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February 9, 2023

PE Watch | Latest developments and trends, February 2023


OECD releases administrative guidance for Pillar Two

On 2 February 2023, the Organisation for Economic Co-operation and Development released Administrative Guidance (the guidance) for the implementation of the global minimum tax. Among other items, the guidance addresses questions related to Permanent Establishments (PEs). For example, it clarifies that if the Main Entity is considered an Excluded Entity, then all its activities, including those performed by its PEs, are excluded from the Global Anti-Base Erosion (GloBE) Rules.

Another topic addressed is the calculation of the Qualified Domestic Minimum Top-up Tax (QDMTT). Accordingly, a jurisdiction with a taxable branch regime must exclude the income or loss of a foreign PE from the income or loss of the Main Entity when calculating the QDMTT. Further, a QDMTT will not include taxes paid by a Main Entity that is allocable to a PE. The guidance notes that the Inclusive Framework will consider providing further guidance on the allocation of income to PEs under a QDMTT in particular circumstances (e.g., in respect of stateless PEs).

PE case law

India: Court rules that servers do not constitute a PE

On 3 January 2023, the Income Tax Appellate Tribunal (ITAT) of New Delhi ruled on case ITA No. 7354/Del/2017 analyzing whether the provision of online services by a nonresident constitutes a PE in India. In the instant case, the nonresident uses computer servers in the United States to market and provide travel-related products and services to Indian airlines.

The tax authorities alleged that the Indian customers' computer terminals were a crucial part of the nonresident's main ticket booking system and therefore they assess the existence of a PE. However, the ITAT agreed with the order of Commissioner of Income-tax Appeals (CIT(A)) stating that the nonresident did not have a fixed place of business in India as no equipment is installed by the nonresident with the clients.

India: Court interprets the term "habitually secures contracts"

On 30 December 2022, the Income Tax Appellate Tribunal (ITAT) of New Delhi ruled on case ITA No. 2617/DEL/2017 whereby it analyzes the existence of a PE. The case concerns a German company that is a leading provider of beverage filling and packaging technology. The company is a tax resident of Germany and plans, develops, and manufactures supplies and installs machinery and complete systems for filling and packaging beverages for its clients. These activities are carried out entirely outside of India. The German company then arranges to supply and install the machinery and systems at its clients' place of business.

The German company has a subsidiary in India. This subsidiary is engaged in procuring and trading in spare parts, providing engineering and installation services, and after-sales services, marketing, and payment collection on behalf of the German company. However, the subsidiary neither had the authority to conclude contracts on behalf of the German company, nor did it maintain a stock of goods or merchandise in India. The spares it did stock were on its own account and not on behalf of the German company.

The issue at hand is whether the German company secured orders habitually through its subsidiary in India. The ITAT opined that a dependent agent must bear one of two "essential" characteristics to be seen as "securing orders" on behalf of the principal. First, the agent must accept orders frequently on behalf of the principal. Second, the agent must represent frequently to clients that the agent has the authority to bind the principal. In this case, the subsidiary's functions, including marketing activities, did not meet either standard as the clients approached the German company directly and contracts were finalized outside India. Therefore, the German company did not have a PE in India on account of the subsidiary's functions in India.

Other PE developments

United Kingdom: Report on tax implications of hybrid and remote working

On 20 December 2022, the Office of Tax Simplification (OTS) published the report "Hybrid and distance working report: exploring the tax implications of changing working practices." The OTS gives independent advice to the United Kingdom (UK) Government on simplifying the tax system, to make things easier for taxpayers.

The report focuses on the trend of allowing employees to work temporarily or permanently overseas while still being employed by UK businesses. Businesses mainly expressed concerns about the potential tax implications, such as the creation of a PE. They suggested to provide relief or a "safe list" of jurisdictions may help with short-term stays and asked for clarification on the definition of a home office PE. Businesses also suggested safe-harbor guidance to streamline the compliance implications of transfer pricing.


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

Ernst & Young Belastingadviseurs LLP, Rotterdam

Ernst & Young Solutions LLP, Singapore

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