May 12, 2022
PE Watch: Latest developments and trends, May 2022
BEPS MLI: Belize and Cameroon deposits instrument of ratification of the MLI
On 7 and 21 April 2022 respectively, Belize and Cameroon deposited their instrument of ratification of the Base Erosion and Profit Shifting (BEPS) Multilateral Instrument (MLI) with the Organisation for Economic Co-operation and Development (OECD). Belize confirmed its preliminary positions regarding the permanent establishment (PE) provisions and chose not to apply any of the PE provisions of the MLI. Cameroon confirmed its preliminary PE positions and chose to apply all of the PE provisions of the MLI. The MLI will enter into force for both jurisdictions on 1 August 2022.
PE tax rulings
Denmark: Employees working from home do not constitute a PE in Denmark
On 1 April 2022, the Danish Tax Board (DTB) published binding tax ruling SKM2022.166.SR analyzing whether an employee who wants to move to Denmark and work from home there would constitute a PE in Denmark. In this case, a Danish citizen working and living in Switzerland would like to work in Denmark due to personal reasons. The employee has the role of Interim Chief Financial Officer and is also a member of the board of directors. He provides financial inputs that the Chief Executive Office and the board of directors can use to make strategic decisions. The employee plans to work in Switzerland three days a week and two days a week in Denmark. The work performed in Switzerland will not differ significantly when he is in Denmark and all tasks related to the board of directors would take place in Switzerland.
The DTB concluded that the employee would not constitute a PE for the Swiss employer. This is because the employee would not be involved in sales-related activities and his role was of an internal nature. Furthermore, the functions as a member of the board of directors would primarily be handled in Switzerland.
On the same date, the DTB also published binding tax ruling SKM2022.167.SR on whether two employees of a Norwegian company who want to move to Denmark and work from home would create a PE in Denmark. Both employees want to move to Denmark for personal reasons and would not receive any compensation to work from home. The work of both employees can be performed from anywhere and it does not have any connection to customers in Denmark. Both employees will not be involved in any sales-related activities nor sign any contracts on behalf of the Norwegian employer. Also, the Norwegian company does not have any operations in Denmark and it does not plan to do so either.
The DTB concluded that both employees would not constitute a PE for their Norwegian employer since there would not be a fixed place of business in Denmark. This is due to the fact that the activities carried on from the home office of both employees do not benefit the Norwegian employer and the decision to work from home in Denmark was never required by the Norwegian employer.
PE developments in response to COVID-19
Germany - Switzerland: Extension to the mutual agreement on frontier workers
On 11 April 2022, the German Ministry of Finance published an update to the mutual agreement with Switzerland, 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 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 of the mutual agreement to 30 June 2022 and it also announces that there will be no further extensions. Other than the extension of the period of application, the content of the mutual agreement remains the same.
Other PE developments
UAE: Public consultation on the introduction of corporate tax
On 28 April 2022, the United Arab Emirates (UAE) Ministry of Finance released a public consultation document on the planned introduction of the corporate tax in the UAE. Among other items, the UAE intends to apply a corporate tax to foreign legal entities that have a PE in the UAE or that earn UAE-sourced income. The PE concept under the proposed corporate tax regime has been designed on the basis of Article 5 of the OECD Model Tax Convention (OECD MTC). The consultation document provides that foreign companies, located in a jurisdiction with a tax treaty with the UAE, can use the Commentaries of the OECD MTC when assessing whether they have a PE in the UAE.
The consultation document provides two activity tests when assessing the existence of a PE: (i) fixed place of business test; and (ii) dependent agent test. A foreign company will have a PE in the UAE if it has a “fixed place” in the UAE through which the business of the foreign company is wholly or partly carried on. Activities carried out through the “fixed place” in the UAE which are considered preparatory or auxiliary in nature may not constitute a PE in the UAE. Generally, preparatory or auxiliary activities are those performed in preparation or in support of more substantive business activities of the foreign company.
In the absence of a fixed place of business, the dependent agent test may be met if a person acts on behalf of a foreign company in the UAE and habitually exercises the authority to conclude contracts in the name of the foreign company. This test would not be met if the person is considered an independent agent, i.e., the person does not work exclusively for the foreign company and is truly legally and economically independent from the foreign company.
Further, the UAE would allow investment managers to provide discretionary investment management services to foreign customers without triggering a PE in the UAE for the foreign investor or the foreign investment fund.
The consultation document also proposes transfer pricing rules. The UAE would follow the arm’s-length principle for transactions and arrangements between related parties, including internal dealings between the head office and the PE.
The consultation will run until 19 May 2022.
Ireland: Ukrainian citizens working remotely in Ireland do not create a PE
On 14 April 2022, the Irish Revenue Commissioners (Irish Revenue) published eBrief No. 090/2 on the tax treatment of Ukrainians working remotely in Ireland. In addition to a separate employment income concession, the Irish Revenue will disregard the presence, for corporation tax purposes, of an employee, director, service provider or agent who is unavoidably in Ireland as a result of the current war in Ukraine. This concession is available provided the employee, director, service provider or agent would have continued to be present in Ukraine but for the war there.
The individual/company should keep records, documents or other evidence indicating that the individual came to Ireland and performed their work or duties in Ireland as a result of the war in Ukraine.
This concession applies for the tax year 2022.
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