Tag: Article 7

Under the OECD Model Tax Convention profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits that are attributable to the permanent establishment in accordance with the provisions of paragraph 2 may be taxed in that other State.

India vs Hyatt International-Southwest Asia Ltd., December 2023, High Court of Delhi, Case No ITA 216/2020 & CM Nos. 32643/2020 & 56179/2022

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service agreement entered into in 1993 between Asian Hotels Limited and Hyatt International-Southwest Asia Limited had been replaced by various separate agreements – a Strategic Oversight Services Agreements, a Technical Services Agreement, a Hotel Operation Agreement with Hyatt India, and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 ...

Germany vs “MEAT PE”, July 2023, FG Munich, Case No 7 K 1938/22

A Hungarian company had a permanent establishment (PE) in Germany. The PE carried out meat cutting work on the basis of work contracts dated 23 February 2017 with the Hungarian company Z Kft. The PE had concluded a service agreement with A Kft. in which A Kft. undertook to provide administrative services in the area of support for employees posted to Germany and was to receive a fee calculated as a percentage of net sales in return. Following an audit of the PE the German tax authorities issued an assessment of additional taxabel income based on the German ordinance on allocation of profits to permanent establishments. Not satisfied with the assessment a complaint was filed by the PE with the Tax Court. In its complaint the PE argued that the tax authorities corrected all of the PE’s sales in Germany without a corresponding legal basis. Contrary to the opinion of the tax authorities, the BsGaV does not constitute a legal basis for a profit correction. In particular, the profit determinations contained in § 30 et seq. BsGaV are not covered by Section 1 of the AStG. Judgement of the Tax Court The Court decided in favour of the PE and set aside the tax assessment. Excerpt (English translation) “… 3. the aforementioned requirements for a permanent establishment-related income adjustment in accordance with § 1 para. 5 sentence 1 in conjunction with para. 1 sentence 1 AStG are not met in the case in dispute. para. 1 sentence 1 AStG are not present in the case in dispute. Business relationships between the domestic permanent establishment and the parent company, the conditions of which do not comply with the arm’s length principle and thereby reduce the domestic income of the plaintiff with limited tax liability, cannot be established. The Senate cannot recognise any relationships under the law of obligations to be assumed or business transactions with a certain degree of significance. It is true that the tax office can be agreed that the activities of the parent company, which essentially consisted of negotiating and signing contracts with the client (Z Kft.) and the contracted service company (M Partners Kft.) as well as the recruitment of the employees deployed in the permanent establishment, would have been regulated by contractual agreements if the permanent establishment and the parent company had been independent companies. However, no invoices were issued for these services. The tax audit also made no findings to the effect that transfer prices to the parent company were included in the tax calculation of the profit generated by the permanent establishment (see Flick/Wassermeyer, AStG § 1 para. 2850) and that the profit generated in Germany was reduced in this respect. However, according to supreme court rulings, the application of Section 1 (5) AStG is directly linked to its para. 1 and is therefore linked to a reduction in income that arises as a result of an agreement on conditions (transfer prices) that are not arm’s length (BFH, decision of 24 November 2021 I B 44/21 (AdV), BStBl II 2022, 431, para. 25 with further references). The tax office’s view that notional mark-up rates may have to be applied in relation to the service relationships between the parent company and the permanent establishment is not accepted. Such factual treatment cannot be inferred from the provisions of the AStG (see judgement of the Nuremberg tax court dated 27 September 2022 1 K 1595/20, IStR 2023, 211). The wording of Section 1 (5) AStG, and in particular the third sentence thereof, also does not indicate that, outside the scope of application of Section 1 AStG and in particular for the general determination of profits in accordance with Sections 4 et seq. Einkommensteuergesetz (EStG – German Income Tax Act), an assessment would have to be made (solely) on the basis of the people functions performed in the respective parts of the company. A corresponding “spill-over effect” cannot be read into Section 1 para. 5 AStG, also due to the systematic position of the provision in the AStG (see BFH, decision of 24 November 2021 I B 44/21 (AdV), BStBl II 2022, 431, para. 25 with further references). The Senate therefore does not share the opinion of the tax office that the activities performed by the commissioned companies Z Kft. and M Kft. can be attributed to the parent company as its own activities and thus as the exercise of essential people functions. The aforementioned companies are not the company’s own personnel (cf. section 1 para. 5 sentence 3 no. 1 AStG, section 2 para. 3 sentence 1 BsGaV). The companies also did not work for the company in accordance with § 2 Para. 4 BsGaV on the basis of a partnership agreement or employment contract with the company, but on the basis of a service or work contract. On the basis of the contracts submitted, the plaintiff proved that the “essential people functions” listed by the tax audit were not performed by the parent company, but by the service provider Z Kft. The latter contractually assumed the supervision of the posted employees, the provision of administrative work in the area of the supervision of employees posted to Germany, the preparation of payroll accounting, the registration and deregistration of employees with insurance companies and the organisation of transport and holiday trips home, as well as renting the office in A-Dorf to the plaintiff.” An appeal has later been filed by the tax authorities with the BFH (I R 49/23) where the case is now pending. Click here for English translation Click here for other translation GER Y-300-Z-BECKRS-B-2023-N-21789 ...

Germany vs “Z Pipeline”, May 2023, FG Düsseldorf, Case No 3 K 1940/17 F

“Z Pipeline” is a limited partnership which operates a network of pipelines. The network runs through Germany, Belgium and the Netherlands. During the year in question, “Z Pipeline”‘s administrative HQ was in Germany. Operational control of the pipeline was exercised by an ‘operations centre’ located in the Netherlands. It was not disputed that the pipeline constituted permanent establishments in Germany, Belgium and the Netherlands and that the profits should be allocated between the tree countries. The question was how the profits should be allocated. The tax authorities came to the conclusion that the profit should predominantly be allocated to the German permanent establishments. In accordance with the low functions and risks, only a low profit was to be allocated to the respective permanent establishments in Belgium an the Netherlands. The profit allocation was calculated using a cost-plus 30% due to industry and company-specific features. “Z Pipeline” disagreed with the method applied by the tax authorities and held that it was more appropriate to allocate the profits on the basis of the indirect method. Judgement of the Tax Court The Court decided in favour of “Z Pipeline”. Excerpt “66 VI.) Since the profit differentiation carried out by the defendant [tax authorities] cannot be used as a basis for taxation, the total profit achieved by the plaintiff [Z Pipeline] must be divided into domestic income within the meaning of § 15, para. 1, sentence 1, no. 2 of the Income Tax Act and into income that is tax-exempt according to double taxation agreements. In this respect, the Senate follows the apportionment made by the plaintiff, which results in domestic income from trade in the amount of €…. 67 The apportionment made by the plaintiff, which is essentially based on which part of the company’s assets (pipeline) generated which turnover, is consistent with Article 5, para. 2 DBA-NL 1959 / Article 7 DBA-Belgium. The defendant has not raised any comprehensible objections as to why the apportionment method, which the plaintiff also applied in a comparable form in the assessment periods up to and including 2009 and which withstood several external audits during this time, should be improper as of 2010. Insofar as he refers to the fact that the apportionment is already inappropriate because in Belgium, instead of the Belgian share of profits determined by the plaintiff, only a lump-sum taxation according to turnover has taken place, he fails to realise that the appropriateness of the profit apportionment has nothing to do with the subsequent taxation of the income and that, moreover, the lump-sum taxation according to turnover has taken place with the consent of the Belgian tax authorities. 68 In the opinion of the Senate, the apportionment chosen by the plaintiff also presents itself as a suitable and appropriate method for the apportionment of profits for the year in dispute 2011. In particular, the plaintiff applied an appropriate method for the apportionment of revenue by apportioning the fees from the transport of goods according to the extent to which the pipelines in Germany, Belgium or the Netherlands were actually used for the respective transport and by allocating the remuneration from the management of the foreign pipeline networks to Germany alone. The allocation of costs is also appropriate. Costs directly attributable to an operating facility (such as repair costs for a specific pipeline section) were allocated to the respective state of location, the costs for the Dutch operating centre responsible for monitoring the entire pipeline network were distributed among the three countries according to pipeline kilometres, and the remaining expenses were distributed according to various objective apportionment keys depending on the type of costs (including a country’s percentage share of the total investment costs or of the total revenue). As these apportionment keys had already been applied for many years and no specific objections had been raised by the tax authorities either in previous external audits or in the present legal action, the Senate had no reason to doubt the appropriateness of the apportionment keys. 69 This also applies to the plaintiff’s approach of allocating all administrative costs (personnel costs, etc.) to the German parent company and, in return, recognising fictitious service revenues for the administration of the foreign network share at the parent company (i.e. in the domestic income) determined according to arm’s length principles. Admittedly, neither this approach nor the calculation formula used by the plaintiff is without alternative. However, since no clearly more suitable yardsticks for the apportionment of administrative/personnel costs are apparent, the calculation can be followed. The fact that the apportionment method does not lead to an inappropriate result (from the perspective of the German tax authorities) is already shown by the fact that it results in higher domestic income in the year in dispute. The fictitious domestic service revenues (… €) are higher than the share of administrative costs that would be allocated to the foreign permanent establishments according to the general allocation formula (-… €) and is now taken into account as expenses in Germany. 70 The income from the supplementary balance sheets is also to be allocated to the individual countries – as undertaken by the plaintiff. The defendant’s allocation of the income from the supplementary balance sheets to Germany alone, which is not substantiated in detail, is not comprehensible. The income is directly related to the hidden reserves contained in the individual assets at the time of the acquisition of the shares in the company and is therefore attributable to the foreign permanent establishment, insofar as the respective asset – in particular the pipeline – belonged to its business assets. The plaintiff proved that a) the supplementary balance sheets were formed on the occasion of changes in shareholders in 2002 and 2005, b) both in the calculation of the capital gains for the departing shareholders and in the calculation of the top-up amounts entered in the supplementary balance sheets, a domestic share of 39,81% and a foreign share of 60.19% and c) the apportionments made by it were examined both in the external audit ...

Spain vs “XZ Insurance SA”, October 2022, Tribunal Economic-Administrative Central (TEAC), Case No Rec. 00/03631/2020/00/00

“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 ...

Germany vs “GER-PE”, September 2022, FG Nürnberg, Case No 1 K 1595/20

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 ...

Netherlands vs “Fertilizer BV”, April 2022, Court of Appeal, Case No. ECLI:NL:GHSHE:2022:1198

In 2016 Fertilizer BV had been issued a tax assessment for FY 2012 in which the tax authorities had imposed additional taxable income of €133,076,615. In November 2019 the district court ruled predominantly in favor of the tax authorities but reduced the adjustment to €78.294.312. An appel was filed by Fertilizer BV with the Court of Appeal. Judgement of the Court of Appeal Various issues related to the assessment was disputed before the Court. Dispute 1: Allocation of debt and equity capital to a permanent establishment in Libya in connection with the application of the object exemption. More specifically, the dispute is whether the creditworthiness of the head office was correctly taken as a starting point and a sufficient adjustment was made for the increased risk profile of the permanent establishment. The Court of Appeal answered this question in the affirmative, referring to the capital allocation approach that is regarded as the preferred method for the application of Article 7 of the OECD Model Convention. Dispute 2: Should all claims and liabilities denominated in dollars be valued in conjunction? The mere fact that claims and debts are denominated in the same currency is insufficient to conclude that there is cohesion. The court takes into account the nature of the contracts in the light of the risks present and whether hedging of risks is intended. The Court shall make a separate assessment for each risk to be identified. The Court values the forward exchange contracts USD 200,000,000 and USD 225,000,000 in connection with USD debt I and USD debt II, and the claim of [N SA] in connection with the forward exchange contract USD 60,000,000. Dispute 3: Was the profit of a subsidiary of interested party, [E BV], (deliberately) set too high? Interested party wants to deviate from its own tax return and internal transfer pricing documentation and refers to a report prepared by [W]. The Court of Appeal places the burden of proof on the interested party. In the opinion of the Court of Appeal, it does not follow from the aforementioned report that there is no trade at arm’s length within the group. The Court of Appeal also pointed to the global character of the report, which means that it is not a transfer pricing report. Furthermore, it has not become plausible that the companies with which [E BV] is compared in the report are sufficiently comparable. The interested party has not made it plausible that the profit has been set at a prohibitively high level. Dispute 4: Did the tax inspector rightly make an adjustment of € 42,843,146 in connection with the Supply Agreement concluded between [E BV] and an affiliated company of the interested party and [E BV], [J Ltd]? The Supply Agreement states that [J Ltd] is obliged to purchase the surplus produced by [E BV] with a new factory at cost price plus a mark-up of 5%. For the remaining goods, transfer prices are used which are based on the [concern Transfer Pricing Master File]. The Court of Appeal placed the burden of proof that the transfer price applied to the surplus was at arm’s length on the interested party. In the opinion of the Court of Appeal, the interested party has not provided this evidence. The Court of Appeal ignored the Supply Agreement. This agreement does not reflect the economic reality, since [E BV] is also a ‘fully fledged’ producer with regard to the surplus. The Court of Appeal derives this from the transfer price documentation and the fact that after the conclusion of the Supply Agreement, the functions performed, the investments made and the capital utilisation have (practically) not changed. The transfer price report from [Y] submitted by the interested party does not lead to a different opinion. There is no breach of the principle of equality since the interested party does not substantiate, or substantiates in too general a manner, that its case is comparable to the Starbucks, Nike and Apple cases and the other examples mentioned by it. The fact that the [group] also concluded agreements with third parties that are (somewhat) similar to the Supply Agreement does not lead to a different opinion either. It cannot be determined whether the functions performed, risks run and assets used by these third parties are comparable to the functions performed, risks run and assets used by [E BV]. Finally, the Court of Appeal ruled that the taxation of a possible profit transfer should not be taken in 2011, the year in which the Supply Agreement was agreed upon, but from month to month (year to year) in which the non-business conduct took place. In all, the Judgement of the Court of Appeal resulted in the additional taxable income of Fertilizer BV being reduced to € 65.609.318. Click here for English Translation Click here for other translation ECLI_NL_GHSHE_2022_1198 (1) ...

India vs UPS Asia Group Pte. Ltd., March 2022, Income Tax Appellate Tribunal – Mumbai, Case No 220/Mum./2021

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 ...

Sweden vs Flir Commercial Systems AB, January 2022, Administrative Court of Appeal, Case No 2434–2436-20

In 2012, Flir Commercial Systems AB sold intangible assets from a branch in Belgium and subsequently claimed a tax relief of more than SEK 2 billion in fictitious Belgian tax due to the sale. The Swedish Tax Agency decided not to allow relief for the Belgian “taxâ€, and issued a tax assessment where the relief of approximately SEK 2 billion was denied and a surcharge of approximately SEK 800 million was added. An appeal was filed with the Administrative Court, In March 2020 the Administrative Court concluded that the Swedish Tax Agency was correct in not allowing relief for the fictitious Belgian tax. In the opinion of the Administrative Court, the Double tax agreement prevents Belgium from taxing increases in the value of the assets from the time where the assets were owned in Sweden. Consequently, any fictitious tax cannot be credited in the Swedish taxation of the transfer. The Court also considers that the Swedish Tax Agency was correct in imposing a tax surcharge and that there is no reason to reduce the surcharge. The company’s appeal is therefore rejected. An appeal was then filed with the Administrative Court of Appeal Decision of the Administrative Court of Appeal The Court upheld the decision of the Administrative Court and the assessment issued and the penalty added by the tax authorities. The Administrative Court of Appeal found that when assessing the amount of credit to be given for notional tax on a transfer of business, the tax treaty with the other country must also be taken into account. In the case at hand, assets were transferred to the company’s Belgian branch shortly before the assets were disposed of through the transfer of business. The tax treaty limited Belgium’s taxing rights to the increase in value accrued in Belgium after the allocation and a credit could be given up to an amount equal to that tax. In the case at hand, the company had claimed a notional credit for tax on the increase in value that had taken place in Sweden before the assets were transferred to Belgium, while the transferee company in Belgium was not taxed on the corresponding increase in value when the assets were subsequently disposed of, as the Belgian tax authority considered that the tax treaty prevented such taxation. The Court of Appeal held that there were grounds for back-taxation and the imposition of a tax surcharge on the basis of incorrect information. The information provided by the company was not considered sufficient to trigger the Tax Agency’s special investigation obligation and the tax fine was not considered unreasonable even though it amounted to a very large sum. Click here for English Translation Click here for translation Sv Flir 2434-2436-20 ...

TPG2022 Preface paragraph 9

The main mechanisms for resolving issues that arise in the application of international tax principles to MNEs are contained in these bilateral treaties. The Articles that chiefly affect the taxation of MNEs are: Article 4, which defines residence; Articles 5 and 7, which determine the taxation of permanent establishments; Article 9, which relates to the taxation of the profits of associated enterprises and applies the arm’s length principle; Articles 10, 11, and 12, which determine the taxation of dividends, interest, and royalties, respectively; and Articles 24, 25, and 26, which contain special provisions relating to non-discrimination, the resolution of disputes, and exchange of information ...

Germany vs “Wind-farm PE”, November 2021, Bundesfinanzhof, Case No I B 44/21

In 2011 a permanent establishment (PE) of a Danish company was established for income tax purposes in Germany in the form of an offshore wind farm. The PE had no employees of its own either in Germany or in Denmark. The technical and commercial management was carried out by two German service and management companies on the basis of management and service contracts. In 2013 the tax authorities issued an assessment related to taxation of assets which, according to allocation principles in the new AOA (significant people functions), would no longer be allocated to Germany. The tax authorities held that allocation of assets to the permanent establishment is determined on the basis of personnel functions exercised in the permanent establishment. If no personnel functions were carried out in the permanent establishment no assets were to be allocated to it. In the tax authorities view, this meant that the wind turbines previously allocated to the domestic permanent establishment as of 1 January 2013 would instead be allocated to the shareholder in Denmark. Due to this (new) allocation of the wind turbine, there was a transfer of assets. Consequently, withdrawal “for non-business purposes” within the meaning of § 4 para. 1 sentence 2 EStG was to be assumed, which was to be recognised at the fair market value of the withdrawn assets. An appeal was filed with the court. Judgement of the BFH The BFH clarified that Section 1 (5) AStG actually requires a reduction in income due to prices that are not at arm’s length in internal business relationships, so-called dealings, and that the allocation regulations of the income correction regulation in Section 1 (5) AStG have no spillover effect on the profit determination regulation of § 4 para. 1 sentence 3 EStG. “Insofar as the tax authorities assume in paragraph 2.2.4.1 of the BMF letter on the application of double taxation agreements to partnerships of 26 September 2014 (BStBl I 2014, 1258) that, with regard to the allocation of assets of a partnership, the principles of § 1 para. 5 AStG are “broadly consistent” with the case law of the BFH on the functional relationship, there are already doubts as to whether, within the framework of such an approach, the allocation of assets would have to be based solely on “personnel functions”. The previous case law of the Senate on this may be based on a function-based approach, but in any case it cannot be inferred that the personnel function alone would be regarded as the decisive allocation parameter” “Even if, with reference to § 1 (5) AStG, the decisive factor were to be the allocation of assets according to the “personnel function”, there are doubts as to whether, in the case in dispute, the wind turbines would have to be allocated to the management permanent establishment in Denmark because personnel functions are only exercised there. This is because it is questionable whether § 1 (5) sentence 3 AStG is to be interpreted to the effect that the relevant personnel function can only be exercised by personnel who are employed by the company as (its own) employees. In any case, the literature doubts that the personnel working in a function for the enterprise must be connected to the enterprise by an employment contract. The wording of the standard does not exclude personnel who work in this function by means of an employee leasing contract or a service contract (Andresen in Wassermeyer/Andresen/Ditz, loc.cit., margin no. 4.70). Thus, in the case in dispute, the personnel of the German service or management companies, who take over the technical and commercial management of the wind turbines on the basis of management and service contracts, would exercise a function in the domestic permanent establishment for the allocation of assets. Consequently, a personnel function would have to be assumed there” “Finally, the Senate has doubts as to whether the principles on the allocation of assets according to the personnel function are applicable at all for so-called permanent establishments without personnel under the validity of Section 1 (5) AStG. The literature points out that the principle of allocating assets according to the personnel function in such permanent establishments would result in the assets that establish the permanent establishment without personnel being allocated to the management permanent establishment……………. It is therefore considered necessary that in the case of permanent establishments without personnel — in deviation from the allocation according to the relevant personnel function — the assets that they establish and that ultimately serve the business function performed there must be attributed to them ” In any case, the tax authorities appear to support the case of a permanent establishment without a significant personnel function with reference to paragraph 75 of the OECD report on the attribution of profits to permanent establishments of 22 July 2010………, according to which, in the case of permanent establishments without a decisive personnel function, the use is to serve as the basis for the allocation of the economic ownership of tangible assets, a “different” allocation of assets is to be assumed ……. which, however, is again not beyond doubt in view of the ambiguous wording of the law (“belonging … to the enterprise”). Click here for English translation Click here for other translation BFH-Beschluss-I-B-44-21-(AdV) ...

UK vs G E Financial Investments Ltd., June 2021, First-tier Tribunal, Case No [2021] UKFTT 210 (TC), TC08160

The case concerned a complex financing structure within the General Electric Group. The taxpayer, GE Financial Investments Ltd (GEFI Ltd), a UK resident company was the limited partner in a Delaware limited partnership, of which, GE Financial Investments Inc (GEFI Inc) a Delaware corporation was the general partner. GEFI Ltd filed UK company tax returns for FY 2003-2008 in which the company claimed a foreign tax credit for US federal income tax. In total, US federal income taxes amounted to $ 303 millions and exceeded the amount of tax due in the UK. The tax authorities opened an enquiry into each of GEFI’s company tax returns for the relevant period, and subsequently issued an assessment where the claims for foreign tax credits was denied in their entirety. Judgement of the Tax Tribunal The tribunal dismissed the appeal of GEFI Ltd and ruled that the UK company did not carry on business in the US. Hence GEFI Ltd was not entitled to a foreign tax credit. Excerpt “By contrast the construction of Article 4 advanced by HMRC requires both worldwide taxation and a connection or attachment to the contracting state concerned. In my judgment, this is the correct approach as it takes into account the common feature or similarity of domicile, residence, citizenship etc, in the context of the Convention, ie that they are all criteria providing, in addition to the imposition of a worldwide liability to tax, a “connection†or “attachment†of a person to the contracting state concerned. Such an interpretation is consistent with Widrig (see paragraphs 44 – 46, above) and Vogel (see paragraph 47, above) and Crown Forest which, as Ms McCarthy submits, when properly understood in context is authority for the proposition that full or worldwide taxation is a necessary feature of the connecting criterion but is not sufficient of itself. … Although her further submission, that, other than the imposition of a worldwide liability to US tax, share stapling has no US law consequences at federal or state level (eg it does not carry with it US filing or reporting obligations or make a stapled overseas company’s constitutional documents subject to or dependent on US law), was not supported by evidence, I agree that, given the differences that do exist for tax purposes (see paragraph 29, above) the connection or attachment is between the stapled entities rather than to the country concerned. 66. Therefore, in the absence of the necessary connection or attachment by GEFI to the US, and despite Mr Baker’s persuasive submissions to the contrary, I do not consider that GEFI was a resident of the US for the purposes of Article 4 of the Convention by reason of the share staple between it and GEFI Inc. As such it is necessary to consider Issue 2, the Permanent Establishment Issue. … However, Ms McCarthy confirmed that, should I conclude that the activities of the LP are sufficient to amount to the carrying on of a business, there is no separate dispute as to whether that business is carried on in Stamford, Connecticut, or some other location. 71. As such, it is therefore necessary to consider what is in effect the only issue between the parties under issue 2(a), namely whether, as it contends, GEFI by its participation in the LP carried on a business in the US or, as HMRC argue, it did not.” … I agree with Ms McCarthy who submits that there is nothing to suggest that personnel or agents acting on behalf of the LP made or conducted continuous and regular commercial activities in the US. All that appears to have happened was that monies were directed straight to GELCO without negotiating terms or the consideration at a director level as would have been expected from a company carrying on commercial activities on sound business principles. … Therefore, notwithstanding its objects, and having regard to the degree of activity as a whole, particularly the lack of participation in the strategic direction of the LP by the directors of GEFI Inc, I have come to the conclusion that GEFI was not carrying on a business in the US through its participation in the LP. … Having concluded for the reasons above that GEFI did not carry on business in the US it is not necessary to address Issue 2(b), ie whether, if GEFI had carried out business in the US, US tax was payable under US law and if so whether the UK is required under Article 24(4)(a) to give relief against this US tax. … Therefore, for the reasons above the appeal is dismissed.” ”G UKFTT 210 (TC) TC08160″] ...

UK vs Irish Bank Resolution Corporation Limited and Irish Nationwide Building Society, August 2020, Court of Appeal , Case No [2020] EWCA Civ 1128

This case concerned deductibility of notional interest paid in 2003-7 by two permanent establishments in the UK to their Irish HQs. The loans – and thus interest expenses – had been allocated to the PEs as if they were separate entities. The UK tax authorities held that interest deductibility was restricted by UK tax law, which prescribed that PE’s has such equity and loan capital as it could reasonably be expected to have as a separate entity. The UK taxpayers, refered to  Article 8 of the UK-Ireland tax treaty. Article 8 applied the “distinct and separate enterprise” principle found in Article 7 of the 1963 OECD Model Tax Convention, which used the language used in section 11AA(2). Yet nothing was said in the treaty about assumed levels of equity and debt funding for the PE. In 2017, the First-tier Tribunal found in favour of the tax authority, and in October 2019 the Upper Tribunal also dismissed the taxpayers’ appeals. Judgement of the UK Court of Appeal The Court of Appeal upheld the decision of the Upper Tribunal and dismissed the appeal of Irish Bank Resolution Corporation and and Irish Nationwide Building Society. Click here for other translation UK vs Irish Bank Resolution Corp. Ltd Aug 2020 case no A3-2019-3060 ...

Tanzania vs Mantra (Tanzania) Limited, August 2020, Court of Appeal, Case No 430 of 2020

Mantra Limited is engaged in mineral exploration in Tanzania. In carrying out its business, it procured services from non-resident service providers mostly from South Africa. In 2014, Mantra Limited wrote to the tax authorities requesting for a refund of withholding taxes of USD 1,450,920.00 incorrectly paid in relation to services that were performed outside Tanzania by non-resident service providers for the period between July, 2009 and December, 2012. The tax authorities refused the request maintaining that, the services in question were rendered in Tanzania and Article 7 of the DTA was irrelevant in as much as it was limited to business profits and not business transactions. Unsuccessfull appeals were filed by Mantra and in 2020 the case ended up in the Court of Appeal where Mantra argued based on the following grounds:- 1. That the Tax Revenue Appeals Tribunal grossly erred in law by holding that the Board was correct in holding that payments for services rendered/ performed abroad by non-resident suppliers had a source in the United Republic of Tanzania; 2. That the Tax Revenue Appeals Tribunal grossly erred in law by holding that Article 7 of the Double Taxation Agreement does not apply on the Appellant’s case; and 3. That the Tax Revenue Appeals Tribunal erred in law by holding that the Appellant was not justified to claim refund o f incorrectly paid withholding tax. Judgement of the Court of Appeal The Court of Appeal decided in favor of the tax authorities. On the first ground “On our part, we fully subscribe to this recent position of law and differ with the previous position in Pan African Energy Tanzania Limited (supra) for two main reasons. First, as correctly held in Tullow Tanzania BV (supra), the respective authority, much as it was based on an Indian decision construing a statute which is not worded similarly to ours, is istinguishable and thus inapplicable in the instant case. Second and more importantly is the fact that, the position in Tullow Tanzania BV (supra) is the more recent position. The settled position as it stands today is such that, where there are two conflicting decisions of the Court on the similar matter, the Court, unless otherwise justified, is expected to follow the more recent decision. … In view of the foregoing discussion therefore, we dismiss the first ground of appeal. “ On the second ground “Guided by the above authority therefore, it is our firm opinion that the Tribunal was right in holding that the exemption under Article 7 of the DTA was not applicable to the appellant’s business transactions. We thus dismiss the second ground for want of merit.” On the third ground “Since we have held in relation to the first and second grounds that, the charging of withholding taxes was correct, there is consequently nothing to refund and, therefore, the third ground becomes redundant because there remains no withholding tax to refund.” Mantra Tanzania Ltd vs The Commissioner General Tanzania Revenue Authority (Civil Appeal No 430 of 2020) 2021 TZCA 657 (5 November 2021) ...

Italy vs Citybank, April 2020, Supreme Court, Case No 7801/2020

US Citybank was performing activities in Italy by means of a branch/permanent establishment. The Italian PE granted loan agreements to its Italian clients. Later on, the bank decided to sell these agreements to a third party which generated losses attributed to the PE’s profit and loss accounts. Following an audit of the branch concerning FY 2003 in which the sale of the loan agreements took place, a tax assessment was issued where the tax authorities denied deduction for the losses related to the transfer of the agreements. The tax authorities held that the losses should have been attributed to the U.S. parent due to lack of financial capacity to assume the risk in the Italien PE. First Citybank appealed the assessment to the Provincial Tax Court which ruled in favor of the bank. This decision was then appealed by the tax authorities to the Regional Tax Court which ruled in favor of the tax authorities. Finally Citybank appealed this decision to the Supreme Court. Judgement of the Supreme Court The Supreme Court reversed the judgement of the Regional Tax Court and decided in favor of Citybank. “This Court, recently (Cass. 19/09/2019, no. 23355), dealing with the Convention between Italy and the United Kingdom on double taxation (Article 7 of which has the same content as Article 7 of the cited Convention between Italy and the United States of America), has specified that: (a) the permanent establishment, from a tax point of view, is a distinct and autonomous entity with respect to the ‘parent company’, the income of which, produced in the territory of the State, is subject to tax, pursuant to Article 23, paragraph 1, letter e), T.U.I.R.; (b) Article 7, paragraph 2, of the Convention between Italy and the United Kingdom against double taxation, entered into on 21 October 1988 (and ratified by Law n. 329 of 1990, ), provides for the application of Article 7, paragraph 2, of the Convention between Italy and the United Kingdom. (b) Article 7, paragraph 2, of the Convention between Italy and the United Kingdom for the avoidance of double taxation, concluded on 21 October 1988 (and ratified by Law No. 329 of 1990), which provides that where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. (c) the OECD Commentary (§ 18. 3.), with respect to the said Article 7, has clarified that the permanent establishment must be endowed with: “a capital structure appropriate both to the enterprise and to the functions it performs. For these reasons, the prohibition on deducting expenses connected with internal financing – that is to say, those which constitute a mere allocation of the parent company’s own resources – should continue to apply generally.”. In the present case, the Regional Commission complied with the above principles of law when it held that the Convention placed limits on the deductibility of the negative components of the Italian branch’s income, understood both as interest expense and as expenses connected with the management of the loan (in the case at hand, these were losses on loans and commission charges for the assignment of loan agreements).” Click here for English translation Click here for other translation >Italy vs Citybank 140420 Courte di cassazione No 7801-2020, ...

Sweden vs Flir Commercial Systems AB, March 2020, Stockholm Administrative Court, Case No 28256-18

In 2012, Flir Commercial Systems AB sold intangible assets from a branch in Belgium and subsequently claimed a tax relief of more than SEK 2 billion in fictitious Belgian tax due to the sale. The Swedish Tax Agency decided not to allow relief for the Belgian “tax”, and issued a tax assessment where the relief of approximately SEK 2 billion was denied and a surcharge of approximately SEK 800 million was added. The Administrative Court concluded that the Swedish Tax Agency was correct in not allowing relief for the fictitious Belgian tax. A double taxation agreement applies between Sweden and Belgium. In the opinion of the Administrative Court, the agreement prevents Belgium from taxing the assets. Consequently, any fictitious tax cannot be deducted. The Administrative Court also considers that the Swedish Tax Agency was correct in imposing a tax surcharge and that there is no reason to reduce the surcharge. The company’s appeal is therefore rejected. Click here for translation FÖRVALTNINGSRÄTTEN I STOCKHOLM MÃ¥l nr 28256-18, 28261-18 och 22183-19 ...

Netherlands vs “Fertilizer BV”, November 2019, District Court, Case No. ECLI:NL:RBZWB:2019:4920

In 2016 Fertilizer BV had been issued a tax assessment for FY 2012 in which the tax authorities had imposed additional taxable income of €162,506,660. Fertilizer BV is the parent company of a fiscal unity for corporation tax (hereinafter: FU). It is a limited partner in a limited partnership under Dutch law, which operates a factory in [Country 1]. The interested party borrowed the money for the capital contribution to the limited partnership from a wholly-owned subsidiary. The share in profits from the limited partnership was expressed as profit from a permanent establishment. In dispute was the amount of interest attributable to the permanent establishment. The court followed the inspector in allocating – in connection with the [circumstances] in [Country 1] – 75% equity and 25% loan capital to the PE. Furthermore, the FU had deposits and loans in USD. These positions were partly hedged by forward exchange contracts. Fertilizer BV valued these deposits and loans at the historical acquisition price or lower value in use. In dispute between the parties was whether and to what extent the positions should be valued as connected. In the opinion of the court, the mere fact that deposits and loans were denominated in USD did not mean that they should be valued as connected. The court considered part of it to be connected. Fertilizer BV is a production company. It sells its products to affiliated sales organisations at prices derived from market prices. After the commissioning of a new factory, Fertilizer BV produced more than before (hereinafter: the surplus). On the basis of two agreements, Fertilizer BV sold the surplus, at cost price with a surcharge of 5%, to a subsidiary established abroad. In the opinion of the court, no real commercial risk had been transferred to the subsidiary and the inspector rightly corrected the taxable amount. Click here for English Translation Click here for other translation ECLI_NL_RBZWB_2019_4920 ...

Italy vs HSBC Milano, September 2019, Supreme Court, Case No 23355

HBP is a company resident in the United Kingdom, which also carries on banking business in Italy through its Milan branch (‘HSBC Milano’), which, for income tax purposes, qualifies as a permanent establishment (‘PE’ or ‘branch’) and grants credit facilities to Italian companies and industrial groups, including (from 1996) Parmalat Spa. HBP brought separate actions before the Milan Provincial Tax Commission challenging two notices of assessment for IRPEG and IRAP for 2003 and for IRES and IRAP for 2004, which taxed interest expense (147,634 euros for 2003 and 143,302 euros for 2004) on loans to Parmalat Spa. (€ 147,634, for 2003; € 143,302, for 2004) on loans from the ‘parent company’ in favour of the ‘PE’, and losses on receivables (€ 9,609,545, for 2003, and € 3,330,382, for 2004), as negative components unduly deducted by the permanent establishment, even though they related to revenues and activities attributable to the ‘parent company’. According to the Office, the PE is considered, from a tax point of view, to be an autonomous entity distinct from the parent company, both under domestic and supranational law, and is therefore, in accordance with Article 7(2) of the Convention between Italy and the United Kingdom for the avoidance of double taxation, subject to the same tax regime as independent entities, with certain consequences from the point of view of the quantification of its income. The Milan Provincial Tax Commission (CTP), with judgment No. 117/2010, allowed the appeals and annulled both notices as they lacked the “necessary tax basis”. The Lombardy Regional Administrative Court, with the judgment in question, after hearing the United Kingdom bank, upheld the Agency’s appeal, disregarding, first of all, the appellant’s objection that the 60-day deadline had not been met, pursuant to Article 12(7) of the Statute of Taxpayers’ Rights, with respect to the notice of assessment for 2003 (“notice for 2003″), on the grounds that the tax assessment notice took account of the urgency of the matter in view of the very short time remaining before the expiry of the time limit for assessment action. As regards the substance of the assessments, with reference to the dispute concerning interest expense, the CTR held that it was deductible only in respect of interest accrued on an amount exceeding the notional endowment fund of €6.3 million (equal to the minimum amount of the banks’ initial capital, according to Bankitalia’s provisions), which could be deducted under Article 7 of the Convention, in order to ensure the principle of free competition between the permanent establishment and the Italian credit institutions. With regard to loan losses, the CTR stated that: ‘Article 109 TUIR refers to the principle of correlation between costs and revenues […] mentioned in the notices of assessment. Article 110, paragraph 7 of the TUIR refers to the principle of free competition”, according to which the components of income, deriving from intercompany transactions with companies not resident in the territory of the State, are valued on the basis of the “normal value” of the goods sold and services received, which entails the equal tax treatment of companies carrying out banking activities, with the determination of a notional endowment fund, which aims to avoid favouring undercapitalised companies. It therefore agreed with the calculations made in the notices of assessment in which, on the finding that the branch, which did not have the regulatory capital (amounting to €45,435. 337, determined in relation to the amount of the credit lines granted to Parmalat Spa) required from an independent party, had transferred to the “parent company”, in the form of interest expense on loans received from the latter, 71.18% of the profits accrued on the “Parmalat credit”, retaining the remaining 28.82%, for the principle of correlation between costs and revenues, for the purposes of their tax deductibility, only 28.82% of the “Parmalat losses” were charged to the “PE”, amounting in total, in the two-year period from 2003 to 2004, to euro 18. 174.135. Finally, the CTR confirmed the legitimacy of the administrative sanctions for violation of tax regulations, excluding the objective uncertainty of the latter. 6. HBP appeals for the annulment of this judgment, on the basis of ten grounds, illustrated by a memorandum pursuant to Article 378 of the Code of Civil Procedure, to which the Agency resists with a counter-appeal. Judgement of the Supreme Court (a) the permanent establishment, from a tax point of view, is a distinct and autonomous entity with respect to the ‘parent company’, the income of which, produced in the territory of the State, is subject to tax, pursuant to Article 23, paragraph 1, letter e), T.U.I.R.; (b) Article 7, paragraph 2, of the Convention between Italy and the United Kingdom against double taxation, entered into on 21 October 1988 (and ratified by Law n. 329 of 1990, ), provides for the application of Article 7, paragraph 2, of the Convention between Italy and the United Kingdom. (b) Article 7, paragraph 2, of the Convention between Italy and the United Kingdom for the avoidance of double taxation, concluded on 21 October 1988 (and ratified by Law No. 329 of 1990), which provides that where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. (c) the OECD Commentary (§ 18. 3.), with respect to the said Article 7, has clarified that the permanent establishment must be endowed with: “a capital structure appropriate both to the enterprise and to the functions it performs. For these reasons, the prohibition on deducting expenses connected with internal financing – that is to say, those which constitute a mere allocation of the parent company’s own resources – should continue to apply generally.”. In ...

Czech Republic vs. FK Teplice, a. s., November 2017, Supreme Administrative Court , Case No 1 Afs 239/2017 – 37

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 ...

TPG2017 Preface paragraph 9

The main mechanisms for resolving issues that arise in the application of international tax principles to MNEs are contained in these bilateral treaties. The Articles that chiefly affect the taxation of MNEs are: Article 4, which defines residence; Articles 5 and 7, which determine the taxation of permanent establishments; Article 9, which relates to the taxation of the profits of associated enterprises and applies the arm’s length principle; Articles 10, 11, and 12, which determine the taxation of dividends, interest, and royalties, respectively; and Articles 24, 25, and 26, which contain special provisions relating to non-discrimination, the resolution of disputes, and exchange of information ...

Spain vs Dell, June 2016, Supreme Court, Case No. 1475/2016

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 businessâ€, 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 ...

Spain vs. branch of ING Direct Bank, July 2015, Spanish High Court, Case No 89/2015 2015:2995

In the INC bank case the tax administration had characterised part of the interest-bearing debt of a local branch of a Dutch bank, ING DIRECT B.V,  as “free” capital, in “accordance” with EU minimum capitalisation requirements and consequently reduced the deductible interest expenses in the taxabel income of the local branch for FY 2002 and 2003. The adjustment had been based on interpretation of the Commentaries to the OECD Model Convention, article 7, which had first been approved in 2008. Judgement of the National Court The court did not agree with the “dynamic interpretation” of Article 7 applied by the tax administration in relation to “free” capital, and ruled in favor of the branch of ING Direct. “In short, in accordance with the terms of the aforementioned DGT Consultation of 1272-98 of 13 July, “Consequently, to the extent that the branch or establishment is that of a banking institution, the interest paid to the head office will be deductible”, the appeal must be upheld in its entirety. Click here for English translation Click here for other translation Spain vs INC Bank 100715 Spanish National High Court ...

Norway vs. GE Healthcare AS, May 2015, Supreme Court , HRD-2015-01008-A

The Supreme Court concluded that the Norwegian taxation of incomes in Ireland were not in violation of the treaty Article 7. 1 and showed that the double taxation which thus arose, in Article 24. 2 gave GE Healthcare AS a tax deduction in Norway equal to the taxes paid by income in Ireland. Such deduction was made by tax decision in the case. GE Healthcare AS was thus protected against the overall tax burden in Norway and Ireland were greater than if the income were only taxed in Norway. There was no reason to limit the taxation of GE Healthcare AS beyond this. Click here for translation Norway vs GE-Healthcare-AS-sak-2014-1968-HRD-2015-01008-A ...

France vs. Bayerische Hypo und Vereinsbank AG, April 2014, Conseil d’État, Case No. FR:CESSR:2014:344990.20140411

Bayerische Hypo und Vereinsbank AG (HVB-AG), a banking institution under German law, set up a French branch under the name “HVB-AG Paris” and contributed ten million Deutschmarks to this structure. The French branch also took out loans from the company’s head office or from third-party companies Following an audit of the branch’s accounts, the tax authorities, after considering that these loans revealed an insufficiency of the contribution made by the head office, particularly in relation to the equity capital that the branch should have had if it had had legal personality, refused to allow the interest corresponding to the fraction of the loans deemed excessive to be deducted from the results taxable in France in respect of the branch’s activity and demanded that the company pay additional corporation tax for the financial year ending in 1994, together with increases In order to justify this reassessment, the tax authorities first argued, during the contradictory reassessment procedure, that the disputed interest characterized a transfer of profits to the German head office within the meaning of Article 57 of the General Tax Code, and then by way of substitution of a legal basis that the interest was not borne by an autonomous company carrying on the same or similar activities as the branch under the same or similar conditions and dealing with the company’s head office as an independent company within the meaning of the provisions of Article 209(I) of the General Tax Code in conjunction with the stipulations of Article 4 of the Franco-German tax treaty of 21 July 1959; In 2008, the Paris administrative court discharged the disputed tax assessment. This decision was then appealed by the tax authorities to the Supreme Administrative Court. Judgement of the Supreme Administrative Court The Supreme Administrative Court upheld the decision of the administrative court and dismissed the appeal of the tax authorities. Excerpts “Considering, on the other hand, that there is no need, in order to interpret the stipulations of Article 4(2) cited above, to refer to the comments formulated by the Tax Committee of the Organisation for Economic Co-operation and Development (OECD) on Article 7 of the model convention drawn up by this organisation, since these comments were made after the adoption of the stipulations in question; that, in the wording applicable to the facts of the case, these provisions must be understood as authorising the State of the branch to attribute to the branch the profits that the interested party would have made if, instead of dealing with the rest of the company, it had dealt with separate companies under ordinary market conditions and prices; that, on the other hand, these stipulations do not have the object or, consequently, the effect of allowing that State to attribute to the branch the profits which would have resulted from the contribution to the interested party of own funds of an amount different from that which, entered in the accounting records produced by the taxpayer, faithfully retraces the withdrawals and contributions made between the various entities of the company; that, in particular, the tax authorities cannot substitute for this latter amount the equity capital with which the branch should have been endowed, by virtue of the applicable regulations or with regard, in particular, to the outstanding risks to which it is exposed, if it had enjoyed legal personality; 7. Considering that it follows from this that the terms of Article 209(I) of the General Tax Code subjecting to corporation tax “profits the taxation of which is attributed to France by an international convention on double taxation” could not, any more than the terms and rules mentioned in point 3, have the effect of attributing to the French tax authorities the taxation of profits established in accordance with the disputed reassessments; 8. Considering that it follows from all the above that, without needing to rule on the objection raised by HVB-AG, the Paris Administrative Court of Appeal, which was not required to respond to all the arguments raised before it, sufficiently reasoned its decision and did not commit an error of law, nor did it distort the documents in the file submitted to it by ruling, after having dismissed the domestic law grounds on which the tax authorities intended to base the contested taxes, that the stipulations of Article 4 of the Franco-German tax treaty could not be usefully invoked for the same purpose; that, consequently, the Minister responsible for the budget is not entitled to request the annulment of the judgment he is challenging;” Click here for English translation Click here for other translation Conseil d'État, 10ème _ 9ème SSR, 11_04_2014, 344990 - Légifrance ...

Spain vs. Roche, January 2012, Supreme Court, Case No. 1626/2008

Prior to a business restructuring in 1999, the Spanish subsidiary, Roche Vitaminas S.A., was a full-fledged distributor, involved in manufacturing, importing, and selling the pharmaceutical products in the Spanish and Portuguese markets. In 1999 the Spanish subsidiary and the Swiss parent, Roche Vitamins Europe Ltd., entered into a manufacturing agreement and a distribution agreement. Under the manufacturing agreement, the Spanish subsidiary manufactured products  according to directions and using formulas, know-how, patents, and trademarks from the Swiss parent. These manufacturing activities were remunerated at cost plus 3.3 percent. Under the distribution (agency) agreement, the Spanish subsidiary would “represent, protect and promote†the products. These activities were remunerated at 2 percent of sales. The Spanish subsidiary was now characterized as a contract manufacturer and commission agent and the taxable profits in Spain were much lower than before the business restructuring. The Spanish tax authorities argued that the activities constituted a PE in Spain according to article 5 of DTT between Spain and Switzerland. Therefore, part of the profits should be allocated to the Spanish subsidiary in accordance with article 7 of the DTT. Supreme Court Judgement The Supreme Court held that the restructured Spanish entity created a PE of Roche Vitamins Europe Ltd. in Switzerland. The profits attributed to the PE included not only the manufacturing profits but also profits from the distribution activity performed on behalf of Roche Vitamins Europe Ltd. in Switzerland. Excerpts “The administration is therefore correct in stating that the applicant company operated in Spain by means of a permanent establishment…” “In short, what is laid down in these two paragraphs 1 and 2 of Article 7 of the Spanish-Swiss Convention (in summary form) is that: (a) If a taxpayer acts in a State, of which he is not a resident, through a permanent establishment, then the profits of that taxpayer may be taxed in that State, but only to the extent that such profits are attributable to the said re-establishment. (b) This means that only the profit that the non-resident would have made in that State if he had had a full presence (as a resident), through a separate and distinct company, will be taxable in that State; but, of course, only in respect of the activity carried out by that establishment. The Audiencia Nacional, contrary to this reading of Article 7, establishes that if a non-resident company has a permanent establishment, then it must be taxed in the State in which that establishment is located for all the activities carried out in the territory of that State, even if they are not carried out through the permanent establishment. Contrary to this, and by application of the only possible interpretation of Article 7(1) and (2) (already explained and in accordance with the criteria of the OECD Tax Committee, as we shall see below), a permanent establishment should only be taxed in the State in which it is located on the profit derived from the activity carried out through the permanent establishment.” “…the sales figure must include all sales made by the permanent establishment. We consider that it is established in the file, contrary to the appellant’s submissions, that those sales must include those made to Portuguese customers, since they were made as a result of the promotional and marketing activities of Roche Vitaminas SA and are therefore attributable to it. It is also common ground that the expenses referred to by the appellant have been taken into account, as is stated in the official document dated 12 July 2002. For the rest, we refer to what was established in the settlement agreement dated 23 April 2003, as well as to the full arguments contained in the judgment under appeal.” Click here for english translation Click here for other translation Spain-vs-Roche-Januar-2014-Supreme-Court-case-nr.-1626-2008 ...

Spain vs. Borex, February 2011, National Court case nr. 80-2008

A Spanish subsidiary of a UK Group (Borex), which imported, processed and sold the materials to third parties, was transformed into a a contract manufacturer. The Spanish subsidiary signed two separate contracts with the UK parent – one for warehousing and the provision of services and the other in respect of an sales agency. Under the first contract, the minerals purchased by the parent would be stored and processed by the subsidiary, which would also provide other relevant services. Under the second contract, the Spanish subsidiary would promote sales of the minerals in Spain, but, as the prices and conditions were fixed by the UK parent, the subsidiary would only send orders to the parent, which according to the contract was not bound to accept them. The subsidiary could not accept orders in the name of the parent or receive payment. The tax authorities argued that there was a high degree of overlapping between the activities carried out by the parent and the subsidiary. According to the tax authorities warehousing, service and promotion of sales activities could not be considered separately, and as the activities were not of a preparatory or auxiliary nature there was a PE in Spain . The National Court concluded that, article 5(3) of the Spain-UK Tax Treaty (article 5(4) of the OECD Model) did not apply, as the activities in the subsidiary could not be considered in isolation. The activities were to be considered part of a chain that completed an economic cycle in Spain. Click here for English translation Click here for other translation Spain-vs-Borex-February-2011-National-Court-case-nr.-80-2008 ...

US vs National Westminster Bank PLC, January 2008, US Court of Appeals, Case No. No. 2007-5028

NatWest is a United Kingdom corporation engaged in international banking activities. For the tax years 1981-1987, NatWest conducted wholesale banking operations in the United States through six permanently established branch locations (collectively “the U.S. Branchâ€). On its United States federal income tax returns for the years at issue, NatWest claimed deductions for accrued interest expenses as recorded on the books of the U.S. Branch. On audit, the Internal Revenue Service (“IRSâ€) recomputed the interest expense deduction according to the formula set forth in Treasury Regulation § 1.882-5. The formula excludes consideration of interbranch transactions for the determination of assets, liabilities, and interest expenses. Treas. Reg. § 1.882-5(a)(5) (1981).2 The formula also imputes or estimates the amount of capital held by the U.S. Branch based on either a fixed ratio or the ratio of NatWest’s average total worldwide liabilities to average total worldwide assets. Id. § 1.882-5(b)(2). Pursuant to the IRS’s recalculation of the interest expense deduction, NatWest’s taxable income was increased by approximately $155 million for the years at issue. NatWest concluded that the increased income would result in an additional tax liability of at least $37 million in the United States for which a foreign tax credit would not be available in the United Kingdom. NatWest thus requested, under Article 24 of the 1975 Treaty, that the United Kingdom enter competent authority proceedings with the United States to resolve the double taxation issue. Pursuant to the competent authority proceedings, the United Kingdom presented NatWest with a settlement offer, which NatWest concluded did not sufficiently address its double taxation concerns. NatWest rejected the settlement offer, paid the additional taxes, and filed suit in 1995, claiming that the IRS’s application of § 1.882-5 to an international bank such as NatWest violated the terms of the 1975 Treaty. The 1975 US/UK Double Taxation Treaty contained an Article 7 in similar terms to Article 8 of the 1976 Convention. In the first of three cases, NatWest claimed that the formula used in the Treasury Regulation to calculate deductible interest was inconsistent with Article 7 of the Treaty. The United States Court of Federal Claims upheld the claim. In relation to Article 7 of the US/UK Treaty it said: “The foregoing examination of Article 7 of the Treaty, pre-ratification reports of the Treasury Department and the Senate, and Commentaries intended to assist in interpretation leads to the conclusion that the Treaty contemplates that a foreign banking corporation in the position of plaintiff will be subjected to U.S. taxation only on the profits of its U.S. branch and that such profits should be based on the books of account of such branch maintained as if the branch were a distinct and separate enterprise dealing wholly independently with the remainder of the foreign corporation, provided that the financial records of the branch, especially those reflecting intra-corporate lending transactions, are subject to adjustment as may be necessary for imputation of adequate capital to the branch and to insure use of market rates in computing interest expenses. In addition to normal deductible expenses reflected on the books of the branch, as adjusted, there shall be allowed in the determination of the profits of the U.S. Branch a reasonable allocation of general and administrative expenses incurred for the purposes of the foreign enterprise as a whole.” The Treasury Regulation was held to operate contrary to Article 7 for a number of reasons. It treated the branch as a unit of the bank rather than as a separate entity and applied the formula without regard to the actual assets and liabilities shown on the books of the branch. Judgement of the Court The court allowed the appeal of National Westminster. According to the court there is nothing in the language of Article 7 to suggest that the government is allowed to impose capital requirements on a branch that are the same as those imposed on separately-incorporated banks in order to give meaning to the phrase “separate and distinct.” The phrase “separate and distinct” does not mean the branch should be treated as if it were “separately-incorporated,” but instead “separate and distinct,” means separate and distinct from the rest of the bank of which it is a part. Thus, Article 7 of the Treaty simply allows the taxing authorities to adjust the books and records of the branch to ensure that transactions between the branch and other portions of the foreign bank are properly identified and characterized for tax purposes. There is nothing in the plain words of the Treaty that allows the government to adjust the books and records of the branch to reflect “hypothetical” infusions of capital based upon banking and market requirements that do not apply to the branch. In short, the government’s reading of Article 7 goes too far. NATIONAL WESTMINSTER BANK PLC v ...