The Ripple Effect of Donroy Ltd. v. United States on Permanent Establishment in Tax Law

The Ripple Effect of Donroy Ltd. v. United States on Permanent Establishment in Tax Law

In the realm of tax law, few cases have had as enduring an impact as the Ninth Circuit’s ruling in Donroy Ltd. v. United States. This 1962 decision profoundly shaped how permanent establishments (PE) are understood, particularly regarding partnerships and their foreign partners. Here, we delve into the specifics of the case, exploring how the U.S. office of a partnership is attributed to limited partners, the factors considered by the court, and the broader implications for tax law.

Background of the Case

Donroy Ltd. v. United States. addressed whether a Canadian corporation, as a limited partner in a California partnership, had a permanent establishment in the U.S. according to the 1942 U.S.-Canada income tax treaty. The central issue was whether the partnership’s U.S. office could be considered a permanent establishment of the foreign limited partners, potentially subjecting them to U.S. income tax.

Key Legal Evaluations
  1. Attribution of Permanent Establishment

    The court concluded that the U.S. office of a partnership is attributable to both general and limited partners. This attribution means that, under U.S. law, foreign partners are treated as if they are engaged in business in the U.S. through this PE, regardless of their direct involvement.

  2. Agency and Independence

    One critical factor was whether a general partner qualifies as an independent agent. The court held that general partners do not serve as independent agents for limited partners concerning the partnership’s U.S. operations, thus attributing the PE to the limited partners.

  3. General vs. Limited Partners

    The court distinguished between general and limited partners, noting that while general partners have active management roles, limited partners do not control the partnership’s business. However, for tax purposes, both are considered to have a PE if the partnership does.

  4. Tax Treaty Interpretation

    The court interpreted the 1942 U.S.-Canada tax treaty to mean that a partnership’s office itself could constitute a PE for foreign partners. This interpretation aligns with the principle that the activities of a partnership extend to its partners.

  5. Influence on Subsequent Case Law

    The ruling in Donroy has been pivotal in several subsequent decisions:

    • Johnston v. Commissioner: This case reinforced that a partnership’s permanent establishment could also be deemed that of its partners.
    • Unger v. Commissioner: Echoed Donroy’sreasoning, noting that the partnership’s PE in the U.S. also applies to foreign limited partners.
Factors Leading to the Court’s Decision

The court examined multiple factors, such as the nature of the partnership, the role of partners, and the specifics of the U.S.-Canada treaty. The analysis focused on the operational realities of the partnership and its alignment with treaty definitions of a PE.

Broader Implications for Tax Law

Donroy has significantly influenced how partnerships are treated under U.S. tax law, particularly in the context of international tax treaties. It underscores the principle that both general and limited partners can be deemed to operate a U.S. PE if the partnership itself operates one, affecting their tax liabilities in the U.S.


Donroy Ltd. v. United States. remains a cornerstone case in tax law, essential for understanding the implications of partnership operations on foreign partners’ tax obligations in the U.S. Its legacy is evident in its extensive citation in later cases and its role in shaping treaty interpretations and tax policy.

The decision in Donroy illustrates the complexity of tax law, especially in a global context, and emphasizes the need for foreign partners to carefully consider their involvement in U.S. partnerships. This case serves as a crucial reference point for legal professionals navigating the intricacies of international tax law and partnership agreements.