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 ...

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 ...

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 ...

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

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

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 ...

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 ...