PE Watch | Latest developments and trends, August 2022


BEPS MLI: Lesotho deposits instrument of ratification of the MLI

On 28 July 2022, Lesotho (pdf) deposited its instrument of ratification of the Base Erosion and Profit Shifting (BEPS) Multilateral Instrument (MLI) with the Organisation for Economic Co-operation and Development (OECD). Lesotho confirmed its preliminary positions regarding the permanent establishment (PE) provisions and chose to apply all of the PE provisions of the MLI. The MLI will enter into force for Lesotho on 1 November 2022.

PE tax rulings

Denmark: Sales manager does not constitute a PE in Denmark

On 6 July 2022, the Danish Tax Board (DTB) published binding tax ruling SKM2022.357.SR. In this ruling, the DTB analyzes whether a sales manager, located in Denmark, would result in the creation of a PE in Denmark.

A Danish subsidiary of a German company employs a sales manager (a Danish citizen and resident) to cover the business development/roll out of specific products (handled by the German company) in the Nordic region. The role of the sales manager includes market research, establishing contact with customers, presentation of products and services, and project management. The sales manager is not authorized to negotiate prices, enter into contracts or otherwise enter into legal obligations on behalf of the German company. Essentially, the costs of the employee are borne by the Danish subsidiary, by whom the sales manager is employed. Costs in relation to the activities carried out by the employee in Denmark are then invoiced to the German entity.

The taxpayer is of the opinion that there is no fixed place of business for the German company in Denmark as the employee has a non-permanent office space available at the Danish subsidiary. Further, the employee primarily works from home when the employee is not visiting customers. According to the DTB, the sales manager cannot be considered an independent agent and therefore the Agency PE rules were assessed. The DTB notes that an Agency PE could be determined if the employee plays a principal role leading to the conclusion of contracts. The DTB is of the opinion that the employee has a marketing function rather than a sales function. This is because the employee simply advertises the products of the German company but he does not participate in any negotiation with customers. Consequently, the DBT did not deem it necessary to establish whether the sales manager’s functions are of a preparatory/auxiliary in nature.

In light of the above, the DTB concluded that the employee working in Denmark would not create a PE for the German company.

PE domestic law

Mauritius: Finance Bill proposes to tax remote workers

On 22 July 2022, Mauritius released the Finance (Miscellaneous Provisions) Bill 2022 (pdf) for public consultation. The Finance Bill introduces some tax measures. Among other items, it is proposed to tax a nonresident employer who has an employee working remotely from Mauritius. The income derived in Mauritius will be any gross income attributable to the work performed by the employee working remotely from Mauritius in an income year (i.e., beginning on 1 July and ending on 30 June).

However, the taxation on the nonresident employer would not be applicable if the employee is a holder of a premium visa and the core business activities of the nonresident are outside Mauritius.

United Kingdom: Pillar Two draft legislation

On 20 July 2022, the United Kingdom (UK) Government released draft legislation (pdf) on the “introduction of the new multinational top-up-tax” inspired from the Global Anti-Base Erosion (GloBE) Model Rules. Among other items, the UK draft legislation notes that a PE is within the scope of the multinational top-up tax rules if the head office is part of a multinational group subject to these rules.

Similar to the GloBE Model Rules, the UK draft legislation definition of “PE” has four scenarios, being: (i) a treaty-PE; (ii) a domestic law PE; (iii) a deemed PE; and, (iv) a stateless PE. However, unlike the GloBE Model Rules, the UK draft legislation does not include a reference to a “deemed place of business.”

In addition, the UK draft legislation includes specific rules applicable to the underlying profits of PEs and adjustments only applicable to PEs.

The draft legislation is open for comment until 14 September 2022.

Other PE developments

Netherlands: New Decree on profit attribution to PEs

On 1 July 2022, the Netherlands published a new Decree related to the profit attribution to PEs. The new Decree reflects the recommendations of the BEPS project, including the ‘additional guidance on the attribution or profits to PEs’ and it replaces the previous Decree published in 2011.

The Decree confirms that the Netherlands follows the Authorized OECD Approach. The Decree also outlines the preference of the Dutch Tax Authority (DTA) for the “capital allocation approach” (i.e., the PE has the same credit rating of the legal entity as a whole) in combination with the fungibility approach (i.e., interest expense allocated in proportion to the allocated debt) with respect to the allocation of interest costs to a PE.

Regarding the attribution of profits to a PE in a tax treaty scenario, the Decree considers that the applicable article in the tax treaty is relevant. However, when a tax treaty does not follow the latest version of the OECD Model Tax Convention (OECD MTC), the treaty should be interpreted in a way to achieve an outcome as close as possible to the arm’s-length principle. On the other hand, in non-tax treaty situations, the most recent text of Article 7 of the OECD Model Tax should be considered. At the same time, the DTA may deviate from these approaches where different interpretations of the arm’s-length principle lead to non-taxation.

Lastly, the Decree also elaborates on the attribution of profits to a dependent agent PE. According to the Decree, there is no reason to allocate part of the profit to the dependent agent PE if the agent receives an arm’s-length remuneration for the performance of its business.

The Decree has taken effect from 2 July 2022.

See EY Global Tax Alert, The Netherlands issues new decree on profit attribution to permanent establishments, dated 18 July 2022.


For additional information with respect to this Alert, please contact the following:

Ernst & Young Belastingadviseurs LLP, Rotterdam
  • Ronald van den Brekel
  • Marlies de Ruiter
  • Maikel Evers
Ernst & Young Solutions LLP, Singapore
  • Chester Wee
Ernst & Young LLP (United States), Global Tax Desk Network, New York
  • Jose A. (Jano) Bustos
  • Ana Mingramm
  • Nadine K Redford
  • Roberto Aviles Gutierrez

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.