PE Watch | Latest developments and trends, July 2023

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EY Global

13 Jul 2023
Subject Tax Alert
Categories Corporate Tax
Jurisdictions Global

PE domestic law

Egypt amends PE definition

On 20 June 2023, Egypt published in the Official Gazette amendments to the Income Tax Law No 91 of 2005 (pdf). In part, the amendments broaden the definition of Permanent Establishment (PE) and incorporate elements from BEPS Action 7. Specifically, they include the Agency PE provision, addressing splitting-up of contracts, and the independent-agent clause applicable in cases of an agent acting on behalf of a closely related person.

Additionally, Egypt has introduced a Service PE clause in line with the UN Model Tax Convention. According to this clause, services performed for a cumulative period exceeding 90 days within any 12-month period will be considered as having a PE in Egypt. Furthermore, the amendments introduce an Insurance PE provision, which applies when premiums are collected in Egypt or risks are insured there, resulting in a PE in Egypt.

These changes came into effect on 16 June 2023.

Pakistan updates PE definition and includes digital presence

On 26 June 2023, Pakistan approved the Finance Bill 2023–2024 (pdf). Among other items, the Finance Bill updates the PE definition. Under the revised definition, the concept of PE now extends to include virtual business presence in Pakistan. This includes any business conducting transactions through the internet or any other electronic medium, regardless of whether a physical presence exists.

The update to the PE definition also removes the requirement of a "fixed" place, eliminating the permanence test for establishing a PE in Pakistan. Consequently, even a temporary place of business could now create a PE. However, the definition of PE in a tax treaty with Pakistan will still take precedence over the domestic PE definition.

Furthermore, the scope of the Service PE provision has been expanded to cover services rendered by an "entity" in Pakistan. Previously, this provision used the expression "employees or other personnel," which led to disagreements over whether engaging an entity in Pakistan would constitute a PE because the terms referred only to individuals.

The Finance Bill will enter into effect on 1 July 2023.

PE case law

Indian Court affirms presence of a PE without operational activities in India

The Delhi branch of the Income Tax Appellate Tribunal (ITAT) in India recently issued a decision rejecting the argument by the tax authorities that a UK partnership did not have a PE in India. In this case, in 2010, a UK partnership entered into an agreement with an Indian broadcasting company for the production and telecasting of the Commonwealth Games. The UK partnership established a Project Office in India under the parties' agreement, which constituted a PE under the India-UK tax treaty. Subsequently, a dispute arose between the contracting parties as the Indian broadcasting company refused to pay the entire contract value and paid a partial amount.

In terms of the contract, the UK partnership invoked the arbitration clause and an arbitral award was passed in July 2020. Unsatisfied with the arbirtrator's award, the UK partnership challenged it before a court in India. The UK partnership continued to operate its Project Office in India, which oversaw arbitration and other contractual issues. Further the partnership continued to file its Return of Income in India and claimed the expenses incurred in connection with legal proceedings as related to the activities of the PE. The PE also earned interest income.

The tax authorities disagreed with the treatment adopted by the UK partnership and contended that because the UK partnership was not operational during the assessment periods, it should not be deemed to have a PE in India. Therefore, the tax authorities argued that Indian-source interest income should be subject to a 15% withholding tax in India as per the treaty.

The ITAT ruled in favor of the UK partnership, as the Indian tax authorities had accepted the UK partnership's assertion that it had a PE in India and had allowed for the deduction of expenses against interest income in past assessment years. Further, the ITAT pointed out that accepting the tax authorities' stand of "no PE" would be prejudicial to Revenue's interest as counter to the final result of arbitration proceedings.

Additionally, the ITAT relied on the Commentaries of the OECD Model Tax Convention, which stipulate that a PE ceases to exist when all acts and measures connected with its former activities are terminated. In the facts of the case, as the acts and measures connected with PE's former activities had not yet terminated (e.g., the project office continues to handle arbitration proceedings and other contractual issues), the ITAT held that, for the relevant year at issue, a PE existed. Consequently, interest income earned is to be taxed as business income of PE (after allowing set off of current year's expenses and brought-forward losses) rather than under interest income article of the treaty.

PE tax treaties

Netherlands and Belgium sign new tax treaty

On 21 June 2023, Belgium and the Netherlands signed a new tax treaty that includes new PE provisions, replacing those in the tax treaty concluded in 2001. In particular, the new tax treaty includes an anti-contract splitting rule, preventing the division of construction activities circumventing the PE definition. The new treaty also incorporates an anti-fragmentation rule, preventing enterprises from dividing their activities to qualify for a PE exemption.

Further, the Agency PE definition has been broadened to cover cases where a person habitually exercises the principal role leading to the conclusion of contracts that are subsequently routinely concluded by the enterprise without material modifications. Moreover, the definition of an independent agent is narrowed to exclude individuals who exclusively or almost exclusively act for closely related enterprises. These changes are in line with the new Agency PE rules under Article 12 of the Multilateral Instrument (MLI) in which the Netherlands has made a reservation. Due to this reservation to Article 12 of the MLI, the new Belgium-Netherlands tax treaty is one of the first Dutch treaties (together with some other recently concluded or (re)negotiated treaties) to include this broadened (in)dependent agent PE concept.

Each country shall notify the other country when it has completed the procedures required under domestic law for this tax treaty to enter into force. The treaty will be in force on the last day of the month that follows the month in which the last notification has been received. The tax treaty will enter into effect on 1 January of the calendar year following the date of entry into force. Assuming that the ratification procedures will not be completed in 2023, the new Belgium-Netherlands treaty is not expected to become applicable before 1 January 2025.

See EY Global Tax Alert, Belgium-Netherlands tax treaty recently signed; ratification to follow, dated 29 June 2023.

Other PE developments

Netherlands issues explanatory Decree on international tax matters

On 28 June 2023, the Dutch State Secretary of Finance published Decree No. 2023–11648, providing clarity on specific international tax matters. The Decree addresses several topics, including certain issues related to PEs.

One of these issues relates to the possibility of a Dutch PE having its own PE, commonly referred to as a "sub-PE." To illustrate this, the Decree presents a scenario in which a Dutch company with a PE in Norway merges with a German company, resulting in the disappearance of the Dutch company while the activities continue unchanged. Consequently, the German company creates a PE in the Netherlands. The question arises as to whether the PE in Norway should be part of the Dutch PE. In such a case, the Decree specifies that the German company becomes the head office of the PE in Norway, preventing the allocation of profits attributable to the PE in Norway to the Dutch PE.

In addition, the Decree clarifies that losses incurred by a Dutch PE can be used to offset against profits earned in later years by a subsequent Dutch PE belonging to the same head office.

The Decree came into effect on 29 June 2023.

United Kingdom releases consultation on PE reform

On 19 June 2023, His Majesty's Revenue & Customs (HMRC) published a consultation on potential reforms to the UK's transfer pricing, PE, and diverted profits tax legislation. This consultation follows the announcement made by the United Kingdom (UK) government in April 2023, proposing reform on different items, including PE.

In this consultation, the UK government is currently evaluating whether, and how, to update existing PE definitions and profit attribution rules to ensure they remain aligned with the developing international framework and the prevention of double taxation. Accordingly, two potential options for the definition of dependent Agent PE have been identified:

  1. To define a UK PE and determine the profits attributable to it by direct reference in legislation to the PE and Business Profits Articles (Articles 5 and 7) in the relevant double taxation treaty, subject to certain restrictions; where no treaty is in place, Articles 5 and 7 of the OECD Model could be used
  2. To define a UK PE and determine the profits attributable to it by reference to the current OECD Model, which would be subject to the relevant double-taxation treaty

Regardless of the chosen reform option, the UK government intends to retain the broker exemption and the investment manager exemption. These exemptions ensure that, under specific circumstances, a UK broker or investment manager is considered an agent with independent status, thus not creating a taxable presence in the UK.

The proposed changes to the rules on attribution confirm that the UK will use the OECD's Authorised Approach to profit attribution.

The consultation closes on 14 August 2023.


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

Ernst & Young Belastingadviseurs LLP (Netherlands)
  • Ronald van den Brekel
  • Roberto Aviles Gutierrez
Ernst & Young Solutions LLP (Singapore)
  • Chester Wee
Ernst & Young LLP (United States)
  • Jose A. (Jano) Bustos
  • Gagan Malik
  • Ana Mingramm

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

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