Navigating Permanent Establishment Rules for Natural Resource Industries: 2025 OECD Guidelines

By Linda Peter Director Tax and Yulanda Mello, Junior Consultant

The OECD’s 2025 update introduces significant changes to how Permanent Establishments (PEs) arise in natural resource activities. These updates broaden the rules and, in some cases, lower the threshold for creating a PE, directly affecting enterprises involved in exploration or extraction  across borders, both onshore and offshore. These changes are particularly relevant for multinational companies operating in multiple jurisdictions.

Under Article (5), subparagraph (f), a PE includes mines, oil or gas wells, quarries or any other place of extraction of natural resources. The term ‘any other place of extraction of natural resources’ is broad enough to include all places of extraction of hydrocarbons, whether onshore and offshore.

The offshore activities include  operations within a Contracting State’s internal or archipelagic waters, its territorial sea, and areas beyond where it holds sovereign rights with respect to the seabed and subsoil and their natural resource.

The onshore activities encompass specialised services related to exploration or exploitation (such as installing mining infrastructure, engineering, consultancy, or seismic surveys). Generic services (such as catering, utilities and standard deliveries) are excluded, even if performed on-site.

Paragraph 48 clarifies that subparagraph (f) does not explicitly cover exploration activities. Whether exploration income creates a PE is generally governed by paragraph 1, but Contracting States may agree bilaterally on specific rules: exploration may not create a PE, may create a PE, or may create a PE if it lasts longer than a specified period.

Historically, income from extraction of natural resources considered as business profits rarely created a PE under paragraph 1, particularly for offshore activities as these are typically short-term and may not take place at a geographically fixed place of business. However, the alternative provision changes this position by introducing a time-based test.

The Alternative Provision 

The OECD 2025 updates introduces an optional, free-standing alternative provision (paragraphs 170–203), which sets a lower PE threshold for non-resident enterprises carrying out relevant activities for more than a bilaterally agreed period (typically 30 to 180 days within any twelve-month period).

Key features:

• The provision applies to both onshore and offshore activities, and includes related services performed “in connection with” these activities, but specifically excludes auxiliary functions such as transportation, towing, anchor handling, and vessel operations.
• The duration threshold for creating a PE must be agreed upon bilaterally.
• There is no anti-contract splitting rule. However, periods of substantially similar activities carried out by closely related enterprises are aggregated, even if performed at different locations or under separate contracts.

Once a PE is established, the source State may tax profits attributable to that PE, while the residence State will provide relief from double taxation. 

Conclusion

The alternative provision broadens the circumstances under which a PE can arise. Entities engaged in natural resource activities should closely review treaty thresholds to ensure effective tax compliance. 

Should you require any assistance regarding the treatment of permanent establishment, do not hesitate to contact BDO Tax Services.