April 13, 2023
PE Watch | Latest developments and trends, April 2023
BEPS Multilateral Instrument: Mexico deposits instrument of ratification of the MLI
On 15 March 2023, Mexico deposited its instrument of ratification of the Base Erosion and Profit Shifting (BEPS) Multilateral Instrument (MLI) with the Organisation for Economic Co-operation and Development (OECD). Mexico confirmed its preliminary MLI positions and chose to apply all of the Permanent Establishment (PE) provisions of the MLI, excluding Article 14 (splitting up of contracts).
The MLI will enter into force for Mexico on 1 July 2023.
PE case law
Switzerland: Ride-hailing platform company creates a PE in Switzerland for social security contributions purposes
On 16 February 2023, the Federal Supreme Court of Switzerland (FSCS) ruled that drivers of a ride-hailing platform company are not self-employed but are in fact engaged in paid employment for social security contributions purposes. The court based its decision on the economic circumstances rather than the legal nature of the contractual relationship. The court considered various factors that indicate self-employment or dependent employment and found that the characteristics of dependent employment clearly dominated. Among others, the drivers lack substantial freedom in pricing, cannot negotiate fees, are monitored by GPS, and are subordinated to the ride-hailing platform company in essential areas.
The FSCS also determined that the foreign company had a PE in Switzerland for social security contributions purposes based on two requirements. First, the contractual rights granted by the Swiss company, fulfilling other group functions and activities within Switzerland, to the foreign company were considered analogous to those of a tenant, allowing the foreign company to freely dispose of the premises in Switzerland. Second, the premises in Switzerland, where drivers complete the registration process, attend training sessions and sign contracts, was deemed a contact point for the drivers and therefore constituted a PE for the foreign company for social security contribution purposes.
The FSCS noted that employees of the Swiss company explained procedures established by the foreign company, implemented their decisions and carried out their instructions, which were related to the foreign company's main activity. The FSCS held that although these activities were not quantitatively or qualitatively significant, as required for a qualification as a PE for direct tax purposes based on the long-established practice of the FSCS, they were enabling or accompanying the main activity and therefore met the requirements for a PE in Switzerland from a social security contributions perspective.
Although the FSCS decision and the aforementioned definition of a PE is not legally binding for direct tax purposes in Switzerland, it is advisable to monitor how the activities of platform companies operating in Switzerland will be evaluated from a direct tax perspective.
United Kingdom: Court of Appeal upholds HMRC's decision on PE losses
On 1 March 2023, the United Kingdom (UK) Court of Appeal dismissed case  EWCA Civ 210, which involved a disagreement over the compatibility of UK group relief rules with European Union (EU) law.
In the case, a group had claimed tax relief for losses incurred by a UK PE of a Dutch entity. However, Her Majesty and Revenue and Customs (HMRC) denied the claim under s.403D(1)(c) ICTA 1988, now in s.107 CTA 2010. The group argued that the domestic limitation imposed by the UK law was incompatible with EU freedom of establishment, citing Case C-18/11 of the Court of Justice of the EU, ruling that EU member states cannot impose limitations that prevent or discourage cross-border group structures.
The Court of Appeal relied on a later ruling by the Court of Justice of the EU (in Case-28/17) to hold that the limitation contained in the UK domestic rules, which was found to be a restriction on the EU freedom of establishment, could be justified on the basis that it aimed to prevent the double deduction of losses. Therefore, the Court of Appeal concluded that there was no violation of EU law.
PE tax rulings
Japan: Appointing a representative and obtaining registration does not create a PE
On 8 March 2023, Japan's National Tax Agency (NTA) published a tax ruling analyzing whether appointing a representative (external lawyer) and obtaining a registration, as required under the Companies Act, would constitute a PE in Japan.
The Japanese NTA concluded that there would be no fixed place of business or dependent agent PE in Japan, provided that the foreign company did not have access to any space in which the representative performed duties and assuming that the representative was not involved in the core business and would not conduct any other activities for the foreign company.
See EY Global Tax Alert, Japan's Tax Authority confirms that a representative and registration in Japan as required under Companies Act does not create a PE, dated 16 March 2023.
Finland — France: Sign of new tax treaty
On 4 April 2023, Finland and France signed a new tax treaty replacing the tax treaty signed in 1970. The updated treaty includes new provisions on PE, which includes an anti-fragmentation rule and an Agency PE provision, consistent with the 2017 OECD Model Tax Convention. In addition, the definition of an independent agent has been narrowed to exclude individuals acting almost exclusively for one or more closely related enterprises.
The tax treaty is still subject to ratification by both Finland and France. Once ratified, the treaty will come into force 30 days after the date on which the latter of the notifications related to the completion of the ratification process has been received. Furthermore, the new tax treaty will take effect from 1 January of the calendar year following its entry into force.
Other PE developments
Greece: Circular on payments to a foreign PE
On 30 March, 2023, Greece issued a Circular on the taxation of fees for technical services, management fees, consulting fees, and similar services paid to a Swiss PE. These fees are not subject to withholding tax in Greece due to Article 23 of the Greece-Switzerland tax treaty, which includes a PE non-discrimination clause. Likewise, this applies to PEs operating in a jurisdiction that has a tax treaty with Greece and includes the same non-discrimination clause for PEs.
Netherlands: Vehicle rental business may create a PE
On 23 March 2023, the Dutch Tax Authorities (DTA) published position paper KG:040:2022:9 discussing whether a vehicle rental business can create a PE in the Netherlands.
The paper explains a case in which a foreign company has more than 20 locations in and around a Dutch city to store vehicles that users can rent and return to a location after use. In this case, the DTA has determined that the foreign company (resident in a treaty country, with a PE provision in line with article 5 OECD Model Tax Convention) has a PE in the Netherlands because it has access to a certain amount of space to carry out its business activities. The paper notes that the various rental locations could be seen as different fixed places, resulting in multiple PEs. Therefore, in its Dutch corporate income tax return, the foreign company must file a single tax return reporting jointly all its PEs in the Netherlands. The paper does not provide guidance on how to allocate profits to these PEs.
It is important to note that although the position paper offers insight into the DTA's position, it is not legally binding for taxpayers.
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
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor