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service agreement entered into in 1993 between Asian Hotels Limited and Hyatt International-Southwest Asia Limited had been replaced by various separate agreements – a Strategic Oversight Services Agreements, a Technical Services Agreement, a Hotel Operation Agreement with Hyatt India, and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

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.” UKFTT 210 (TC) TC08160″] ...

Italien fashion group, Dolce & Gabbana, had moved ownership of valuable intangibles to a subsidiary established for that purpose in Luxembourg. The Italian Revenue Agency found the arrangement to be wholly artificial and set up only to avoid Italien taxes and to benefit from the privileged tax treatment in Luxembourg. The Revenue Agency argued that all decision related to the intangibles was in fact taken at the Italian headquarters of Dolce & Gabbana in Milan, and not in Luxembourg, where there were no administrative structure and only one employee with mere secretarial duties. Dolce & Gabbana disagreed with these findings and brought the case to court. In the first and second instance the courts ruled in favor of the Italian Revenue Agency, but the Italian Supreme Court ruled in favor of Dolce & Gabbana. According to the Supreme Court, the fact that a company is established in another EU Member State to benefit from more advantageous tax legislation does not as such constitute an abuse of the freedom of establishment. The relevant criteria in this regard is if the arrangement is a wholly artificial and as such does not reflect economic reality. Determination of a company’s place of business requires multible factors to be taken into consideration. The fact, that the Luxembourg company strictly followed directives issued by its Italian parent company is not sufficient to consider the structure as abusive and thus to relocate its place of effective management to Italy. A more thorough analysis of the activity carried out in Luxembourg should have been performed. According to the Supreme Court something was actually done in Luxembourg. Click here for English translation Click here for other translation ...

GE is incorporated in and is a tax resident of the USA. It is engaged in the business of manufacture and offshore sale of highly sophisticated equipments such as gas turbine parts and subassemblies. GE sells its products offshore on a principal to principal basis to customers all over the world, including to customers located in India, whereby the title to the goods sold to Indian customers passes from it outside India. A liaison office was set up in 1991 in New Delhi to act as a communication channel and not carry on any business activity. GE has been in India since 1902. Its global businesses had a presence in India and the group had become a significant participant in a wide range of key services, technology and manufacturing industries. Employment across India exceeds 12,000. Over 1 billion dollar of exports from India support GE’s global business operations around the world. It has sourced products, services and intellectual talent from India for its global businesses. It pioneered the concept of software sourcing from India and was one of the largest customers for the IT service industry of India. Following an extensive audit the tax authorities issued an income assessment to what they had determined to be a permanent establishment of GE in India. GE held they were not subjected to income tax laws of India as they had no permanent establishment. The High Court dismissed GE’s appeal and upheld the assessment. The High Court concluded that core sales activity was conducted from GE premises in India and that the activities in India were not of a preparatory and auxiliary character. The High Court rejected GE’s contention that since the expatriate employees and employees of the Indian entity did not have the authority to conclude contracts, the activities could not be anything other than preparatory and auxiliary. Determining whether a practice is preparatory or auxiliary requires asking whether the activity undertaken at the fixed place of business is an essential and significant part of the activity of the enterprise as a whole – it must be the case that the activities must per se be responsible for the realization of profits.” “… the process of sales and marketing of GE‟s product through its various group companies, in several segments of the economy (gas and energy, railways, power, etc.) was not simple.” “…. the facts of the present case clearly point to the fact that the assessee‟s employees were not merely liaisoning with clients and the headquarters office.” “GE India comprising of expats and other employees of GEIIPL etc., were not working for a particular enterprise, but, for multiple enterprises dealing in one of the three major businesses of GE group. Activities of an agent must be “devoted wholly, or almost wholly on behalf of that enterprise.” “GE India‟s activities clearly constitute activities that would establish agency PE in India” “…the analysis carried out by the Revenue – not merely by the ITAT but also by the AO in the assessment order, was after considering the relevant decisions – including Rolls Royce PLC – where 35% profits were attributable to marketing activities in India.” “Having regard to the conspectus of facts in this case and the findings of the lower Revenue authorities – including the AO and the CIT(A), both of whom have upheld the attributability of income to the extent of 10% and apportionment of 3.5% of the total values of supplies made to the customers in India as income, the Court finds no infirmity with the findings or the approach of the Tribunal in this regard.” “…since all questions of law have been answered against the assessees, these appeals have to fail and are consequently dismissed but without orders as to costs.” ...

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 ...

US companies, AB LLC and BD Holdings LLC, came to South Africa in 2007 to perform certain services for X, a company based in and operating from South Africa. To perform these services they concluded a contract with X. There only purpose for coming to South Africa was to perform the services and earn income or profits in terms of the contract. Having achieved this objective they left the country in 2008. Furthermore in 2009 they recieved a succes bonus for the work performed in 2007 and 2008. On 14 June 2011 they were assessed for taxation purposes for the 2007, 2008 and 2009 years by the Revenue Service. The total taxable amount for these years, although only earned during the period February 2007 to May 2008, according to the respondent, was R 63.990.639. The assessment was based on the provisions of Articles 7(1), 5(1) and 5(2)(k) of the DTA. According to these assessments the US companies were liable for tax for those years for the income it earned in South Africa during the stay here in 2007 and 2008. It was contended by the US companies that once the requirements of articles 5(2) are met the focus of the enquiry shifts to the requirements in article 5(1), and only if the requirements of article 5(1) are met can it be safely concluded that the existence of a “permanent establishment” has been proved. On this basis the, even if it were found that the requirements of article 5(2)(k) were met in this case (it specifically eschewed any concession to the effect that they were met), it nevertheless has still to be found that the requirements of article 5(1) had been met in order for being held liable for taxation for the income earned (or the profits it made) from operations in this country. The Court refered to basic rules of interpretation: “The need to interpret international treaties in a manner which gives effect to the purpose of the treaty and which is congruent with the words employed in the treaty is well established.” And: “As mentioned above the term must be given a meaning that is congruent with the language of the DTA having regard to its object and purpose.” The defining characteristic in terms of article 5(1) is that it must be “a fixed place of business through which the business of an enterprise is wholly or partly carried on”. Thus, the nonresident party (the appellant in this case) is not required to carry out all its business from the “fixed place of business” so established. In this sense, even if some of the obligations were performed from another premises, they would, nevertheless, have established “a permanent establishment”. The Tax Court dismissed the appeal and ruled in favor of the Revenue Service. The Court also upheld a penalty imposition of 100%. The court disagreed with the taxpayer’s argument that it had not intended to avoid the tax but had merely misinterpreted the law in good faith. The court noted: “The appellant must accept responsibility for its own error regardless of whether the error was bona fide or not. In these circumstances, it cannot be held that the respondent acted erroneously, or failed to exercise his discretion judiciously, when only waiving part of the additional tax he was entitled to impose, or that the imposition of the additional tax at all was unduly harsh. The appellant benefitted significantly from the waiver granted by the respondent. In my judgment, taking the waiver into account, it cannot be said that the additional tax imposed is disproportionately punitive. I find no fault with its imposition. Hence, its appeal against the additional tax must fail.” ...

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 ...

The French company, Zimmer SAS, distributed products for Zimmer Limited. In 1995 the company was converted into a commissionaire (acting in its own name but on behalf of Zimmer Ltd.). The French tax authorities argued that the commissionaire was taxable as a permanent establishment of the principal, because the commissionaire could bind the principal. The Court ruled that the commissionaire could not bind the principal. Therefore, the French commissionaire could not be a permanent establishment of the principal. Click here for English translation ...

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.” ...