A sales, marketing and management service agreement entered into in 1993 between Asian Hotels Limited and Hyatt International-Southwest Asia Limited had been replaced by various separate agreements – a Strategic Oversight Services Agreements, a Technical Services Agreement, a Hotel Operation Agreement with Hyatt India, and trademark license agreements pursuant to which Asian Hotels Limited was permitted to use Hyatt’s trademark in connection with the hotel’s operation. In 2012, the tax authorities issued assessment orders for FY 2009-2010 to FY 2017-2018, qualifying a portion of the service payments received by Hyatt as royalty and finding that Hyatt had a PE in India. Hyatt appealed the assessment orders to the Income Tax Appellate Tribunal, which later upheld the order of the tax authorities. Aggrieved with the decision, Hyatt filed appeals before the High Court. Judgement of the High Court The High Court set aside in part and upheld in part the decision of the Tribunal. The court set aside the decision of the Tribunal in regards of qualifying the service payments as royalty. The court found that the strategic and incentive fee received by Hyatt International was not a consideration for the use of or the right to use any process or for information of commercial or scientific experience. Instead, these fees were in consideration of the services as set out in SOSA. The fact that the extensive services rendered by Hyatt in terms of the agreement also included access to written knowledge, processes, and commercial information in furtherance of the services could not lead to the conclusion that the fee was royalty as defined under Article 12 of the DTAA. The court upheld the findings of the Tribunal that Hyatt had a permanent establishment in India. According to the court “It is apparent from the plain reading of the SOSA that the Assessee exercised control in respect of all activities at the Hotel, inter alia, by framing the policies to be followed by the Hotel in respect of each and every activity, and by further exercising apposite control to ensure that the said policies are duly implemented. The assessee’s affiliate (Hyatt India) was placed in control of the hotel’s day-to-day operations in terms of the HOSA. This further ensured that the policies and the diktats by the Assessee in regard to the operations of the Hotel were duly implemented without recourse to the Owner. As noted above, the assessee had the discretion to send its employees at its will without concurrence of either Hyatt India or the Owner. This clearly indicates that the Assessee exercised control over the premises of the Hotel for the purposes of its business. Thus, the condition that a fixed place (Hotel Premises) was at the disposal of the Assessee for carrying on its business, was duly satisfied. There is also little doubt that the Assessee had carried out its business activities through the Hotel premises. Admittedly, the Assessee also performed an oversight function in respect of the Hotel. This function was also carried out, at least partially if not entirely, at the Hotel premises.” The Court also confirmed the direction of the Tribunal asking Hyatt to submit the working regarding apportionment of revenue, losses etc. on a financial year basis so that profit attributable to the PE can be determined judicially. According to the High Court profits attributable to a PE are required to be determined considering the permanent establishment as an independent taxable entity, and prima facie taxpayers would be liable to pay tax in India due to profits earned by the permanent establishment notwithstanding the losses suffered in the other jurisdictions. This matter was to be decided later by a larger bench of the Court. hyatt-international-513917 ...

“XZ Insurance SA” is the parent company in a group engaged in insurance activities in its various branches, both life and non-life, finance, investment property and services. An audit was conducted for FY 2013-2016 and in 2020 an assessment was issued in relation to both controlled transactions and other transactions. Among outher issued the tax authorities determined that “XZ Insurance SA” did not receive any royalty income from the use of the XZ trademark by to other entities of the group, both domestic and foreign. In the assessment the tax authorities determined the arm’s length royalty percentage for use of the trademarks to be on average ~0,5%. “In order to estimate the market royalty, the first aspect to be studied is the existence of an internal comparable or comparable trademark assignment contracts. And we have already stated that the absence of valid internal and external comparables has led us to resort to the use of other generally accepted valuation methods and techniques. In this respect, it should be noted that this situation is frequent when valuing transactions related to intangibles, and the Guidelines have expressly echoed this situation (in particular, in paragraphs 6.138, 6.153, 6.156, 6.157 and 6.162, which are transcribed in section 6.2 of this Report).” A complaint was filed by “XZ Insurance SA” Judgement of the TEAC The TEAC dismissed the complaint of “XZ Insurance SA” and upheld the tax assessment. Excerpts from the decision concerning the assessment of income for use of the trademarks by other group companies “On this issue, it is worth pointing out an idea that the complainant uses recurrently in its written submissions. The complainant considers that if there is no growth in the number of policies and premiums, it should not be argued that the use of the XZ brand generates a profit in the subsidiaries. However, as the Inspectorate has already replied, it is not possible to identify the increase in the profit of the brand with the increase in premiums, nor that the growth, in certain countries, of the entities is exclusively due to the value of the brand. Logically, increases and decreases in premiums are due to multiple factors, including the disposable income of the inhabitants of each country, tax regulations, civil liability legislation, among others, and we cannot share the complainant’s view that the brand does not generate a profit in the event of a decrease in premiums in the market. Furthermore, insofar as the enforceability of the royalty is conditioned by the fact that the assignment produces a profit for the company using the brand, there is greater evidence as to the usefulness of the brand in the main markets in which the group operates and in which it is most relevant: Spain, COUNTRY_1, Latin American countries, COUNTRY_2, COUNTRY_3, COUNTRY_4 and COUNTRY_5. Finally, one aspect that draws the attention of this TEAC is the contrast between what the complainant demands that the administration should do and the attitude of the administration in the inspection procedure. On the one hand, it demands that the administration carry out a detailed analysis of the valuation of the profit generated by the trademark for the group, but, on the other hand, there is a total lack of contribution on the part of the entity in providing specific information on the valuation of the trademark that could facilitate the task it demands of the administration. In fact, this information was requested by the Inspectorate, to which it replied that “there are no studies available on the value or awareness and relevance of the XZ brand in the years under inspection” (…) “It follows from the above that it has not been proven that the different entities of the group made direct contributions or contributions that would determine that, effectively, the economic ownership of the trademark should be shared. Therefore, this TEAC must consider, given the existing evidence, that both the legal and economic ownership of the trademark corresponds to the entity XZ ESPAÑA. In short, it is clear from the facts set out above that certain entities of the group used, and use, for the marketing of their services and products, a relevant and internationally established trademark, the “XZ” trademark, which gives them a prestige in the market that directly and undoubtedly has an impact on their sales figures, with the consequent increase in their economic profit. It is clear from the above that there was, in the years audited, a transfer of use of an established, international brand, valued by independent third parties (according to the ONFI report, according to …, between … and …. million euros in the years under review) and maintained from a maintenance point of view (relevant advertising and promotional expenses). Therefore, it is reasonable to conclude, as does the Inspectorate, that, in a transaction of this type – the assignment of the “XZ” trademark – carried out at arm’s length, a payment for the use of the intangible asset would have been made to its owner, without prejudice to the fact that the value assigned to the assignment of use of the aforementioned trademark may be disputed; but what seems clear, and this is what the TEAC states, is that it is an intangible asset whose assignment of use has value. In conclusion, the TEAC considers that the entity owning the trademark (XZ SPAIN) had an intangible asset and transferred its use, for which it should receive income; by transferring the use of the asset to group entities, both domiciled in Spain and abroad, it is appropriate to calculate that income for XZ SPAIN by applying the regime for related-party transactions.” (…) “In section 6 of the report, as we have already analysed, ONFI attempts to find external comparables, insofar as there are no internal comparables within the group, reaching the conclusion that they cannot be identified in the market analysed. Consequently, it proceeds to estimate the royalty that XZ Spain should receive, by applying other methodologies that allow an approximation to the arm’s length price, based ...

A Hungarian company had a permanent establishment (PE) in Germany. The PE provided installation and assembly services to third parties in Germany. Following an audit of the German PE for FY 2017 the German tax authorities issued an assessment of additional taxabel income calculated based on the cost-plus method, cf. section 32 of the BsGaV (German ordinance on allocation of profits to permanent establishments). Not satisfied with the assessment a complaint was filed with the Tax Court. Judgement of the Tax Court The Court decided in favour of the PE and set aside the tax assessment. Excerpt (English translation) “Pursuant to Section 1 para. 1 sentence 1 AStG, the following applies: If a taxpayer’s income from a business relationship abroad with a related party is reduced by the fact that the taxpayer bases its income calculation on different conditions, in particular prices (transfer prices), than would have been agreed between independent third parties under the same or comparable circumstances (arm’s length principle), its income must be recognised as it would have been under the conditions agreed between independent third parties, irrespective of other provisions. This provision shall apply accordingly in accordance with Section 1 (5) AStG if the conditions, in particular the transfer prices, on which the allocation of income between a domestic company and its foreign permanent establishment or the determination of the income of the domestic permanent establishment of a foreign company is based for tax purposes for a business relationship within the meaning of paragraph 4 sentence 1 number 2 do not comply with the arm’s length principle and the domestic income of a limited taxpayer is reduced or the foreign income of an unlimited taxpayer is increased as a result. In order to apply the arm’s length principle, a permanent establishment must be treated as a separate and independent company, unless the affiliation of the permanent establishment to the company requires a different treatment. The criteria of Section 1 para. 5 sentence 1 in conjunction with Section 1 para. § Section 1 para. 1 sentence 1 AStG are not fulfilled in the case in dispute insofar as there are no transfer pricing issues in particular. There are no indications apparent to the court and no such indications were presented by the tax office that the service relationships between the Hungarian parent company and the domestic permanent establishment as the taxable entity were overcharged or would not stand up to a third-party comparison in any other way. Insofar as the domestic permanent establishment made payments to the parent company (e.g. payments to the Hungarian social security fund), these were merely cost reimbursements in the year in dispute, which were passed on to the branch without any mark-up. In particular, the court does not agree with the tax office’s view that fictitious mark-up rates should be applied in relation to the service relationships between the Hungarian parent company and the domestic permanent establishment. Such factual treatment cannot be inferred from the provisions of the AStG.” (An appeal has later been filed by the tax authorities with the BFH (I R 49/23). Click here for English translation Click here for other translation FG Nürnberg Urteil vom 27-09-2022 - 1 K 1595-20 ORG ...

UPS Asia is a company incorporated under the laws of Singapore and is engaged in the business of provision of supply chain management including the provision of freight forwarding and logistic services. In 2012 UPS Asia had entered into a Regional Transportation Services Agreement with UPS SCS (India) Pvt. Ltd. for the provisions of freight and logistics services. Under the Transportation Agreement, UPS Asia arranged to perform international freight transportation and provide overseas support services, while UPS India performed freight and logistics services in India to its India customers and to UPS Asia. Following an audit an assessment was issued according to which UPS Asia had a PE in India in the form of UPS India. Furthermore, profits of Rs.2,09,53,496 was considered attributable to operation in India. The tax authorities held that UPS India constitutes a PE of UPS Asia in India within the meaning of Article 5 of India–Singapore DTAA. Not satisfied with the assessment UPS Asia filed an appeal and submitted that UPS India was remunerated in accordance with the arm’s length principle (article 9) and, therefore, no further profit was required to be attributed (Article 7) to UPS India in the present case. Judgement of the Tax Appellate Tribunal The Tribunal allowed the appeal of UPS and set aside the assessment. Excerpt ” … 9. …. Thus, respectfully following the decision of the Co–ordinate Bench rendered in assessee’s own case cited supra, we hold that when the Indian A.E. is remunerated at arm’s length price no further profit attribution is required and the issue of existence of P.E. becomes wholly tax neutral. Accordingly, the addition made by the Assessing Officer is directed to be deleted. 10. In the result, appeal by the assessee is allowed in terms of our aforesaid findings. .. Click here for html-version. India vs UPS-Asia-Group-Pte.-Ltd. March 2022-ITAT-Mumbai ...

According to the Regional Court, it follows from Section 2 of the Income Tax Act that a footballer is subject to tax in the Czech Republic by reason of his residence, permanent home or other similar criteria if he had resided in the Czech Republic (continuously or in several periods) for at least 183 days in 2011 or if he had a permanent home in the Czech Republic in circumstances from which it can be inferred that he intended to reside there permanently. If at least one of these conditions is met, the footballer would be a Czech tax resident within the meaning of Article 2(2) of the Income Tax Act and would be liable to tax on the basis of that (i.e. residence, permanent home or similar criteria). He would therefore also be a resident of the Czech Republic within the meaning of Article 4(1) of the Double Taxation Treaty. The Regional Court did not find any reason to apply Article 5 or Article 3(2) of the Double Taxation Treaty, since the contested decision is based, quite correctly, on the interpretation of Article 4 of the Treaty and, in particular, on the fact that the applicant did not bear the burden of proof to establish that the footballer was a tax resident of the Czech Republic. With regard to the objections challenging the procedure under section 38s of the Income Tax Act, the Court states that that provision does not give the tax authorities any margin of appreciation when it comes to determining the basis for calculating the tax levied or withheld. It clearly states that the basis for calculating the amount of tax levied or withheld, including advances, is the amount which, after collection or withholding, would have remained after the amount actually paid by the taxpayer to the taxpayer. It is therefore irrelevant what amount the footballer invoiced to the claimant, but only what amount was actually paid to him. At the same time, the applicant’s argument that, if the tax had not been paid by a domestic person, only the actual income would have been the taxable amount is not valid. Such a situation cannot arise at all in the case of a procedure under section 38s of the Income Tax Act. Therefore, in the Court’s view, the tax authorities did not err in failing to address the question of actual income as the applicant had envisaged it and in relying only on the amounts paid by the applicant to the footballer. An appeal was filed with the Supreme Administrative Court. Judgement of the Court The Supreme Administrative Court found the first ground of appeal (failure to discharge the burden of proof) to be well-founded and therefore set aside the judgment of the Regional Court under appeal. Since the defects complained of cannot be remedied in the proceedings before the Regional Court, but can only be remedied in the proceedings before the administrative authority, the Supreme Administrative Court also annulled the defendant’s decision, which is bound in further proceedings by the legal opinion expressed above (in particular paragraph [55] of the judgment). [88] As the Supreme Administrative Court annulled the judgment of the Regional Court and at the same time annulled the decision of the administrative authority pursuant to Article 110(2) of the Code of Civil Procedure, it is obliged to decide on the costs of the proceedings preceding the annulled decision of the Regional Court (Article 110(3), second sentence, of the Code of Civil Procedure). In this case, the costs of the proceedings on the action and the costs of the proceedings on the appeal form a single unit and the Supreme Administrative Court decided on their compensation in a single judgment based on Article 60 of the Code of Civil Procedure (cf. judgment of the Supreme Administrative Court of 19 November 2008, No 1 As 61/2008 98). [89] The defendant was unsuccessful in the case and is therefore not entitled to reimbursement of its costs. The complainant was fully successful in the case, therefore the Supreme Administrative Court awarded him compensation for the costs of the proceedings against the defendant pursuant to Article 60(1) of the Code of Civil Procedure in conjunction with Article 120 of the Code of Civil Procedure. Those costs consisted of CZK 8 000 for court fees (court fee for the application of CZK 3 000 and court fee for the appeal of CZK 5 000). “…” Click here for English Translation Click here for other translation Case No 1 Afs 239-2017 – 37 ...

Dell Spain is part of a multinational group (Dell) that manufactures and sells computers. Dell Ireland, operates as distribution hub for most of Europe. Dell Ireland has appointed related entities to operate as its commissionaires in several countries; Dell Spain and Dell France are part of this commissionaire network. The group operates through a direct sales model and sales to private customers in Spain are conducted by Dell France, through a call centre and a web page. Dell Spain use to operate as a full-fledged distributor, but after entering into a commissionaire agreement Dell Spain now served large customers on behalf of Dell Ireland. A tax assessment was issued by the tax authorities. According to the assessment the activities in Spain constituted a Permanent Establishment of Dell Ireland to which profits had to allocated for FY 2001-2003. Judgement of the Supreme Court The Supreme Court concludes that the activities of Dell Spain constitutes a Permanent Establishment of Dell Ireland under both the “dependent agent” and “fixed place of business” clauses of the treaty. The expression “acting on behalf of an enterprise” included in article 5.5 of the Spain-Ireland tax treaty does not necessarily require a direct representation between the principal and the commissionaire, but rather refers to the ability of the commissionaire to bind the principal with the third party even when there is no legal agreement between the latter two. Furthermore, the Supreme Court considers that Dell Spain cannot be deemed as an independent agent since it operated exclusively for Dell Ireland under control and instructions from the same. Regarding the “fixed place of business”, the Supreme Court states that having a place at the principal’s disposal also includes the use of such premises through another entity which carries out the principal’s activity under its supervision. This Court also explained that considering a company as a PE is not only based on its capacity to conclude contracts that bind the company but also on the functional and factual correlation between the agent and the company in the sense that the agent has sufficient authority to bind the company in its day to day business, following the instructions of the company and under its control. In regards to question of Employee stock option expences,  the Court partially upheld the claim of Dell and stated “”expenses that are correlated with income” are deductible expenses. Consequently, any expense correlated with income is an accounting expense, and if any accounting expense is a deductible expense in companies, with no exceptions other than those provided for by law” Click here for English translation Click here for other translation Spain-vs-Dell-20-june-2016-Supreme-Court-case-nr-2861-2016 ...

The Knights of Columbus, a resident United States corporation, provides life insurance to its Canadian members and relies upon Canadian agents to do so. The issue before the court was whether the Knights of Columbus is liable for tax in Canada on business profits from its insurance business. This hinges on the application of the Convention between the United States of America and Canada with respect to Taxes on Income and Capital (the Canada-U.S. Treaty), specifically a determination of whether the Knights of Columbus has a permanent establishment in Canada as a result of either: (1) carrying on its business through a fixed place of business in Canada (Article V(1) of the Canada-U.S. Treaty). (2) using agents, other than independent agents acting in the ordinary course of their business, who habitually exercise in Canada authority to conclude contracts in the name of the Knights of Columbus (Article V(5) and (7) of the Canada-U.S. Treaty). The Tax Court’s decision The Tax Court ruled in favor of Knights of Columbus. “The issue of a fixed place of business permanent establishment is to be determined by considering the third condition. Was the Knights of Columbus’ business being carried on through the Field Agents’ home offices. This is where I found the experts’ evidence of most assistance. … Once it has been determined that the Field Agents are independent contractors, which has been agreed, that is, that they are in business on their own account, then it is illogical to find that all the organizing and recordkeeping that they conduct at home is anything other than business activities of their own business. The Knights of Columbus do not have any right of disposition over these premises. The argument that payment of an expense commission creates some such right is not well founded. The expense commission is simply an added commission bearing no relation to actual expenses, which are totally borne by the agent. As well, the agents employ no Knights of Columbus’ staff, have no Knights of Columbus’ signage on the property, are not under the control of the Knights of Columbus for what is required at the home office, and simply provide no access to the Knights of Columbus. The agents do not meet applicants at the premises8. The Knights of Columbus make no operational decisions at the Field Agent’s premises. The Knights of Columbus had no officers, directors or employees even visit the agents’ home offices, let alone have any regular access. All risks connected with carrying on business at the home offices are borne by the agents themselves. The agents are not carrying on the Knights of Columbus’ core business from these premises. Their premises cannot therefore be found to be a fixed place of business permanent establishment. … In summary, the Appellant’s appeal is allowed and the assessments are vacated on the basis that the Knights of Columbus did not carry on business in Canada through a permanent establishment either on the basis of the fixed place of business permanent establishment, or a dependent agent permanent establishment. Neither form of permanent establishment has been proven.” Canada vs Knights of Columbus 16052008 2008TCC307 ...

At issue in the Philip Morris case was the scope of the definition of permanent establishments – whether or not activities in Italy performed by Intertaba s.p.a. constituted a permanent establishment of the Philip Morris group. According to the tax authorities the taxpayer had tried to conceal the P.E. in Italy by disguising the fact that the Italian company was also acting in the exclusive interest of the Philip Morris group. On the basis of a tax audit report the Revenue Department – VAT office of Milan, by means of separate adjustment notices for the years 1992 to 1995, charged AAA, and on its behalf BBB s.p.a, for having failed to invoice the amounts paid by the State Monopolies Administration for the supply-distribution in the national territory of cigarettes under the CCC brand. In addition, according to the Administration, the company had failed to self-invoice the amounts for transport and distribution of the tobacco in the national territory. The Court of Appeal set aside the assessment issued by the tax authorities, and the tax authorities in turn filed an appeal with the Supreme Court. Judgement of the Supreme Court The Supreme Court set aside the decision of the court of first instance and remanded the case with the following instructions: “…Ultimately, the activity in question – especially if it relates to the distribution of goods in a large market – does not seem to be comparable to that of a broker or a general or independent agent, which do not give rise to a permanent establishment, as expressly provided for in Article 5(6) of the OECD Model. 3.8. In conclusion, it must be held that the Regional Tax Commission not only failed to provide an adequate statement of reasons for the evidence offered by the office, in particular by failing to provide a full account of the evidence gathered in the inspection by the Guardia di Finanza and to carry out an analytical assessment in the light of the reasons of the parties, but also infringed and/or misapplied the rules and principles contained in the OECD Model and incorporated in the bilateral Italy-Germany Convention. The upholding of the appeal entails the cassation of the contested judgment, with referral to another section of the Regional Tax Commission of Lombardy. The referring judges must therefore, after analytically examining the content of the documentation offered and the findings made in the assessment, an examination of which they must give adequate reasons, comply with the following principles of law: (I) a corporation with its registered office in Italy may take on the role of a multiple permanent establishment of foreign companies belonging to the same group and pursuing a single strategy. In such a case, the reconstruction of the activity carried out by the domestic company, in order to ascertain whether or not it is an ancillary or preparatory activity, must be unitary and related to the group’s program considered as a whole; (II) an independent supply of services rendered in the national territory for consideration, when there is a direct and immediate link between the supply and the consideration, constitutes a transaction subject to VAT and to the related obligations of invoicing or self-billing, declaration and payment of the tax, regardless of whether it is part of a contract providing for other services to be rendered by the recipient and regardless of whether the latter, being a non-resident, has a fixed establishment in Italy; (III) the activity of controlling the exact performance of a contract between a resident and a non-resident person cannot in principle be regarded as an auxiliary activity within the meaning of Article 5(4) of the OECD Model Law and Article 5(3)(e) of the Convention between Italy and the Federal Republic of Germany against double taxation of 18 October 1989, which was ratified and made enforceable in Italy by Law No 459 of 24 November 1992? (IV) the entrusting to a domestic structure of the function of business operations (management) by a company not having its seat in Italy, even if it concerns a certain area of operations, entails the acquisition by that structure of the status of a permanent establishment for the purposes of VAT; (V) the assessment of the requirements of the permanent establishment or fixed establishment, including that of dependence and that of participation in the conclusion of contracts, must be conducted not only at the formal level, but also – and above all – at the substantive level. If it reaches the conclusion that BBB s.p.a. acted as a permanent establishment of AAA, the Regional Commission will have to decide on the issues raised in relation to the finding of omitted invoicing without payment of tax and on the other issues raised in the preliminary appeals, which have been absorbed by the upholding of the complaints on the non-existence of a permanent establishment.” Click here for English translation Click here for other translation Italy vs PM 2002-3368 ...