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June 9, 2022

PE Watch | Latest developments and trends, June 2022


Public consultation on tax certainty

On 27 May 2022, the Organisation for Economic Co-operation and Development (OECD) Secretariat released two public consultation documents regarding a Tax Certainty Framework for Amount A and Tax Certainty for Issues Related to Amount A for Pillar One of the OECD/G20 project on Addressing the Tax Challenges Arising from the Digitalisation of the Economy (the BEPS 2.0 project).

The Tax Certainty for Issues Related to Amount A document contains draft provisions of the envisaged Multilateral Convention to implement Amount A of Pillar One on dispute prevention and resolution. The draft provisions include a mandatory binding dispute resolution mechanism for issues that concern an adjustment to the profits of a transaction between members of a Covered Group, or to the profits attributed to a permanent establishment (PE) of a member of the Covered Group (including the question of whether such a PE exists).The Tax Certainty Framework for Amount A document does not refer to the taxation of PEs as it solely relates to Amount A issues.

See EY Global Tax Alert, OECD releases public consultation documents on tax certainty under Amount A for Pillar One, dated 7 June 2022.

BEPS MLI: China, Hong Kong and Senegal deposit instrument of ratification of the MLI

On 25 May 2022, China and Hong Kong deposited their instruments of ratification of the Base Erosion and Profit Shifting (BEPS) Multilateral Instrument (MLI) with the OECD. Both jurisdictions confirmed their preliminary positions and chose not to apply any of the PE provisions of the MLI. The MLI will enter into force for both jurisdictions on 1 September 2022.

Likewise, on 10 May 2022, Senegal deposited its instrument of ratification of the MLI with the OECD. Senegal confirmed its preliminary positions regarding the PE provisions and chose to apply all of the PE provisions of the MLI. The MLI will enter into force for Senegal on 1 September 2022.

PE case law

India: Sales supported by a related party in India do not constitute a PE

On 29 April 2022, the Indian Income Tax Appellate Tribunal (ITAT) issued its decision No.514/Del/2021 on whether a company from Singapore could create a PE for selling products in India. In this case, the company from Singapore is in the business of manufacturing and sale of scientific research instruments and entered into a sales commission agreement, a distribution agreement and a marketing support services agreement with a related party in India. The Indian company maintained a warehouse and such premises were used as a sales outlet for soliciting or receiving orders.

The Assessing Officer (AO) observed that the premises of the Indian company were used to stock goods and as a sales outlet and therefore such premises had to be considered as a fixed place of business. The AO also observed that the Indian company habitually exercised a predominant role for concluding contracts on behalf of the company from Singapore and therefore the Indian company should be considered a dependent agent (DA). The AO held that the Singapore company had both a fixed place PE and DAPE in India.

With regards to the dispute of the fixed place of business, the employees of the company from Singapore were never physically present in India. Also, sales to Indian customers were shipped directly from Singapore. The sales of goods stored at warehouses in India were sales relating to the Indian company’s own business as a distributor in India. Hence, the ITAT concluded that the company from Singapore does not have a fixed place of business in India.

With respect to the dependent agent PE, it was clear from the examination of the invoices that the sales of the products were made by the company from Singapore. Also, the sales commission agreement did not grant any authority to the Indian company to conclude any contract on behalf of the company from Singapore. It was also not proved that the Indian company worked wholly or exclusively for Singapore company in the regular course of its business to qualify as a dependent agent under the tax treaty. Accordingly, the ITAT concluded that the Indian company did not constitute a PE of the company from Singapore.

PE tax rulings

Denmark: Employee working from home creates a PE

On 12 May 2022, the Danish Tax Board (DTB) published binding tax ruling SKM2022.250.SR analyzing whether an employee residing in Denmark and working from home would create a PE for his employer in Germany. In this case, the German company sells products in Denmark and 90% of these sales are made through retailers and the rest through direct sales to customers. The price negotiation and order confirmation takes place in Germany.

The German company has hired a sales manager domiciled in Denmark who for personal reasons does not want to relocate to Germany nor commute between Denmark and Germany. The sales manager would be working from home and would not have any contact with customers but it would have contacts with the retailers. Currently, the sales manager’s work related to the Danish market only amounts to 5% of the sales manager total work effort. Therefore, there is no commercial advantage for the employer in Germany to have a sales manager in Denmark.

The DTB concluded that the German company has a business interest in having a sales manager located in Denmark since he is close to some of the customers located in the Nordic region. Thus, the work performed in Denmark is not solely due to personal reasons. Also, the DTB is of the opinion that is not a relevant factor that 5% of the sales manager’s work would be related to the Danish market since he works from Denmark between 40-50% of his time. Lastly, the DTB concluded that there is a fixed place of business in Denmark since the employee naturally has unlimited access to his home and the work takes place on a regular basis.

Russia: Tax treatment of PE’s interest expenses

On 8 May 2022, the Russia Federal Tax Service issued guidance letter SD-4-3/3286 clarifying the tax treatment of interest expenses by a Chinese PE. In this letter, a Joint Venture registered a branch in Russia to carry on construction activities. The joint venture borrowed funds under a loan agreement and used the funds to pay expenses related to the construction of a bridge, operating expenses, testing work, and interest on the loan. In the branch’s account, it was reflected the interest payable on the loan as part of its non-sale expenses.

In the case at hand, the Russia Federal Tax Services concluded that the branch could deduct interest payments if the funds received under the loan agreement were used to implement the joint venture agreement and the branch actually carried out activities to coordinate and control the construction activities.

Other PE developments

Hong Kong: Clarification of taxation of a server PE

In May 2022, the Inland Revenue Department (IRD) of Hong Kong released the minutes of annual meeting 2021 between the Inland Revenue Department and the Hong Kong Institute of Certified Public Accountants. The minutes of the meeting should be of assistance in future dealings with the IRD.

Among other items, the document addresses the application of the source principles to a data center or server PE. In particular, it clarifies an apparent contradiction in the Departmental Interpretation and Practice Notes (DIPN) No. 39 (Revised) (For more details see PE Watch May 2020). One of the attendees sought further clarifications in cases where the core operations of an enterprise were carried out in Hong Kong and the server was located outside Hong Kong. The IRD has indicated that a part or all of its profits could be regarded as non-taxable offshore Hong Kong profits. Another attendee asked for clarification on the principle in determining the locality of e-commerce profits. For this, the IRD reconfirmed that the location of the server PE alone would not determine the locality of the profits, instead the core operations for the e-commerce transaction and the place where those operations had been carried out should be focused on.

Furthermore, the IRD referred to the Commentaries of the 2017 OECD Model Tax Convention (OECD MTC) which are aligned with the IRD’s position. According to the IRD, the Commentaries of the OECD MTC provide very good guidance on whether the mere use of computer equipment in electronic commerce operations in a country could constitute a PE.

Sweden: Home office PE guidance

On 13 May 2022, the Swedish Tax Agency (STA) updated its guidance on PEs for employees working from home. The updated guidance replaces guidance 131 160469-15/111 published in 2015 and aligns with the Commentaries of the 2017 OECD Model Tax Convention on home office PEs. Previously, the STA had a strict approach when determining a home office PE. Working more than a day per week from home could increase the risk of creating a PE provided other requirements were met. In this updated guidance, the STA is of the opinion that, generally, an employee working from home does not automatically creates a PE for its foreign employer. However, if there is a requirement of the foreign employer to work from home, such conclusion may be different.

According to the updated guidance, working from home due to government restrictions or force majeure cases (e.g., the COVID-19 pandemic) will not give rise to the existence of a PE. Likewise, if an employee works from home for personal reasons (i.e., not required or imposed by the foreign employer) and there is no commercial interest for the foreign employer (i.e., there is no advantage for the foreign employer that the work is performed in the employee’s home), then the employee’s home would not be considered at the disposal of the foreign employer.

In addition, the guidance includes six examples to illustrate cases when an employee working from home could or could not create a PE.


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