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March 10, 2022

PE Watch: Latest developments and trends, March 2022


BEPS MLI: Bahrain and Romania deposit instrument of ratification of the MLI

On 23 and 28 February 2022, Bahrain and Romania, respectively, deposited their instrument of ratification, approval or acceptance of the Base Erosion and Profit Shifting (BEPS) MLI with the Organisation for Economic Co-operation and Development (OECD). Bahrain confirmed its preliminary positions regarding the permanent establishment (PE) provisions and chose not to apply any of the PE provisions of the MLI. Romania changed its preliminary PE positions and chose now not to apply any of the PE provisions of the MLI. The MLI will enter into force for both jurisdictions on 1 June 2022.

Transfer Pricing: Country profiles updated

On 28 February 2022, the OECD published new and updated transfer pricing (TP) country profiles reflecting the current TP legislation and practices of 30 jurisdictions. In this update, 6 new jurisdictions were added (Honduras, Iceland, Jamaica, Papua New Guinea, Senegal, and Ukraine) and 24 jurisdictions were updated (Brazil, Canada, Chile, China, Croatia, Dominican Republic, Estonia, Finland, Greece, Hungary, Israel, Kenya, Korea, Liechtenstein, Lithuania, Luxembourg, Malta, Panama, Poland, Portugal, Slovenia, United Kingdom, United States, and Uruguay). The TP country profiles include two questions in relation to PEs, namely: (i) whether the jurisdiction follows the Authorized OECD Approach for the attribution of profits to a PE; and (ii) whether the jurisdiction follows another approach for the attribution of profits to a PE.

Currently, the TP country profiles cover 69 jurisdictions and the OECD expects to conduct further updates as changes in legislation or practice are submitted to the OECD Secretariat.

PE domestic law

Nigeria: Amendment to the Significant Economic Presence provision

Recently, Nigeria published Finance Act 2021. The Finance Act introduced over 40 amendments to the existing tax and regulatory legislation in Nigeria. Among other items, the Finance Act amends the Significant Economic Presence (SEP) provision to grant the Federal Inland Revenue Service (FIRS) the discretion to tax on a fair and reasonable percentage the turnover attributable to the SEP. The discretion to apply a fair and reasonable percentage applies in cases where there is no taxable profit, the profits cannot be ascertained or the taxable profit is less than what is to be expected from that type of business. Based on this amendment, nonresidents may be subject to income tax on a deemed profit basis at the discretion of the FIRS, to the extent that their actual profits cannot be readily and reflectively computed. However, it is not clear yet what percentage of turnover should be deemed as taxable profits.

Previously, the FIRS has adopted for nonresidents a deemed profit of 20% of the income with a tax rate of 30% resulting in an effective tax rate of 6%. There is the possibility that the same provision may be applied in cases of SEP. Further guidance is expected on this issue.

The Finance Act is applicable from 1 January 2022.

See EY Global Tax Alert, Nigeria | Highlights of Finance Act 2021, dated 22 February 2022.

Tax treaties

Denmark and France: New tax treaty signed

On 4 February 2022, France and Denmark signed a new tax treaty. With regards to the PE provision, the tax treaty includes a list of activities that are considered intrinsically preparatory or auxiliary, an anti-fragmentation rule, an anti-contract splitting rule, and an Agency PE provision similar to the 2017 OECD Model Tax Convention. Further, the definition of an independent agent is restricted when a person is acting exclusively, or almost exclusively, for one or more enterprises to which this agent is closely related.

The tax treaty still needs to be ratified by both jurisdictions. The tax treaty will enter into force on the first day following the date in which the latter of the notifications related to the completion of the ratification process has been received. The tax treaty will enter into effect on 1 January of the calendar year following the date of entry into force.

Colombia and Netherlands: Tax treaty signed

On 16 February 2022, Colombia and the Netherlands signed a tax treaty. Among other items, the tax treaty includes a service PE (for a period or periods aggregating more than 183 days in any 12-month period), and an anti-contract splitting rule for construction activities and services. A special provision is included stating that “offshore activities” (activities carried out in the territorial sea or any area adjacent to the territorial sea in which one of the jurisdictions exercises its sovereign rights) constitute a PE in the state where the activities are carried out unless such activities are carried out for a period or periods of less than 30 days in a 12-month period. Furthermore, the tax treaty includes an anti-fragmentation rule and the Agency PE provision in line with the 2017 OECD Model Tax Convention.

The protocol of the tax treaty includes a most favorite nation clause that is triggered if after the conclusion of this tax treaty the Netherlands concludes a tax treaty with another jurisdiction in which the Service PE provision is for a period or periods of 183 days or less, and stipulates that then such threshold should also apply to the Colombia-Netherlands tax treaty as from the date on which the relevant tax treaty between the Netherlands and the other jurisdiction enters into force.

The tax treaty still needs to be ratified by both jurisdictions. The tax treaty will enter into force on the last day of the month following the month in which the latter of the notifications related to the completion of the ratification process has been received. The tax treaty will enter into effect on 1 January of the calendar year following the date of entry into force.

PE tax rulings

Denmark: Sales activities constitute a PE in Denmark

On 9 February 2022, the Danish Tax Board (DTB) published tax ruling SKM2022.58.SR analyzing whether the sales activities of a nonresident company would create a PE in Denmark. In this case, a Swiss company hired an employee to handle certain sales activities focused on car dealers in the Scandinavian market. The activities performed by the employee include getting new customers, keeping a database of customers, marketing new products, and certain administrative items. The employee is a Danish national, the work he performs is very limited in the Danish market (and predominantly related to the other Nordic countries), and it is carried out from the home of the employee since there is no office of the Swiss company in Denmark. The employee spends most of his time traveling and visiting car dealers outside Denmark.

The DTB concluded that the Swiss company has a PE in Denmark since the activities performed by the employee are part of the main activities of the Swiss company. Also, the DTB emphasized that the employee would have a central function of the development of the Scandinavian market since the employee was employed with a view to establishing sales channels in such market. Another relevant element considered by the DTB was the employee's geographical location in Denmark. If the employee would not have been located in Denmark, it would be more difficult to carry on sales activities in the Scandinavian market.


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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