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July 14, 2022

PE Watch: Latest developments and trends, July 2022


Update of transfer pricing country profiles

On 9 June 2022, the Organisation for Economic Co-operation and Development (OECD) published updated transfer pricing (TP) country profiles reflecting the current TP legislation and practices of Egypt, Liberia, Saudi Arabia, and Sri Lanka. The TP country profiles include two questions in relation to Permanent Establishment (PE), namely: (i) whether the jurisdiction follows the Authorized OECD Approach (AOA) for the attribution of profits to a PE; and (ii) whether the jurisdiction follows another approach for the attribution of profits to a PE. According to the information provided in this update, Egypt, Liberia, Saudi Arabia, and Sri Lanka do not follow the AOA for the attribution of profits to a PE. Instead, they follow other approaches, including the force of attraction approach.

Currently, the TP country profiles cover 73 jurisdictions, and the OECD expects to release additional updates as changes in legislation or practice are submitted to the OECD Secretariat.

BEPS Multilateral Instrument: Estonia and Spain notify completion of domestic procedures for certain Covered Tax Agreements

On 1 June 2022, Estonia and Spain notified the 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. Estonia notified 14 CTAs and Spain notified 50 CTAs.

When Spain deposited its instrument of ratification of the MLI, it opted in for Part VI (Arbitration) of the MLI. Thus, Spain also included in the notification the completion of internal procedures for the entry into effect of the provisions of Part VI of some CTAs.

With respect to the PE provisions of the MLI, Estonia chose not to apply any of the PE provisions to its CTAs and Spain has adopted all of the PE provisions. With respect to the notified CTAs, the provisions of the MLI will have effect 30 days after the date of the latest notification to the Depositary under Article 35(7)(b).

PE case law

Canada: Service PE for activities spanned in separate years

On 13 June 2022, the Tax Court of Canada issued its decision in the case Triskelion Projects International Inc. v. the Queen dealing with the definition of Service PE in the Canada-United States (US) tax treaty. In this case, a US corporation provided project management services related to the construction industry in Canada between March 2015 and March 2016 (more precisely, 198 days in 2015 and 54 days in 2016).

The Canada-US tax treaty includes a Service PE clause which states that the source state may tax income earned by a resident of the other state from providing services in the source state if the resident of the other state is present 183 days or more in the source state in any twelve-month period.

The only issue in dispute in this case was whether, under the Canada-US tax treaty, the US corporation had a Service PE in Canada for its 2016 taxation year on the basis that it provided services in Canada for “183 days or more in any twelve-month period.”

The US corporation contended that the tax authorities were not permitted to use the time spent in 2015 in its calculation, since it had used 183 of the 198 days spent by the US corporation in Canada in 2015 towards the 2015 assessment. Consequently, the tax authorities were entitled to carry over only 15 days from its 2015 computation in determining whether there is a Service PE in Canada for its 2016 taxation year. The court rejected the position of the US corporation since as the tax authorities did not make any assessment for 2015, it lacked any factual foundation for its argument. Furthermore, the US corporation admitted the fact that it provided consulting services in Canada for at least 183 days between 19 March 2015 and 18 March 2016 (i.e., within 183 days in any twelve-month period). The court found this fact determinative to fulfill the requirements in the Service PE provision of the Canada-US tax treaty.

PE domestic law

Maldives: New regulation on the taxation of PEs

On 17 May 2022, the Maldives Inland Revenue Authority (MIRA) issued the Fourth Amendment to the Income Tax Regulations (2022/R-82). Among other items, the Fourth Amendment introduces a new subsection requiring that the general approach stated in Article 7(2) of the OECD Model Tax Convention on Income and on Capital (2017) shall be adopted in determining the taxable income of the PE in the Maldives of a nonresident of the Maldives.

This amendment has effect from 17 May 2022.

PE tax rulings

Denmark: Outsourced services to third parties not relevant for the existence of a PE

On 8 June 2022, the Danish Tax Board (DTB) published binding tax ruling SKM2022.293.SR addressing the existence of a PE in a case where the nonresident outsources its activities to a subcontractor. In this case, a German company offers information technology (IT) solutions and services, including onsite IT support and it does not have any office or facilities in Denmark. The German company intends to provide IT support to a customer in Germany which includes the provision of onsite IT support to the customer’s subsidiary in Denmark. The assignment is expected to last between three and five years.

The customer’s subsidiary in Denmark has different locations across Denmark and it will make office space available at each location for the staff performing the IT support. For this, the German company intends to outsource the IT support to be provided in Denmark to a subcontractor who is an independent third party and has several customers.

The DTB noted, that the German company would have a fixed place of business in Denmark as it would have a place of business at its disposal at the premises of the customer. Further, it was noted that the German company would have an employee who would occasionally travel to Denmark and supervise the subcontractor, which contributed to the German company's business operations in Denmark.

Other PE developments

Costa Rica: New rules to calculate taxable income of PE providing international transport and communication services

On 16 May 2022, Costa Rica published in the Official Gazette Resolution No. DGT-R-14-2022 introducing new rules applicable to the simplified method to calculate taxable income of PEs providing international transport and communication services. Under the simplified method, a PE is subject to an imputed income assessment equal to 15% of their Costa Rican gross income, unless it provides evidence of a lower amount of actual income (e.g., documentation supporting an allocation of income between Costa Rica and other countries would prove that all income is not Costa Rican source). The amount of the imputed income assessment is subject to 30% corporate income tax. A reduced rate (between 5% and 20%) may apply to PEs whose annual gross income does not exceed specified amounts.

This simplified method should be requested through the tax authorities’ electronic platform. If approved, the PE may benefit from the simplified calculation for up to three fiscal years and should annually file an affidavit stating that it has met all the requirements.

Finland: Updated guidance on taxation of foreign business owners and professionals

On 17 June 2022, the Finland Tax Agency updated its guidance VH/1337/00.01.00/2022 on the taxation of independent personal services. The guidance is only applicable to the taxation of individuals who live abroad or move temporarily from abroad to Finland. It also includes examples to illustrate the application of the guidance and can be used as a point of reference rather than a conclusion. 

In this update, a definition of "construction and installation" was added to the guidance and the characterization of shipyards as places of business was addedThe updated guidance clarifies that a shipyard may be considered as a place of business and therefore individuals working in a shipyard could have a fixed base in Finland. If the shipyard becomes a fixed base for the individual, the time limits provided by many tax treaties for the determination of a PE on a site involving construction, installation and assembly activities should not be valid in assessing the existence of a fixed base.


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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