PE case law

Luxembourg Court confirms nonrecognition of Malaysian PE

On 17 April 2025, the Luxembourg High Administrative Court published case 50602C, upholding the Luxembourg Tax Administration's decision to deny the recognition of a Malaysian permanent establishment (PE) claimed by a Luxembourg-resident company (Lux Co). The key issues before the court were whether the Malaysian branch had sufficient economic substance to qualify as a PE under the Luxembourg-Malaysia tax treaty and whether certain interest-free shareholder loans should be recharacterized as hidden capital contributions.

The case involved Lux Co's acquisition of shares in two companies, financed through interest-free loans from a related party. Company A sought to allocate these participations to a newly created Malaysian branch and applied for an advance tax ruling confirming the branch's status as a PE. Recognition of the branch as a PE would have exempted the related assets from Luxembourg net wealth and corporate taxes.

The Luxembourg Tax Administration rejected the request, citing a lack of substance and abuse of law under domestic anti-abuse provisions. The Lower Administrative Court upheld the tax authority's position, finding that the Malaysian branch lacked genuine economic activity. On appeal, the High Administrative Court confirmed this view, stressing that the branch had no separate bank account, outsourced key functions to another group entity, and carried out no meaningful operations. It concluded that the branch lacked the autonomy and operational independence required to qualify as a PE under Article 5 of the Luxembourg-Malaysia tax treaty.

The High Administrative Court ultimately found that the structure was artificially designed to achieve a tax benefit, with no substantial commercial purpose. It therefore ruled the arrangement constituted an abuse of law and upheld the denial of PE status. It also confirmed that the interest-free loans were to be recast as equity.

PE tax rulings

Denmark issues ruling on remote work and permanent establishment

On 11 March 2025, the Danish Tax Council issued binding tax ruling SKM2025.133.SR, considering whether a UK-based limited liability partnership (LLP) or its partners would have a PE in Denmark, given that one of its partners planned to work remotely from home in Denmark part of the time. The LLP provides investment advisory services and is treated as tax-transparent in both the UK and Denmark. The partner in question was set to become the Group Chief Operating Officer (COO) and a minority owner of the firm.

The key issue was whether working remotely in Denmark created a fixed place of business in Denmark that could trigger Danish taxation for the LLP. The Danish Tax Council focused on the nature of the role and responsibilities. Despite the COO title, the partner would not hold executive authority, nor be empowered to legally bind the LLP. The ownership stake would also be below 1%. Furthermore, the work performed from Denmark would be exclusively directed toward portfolio companies outside of Denmark, meaning the partner would not represent the LLP externally within Denmark.

In addition, the partner would work from Denmark only one to two days per week, without any fixed or planned working days, with the remaining time would be spent traveling. The decision to work from a home office in Denmark was made solely for personal reasons. The LLP neither required nor expected the employee to work from Denmark. As a result, the Council concluded that the home office does not constitute a place of business.

Based on these facts, the Danish Tax Council concluded that the partner's home office did not constitute a PE. The work carried out from Denmark was seen as limited, personal and not central to the LLP's business operations. Therefore, the LLP would not be considered to have a taxable presence in Denmark under Danish tax law.

Other PE developments

UK HMRC launches consultation to update PE rules

On 28 April 2025, His Majesty's Revenue & Customs (HMRC) launched a public consultation on proposed changes to the United Kingdom's (UK's) PE rules. This consultation forms part of a broader review of the UK's international tax framework, which also covers reforms to transfer pricing and the Diverted Profits Tax (DPT). The consultation follows a policy consultation held in June 2023 and reflects the UK government's ongoing commitment under its Corporate Tax Roadmap to ensure the tax system remains effective and aligned with global standards.

The proposed updates aim to align UK law with international standards, particularly the Organisation for Economic Co-operation and Development's 2017 definition of a PE. Key areas under review include the PE definition, the attribution of profits to a PE and the use of guidance materials in interpreting domestic legislation. The government is also proposing amendments to the legislation and Statement of Practice related to the Investment Manager Exemption.

The consultation is open until 7 July 2025.