April 14, 2022
PE Watch: Latest developments and trends, April 2022
BEPS MLI: Thailand deposits instrument of ratification of the MLI
On 31 March 2022, Thailand deposited its instrument of ratification of the Base Erosion and Profit Shifting (BEPS) Multilateral Instrument (MLI) with the Organisation for Economic Co-operation and Development (OECD). Thailand confirmed its preliminary positions regarding the permanent establishment (PE) provisions and chose to apply all of the PE provisions of the MLI. The MLI will enter into force for Thailand on 1 July 2022.
Commentary to the GloBE rules
On 14 March 2022, the OECD/G20 Inclusive Framework adopted the Commentary to the Global Anti-Base Erosion (GloBE) Rules. The Commentary provides detailed technical guidance on the operation and intended outcomes of the Model Rules and clarifies the meaning of certain terms. It also illustrates the application of the rules to various fact patterns. In relation to PEs, the Commentary provides more details on the allocation of income or loss between a Main Entity and a PE (e.g., how to prevent double counting or omission in the computation of the GloBE Income or Loss of the Main Entity and the PE).
Further, the Commentary acknowledges concerns about the application of the Income Inclusion Rule (IIR) by a Parent Entity jurisdiction which has entered into a bilateral tax treaty adopting the exemption method to eliminate double taxation. In this case, the Commentary notes the potential introduction of a ‘’switch-over’’ rule (SOR) in the relevant tax treaty to safeguard the application of the IIR when dealing with PEs. The Commentary, however, does not include a sample SOR that countries could use when (re)negotiating their tax treaties.
The Commentary also provides further clarifications with respect to the four-pronged PE definition in the Model Rules, as well as examples. In addition, the Commentary describes how to determine the location of an Entity and a PE.
Opinion by the Court of Justice of the European Union (CJEU) Attorney General (AG) on compatibility of the German cross-border loss relief
On 10 March 2022, AG Collins gave his opinion in case C-538/20. In this case, a German entity with a PE in the United Kingdom incurred losses which could not be deducted in Germany as the relevant tax treaty between these countries includes an exemption method for the elimination of double taxation. The court in Germany requested clarifications from the CJEU on whether the rules on deductibility of so-called ‘’final losses’’ from a PE are compatible with the freedom of establishment.
In the AG’s view, Germany’s rules on deductibility of losses from a PE do not restrict the freedom of establishment. The AG acknowledges that a resident company with a PE in another Member State is treated less favorable than it would be if the PE were in the same Member State as the resident company. However, it is important to consider the principle of symmetry, where the losses incurred by a PE are excluded from the tax base of the head office in Germany by way of a Double Tax Treaty since profits are also exempted. This conclusion is based on settled case law where a difference in treatment does not constitute a restriction of the freedom of establishment if it concerns situations that are not objectively comparable.
PE case law
Germany: Allocation of assets to PE without personnel
On 3 March 2022, the German Federal Tax Court published a temporary injunction I B 44/21 on whether the significant people functions are to be regarded as the decisive allocation parameter for assets held by a PE. In the case at hand, a German limited partnership , through a PE, operates a wind farm on leased property and its head office is in Denmark. The PE does not employ its own personnel and its technical and business management services are handled by other German companies.
In the facts underlying the case, the German tax authorities concluded that in the case of a PE without personnel and taking into account the Authorised OECD Approach (AOA), no assets and business transactions could be allocated to the PE, as it did not perform any significant people functions. Instead, the assets should be allocated to the head office since it performs the PE’s significant people functions. As a result, all PE’s assets were deemed to be transferred for tax purposes and thus subject to German exit taxation.
Even though no decision has yet been made on the appeal against this tax authorities’ position, the German Federal Tax Court expressed serious doubts about the position. The court based its doubts on the opinion in literature, according to which the respective German exit tax rules (existing outside the AOA rules) do not recognize an allocation in accordance with the significant people functions and consequently do not apply in this case.
According to the court, it is necessary that, in the case of a PE without personnel, the assets of the PE and which ultimately serve the business function performed there must be allocated to the PE.
India: Mere access to the premises of a Joint Venture does not constitute a PE
On 9 March 2022, the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) issued its decision in FCC Co. Ltd vs. ACIT on whether the technical support services rendered in India by a Japanese company could give rise to a PE. In this case, a Japanese company in the business of manufacturing and supplying automotive parts, entered into a Joint Venture (JV) agreement with another company in India and formed a JV in India. The Japanese company sent some of its employees to the factory site of JV in India to provide technical support to the JV in manufacturing and the assembly of products.
The Indian tax authorities contended that the Japanese company frequently sent its professionally qualified employees to the factory site of JV in India to guide its production and manufacturing activity and such factory site constituted a Fixed Place PE in India. Indian tax authorities also contended that the Japanese company would constitute a Supervisory PE in India due to certain employees of the Japanese company helping to set up a new product line in India for which end-to-end supervision has been rendered. The period of stay of these employees in India exceeded six months and hence it would constitute a supervisory PE of the Japanese company in India as well under Article 5 of the India-Japan treaty.
The ITAT analyzed whether the JV constituted a fixed place of business. In order to constitute a fixed place of business it is necessary that the premises are at the disposal of the enterprise. The place is at the disposal of the enterprise when the enterprise has the right to use the premises and has control over the premises. In the case at hand, the Japanese company had access to the premises of the JV but only limited to the rendering of services to the JV without any control over the premises. Therefore, the ITAT concluded that merely providing access to the premises does not constitute a Fixed Place PE for the Japanese company. Additionally, the ITAT concluded that the employees of the Japanese company did not provide supervision in connection with any building site or construction, installation or assembly project. Thus, the existence of a supervisory PE did not arise and the computation of the duration of stay of the employees is not relevant.
PE tax rulings
Denmark: Data center is not a PE
On 11 March 2022, the Danish Tax Board (DTB) published binding tax ruling SKM2022.119.SR whereby it analyzes whether a nonresident purchasing data center services from a Danish company would constitute a PE in Denmark. In this case, a Multinational Enterprise (MNE) group plans to establish a data center company in Denmark which would own and operate the facilities and equipment to be used for hosting the MNE group’s software solutions.
A nonresident part of the MNE group would purchase the services rendered by the data center company in Denmark, including web hosting, data processing, and other related services. The employees from the data center company would not have any interaction with clients nor would they have any involvement in the services performed by the data center company. Further, the nonresident would not have access to the facilities of the data center. The DTB concluded that the nonresident would not have a fixed place of business in Denmark since it would not have access to the data center. This view is in line with previous rulings by the DTB on similar matters.
The DTB also analyzes whether automated services rendered by the data center company would give rise to a PE in Denmark. According to the DTB’s opinion, the nonresident would not have a PE in Denmark in relation to the automatic services. This conclusion is based on the Commentaries of the OECD Model Tax Convention where in the DTB’s view, a location should be ‘’used’’ to carry on business. For this to happen, the location should be at the disposal of the nonresident. Considering that the data center is not at the disposal of the nonresident, automated services cannot be considered to constitute a PE in Denmark.
PE developments in response to COVID-19
Austria – Germany: Extension to the mutual agreement on frontier workers
On 4 April 2022, the German Ministry of Finance published another update to the mutual agreement with Austria, on frontier workers. Among other items, this mutual agreement includes a section 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 COVID-19 pandemic will generally not constitute a home office PE for their employers. The current update extends the application for both mutual agreements to 30 June 2022 but also announces that there will be no further extensions. Other than the extension of the period of application, the content of the mutual agreements remains the same.
Singapore: Extension of the application of the PE and COVID-19 guidance
On 15 February 2022, the Inland Revenue Authority of Singapore (IRAS) updated on its website its tax guidance on COVID-19 relating to the creation of PEs in Singapore. The updated guidance extended its period of application up to 31 March 2022 (previously it was to 31 December 2021). In this update, the IRAS has also indicated that the period of application of its tax guidance would not be further extended. Other than the extension of the period of application, the IRAS’ position on the creation of PEs as a result of the presence of employees of a foreign company in Singapore due to COVID-19 travel restrictions remains the same.
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