PE Watch: Latest developments and trends, January 2023


BEPS Multilateral Instrument: Switzerland notifies completion of domestic procedures for its Covered Tax Agreement with Iceland

On 16 December 2022, Switzerland made a notification (pdf) to the OECD in relation to the Multilateral Instrument (MLI). This notification relates to the completion of internal procedures for purposes of the entry into effect of the Covered Tax Agreement (CTA) with Iceland. This notification is required due to the MLI position of Switzerland which links the entry into effect of the MLI Provisions for a CTA to the notification of completion of internal procedures with respect to the relevant CTA.

Switzerland has not adopted any of the permanent establishment (PE) provisions in the MLI. Therefore, with respect to the notified CTA, the PE provisions of the MLI will not be applicable.

PE domestic law

Italy: New safe harbor for Agency PE

On 29 December 2022, Italy approved the Budget Law for 2023. Among other items, the Budget Law includes a change to the domestic definition of PE by excluding, under certain circumstances, that nonresident investment vehicles availing of asset managers in Italy may constitute an Italian PE.

An asset manager is defined as the person who, in the name and/or on behalf of a foreign investment vehicle (or of its direct or indirect subsidiaries), habitually concludes contracts and /or negotiations, or in any case assists, also through preliminary activities, for the purchase and/or sale of financial instruments, even availing of a discretionary power. The asset manager, either an Italian resident or a nonresident entity operating through an Italian PE, is not considered a “dependent agent” provided that:

  • The nonresident investment vehicle (and its direct or indirect subsidiaries) reside in a country with an instrument to exchange of information with Italy.

  • The investment vehicle qualifies as an independent vehicle (to be defined through a Ministerial Decree).

  • The asset manager operating in Italy does not hold positions in the administrative bodies of the nonresident investment vehicle, or any of its subsidiaries, nor holds a stake in the economic results of the investment vehicle up to a certain threshold.

  • The remuneration received by the asset manager from its management activity is calculated at arm’s length and duly documented.

The new PE definition entered into force on 1 January 2023.          

Slovak Republic: Update to transfer pricing rules and attribution of profits to PEs

On 23 December 2022, Slovakia published (pdf) amendments to the Income Tax Act by updating certain transfer pricing rules and provisions related to the attribution of profits to a PE. The amendments include provisions for determining how profits should be attributed to a PE. The main changes concern the treatment of income or expenses that can be attributed to a PE but occur before or after the PE actually exists. In these cases, income or expenses that occurred before the PE was established should be reported in the PE's first tax return. If the income occurs after the PE no longer exists, it should be recorded in the period in which it is recognized by the head office. In the case of expenses which occur (or their tax deductibility is achieved) only after the PE no longer exists, these can be recognized in either of the PE's last two tax periods through an additional (supplementary) tax return. The amendments also stress the requirement for the PE to maintain transfer pricing documentation.

In addition, in situations where the transfer prices are not set at arm’s length, tax authorities should, based on the amendment, apply the median value when adjusting the prices during a tax audit. This does not apply if the taxpayer is able to prove that adjustment to a different value is more appropriate considering given conditions.

The amendments entered into force on 1 January 2023.

UAE: Introduction of the PE definition

On 9 December 2022, the United Arab Emirates (UAE) Ministry of Finance released Federal Decree-Law No. 47 of 2022 (pdf) on the Taxation of Corporations and Businesses to enact a new corporate tax (CT) regime in the UAE. Among other items, the new CT regime introduces a PE definition. Accordingly, the PE definition covers a fixed place of business and an Agency PE. It also includes a Construction PE clause and a list of activities that are deemed not to constitute a PE, but only if they are of a preparatory or auxiliary character. An anti-fragmentation rule is also part of the PE definition, preventing enterprises from fragmenting their activities to qualify for a PE exemption. The CT regime also includes an exemption to constitute a PE for an Investment Manager provided certain requirements are met.

The PE definition states that other forms of nexus in the UAE could create a PE, but these forms are not defined and they will be determined through a Ministerial Decision.

As for the attribution of profits to PEs, transactions with related parties and connected persons are required to comply with the arm’s-length principle. The related party definition covers internal dealings between the head office and its PE.

See EY Global Tax Alert, UAE Ministry of Finance releases Corporate Tax Law: Detailed review, dated 12 December 2022.

PE case law

India: Ground support in India creates PE for a company in Singapore

On 16 November 2022, the Chennai Bench of the Income-tax Appellate Tribunal decided case No.14/Chny/2020 (pdf) whereby it analyzed the existence of a fixed place of business and an Agency PE. In this case, a Singaporean subsidiary of an Indian company, provided end-to-end supply chain solutions for various types of products. The Singaporean subsidiary received support from its Indian company, for services provided to customers in India. The Indian company supplied products to companies under the name of the Singaporean subsidiary and also negotiated with Indian customers for imports and set terms and conditions of sales. The Indian company's premises were at the disposal of the Singaporean subsidiary and the team of the Indian company carried out their functions from there.

The Chennai Tribunal ruled that the Singaporean subsidiary had a fixed place of business in India due to the disposal test being met and the services rendered by the Indian company were the main functions of the group business. The Chennai Tribunal also ruled that the Indian company constituted an agency PE in India because the employees of the Indian company acted as agents of the Singaporean subsidiary with the authority to conclude contracts, which they habitually exercised it.

Nigeria: Company in the satellite business creates a PE

Recently, the Nigerian Tax Appeal Tribunal (TAT) issued the decision TAT/LZ / CIT / 067 / 2021 (pdf) on the existence of a PE in Nigeria. In this case, a Dutch entity in the business of distributing global satellite capacity entered into a contract with a Nigerian Broadcasting entity via a related party in Nigeria. The Dutch entity also contracted with an unrelated local company to provide uplinks and transmission services to the Nigerian entity. The Federal Inland Revenue Service (FIRS) in Nigeria noted that the Dutch entity constituted an Agency PE and had a fixed place of business in Nigeria.

The Dutch entity appealed the decision to the TAT, asserting that the related party and the unrelated local company did not create a PE in Nigeria. The TAT confirmed that the Dutch entity had a PE in Nigeria since the award of the contract was dependent on the existence of a local company (i.e., the related party) which is critical to operate the contract in Nigeria. Furthermore, the TAT noted that the fact that the related party represented the interests of the Dutch entity in the service contract suggests that the related party had the authority to conclude contracts on behalf of the Foreign Partner in a habitual manner. According to the TAT, the services provided by the unrelated local company were integral to the services agreed in the contract. The fact that both companies are not related does not preclude the unrelated party from creating a PE in Nigeria for the Dutch entity. The TAT also found that business premises in Nigeria used for the uplink and transmission services were available to the Dutch entity when carrying on its business in Nigeria.


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

Ernst & Young Belastingadviseurs LLP, Rotterdam
  • Ronald van den Brekel
Ernst & Young Solutions LLP, Singapore
  • Chester Wee
Ernst & Young LLP (United States), Global Tax Desk Network, New York
  • Jose A. (Jano) Bustos
  • Ana Mingramm
  • 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.