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April 8, 2021

PE Watch: Latest developments and trends, April 2021


BEPS Multilateral Instrument (MLI)

On 25 and 30 March 2021, Hungary and Greece respectively deposited their instrument of ratification of the MLI with the Organisation for Economic Co-operation and Development (OECD). Greece and Hungary confirmed their preliminary positions regarding the permanent establishment (PE) provisions in which they chose not to apply any of the PE provisions. In addition, Hungary also added 10 tax treaties (Albania, Armenia, Bahrain, Belarus, Bosnia and Herzegovina, Kuwait, North Macedonia, Oman, United Arab Emirates, United States) to its list of Covered Tax Agreements (CTAs) and removed 2 tax treaties ( Moldova, Mongolia) from its list. The MLI will enter into force for both jurisdictions on 1 July 2021.

Furthermore, on the same date, the OECD released the first Opinion of the Conference of the Parties of the MLI clarifying the interpretation and application of Article 35(1)(a) of the MLI on the entry into effect of the provisions of the MLI.

See EY Global Tax Alert, OECD publishes Arbitration Profiles of 30 countries under the MLI and a clarification regarding entry into effect, dated 1 April 2021.

Case Law

Norway: Attribution of profits to a branch of a nonresident bank

On 10 March 2021, Norway’s Tax Appeals Board issued decision 01 NS 135/2019 regarding the allocation of free capital to a nonresident bank’s branch in Norway. In this case, the Norwegian branch’s income of a nonresident bank consisted significantly of interest on loans issued to local borrowers. These loans were largely financed by the head office on similar terms to those of the Norwegian branch’s loans to local borrowers. As a result, the Norwegian branch was heavily debt financed and its free capital never exceeded 2.9% of its total assets. In light of this, the Norwegian Tax Administration determined that the Norwegian branch’s notional interest payments to the head office were excessive under the Authorised OECD Approach (AOA).

The taxpayer argued that the Norwegian branch’s notional interest payments were not excessive and the lack of free capital should not be viewed in isolation. The taxpayer affirmed that the head office did not make any financing-related charge to the branch and these uncharged costs outweighed the effect of the branch’s lack of free capital. The taxpayer also noted that the Norwegian branch’s operating costs were significantly lower than the operating costs reported by comparable third parties, and as such the Norwegian branch’s borrowing costs were low.

The Tax Appeals Board noted that operating costs for banks are essentially costs for borrowing and on this basis concluded that it was inappropriate to assess the Norwegian branch’s notional interest payment solely on the allocation of free capital. The Tax Appeals Board also mentioned that there may be situations to solely rely on a transaction-based assessment, but one must look at transactions in the aggregate. Separate transactions must be considered together if there is a reasonable business connection between them.

Other PE developments

India: Equalization levy not applicable to PEs

On 23 March 2021, the Indian Finance Minister (FM) introduced amendments to the Finance Bill 2021. The amendments were generally intended to address certain ambiguities arising from the text of the initial proposals contained in the Bill. Among other items, one of the amendments was on provisions of the equalization levy chargeable on e-commerce supply and services (ESS EL).

With effect from 1 April 2020, ESS EL at a 2% tax rate is chargeable on consideration received or receivable by foreign e-commerce operators for making or providing or facilitating the online sale of goods or provision of services. Finance Bill 2021, introduced by the FM on 1 February 2021, proposed to clarify that consideration received/receivable shall include consideration for the sale of goods and provision of services, regardless of whether the e-commerce operator owns the goods or provides the service. Concerns were raised that a sale made by resident seller or foreign sellers with a PE in India were already taxed in India; regardless if the sale is made physically or online through a digital platform of the foreign e-commerce operator and hence, charging ESS EL on such sale or service consideration may lead to double taxation. To address such concerns, the FM amended Finance Bill 2021 to clarify that foreign e-commerce operators shall not pay ESS EL on consideration for the sale of goods owned by, or provision of services by, a resident in India or a PE of a nonresident in India where such sale/service is effectively connected to a PE in India. To ensure this assessment is clear, Indian tax authorities will require that foreign e-commerce platforms stipulate on their websites who is the owner of inventory sold in India. The Finance Bill 2021 without further modifications received the assent of the President of India on 28 March 2021 and became the Finance Act 2021 (No. 13 of 2021).

The amendment to the ESS EL provision is made effective retrospectively from 1 April 2020.

Ireland: Public consultation to incorporate the AOA

On 16 March 2021, Ireland’s Department of Finance released a public consultation on the application of the AOA to the attribution of profits to PEs. The proposed legislation, which follows a series of other transfer pricing (TP) updates and reforms, is planned to apply to tax years beginning on or after 1 January 2022.

The proposed legislative updates were indicated as part of Ireland’s Corporation Tax Roadmap (released 14 January 2021) and extending the TP rules to the taxation of PEs in Ireland – in line with the AOA – is seen as forming part of the ongoing process of modernizing and strengthening Ireland’s corporation tax code.

The public consultation proposes that a new supplementary provision be included in the Irish tax legislation similar to Article 7(2) of the OECD Model Tax Convention.

In particular, the public consultation will address some of the following areas:

  • Whether all aspects of the AOA Guidance should be applied in connection with the computation of relevant branch income in Ireland.
  • The possible approach in relation to documentation requirements, and what particular issues might arise were documentation requirements to apply.
  • Whether consideration should be given to enterprises of a certain size and/or operating in a certain sector.
  • Whether there are considerations around the potential interaction of the AOA Guidance with other provisions of Irish tax legislation.

The consultation is open for submissions until 16 April 2021.

See EY Global Tax Alert, Irish Department of Finance releases public consultation on application of the Authorised OECD Approach in Ireland, dated 22 March 2021.

Luxembourg: Update to the application of MAP rules

On 11 March 2021, Luxembourg Tax Authorities updated Circular L.G.-Conv. D.I. n°60 (Circular) on the application of the mutual agreement procedure (MAP). The Circular states that the access to the MAP is intended to be broadly applied. Among other items, the Circular provides that a resident entity in Luxembourg with a PE in a third state that is not a party to the relevant tax treaty can also initiate a MAP to defend the interests of said PE. In these cases, the competent authority may delegate negotiating competence to the PE state, in particular to situations where only the PE state is concerned with taxation not in accordance with the relevant tax treaty.

See EY Global Tax Alert, Luxembourg updates Mutual Agreement Procedure, dated 25 March 2021.


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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