Tag: Article 7
Article 7 of the OECD Model Tax Convention
BUSINESS PROFITS
1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.
2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment.
3. In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere.
4. Insofar as it has been customary in a Contracting State to determine the profits to be attributed to a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in paragraph 2 shall preclude that Contracting State from determining the profits to be taxed by such an apportionment as may be customary; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles contained in this Article.
5. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise.
6. For the purposes of the preceding paragraphs, the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary.
7. Where profits include items of income which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article.
Germany vs “Z Pipeline”, May 2023, FG Düsseldorf, Case No 3 K 1940/17 F
“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 Pipeline” disagreed with the method applied by the tax authorities and held that it was ... Read more
Spain vs “XZ Insurance SA”, October 2022, Tribunal Economic-Administrative Central (TEAC), Case No Rec. 00/03631/2020/00/00
“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 has led us to resort to the use of other generally accepted valuation methods and ... Read more
The Netherlands releases New 2022 Decree on Profit Allocation to PE’s
July 1 2022 the State Secretary of Finance has issued updated guidance on the profit allocation to permanent establishments – Decree no. 16683. The purpose of the guidance is to clarify the way in which the Tax and Customs Administration assesses the profit allocation to permanent establishments. Attention is paid to the introduction of the object exemption in the Corporate Income Tax Act 1969 (Corporate Tax Act 1969) in 2012, a number of editorial changes have been made and references to other decrees and documents have been updated. Click here for Unofficial English translation Click here for other translation NL-PE-2022-16683 ... Read more
Netherlands vs “Fertilizer BV”, April 2022, Court of Appeal, Case No. ECLI:NL:GHSHE:2022:1198
In 2016 Fertilizer BV had been issued a tax assessment for FY 2012 in which the tax authorities had imposed additional taxable income of €133,076,615. In November 2019 the district court ruled predominantly in favor of the tax authorities but reduced the adjustment to €78.294.312. An appel was filed by Fertilizer BV with the Court of Appeal. Judgement of the Court of Appeal Various issues related to the assessment was disputed before the Court. Dispute 1: Allocation of debt and equity capital to a permanent establishment in Libya in connection with the application of the object exemption. More specifically, the dispute is whether the creditworthiness of the head office was correctly taken as a starting point and a sufficient adjustment was made for the increased risk profile of the permanent establishment. The Court of Appeal answered this question in the affirmative, referring to the capital allocation approach that is regarded as the preferred method for the application of Article 7 ... Read more
India vs UPS Asia Group Pte. Ltd., March 2022, Income Tax Appellate Tribunal – Mumbai, Case No 220/Mum./2021
UPS Asia is a company incorporated under the laws of Singapore and is engaged in the business of provision of supply chain management including the provision of freight forwarding and logistic services. In 2012 UPS Asia had entered into a Regional Transportation Services Agreement with UPS SCS (India) Pvt. Ltd. for the provisions of freight and logistics services. Under the Transportation Agreement, UPS Asia arranged to perform international freight transportation and provide overseas support services, while UPS India performed freight and logistics services in India to its India customers and to UPS Asia. Following an audit an assessment was issued according to which UPS Asia had a PE in India in the form of UPS India. Furthermore, profits of Rs.2,09,53,496 was considered attributable to operation in India. The tax authorities held that UPS India constitutes a PE of UPS Asia in India within the meaning of Article 5 of India–Singapore DTAA. Not satisfied with the assessment UPS Asia filed an ... Read more
Sweden vs Flir Commercial Systems AB, January 2022, Administrative Court of Appeal, Case No 2434–2436-20
In 2012, Flir Commercial Systems AB sold intangible assets from a branch in Belgium and subsequently claimed a tax relief of more than SEK 2 billion in fictitious Belgian tax due to the sale. The Swedish Tax Agency decided not to allow relief for the Belgian “tax”, and issued a tax assessment where the relief of approximately SEK 2 billion was denied and a surcharge of approximately SEK 800 million was added. An appeal was filed with the Administrative Court, In March 2020 the Administrative Court concluded that the Swedish Tax Agency was correct in not allowing relief for the fictitious Belgian tax. In the opinion of the Administrative Court, the Double tax agreement prevents Belgium from taxing increases in the value of the assets from the time where the assets were owned in Sweden. Consequently, any fictitious tax cannot be credited in the Swedish taxation of the transfer. The Court also considers that the Swedish Tax Agency was correct ... Read more
Germany vs “Wind-farm PE”, November 2021, Bundesfinanzhof, Case No I B 44/21
In 2011 a permanent establishment (PE) of a Danish company was established for income tax purposes in Germany in the form of an offshore wind farm. The PE had no employees of its own either in Germany or in Denmark. The technical and commercial management was carried out by two German service and management companies on the basis of management and service contracts. In 2013 the tax authorities issued an assessment related to taxation of assets which, according to allocation principles in the new AOA (significant people functions), would no longer be allocated to Germany. The tax authorities held that allocation of assets to the permanent establishment is determined on the basis of personnel functions exercised in the permanent establishment. If no personnel functions were carried out in the permanent establishment no assets were to be allocated to it. In the tax authorities view, this meant that the wind turbines previously allocated to the domestic permanent establishment as of 1 ... Read more
UK vs G E Financial Investments Ltd., June 2021, First-tier Tribunal, Case No [2021] UKFTT 210 (TC), TC08160
The case concerned a complex financing structure within the General Electric Group. The taxpayer, GE Financial Investments Ltd (GEFI Ltd), a UK resident company was the limited partner in a Delaware limited partnership, of which, GE Financial Investments Inc (GEFI Inc) a Delaware corporation was the general partner. GEFI Ltd filed UK company tax returns for FY 2003-2008 in which the company claimed a foreign tax credit for US federal income tax. In total, US federal income taxes amounted to $ 303 millions and exceeded the amount of tax due in the UK. The tax authorities opened an enquiry into each of GEFI’s company tax returns for the relevant period, and subsequently issued an assessment where the claims for foreign tax credits was denied in their entirety. Judgement of the Tax Tribunal The tribunal dismissed the appeal of GEFI Ltd and ruled that the UK company did not carry on business in the US. Hence GEFI Ltd was not entitled ... Read more
UK vs Irish Bank Resolution Corporation Limited and Irish Nationwide Building Society, August 2020, Court of Appeal , Case No [2020] EWCA Civ 1128
This case concerned deductibility of notional interest paid in 2003-7 by two permanent establishments in the UK to their Irish HQs. The loans – and thus interest expenses – had been allocated to the PEs as if they were separate entities. The UK tax authorities held that interest deductibility was restricted by UK tax law, which prescribed that PE’s has such equity and loan capital as it could reasonably be expected to have as a separate entity. The UK taxpayers, refered to Article 8 of the UK-Ireland tax treaty. Article 8 applied the “distinct and separate enterprise” principle found in Article 7 of the 1963 OECD Model Tax Convention, which used the language used in section 11AA(2). Yet nothing was said in the treaty about assumed levels of equity and debt funding for the PE. In 2017, the First-tier Tribunal found in favour of the tax authority, and in October 2019 the Upper Tribunal also dismissed the taxpayers’ appeals. Judgement ... Read more
Tanzania vs Mantra (Tanzania) Limited, August 2020, Court of Appeal, Case No 430 of 2020
Mantra Limited is engaged in mineral exploration in Tanzania. In carrying out its business, it procured services from non-resident service providers mostly from South Africa. In 2014, Mantra Limited wrote to the tax authorities requesting for a refund of withholding taxes of USD 1,450,920.00 incorrectly paid in relation to services that were performed outside Tanzania by non-resident service providers for the period between July, 2009 and December, 2012. The tax authorities refused the request maintaining that, the services in question were rendered in Tanzania and Article 7 of the DTA was irrelevant in as much as it was limited to business profits and not business transactions. Unsuccessfull appeals were filed by Mantra and in 2020 the case ended up in the Court of Appeal where Mantra argued based on the following grounds:- 1. That the Tax Revenue Appeals Tribunal grossly erred in law by holding that the Board was correct in holding that payments for services rendered/ performed abroad by ... Read more
Italy vs Citybank, April 2020, Supreme Court, Case No 7801/2020
US Citybank was performing activities in Italy by means of a branch/permanent establishment. The Italian PE granted loan agreements to its Italian clients. Later on, the bank decided to sell these agreements to a third party which generated losses attributed to the PE’s profit and loss accounts. Following an audit of the branch concerning FY 2003 in which the sale of the loan agreements took place, a tax assessment was issued where the tax authorities denied deduction for the losses related to the transfer of the agreements. The tax authorities held that the losses should have been attributed to the U.S. parent due to lack of financial capacity to assume the risk in the Italien PE. First Citybank appealed the assessment to the Provincial Tax Court which ruled in favor of the bank. This decision was then appealed by the tax authorities to the Regional Tax Court which ruled in favor of the tax authorities. Finally Citybank appealed this decision ... Read more
Sweden vs Flir Commercial Systems AB, March 2020, Stockholm Administrative Court, Case No 28256-18
In 2012, Flir Commercial Systems AB sold intangible assets from a branch in Belgium and subsequently claimed a tax relief of more than SEK 2 billion in fictitious Belgian tax due to the sale. The Swedish Tax Agency decided not to allow relief for the Belgian “tax”, and issued a tax assessment where the relief of approximately SEK 2 billion was denied and a surcharge of approximately SEK 800 million was added. The Administrative Court concluded that the Swedish Tax Agency was correct in not allowing relief for the fictitious Belgian tax. A double taxation agreement applies between Sweden and Belgium. In the opinion of the Administrative Court, the agreement prevents Belgium from taxing the assets. Consequently, any fictitious tax cannot be deducted. The Administrative Court also considers that the Swedish Tax Agency was correct in imposing a tax surcharge and that there is no reason to reduce the surcharge. The company’s appeal is therefore rejected. Click here for translation ... Read more
Netherlands vs “Fertilizer BV”, November 2019, District Court, Case No. ECLI:NL:RBZWB:2019:4920
In 2016 Fertilizer BV had been issued a tax assessment for FY 2012 in which the tax authorities had imposed additional taxable income of €162,506,660. Fertilizer BV is the parent company of a fiscal unity for corporation tax (hereinafter: FU). It is a limited partner in a limited partnership under Dutch law, which operates a factory in [Country 1]. The interested party borrowed the money for the capital contribution to the limited partnership from a wholly-owned subsidiary. The share in profits from the limited partnership was expressed as profit from a permanent establishment. In dispute was the amount of interest attributable to the permanent establishment. The court followed the inspector in allocating – in connection with the [circumstances] in [Country 1] – 75% equity and 25% loan capital to the PE. Furthermore, the FU had deposits and loans in USD. These positions were partly hedged by forward exchange contracts. Fertilizer BV valued these deposits and loans at the historical acquisition ... Read more
Italy vs HSBC Milano, September 2019, Supreme Court, Case No 23355
HBP is a company resident in the United Kingdom, which also carries on banking business in Italy through its Milan branch (‘HSBC Milano’), which, for income tax purposes, qualifies as a permanent establishment (‘PE’ or ‘branch’) and grants credit facilities to Italian companies and industrial groups, including (from 1996) Parmalat Spa. HBP brought separate actions before the Milan Provincial Tax Commission challenging two notices of assessment for IRPEG and IRAP for 2003 and for IRES and IRAP for 2004, which taxed interest expense (147,634 euros for 2003 and 143,302 euros for 2004) on loans to Parmalat Spa. (€ 147,634, for 2003; € 143,302, for 2004) on loans from the ‘parent company’ in favour of the ‘PE’, and losses on receivables (€ 9,609,545, for 2003, and € 3,330,382, for 2004), as negative components unduly deducted by the permanent establishment, even though they related to revenues and activities attributable to the ‘parent company’. According to the Office, the PE is considered, from ... Read more
Czech Republic vs. FK Teplice, a. s., November 2017, Supreme Administrative Court , Case No 1 Afs 239/2017 – 37
According to the Regional Court, it follows from Section 2 of the Income Tax Act that a footballer is subject to tax in the Czech Republic by reason of his residence, permanent home or other similar criteria if he had resided in the Czech Republic (continuously or in several periods) for at least 183 days in 2011 or if he had a permanent home in the Czech Republic in circumstances from which it can be inferred that he intended to reside there permanently. If at least one of these conditions is met, the footballer would be a Czech tax resident within the meaning of Article 2(2) of the Income Tax Act and would be liable to tax on the basis of that (i.e. residence, permanent home or similar criteria). He would therefore also be a resident of the Czech Republic within the meaning of Article 4(1) of the Double Taxation Treaty. The Regional Court did not find any reason to ... Read more
TPG2017 Preface paragraph 9
The main mechanisms for resolving issues that arise in the application of international tax principles to MNEs are contained in these bilateral treaties. The Articles that chiefly affect the taxation of MNEs are: Article 4, which defines residence; Articles 5 and 7, which determine the taxation of permanent establishments; Article 9, which relates to the taxation of the profits of associated enterprises and applies the arm’s length principle; Articles 10, 11, and 12, which determine the taxation of dividends, interest, and royalties, respectively; and Articles 24, 25, and 26, which contain special provisions relating to non-discrimination, the resolution of disputes, and exchange of information ... Read more
Spain vs Dell, June 2016, Supreme Court, Case No. 1475/2016
Dell Spain is part of a multinational group (Dell) that manufactures and sells computers. Dell Ireland, operates as distribution hub for most of Europe. Dell Ireland has appointed related entities to operate as its commissionaires in several countries; Dell Spain and Dell France are part of this commissionaire network. The group operates through a direct sales model and sales to private customers in Spain are conducted by Dell France, through a call centre and a web page. Dell Spain use to operate as a full-fledged distributor, but after entering into a commissionaire agreement Dell Spain now served large customers on behalf of Dell Ireland. A tax assessment was issued by the tax authorities. According to the assessment the activities in Spain constituted a Permanent Establishment of Dell Ireland to which profits had to allocated for FY 2001-2003. Judgement of the Supreme Court The Supreme Court concludes that the activities of Dell Spain constitutes a Permanent Establishment of Dell Ireland under ... Read more
Spain vs. branch of ING Direct Bank, July 2015, Spanish High Court, Case No 89/2015 2015:2995
In the INC bank case the tax administration had characterised part of the interest-bearing debt of a local branch of a Dutch bank, ING DIRECT B.V, as “free” capital, in “accordance” with EU minimum capitalisation requirements and consequently reduced the deductible interest expenses in the taxabel income of the local branch for FY 2002 and 2003. The adjustment had been based on interpretation of the Commentaries to the OECD Model Convention, article 7, which had first been approved in 2008. Judgement of the National Court The court did not agree with the “dynamic interpretation” of Article 7 applied by the tax administration in relation to “free” capital, and ruled in favor of the branch of ING Direct. “In short, in accordance with the terms of the aforementioned DGT Consultation of 1272-98 of 13 July, “Consequently, to the extent that the branch or establishment is that of a banking institution, the interest paid to the head office will be deductible”, the ... Read more
Norway vs. GE Healthcare AS, May 2015, Supreme Court , HRD-2015-01008-A
The Supreme Court concluded that the Norwegian taxation of incomes in Ireland were not in violation of the treaty Article 7. 1 and showed that the double taxation which thus arose, in Article 24. 2 gave GE Healthcare AS a tax deduction in Norway equal to the taxes paid by income in Ireland. Such deduction was made by tax decision in the case. GE Healthcare AS was thus protected against the overall tax burden in Norway and Ireland were greater than if the income were only taxed in Norway. There was no reason to limit the taxation of GE Healthcare AS beyond this. Click here for translation Norway vs GE-Healthcare-AS-sak-2014-1968-HRD-2015-01008-A ... Read more
France vs. Bayerische Hypo und Vereinsbank AG, April 2014, Conseil d’État, Case No. FR:CESSR:2014:344990.20140411
Bayerische Hypo und Vereinsbank AG (HVB-AG), a banking institution under German law, set up a French branch under the name “HVB-AG Paris” and contributed ten million Deutschmarks to this structure. The French branch also took out loans from the company’s head office or from third-party companies Following an audit of the branch’s accounts, the tax authorities, after considering that these loans revealed an insufficiency of the contribution made by the head office, particularly in relation to the equity capital that the branch should have had if it had had legal personality, refused to allow the interest corresponding to the fraction of the loans deemed excessive to be deducted from the results taxable in France in respect of the branch’s activity and demanded that the company pay additional corporation tax for the financial year ending in 1994, together with increases In order to justify this reassessment, the tax authorities first argued, during the contradictory reassessment procedure, that the disputed interest characterized ... Read more
Spain vs. Roche, January 2012, Supreme Court, Case No. 1626/2008
Prior to a business restructuring in 1999, the Spanish subsidiary, Roche Vitaminas S.A., was a full-fledged distributor, involved in manufacturing, importing, and selling the pharmaceutical products in the Spanish and Portuguese markets. In 1999 the Spanish subsidiary and the Swiss parent, Roche Vitamins Europe Ltd., entered into a manufacturing agreement and a distribution agreement. Under the manufacturing agreement, the Spanish subsidiary manufactured products according to directions and using formulas, know-how, patents, and trademarks from the Swiss parent. These manufacturing activities were remunerated at cost plus 3.3 percent. Under the distribution (agency) agreement, the Spanish subsidiary would “represent, protect and promote” the products. These activities were remunerated at 2 percent of sales. The Spanish subsidiary was now characterized as a contract manufacturer and commission agent and the taxable profits in Spain were much lower than before the business restructuring. The Spanish tax authorities argued that the activities constituted a PE in Spain according to article 5 of DTT between Spain and ... Read more
Spain vs. Borex, February 2011, National Court case nr. 80-2008
A Spanish subsidiary of a UK Group (Borex), which imported, processed and sold the materials to third parties, was transformed into a a contract manufacturer. The Spanish subsidiary signed two separate contracts with the UK parent – one for warehousing and the provision of services and the other in respect of an sales agency. Under the first contract, the minerals purchased by the parent would be stored and processed by the subsidiary, which would also provide other relevant services. Under the second contract, the Spanish subsidiary would promote sales of the minerals in Spain, but, as the prices and conditions were fixed by the UK parent, the subsidiary would only send orders to the parent, which according to the contract was not bound to accept them. The subsidiary could not accept orders in the name of the parent or receive payment. The tax authorities argued that there was a high degree of overlapping between the activities carried out by the parent and the ... Read more
US vs National Westminster Bank PLC, January 2008, US Court of Appeals, Case No. No. 2007-5028
NatWest is a United Kingdom corporation engaged in international banking activities. For the tax years 1981-1987, NatWest conducted wholesale banking operations in the United States through six permanently established branch locations (collectively “the U.S. Branch”). On its United States federal income tax returns for the years at issue, NatWest claimed deductions for accrued interest expenses as recorded on the books of the U.S. Branch. On audit, the Internal Revenue Service (“IRS”) recomputed the interest expense deduction according to the formula set forth in Treasury Regulation § 1.882-5. The formula excludes consideration of interbranch transactions for the determination of assets, liabilities, and interest expenses. Treas. Reg. § 1.882-5(a)(5) (1981).2 The formula also imputes or estimates the amount of capital held by the U.S. Branch based on either a fixed ratio or the ratio of NatWest’s average total worldwide liabilities to average total worldwide assets. Id. § 1.882-5(b)(2). Pursuant to the IRS’s recalculation of the interest expense deduction, NatWest’s taxable income was ... Read more