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August 13, 2021

PE Watch|Latest developments and trends, August 2021


Update to transfer pricing country profiles

On 3 August 2021, the Organisation for Economic Co-operation and Development (OECD) published updated transfer pricing (TP) country profiles reflecting the current TP legislation and practices of 20 jurisdictions. In this update, 3 new jurisdictions were added (Angola, Romania, Tunisia) and 17 jurisdictions were updated (Argentina, Australia, Colombia, Costa Rica, Czech Republic, Denmark, India, Japan, Netherlands, New Zealand, Nigeria, Norway, Russia, Slovak Republic, Spain, Switzerland, Turkey). Among other items, the TP country profiles now include two questions in relation to permanent establishments (PEs), namely: (i) whether the jurisdiction follows the Authorized OECD Approach (AOA) for the attribution of profits to a PE; and (ii) whether the jurisdiction follows another approach for the attribution of profits to a PE.

Currently, the TP country profiles cover 60 jurisdictions and the OECD expects to conduct updates in batches during the second half of 2021 and the first half of 2022.

PE developments in response to COVID-19

Hong Kong: Guidance on COVID-19 and PEs

On 28 July 2021, the Hong Kong Inland Revenue Department (IRD) published guidance on tax issues arising from the COVID-19 pandemic. The guidance is generally in line with the updated guidance on tax treaties and the impact of the COVID-19 pandemic released by the OECD in January 2021 and should be read together with the Commentaries on the OECD Model Tax Convention (MTC).

The guidance includes a section on PEs and states that the IRD has a flexible approach to determine the existence of a PE. Hence, the employees working temporarily from home because of COVID-19 should not create a PE for their employers. Likewise, the temporary conclusion of contracts in the home of employees or agents should not create a PE. However, a different outcome may be determined if the employee or agent were concluding contracts in their home jurisdictions before the COVID-19 pandemic.

The above guidance applies to cases during the COVID-19 pandemic when public health measures are in effect. Otherwise, an examination of the facts and circumstances would be required to determine the existence of a PE.

PE domestic law

Maldives: Update to the PE definition

On 20 July 2021, the First Amendment to the Income Tax Act (Law No. 15/2021) was issued. Among other items, the Law updates the PE definition as follows: (i) reducing from six months to 90 days the construction PE threshold and the anti-contract splitting rule; (ii) broadening the PE definition to include the exploration, extraction and exploitation of natural resources if such activities last more than 90 days; (iii) broadening of the PE definition to include the installation or use of substantial equipment under a contract or agreement for more than 90 days; and (iv) removing the list of preparatory or auxiliary activities.

Further, the Law also includes that royalty payments made by the PE for the use of patents or other rights are not deductible. Likewise, commission payments made by the PE for the provision of specific services are not deductible.

Spain: Approval of Anti-Tax Fraud Law

On 10 July 2021, the Spanish State Official Gazette published Law 11/2021 (Anti-Tax Fraud Law) which includes a number of amendments to the Spanish tax provisions aimed at aligning provisions with the European Union (EU) Anti-Tax Avoidance Directive (ATAD) I. Among other amendments to the Spanish controlled foreign company (CFC) rules, foreign PEs held by Spanish tax resident companies are now included in the scope of CFC provisions. PEs located in the EU and the European Economic Area may be able to claim the application of the safe harbor provision if they have actual business activity. Also, the exit tax rules are amended to include the transfer of the activity of a PE in the Spanish territory to another Member State as a new exit tax scenario, again in line with ATAD I provisions.

PE case law

Spain: Court decision on whether a Swiss entity has a PE in Spain

Recently, case SAN 1879/2021 was published by the Spanish National High Court. This case addresses the existence of a PE in Spain of a Swiss company. In this case, three subsidiaries in Spain performed manufacturing activities, services, and distribution activities for a related party in Switzerland. The Spanish tax authorities considered that the Swiss entity had a fixed place of business and an Agency PE in Spain. According to the Spanish National High Court, the key considerations to determine the existence of a PE in Spain are found in the service agreements between the Spanish entities and the Swiss entity, including the following, whether: (i) the Spanish subsidiaries have exclusive operations with the Swiss entity; (ii) the Spanish subsidiaries are producing goods under the instruction of the Swiss entity; (iii) the Swiss entity has used the facilities of the Spanish entities; (iv) the Swiss entity owns all raw materials and products; and (v) the Swiss entity bears all the risks.

After determining the existence of a PE in Spain, the Spanish National High Court confirmed the appropriateness of the attribution of profits to the Spanish PE made by the Spanish tax authorities through an indirect method for all the income obtained in Spain and abroad, since the Swiss entity had not provided accounting information on their Spanish operations.

United Kingdom: Court decision on whether a UK taxpayer is resident in the US as well as whether the UK taxpayer in question has a PE in the US

On 8 June 2021, the First-tier Tribunal Tax Chamber of the United Kingdom (UK) gave its judgment regarding a case with PE implications ([2021] UKFTT 210 (TC)). The case considered the operation of the residence article in the UK-United States (US) tax treaty as well as whether the UK company in question was carrying on business in the US through a PE.

In this case, the UK tax-resident company and a US corporation were partners in a Delaware limited partnership. The UK company and the US corporation were regarded as "stapled entities." Under US tax law (subject to any exemption), if a domestic corporation and a foreign corporation are stapled entities, the foreign corporation is to be treated as a US domestic corporation. Accordingly, the UK company was liable to US tax on its worldwide income due to the staple.

The issue for the Tribunal to determine was whether the staple shares had the effect that the UK taxpayer was a resident of the US for the purposes of Article 4 (residence) of the UK-US tax treaty. If the answer to this issue was negative, the Tribunal was asked to determine if the UK taxpayer was carrying on business in the US through a PE.

On the residence issue, the Tribunal ruled that the UK company was not considered a resident of the US for the purposes of Article 4. The Tribunal held that the term "any other criterion of a similar nature" used in Article 4 required a "connection" or "attachment" to the state, and the staple demonstrated connection to the US corporation not the country concerned (the US). The UK company was therefore not resident in both the UK and the US for the purposes of Article 4(1) and did not fall within the provisions of Article 4(5). As such, it could not benefit from the treaty provisions providing relief in the UK for tax paid in the US. The Tribunal also rejected the taxpayer's alternative ground for claiming foreign tax credit under the treaty – that it was carrying on a business in the US through a PE. In finding this, the Tribunal considered the degree of activity as a whole, particularly the lack of participation in the strategic decisions of the limited partnership by the directors of the UK company.

PE tax rulings

Denmark: Ruling assessing the existence of a PE for activities in a railway network

On 1 July 2021, the Danish Tax Council published a binding ruling on the creation of a PE in Denmark for a foreign corporate entity on the basis of various contracts entered into with Danish companies to carry out work on the Danish railway network. The work was carried out by employees of the foreign corporate entity, and all the contracts had different durations entailing a varying number of annual working days in Denmark. Whereas most of the contracts did not cause the creation of PE in Denmark for the foreign corporate entity, one contract triggered a Danish taxable presence in the form of a PE. The Tax Council confirmed that the income and expenses from the contracts that were not considered to create a PE should not be included in the taxable income of the Danish PE as triggered by that contract.

The key consideration for assessing that the relevant contract should create a PE in Denmark was the permanency of the work to be carried out under the contract, and the fact that the Danish railway network should be regarded as a (fixed) place of business. The contract was expected to result in 296 working days in Denmark over the contract period (four years), and the Danish Tax Council ruled that the time required for a PE was met due to the recurring nature of the activities in Denmark regardless of the fact that any continuous presence was expected to last less than 75 days a year. Further, the Danish Tax Council ruled that the Danish railway network should constitute a single geographical and commercial unit, and thus the Danish railway network should constitute a (fixed) place of business.

Peru: Ruling clarifying whether a Peruvian entity changing its residence abroad may create a PE in Peru

On 15 June 2021, Peru's National Superintendency of Customs and Tax Administration published ruling N 040 -2021-SUNAT/7T0000 whereby it clarifies whether a Peruvian entity that changes its residence from Peru to a foreign jurisdiction for corporate law purposes would create a PE in Peru. In this case, a Peruvian entity changed its residence abroad but it kept its assets, liabilities, and operations in Peru. According to the ruling, any entity incorporated in Peru that changes its residence abroad without going through a liquidation process and keeps its assets, liabilities and operations in Peru would still be considered a person for corporate income tax purposes in Peru. The ruling also provides that a PE only exists for persons incorporated abroad. Consequently, in the case at hand there would not be a PE in Peru since the Peruvian entity is still considered to be resident in Peru.

Ukraine: Tax ruling clarifying the PE definition in some tax treaties

On 13 July 2021, the State Tax Service (STS) of Ukraine published Individual Tax Ruling (ITR) no. 2745/I?K/99-00-21-02-02-06 to clarify the PE definition in the tax treaties with Italy, Romania, and Switzerland. According to the ITR, although Article 5 (PE) of the tax treaties does not define the term ''fixed place of business'' and ''business,'' Article 3 (Definitions) of the tax treaties provides that any term not defined therein has the meaning under the law of the respective jurisdiction applying the tax treaty. Further, the ITR also touches on the Commentaries of the OECD MTC and other peculiarities of the PE definition in these tax treaties. The STS also pointed out that the lists of the types of places of business that constitute a PE for tax treaty purposes are not exhaustive.

The ITR is issued on a case-by-case basis and can only be used by the taxpayer who requested it. Other taxpayers cannot rely on the ITR provisions but they can use it for informational purposes.

Other PE developments

Hong Kong: Internet businesses should comply with business registration requirements

On 19 July 2021, the IRD published a notice on its website clarifying that internet businesses should also comply with the business registration requirements. According to the notice, a person carrying on business in Hong Kong through the internet needs to apply for business registration. To ascertain whether the activities carried out through the internet constitute the carrying on of a business in Hong Kong, the IRD will gather details of the relevant activities, including: (i) procurement and promotion of goods; (ii) solicitation of buyers; (iii) delivery of goods; and (iv) settlement of sales proceeds. Failure to comply with the business registration may result in prosecution being brought against the person concerned.

United Nations: Report on the twenty-second session of the Committee of Experts on International Cooperation in Tax Matters

Recently, the United Nations (UN) published the report on the twenty-second session of the Committee of Experts on International Cooperation in Tax Matters held on 19-28 April 2021. Among other items, the report confirms that the 2021 version of the UN MTC will be released later this year.

This update will include that the registration for value-added tax or goods and services tax is irrelevant for the purposes of the interpretation and application of the PE definition in the UN MTC. Also, the update brings some changes to the Commentaries of the PE provision such as editorial corrections, e.g., updating the references to the Commentaries on the OECD Model Tax Convention. In addition, the Secretariat of the Committee invited the next membership of the Committee to consider the remaining technical issues with respect to article 5(6) of the UN MTC (insurance PE), i.e., removing the carve -out for reinsurance in article 5(6) of the UN MTC.

The next session of the Committee of Experts on International Cooperation in Tax Matters will be held on 19-22 October 2021.


For additional information with respect to this Alert, please contact the following:

Ernst & Young Belastingadviseurs LLP, Rotterdam

Ernst & Young Belastingadviseurs LLP, Amsterdam

Ernst & Young Solutions LLP, Singapore

Ernst & Young LLP (United States), Global Tax Desk Network, New York