TUTORIAL 6: Permanent establishment and profit attribution

DE-the state of residence; BE-the state of source

 Art 7 OM, business profits taxed in the state of residence (DE), unless there is a PE in
another contracting state (BE).
In our example, (1) the profits attributed to the PE will be taxed in BE; (2) DE will provide
the credit or exemption method in the state of residence.
 Art 1 and 2 OM- the scope of convention; Art 3 to 5 OM-definition; Art 6 to 22 OM -
distribute rule
 Art 5(1)-the first paragraph recalls something very concrete, material a place of
business. The place of business is fixed, not something temporary. “the business of the
enterprise is wholly or partially carried on.” Implies there will be some personnel in this
place of business.
In our example, BE has PE means we have a fixed place of business with some personnel
working there and conducting the business activity which is conducted by Company X in
BE.
 Art 5(2)-In this paragraph shows us the examples of PE. It’s Just a list of examples, not
an exhaustive (詳細的) list. Besides, those examples can be PE only if they meet the
requirement of Art 5 (1).
 Art 5 (5) (1)- introduce the agency PE, an individual who act as an agent and this agent is
actually carry on the business activity of company X.
The problem is “how to define a person in Art 5(5) first line?”, Art 3(1)(a) ” the term “person”
includes an individual, a company and any other body of persons;” such as associations. foundations, and
 trust, even when they are hybrid entities. So, the agency can be an individual but also an
entity or organization.
 Art 5 (5) (1)(a)- In 2014 OM only the agency in the name of the enterprise is defined as
agency PE, but the taxation in PE jurisdictions is easy to avoid as long as the agency
provides services by the enterprise but not in the name of the enterprise. Therefore, the
2017 OM added Art 5 (5) (1)(a)(ii) and(iii), cover the so called commissioners
agreement.
 Art 5 (5) (1)(a)(i) “in the name of the enterprise”- which does not necessarily mean that
we should name that the name of the enterprise is expressly mentioned in in the
contract, but it is enough that it is stated that it is in the name of another of another
person.
 Art 5 (5) (1)(a)(ii)(iii) Someone who does not conclude formally the contract in the name
of company X, but who convinced the parties to do that. So, in fact, it is only because of
the activity of the agent that we have those contracts concluded. Then regardless of the
form, we need to say that there is a permanent establishment in in Belgium. we can
have a permanent establishment on the basis of paragraph five. Only when it is not an
independent.
 Art 5 (6)

Case study 1

X Inc. is located in the US and carries on a large retail business. X Inc. sells, amongst others,
Dutch souvenir products in the Netherlands (e.g., cheese, tulips, etc.). These products can
be purchased by travellers at the Dutch airport of Schiphol. X Inc. does not sell the
souvenir products directly, but makes use of a Dutch resident intermediary person – Mr. Y.
It is thus Mr. Y who sells, on behalf of its principal X Inc., the Dutch souvenir products to
travellers at Schiphol airport against a price of EUR 40.

For each sold product, Mr. Y receives from X Inc. an (arm’s length) remuneration of EUR 4.
Mr. Y is also responsible for managing the inventory risk on behalf of X Inc. (the products in
question typically have a very short expiration date).

Mr. Y is unrelated to X Inc. and does not act in the ordinary course of his business. X Inc. is
the only principal for whom Mr. Y performs his intermediary services. In 2018, Mr. Y has
sold 5,000 souvenir products in the Netherlands on behalf of X Inc.

 only if we have a PE then we can said Netherlands can claim taxi right.
 Art 5(5)(1)-Mr. Wai is a person, he's acting in a contracting state in the Netherlands.
On behalf of an enterprise (X incorporation). He plays the principal role leading to the
conclusion of contracts. Because he's the one who makes the end the end of the
contract with the customers and not Corporation X.
 Art 5 (6)-
o The risks is also considered important in that matter? a risk may lead us to
conclude that it's independent. If you are an employee, you don't have an
inventory risk. it is not a clearly said if it is in the name or not. So, it could be
a broker, or it could be a general commission. the actual remuneration of Mr.
Y depends on how many products are sold. this shows a certain margin of
risk, which could lead us to think that it is an independent agent. his
profession is a broker or an agent. So he's not an employee of acts
incorporation work working in the Netherlands, but he's a professional
agent. -independent. Art 5 (6) first part -not PE.
o if the person acts exclusively or almost exclusively on behalf of the
enterprise-dependent. Art 5 (6) Second part - PE.
o the fact that that it's not acting in the ordinary course of his business does
automatically exclude that it is an independent agent. The opposite of Art 5
(6) first part – PE.
o Art 5 commentary-paragraph 111
111. The last sentence of paragraph 6 provides that a person is not considered to be an independent

agent where the person acts exclusively or almost exclusively for one or more enterprises to which it is

closely related. That last sentence does not mean, however, that paragraph 6 will apply automatically

where a person acts for one or more enterprises to which that person is not closely related. Paragraph 6
 requires that the person must be carrying on a business as an independent agent and be acting in the

ordinary course of that business. Independent status is less likely if the activities of the person are

performed wholly or almost wholly on behalf of only one enterprise (or a group of enterprises that are

closely related to each other) over the lifetime of that person’s business or over a long period of time.

Where, however, a person is acting exclusively for one enterprise, to which it is not closely related, for a

short period of time (e.g. at the beginning of that person’s business operations), it is possible that

paragraph 6 could apply.

As indicated in paragraph 109 above, all the facts and circumstances would need to be taken into account

to determine whether the person’s activities constitute the carrying on of a business as an independent

agent. Art5 (6) last sentence 說如果和一個以上企業高度相關，不能稱作 independent agent。但不代表

不和一個以上企業高度相關，就是 independent agent

regardless of the situation, the crucial elements is that it is not acting in the
ordinary course of his business is not acting as a professional agent.
Therefore, in light of this, it can be concluded that it is an agency PE.

Case study 2

Beverage Sarl is a company incorporated under the laws of France and having its place of
effective management in France. It has legal personality and is treated as an opaque entity
for tax purposes by France, Germany and Belgium. Beverage Sarl carries on an enterprise,
amongst others, through a permanent establishment (PE) located in Belgium. In 2018,
Beverage Sarl receives a royalty payment of 100 from a non-affiliated company X, which is
a tax resident of Germany. The royalty payment is attributable to the Belgium PE. Assume
that the national withholding tax applied in Germany on the payment is 20%.
Beverage Sarl is subject to corporate income tax in France, but the profits of the Belgium
PE are fully exempt based on French tax law.

All 3 States have concluded bilateral tax treaties with each other that follow the most
current OECD MC 2017, apart for the following exceptions. Under the tax treaty between
France and Germany, the permissible withholding tax rate on royalty payments is 10%.
Under the tax treaty between Belgium and Germany, the permissible withholding tax rate
on royalty payments is 15%. The corporate income tax rate in Belgium is 25%.

 Art 7 OM, business profits taxed in the state of residence (FR), unless there is a PE in
another contracting state (BE). in general we apply business profits article seven unless
there is a more specific provision.
 Normally developing country is the source of state and rich of raw materials. PE will
give to the developing country the right to tax. So UN model convention as a broader
concept of permanent establishment
Art 5(3) OM vs Art 5(3) UNM
Art 5 (6) UNM- insurance PE
Art 12 (1) OM- shall be taxable only in that other State -only state of residence can tax
Art 12 (1) UNM - may be taxed in that other State- the state of source may can tax too
 royalty payment is 100 After the withholding tax is 15%. So it means that Germany
only transfers 85. 85 is transferred to Belgium because the profits are attributable to
the PE. The question is FR or BE has the tax right
 so Belgium is taxing and then Belgium corporate tax applies. BE will tax 85 and will
grant a credit or an exemption for the 15 which is paid in DE.
 There is a juridical double taxation, because we have the BE PE, which is tax both in DE
via the withholding tax.
 From a civil law point of view, the permanent establishment is the same company.
From a tax point of view, it is considered a separate company-> separate entity
approach
From EU perspective, the sango bank case: should provide resident and non-resident
the same tax treatment, or it would be a discrimination.
 That if Belgium grants the credit to resident taxpayers, they need us to also grant
credit to non-resident taxpayers and then in our case also to Belgium PE.
PE located in Belgium shall receive the same treatment for CIT and Capital tax on
incomes derived dividends attributable to the PE located in third countries. Otherwise
there is an infringement of freedom of establishment (see Saint Gobain case). In
addition, Art. 24(3) OECD has the similar rule. The taxation on PE Belgium shall not be
less favorably levied in Germany