Permanent establishment (2023)

Wednesday 1 March 2023

Barbara Gangl

Binder Grösswang, Vienna

gangl@bindergroesswang.at

Report on the session of the Taxation Section at the 12th Annual London Finance and Capital Markets Conference in London

Monday 16 January 2023

Session Chair

Guglielmo Maisto Maisto e Associati, Milan

Speakers

Jessica Kemp Travers Smith, London

Guadalupe Díaz-Súnico Aboitiz Gòmez-Acebo & Pombo, Barcelona

Stefan Mayer Gleiss Lutz, Frankfurt

Rachel Fox William Fry, Dublin

Yuval Navot Herzog Fox & Neeman, Tel Aviv

Luca Romanelli AndPartners Tax and Law Firm, Milan

Introduction

After a brief introduction, the Session Chair, Guglielmo Maisto, started by providing an overview of the topics to be discussed and the agenda. The topics addressed by the panel were the establishment of permanent establishments (PEs) by employees working from home, recent case law and administrative practice regarding PEs, and evolving trends.

Panel discussion

Maisto pointed out different situations of employees working from home (one day v permanently, differences between business areas etc) which might lead to divergent results and highlighted the challenges with respect to employees working from home due to the different approaches of countries.

Jessica Kemp started by reminding the audience of the differences between types of PEs and continued by explaining the fixed place of business PE. Kemp pointed out the requirements thereof and provided an example (employee or director working from a home office in another jurisdiction, but has an office space). Further, Kemp explained the dependent agent PE and its requirements. She noted that the significant differentiating characteristic is that the agent acts on behalf of the company. After referring to the situation related to the Covid-19 pandemic, which was not permanent, Kemp addressed the practical challenges (eg, new working models and competition for talent) in working cross-border and the two biggest problems identified: the administrative burden and lack of certainty. She continued with potential solutions that must be multilateral. From her point of view, the key things are clearer guidance, bright line tests, safe harbours and clarity on transfer pricing. With respect to diverted profits tax and PEs, Kemp stated that the aim is to change behaviour because it is an anti-avoidance measure.

Guadalupe Díaz-Súnico Aboitiz continued with the first Spanish ruling concerning a PE case issued in January 2022, which follows Organisation for Economic Co-operation and Development (OECD) guidelines. The Spanish tax authorities took the position that a home office is not available to the company. Díaz-Súnico Aboitiz explained the relevant criteria for a PE outlined in the ruling: the change of role should be caused by the employer; no other working space is available to the employee; and there should be extra salary for working from home. She concluded with certain references to domestic rules, for example, the domestic annual exemption for wages on work carried out abroad and the so-called Beckham regime for inbound workers.

With respect to Ireland and employees who work remotely, Rachel Fox pointed out that no home office PE should be created; in particular, maintained office space should be available to the employee; the place where the employee is working from is not at the disposal of the company; and the employee is not reimbursed for home office costs. Generally, management and client-facing roles should be performed in the company’s home country and remote work arrangements should be limited to the extent possible to internal support and back office roles. Further, with respect to avoiding a dependent agent PE, Fox stated that employees should not be authorised to conclude contracts on behalf of the company or hold themselves out as having such authority and that contract negotiations should primarily take place in the company’s home country. Fox continued with some structures that might be considered as alternatives to a PE: establishment of a subsidiary and transfer of employees to that subsidiary (service agreements); use of a global employment company (secondment); or employer of record. She concluded with a presentation of different employment models.

Stefan Mayer continued with the German point of view on home offices and stated that, generally, a home office is not a PE because it is not a fixed place of business. With respect to the qualification of an employee as a dependent agent, it would be decided according to whether this employee is customer-facing. Mayer pointed out that for wage tax and social security purposes, the home office is almost always a PE.

Maisto continued with respect to the determination of the profit of a PE, especially when low-value functions are rendered through the home office. He described the different methods (cost plus v profit split) based on examples (data protection team officer v senior manager). Maisto concluded with several experiences from case law concerning home office cases in Canada, Denmark and Sweden, and described the criteria outlined by the decisions. In this respect, Súnico Aboitiz commented that only trends can be derived.

Then Mayer explained a German case decided by the German Federal Fiscal Court with respect to a board member as a permanent representative, which creates a PE if the board member concludes contracts on behalf of the company. Mayer continued with a question regarding what has to be allocated because this is relevant for risk assessment. Mayer concluded with several practical recommendations.

Yuval Navot informed the audience that there is no real new specific case law in Israel on the matter. However, the Israel tax authority has taken a new approach in recent years to identify local PEs for global internet companies with Israeli local subsidiaries. Navot stated that this policy was published in a Revenue Circular a few years ago and reflects a creative way to tax multinational internet companies without imposing a digital services tax (DST). Following this publication, Navot witnessed the aggressive income tax audits of all big internet companies active in the Israeli market. The PE claims raised by the Israel tax authority rely in particular on the attribution of the activities of the employees of an Israeli subsidiary to the non-resident parent company for the purpose of the fixed place of business PE analysis: when a subsidiary works for the non-resident parent company in the way that employees of the Israel subsidiary interact with customers in Israel, it may create a PE for the non-resident parent company. Navot also mentioned the royalty issue in Israel; part of the royalty payment is allocated to the Israel PE by the Israel tax authority.

After referring to the Philip Morris case, Maisto handed over to Luca Romanelli who explained the investment management PE exemption implemented with a new law directive. The exemption applies to a foreign special purpose vehicle (SPV) acting through agents who act in the name or on behalf of the SPV or its subsidiaries and conclude or contribute to the conclusion of contracts for the acquisition, sale or negotiation of financial instruments (including derivatives, shares and receivables) if certain conditions are fulfilled. The conditions are: (1) the SPV resides in a White List country; (2) the agent is neither a board member nor controls the SPV or its subsidiaries and does not hold more than 25 per cent of the profit participation rights in the same vehicle; (3) implementation requirements for independence; and (4) the remuneration of the manager must be supported by transfer pricing (TP) documentation.

Conclusion and final remarks

After the advisory company example provided by Maisto, and final comments from Kemp and Mayer with respect to private equity funds, Maisto presented a slide with practical pointers for 2023: review home office corporate guidelines; replace the home office with service agreements or the secondment of employees; and take advantage of domestic PE exemptions.