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PE case law

French Court rules against deducting foreign PE losses

On 26 April 2024, the French Supreme Administrative Court (Conseil d'Etat) issued decision No. 466062, addressing whether European Union (EU) law allows resident companies to deduct final losses of a Permanent Establishment (PE) located in another EU Member State from their taxable profits in France.

In this case, a French company set up a PE in Luxembourg for a construction project. Following the closure of the PE, the company sought to offset the losses incurred by the PE against the profits of its French tax-consolidated group. Disagreeing with this approach, the French tax authorities contested the use of PE losses, leading the taxpayer to appeal to the lower court.

Although the lower court ruled in favor of the taxpayer, the Supreme Administrative Court adopted a contrary view. The Supreme Administrative Court noted that French domestic law and the France-Luxembourg tax treaty prevented the deduction of losses made through a PE, whereas losses from a French branch were deductible. However, citing case law from the Court of Justice of the EU (CJEU), the Supreme Administrative Court emphasized that such differential treatment does not violate the freedom of establishment if the taxpayer's situation is not comparable to a purely domestic situation.

The Supreme Administrative Court highlighted that, according to the relevant tax treaty, France is restricted to taxing the profits of a PE in Luxembourg of a French company, whereas profits generated by a branch in France are taxable in France. Consequently, the Supreme Administrative Court concluded that the inability to offset PE losses did not restrict the freedom of establishment under EU law. It declined to refer the matter to the CJEU, considering the applicable rules to be clear and unequivocal.

The Supreme Administrative Court's judgment is final and cannot be appealed.

PE domestic law

Saudi Arabia issues guidelines for Regional Headquarters Tax rules

On 15 April 2024, the Zakat, Tax and Customs Authority (ZATCA) published guidelines on the Regional Headquarters (RHQ) Tax Rules published in February 2024. Under the RHQ Tax Rules, RHQ entities established in Saudi Arabia that meet the relevant criteria are granted a 30-year renewable tax incentive of 0% corporate income tax and 0% withholding tax.

In part, the guidelines clarify that a nonresident affiliate should not be considered a tax resident (or be deemed to have a PE) in Saudi Arabia merely because of the support functions carried out by the group's RHQ in Saudi Arabia. Additionally, the "force of attraction" rule should apply to RHQs, unless it takes the form of a limited liability company in Saudi Arabia. Under this rule, if the nonresident head office is providing goods and/or services to a Saudi customer that are the same or similar to the goods and/or services of the RHQ, income from such goods and/or services also must be reported in the RHQ's tax return, unless relief is available under a double tax treaty between Saudi Arabia and the counterparty jurisdiction.

See EY Global Tax Alert, Saudi Arabia issues guidelines for Regional Headquarters Tax and zakat rules, dated 19 April 2024.

Saudi Arabia announces exemption of Zakat for PEs

On 21 March 2024, Saudi Arabia published in the Official Gazette new executive regulations for Zakat collection. Among other things, the regulations provide that a PE in Saudi Arabia of nonresidents is no longer subject to Zakat.

This new regulation applies to financial years starting on or after 1 January 2024. However, the regulation can also be applied to fiscal years that began before 1 January 2024, provided that a Zakat payer submits an application within 60 days from the date of publishing the regulation.

See EY Global Tax Alert, Saudi Arabia issues new Executive Regulations for Zakat Collection, dated 4 April 2024.

Uganda introduces provisions on PE

On 27 March 2024, the Ministry of Finance of Uganda presented the national budget for the 2024/2025 financial year along with other tax bills. The Income Tax (Amendment) Bill introduces a provision on PE, defining a PE as fixed place of business through which the business of the enterprise is wholly or partly carried on. The PE provision includes a Construction PE to be determined for projects or activities that last for at least 90 days in any 12-month period. Likewise, the PE provision includes a Service PE to be determined when the furnishing of services lasts 183 days or more in any 12-month period that commences or ends during the year of income. Additionally, the PE provision includes a clause to prevent splitting up of contracts for both Construction and Service PEs.

Furthermore, the Bill includes an anti-fragmentation clause to prevent the use of the specific activity exemptions to artificially avoid PE status by fragmenting a cohesive operating business into several small operations to argue that each part is merely engaged in preparatory or auxiliary activities. In addition, the amendments include an Agency PE clause consistent with the 2017 Organisation for Economic Co-operation and Development Model Tax Convention.

See EY Global Tax Alert, Uganda issues tax amendment bills for 2024 affecting excise duty, stamp duty, VAT, income tax and PEs, dated 18 April 2024.