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December 8, 2022

PE Watch: Latest developments and trends, December 2022


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

On 30 and 10 November 2022, Spain and Indonesia notified, respectively, to the Organisation for Economic Co-operation and Development (OECD) Depositary of the Multilateral Instrument (MLI), the completion of their internal procedures for the entry into effect of the MLI provisions with respect to certain Covered Tax Agreements (CTAs). This notification is required when a Contracting Jurisdiction has made the reservation in Article 35(7)(a) of the MLI. Spain notified three CTAs (Hong Kong, Senegal, and Thailand) and Indonesia notified six CTAs (China, Hong Kong, Romania, Seychelles, Spain, and Thailand).

Both jurisdictions have adopted all of the permanent establishment (PE) provisions in the MLI. 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                                

India: Decision on threshold period for Construction PE

On 15 November 2022, the Delhi High Court decided case 2022/DHC/004893 whereby it analyzed when to start counting the threshold period for purposes of the Construction PE clause under the India-Cyprus Double Tax Agreement (DTA) which provides a 12-month threshold for construction/installation activities to create a PE.

In this case, a company from Cyprus was awarded a contract to work in relation to the development of a gas field in India. The actual installation work commenced in January 2008 and was completed in September 2008. The Assessment Officer held that the Cyprian company had a PE in India because one employee of this company visited India in September 2007. According to the Cyprian company, such visit was only to collect data and information to bid for the contract to develop the gas field. 

The Delhi High Court noted that a building site or an assembly project can only be construed as a fixed place of business when the enterprise commences its activities at the project site. Any activity which may be related or incidental but was not carried out at the project site should not be construed as a PE. Preparatory work at a site such as construction of a site office, a planning office or preparing the site itself could also be counted towards the minimum duration of a PE, however, there was no such allegation in the present facts. Further, it is settled law that preparatory work like travelling for obtaining a tender/contract cannot be deemed to be the starting point of the contract. The Delhi High Court held that there was no evidence placed on the record against the factual finding of the lower appellate court that work commenced at the site in January 2008. Accordingly, the threshold period of 12 months was not exceeded in the present case and consequently the Cyprian company did not have a PE in India.

Kazakhstan: Court case ruling whether dividends should be allocated to a PE and whether services performed abroad are being performed by a PE

Recently, a Court of Appeal in Kazakhstan ruled in case no.7199-22-00-4?/812 whereby it analyzed whether a dividend distribution should be allocated to a PE and also whether the services performed abroad should be taxed at 20% due to the existence of a PE in Kazakhstan.

In this case, a French company registered a PE in Kazakhstan, and it was also a shareholder in a Joint Venture (JV) entity in Kazakhstan. Further, the personnel of the PE were considered as executing strategic and managerial functions with respect to the JV entity paying dividends.

The JV entity was subject to a tax audit and the tax authorities believed the dividends distributed and paid to the French company should have been allocated to the PE in Kazakhstan and consequently taxed at 20%. The tax authorities reached this conclusion since the JV entity’s directors were also performing management positions in the PE in Kazakhstan.

In addition, the French company rendered services to the JV entity. The service agreement provided that the services could also be rendered by the PE and, in that case, the invoices should be issued directly by the PE. During the tax audit, the tax authorities found that the invoices issued by the French company and the invoices by the PE were identical. Therefore, the tax authorities attributed the income from all those services performed by the French company to the PE and applied a withholding tax of 20%. The JV entity contended that the services were performed abroad and were not performed by the personnel of the PE. Consequently, the remuneration for those services cannot be attributed to the PE.

As for the allocation of dividends to the PE, the Court disagreed with the tax authorities. The Court noted that the functions of the employees of the PE were only of an organizational nature and could not influence the shareholder's decisions and contribute to the dividends. Thus, the Court confirmed that the dividends should not be allocated to the PE, and they should be taxed at 5% under the relevant tax treaty. Likewise, the Court disagreed with the tax authorities on the services rendered by the PE. According to the Court, the income of the French company received for the services provided outside of Kazakhstan was not related to the income received by its PE. This is in accordance with the terms and conditions of the service agreement which stipulates that the French company and the PE would maintain separate records and issue separate invoices for the services performed in Kazakhstan and abroad.

PE tax rulings

Denmark: CEO working from home creates a PE

On 21 November 2022, the Danish Tax Board (DTB) issued binding tax ruling SKM2022.557.SR analyzing partly whether two Norwegian companies had a place of effective management in Denmark and partly whether such companies also have a PE in Denmark. In this case, the Chief Executive Officer (CEO) of the companies works from home in Denmark three days a week and two days a week from the office in Norway. The CEO works long hours in Norway and therefore spend 65% of the working hours in Norway and 35% in Denmark. Further, the CEO holds 20% of the shares in the Norwegian companies.

The DTB noted that the place of effective management is not in Denmark since the day-to-day management is in Norway where most of the employees are also located. As for the existence of a PE, the DTB concluded that both Norwegian companies have a PE in Denmark. This is because the Norwegian companies have an interest in being present in Denmark due to the relocation of the CEO to Denmark. Further, the CEO plays an important role in both companies and cannot be easily replaced.

Tax treaties

Brazil and the United Kingdom (UK): Tax treaty signed

On 29 November 2022, Brazil and the UK signed a tax treaty. Among other items, Article 5 (i.e., PE) of the tax treaty includes a provision where services rendered for more than 183 days in any 12-month period are considered to create a PE. 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.

The tax treaty still needs to be ratified by both jurisdictions before it enters into force. The tax treaty will enter into effect on 1 January of the calendar year following the date of entry into force.

Other PE developments

Malta: Introduction of transfer pricing regulations

On 18 November 2022, Malta implemented transfer pricing (TP) rules into domestic law. The TP rules will be applicable to cross-border arrangements between associated enterprises. The term “associated enterprises” is defined as a body of persons having 50% or more voting rights in an entity part of a multinational enterprise (MNE) group in scope of the country-by-country (CbC) reporting or 75% voting rights in the case of MNE groups not falling within the scope of CbC reporting.

The TP rules include two de minimis thresholds: i) an aggregate value of €6 million for arrangements of a revenue nature in the year preceding the year of assessment; and ii) €20 million for arrangements of a capital nature in the year preceding the year of assessment. This means that when the arrangement does not fall under thresholds, and unless elected otherwise by the taxpayer, the TP rules would not apply.

As for the attribution of profits to PEs, Malta will follow the Authorized OECD Approach and will treat a PE as if it were a separate enterprise engaged in the same or similar activities under the same or similar conditions.

The TP rules will apply vis-a-vis any relevant arrangement entered into on or after 1 January 2024 and any relevant arrangement entered into before the said date which is materially altered thereafter.


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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