PE Watch: Latest developments and trends, March 2021

OECD BEPS Multilateral Instrument (MLI) and tax treaties


On 18 February 2021, Croatia (pdf) and Malaysia (pdf) deposited their instrument of ratification of the MLI with the Organisation for Economic Co-operation and Development (OECD). Croatia and Malaysia confirmed their preliminary positions regarding the permanent establishment (PE) provisions in which they chose to apply all PE provisions but Article 14 (splitting-up of contracts). Croatia also added three tax treaties (Kazakhstan, United Arab Emirates, Vietnam) to its list of Covered Tax Agreements (CTAs). The MLI will enter into force for both jurisdictions on 1 June 2021.


On 23 February 2021, The French Tax Authority (Direction générale des Finances publiques or DGFiP) issued a Commentary on the interpretation and application of the 2018 France-Luxembourg Tax Treaty. With respect to PEs, the Commentary includes a short explanation of each of the clauses of the PE definition (namely, fixed place of business, anti-contract splitting rule, preparatory or auxiliary activities, anti-fragmentation rule, dependent agent PE, independent agent and closely related enterprises) and a couple of examples on the application of the anti-contract splitting rule and the dependent agent definition. The Commentary also includes references to other relevant Commentaries issued by DGFiP. For example, on the Principal Purpose Test (PPT), the Commentary references the BEPS Multilateral Instrument Commentary issued in December 2020.


Recently, the Russian Ministry of Finance (MOF) published guidance letter 03-08-05/8307, dated 9 February 2021, clarifying the criteria for determining whether a Russian resident enterprise has a PE in Azerbaijan under the tax treaty. The guidance letter starts by commenting that the tax liability of a taxpayer in Russia (whether resident or nonresident) must be determined based on the provisions of the applicable tax treaty, which will prevail over any conflicting Russian tax laws and regulations. Further, the letter guidance goes on to the PE definition contained in the treaty and in particular on the so-called ”negative list.”

MOF notes the difficulty that may arise in certain cases to distinguish whether an activity is preparatory or auxiliary. By referencing the OECD Model Tax Convention and Commentaries, MOF has indicated that the decisive criterion is whether the activity carried through the fixed place of business forms an essential and significant part of the activity of the nonresident as a whole, but nonetheless each case must be examined on its own facts and circumstances. But there are other factors that can be considered when assessing the nature of an activity. For example, considering the duration of the activity and whether the activities carried through a fixed place of business are the same as of the enterprise.

The guidance letter concludes that the collection of initial information and documents, kickoff meetings, and negotiations by a Russian entity in Azerbaijan are activities of a preparatory or auxiliary character which do not create a PE in Azerbaijan.

PE developments in response to COVID-19

Austria: Updated guidance on COVID-19 and PEs

On 29 January 2021, the Austrian MOF published updated guidance (pdf) on the application and interpretation of the Austrian tax treaties in connection with the COVID-19 pandemic. The updated guidance replaces the guidance published on 20 July 2020. With respect to PEs, the guidance remains unchanged although the updated guidance includes a reference that Austria follows the OECD analysis on tax treaties and the impact of the COVID-19 pandemic released in January 2021 and also refers to the updated mutual agreement between Austria and Germany on frontier workers signed on 15 January 2021.

Cyprus: Updated guidance on COVID-19 and PEs

On 25 January 2021, the Tax Department of Cyprus issued additional guidance (pdf) on the impact of COVID-19 on the application and interpretation of tax residency and PE under the Cypriot Income Tax Law. The additional guidance confirms that the original guidance issued on 27 October 2020 continues to apply for 2021 as long as the special measures relating to the COVID-19 pandemic are in force around the globe. Before the update, the guidance was generally applicable from 21 March 2020 until 9 June 2020 but depending on the specific facts of each case, this period could be extended before or after the mentioned dates as long as the taxpayer provided relevant supporting evidence proving the objective restriction to travel by reason of the COVID-19 pandemic.

Other PE developments

Denmark: Guidance on deduction of final losses incurred by PEs

On 16 February 2021, the Danish Tax Authority (DTA) released a new control signal (SKM2021.89.SKTST). A control signal is released to publish the change of a certain tax practice followed by a final decision by a court, the National Tax Court or a European Union (EU) judgment. This new control signal clarifies that losses from a Danish PE can be deducted from the taxable income of jointly-taxed Danish group companies. The control signal is published in continuation of Case C-28/17 (NN A/S) issued by the European Court of Justice concerning the refusal to allow a Danish company to deduct losses from its taxable income incurred by the Danish branch of its Swedish subsidiary, setting aside the Danish tax authorities’ previous tax practice.

As a result, Denmark allows the deduction of losses incurred by a Danish PE of a foreign group company from the taxable income of a Danish jointly taxed company provided that the relevant losses are impossible to deduct at the level of the foreign company. In order to prove the impossibility to deduct the losses, the taxpayer should analyze the tax rules applicable to the country where the foreign entity is domiciled and prove that it exhausted all possibilities to deduct such losses.

Italy: Tax investigation of a food delivery service company to determine the existence of a PE

On 24 February 2021, the Milan Public Chief Prosecutor’s office announced the launch of a tax investigation against four multinational enterprises (MNEs) operating in the gig and sharing economy in the food delivery sector to assess whether the MNEs have carried out activities without registering a PE (so-called ‘’hidden PE’’) in Italy. Among others, the tax auditors are investigating certain peculiarities in the contractual relationships between the MNEs and the riders as an indicia of foreign presence in Italy.

Should the investigation conclude that the hidden PE does exist, the tax authorities can impose administrative penalties ranging between 120% to 240% of the assessed taxes, along with possible criminal liability if a certain threshold for tax evasion is exceeded.

Moldova: Guidance on the updated PE definition

On 17 February 2021, Moldova published updated guidance on PE to reflect the changes made by the 2020 tax reform (Law 257 of 16 December). The guidance is legally binding on the taxpayer and the tax authority alike. The 2020 tax reform, among other things, modifies the PE definition to add the list of preparatory and auxiliary activities that are considered intrinsically preparatory or auxiliary. The 2020 tax reform also amends the PE definition to merge the term ‘’fixed base’’ with ‘’permanent establishment’’ and the positive list of PEs.

The guidance is effective from 1 January 2021.

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
  • Konstantina Tsilimigka
Ernst & Young Solutions LLP, Singapore
  • Chester Wee
Ernst & Young LLP (United States), Global Tax Desk Network, New York
  • Jose A. (Jano) Bustos
  • Ana Mingramm

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