BEPS MLI

Azerbaijan and Mongolia deposit instrument of ratification of the MLI

On 24 and 30 September 2024, Azerbaijan and Mongolia respectively deposited their instruments of ratification of the Multilateral Instrument (MLI) with the Organisation for Economic Co-operation and Development (OECD) and confirmed their MLI positions.

With respect to the Permanent Establishment (PE) provisions, Azerbaijan and Mongolia confirmed their preliminary positions and did not make any additional reservations. Therefore, all the PE provisions will be applicable to Mongolia's Covered Tax Agreements (CTAs) to the extent that there is a matching position between Mongolia and the other contracting state. For Azerbaijan, Article 12 (Agency PE) of the MLI will not apply, due to Azerbaijan's reservation on this provision. Additionally, Article 14 (Splitting up of Contracts) will not apply to provisions in its CTAs related to the exploration or exploitation of natural resources.

The MLI will enter into force for Azerbaijan and Mongolia on the first day of the month following the expiration of a period of three calendar months beginning on the date of the deposit of their instrument of ratification (i.e., on 1 January 2025).

Democratic Republic of the Congo signs the MLI

On 19 September 2024, the OECD announced that the Democratic Republic of the Congo signed the MLI. At the time of signature, the Democratic Republic of the Congo submitted a list of tax treaties that it would like to designate as CTAs and submitted a preliminary list of reservations and notifications in relation to the CTAs (MLI positions).

With respect to the PE provisions, the Democratic Republic of the Congo chose to apply all the PE provisions.

PE case law

Indian Court rules PE can be taxed on profits despite global losses

On 19 September 2024, the Full Bench of the Delhi High Court addressed whether a PE in India can be taxed on its profits even if the overall enterprise reports global losses. A Full Bench was constituted for this case due to conflicting judgments from different Division Benches of the same court on similar legal issues.

Previously, a Division Bench Delhi High Court had ruled that profits could only be attributed to a PE if the entire enterprise, including the PE, was profitable. However, a different Division Bench took a different view, prompting the matter to be referred to the Full Bench.

In this case, a foreign taxpayer with a PE in India argued that the PE's profits should not be taxed, citing the group's overall global losses. The Indian Tax Authorities challenged this argument.

The Full Bench ruled that the PE should be treated as a separate, independent entity from the head office. The court emphasized the arm's-length principle. This means that the PE's financial performance is evaluated based on its own economic activities in India, without being influenced by the overall group's global performance. As a result, even if the global group is incurring losses, the PE can still be profitable and taxed based on the income it generates within India.

PE domestic law

Netherlands clarifies branch exemption for disregarded PEs

On 17 September 2024, the Dutch Government published its 2025 Budget proposals. Among other items, it provides a clarification on the branch exemption with respect to disregarded PEs. Due to the implementation of the Anti-Tax-Avoidance Directive (ATAD) II, the branch exemption does not apply with respect to disregarded PEs. As a result, the profit of a PE is included in the Dutch taxable base if the relevant jurisdiction does not recognize that PE as such.

However, the implementation of ATAD II could lead to double taxation for disregarded PEs. This concerns situations in which the profit of the disregarded PE is included in a profit-based tax in the other jurisdiction. Therefore, the Budget proposes that the Dutch branch exemption applies to disregarded PEs to the extent that the profit of the disregarded PE is subject to a profit-based tax in the jurisdiction where that PE is considered to be located for the purposes of the branch exemption.

PE tax treaties

Hong Kong and Turkiye sign tax treaty

On 24 September 2024, Hong Kong and Turkiye signed a tax treaty. The PE article of the treaty includes a provision stating that services rendered for more than 183 days in any 12-month period are considered to create a PE.

The treaty also includes anti-contract-splitting and anti-fragmentation rules. These are designed to prevent businesses from dividing construction projects or other business activities to circumvent the PE threshold. Specifically, the anti-contract-splitting rule addresses attempts to split construction contracts to avoid meeting PE criteria, while the anti-fragmentation rule prevents enterprises from segmenting their activities to qualify for a PE exemption.

Further reinforcing these PE provisions, the treaty contains an Agency PE clause, which applies to situations in which a person habitually plays a principal role in the conclusion of contracts. This provision states that if contracts are routinely concluded by the enterprise with no material changes after this person's involvement, a PE is established. Additionally, the treaty narrows the definition of an independent agent, explicitly excluding individuals who exclusively or almost exclusively act on behalf of closely related enterprises.

Several of these PE-related provisions align with those in the MLI, although Hong Kong has opted out of the PE articles of the MLI.

Each country shall notify the other country when it has completed the procedures required under domestic law for this tax treaty to enter into force. The treaty will be in force 30 days after the date of the last notification has been received.

Other PE developments

UK issues guidance on registering Dependent Agent PE

On 17 September 2024, His Majesty's Revenue and Customs (HMRC) released guidance on the registration process for corporation tax for nonresident companies conducting business in the United Kingdom (UK) through a Dependent Agent Permanent Establishment (DAPE).

According to the guidance, a non-UK resident company operating through a DAPE without a physical presence in the UK must register for UK Corporation Tax within three months from the date it becomes liable. The guidance also outlines the required documentation, online registration procedures and post-registration obligations.

If a nonresident company has a physical presence in the UK in addition to a DAPE, then it must also register with Companies House, whereby it will be registered for corporation tax at the same time (if it was not already required to register by virtue of having a DAPE, before a physical presence).