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October 13, 2022

PE Watch: Latest developments and trends, October 2022


BEPS MLI: Mongolia signs the MLI and South Africa and Bulgaria deposit instrument of ratification of the MLI

On 6 October 2022, Mongolia signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI), becoming the 100th jurisdiction to join the MLI. At the time of signature, Mongolia also submitted its preliminary positions concerning the MLI provisions to the Organisation for Economic Co-operation and Development (OECD). With respect to the Permanent Establishment (PE) provisions, Mongolia chose to apply all of the PE provisions. Mongolia must confirm its preliminary positions when depositing its ratification with the OECD.

Also, on 30 and 16 September 2022, South Africa and Bulgaria, respectively, deposited their instruments of ratification of the MLI with the OECD. South Africa confirmed its preliminary MLI positions in relation to the PE provisions in which it chose not to apply Article 12 (Agency PE) and Article 14 (splitting-up of contracts) of the MLI. Bulgaria changed its preliminary positions regarding the PE provisions and chose to apply all of the PE provisions of the MLI with the exception of Article 14. The MLI will enter into force for both jurisdictions on 1 January 2023.

PE case law

European Union: Deduction of final losses by a PE

On 22 September 2022, the Court of Justice of the European Union (CJEU) issued its decision in the case C-538/20. In this case, a German entity with a PE in the United Kingdom (UK) incurred PE 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.

The CJEU held that Germany's rules on deductibility of losses from a PE do not restrict the freedom of establishment. According to the CJEU, the situation of the foreign PE in the UK is not objectively comparable with the situation of a domestic PE with a head office in Germany. This is because the losses incurred by the PE in UK are excluded from the tax base in Germany under the relevant tax treaty, whereas, in a domestic scenario this would not be the case.

PE tax rulings

Türkiye: Liaison office does not create a PE

Recently, the Turkish Revenue Administration issued a tax ruling on Regional Management Centers. These Regional Management Centers provide, inter alia, activities related to investment and management strategies, planning, promotion, sales, after-sales services, brand management, financial management, technical support, research and development, and external procurement.

The tax ruling clarifies that a liaison office will not be subject to corporate income tax, and therefore will not constitute a PE, if it is licensed to operate as a regional management center. This is provided the liaison office does not engage in commercial or any other income-generating activities or any activities other than those permitted in its license. If the aforementioned conditions are not met, such liaison offices will have to be registered as a corporate taxpayer.

See EY Global Tax Alert, Türkiye confirms non-taxable status of liaison offices that are licensed to perform regional management center activities and that do not perform any commercial activities, dated 14 September 2022.

Other PE developments

Finland: Update to PE guidance

On 25 August 2022, the Finnish Tax Administration updated the guidance on PEs. Among other items, this update reflects the decision KHO 2021:171 of the Supreme Administrative Court. In this case, the Supreme Administrative Court held that the promotion of products cannot be considered part of the core business of a company. According to the decision, even though the sales constitute part of the core business, sales can also have auxiliary functions such as marketing by product promotion.

Accordingly, the updated guidance provides that sales activities can also be regarded as preparatory or auxiliary in a situation where the employees of a foreign company only present the company's products in Finland without participating in any way in the actual sales.

Ireland: Guidance on the attribution of profits to a branch

On 7 September 2022, the Irish Revenue Commissioners (Irish Revenue) released a Tax and Duty Manual on the attribution of profits to a branch/PE. The purpose of this manual is to provide an overview of, and guidance in relation to, the newly introduced authorized OECD approach which applies to tax years beginning on or after 1 January 2022.

The manual provides that the attribution of profits to a branch is derived from Article 7(2) of the OECD Model Tax Convention and applies regardless of whether a tax treaty has been entered into by Ireland and the country in question. By virtue of this provision, the branch is hypothesized as a separate company independent of the company of which it is a part. This hypothesis is taking into account the functions performed, assets used, and risks assumed by the company (of which the branch is a part), through the branch and through other parts of the company.

Among other items, the manual also lists relevant branch records to have available, compliance requirements and penalties for non-compliance.


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


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