August 9, 2023
PE Watch | Latest developments and trends, August 2023
Domestic law PE developments
Kenya introduces branch profits tax
On 26 June 2023, Kenya's Finance Act 2023 received presidential assent. One key provision in the Finance Act 2023 introduces a branch profits tax. Under this new tax, a 15% rate will be applied to profits that Permanent Establishments (PEs) repatriate to their head offices. The amount subject to this tax will be determined using a formula. To calculate the repatriated profit, the net assets at the beginning of the year are added to the net profit earned during the year. Next, the tax payable and the net assets at the end of the year are subtracted. The result obtained from this calculation will be considered as the repatriated income, which will then be subject to the 15% branch profits tax.
Additionally, the Finance Act 2023 will reduce the corporate income tax rate for PEs to 30%, down from the previous rate of 37.5%.
These changes are scheduled to take effect on 1 January 2024.
PE tax rulings
Finland issues ruling on allocation of taxes paid by a PE
On 20 July 2023, the Finnish Central Tax Board (CTB), a government agency responsible for providing rulings and interpretations on tax matters in Finland, published preliminary ruling KVL:2023/25. The preliminary ruling involves a Finnish entity that registered a PE in Estonia in 2001. In Estonia, a PE's net income is generally taxed only when its assets are transferred to the head office.
In 2022, the accumulated earnings of the Estonian PE were transferred to the head office, and income tax was paid in Estonia for this transfer. The main question was whether the Finnish entity could credit the income tax paid in Estonia. Based on prior case law, the CTB believes that the tax paid in Estonia can be credited against the tax liability in Finland. However, because the transferred earnings of the PE included profits from previous years, it is necessary to determine how this tax needs to be allocated over time. Therefore, the tax paid must be divided and allocated to those respective years.
After determining the tax allocation for each tax year, the Finnish entity can then calculate how much of the foreign tax can be offset against its tax liability in Finland for each specific year or in later years, following the applicable rules and limitations under domestic law.
Other PE developments
Colombia releases draft guidance on Significant Economic Presence
On 29 June 2023, Colombia issued a Draft Decree providing guidance on the Significant Economic Presence (SEP) provision. Introduced in 2022, the SEP provision imposes tax on nonresidents for income from digital services in Colombia starting on January 2024, subject to specific conditions.
The Draft Decree defines terms that were unclear when the SEP provision was introduced. It explains that "digital services" refer to services provided through the internet or electronic networks, with minimal human involvement and relying on information technology. Certain services like technical services, consulting, technical assistance, and education services provided through the internet are excluded as they are taxed under different rules. Additionally, the Draft Decree defines "clients" and "users," along with the term "digital interface."
The Draft Decree also clarifies how the location of a client and/or user is determined. These criteria include the domicile or habitual residence of the customer/user, location of the payment mechanisms, and shipping and internet protocol (IP) address.
Moreover, the Draft Decree provides an option to file a return and pay a 3% tax on gross income instead of applying a 10% withholding tax on gross income. Nonresidents making this election should make quarterly advance payments based on 2% of their net quarterly income from its SEP. These advance payments can be credited against their annual SEP income tax liability.
The Draft Decree was open for comments until 15 July 2023. It is expected that a final Decree on this matter will consider the input received and be issued soon.
See EY Global Tax Alert, Draft decree provides guidance for nonresidents subject to Colombia's version of digital services tax (Significant Economic Presence), dated 11 July 2023.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Belastingadviseurs LLP (Netherlands)
Ernst & Young Solutions LLP (Singapore)
Ernst & Young LLP (United States)
Published by NTD's Tax Technical Knowledge Services group; Carolyn Wright, legal editor