PE case law

Belgium: Court confirms tax treaty exemption for profits attributed to a Luxembourg PE

On 29 June 2026, the Court of First Instance of Brussels published case 2024/1386/A, ruling in favor of a Belgian company with a Luxembourg permanent establishment (PE) for which the Belgian tax authorities had denied treaty relief. In this case, the company had established the PE in 2017 and subsequently exempted the PE profits under Article 7 of the Belgium-Luxembourg tax treaty. The tax authorities did not dispute the existence of a PE under Article 5, but argued that the profits could not be attributed to it. The tax authorities contended that the "significant people functions" (SPFs) relevant to the ownership of the financial assets and the associated risks were performed at the Belgian head office, and reallocated the income to Belgium.

The court applied the two-step Authorised Organisation for Economic Co-operation and Development (OECD) Approach (AOA). It noted that, because the treaty follows the pre-2010 version of Article 7, interpretations in the OECD's 2010 report on the allocation of profits to permanent establishments that depart from that wording could not be relied upon.

The first step of the AOA requires applying a functional and factual analysis. This step examines whether the PE operates as a separate and independent enterprise by identifying the SPFs performed at the PE on which the related assets and risks are allocated. Here, the court found that the PE genuinely carried out specific activities in Luxembourg, namely holding and disposing of participations in foreign companies and providing related financing. It also found that the individuals directing the PE performed active, substantive SPFs there. Two permanent representatives of the PE carried out the strategic decision-making, while a business controller managed the financial assets on a day-to-day basis and reported to the CFO. These were genuine functions, not merely formal or pro forma ones. The court rejected the tax authorities' contention that the PE's single employee could not perform an SPF.

The court held that the representatives' Belgian residence did not alter this conclusion. Nor did the fact that they rendered their services through Belgian companies and also exercised functions for the head office. If a person performs an SPF for both the head office and the PE, the analysis must determine on the facts where each function is actually exercised.

The second step is to determine the PE's profits, treating the PE as a hypothetically distinct and separate enterprise and pricing its dealings with the head office at arm's length. As this step was not in dispute, the court concluded that the assets, and the profits arising from them, were properly attributable to the PE. Belgium was therefore required to grant the exemption under Articles 7 and 23 of the tax treaty.

PE guidance

Germany releases final PE guidance updating long-standing administrative practice

On 18 June 2026, the German Federal Ministry of Finance (BMF) published the final circular updating the administrative principles on the existence of a PE under both domestic law and tax treaties. This follows the draft released on 13 February 2026, which was subject to consultation. The final circular replaces the long-standing 1999 guidance on PEs and consolidates recent German Federal Fiscal Court case law with developments under Article 5 of the OECD Model Tax Convention. A key message of the circular is that the PE analysis must be based on an overall assessment of the facts, with individual criteria (such as fixed place of business, degree of permanence and power of disposal) not assessed in isolation. The final version clarifies, however, that each criterion must be met on its own, and that a stronger presence of one criterion cannot fully replace another.

The circular confirms the two-step approach set out in the draft. First, it must be determined whether a PE exists under German domestic law. Second, if a tax treaty applies, it must be determined whether the treaty restricts Germany's taxing rights. While the BMF notes broad alignment between the domestic and treaty concepts, it also highlights important differences, including the absence of a preparatory or auxiliary activity exception under domestic law. As a result, a PE may arise under domestic law even if a treaty ultimately protects the income from German tax.

The circular retains practical examples from the draft, covering, among other things, home office arrangements, activities carried out at third-party premises, service and management companies, internet influencers and dependent-agent PEs, largely aligning the German tax authorities' views with recent OECD Commentary.