September 8, 2022
PE Watch: Latest developments and trends, September 2022
PE domestic law
Colombia: Introduction of the significant economic presence article
On 8 August 2022, the Colombian Government submitted to the Colombian Congress a tax reform bill introducing new measures. Among other items, the bill introduces the concept of "significant economic presence.” This new concept would tax foreign entities as if they have a permanent establishment (PE) and therefore create a local taxable presence in Colombia.
A nonresident entity would be considered to have a significant economic presence in Colombia when meeting one of the following requirements: (i) gross income from transactions with customers in Colombia higher than 31,300 tax units (approx. US$297,000) during the relevant tax year; ii) using a website with a Colombian domain; or iii) interaction with more than 300,000 users in Colombia during the relevant tax year. If the activities in Colombia are carried on by different entities of the same Multinational Enterprise (MNE) group, the aforementioned criteria would be tested for the transactions of all related parties.
Payments to nonresidents with a significant economic presence in Colombia would generally be subject to a 20% withholding tax. Furthermore, the bill recognizes that a tax treaty should prevail over Colombian domestic law when foreign entities reside in a tax treaty jurisdiction.
See EY Global Tax Alert, New Colombian Government submits tax reform bill to Congress, dated 17 August 2022.
PE case law
Germany: Property management company can constitute a PE
On 11 August 2022, the German Federal Fiscal Court (FFC) decided case III R 35/20 analyzing whether foreign investment in German real estate with the involvement of a property management company, is decisive to determine the existence of a PE. In the underlying case, a German real estate company, with its place of effective management in Luxembourg, granted to a Germany property management company a comprehensive power of attorney relating to real estate management activities. Among other items, the property management company handled all contracts in connection with the management of the property and represented the German real estate company vis-à-vis banks and authorities.
It was disputed whether the conclusion of the power of attorney gave rise to a PE in Germany with the consequence that the rental real estate income of the German real estate company would be subject to trade tax. The FFC concluded that this is not the case.
The FFC based its decision, among other things, on the wording of the law, according to which the PE must directly serve the company’s operating activities. According to the FFC, it is necessary to have a certain space at its disposal with a certain degree of permanence. In the case at hand, the property management company was monitored by the German real estate company by telephone or in writing from Luxembourg and no premises were facilitated by the German real estate company. The FFC referred the case back to the lower court due to a lack of findings on the facts of the case.
PE tax rulings
Denmark: Managing director working from home does not constitute a PE
On 29 August 2022, the Danish Tax Board (DTB) published binding tax ruling SKM2022.406.SR analyzing if a managing director working from home would create a PE in Denmark. In this case, the managing director of a foreign MNE group is a Danish citizen and wishes to work from Denmark due to personal reasons. The managing director’s duties involve managing the company’s overall operations. When he is not traveling to other jurisdictions, he works from his home in Denmark. The MNE group does not require the managing director to work from home or from another specific place in Denmark but it accepts the condition of the managing director to stay in Denmark more frequently.
Although the MNE group has a subsidiary in Denmark, the managing director does not have any operational role in this subsidiary. He also does not have any space or office available in the subsidiary and he does not work from there either. Further, it is expected that, after the pandemic, the managing director will work in Denmark in a sporadic basis.
According to the DTB, the fact that the managing director partly works from home in Denmark should not mean that the nonresident entity has a PE in Denmark. This conclusion is based on the fact that the nonresident does not have a place of business at its disposal in Denmark and does not have control over the managing director’s remote workplace. Among other things, the DTB also emphasized that the employee would not be involved in sales prospecting work or the like in Denmark, as this function was handled by the subsidiary, and that the work in Denmark could not be planned, but arose randomly and sporadically.
Denmark: Ruling on anti-fragmentation of activities
On 18 August 2022, the DTB published binding tax ruling SKM2022.395.SR whereby it analyzes whether a warehouse in Denmark of a nonresident would create a PE in Denmark. In this case, a centralized procurement company in Ireland oversees the delivery of certain products throughout Europe. The Irish company has employees who all live and work in Ireland. All employees are senior employees who have the relevant qualifications and decision-making skills. Further, the Irish company’s employees are authorized to make all relevant decisions on behalf of the Irish company, including entering into agreements with third parties.
The Irish company buys products from independent parties. The company sells the majority of products stored in a storage facility in Denmark to a related party in Denmark. All sales work in relation to any third-party buyers takes place from Ireland, and thus no sales-related functions are performed from Denmark. Furthermore, the Irish company entered into a service agreement with a related party in Denmark to provide services in relation to purchasing and logistics as well as monitoring the storage capacity of the warehouse. These services are provided by two employees of a related party in Denmark.
The DTB is of the opinion that warehousing activities on their own should fall under the preparatory or auxiliary activities definition and therefore should not constitute a PE in Denmark. However, the DTB concludes that Article 13(4) of the Multilateral Instrument (anti-fragmentation rule) applies in this case and thus, the overall activities (i.e., the combination of the activities) constitute an important and significant part of the company's activities as a whole, and is not of a preparatory or auxiliary nature. The DTB could therefore not confirm that there was no PE in Denmark.
Uruguay: Clarification of profits remitted by the PE to its head office
On 13 July 2022, the Uruguayan Tax Authority (DGI) published Consultation No. 6490 whereby it analyzes the tax treatment of profits remitted by a PE in Uruguay to its head office in Belgium. In this case, the taxpayer requested the DGI to confirm whether the profits of the PE are taxable in Uruguay in accordance with the tax treaty between Belgium and Uruguay. According to the ruling, Article 10 (dividends) of the relevant tax treaty is not applicable since the substantive scope of the article of is not met. This is because Article 10 only applies when a resident of a contracting states pays dividends to a resident of the other contracting state and since the PE is not a tax resident of Uruguay the substantive scope is not satisfied.
Following the analysis of the dividend article, the DGI is of the opinion that Article 7 (business profits) becomes relevant. According to Article 7, Belgium has the exclusive taxing right of the taxpayer’s profits unless such profits are attributable to a PE in Uruguay. The DGI considers that the remittance of profits by the PE to its head office cannot be regarded as profits attributable to the PE and therefore is not taxable in Uruguay.
See EY Global Tax Alert, Uruguay’s Tax Authority clarifies tax treatment of profit repatriations paid by a permanent establishment under double tax treaty, dated 8 August 2022.
Brazil - Colombia: Tax treaty signed
On 5 August 2022, Brazil and Colombia signed a tax treaty. Among other items, the tax treaty includes two separate provisions where construction activities and services rendered for more than 6 months during a 12-month period are considered to create a PE. Further, it includes a provision dealing with the splitting-up of a contract for construction activities. The tax treaty also contains a list of activities that are deemed not to constitute a PE, but only if they are of a preparatory or auxiliary character. An anti-fragmentation rule is also part of the tax treaty, preventing enterprises from fragmenting their activities in order to qualify for a PE exemption.
In addition, the tax treaty incorporates the Agency PE provision inspired from BEPS Action 7 to cover cases where a person habitually exercises the principal role leading to the conclusion of contracts that are subsequently routinely concluded by the enterprise without material modifications. Moreover, the definition of an independent agent is restricted (excluding persons 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. As soon as the ratification procedures are completed in each jurisdiction, the tax treaty will enter into force. The tax treaty will enter into effect on 1 January of the calendar year following the date of entry into force.
See EY Global Tax Alert, Colombia and Brazil sign double tax treaty, dated 18 August 2022.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Belastingadviseurs LLP, Rotterdam
Ernst & Young Solutions LLP, Singapore
Ernst & Young LLP (United States), Global Tax Desk Network, New York