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October 12, 2023

PE Watch | Latest developments and trends, October 2023


Armenia and Côte d'Ivoire deposit instrument of ratification of the MLI

On 25 September 2023, Armenia and Côte d'Ivoire deposited with the Organisation for Economic Co-operation and Development (OECD) their instrument of ratification of the Base Erosion and Profit Shifting (BEPS) Multilateral Instrument (MLI) and confirmed its MLI positions. With respect to the permanent establishment (PE) provisions, Armenia and Côte d'Ivoire confirmed their preliminary positions and did not make any additional reservations. Therefore, all the PE provisions will be applicable to Armenia and Côte d'Ivoire's Covered Tax Agreements (CTAs) to the extent that there is a matching position between Armenia and Côte d'Ivoire and the other contracting state. The MLI will enter into force for Armenia and Côte d'Ivoire on the first day of the month following the expiration of a period of three calendar months beginning on the date of the deposit of their instrument of ratification (i.e., on 1 January 2024).

Eswatini signs the MLI

On 27 September 2023, the OECD announced that Eswatini signed the MLI. At the time of signature, Eswatini submitted a list of tax treaties that it would like to designate as covered tax agreements (CTAs) and submitted a preliminary list of reservations and notifications in relation to the CTAs (MLI positions). Eswatini chose to apply all the PE provisions.

EU PE developments

European Commission proposes Head Office Tax System Directive for SMEs

On 12 September 2023, the European Commission published a new legislative proposal "establishing a Head Office Tax system for micro, small and medium sized enterprises (SMEs)."

The proposal sets forth rules introducing the possibility for SMEs operating cross-border within the European Union (EU) to continue applying the tax rules that they are familiar with in their Member State of residence to calculate their PEs' taxable results in other Member States. The Directive will also amend Directive 2011/16/EU (DAC Directive) to enable Member States to exchange information regarding the Head Office Tax Directive. Commission President Ursula von der Leyen announced this initiative in her 2022 State of the European Union Address, under the "SME Relief Package."

The rules in the Directive will create a one-stop-shop regime whereby the tax filing, tax assessments and collections for PE(s) would be dealt with through a single tax authority ("filing authority"), i.e., the tax authority in the Member State of the head office. Audits, appeals and dispute resolution procedures would remain domestic and in accordance with the procedural rules of the respective Member State.

The draft Directive will now move to the negotiation phase among Member States with the aim of reaching unanimous agreement. The Commission proposes that the Member States transpose the Head Office Tax Directive into their national laws by 31 December 2025 for the rules to come into effect as of 1 of January 2026.

See, EY Global Tax Alert, European Commission proposes Head Office Tax System Directive for SMEs, dated 27 September 2023.

PE Case law

Norwegian Tax Appeals Board explains PE liability in Norway under the tax agreement with Germany

On 25 September 2023, the Norwegian Tax Administration published Tax Appeals Board Decision No. SKNS1-2023-54. The Decision deals with the concept of a construction PE under the Norway-Germany tax treaty.

In this case, a German tax resident was contracted to install and assembe ship equipment in Norway. The contract spanned from February 2018 to December 2023, with consecutive installations and payments received at the end of each phase of work. The Norwegian Tax Administration considered these activities as constituting a PE in Norway, while the taxpayer argued that the contract consisted of multiple projects, each lasting less than 12 months.

The Norwegian Tax Appeals Board agreed with the Norwegian Tax Administration, emphasizing that despite being divided into sub-deliveries, the project should be considered as a whole. The Board observed that all the sub-deliveries were integral parts of the same overarching project and the taxpayer's activities in Norway played a crucial role in completing all the sub-deliveries. Therefore, when determining whether the installation and assembly projects constituted a PE, the entire assignment should be taken into account.

Peruvian Supreme Court holds Peruvian branches may not offset past losses when distributing dividends to nonresident parent

On 20 July 2023, the Supreme Court enacted Court Ruling 31323–2022, analyzing how losses from previous fiscal years apply in the distribution of deemed dividends made by a Peruvian branch to its nonresident parent company.

The court concluded that, under the described scenario, the Peruvian branch may not offset its losses from previous fiscal years to determine the net income that the branch obtained after tax that would be distributed as deemed dividends.

Given that the tax withholding to be made by the Peruvian branch refers to income obtained by a nonresident entity, it is not possible to offset losses from previous fiscal years of a resident entity (Peruvian branches), as the loss-offsetting regime only applies to Peruvian residents and should not be extended to Peruvian branches of nonresident entities, the Court concluded.

See EY Global Tax Alert, Peruvian Supreme Court holds Peruvian branches may not offset past losses when distributing dividends to nonresident parent, dated 7 September 2023.

PE tax rulings

Denmark: A CEO working from a home office in Denmark did create a PE

On 1 September 2023, the Danish Tax Board (DTB) published binding tax ruling SKM2023.423.SR. In this ruling, the DTB analyzes whether a CEO working from a home office in Denmark would result in (1) changing the tax residence of the company to Denmark, or (2) the creation of a PE in Denmark.

As a result of the COVID-19 pandemic, a non-Danish company implemented a hybrid work policy that encouraged employees to work from home; after the stabilization of the pandemic the company made this policy permanent, so employees could decide either to work from home or at the employer's premises. As a result of this policy, the company's managing director (the "CEO") will work from his Danish residence (home office) two weekdays. Before the COVID-19 pandemic, the CEO was resident in both in the country of the employer and in Denmark, while his family resided in Denmark. Under the new employment policy, the CEO would spend two specific workdays every week carrying out preparatory work, strategy work and online conversations in Denmark, while the rest of the week he would perform his management duties (e.g., attending weekly management meeting) from the country of the head office.

The DTB ruled that although the non-Danish company did not have tax residence in Denmark, as it did not have its seat of effective management in Denmark, the CEO's working from his home office in Denmark did meet the PE criteria. The DTB based its ruling on the fact that the CEO is of critical importance to the company, due to his position in the company, and that because the CEO wanted to work from Denmark, the company has an interest in being present in Denmark. Furthermore, unlike previous cases involving CEOs, his work from Denmark did not occur randomly, because it was scheduled for two fixed days each week.


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


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