the PE (i.e. income and losses are generated through the direct or indirect intervention of the PE).

This effective connection rule is also adopted in certain tax treaties signed by Argentina. In fact, as a general rule, Argentine treaty law follows the OECD Model Convention rules on attribution of profits to a PE. As a result, if a foreign enterprise has a PE in the other contracting State, such other State may tax the foreign enterprise but only on the amount of the profits that are attributable to the PE. In other words, only the profits made through the activities of a PE are taxable in the country where the PE is situated.

However, some Argentine tax treaties adopt “limited force of attraction” rules (e.g. Australia, Belgium, Canada, Denmark, Spain,  Finland, Norway, Netherlands, Russia, and Sweden). Under these rules, income deriving from the sale of goods identical or similar to those sold by a PE, as well as the performance of activities identical or similar to those performed by a PE, would be attributed to that PE.  Notwithstanding this, it could be argued that based on a more favorable rule under domestic law, the treaty force of attraction rule must be disregarded in a treaty setting.