PE case law

Indian tribunal overrules revenue department ruling on the existence of a PE for a computer reservation system provider

On 9 February 2024, the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) issued decision No. 6731/Del/2015, addressing the existence of a permanent establishment (PE) in India for a company in the United States (US). The primary business activity of this US company in India was facilitating airline and hotel bookings.

The US company entered into agreements with various airlines, wherein through its computer reservation system (CRS), it agreed to facilitate ticket bookings and provide related services. It also entered into subscriber agreements with travel agencies outside India, some of which had locations in India. Importantly, the US company did not have any office, place of business, or employees based in India. It only availed itself of certain marketing support from a group company's branch office in India.

The tax officer held that the US company constituted a PE in India and attributed the total profits earned from booking fees originating from India to this PE. The company contested this assessment, arguing that the Indian travel agents did not directly access the CRS, as the services were hosted outside India. Furthermore, the company did not provide any equipment or physical assets to the travel agents in India. Additionally, the Indian travel agents were independent operators, not exclusive agents, and were free to use multiple CRS providers.

The ITAT court found that the US company did not have a fixed place of business PE in India based on two key factors: (i) the CRS was accessible to foreign travel agencies but not directly to Indian agents; and (ii) the US company did not provide any equipment or facilities to the Indian travel agents within India.

Moreover, the ITAT court determined that the company did not have an agency PE in India, as there was no entity that habitually secured contracts on behalf of the US company or independently bound it to contracts without the US company's direct involvement.

Domestic law PE developments

Germany updates guidance on home office PEs

On 5 February 2024, the German Ministry of Finance published amendments to the application decree of the German Fiscal Code, that provides guidance on how to implement and interpret the tax law. Among other things, the amendments include new guidance on the existence of a PE due to employees working from home as well as on the place of effective management.

The updated guidance notes that, generally, an employee's remote work does not constitute a PE for German tax purposes or for tax treaty purposes from a German perspective. This is true even if: (i) the employer covers the costs for the home office and associated equipment; (ii) the employer (as tenant) and the employee (as landlord) conclude a rental agreement for the home office, unless the employer is authorized to use the rooms for other purposes, and (iii) the employer does not provide another workplace for the employee. This results from the underlying assumption that the employer does not have sufficient power of disposal over the employee's premises. A different view can be taken if the employee exercises management functions and these convey power of disposal to the employer.

Moreover, the updated guidance addresses the interaction of a PE and the place of effective management for German tax purposes. According to the updated guidance, the place of effective management is determined according to where regular business operations and organizational measures (day-to-day business) are actively conducted. Importantly, it is not essential to have a specific and dedicated facility, as managerial tasks can also be carried out in the managing director's residence or in facilities belonging to any service or management companies involved. On the other hand, the updated guidance notes that managerial tasks performed during business travel do not constitute a place of effective management. Ultimately, the actual circumstances of the individual case should always be considered.

Furthermore, when a company conducts management activities at multiple locations, it is generally necessary to assign weights to these activities based on their significance for the company. This helps in determining the (main) place of management. However, if multiple equivalent places of management exist, this results in multiple management PEs.

Italy provides implementation rules for Investment Management Exemption regime

On 4 March 2024, Italy published in the Official Gazette a Decree implementing provisions in the Italian consolidated income tax code regarding the Investment Management Exemption regime. Under the Investment Management Exemption regime, a foreign investment vehicle and its direct or indirect subsidiaries can claim that they have no Italian PE if the asset/investment manager, or an advisor operating in Italy on their behalf or for their benefit, can be deemed to be acting independently of the foreign investment vehicle.

The Decree mainly addresses the definition of foreign investment vehicles and certain independence requirements.

See EY Global Tax Alert, Italy issues ministerial decree providing implementation rules for Investment Management Exemption regime, dated 6 March 2024.

Other PE developments

UAE sets out timeline for registering PEs in the country

On 27 February 2024, the Federal Tax Authority of the United Arab Emirates (UAE) published Decision No.3 of 2024, outlining key points related to the registration timeline for Corporate Tax purposes. Among other items, the Decision notes that a juridical person that is a "Non-Resident Person" who has a PE in the UAE prior to 1 March 2024 must apply to register for Corporate Tax within nine months from the date of the existence of the PE in the UAE. A juridical person that is a Non-Resident Person on or after 1 March 2024 and has a PE is required to apply to register for Corporate Tax within six months of the existence of the PE in the UAE.

A PE could be also created when a person has a nexus in UAE (e.g., if the person earns income from immovable property in the UAE). A person who has a nexus in the UAE prior to 1 March 2024 shall submit a tax registration application within three months from 1 March 2024. If nexus is established on or after 1 March 2024, the deadline for submitting a tax registration application is three months after nexus is established.

This Decision came into effect on 1 March 2024.