A UK PE of the Royal Bank of Canada had (through its Canadian head office) advanced loans of CAD $540 million in the early 1980s to Sulpetro Limited (“Sulpetro”), a Canadian company, to help fund the exploitation by its group of companies of rights to drill for oil, largely in the Buchan field of the North Sea. The Sulpetro group sold its interest in the Buchan oil field to the BP group in 1986, in exchange for various sums including an entitlement to contingent royalty payments on production from the oil field (linked to the excess of the market price of the oil in question above a benchmark level) (“the Payments”). Sulpetro was already in financial difficulties at the time of the sale to BP and ultimately went into receivership in 1993, by which time some Payments had started to be made due to the ... Continue to full case

A Hungarian company had a permanent establishment (PE) in Germany. The PE provided installation and assembly services to third parties in Germany. Following an audit of the German PE for FY 2017 the German tax authorities issued an assessment of additional taxabel income calculated based on the cost-plus method, cf. section 32 of the BsGaV (German ordinance on allocation of profits to permanent establishments). Not satisfied with the assessment a complaint was filed by the taxpayer with the Tax Court, which later decided in favour of the PE and set aside the tax assessment. An appeal was then filed by the tax authorities with the Federal Tax Court. Judgment The Federal Tax Court upheld the decision of the Tax Court and ruled in favour of the PE. Excerpt in English “1. It already follows from the wording of Section 1(5) sentence 1 of the Foreign ... Continue to full case

A Hungarian company had a permanent establishment (PE) in Germany. The PE carried out meat cutting work on the basis of work contracts dated 23 February 2017 with the Hungarian company Z Kft. The PE concluded a service agreement with A Kft. in which A Kft. undertook to provide administrative services in the area of support for employees in Germany and was to receive a fee calculated as a percentage of net sales in return. Following an audit of the PE the German tax authorities issued an assessment of additional taxabel income based on the German ordinance on allocation of profits to permanent establishments. In the assessment the service fee was instead determined using the cost plus method. Not satisfied with the assessment a complaint was filed by the PE with the Tax Court. In its complaint the PE argued that the tax authorities corrected ... Continue to full case

The question to be decided by the Full Bench of the High Court was whether a permanent establishment (PE) could have positive income notwithstanding losses incurred by the company – of which it is part – in other jurisdictions. This issue was left unresolved in the High Court’s December 2023 judgment, as the Division Bench questioned the view expressed in previous case law that attribution of profits to a PE would only be justified if the company as a whole, and the PE being merely a part of it, had made profits. Hyatt International, on the other hand, argued that if the company had suffered a loss in the relevant assessment year, no profit or income attribution would be warranted as far as the PE was concerned. Judgment The Full Bench of the High Court rejected Hyatt International’s contention and held that the cautious view ... Continue to full case

Mabe Colombia paid a related party in Mexico, Controladora Mabe S.A., for certain services the mexican company performed on its behalf. At issue was whether the payments Mabe Colombia had made to the Mexican company for these services were deductible and whether withholding taxes applied to the payments. The tax authorities had issued a tax assessment for FY 2017 where deductions for the payments had been disallowed in Mabe Colombia’s taxable income. Mabe Colombia contested the assessment, arguing that it violated the Colombia-Mexico Double Taxation Agreement (DTA) and misapplied local tax laws. The company maintained that the commissions paid to a Mexican entity were taxable only in Mexico under the DTA, making them fully deductible in Colombia without withholding tax. It also argued that the non-discrimination clause of the DTA prevented the application of limitations on foreign payment deductions under local law. The administrative court had ... Continue to full case

The factual circumstances of the case revolve around a dispute between “A IGF s.a.r.l.”, a Luxembourg entity, and the tax authorities regarding the existence and recognition of a permanent establishment (PE) in the United States. “A IGF s.a.r.l.” contended that it had a fixed place of business in the USA, which qualified as a PE under Article 5 of the tax convention between Luxembourg and the USA. This recognition would affect the taxation of certain financial activities, potentially allowing for adjustments to taxable income in Luxembourg. The tax authorities disagreed. Judgment The court analyzed whether the activities carried out by “A IGF s.a.r.l.”’s “USA branch” met the criteria for a PE, which requires not only a fixed place of business but also real and effective activity. Despite providing evidence of a physical location and certain management activities, the court found that the proof of genuine ... Continue to full case

“Consulting GmbH” sold consulting services in Russia and Romania, where it also had fixed places of business. The income from these permanent establishments was declared as exempt under the double tax treaties with Russia and Romania. The tax authority, did not grant the tax relief under the exemption method. It found that German activity reservations applied to the income, due to the involvement of a person with unlimited tax liability in Germany in the activities of the PE’s. An appeal was filed with the Administrative Court, which later ruled in favour of the tax authorities. Judgment The Supreme Administrative Court confirmed the decision of the Administrative Court and upheld the decision of the tax authorities. Click here for English translation Click here for other translation ... Continue to full case

A Kenyan PE of Siemens Aktiengesellschaft had operated under a transfer pricing policy applying a 3% Net Cost Plus margin, justifying it based on its limited-risk functional profile and minimal exposure to entrepreneurial risks. Siemens Germany, as the main contracting entity and the project’s entrepreneur, bore the risk and assumed losses following the insolvency of consortium partner Isolux. The tax authorities disagreed with the 3% margin and applied a median Net Cost Plus margin of 6.94%, derived from a benchmarking study of comparable European engineering and project management companies, citing that the PE’s actual returns were negative and thus outside the arm’s length range. An appeal was filed by Siemens with the Tax Appeals Tribunal. Judgment The Tribunal dismissed the appeal by Siemens AG’s Kenyan Permanent Establishment, upholding the tax authorities assessments on corporation tax, withholding tax (WHT), and PAYE. The Tribunal found that the ... Continue to full case

Progress Rail Locomotive Inc. is a US-based manufacturer and supplier of railway equipment. It had a wholly-owned subsidiary in India which carried out manufacturing activities and also provided various support services to Progress Rail Locomotive Inc. Following an audit, the tax authorities issued a notice of assessment concluding that Progress Rail Locomotive Inc. had a PE in India and that income attributable to the PE was taxable in India. An appeal ended up in the High Court of OF Delhi. Judgment The High Court ruled in favour of India vs. Progress Rail Locomotive Inc. and held that the mere existence of a subsidiary in India does not constitute a PE. In order to establish the existence of a PE, the conditions set out in the applicable treaty must be met on the basis of the actual facts of the case. These conditions were not met ... Continue to full case

“X-IP AB” was part of an international group. In 2012 and 2013, a major restructuring was carried out within the group, including a decision to centralise and streamline the group’s management and development of intangible assets in Luxembourg. In 2012, the company registered a branch in Luxembourg, which was given responsibility for managing and developing the intangible assets held by the company. The branch employed staff with expertise in the field and the intangible assets were allocated to the branch at a book value of EUR 1. In the second half of 2013, a company was incorporated in Luxembourg (hereafter LUX). In September 2013, the branch transferred the intangible assets to LUX through a business disposal for a market consideration in the form of shares in LUX. In its tax return for 2013, “X-IP AB” claimed a deduction of notional tax in Luxembourg of just ... Continue to full case

The tax authorities had amended TECNA Estudios y Proyectos de Ingeniería S.A.’s tax return for FY 2010, disallowing certain costs that it could not be allocated to TECNA. ​ TECNA appealed the decisions, arguing that branches cannot enter into contracts with their head offices and that the costs in question were not for technical services but for payroll costs allocated by the head office. ​ The Administrative Court ruled in favor of TECNA, declaring the nullity of the tax authorities decisions and reinstating TECNA’s original tax return. ​ The tax authorities appealed. Judgment The Supreme Administrative Court reviewed the case, focusing on whether the cost derived from the operation between TECNA and its head office could be deducted without registering the technology import contract. ​ The Council concluded that, for tax purposes, branches must comply with the same requirements as independent entities, including the registration ... Continue to full case

A sales, marketing and management service agreement entered into in 1993 between Asian Hotels Limited and Hyatt International-Southwest Asia Limited had been replaced by various separate agreements – a Strategic Oversight Services Agreements, a Technical Services Agreement, a Hotel Operation Agreement with Hyatt India, and trademark license agreements pursuant to which Asian Hotels Limited was permitted to use Hyatt’s trademark in connection with the hotel’s operation. In 2012, the tax authorities issued assessment orders for FY 2009-2010 to FY 2017-2018, qualifying a portion of the service payments received by Hyatt as royalty and finding that Hyatt had a PE in India. Hyatt appealed the assessment orders to the Income Tax Appellate Tribunal, which later upheld the order of the tax authorities. Aggrieved with the decision, Hyatt filed appeals before the High Court. Judgment of the High Court The High Court set aside in part and ... Continue to full case

In 2013 “A” SARL requested a tax ruling confirming that its US branch had sufficient substance to qualify as a permanent establishment. The tax authorities issued the ruling conferming this to be the case, but only premised on the information provided by “A” SARL. The ruling would not be valid if the facts or circumstances described therein were incomplete or inaccurate. In 2016, “A” SARL filed an amended tax return for 2013 in which it had effectively allocated a dividend in kind to the US branch. Despite of the above mentioned tax ruling, the tax authorities disallowed the amendments to the tax return, finding that the US branch did not have sufficient substance to qualify as a permanent establishment. Not satisfied with the decision “A” SARL filed an appeal with the Administrative Court. Judgment of the Administrative Tribunal The Court decided in favour of the ... Continue to full case

At issue was whether or not a proportionate share of management and general administrative expenses incurred by the head office in Spain should be allocated to its PE in Algeria. The tax authorities (appelante) argued that, in general, these expenses cannot be individualised and, therefore, a proportional criteria should be used to determine the amount to be allocated to the Algerian PE. Compañía Española de Petróleos, S.A. argued that only management and general administrative expenses related to the purposes of the Algerian PE should be attributed to it. According to the company, the tax authorities had not carried out an appropriate analysis when examining what percentage of these expenses related to the Algerian PE. Judgment of the Supreme Court The Supreme Court decided in favor of Compañía Española de Petróleos S.A. Excerpts (English translation) “The tax authorities point out that in commercial groups there are ... Continue to full case

A Hungarian company had a permanent establishment (PE) in Germany. The PE carried out meat cutting work on the basis of work contracts dated 23 February 2017 with the Hungarian company Z Kft. The PE had concluded a service agreement with A Kft. in which A Kft. undertook to provide administrative services in the area of support for employees posted to Germany and was to receive a fee calculated as a percentage of net sales in return. Following an audit of the PE the German tax authorities issued an assessment of additional taxabel income based on the German ordinance on allocation of profits to permanent establishments. Not satisfied with the assessment a complaint was filed by the PE with the Tax Court. In its complaint the PE argued that the tax authorities corrected all of the PE’s sales in Germany without a corresponding legal basis ... Continue to full case

“Z Pipeline” is a limited partnership which operates a network of pipelines. The network runs through Germany, Belgium and the Netherlands. During the year in question, “Z Pipeline”‘s administrative HQ was in Germany. Operational control of the pipeline was exercised by an ‘operations centre’ located in the Netherlands. It was not disputed that the pipeline constituted permanent establishments in Germany, Belgium and the Netherlands and that the profits should be allocated between the tree countries. The question was how the profits should be allocated. The tax authorities came to the conclusion that the profit should predominantly be allocated to the German permanent establishments. In accordance with the low functions and risks, only a low profit was to be allocated to the respective permanent establishments in Belgium an the Netherlands. The profit allocation was calculated using a cost-plus 30% due to industry and company-specific features. “Z ... Continue to full case

Travelport Inc. provides electronic global distribution services to airlines via a computerised reservation system (CRS). This system is connected to airline servers, with data continuously sent and obtained regarding flight schedules, seat availability, and so on. Travelport earns USD/EUR 3 for each booking made in India for providing CRS services. Travelport entered into a distribution agreement with an Indian entity to market and distribute those CRS services to travel agents in India. For this service, Travelport paid an amount ranging from 33.33% to 60% of its total earnings to the Indian entity. Following an audit, the tax authorities concluded that the income earned by Travelport Inc. from the CRS services was earned through the hardware installed at the travel agents’ premises in India, and that Travelport Inc. was liable for tax on the total income of USD/EUR 3 in India. However, Travelport Inc. filed complaints, ... Continue to full case

In a request for a binding consultation the question raised was whether activities carried out in Spain resulted in the existence of a permanent establishment. The General Directorate considered that an enterprise cannot fragment a cohesive operating business into several small operations and argue that each of these is merely engaged in a “preparatory or auxiliary activity”. The Irish company was considered to have a PE in Spain, as it carried out a significant part of all its activity in Spain – not just simple storage/warehousing, but rather multiple logistics operations. Click here for English Translation Click here for other translation ... Continue to full case

In 2009 a British company – Bupa Insurance Limited – absorbed the Danish company International Health Insurance, whose shares it had acquired in 2005 and which had had a French branch since 1993. Following an audit for FY 2009 and 2010, the tax authorities considered that the French branch had passed on to Bupa Insurance Limited, free of charge, the customers associated with its insurance business in France, and considered this transaction to be an indirect transfer of profits within the meaning of Article 57 of the General Tax Code. The Administrative Court of Appeal set aside the assessment and an appeal was then filed with the Conseil d’État by the tax authorities. Judgment of the Supreme Administrative Court The Supreme Administrative Court upheld the decision from the CAA and dismissed the appeal of the tax authorities. Excerpts “3. It is clear from the statements ... Continue to full case

“XZ Insurance SA” is the parent company in a group engaged in insurance activities in its various branches, both life and non-life, finance, investment property and services. An audit was conducted for FY 2013-2016 and in 2020 an assessment was issued in relation to both controlled transactions and other transactions. Among outher issued the tax authorities determined that “XZ Insurance SA” did not receive any royalty income from the use of the XZ trademark by to other entities of the group, both domestic and foreign. In the assessment the tax authorities determined the arm’s length royalty percentage for use of the trademarks to be on average ~0,5%. “In order to estimate the market royalty, the first aspect to be studied is the existence of an internal comparable or comparable trademark assignment contracts. And we have already stated that the absence of valid internal and external comparables ... Continue to full case