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November 11, 2021

PE Watch: Latest developments and trends, November 2021


BEPS Multilateral Instrument: Indonesia and Russia notify on the entry into effect of certain Covered Tax Agreements

On 21 October 2021, Indonesia and Russia notified the Organisation for Economic Co-operation and Development (OECD) Depositary of the Multilateral Instrument (MLI) that they completed their internal procedures for the entry into effect of the MLI provisions with respect to specific Covered Tax Agreements (CTAs), which is required when a Contracting Jurisdiction has made the reservation in Article 35(7)(a) of the MLI. Indonesia notified five CTAs and Russia notified seven CTAs. With respect to the permanent establishment (PE) provisions of the MLI, both Indonesia and Russia have adopted all of the PE provisions. With respect to the notified CTAs, the provisions of the MLI will generally have effect 30 days after the date of the latest notification to the Depositary under Article 35(7)(b).

PE domestic law

Ireland: Finance Bill 2021 includes the adoption of the “Authorised OECD Approach”

On 21 October 2021, the Irish Government published the Finance Bill 2021 (as initiated). Among other items, the Finance Bill introduces measures that provide for the application of the “Authorised OECD Approach” (AOA) for the attribution of income to a branch of a nonresident company operating in Ireland. The AOA approach would be applicable to a branch or agency, i.e., a place through which a company not resident in Ireland carries on a trade in Ireland. The Finance Bill also prescribes that certain branch records outlining the activities of the branch’s business must be retained for possible inspection by Irish Revenue.

It is expected that this Finance Bill will be enacted before the end of 2021. Hence, the AOA will apply for accounting periods beginning on or after 1 January 2022, although transfer pricing rules, including these new branch provisions, for small or medium-sized companies remain subject to a commencement order.

Mexico: Update to transfer pricing rules for maquiladoras

On 26 October 2021, the Mexican Senate approved the economic proposal for 2022, which includes tax reform. Among other items, the tax reform would amend the transfer pricing (TP) rules for manufacturing entities (maquiladoras) to qualify for the PE exemption. Maquiladoras may be deemed not to have a PE in Mexico if certain requirements and TP rules are met. Under the current TP rules, a maquiladora has two options to determine its profit level: (i) use of a safe harbor; or (ii) obtain an advance pricing agreement (APA).

The tax reform removes the option given to maquiladoras to request an APA to confirm their compliance with the TP rules. As a result, the only option will be to apply the safe harbor rule, under which maquiladoras must determine taxable income based on the greater amount of 6.9% of the total value of the assets used in the provision of manufacturing services or 6.5% of the total costs and expenses incurred in the manufacturing operation.

The tax reform would be effective from 1 January 2022.

Tax treaties

Germany – Mexico: Amending protocol to tax treaty

On 8 October 2021, Germany and Mexico signed an amending protocol to the 2008 tax treaty. Among other items, Article 5(4) of the tax treaty (list of preparatory or auxiliary activities) has been replaced to state that the activities listed in Article 5(4) will be deemed not to constitute a PE only if they are of a preparatory or auxiliary character.

The protocol will enter into force 30 days after the receipt of the ratification instruments by each jurisdiction. The protocol will enter into effect on 1 January of the calendar year following the date of entry into force.

PE tax rulings

Denmark: Sales agent constitutes a PE in Denmark

On 22 October 2021, the Danish Tax Board (DTB) published a binding tax ruling SKM2021.546.SR analyzing whether a sales agent would create a PE in Denmark. In this case, a foreign company plans to employ a sales representative in Denmark who will work exclusively with customers located in Finland, Norway and Sweden but he would not be involved in any sales activities with customers in Denmark. The sales representative would work from home and around 60-70% of his time would be working on the road. His main tasks include making phone calls to (potential) customers and preparing presentations for clients. All information related to sales prices and other sales conditions come from the sales manager located abroad. All contracts are negotiated and signed by the foreign company. The foreign company wanted to confirm with the DTB that the activities in Denmark would not lead to the existence of a PE in Denmark.

According to the tax ruling, it is not clear whether the foreign company orders the sales representative to carry out the work from home. However, the DTB is of the opinion that the sales representatives’ activities are essential to the business of the foreign company. Further, the DTB is of the opinion that the sales representative’s activities are performed on a regular basis from home and hence the sales representative’s home should be considered a place of business for the foreign company. As a result, the DTB considers that the activities performed by the sales representative in Denmark would create a PE.

Spain: Warehousing activities do not create a PE in Spain    

Recently, the General Directorate of Taxes (GDT) in Spain published a binding tax ruling V2411-21, dated 14 September 2021. In this case, a company resident in Turkey is planning to start activities in Spain. The activities to be carried on in Spain would involve the importation of components for the automotive industry produced by the same company in Turkey. The company intends to rent a warehouse in Spain and it would engage with third parties to deliver the goods to the customers rather than having its own employees. The company asked whether the activities carried on in Spain would create a PE.

The tax authorities considered that the warehouse can be considered a fixed place and found that through this fixed place, part of the business of the Turkish company is carried on. Consequently, the warehouse is a fixed place of business. Following, the tax authorities assessed whether the activities carried on in the warehouse may fall under the list of preparatory or auxiliary activities. For this, the tax authorities use the Commentaries of the OECD Model Tax Convention (OECD MTC) 2014 and explicitly clarifies that the Commentaries of the OECD MTC 2017 should not be used since the tax treaty between Spain and Turkey was signed before 2017. According to the tax ruling, provided the activities in Spain are limited to warehousing and the delivery of goods to customers in Spain, the activities carried on in Spain by the company resident in Turkey should not create a PE. Further, the tax authorities also assessed the existence of an Agency PE. The tax authorities did not find either the existence of an Agency PE since the company resident in Turkey does not have employees in Spain and the third parties providing services to the company resident in Turkey do not have the authority to conclude or negotiate contracts.

PE developments in response to COVID-19

Germany-Austria: Extension to the mutual agreement on frontier workers

On 7 October 2021, the German Ministry of Finance published an update to the mutual agreement with Austria on frontier workers. In a previous update published in January 2021, the mutual agreement added a section on the application and interpretation of Article 5(1) of the German-Austria tax treaty (fixed place of business) with respect to home office PEs.

Accordingly, employees carrying out their activity in their home office in their country of residence solely as a result of the pandemic will generally not constitute a home office PE for their employers. In general, the agreement is automatically extended by one month at the end of each month unless it is terminated. In this update, the mutual agreement extends its application at least to 31 December 2021. Other than the extension of the period of application, the content of the mutual agreement remains the same.

Other PE developments

Austria: Update to TP guidelines

On 7 October 2021, the Austrian Ministry of Finance published a revised version of the Austrian TP guidelines. Among other items, the guidelines include a section on PEs. In this update, a reference to home office PE and service PE has been included.

For a home office PE, it provides that a home can be at the disposal of the employer if the activity carried on from home is sufficiently permanent (generally six months or longer) subject to the exceptions under the list of preparatory or auxiliary activities. If the activities carried on from home account for less than 25% of the employee’s working total time, it may be considered as merely occasional but more than 50% is no longer merely occasional. Furthermore, if a home is used as a base for service support or to conduct client meetings, it may constitute a PE regardless of the working time of the employee spent therein.

Also, a few Austrian tax treaties contain a service PE provision that is based on the United Nations Model Tax Convention. According to this provision, the performance of a service with a physical presence in the source state for a certain minimum period of time is considered a PE, irrespective of the existence of a place of business.


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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