PE Watch | Latest Developments And Trends, April 2022

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14 April 2022

PE Watch | Latest developments and trends, April 2022

BEPS MLI: Thailand deposits instrument of ratification of the MLI

Commentary to the GloBE rules

Further, the Commentary acknowledges concerns about the application of the Income Inclusion Rule (IIR) by a Parent Entity jurisdiction which has entered into a bilateral tax treaty adopting the exemption method to eliminate double taxation. In this case, the Commentary notes the potential introduction of a ''switch-over" rule (SOR) in the relevant tax treaty to safeguard the application of the IIR when dealing with PEs. The Commentary, however, does not include a sample SOR that countries could use when (re)negotiating their tax treaties.

European Union

On 10 March 2022, AG Collins gave his opinion in case C-538/20. In this case, a German entity with a PE in the United Kingdom incurred losses which could not be deducted in Germany as the relevant tax treaty between these countries includes an exemption method for the elimination of double taxation. The court in Germany requested clarifications from the CJEU on whether the rules on deductibility of so-called ''final losses" from a PE are compatible with the freedom of establishment.

PE case law

On 3 March 2022, the German Federal Tax Court published a temporary injunction I B 44/21 on whether the significant people functions are to be regarded as the decisive allocation parameter for assets held by a PE. In the case at hand, a German limited partnership , through a PE, operates a wind farm on leased property and its head office is in Denmark. The PE does not employ its own personnel and its technical and business management services are handled by other German companies.

Even though no decision has yet been made on the appeal against this tax authorities' position, the German Federal Tax Court expressed serious doubts about the position. The court based its doubts on the opinion in literature, according to which the respective German exit tax rules (existing outside the AOA rules) do not recognize an allocation in accordance with the significant people functions and consequently do not apply in this case.

India: Mere access to the premises of a Joint Venture does not constitute a PE

The Indian tax authorities contended that the Japanese company frequently sent its professionally qualified employees to the factory site of JV in India to guide its production and manufacturing activity and such factory site constituted a Fixed Place PE in India. Indian tax authorities also contended that the Japanese company would constitute a Supervisory PE in India due to certain employees of the Japanese company helping to set up a new product line in India for which end-to-end supervision has been rendered. The period of stay of these employees in India exceeded six months and hence it would constitute a supervisory PE of the Japanese company in India as well under Article 5 of the India-Japan treaty.

PE tax rulings

On 11 March 2022, the Danish Tax Board (DTB) published binding tax ruling SKM2022.119.SR whereby it analyzes whether a nonresident purchasing data center services from a Danish company would constitute a PE in Denmark. In this case, a Multinational Enterprise (MNE) group plans to establish a data center company in Denmark which would own and operate the facilities and equipment to be used for hosting the MNE group's software solutions.

The DTB also analyzes whether automated services rendered by the data center company would give rise to a PE in Denmark. According to the DTB's opinion, the nonresident would not have a PE in Denmark in relation to the automatic services. This conclusion is based on the Commentaries of the OECD Model Tax Convention where in the DTB's view, a location should be ''used" to carry on business. For this to happen, the location should be at the disposal of the nonresident. Considering that the data center is not at the disposal of the nonresident, automated services cannot be considered to constitute a PE in Denmark.

Austria — Germany: Extension to the mutual agreement on frontier workers

Singapore: Extension of the application of the PE and COVID-19 guidance

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Ernst & Young Belastingadviseurs LLP, Rotterdam

Ernst & Young Belastingadviseurs LLP, Amsterdam

Ernst & Young Solutions LLP, Singapore

Ernst & Young LLP (United States), Global Tax Desk Network, New York

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