European and International Taxation Double Tax Conventions provisions © Jean Monnet Module: Managing the EU: Taxation, Governance and Economics The content does not represent the view of the Erasmus+ project nor the European Commission but only of the author Jean Monnet Module: Managing the EU: Taxation, Economics and Governance Cluj-Napoca

Defining Permanent Establishment European and International Taxation Defining Permanent Establishment Introduction Definition of Permanent Establishment => crucial to the taxation of business profits PE term comes from 1920s.. Threshold level of presence to be reached before source taxation rights are triggered Usually PE -> a foreign branch (exemptions = computer server) Difference between PE and subsidiary => PE is not a legal entity distinct from the parent / taxed under sourced. Subsidiary is independent legal entity / taxed under residence. Organization perspective: PE seen as a part of the corporate entity PE: transfer pricing issues (art. 5 OECD Model Tax Convention)

Defining Permanent Establishment European and International Taxation Defining Permanent Establishment The concept of a permanent establishment PE: as a taxing right problem source / residence If a PE exists -> allocation rights of taxation to the country where the profits are obtained (SOURCE state) Which definition of PE is to be applied? If no DTC between domestic country and foreign country -> domestic law definition of PE If DTC is in force => DTC definition of PE

The concept of permanent establishment European and International Taxation The concept of permanent establishment

Defining Permanent Establishment European and International Taxation Defining Permanent Establishment The concept of permanent establishment Definition of PE according to article 5(1) of the OECD model treaty: PE: a fixed place of business through which the business of an enterprise is wholly or partly carried out According to article 5(2) of the OECD model treaty - PE includes: A place of management A branch An office A factory A workshop A mine, an oil or gas well, a quarry or ay other place of extraction of natural resources According to article 5(3) of OECD model treaty – PE includes: A building site or construction or installation project constitutes a PE only if it lasts more than 12 month

Physical PE –”fixed place of business” European and International Taxation Physical PE –”fixed place of business” According to the definition, a physical presence appears to be required, which must be fixed Situation different in respect of various e-commerce situations According to OECD Commentary fixed means: “established at a distinct place with a certain degree of permanence” In practice, fixed place of business (commercial aspect) could be: A stand in marketplace A part of premises of another enterprise NO requirements for this place to be owned => OECD considers that a fixed place of business (geographical aspect) should be a specific geographical point

Physical PE –”fixed place of business” European and International Taxation Physical PE –”fixed place of business” PE: a fixed place of business through which the business of an enterprise is wholly or partly carried out It is clear PE = for dependent agents or employees It is unclear if PE or other “personnel” (example below) German company based in Germany – specialized in block-booking hotel rooms in Paris for German tour operators. It had no premises in France, nor any persons capable of binding it in contract there. An unconnected travel agency in Paris made office space available to the German company from time to time which was used by a manager of the German firm when he visited. It was hardly ever used as a correspondence address. The German manager owned a couple of flats in Paris and stayed in these during his visits. Is this construction triggering a PE risk? Response: 1.The lack of formal accommodation at the disposal of the German company and the lack of evidence that any business of the company was conducted from any Parisian address led the Court to decide that there was no PE in France 2.The German company had no legal interest in any premises in Paris, nor could it be proved that the company‘s business was being carried on in Paris in premises owned by anyone else. CONCLUSION: NO PE risk

European and International Taxation Construction PE Usually refers to building site or construction or installation project Period to trigger a PE: mainly 12 month

Agency PE The override to the “fixed place of business requirement: European and International Taxation Agency PE The override to the “fixed place of business requirement: A key test as to whether an enterprise is carrying out business in a country: Art. 5 para. 5. of the OECD Model Tax Convention Notwithstanding the provisions of paragraphs 1 and 2, where a person — other than an agent of an independent status to whom paragraph 6 applies — is acting on behalf of an enterprise and has, and habitually exercises, in a Contracting State an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph.

Agency PE A person acting on behalf of the enterprise European and International Taxation Agency PE A person acting on behalf of the enterprise Other than an agent of independent status An authority to concluded contracts in the name of the enterprise This authority must e habitually exercised

Agency PE The use of agents – dependent agents European and International Taxation Agency PE The use of agents – dependent agents Companies usually use agents to secure sales at the beginning of activities Personnel – defined in OECD Commentary as ―all those who receive instructions from the company, not merely its employees‖ Depending on person, it may be created a PE without being a fixed place of business by a dependent agent Dependent agent: – may or not be an employee of the company must have authority to bind the enterprise in contract in the State concerned Substance over form principle – when assessing the nature of the agent

Services PE European and International Taxation i) UN Model Convention …the furnishing of services […] through employees or other personell […], but only if activities of that nature continue for a period or periods aggregating more than 6 months within any 12-monthsperiod. OECD Model Convention/ Commentaries No fixed place of business is necessary! Services performed outside the source state are not taxable therein Tax should be levied on a net amount (e.g. profit) Source state taxation allowed only when a certain threshold is reached Addition to the definition of PE: a)through an individual who is present in that other State for a period or periods exceeding in the aggregate 183 days in any twelve month period, and more than 50 per cent of the gross revenues attributable to active business activities of the enterprise during this period or periods are derived from the services performed in that other State through that individual, or b) for a period or periods exceeding in the aggregate of 183 days in any 12 month period, and these services are performed for the same projects through one or more individuals who are present and performing such services in that other State.

EXEMPTIONS FROM PE: European and International Taxation 1. The exception for activities which are “preparatory or auxiliary” – Art. 5 para 4 OECD Model Tax Convention: Notwithstanding the preceding provisions of this Article, the term "permanent establishment" shall be deemed not to include: a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise; d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise; e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character; f) the maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs a) to e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.

Supply of information for scientific research European and International Taxation Exemption from PE: the exemption for activities which are “preparatory or auxiliary” Examples of activities which are categorized as preparatory or auxiliary : Advertising services for the whole company, not for other third parties Supply of information for scientific research

Exemptions to PE: European and International Taxation Independent agent – not give rise to a PE: An agent bearing a commercial degree of entrepreneurial risk; An agent being both legally and commercially independent of the enterprise; An agent not being required to comply with detailed instructions from the enterprise; An agent not being subject to comprehensive control by the enterprise; The agent having skill and knowledge on which the enterprise relies, e.g. a network of contacts, local market knowledge, expertise in local government rules and regulations; The agent working for a number of different clients. Independent agent – acting on the ordinary course of the business Group companies are not necessarily dependent agents – whether such companies are acting on concluding contracts on behalf of the parent company