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June 10, 2021

PE Watch: Latest developments and trends, June 2021

PE developments in response to COVID-19

Australia: Updated guidance on COVID-19 and PEs

On 25 May 2021, the Australian Taxation Office (ATO) updated, once again, its guidance on COVID-19 and PEs. The updated guidance extends its period of application to 31 December 2021 (previously it was to 30 June 2021). Other than the extension of the period of application, the ATO approach on PEs remains the same. According to the ATO, the guidance ceases to apply from 1 January 2022 and taxpayers may need to consider whether ongoing scenarios after this date may give rise to a PE in Australia.

Australia: Update to taxation ruling on PEs

On 12 May 2021, the ATO updated taxation ruling TR 2002/5 (outlining the ATO’s interpretation of the phrase ‘’a place at or through which a person carries on business’’ in the Australian domestic law definition of PE) to make reference to the COVID-19 pandemic resulting in certain situations in which the presence of employees in Australia for six or more months may be considered temporary for PE purposes. In this update, the taxation ruling provides that international travel restrictions and measures imposed by governments globally during the COVID-19 pandemic may have forced some employees to continue their employment from Australia, when ordinarily they would have been located outside Australia. Hence, in these extraordinary circumstances, the presence of employees working from Australia for a foreign employer due to the COVID-19 pandemic, for a period of six months or more may be considered as temporary. Each case should be assessed in light of the relevant facts and circumstances.

Domestic Law PE developments

Kenya: Introduction of a new PE definition

On 4 May 2021, the Kenyan Government submitted Finance Bill 2021 to Parliament. Among other items, the Finance Bill proposes to repeal the current PE definition and introduce a new one. The current PE definition includes a fixed place of business provision, a list of PE examples, a Construction PE clause (six months threshold) and a Dependent Agent PE. The proposed PE definition includes the following:

  • Fixed place of business provision and a list of PE examples
  • Service PE for the provision of services exceeding 91 days in any 12-month period
  • Construction PE clause with a time threshold of 183 days and a contract splitting rule
  • Dependent Agent PE is a person in Kenya who acts on behalf of a foreign enterprise and habitually concludes contracts or plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification
  • Exploration PE for installation or structures used in exploration for natural resources exceeding 91 days
  • A list of activities excluded from the PE definition provided the activities are of a preparatory or auxiliary nature

If the Bill is enacted, the new PE concept would be applicable as of 1 July 2021.

See EY Global Tax Alert, Kenyan Government presents Finance Bill, 2021 to Parliament, dated 25 May 2021.

Sri Lanka: Update to the PE definition

On 13 May 2021, Sri Lanka published in the Official Gazette an amendment to the Inland Revenue Act of 2017. Among other items, the amendment repeals the former Sri Lankan PE definition and introduces a new one.

The former Sri Lankan PE definition included a fixed place of business provision, a Construction PE clause (90 days threshold), a Service PE provision (183 days or more in any 12-month period), and an Agency PE clause. The new PE definition provides that “Sri Lankan permanent establishment” means any business connection or fixed place of business through which the business of the enterprise is wholly or partly carried out, irrespective of the number of days of such business being carried out in Sri Lanka. This modification of the Sri Lankan PE definition somewhat provides for an enhancement of coverage while formalizing the contents. Further, the change has no impact on the PE definition and on the relief mechanism included under the respective tax treaties between Sri Lanka and other jurisdictions.

The amendment also repeals the PE definition used for transfer pricing (TP) purposes and introduces a new one. The new PE definition for TP purposes would be the same as the one with which a tax treaty is in force between Sri Lanka and the jurisdiction where a person has an agency, branch or establishment in Sri Lanka.

The new PE definition is effective from 1 April 2018 (i.e., from the date of introduction of the main Act).

Other PE developments

Chile: Attribution of assets to a PE in Chile after a corporate restructuring

On 12 May 2021, the Chilean Internal Revenue Service (IRS) issued ruling 1244 in relation to the amortization of assets attributed to a PE in Chile after a corporate restructuring. In this case, a company located in the United States (US) has a PE in Chile to which it has allocated assets, a list of clients and contracts. The PE bears all the risks and responsibilities derived from its activity in Chile. The corporate group goes through a corporate restructuring for which the business line of the activities in Chile would be transferred by means of a profit allocation from the PE of the US parent company and subsequently contributed to a company resident in Switzerland (subsidiary of the US company). The Swiss company would then assign the business line to a new PE in Chile. The IRS confirmed the following tax implications:

  1. All assets owned by the PE in Chile should be transferred to the head office in the US. This transfer would trigger: (i) a profit distribution subject to a 35% dividend withholding tax applied on the amount of the distribution; and (ii) potential capital gains subject to corporate income tax at the level of the local PE determined on the difference of the tax basis of each asset, list of clients and contracts held by the PE and its transfer value considered in the profit allocation. These aspects are not expressly addressed in the resolution part of the ruling but highlighted in the request made by the taxpayer.
  2. The head office in the US would increase its equity on its Swiss subsidiary to the same market value of the profit distribution made by the PE in Chile. This equity increase would be made by the transfer of assets and contracts from the PE in Chile. Thereafter, the head office in the US would issue shares or rights to reflect the equity increase. The Swiss company would attribute the assets and contracts to the new PE in Chile at the same value received by the US company.
  3. For amortization purposes, the value attributed to the assets and contracts assigned by the Swiss company to its new PE in Chile should have the following implications: (i) in the case of assets, that amount should need to be considered as the depreciation base (for fixed assets) or tax basis for capital gain purposes in case of any potential disposal; and (ii) in the case of contracts, the amount assigned should be considered as an intangible asset not subject to amortization unless such intangibles are to be disposed (where they would be deducted as part of their tax basis) or if they may completely lose its economic value.

Denmark: Tax ruling on remote working

On 19 May 2021, the Danish Tax Board issued the binding tax ruling SKM2021.277.SR whereby an employee working from home did not create a PE, considering the employee’s added and new (as compared to a prior binding ruling) responsibilities and tasks as caused by the COVID-19 pandemic. In this case, a foreign investment company employed a Danish employee to evaluate new investments and represent the company’s board in portfolio companies. The employee did not engage in any strategy or activity to attract Danish clients since the foreign investment company does not have such investments in Denmark. Further, the employee works from home in Denmark and did not have any decision-making power. In addition, the employee had an office made available to him in the foreign investment company’s home jurisdiction.

Taking into consideration the COVID-19 PE guidance, the Danish Tax Board concluded that there was not PE in Denmark since the management planning and strategy of the foreign investment company did not take place in Denmark and therefore there was no place of management in Denmark. Although the employee assists with the investment activities of the foreign investment company, all important decisions are still made in other jurisdictions. Moreover, the employee does not have a majority of votes in any of the boards he participates in. This includes the added and new responsibilities and tasks performed by the employee as caused by the COVID-19 pandemic.

Greece: Circular on treatment of losses incurred by foreign PEs

On 18 May 2021, the Greek Tax Authorities issued circular E.2100 amending the treatment of losses incurred by foreign PEs. Previously, domestic and foreign business profits were subject to tax in Greece but companies could not deduct the losses incurred by foreign PEs. This outcome created different treatment of companies and was considered a restriction on the freedom of establishment by the European Commission. According to the circular, losses incurred by a foreign PE in the European Union or in the European Economic Area can be deducted in Greece provided the tax treaty between Greece and the relevant jurisdiction does not allow for the exemption of profits attributable to a 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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