BEPS MLI: Lesotho, Thailand and Vietnam sign the MLI
On 9 February 2022, Lesotho (pdf), Thailand (pdf), and Vietnam signed (pdf) the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI), becoming the 97th, 98th, and 99th jurisdiction to join the MLI. At the time of signature, these jurisdictions also submitted their preliminary positions concerning the MLI provisions to the Organisation for Economic Co-operation and Development (OECD). With respect to the Permanent Establishment (PE) provisions, Lesotho and Thailand chose to apply all the PE provisions, and Vietnam chose to apply all the PE provisions except for the contract splitting rule. The new signatories must confirm their preliminary positions when depositing their ratification with the OECD.
PE domestic law
Costa Rica: Bill to modify PE definition
In December 2021, Costa Rica’s Congress proposed a bill that would amend the definition of permanent establishment (PE) in its domestic law. Currently, Costa Rican law defines PE as any fixed place of business in which the essential activity of an enterprise is wholly or partly performed. If approved, the bill would amend the PE definition by eliminating the term “essential activity.” Thus, the bill would define PE as any fixed place of business where the business of an enterprise is wholly or partly carried on.
The proposed change is in response to the recommendation made in October 2020 by the European Union (EU) Code of Conduct Group. According to the findings (pdf) by the EU Code of Conduct Group, the PE definition in Costa Rica sets a higher threshold for the qualification of nonresident activities as taxable in the jurisdiction and is not in line with international standards (i.e., the Organisation for Economic Co-operation and Development and United Nations Model Tax Conventions).
PE tax rulings
Denmark: Purchase of sales services does not give rise to a PE
On 6 January 2022, the Danish Tax Board (DTB) published a binding tax ruling SKM2022.7.SR analyzing whether a German company who pays for a sales service company in Denmark creates a PE in Denmark. In this case, the Danish company is responsible for the day-to-day management of the sales consultants who participate in the sales services. The sales agents do not have an employment relationship with the German company nor have the authority to conclude contracts on behalf of the German company. The sales activities include customer care, market analysis, customer meetings, and participation in fairs.
The DTB concluded that the Danish company should be considered an independent agent and therefore the sales activities in Denmark would not create a PE for the German company. The reasoning for this conclusion is, among others, that the Danish company has the power and control to organize how and when the sales agents perform the work for the German company and the sales agents are not subject to any detailed instructions from the German company. The DTB also considered the fact that the Danish company provides similar sales services to other companies which are not related to the German company.
Peru: Counting days for calculation of PE threshold before introduction of the PE definition
On 23 December 2021, Peru’s Tax Administration issued tax ruling 111-2021-SUNAT/7T0000 (pdf) analyzing a series of tax-related questions posed by a nonresident entity. The nonresident entity, located in a jurisdiction with which Peru does not have a tax treaty, wanted to confirm whether its construction activities and provision of services in Peru could give rise to a PE after the introduction of the PE definition into Peruvian domestic tax law. The PE definition was introduced into Peruvian tax legislation as of 1 January 2019. Accordingly, construction activities and services rendered for more than 183 days during a 12-month period are considered to create a PE. The construction activities and services performed by the nonresident started before the introduction of the PE definition in Peru and continued afterwards.
The ruling concludes that the days when construction activities and services were provided before 1 January 2019 should be counted and aggregated for purposes of computing the threshold (i.e., 183 days within any 12-month period).
Another question addressed in the tax ruling relates to the tax implications of a transfer of assets between a head office and its PE. The ruling provides that if the head office transfers tangible assets to the PE in Peru for use in the PE's economic activities, the transfer will be subject to income tax, provided the tangible assets are physically located in Peru. Likewise, if the head office transfers intangible assets, the transfer will be subject to income tax when the intangible assets are used in Peru.
Russia: Tax treatment of multiple PEs within a single project
In December 2021, the Russian Ministry of Finance (MOF) published a guidance letter 03-03-07/101037 clarifying the computation of the tax base of multiples PEs within a single project. Under the Russian Tax Code, as a general rule, a nonresident carrying on business in Russia with more than one PE, should be subject to tax separately for each PE. However, if the activities giving rise to the different PEs are part of a single project, then the nonresident could calculate the taxable profits attributable to each of the PEs in Russia, provided all PEs follow the same accounting policies for tax purposes. Moreover, the guidance letter clarifies that losses of a PE can only be carried forward by that particular PE.
Spain: Remote worker does not create a PE
Recently, the Spanish General Directorate of Taxes (GDT) confirmed through an unpublished ruling that the presence of an employee working remotely from home due to the COVID-19 pandemic does not result in a PE in Spain. In the case at hand, an employee working for a company resident in the United Kingdom (UK) traveled to Spain and was unable to leave Spain due to a lockdown. The employee continued to work for the UK Company from Spain, without any change in his work while in Spain. Once the lockdown and travel ban were lifted, the employee decided, for personal reasons, to stay in Spain. Afterwards, the UK company requested the employee to return to the UK but the employee refused and resigned. The employee was present in Spain for more than 183 days and the UK company did not bear any costs connected to the employee’s working remotely from Spain.
The UK company requested the GDT to address whether the presence of the employee in Spain would create a PE. The GDT concluded that during the COVID-19 pandemic, individuals who stay at home to work remotely are doing so by an extraordinary event, not an enterprise’s requirement. Therefore, considering the extraordinary nature of the COVID-19 pandemic, working from home would not create a PE in Spain for the UK company because such activity lacks a sufficient degree of permanency or continuity. The GDT also analyzed whether working from home may constitute a PE after the lockdown and travel ban were lifted. In such case, the GDT concluded that the employee’s home office was not at the disposal of the UK company based on the following reasons: (i) working from Spain was a personal decision and was not imposed or required by the UK company; (ii) the UK company did not bear any costs; and (iii) the UK Company has an office in the UK which could have been used by the employee to develop his work without the need to be in Spain.
See EY Global Tax Alert, Spain’s Tax Authority issues ruling on remote workers and permanent establishments during and after COVID-19 restrictions, dated 28 January 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 Belastingadviseurs LLP, Amsterdam
- David Corredor-Velásquez
- Roberto Aviles Gutierrez
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
For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.