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service agreement entered into in 1993 between Asian Hotels Limited and Hyatt International-Southwest Asia Limited had been replaced by various separate agreements – a Strategic Oversight Services Agreements, a Technical Services Agreement, a Hotel Operation Agreement with Hyatt India, and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

In 2013 “A” SARL requested a tax ruling confirming that its US branch had sufficient substance to qualify as a permanent establishment. The tax authorities issued the ruling conferming this to be the case, but only premised on the information provided by “A” SARL. The ruling would not be valid if the facts or circumstances described therein were incomplete or inaccurate. In 2016, “A” SARL filed an amended tax return for 2013 in which it had effectively allocated a dividend in kind to the US branch. Despite of the above mentioned tax ruling, the tax authorities disallowed the amendments to the tax return, finding that the US branch did not have sufficient substance to qualify as a permanent establishment. Not satisfied with the decision “A” SARL filed an appeal with the Administrative Court. Judgement of the Administrative Tribunal The Court decided in favour of the tax authorities and denied the recognition of US permanent establishment. Excerpt (in English) “In view of all the inconsistencies noted above in relation to (i) the date on which the Branch was set up, (ii) the transfer to the Branch of the claimant company’s shareholdings in company “M” and (iii) the distribution of the dividend to the claimant company, and in the absence of detailed and concrete explanations from the plaintiff company concerning, in particular, the contradictions in the dates mentioned in the various resolutions of its Board of Directors, respectively in its initial and amending tax returns, the allegation that the disputed dividend in kind was attributed to it via the branch must be rejected as being unsupported by any tangible evidence. Indeed, it would have been incumbent on the plaintiff company to provide documents that would have made it possible to establish irrevocably and indisputably that the disputed bonds had first been transferred by “M” to the branch before being subsequently reallocated to it by the branch, such as, for example, a copy of the decision by the shareholders of “F” to distribute a dividend in kind to the branch, with a precise indication of the date of payment, proof of the registration of the bonds in “M”‘s share account, proof of the transfer of the bonds to “F”‘s share account, proof of the transfer of the bonds to “M”‘s share account, proof of the transfer of the bonds to “F”‘s share account, proof of the transfer of the bonds to “M”‘s share account and proof of the transfer of the bonds to “F”‘s share account. bonds to the branch’s securities account, or a copy of the minutes and decisions taken by the manager of the US Branch, and in particular a document issued by the latter stating that the … Eurobonds were continued by the branch to the plaintiff company after July 11, 2013 at 4:30 p.m., i.e. the time when, according to the aforementioned letter of July 11, 2013, the branch would have been allocated the plaintiff company’s holdings in company “F”, or, if applicable, on July 12, 2013, which it nevertheless remains in default of doing. This conclusion is not shaken by the documents submitted by the plaintiff company to establish the existence of a permanent establishment in the United States within the meaning of Article 5 of the Convention, namely the certificate of registration of the Stable Establishment with the Connecticut revenue authorities, the branch’s bank account details and the copy of the service contract between the branch and the American company “H”. Indeed, it must be noted that the certificate of registration of the Stable Establishment with the Connecticut Revenue Service contains no precise date, so that it has not been established that the said establishment was actually created on July 11, 2013, as the plaintiff company maintains. As for the other two documents, they are irrelevant to the issue of the actual transfer of the dividend in kind to the branch, and must therefore be rejected as irrelevant in this respect. The same is true of the copy of the document described by the plaintiff company as a “copy of the confirmation of the listing of the Eurobonds on the Jersey Stock Exchange”, dated October 9, 2013, which, in the absence of more detailed explanations, does not allow us to conclude that the disputed bonds were actually reallocated to the plaintiff company via the branch on July 12, 2013. It follows that it has not been unequivocally established that the key elements of the transaction in the present case correspond to those described in the request for an advance ruling, so that the ACD was not obliged to comply with it, in particular as regards the recognition of the branch as a permanent establishment and consequently the taxation of its profits in the United States. It follows from all the foregoing considerations that the tax office rightly refused to take into consideration the new tax balance sheet as provided by the plaintiff company together with the rectifying tax return dated November 15, 2016, so that the bulletins for community income tax and communal business tax for the year 2013, issued on September 21, 2016 are to be confirmed. It follows from all the foregoing considerations that the appeal is not well-founded in any of its pleas, so that the plaintiff company is to be dismissed.” Click here for English translation Click here for other translation ...

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. 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In a request for a binding consultation the question raised was whether activities carried out in Spain resulted in the existence of a permanent establishment. The General Directorate considered that an enterprise cannot fragment a cohesive operating business into several small operations and argue that each of these is merely engaged in a “preparatory or auxiliary activity”. The Irish company was considered to have a PE in Spain, as it carried out a significant part of all its activity in Spain – not just simple storage/warehousing, but rather multiple logistics operations. Click here for English Translation Click here for other translation ...

In 2009 a British company – Bupa Insurance Limited – absorbed the Danish company International Health Insurance, whose shares it had acquired in 2005 and which had had a French branch since 1993. Following an audit for FY 2009 and 2010, the tax authorities considered that the French branch had passed on to Bupa Insurance Limited, free of charge, the customers associated with its insurance business in France, and considered this transaction to be an indirect transfer of profits within the meaning of Article 57 of the General Tax Code. The Administrative Court of Appeal set aside the assessment and an appeal was then filed with the Conseil d’État by the tax authorities. Judgement of the Supreme Administrative Court The Supreme Administrative Court upheld the decision from the CAA and dismissed the appeal of the tax authorities. Excerpts “3. It is clear from the statements in the judgment under appeal that the Marseille Administrative Court of Appeal held that the French branch of the Danish company International Health Insurance bore the operating risk of the insurance business carried out in France prior to 1 January 2009, but noted that prior to that date, the insurance contracts offered by this branch were governed by Danish law and did not benefit from any particular adaptation to the French situation, and that all the services offered to the insured parties, in particular the assistance service, were provided in Denmark, that the contracts concluded with the insurance brokers responsible for canvassing on French territory were partly concluded by the Danish company, that nothing in the file established that the employees of the French branch had the function of developing their own clientele for the benefit of the branch, and that the registration of French clients according to a specific quotation, although it allowed for an accounting analysis specific to clients who had concluded contracts with brokers operating on French territory, did not demonstrate that the activity of the branch would have consisted of developing such a client base. The Court deduced from these findings that the Minister did not establish that this branch had real commercial autonomy before 1 January 2009 and, consequently, the existence of a free transfer of customers leading to the presumption of an indirect transfer of profits to the British company Bupa Insurance Limited. 4. By ruling, in the light of the factors mentioned in point 3, which it assessed in a sovereign manner, that, since the French branch of the Danish company did not have genuine commercial autonomy, the fact that it had borne the operating risk inherent in the insurance business carried on in France prior to 1 January 2009 was not sufficient to establish the existence of its own customer base, In order to deduce that no free transfer of clientele, likely to characterise an indirect transfer of profits within the meaning of Article 57 of the General Tax Code, had been established, the Marseille Administrative Court of Appeal, which ruled in a sufficiently reasoned and uncontradicted judgment, did not commit an error of law or incorrectly characterise the facts before it. 5. It follows from the foregoing that the Minister has no grounds for seeking the annulment of the judgment which he is challenging. “ Click here for English translation Click here for other translation ...

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 ...

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 ...

A Permanent Establishment (PE) in Kenya of MAN Diesel and Turbo SE Germany (MAN) entered into a consortium with a firm called MPG Services to engineer, procure and construct an 87 MW generating capacity thermal power plant on behalf of Thika Power Ltd. The role of MAN’s Kenyan PE in the project was mobilization, engineering and design, reservation of the diesel sets, and steam turbine and other start-up costs associated with its part of the works which included supervision of the assembly and installation of engines and commissioning the engines. MAN Germany was to provide for the materials up to the port of export and the PE was to assist in the onshore part which included supervision of the assembly and installation work as well as commissioning the work but did not include supply of equipment. In 2015, the tax authorities initiated an audit which resulted in a final tax assessment issued in 2017. According to the assessment MAN’s Kenyan PE owed additional taxes on undeclared income (income resulting from the imports of Equipment), penalty and interest in an amount of Kshs 347,518,798.00. MAN filed an appeal with the Tax Appeals Tribunal (TAT) premised on the grounds that the tax authorities erred in fact and in law in its demand for additional tax for FY 2012 and 2013. According to MAN, income from offshore supply of equipment by MAN DT Germany is not attributable to MAN’s Kenyan PE under Article 7 of the DTA by virtue of the Force of Attraction Rule. The Tribunal allowed the appeal and set aside the assessment. The tax authorities then filed an appeal with the High Court. Judgement of the High Court The High Court dismissed the appeal of the tax authorities and decided in favor of MAN’s Kenyan PE. According to the High Court, income from the supply of equipment by MAN DT Germany is not attributable to MAN’s Kenyan PE under Article 7 of the DTA by virtue of the Force of Attraction Rule. Excerpts “44. Identifying the Commissioner’s true case is important because of the nature of his statutory mandate which involves the exercise of an extraordinary administrative power enabling the Commissioner to apply the laws. The exercise of that power involves his ‘determining’ a tax liability. An appeal in this context is against the Commissioner’s ‘decision’ namely his determination of a tax liability and its amount. The basic jurisdictional requirement for the exercise of the power is that the Commissioner is ‘satisfied’ of the various requirements. Once the Commissioner reaches the requisite level of satisfaction, an appeal must, of necessity go to whether he justified in being so satisfied. He must stand or fall by his reasons for exercising the power.” 45. The reason offered by the Commissioner is that the Respondent failed to avail documents to support the income from the imports. This argument sounds attractive. But, the challenge is, the Respondent was not the importer and his role was clearly defined in the documents provided. That being the case, the Commissioner’s decision that stands on shaky ground and the TAT correctly declined to uphold it. 46. Closely tied to the above ground is the appellant’s argument that the Respondent did not produce some documents as required by section 23 of the TPA. Whereas the said section obliges a tax payer to avail records, the flip side of this position is that a party can only produce documents in his possession. It could not have been the intention of the law to compel tax payers to produce documents in the hands of a third party and more so, if the transactions were undertaken by third parties. The Respondent persuaded the TAT that it was not the importer and it could not produce documents in the hands of a third party. To expect the Respondent to produce import documents in the hands of a third-party amounts to overly overstretching the ambit of sections 23, 56(1) and 30 of the TPA. On this ground, the appellant argument collapses. 47. The evidence on record on this particular issue leaves no doubt that the Respondent discharged the burden of proof. As Lord Denning held in Miller v Minister of Pensions,[20] ‘The…{standard of proof}…is well settled. It must carry a reasonable degree of probability…if the evidence is such that the tribunal can say: ‘We think it more probable than not’ the burden is discharged, but, if the probabilities are equal, it is not.’ 48. The burden placed upon the Respondent by the law was to establish by evidence that it was not the importer and to confirm its role under the contract. Simply put, it was required to demonstrate that the tax was not due. The test is whether the Respondent established a prima facie case and having done so, the evidential burden shifted to the appellant to persuade the TAT on the contrary. It never did so. … 56. In conclusion, I find no basis at all upon which I can interfere with the TAT’s decision. The upshot is that the appellant’s appeal fails. The appeal is hereby dismissed with costs to the Respondent.” Click here for other translation ...

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″] ...

The issue in the case before the Supreme Administrative Court was whether an Irish company had a PE in France in a situation where employees of a French company in the same group carried out marketing, representation, management, back office and administrative assistance services on behalf of the group. The following facts were used to substantiate the presence of a French PE: French employees negotiated the terms of contracts and were involved in drafting certain contractual clauses with the customers. Contracts were automatically signed by the Irish company – whether this action corresponded to a simple validation of the contracts negotiated and drawn up by the managers and employees in France. Local advertising programs were developed and monitored by employees in France. French employees acted to third parties as employees of the Irish company. Customers did not distinguish between the Irish and the French company. In a 2018 decision the Administrative Court had found that none of these factors established that employees in France had been authorized to act on behalf of and in the name of the Irish company. The Administrative Court instead based the decision on whether contracts could be entered and services could be rendered without prior approval of the contracts by the Irish parent entity. The Court concluded that French employees could not commit its Irish principal contractually and services could not be rendered until the customer contract had been approved by the Irish company. The Supreme Administrative Court (CAA) overturned the decision of the Administrative Court. “...it is clear from the documents in the file submitted to the trial judges that the French company has the human resources to enable it to provide the services of the Irish company independently, in particular the human resources to enable it to decide to conclude a contract with an advertiser for the provision of services operated by the Irish company.” “…the French company must be regarded as having the appropriate technical resources to make it possible for the Irish company to provide the services autonomously, even though no data center used to carry out the linking functions is located in France, nor, for that matter, in Ireland.” On the issue of permanent establishment, see also the French Zimmer decision from 2010 and the later Google decision from 2017. Click here for English Translation Click here for other translation ...

S GmbH was an Austrian trading company of a group. In the course of business restructuring, the real estate division of the Austrian-based company was initially separated from the “trading operations/brands” division on the demerger date of 31 March 2007. The trademark rights remained with the previous trading company, which was the parent company of the group, now M GmbH. On 25 September 2007, M GmbH transferred all trademark rights to a permanent establishment in Malta, which was set up in the same year, to which it also moved its place of management on 15 January 2008. Licence agreements were concluded between S GmbH and M GmbH, which entitle S GmbH to use the trademarks of M GmbH for advertising and marketing measures in connection with its business operations in return for a (turnover-dependent) licence fee. The tax authorities (re)assessed the corporate income tax for the years 2008 and 2009. The audit had shown that the licence fees were to be attributed in their entirety to S GmbH as the beneficial owner of the trade marks, which meant that the licence payments to M GmbH were also not to be recognised for tax purposes. S GmbH had created the trademark rights, which had been valued at a total value of €383.5 million in the course of its spin-off; the decisions regarding the use, creation, advertising and licensing of the trademark rights continued to lie with the decision-makers of the operational company advertising the revisions at the Austrian group location. The Maltese management was present at meetings with advertising agencies in Austria, but its activities did not actually go beyond support and administration. The aim of the chosen structure had been a tax-saving effect, whereby the actual taxation of the licence income in Malta had been 5%. A complaint filed by S GmbH was dismissed by the Bundesfinanzgericht. S GmbH then filed an appeal with the Verwaltungsgerichtshof. Judgement of the Court The Court dismissed the appeal of S GmbH and upheld the decision of the tax authorities Excerpts: “In the appeal case, the BFG found that the trademark rights had been created before the separation of the companies. No new trademarks had been registered during the audit period. The advertising line was determined by a two-year briefing of the group and was based on the requirements of the licensees. The brand managers of M GmbH participated in the process, but the decisions were made by the organs of the appellant, which spent over €56 million in 2008 and almost €68 million in 2009 on advertising and marketing.. In contrast, M GmbH had hardly incurred any advertising expenses, and its salary expenses were also disproportionate to the tasks of a company that was supposed to manage corporate assets of almost €400 million in trademark rights and to act as the (also economic) owner of these assets. The minimal salary expenditure, which amounted to a total of € 91,791.0 in 2008 and € 77,008.10 in 2009 and was distributed among eight persons (most of whom were part-time employees), could only be explained by the fact that all relevant trademark administration, maintenance and management tasks were, as in the past, handled either by group companies (by way of group-internal marketing activities) or by specialists commissioned by the group (trademark lawyer, advertising agency) and that M GmbH only acted in a supporting capacity. If, against this background, the BFG assumes, despite the formal retention of the legal ownership of the trademark rights, that the economic ownership of the trademark rights, which had already been created at that time, was also transferred to the appellant at the time of the spin-off, this cannot be seen as an unlawful act which the Administrative Court should take up. If, in the case at hand, the appellant nevertheless concluded licence agreements with M GmbH, the reason for this cannot have been the acquisition of the right of use to which it was entitled from the outset as the beneficial owner. The BFG was therefore correct in denying that the amounts paid by the appellant under the heading of “licence payments” were business expenses. …” Click here for English translation Click here for other translation ...

A Swiss company, Ashland Industries Europe GmbH, had not declared a presence in Spain for VAT purposes and did not charge VAT for local sales. However, the Swiss company used the resources of its Spanish subsidiary when performing these local sales of goods in Spain. On that basis, the Spanish tax authorities found that the company had a permanent establishment for in Spain for VAT purposes and issued an assessment. An appeal was filed by Ashland Industries, but the appeal was dismissed by the courts. The Spanish Supreme Court concluded that: “First. To determine whether a permanent establishment can be deemed to exist in the Spanish territory of application of VAT where the only transactions carried out subject to that tax are supplies of goods other than supplies of gas, electricity, heat or refrigeration. Second. If the answer to the previous question is in the affirmative, what conditions are necessary to establish that a Spanish subsidiary constitutes a permanent establishment in the Spanish territory of application of value added tax? The answer to the first question, in accordance with our reasoning, must be that, on an interpretation of Articles 69(3) and 82(2) of Law 37/1992, Articles 44 and 45 of Directive 2006/112 and Article 11(1) of the implementing regulation (EU) of 15 March 2011, a permanent establishment may be deemed to exist in the Spanish territory in which VAT is applicable where the only transactions carried out subject to that tax are supplies of goods other than gas, electricity, heat or refrigeration. The answer to the second question, in accordance with our reasoning, must be that the conditions necessary for holding that a Spanish subsidiary constitutes a permanent establishment in the Spanish territory where value added tax is applied are those which derive from the case-law of the Court of Justice of the European Communities and which have been set out in the case-law of that Chamber, judgment of 23 March 2018 (RCA 68/2017). It follows from the case-law that, in order to be able to speak of a permanent establishment for VAT purposes, the following conditions must be met: (a) The existence of a fixed place of business which determines the link with the territory of application of the tax A physical link with the place of business is therefore required and it must have a sufficient degree of permanence (judgments of 4 July 1985, Berkholz, 168/84, EU:C:1985:299, paragraphs 18 and 19; and of 28 June 2007, Planzer Luxembourg, C-73/06, EU:C:2007:397 , paragraph 54). (b) An adequate structure in terms of human and technical resources (Berkholz, paragraphs 18 and 19, and Planzer Luxembourg, paragraph 54; also, judgment of 16 October 2014, Welmory, C-605/12 , EU:C:2014:2298, paragraph 58). Therefore, Articles 84(2) LIVA and 31(2) LFIVA, by requiring the permanent establishment to intervene in the supply of goods or services, consider that such an intervention takes place when the establishment arranges its material and human factors of production or one of them for the purpose of carrying out the transaction subject to VAT. It is not essential to have their own structures, and agencies or representatives authorised to contract in the name or on behalf of the taxable person may be considered permanent establishments [ see Article 69(3)(2)(a) Vat]. It must also have a sufficient degree of permanence and a structure suitable, from the point of view of its human and technical resources, to enable it to carry out autonomously the transactions in question (Case C-190/95 AROLease [1997] ECR I-0000). I-4383, paragraph 16, and Case C-390/96 Lease Plan [1998] ECR I-2553, paragraph 24). (c) With a few exceptions, it does not have to be a subsidiary, since it has legal personality. In such situations, it is the subsidiary which becomes liable for VAT, and not the parent company, which, in order to be regarded as such, must not act through subsidiaries but through permanent establishments in the territory where the tax is applied (see Article 87(2) LFIVA and Article 31(2) LFIVA). However, by way of exception, a subsidiary may be regarded as a permanent establishment where it is wholly controlled by the parent company on which it is wholly dependent and where it operates as a mere subsidiary. In such situations, the underlying economic reality must prevail over legal independence (judgments of 20 February 1997, DFDS, C-260/95, EU:C:1997:77 , paragraph 29; and 25 October 2012, Daimler Widex, C-318/11 and C-319/11, EU:C:2012:666, paragraphs 48 and 49).” Click here for English Translation Click here for other translation ...

The Italian Revenue Agency had notified to Gulf Shipping & Trading Corporation Ltd Inc. several notices of assessment, relating to the tax years 1999 to 2006, contesting undeclared taxable income, having ascertained that the aforesaid company had a permanent establishment in Italy through which it traded in construction materials. The company had lodged separate appeals against the above tax assessments, which were partially upheld by the Tax Commission, which, in particular, had partially recalculated the taxable income in relation solely to transactions involving the sale of stone materials to Italian clients The tax authorities appealed the sentence of the court of first instance. According to the Revenue Agency in regards to “permanent establishment”, what needs to be verified is the fact that, through the fixed place of business, the company based abroad carries out its activity in the Italian territory, i.e. an economically relevant activity for the subject to which it is referable, to be understood, however, in a broad sense, up to including the performance of a service, or, in general, any business activity, provided that it is referable, in fact, to the subject that exercises it. Where it is ascertained that a fixed place of business carries out both preparatory and ancillary activities and activities that may constitute the existence of a permanent establishment, the fixed place of business cannot but be considered a permanent establishment in its entirety The Supreme Court set aside the judgement of the Tax Commission. “…in particular the fact that he: issued invoices on behalf of the company; kept documentation in the interest of the company; executed sales contracts, affixing his signature/signature to all invoices; handled relations with domestic banking intermediaries with whom company, foreign and foreign currency current accounts were accessible; paid suppliers by issuing checks drawn on company current accounts but also on accounts in the name of a natural person; gave instructions to banking intermediaries to collect invoices“ “Moreover, the plurality of activities concretely carried out has not been specifically analyzed, in particular the activity of purchasing on behalf of the subsidiaries and the circumstance that the fees were sent directly to the current accounts opened in Italy and the possible nature of intermediation of the same or the specific financing function carried out, or even, for the purposes of framing the case within the provision of art. 162, paragraph 6, Presidential Decree no. 917/1986, the activity of money reuse; In particular, these are relevant and decisive facts that were not sufficiently examined by the appeal judge, for the purposes of assessing the nature of the activity carried out and their inclusion in the category of permanent establishment;” Click here for English Translation ...

AFRICAN BARRICK GOLD PLC (now Acacia Mining Plc), the largest mining company operating in Tanzania, was issued a tax bill for unpaid taxes, interest and penalties for alleged under-declared export revenues. As a tax resident in Tanzania, AFRICAN BARRICK GOLD was asked to remit withholding taxes on dividend payments amounting to USD 81,843,127 which the company allegedly made for the years 2010, 2011, 2012 and 2013 (this sum was subsequently reduced to USD 41,250,426). AFRICAN BARRICK GOLD was also required to remit withholding taxes on payments which the mining entities in Tanzania had paid to the parent, together with payments which was made to other non-resident persons (its shareholders) for the service rendered between 2010 up to September 2013. AFRICAN BARRICK GOLD argued that, being a holding company incorporated in the United Kingdom, it was neither a resident company in Tanzania, nor did it conduct any business in Tanzania to attract the income tax demanded according to the tax assessment issued by the tax authorities. In 2016, the Tax Revenue Appeals Tribunal upheld the assessment issued by the tax authorities. AFRICAN BARRICK GOLD then filed an appeal to the Court of Appeal. Judgement of the Court of Appeal The Court dismissed the appeal of AFRICAN BARRICK GOLD and upheld the assessment issued by the tax authorities. Excerpts “In light of our earlier finding that the appellant is a resident company with sources of mining income from its mining entities in Tanzania, this ground need not detain us long. We shall dismiss this ground because assignment of TIN and VRN registration numbers are legal consequences of the appellant’s tax residence in Tanzania. From the premise of our conclusion that the appellant became a resident company from 11th March 2010 when it was issued with a Certificate of Compliance for purposes of registering its place of business in Tanzania, the appellant had statutory obligation to apply to the respondent for a tax identification number within 15 days of beginning to carry on the business.” “We shall not trouble ourselves with the way the Board and the Tribunal interchangeably discussed “tax avoidance” and “tax evasion” while these courts were determining the salient question as to whether the dividend the appellant received from its Tanzanian entities and which was paid out to the appellant’s shareholders abroad was subject to withholding tax. As we pointed earlier, neither the Board nor the Tribunal made any actionable criminal finding against the appellant in respect of tax evasion. Otherwise, we agree with Mr. Tito in his submission that since the dividend which the appellant paid to its foreign shareholders had a source in the United Republic in terms of section 69(a) of the ITA 2004, the appellant had a statutory duty under section 54(1)(a) of the ITA 2004 to withhold tax from such dividends. Because the appellant failed to withhold that tax, the appellant is liable to pay that withholding tax in terms of sections 82(l)(a)(b) and 84(3) of the ITA 2004.” Click here for translation ...

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 ...

Two Swiss companies, A GmbH und B GmbH, belonged to a multinational group under a Dutch parent. The group provided food and fuel to military troops and civilian in areas of crises and armed conflicts. A group company located in the United Arab Emirates provided services to the Swiss companies primarily in relation to activities in Afghanistan. A GmbH und B GmbH had a permanent establishment in Afghanistan. As there are no tax treaties between Switzerland and Afghanistan, for Swiss tax purposes the allocation of income between the two companies and the permanent establishment in Afghanistan was governed by Swiss domestic law. A tax assessment was issued by the authorities which was brought to the Swiss courts by the companies. In 2018 the case ended up in the Swiss Supreme Court. The Supreme Court ruled that according to Swiss law, the profit allocation has to start from the total global income of the companies. Hence, the assessment was partially incorrect, as taxable profit in Switzerland had been calculated without taking into account foreign profit or losses. The the case was remanded to the lower court for further consideration. Click here for English translation Click here for other translation ...

At issue was if the activities carried out by Samsung Heavy Industries’ Mumbai project office constituted a permanent establishment or if the activities were of a preparatory and auxiliary nature. The Indian Supreme Court decided in favor of Samsung Heavy Industries. Under the Tax Treaty, the condition for application of Article 5(1) of the Tax Treaty and there by constituting PE is that there should be a place ‘through which the business of an enterprise’ is wholly or partly carried on, and furthermore that these activities are not of a preparatory and auxiliary nature, cf. Article 5(4)(e). Board Resolution documents showed that the Mumbai project office was established to coordinate and execute “delivery documents in connection with construction of offshore platform modification of existing facilities for Oil and Natural Gas Corporation”. The office was not involved in the core activity of execution of the Project. No expenditure was incurred by the office in India – only 2 employees. The burden of proving that the office does not constitute a PE is not on the taxpayer. The activities carried out by the office in Mumbai were within the exclusionary Article 5(4)(e) of Tax Treaty as an auxiliary office acting only as a liaison office between taxpayer and Oil and Natural Gas Corporation ...

East African Breweries International Ltd (applicant) is a wholly owned subsidiary of East African Breweries Limited, and is incorporated in Kenya. East African Breweries International Ltd was involved in developing the markets of the companies in countries that did not have manufacturing operations. The company did not carry out marketing services in Uganda but was marketing Ugandan products outside Uganda. After sourcing customers, they pay to the applicant. A portion is remitted to Uganda Breweries Limited and East African Breweries International Ltd then adds a markup on the products obtained from Uganda Breweries Limited sold to customers in other countries. East African Breweries International Ltd would pay a markup of 7.5 % to Uganda Breweries and then sell the items at a markup of 70 to 90%. In July 2015 the tax authorities (respondent) audited Uganda Breweries Limited, also a subsidiary of East African Breweries Limited, and found information relating to transactions with the East African Breweries International Ltd for the period May 2008 to June 2015. The tax authorities issued an assessment of income tax of Shs. 9,780,243,983 for the period June 2009 to June 2015 on the ground that East African Breweries International Ltd was resident in Uganda for tax purposes. An appeal was filed by East African Breweries International Ltd where the agreed issues were: 1. Whether the applicant is a taxable person in Uganda under the Income Tax Act? 2. Whether the applicant obtained income from Uganda for the period in issue? 3. What remedies are available to the parties? Judgement of the Tax Appeals Tribunal The tribunal dismissed the appeal of East African Breweries International Ltd and upheld the assessment issued by the tax authorities. Excerpt “From the invoices and dispatch notes tendered in as exhibits, it was not clear who the exporter of the goods was. There was no explanation why the names of the parties were crossed out and replaced with others in some of the invoices and dispatch notes. While the applicant did not have an office or presence in Uganda it was exporting goods. In the absence of satisfactory explanations, the Tribunal would not fault the Commissioner’s powers to re-characterize transactions where there is a tax avoidance scheme. The arrangement may not only be a tax avoidance scheme but also one where the form does not reflect the substance. The markup the applicant was paying Uganda Breweries was extraordinarily low compared to what the applicant was obtaining from its sale to third partied. Once again in the absence of good reasons, the form does not reflect the substance. If the Commissioner re-characterized such transactions, the Tribunal will not fault him or her. The Commissioner cannot be said to have acted grossly irrationally for the Tribunal to set aside the decision. The Tribunal notes that the activities of the group companies were overlapping. It is not clear whether they were actually sharing TIN, premises and staff. The witness who came to testify on behalf of the applicant was from East African Breweries Limited. Despite the applicant selling goods to many countries it does not have an employee or officer to testify on its behalf. The markup of the sale of the goods by Uganda Breweries Limited to the applicant was far lower than that between the applicant and the final consumers in Sudan, Congo and Rwanda. While Uganda Breweries Limited was charging the applicant a markup of 7.5% the applicant was charging its customers 70 to 90%. This is part of a transfer pricing arrangement where the companies are dealing with each other not at arm’s length. The arm’s length principle requires inter-company transactions to conform to a level that would have applied had the transactions taking place between unrelated parties, all other factors remaining the same. Under. S. 90 of the Income Tax Act, in any transaction between associates, the commissioner may distribute, apportion or allocate income, deductions between the associates as is necessary to reflect the income realized by the taxpayer in an arm’s length transaction. An associate is defined in S. 3 of the Income Tax Act. In making any adjustments the commissioner may determine the source of income and the nature of any payment or loss. The transfer pricing arrangement originated in Uganda. The Commissioner apportion taxes according to the income received by the applicant. In Unilever Kenya Limited v CIT Income Tax Appeal No. 753/2003 (High Court of Kenya) Unilever Kenya Limited (UKL) and Unilever Uganda Limited (UUL) were both subsidiaries of Unilever PLC, a UK multinational group. Pursuant to a contract, UKL manufactured goods on behalf of and supplied them to UUL, at a price lower than UKL charged to unrelated parties in its domestic and export sales for identical goods. The Commissioner raised an assessment against UKL in respect of sales made by UKL to UUL on the basis that UKL’s sale to UUL were not at arm’s length prices. In that matter it was held that in the absence of guidelines under Kenya law, the taxpayer was entitled to apply OECD transfer pricing guidelines. In this application, the issue is not about which rules to apply. What the Tribunal can note is that the Commissioner has powers to apportion income on an intergroup company and issue an assessment. In this case the Commissioner chose the applicant over Uganda Breweries Limited. The Tribunal feels that the Commissioner was acting within his discretion and was justified to do so. Taking all the above into consideration, the Tribunal finds that the applicant did not discharge the burden placed on it to prove the respondent ought to have made the decision differently. Click here for other translation ...

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 > ...

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 ...

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 ...

For the purpose of determining whether a Swiss Corporation had effektivly been managed from the Netherlands or had a permanent establishment in the Netherlands, the Dutch tax authorities send a request for information. The Swiss Corp was not willing to answere the request and argued that the request was disproportionate and that the concepts of “documents concerning decision-making with regard to important decisions” and “e-mail files” was and did not fit into the powers that an inspector has under Article 47 of the AWR. The court ruled in favor of the tax authorities. The court did not find the tax authorities’ request for information disproportionate. Article 47 of the Awr requires the provision of factual information and information that may be relevant to taxation with respect to the taxpayer (cf. Supreme Court October 20, 2017, ECLI: NL: HR: 2017: 2654). In the opinion of the court, the defendant remained within those limits with his request to claimant to provide access to the entire, original administration in the broadest sense (see 1.6). In addition, a broad range of starting points with regard to the subjective tax liability of the plaintiff also justifies a broad question in this case. The court passed the claim that requesting access to “documents concerning decision-making on important decisions” and “e-mail files” was open to multiple interpretations. However, in the view of the court, the mere circumstance that a request for information left some room for interpretation did not mean that it was not in accordance with the powers that the inspector has pursuant to Article 47 of the AWR. Click here for other translation ...

The Swedish Branch of Yazaki Europe Ltd had been heavily lossmaking for more than five years. The Branch only had a limited number of customers in Sweden and where it acted as a simple information exchange provider. The branch had limited risks, as all risk related to R&D functions were located outside Sweden. Excerpt from the Judgement of the Court “…the District Court finds that the branch has had limited opportunities to influence the costs of the products, the choice of suppliers and service providers regarding the development of the products in the projects run in collaboration with the Swedish customers, and price to the customer. Furthermore, the branch has been referred to make purchases in the currencies that result from the group structure. The branch states that…the work done by the branch has been of such scope and importance that significant people functions are to be considered in the branch for virtually all risks that can be associated with production and development. – the sale of the goods and services sold from the branch. The branch also states that the branch’s Branch Manager was the CEO and certified part of the Electronics & Instrumentation Business Unit (EIBU), a collaboration between various business units within YEL. The branch relies on a statement from expert Roberto Bernales Soriano. …The job descriptions, agreements and protocols, as well as the investigation in general, do not, in the opinion of the Administrative Court, support any decisive decision in the branch or that the head office’s role should have been limited to such passive decision-making as is discussed in the expert opinion cited by the branch. The investigation does not therefore support that it is in the branch that most of the risks and assets associated with the production for the sale in the branch have been handled. Deloitte’s functional analysis and benchmarking study as well as other studies were conducted in 2015, ie. in retrospect. …The Court of Appeal considers that the value of the functional analysis and the new benchmarking study as well as other studies is limited. … the District Court considers that the branch was primarily responsible for sales to Swedish customers, have been collectors and intermediaries of information to and from customers and other units. The TP documentation and other investigations show that the branch has not borne the risks posed by the branch. In view of the activities carried out in the branch, the limited functions that existed in the branch and the limited risks borne by the branch, there is clear support for the notion that the branch has been a service provider, which should have reported a stable profit during the years that is now in question and not such a risk-bearing entity as the branch thinks. It is clear from the investigation that the losses were incurred as a result of the day-to-day sales operations in the branch and not because the branch has taken such risks as an entrepreneur takes. Thus, it is clear that the reported profit does not reflect the financial result the branch would have had if it had been an independent company. … In order to be able to estimate the result in this case, a discretionary assessment must be made. …The Swedish Tax Agency has taken into account the existing investigation and made relevant comparisons. In the light of what is stated in the TP documentation on the Group’s remuneration levels for the production units , for management and for design and development services, the profit assessed by the Swedish Tax Agency – the margin of 2 per cent for the branch in the current year, is considered prudently estimated.“ Click here for translation ...

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 ...

The Swedish branch of Technology Partners International Europe Ltd. was loss-making. The branch had no significant people functions but only two employees performing low value-added services. From the Judgement of the Court of Appeal “The distribution of revenue and costs between a British company and its Swedish branch is regulated for the current tax years in Article 7 of the 1983 double taxation agreement with the United Kingdom. Further guidance on the application of this issue can be obtained in the 2008 OECD report on profit allocation. A two-step test according to the so-called functional separate entity approach, as described in the administrative law, must be done. The Court of Appeal agrees, in light of the information provided by the branch during the Swedish Tax Agency’s investigation and because the Nordic manager cannot be linked to the branch, in the administrative court’s assessment that the branch has in the current years lacked so-called significant people functions. Nor has the branch had any function which has meant financially significant activities or areas of responsibility. It is therefore a so-called low risk service provider vis-à-vis the head office. The Swedish Tax Agency has used the net margin method to determine the arm’s length level in the distribution of income. The work has been based on the costs to be attributed to the branch and used a profit margin of 5% on the basis that the branch may in any case be considered to provide so-called low value adding services. The branch has referred to ongoing restructuring work in the Nordic organization in the Group, market and business strategic aspects as well as the assessment made in the Group’s internal pricing policy. However, the Tax Agency may be deemed to have shown that the branch’s income and expenses must be determined in accordance with the appealed decisions. What the branch has presented does not change this assessment. The appeal must therefore be rejected in this part.” Click here for translation ...

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 ...

The district court of Paris has approved a  “convention judiciaire d’intérêt public” negotiated between the French state and Google for an amount of € 500 million plus another agreement with the French tax authorities which amounts to 465 million euros. The agreement puts an end to the French lawsuits against Google for aggressive tax evasion, and litigation with the tax administration relating to adjustments for the periods going from 2005 to 2018. The CJIP “convention judiciaire d’intérêt public“, was established by Article 22 of Law No. 2016-1691 of 9 December 2016 in France on transparency and fight against corruption. By Law No. 2018-898 of October 23, 2018 the law was extended to cover cases for tax evasion. According to the CJIP legal actions can be ended in return for the payment of a fine. The dispute concerned the existence of a permanent establishment of Google Ireland in France. In Googles European headquarters in Ireland the corporate tax rate is (12.5%). However, according to the French tax authorities most of the profits related to the French marked was attributable to a Permanent establishment in France. The case was first brought before the Administrative Court in Paris (July 2017) and then the Paris Administrative Court of Appeal (April 2019). Both courts found in favor of Google and canceled the tax adjustments. The state then brought the case before the French Supreme Court and now – to end the proceedings – Google has entered into the CJIP agreement. According to the agreement Google will not have to admit to tax avoidance or evasion. Click here for translation The full CJIP agreement between France and Google have been published on the website of the French Agency for Anti-corruption. Click here for translation ...

The French tax administration argued that Google had a permenent establishment in France because the parent company in the US and its subsidiary in Ireland had been selling a service – online ads – to customers in France. In 2017 the administrative court found that Google France did not have the capability to carry out the advertising activities on its own. Google Ireland Limited therefore did not have a permanent establishment in France. The same conclution was reached i 2019 by the Administrative court of appeal. Click here for translation ...

The European Commission found that Luxembourg did not grant illegal State aid to McDonald’s as a consequence of the exemption of income attributed to a US branch. “Based on this analysis, the Commission concludes that in this specific case, it is not established that the Luxembourg tax authorities misapplied the Luxembourg – US double taxation treaty. Therefore, on the basis of the doubts raised in the Opening Decision and taking into account its definition of the reference system, the Commission cannot establish that the contested rulings granted a selective advantage to McD Europe by misapplying the Luxembourg – US double taxation treaty.” McDonald’s Corporation is a Delaware public limited company with its principal office located in Oak Brook, Illinois, USA. It operates and franchises McDonald’s restaurants, which serve food and beverages. Of the 37,241 restaurants in over 100 countries approximately 34,108 are franchised and 3,133 are operated by the company. McDonald’s Corporation is therefore primarily a franchisor, with over 80% of McDonald’s restaurants owned and operated by independent franchisees. In 2017, McDonald’s Corporation had around 400 subsidiaries and 235,000 employees and recorded total revenues of USD 22.8 billion, of which USD 12.7 billion was from company-operated sales and USD 10.1 billion from franchised revenues. A Luxembourg group company made a buy-in payment to enter a cost sharing arrangement with a US related company, and thereby acquired beneficial ownership of certain existing and future franchise rights. These rights were allocated to the US branch of the Luxembourg company. The royalty fees due by franchisees would first be paid to a Swiss branch of the Luxembourg company, which provided services associated with the franchise rights. The royalty fees would then be transferred to the US branch, deduction being made of a service fee to the benefit of the Swiss branch consisting of cost coverage, plus a profit mark-up. Although royalty fees was booked in the US no tax was levied. This was due to the fact that the activities carried out in the US did not constitute a trade or business. The income allocated to the US branch was also not taxed in Luxembourg. According to the US-LUX tax treaty the residence State was prevented from taxing as (1) the US activity would constitute a permanent establishment under the Luxembourg interpretation of the treaty and (2) the existence of such a permanent establishment would oblige Luxembourg to apply the article on the elimination of double taxation. In a tax ruling Luxembourg found that the income would be exempt although not taxed in the US. The Commission decided to initiate the formal investigation procedure because it took the preliminary view that the contested tax rulings granted State aid to McDonald’s Europe within the meaning of Article 107(1) of the Treaty and expressed its doubts as to the compatibility of the contested tax measures with the internal market. In particular, the Commission expressed doubts that the revised tax ruling misapplied Article 25(2) of the Luxembourg – US double taxation treaty and thereby granted a selective advantage to McDonald’s Europe. Following the investigation, the Commission concluded that Luxembourg did not give a selective advantage to McDonald’s by exempting the income allocated to the US branch. The conclusions of the European Commission on the issue of state aid does not relate to the arm’s length nature of the transfer pricing setup used by McDonald’s in relation to the European marked ...

Company X B.V. held all the shares in the Irish company A. The Tax Agency in the Netherlands claimed that the Irish company A qualified as a “low-taxed investment participation”. The court agreed, as company A was not subject to a taxation of 10 per cent or more in Ireland. The Tax Agency also claimed that X B.V.’s profit should include a hidden dividend due to company A’s providing an interest-free loan to another associated Irish company E. The court agreed. Irish company E had benefited from the interest-free loan and this benefit should be regarded as a dividend distribution. It was then claimed by company X B.V, that the tax treaty between the Netherlands and Ireland did not permit including hidden dividends in X’s profit. The Supreme Court disagreed and found that the hidden dividend falls within the scope of the term “dividends” in article 8 of the tax treaty. Click here for translation ...

The Danish company Bevola had a PE in Finland. The PE incurred a loss when it was closed in 2009 that could not be utilized in Finland. Instead, Bevola claimed a tax deduction in its Danish tax return for 2009 for the loss suffered in Finland. A deduction of the loss was disallowed by the tax authorities because section 8(2) of the Danish Corporate Tax Act stipulates that the taxable income does not include profits and losses of foreign PEs (territoriality principle). Bevola would only be entitled to claim a tax deduction for the Finnish loss in the Danish tax return by making an election of international joint taxation under section 31 A. However, such an election means that all foreign entities must be included in the Danish tax return and the election is binding for a period of 10 years. The decision of the tax authorities was confirmed by the National Tax Tribunal on 20 January 2014. The taxpayer filed an appeal with the Eastern High Court claiming that section 8(2) was incompatible with the EU principle of freedom of establishment, because Bevola would have been entitled to claim a tax deduction if the loss had been suffered by a domestic Danish PE. A reference was made to the ECJ decision in case C-446/03, Marks & Spencer. The High Court asked the European Court of Justice if Article 49 TFEU preclude a national taxation scheme such as that at issue in the main proceedings under which it is possible to make deductions for losses in domestic branches, while it is not possible to make deductions for losses in branches situated in other Member States, including in circumstances corresponding to those in the Court’s judgment [of 13 December 2005] in Marks & Spencer, C 446/03, EU:C:2005:763, paragraphs 55 and 56, unless the group has opted for international joint taxation on the terms as set out in the main proceedings? The Court held that section 8(2) causes losses of foreign PEs to be treated less favorable compared to losses of domestic PEs. The fact that a taxpayer could opt for international joint taxation did not make a difference because this scheme was subject to two strict conditions. Comparability of the situations should be evaluated based on the purpose of the relevant legislation. The purpose of the Danish law was to prevent double taxation of profits and double deduction of losses. With regard to losses suffered by a PE in another Member State which has ceased activity and whose losses cannot be deducted in that Member State, the situation of a company having such a PE was held not to be different from that of a company with a domestic PE, from the point of view of the objective of preventing the double deduction of losses. The Court added that the aim of section 8(2) more generally is to ensure that the taxation of a company with such a PE is in line with its ability to pay tax. Yet the ability to pay tax of a company with a foreign PE which has definitively incurred losses is affected in the same way as that of a company whose domestic PE has incurred losses. On this basis, the Court concluded that the difference in treatment concerned situations that were objectively comparable. According to the Court, section 8(2) could be justified by overriding reasons in the public interest relating to the balanced allocation of powers of taxation between Member States, the coherence of the Danish tax system, and the need to prevent the risk of double deduction of losses ...

The issue in this case was whether Mastercard Asien Pasific Ltd has a permanent establishment in India as regards the use of a global network and infrastructure to process card payment transactions for customers in India and as regards other related activities. India’s Authority for Advance Rulings found that that Mastercard’s activities in India created a permanent establishment under several different theories. The AAR also concluded that processing fees paid to Mastercard’s regional headquarters in Singapore by Indian banks and other financial institutions were royalty income, but would be taxable as business profits in India under Article 7 in the DTT between India and Singapore for being effectively connected with a PE of Mastercard Asia Pacific in India. AAR ruling: ...

The French Supreme Court issued a decision on 4 April 2018, concluding that a permanent establishment (PE) existed in France for purposes of determining nonresident companies’ exposure to French VAT in a case involving a transport commissionaire arrangement. The decisions clarify the criteria for determining whether a service provider will be considered to have sufficient substance in France to enable the services to be performed in an independent manner, and thus constitute a PE. A UK sea carriage commissionaire signed a client assignment contract with a French company carrying out the same activity, as well as a contract for the French company to organize and provide transport services. The UK company was required to approve any new clients or suppliers. The UK company also managed the reservation systems for clients to book the transport and communicated with the clients regarding the transport and the insurance linked to the business. The French company was responsible for the overall development of the business through identifying new clients, and it physically organized the transport services. The French company had the authority to negotiate independently with clients and suppliers in the name of the UK company, including the negotiation of prices. For this purpose, the company had three offices in France with customer service personnel to receive orders and organize the transport services, as well as a sales department. The Supreme Court concluded that the French company had sufficient human and technical resources to provide the transport commissionaire services. Accordingly, the court held the that the UK company had a PE in France, even though the company had no means of providing the transport services on its own, since the transport services were organized and carried out independently by the French company. Click here for translation ...

The OECD has released additional guidance on the attribution of profits to permanent establishments. This additional guidance sets out high-level general principles for the attribution of profits to permanent establishments arising under Article 5(5), in accordance with applicable treaty provisions, and includes examples of a commissionnaire structure for the sale of goods, an online advertising sales structure, and a procurement structure. It also includes additional guidance related to permanent establishments created as a result of the changes to Article 5(4), and provides an example on the attribution of profits to permanent establishments arising from the anti-fragmentation rule included in Article 5(4.1). See also the 2008 Guidance and 2010 Guidance ...

The issue in the case before the Administrative Court of Appeal of Paris was whether an Irish company had a PE in France in a situation where employees of a French company in the same group carried out marketing, representation, management, back office and administrative assistance services on behalf of the group. The following facts were used to substantiate the presence of a French PE: French employees negotiated the terms of contracts and were involved in drafting certain contractual clauses with the customers. Contracts were automatically signed by the Irish company – whether this action corresponded to a simple validation of the contracts negotiated and drawn up by the managers and employees in France. Local advertising programs were developed and monitored by employees in France. French employees acted to third parties as employees of the Irish company. Customers did not distinguish between the Irish and the French company. However, the Administrative Court found that none of these factors established that employees in France had been authorized to act on behalf of and in the name of the Irish company. The Court instead based the decision on whether contracts could be entered and services could be rendered without prior approval of the contracts by the Irish parent entity. The Court concluded that French employees could not commit its Irish principal contractually and services could not be rendered until the customer contract had been approved by the Irish company. The decision of the Administrative Court has now been appealed to the French Supreme Court. On the issue of permanent establishment, see also the French Zimmer decision from 2010 and the later Google decision from 2017. Click here for translation ...

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 ...

The French tax administration argued that Google had a permenent establishment in France because the parent company in the US and its subsidiary in Ireland had been selling a service – online ads – to customers in France. The administrative court found that Google France did not have the capability to carry out the advertising activities on its own. Google Ireland Limited therefore did not have a permanent establishment in France. Click here for translation ...

In June 2017, the Indonesian government announced that it had settled a lengthy tax dispute with Google for 2016. While the settlement sum has not been disclosed, it is perceived as setting a new tone in the interpretation of permanent establishment status for tech companies ...

S BV was not granted deductions in its Swedish PE for interest on debt relating to the acquisition of subsidiaries. The Court of Appeal considers that it is clear that key personnel regarding acquisition, financing and divestment of the shares in the subsidiary and the associated risks have not existed in the PE. It is also very likely that the holding of the shares has not been necessary for and conditioned by the PE’s operations. Therefore, there is no support for allocating the shares and the related debt to the PE. Click here for translation ...

India’s Supreme Court found that Formula One World Championship which conducts Formula One racing events, has a permanent establishment (PE) for its business in India and income accruing from it is taxable. “We are of the opinion that the test laid down by the Andhra Pradesh High Court in Visakhapatnam Port Trust case fully stands satisfied. Not only the Buddh International Circuit is a fixed place where the commercial/economic activity of conducting F-1 Championship was carried out, one could clearly discern that it was a virtual projection of the foreign enterprise, namely, Formula-1 (i.e. FOWC) on the soil of this country. It is already noted above that as per Philip Baker, a PE must have three characteristics: stability, productivity and dependence. All characteristics are present in this case. Fixed place of business in the form of physical location, i.e. Buddh International Circuit, was at the disposal of FOWC through which it conducted business. Aesthetics of law and taxation jurisprudence leave no doubt in our mind that taxable event has taken place in India and non-resident FOWC is liable to pay tax in India on the income it has earned on this soil.” “We have held that FOWC has PE in India and income that is attributable in India will be taxed. The amount that is to be taxed is to be assessed by an assessing officer,” a bench of Justices A K Sikri and Ashok Bhushan said ...

TCL BELGIUM, established in Belgium, entered into an agreement on 18 December 2007 with TCL Macao, which sells television sets, under the terms of which TCL Belgium undertook to provide marketing services through its TCL France branch located in France; Following an audit of TCL Belgium’s accounts for the financial years ended 31 December 2008 and 2009 relating to the activities of its French branch, the tax authorities considered that TCL Macao had, under this agreement, benefited from a transfer of profits within the meaning of Article 57 of the French General Tax Code. In an appeal to the Administrative Court of Appeal, TCL BELGIUM sought, firstly, a discharge of the additional corporation tax and the reminders of the minimum business tax assessment and the corresponding surcharges levied against it on that account, and secondly, a discharge of the additional withholding tax assessments and the corresponding surcharges also levied against it. Judgement of the Court The Administrative Court of Appeal parcially upheld and parcilly set aside the decision of the Administrative Court. It stated that “… 19. Considering, eighthly, that, contrary to what TCL BELGIUM also maintains, the department did take into account data from comparable companies over several years and, in particular, to determine the competition margin, used an average of the median margin rates of the companies on its panel over three years; that the administration did not therefore disregard its own doctrine on this point; 20. Considering, ninthly, that the company still maintains that the administration, following the recommendations of its own doctrine, could not base its reassessment on the median value of the profit margins recorded for the companies deemed to be comparable over three years, since this data alone is not relevant for defining the arm’s length interval; that, as the applicant company maintains, the administration is only entitled to correct a company’s profit margins insofar as they do not fall within the arm’s length range resulting from data from other companies carrying on similar activities; that, in these circumstances, the median cannot, on its own, in principle, constitute a relevant reference reflecting the admissible panel of profit margins practised that may be taken into account; 21. Considering that, in the present case, the interquartile range may be used to define the arm’s length range, and extends for 2008 from 0.90% to 3.74% and for 2009 from -4.87% to 2.80%; that there are therefore grounds for confirming the adjustment notified to the applicant company only insofar as its margin rate calculated using the transactional net margin method remains lower than the lower of these two figures; 22. Considering that for 2009, insofar as the company’s margin rate, determined using the transactional net margin method, was 0.24% and therefore between the two values mentioned above of -4.87% and 2.80% defining the arm’s length interval, the company is entitled to request full discharge of the reassessment against it; 23. Considering that, for 2008, the company should be discharged in respect of the difference between the amount of the reassessments resulting from the application to its transactions of the mark-up rate of 2.20% adopted by the department on the basis of the average of the medians of the mark-up rates for the years 2006 to 2008 and the amount of the reassessments that would have resulted from the application to these same transactions of the aforementioned mark-up rate of 0.90% corresponding to the low point of the interquartile range; that, on the other hand, it is appropriate to confirm the remainder of the adjustments corresponding to the difference in the mark-up rate between 0.90% and 0.41%, i.e. the initial mark-up rate of the French branch of TCL BELGIUM determined using the transactional net margin method, since TCL BELGIUM does not claim any consideration that could explain its subsidiary’s waiver of an arm’s length margin, and the existence of a transfer of profits from TCL BELGIUM to TCL Macao within the meaning of Article 57 of the French General Tax Code is thus established;” … Click here for English translation Click here for other translation ...

The case relates to controlled transactions between a Danish company and its permanent establishment, as well as the calculation of taxable income of the permanent establishment. The Danish Tax Administration was entitled to make tax assessment in accordance with applicable Tax Law. The transfer pricing-documentation provided by the Company lacked a comparability analysis. The assessment was in line with the OECD Transfer Pricing Guidelines, but some corrections to the tax assessment were made. Click here for translation ...

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 ...

In this decision, the Conseil d’État confirms that Article 57 of the General Tax Code is applicable to any company taxable in France, including a French branch of a foreign company. Under Article 57, where the tax authorities establish the existence of a relationship of dependence and a practice falling within its scope, the presumption of an indirect transfer of profits can only be effectively rebutted by the company liable to tax in France if it proves that the advantages granted by it were justified by the receipt of a benefit. Excerpts “….4. Considering, firstly, that if the applicant company mentions supplier debts of its branch towards the head office, such debts, in normal relations between independent companies, do not generate interest, so that this circumstance has no bearing on the absence of interest stipulations on the advances granted to the head office; 5. Considering, secondly, that under the first paragraph of Article 57 of the General Tax Code, applicable to corporation tax by virtue of Article 209 of the same code: “For the purposes of determining the income tax due by companies which are dependent on or which have control over companies located outside France, the profits indirectly transferred to the latter, either by way of an increase or decrease in purchase or sale prices, or by any other means, are incorporated into the results shown in the accounts (…)”; that these provisions institute the principle of the taxable income of companies located outside France. )”; that these provisions establish, as soon as the administration establishes the existence of a link of dependence and a practice falling within their provisions, a presumption of indirect transfer of profits which can only be usefully combated by the company liable to tax in France if it provides proof that the advantages it has granted were justified by the obtaining of compensation; that, on the one hand, these provisions are applicable to any company taxable in France, including a French branch of a company whose registered office is abroad, without the circumstance that the branch does not have legal personality being an obstacle to this; that, on the other hand, the advantages granted by a company taxable in France to a company located outside France in the form of interest-free loans constitute one of the means of indirect transfer of profits abroad; The tax authorities may therefore reinstate in the results of a permanent establishment, taxable in France, the interest which was not invoiced because of the recording of advances granted to the head office located outside France, provided that these advances do not correspond to after-tax profits and that the company does not establish the existence of counterparts for the development of the activity of the French branch; 6. Considering that, in its accounting records drawn up for the purposes of its taxation in France, the permanent establishment of Sodirep Textiles SA-NV recorded advances of funds granted to the Belgian headquarters of this company; that it follows from the above that, in the circumstances of the case, the administration is justified in reintegrating, in the taxable results in France of this permanent establishment, the interest which should have remunerated the advances of funds thus granted, insofar as the absence of invoicing of this interest constitutes an indirect transfer of profits within the meaning of Article 57 of the general tax code, in the absence of proof provided by the applicant company that the advantages in question had at least equivalent counterparts for its branch; 7. Considering, thirdly, that Article 5(4) of the Franco-Belgian Tax Convention of 10 March 1964 stipulates, in the version applicable to the facts of the case: “Where an enterprise carried on by a resident of one of the two Contracting States is dependent on or has control over an enterprise carried on by a resident of the other Contracting State, (…) and where one of these enterprises is dependent on or has control over the other enterprise, (…) and where the other enterprise is dependent on or has control over the other enterprise, (…) and where the other enterprise is dependent on or has control over the other enterprise, (…) ) and one of those enterprises grants or imposes conditions to the other enterprise which differ from those which would normally be accorded to effectively independent enterprises, any profits which would normally have accrued to one of those enterprises but which have thereby been transferred, directly or indirectly, to the other enterprise may be included in the taxable profits of the first enterprise. In that event, double taxation of the profits so transferred shall be avoided in accordance with the spirit of the Convention and the competent authorities of the Contracting States shall agree, if necessary, on the amount of the profits transferred. ” ; 8. Considering that the permanent establishment operated in France by the company Sodirep Textiles SA-NV is, as has been said, a branch without legal personality under the control of this Belgian company; that in the light of the above-mentioned provisions, the profits transferred by the branch to the Belgian company may be taxed in France if the branch has granted the head office interest-free cash advances under conditions different from those which would normally be made to genuinely independent enterprises; that there is no need, in order to interpret these provisions, 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 provisions in question;…” Click here for English translation Click here for other translation ...

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 ...

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.” ...

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 ...

The Irish company Dell Products was taxable in Norway for years 2003-2006. The issue was whether Dell Products had a permenent establishment in Norway, cf. Article 5. 5 in the tax treaty between Ireland and Norway from 2000. Dell Products sold PC’s and equipment by a commission agreement in which the Irish company was Principal and the Norwegian company Dell AS was commissioner. Both the companies are part of the Dell group. Dell AS sold to customers who were large enterprises and the public sector. It was not disputed that the agreement was not legally binding on Dell Products in relation to customers. Dell Products would have a permanent establishment in Norway and may be taxable Norway, if Dell Norway had acted “on behalf of” and had the “authority to conclude contracts on behalf of the” Dell, ref. Tax Treaty Article 5. 5. Unlike the District Court and the Court of Appeal the Supreme Court did not wote in favor of the tax authorities. The wording of the article strongly support that the commissioner must bind the principal in relation to the customer. The article is identical to the OECD Model Convention, and it had the same weight that also the commentary for this support a requirement for judicial bond. Also other legal sources pointed in the same conclusion. When both the wording and other legal sources support this condition, Article 5. 5 cannot lead to an anna result. The Supreme Court came to the conclusion that Dell Products did not have a permanent establishment in Norway. Click here for translation ...

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 ...

On 22 July 2010 a new report on the attribution of profits to permanent establishments was published. The 2008 Report will serve as background guidance to the 2008 revised Commentary‘s interpretation of the pre-2010 Article 7 for as long as bilateral tax treaties that are based on the text of that version of Article 7 are in force. However, because the 2008 Report included a number of references to the text of the pre-2010 Article 7, and because the Committee revised the text of Article 7 in the 2010 update to the Model Tax Convention, the Committee believed it would be advisable to prepare a modified version of the 2008 Report which would delete obsolete references to the text of the pre-2010 Article 7 and which would align the Report‘s wording with the wording of the new Article 7, thus making the modified Report available as a future reference for guidance on the interpretation of future treaties based on the new Article 7. The Committee decided to prepare this modified version of the 2008 Report for publication simultaneously with the 2010 update to the Model Tax Convention. The 2010 Report does not change the conclusions of the 2008 Report and has been prepared simply to avoid difficulties that might arise in trying to use the 2008 Report for the interpretation of the new Article 7 ...

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 ...

On 17 July 2008, the OECD Council approved the release the Report on the Attribution of Profits to Permanent Establishments. The Report includes a preface and four Parts. Part I sets out general considerations for attributing profits to permanent establishments, regardless of the business sector in which they operate. Part II describes the application of the approach to enterprises carrying on a banking business through a permanent establishment. Part III addresses the situation of permanent establishments of enterprises carrying on global trading in financial instruments. Part IV deals with the application of the approach to PE of enterprises carrying on insurance activities ...

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

The 1994 OECD report on issues related to the attribution of income to permanent establishments, was made available to the public by decision of the OECD Council on 26 November 1993. The report examines the circumstances under which income is to be attributed to a permanent establishment for purposes of an income tax treaty, particularly where goods, services, or intangibles are transferred between the permanent establishment and the home office or another permanent establishment in a third country. Part I sets out general issues related to attributing income to permanent establishments. Part II describes issues raised by the tax treatment of Permanent Establishments. Part III contains conclusions and suggestions ...