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February 11, 2021

PE Watch: Latest developments and trends, February 2021

OECD: Updated guidance on tax treaties and the impact of the COVID-19 pandemic

On 21 January 2021, the Organisation for Economic Co-operation and Development (OECD) published updated guidance on tax treaties and the impact of the COVID-19 pandemic (the guidance) prepared by the OECD Secretariat. The guidance updates the guidance published on 3 April 2020 by the OECD Secretariat. With respect to permanent establishments (PEs), the updated guidance covers the same three situations set forth in the initial guidance, namely, home office PE, agency PE, and construction PE, and it remains silent about situations concerning service PE.

This updated version of the guidance examines whether the analysis and the conclusions outlined in the April 2020 guidance continue to apply where the circumstances persist for a significant period and contains references to individual country practices and guidance during the COVID-19 pandemic. In particular, the updated guidance revisited its earlier guidance on construction PE and explains that jurisdictions may consider not to include temporary interruptions for calculating the time threshold.

See EY Global Tax Alert, OECD Secretariat issues updated guidance on tax treaties and the impact of COVID-19 pandemic, dated 27 January 2021.

OECD BEPS Multilateral Instrument and tax treaties

On 15 January 2021, Estonia deposited its instrument of ratification of the Multilateral Instrument (MLI) with the OECD bringing the number of signatories that have deposited their ratification to 61. Estonia confirmed its preliminary MLI positions, including its choice to not apply any of the PE provisions. The MLI will enter into force for Estonia on 1 May 2021.

As some jurisdictions continue to ratify the MLI to swiftly implement the BEPS treaty-based recommendations into their treaties, others continue updating their treaties, not covered by the MLI, bilaterally to include the said recommendations. For example, in January 2021, Germany signed amending protocols with Ireland and the United Kingdom to amend their tax treaties. Among others, the amending protocols contain the updated preamble language and a principal purpose test. With respect to the PE provisions, the protocols include an anti-fragmentation clause and a definition of a closely related enterprise.

Further, some of the newly signed tax treaties also contain some of the BEPS recommendations. For instance, on 25 January 2021, the Netherlands and Chile signed a tax treaty which, among others, includes: (i) a contract splitting rule for construction activities and service PE; (ii) an anti-fragmentation clause; (iii) agency PE provision in line with the OECD Model Tax Convention 2017); and (iv) a definition of a closely-related enterprise. The treaty will enter into force on the last day of the month following the month in which the ratification process is complete and the exchange of ratification instruments has taken place.

PE developments in response to COVID-19

Australia: Updated guidance on COVID-19 and PEs

On 3 February 2021, the Australian Taxation Office (ATO) updated, for the second time, its guidance on COVID-19 and PEs. The updated guidance extends its period of application to 30 June 2021 (previously it was to 31 January 2021). Other than the extension to 30 June 2021, the ATO approach on PEs remains the same. Unlike the earlier guidance, the ATO provides that the guidance ceases to apply from 1 July 2021 and taxpayers may need to consider whether ongoing scenarios may give rise to a PE in Australia.

Austria-Germany: Updated mutual agreement on frontier workers

On 15 January 2021, Austria and Germany signed an updated mutual agreement on their 2000 tax treaty. The mutual agreement mainly revolves around frontier workers. Last year, in light of the COVID-19 pandemic, a first mutual agreement entered into force on 15 April 2020 and it was updated for the first time on 28 October 2020. The latest update includes a new section on the application and interpretation of Article 5(1) of the treaty (fixed place of business) with respect to home office PEs. Accordingly, employees carrying out their activity in their home office solely as a result of the pandemic will generally not constitute a home office PE for their employers.

The updated mutual agreement entered into force on 16 January 2021 and is valid until 31 March 2021. It automatically extends every month until one of the competent authorities notifies the termination of the mutual agreement one week before the start of the following month.

Singapore: Updated guidance on COVID-19 and PEs

On 29 January 2021, the Inland Revenue Authority of Singapore (IRAS) updated its guidance on the conditions where the unplanned presence of employees in Singapore due to COVID-19 travel restrictions will not result in the creation of a PE. In this update, the application period is extended to 30 June 2021 and this date is subject to review as the COVID-19 situation evolves.

Further, for the interpretation of the provisions of Singapore’s tax treaties, the IRAS has indicated that reference may be made to the OECD Secretariat analysis of tax treaties and the impact of the COVID-19 pandemic published on 3 April 2020 and 21 January 2021. The IRAS has decided to “stop the clock” for determining whether the construction PE threshold has been exceeded during certain periods where operations are suspended as a public health measure to prevent the spread of the COVID-19 virus. Specifically, the IRAS will not count 122 days during the lock-down period between 7 April 2020 to 6 August 2020, provided that the nonresident enterprise meets all the conditions set forth in the guidance.

Other PE developments

Germany: Preliminary ruling on deducting losses incurred by a PE in another member state

On 15 January 2021, the Court of Justice of the European Union (CJEU) published a request for a preliminary ruling (C-538/20) on whether European Union law precludes Germany from preventing a resident company in Germany from deducting losses incurred by a PE in another Member State once the PE has exhausted all opportunities to deduct the losses in the other Member State. The case concerns a PE in the United Kingdom (UK) that incurred losses, which could not be deducted in Germany as the tax treaty between Germany and the UK prescribes a tax-base exemption as the method for elimination of double taxation.

The court in Germany requested clarifications from the CJEU on whether the rules on deductibility losses from a PE are compatible with the freedom of establishment. The CJEU will analyze this case and issue a decision in the upcoming months.

It is important to note that this case resembles some of the cases previously decided by the CJEU, such as Lidl (Case C-414/06), Krankenheim Wannsee (Case C-157/07), Timac Agro (C-388/14) and Bevola Tock (Case C-650/16).

Ireland: Future tax policy

On 14 January 2021, the Irish Department for Finance published an update to Ireland’s Corporation Tax Roadmap (the Roadmap). The Roadmap serves to give investors a signal of Ireland’s future policy intent and sets out timelines for action. Among other items, the Roadmap proposes to extend the existing transfer pricing rules to the taxation of branches in Ireland in line with the Authorized OECD Approach (AOA). It is expected that work on this update will commence in early 2021 and the Department for Finance intends to bring forward the necessary legislation in Finance Bill 2021. It is expected that Finance Bill 2021 will be published in late October 2021.

See EY Tax Alert, Ireland publishes updated Corporation Tax Roadmap, dated 21 January 2021.

Spain: Annual tax plan for 2021

On 1 February 2021, the Spanish Tax Authority published Resolution BOE-A-2021-1379 outlining its annual tax plan for 2021. Among other items, the Resolution provides that the tax authorities will start using big data to strengthen their tools and systems to tax activities from nonresidents. The Resolution also indicates that one of the areas to keep reinforcing for appropriate tax compliance is the attribution of profits to PEs. Likewise, the Spanish tax authorities will start closely monitoring e-commerce activities by using the information gathered for the new Digital Services Tax, and whether such activities are paying taxes accordingly. Further, the Spanish tax authorities will rely on technology to increase the exchange of information to assess the duration of stay of some individuals in Spain, which may have some impact on tax residency and 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


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