The concept of Permanent Establishments (PE) included in various Double Taxation Avoidance Agreement models has always been a focal point for the OECD. Action 7 of its BEPS Action Plan(1) aims to prevent the artificial avoidance of PE status through a series of measures.
The definition can be found in Article 5 of the Model Convention (and in most Double Taxation Avoidance Agreements), where it is stated that the term “Permanent Establishment” does not include, among other things, the maintenance of a fixed place of business solely for the purpose of conducting any other auxiliary or preparatory activities for the enterprise. However, a person or entity (other than an independent agent) acting on behalf of a company and habitually exercising authority to conclude contracts on behalf of the company shall be deemed to act as a Permanent Establishment.
A recent ruling by the Superior Court of Justice of Catalonia is pivotal in this matter. The ruling favored the dynamic interpretation carried out by the Tax Inspection on the Spanish subsidiary of a Taiwanese group. Although its stated purpose was to provide marketing and ancillary services, an analysis of the functions performed in Spain revealed that the Spanish subsidiary, in addition to the aforementioned functions, also acted as a fully functional distributor with full negotiating capacity on behalf and for the account of the Taiwanese parent company, contracts that were ratified by the latter. (The analysis conducted by Tax Inspection included functions performed in Spain, statements from clients, and human resources.)
Indeed, this judgment from the Superior Court of Justice of Catalonia demonstrates adaptation to the new rules promulgated in Action 7 of the OECD BEPS Project, particularly affecting issues related to preparatory or ancillary activities (paragraph 4) and the PE of a dependent agent (paragraphs 5 and 6).
A “dependent agent” refers to a natural or legal person (e.g., a subsidiary) acting on behalf of a non-resident company with the authority to conclude contracts. Concerning the agent’s conduct, a PE will not only exist when the agent concludes contracts but also when they play the principal role leading to their conclusion, and the foreign company’s actual involvement in concluding them is minimal, meaning there is routine approval, without substantial modifications, of the work performed by the agent.
At Feliu N&I, we specialize in Permanent Establishments in International Taxation and can provide support in analyzing your subsidiaries and internationalization strategy. Contact us today!
