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October 14, 2021

PE Watch | Latest developments and trends, October 2021


Namibia signs the MLI

On 30 September 2021, the OECD announced that Namibia signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI). With respect to the preliminary Permanent Establishment (PE) provisions of the MLI, Namibia chose to apply all of them. The definitive MLI positions for Namibia will be provided upon the deposit of its respective instrument of ratification, acceptance or approval of the MLI.

Andorra and Spain deposit instrument of ratification of the MLI with the OECD

On 28 and 29 September 2021, Spain and Andorra deposited their instrument of ratification of the MLI with the OECD, respectively. Both jurisdictions confirmed their preliminary positions regarding the PE provisions. Accordingly, Andorra chose not to apply any of the PE provisions and Spain chose to apply all PE provisions of the MLI except Article 14 (splitting up of contracts). The MLI will enter into force for both jurisdictions on 1 January 2022.

PE case law

India: Decision confirming that a US company in the business of money transfers does not constitute a PE in India

On 20 September 2021, the Indian Tax Appellate Tribunal (ITAT) of Delhi issued its decision No.7211/Del/2017 on whether the activities of a nonresident created a PE in India. In this case, a company resident in the United States (US) appointed representatives in India who provide the service of making payments to individual beneficiaries in India, remittances that are made through the nonresident from remitters abroad and destined in favor of beneficiaries residing in India. The representatives are entities such as the Indian Post Offices, banks, and travel agents, among others.

The Assessing Officer (AO) concluded that these representatives create an Agency PE for the nonresident in India. Further, the AO also found that the nonresident had a fixed place of business in India due to the usage of software developed and owned by the nonresident which is installed on the machines in premises of the agents and dedicated to the business of the nonresident, which is the money-transfer in India. In particular, the AO asserted that representatives in India have access to the nonresident computers in the US and the software has been installed in the premises of the representatives and hence taken together with the representatives’ premises it constitutes a fixed place of business in India.

The ITAT dismissed this case and upheld the decision made by the Second Appellate Authority (Co-ordinate Bench of ITAT) for previous tax years in the nonresident taxpayer’s own case. In the earlier decision which was subsequently followed in multiple tax years, the Co-ordinate Bench of ITAT ruled that the representatives were independent agents meeting all the conditions under the India-US tax treaty i.e., they were acting in the ordinary course of their business, they were legally/economically independent of the nonresident, they did not work wholly or almost wholly for the nonresident and they were remunerated at an arms-length price. Further, the representatives did not have the authority to conclude contracts in India. The representatives were merely servicing the contracts which were concluded by the nonresident itself outside India. Hence, it was held that an Agency PE was not created under the India-US treaty. Moreover, the Co-ordinate Bench of ITAT found that the representatives’ fixed premises where the activities of the representative take place are owned or leased by the representatives. Thus, there is no evidence showing that the nonresident has such premises at its disposal. In addition, the mere use of the software by the representatives should not be seen as being a fixed of place of business for the nonresident.

India: Supreme Court dismisses petition filed by taxpayer for relaxation of residency norms in India, during the period affected by COVID-19 pandemic

Recently, an individual approached the Supreme Court (SC) of India, to request relaxation from triggering residency (more than 182 days stay during a tax year) in India in the period disrupted due to the pandemic. As per information available in media reports, the individual had travelled to India and his stay was prolonged on account of a COVID-induced lockdown and suspension of international air travel. He was able to leave the country only after six months, thereby triggering residency for tax year 2020-21 under the Indian tax law. The SC did not grant the relaxation and dismissed the petition dated 7 September 2021. As stated in media reports, the SC noted that a transport bubble system was created by the Indian Government for such passengers from July 2020 onwards, which the individual could have utilized but he did not. Based on above, the SC noted that it should be shown that the individual was confined in India for reasons beyond his control and until then, it refrained to adjudicate on the petition.

The Indian Government has provided very limited and strict relaxation during the period affected by the Pandemic, for considering the days spent in India for examining residential status or even PE exposure for foreign taxpayers in India. To avoid genuine hardship for the tax year 2019-20 [India follows a tax year of 1 April to 31 March], through an administrative circular dated 8 May 2020, the Indian Government provided relaxation by announcing exclusion of a period of overstay in India from 22 March 2020 to 31 March 2020 for determining the residential status in India. Additionally, through another administrative circular dated 3 March 2021, the Government acknowledged the practical cases of double taxation due to the prolonged stay of individuals in India and that such double taxation may be resolved through tax treaties. Instead of providing a general relaxation for tax year 2020-21, the circular provided an opportunity for impacted individuals to contact the Government for the consideration of relief in the specific cases.

In the above backdrop, this ruling by the highest court of India was of critical importance and would have formed a basis for many similar cases. Dismissal of the petition by the SC renders all matters to be examined on their own merits under the rules of the Indian tax law and tax treaties, as applicable.

PE tax rulings

Denmark: Binding tax ruling on home office PE

On 28 September 2021, the Danish Tax Board (DTB) published binding tax ruling SKM2021.489.SR addressing whether an employee of a Swiss company working from home in Denmark would create a PE for the Swiss company. The Swiss company is in the business of developing, selling and hosting software for international clients, including some Danish clients. One of the employees of the Swiss company decided for personal reasons to live in Denmark and work there for two days a week and the rest of the days in Switzerland. The activities of the employee consist of answering queries, conducting software demonstrations, participating in the product introduction for the customer and helping to write quotes. The employee cannot sign contracts or other official documents, but can only help prepare them so that the content and delivery of the contracts is correct. Furthermore, the Swiss company has no interest in having employees working from Denmark nor does it get any business advantage from having an employee in Denmark.

Based on the facts and circumstances of the case, the DTB concluded that the Swiss company is not carrying on any business from a fixed place in Denmark and therefore there would not be PE in Denmark for the Swiss company. Further, the DTB took into account that the Swiss company did not request the employee to live in Denmark and does not subsidize or cover any expenses for doing so in reaching its conclusion.

Spain: Binding tax ruling determining the existence of a fixed base in Spain

In October 2021, the General Directorate of Taxes (GDT) in Spain published binding tax ruling V2119-21 dated 15 July 2021, to determine whether the activities of an architect living in Spain and working for a Swiss company would be taxable in Spain. In this case, the architect lived and worked in Switzerland from January 2020 to July 2020 and then changed his residency to Spain in August 2020. During November and December 2020, the architect worked on a project for a Swiss company from his home in Spain and claimed that he was not a tax resident in Spain during 2020 since his presence in Spain was no longer than 183 days. The question raised to the Spanish Tax Authorities was whether the profits of the services rendered to the Swiss company would be taxable in Spain or Switzerland considering that the architect was a Swiss tax resident during 2020.

To answer the question posed, the Spanish Tax Authorities referred to the Spain-Switzerland tax treaty, in particular to Article 14 (independent personal services). This article establishes that professional services (including architects) shall be taxable only in Switzerland unless the individual has a fixed base regularly available to him in Spain for the purpose of performing his activities. According to the Commentaries of the OECD Model Tax Convention (OECD MTC), the “fixed base” term has been interpreted in the same way as the term “permanent establishment.” Thus, if the architect were to have a PE in Spain it could be concluded that he has a fixed base in Spain. The tax ruling makes a reference to the Commentaries of the OECD MTC to list the requirements of a PE: (i) have a “place of business”; (ii) the place of business needs to be “fixed,” i.e. established at a distinct place with a certain degree of permanence; and (iii) carrying on business through the fixed place of business.

The Spanish Tax Authorities concluded that the architect had a PE in Spain since its activities were performed from his home in Spain. As a result, all profits attributable to the services rendered to the Swiss company should be taxable in Spain.

PE developments in response to COVID-19

Germany-Switzerland: Extension to the mutual agreement on frontier workers

On 8 September 2021, the German Ministry of Finance published an update to the mutual agreement with Switzerland on frontier workers. In a previous update published in May 2021, the mutual agreement included a section on the application and interpretation of Articles 5(1) and 5(4) of the German-Swiss tax treaty (permanent establishment/fixed place of business) with respect to home office PEs. Accordingly, employees carrying out their activity in their home office in their country of residence solely as a result of the pandemic will generally not constitute a home office PE for their employers. In general, the agreement is automatically extended by one month at the end of each month unless it is terminated. In this update, the mutual agreement extends its application at least to 31 December 2021. Other than the extension of the period of application, the content of the mutual agreement remains the same.

Other PE developments

New Zealand: Interpretation statement on the definition of “resident” for GST purposes

On 2 September 2021, the Inland Revenue Department (IRD) of New Zealand issued an interpretation statement on the definition of “resident” for New Zealand Goods and Services Tax (GST) purposes. Among other things, the definition of “resident” for GST purposes includes a person to the extent that they carry on any taxable activity or other activity in New Zealand, while having any “fixed or permanent place” in New Zealand relating to that taxable or other activity.

The interpretation statement provides that while the concepts overlap, the term ‘’fixed or permanent place’’ for GST purposes is not equivalent to the term ‘’fixed establishment’’ used for New Zealand income tax purposes or the phrase ‘’permanent establishment’’ used in New Zealand’s double tax treaties. This is because, for income tax purposes, the link required between a “permanent establishment” or a “fixed establishment” and a business is stronger than the link required between a ‘’fixed or permanent place’’ and the New Zealand activity for GST purposes.

For GST purposes, the definition of resident requires that the “fixed or permanent place” simply relates to the activity that is being carried on and does not require that the activity amounts to a business. Nor does the GST definition of resident require that the activity be carried on in or through the fixed or permanent place.

In addition, the terms used for income tax purposes in New Zealand specifically exclude some establishments (e.g., facilities for storage, display or delivery), while the GST definition does not contain such exclusions. However, the IRD accepts that commentaries relating to the OECD Model Tax Convention and OECD MLI may be useful in understanding the similarities and differences in the terms.

The interpretation statement will be relevant for those who need to determine whether they are New Zealand resident for GST purposes and may impact on whether:

  • New Zealand GST needs to be charged on any supplies made to that person.
  • The person is required to charge and account for New Zealand GST on supplies they make in New Zealand.
  • A person can, or is required to, register for GST in New Zealand.

Russia: Guidance letter on construction PE

Recently, the Russian Ministry of Finance published letter 03-08-05/71633 dated 3 September 2021 clarifying PE implications with respect to the activity of a Russian entity on a building site in Kazakhstan. The Ministry of Finance refers to Commentaries on OECD Model Tax Convention citing that a building site should be regarded as a single unit, even if it is based on several contracts, provided that it forms a coherent whole commercially and geographically. When determining whether the activities of a building site constitute a PE, other connected activities should also be taken into account, including: (i) contracts which have been concluded with the same person or related persons; (ii) nature of such contracts and activities; and (iii) involvement of the same employees carrying out activities under different contracts. The Ministry of Finance also makes a reference to the MLI, namely to Article 14 (splitting up of contracts). The reference provides that both the MLI and Commentaries on OECD Model Tax Convention should be taken into account together with the Russia-Kazakhstan tax treaty.

The MLI has been ratified by both jurisdictions. With respect to taxes withheld at source, the MLI entered into effect on 1 January 2021 for both jurisdictions. With respect to other taxes, the MLI entered into effect on 26 June 2021 for Kazakhstan and will enter into effect on 1 January 2022 for Russia. Thus, when analyzing PE implications, one should also factor the MLI and its impact on the relevant tax treaty.

Saudi Arabia: Guidelines on deductibility of expenses

On 19 September 2021, the Saudi Arabian Zakat, Tax and Customs Authority (ZATCA) issued a new income tax guideline on the deductibility rules of expenses for the purpose of determining the income tax base. Among the expenses that may be deducted are those amounts paid by a PE in Saudi to its head office outside the Kingdom, provided that such expenses are directly incurred by the head office for the exclusive benefit of the PE or are general and administrative expenses. Deductibility is not allowed for amounts paid against royalties, commissions, certain interest expenses and indirect general and administrative expenses.

The guideline provides details on the meaning of deductible and non-deductible expenses with illustrative examples and instructions on deduction permissibility of certain expenses from the tax base.


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