Beyond ATAD: The new Luxembourg definition of permanent establishment
The Law dated 21 December 2018 (the "ATAD Law") has introduced a new provision applicable to the existing domestic definition of a Permanent Establishment ("PE")
Christophe De Sutter - Partner - Cross-Border Tax - Deloitte
Veronika Lavore - Manager - Cross-Border Tax - Deloitte
Published on 21 May 2019
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Under Luxembourg law, the notion of PE is covered by §16 of the Luxembourg Tax Adaptation Law (“StAnpG”). Pursuant to the ATAD Law, a new paragraph (5) has been added to §16 in order to prevent misinterpretations of the PE definition under the Treaty resulting in double exemption.
In particular, the new paragraph foresees that, unless there is a clear provision in the Treaty stating otherwise, a taxpayer can be considered as carrying out an activity in another State, through a PE, only to the extent that the activity is independent and represents a participation in the economic life in that other State. Confirmation that the PE State acknowledges the existence of a PE may or must be required depending on the applicable Treaty.
STRUCTURE OF §16StAnpG
General Rule: Permanent establishment within the meaning of the tax law is any local fixed plant or facility that is used for the performance of a commercial activity.
Positive List: Non-exhaustive list of PE examples (i.e., branch, factory, warehouse, sales office, office […])
Specific activities rules: Railway, mining, supply of gas, water, electricity, or heat.
New paragraph 5
Lex specialis (Interpretation rule to apply in case of unclear PE definition under the Treaty):
- Hierarchy of Law principle: when a Treaty applies, the only relevant criteria for the qualification of a PE are those of the Treaty.
- Independent activity and participation in economic life criteria: a taxpayer should be considered as carrying out a business in the other contracting state through a permanent establishment if this activity is independent and represents a participation in the economic life of this contracting state.
- Proof from PE State: confirmation of the existence of the permanent establishment in the other State must be provided or may be requested, depending on whether the relevant double tax treaty contains a provision similar to Article 23 (a) (4) Model Convention.
ANALYSIS OF §16(5)
The new provision supplements the existing PE definition
with the following additional conditions:
The taxpayer should be able to demonstrate its independence, i.e., the activity is carried out by the PE in the absence of a dependent relationship and at its own risk.
Participation in the economic life
Based on the various commentaries to the ATAD Law (the “Commentaries”), this criterion is met when the activity is industrial or commercial in nature. To this extent, the Commentaries add that the simple management of financing activities or intellectual property rights is not sufficient to sustain the participation in economic life.
The upfront exclusion of financing and intellectual property activities has raised various interpretative questions, in particular in the light of the recent guidelines provided for those same concepts, already known in the Luxembourg income tax system. More specifically, the Administrative Court decision dated 8 February 2018 (no. 39274C), with reference to the asset management activity, has stated that the recognition of a commercial activity has to be assessed on a case-by-case basis, taking into account the nature of the assets managed, the volume of the transactions, and the substance of the organization .
Therefore, and in order to preserve a coherent interpretation of these terms in the Luxembourg tax code, conducting inter-company transactions or managing intellectual property rights could not, by itself, prevent the activity of a PE from being considered as a commercial activity participating in the economic life of the PE State. Various elements, such as how the transactions are conducted, their volume and performance, and consistency with the group’s activities and operating model are all important when analyzing and determining status on a case-by-case basis.
 Administrative Court, 8 February 2018, no. 39274C. Also La notion d’activité commerciale et ses conséquences pratiques en droit fiscal luxembourgeois, Pol Mellina et Daniel Riedel, Droit fiscal luxembourgeois, Livre jubilaire de l’International Fiscal Association Luxembourg, 2018.
Proof from the other Contracting State recognizing the PE
In order to confirm the PE status, the taxpayer may be requested to provide proof of recognition of the PE in the PE State. This proof will have to be provided by the taxpayer when the relevant Treaty does not include a provision similar to Article 23 (a) (4) of the 2000 OECD Model Convention (i.e., a provision ensuring that an exemption is not granted under a Treaty when the other Contracting State exempts the same income or applies limited taxation in application of the Treaty).
Some clarifications in respect of this condition have been provided in Circulaire du Directeur des contributions no. 19 of 22 February 2019 (the “Circular”).
According to the Circular, when Article 23 (a) (4) is included in the relevant Treaty, a certification could be requested, in particular, when the factual analysis is complex and notably when the nature of the activity does not require significant infrastructure or human resources. It could be anticipated that this would likely be the case for financing and intellectual property rights management activities.
Regardless of whether the proof had to be mandatorily provided by the taxpayer or has been requested by the Luxembourg tax authorities, the Circular states that the absence of such proof would lead to an automatic denial of the permanent establishment status.
Conversely, assuming that the ultimate purpose of the new provision is to ensure the PE is recognized in the PE State, one could expect that, when valid proof from the PE State is available, the independence and participation in the economic life criteria do not need to be demonstrated.
Regarding the type of proof, the Circular specifies that the recognition of the PE can be demonstrated through any relevant documentation, such as a tax assessment of the PE tax returns or a certification from the tax authorities of the PE State (not an exhaustive list).
On the other hand, the Circular clearly states that it is not sufficient to provide a document proving that the PE performs a commercial activity in the PE State.
the Article 23 (a) (4)
A proof a recognition of the permanent establishment by the other State MAY BE REQUESTED by the Luxembourg Tax Authorities when the factual background is uncertain and, notably, when the activity does not require significant infrastructure or human resources.
Treaties not including
the Article 23 (a) (4)
A Proof of recognition of the permanent establishment by the other State MUST BE PROVIDED by the taxpayer.
The new provision has given rise to a number of uncertainties in respect of its scope and practical implications, for which clarifications are pending.
To mention some, it has been argued that §16(5) might result in an indirect amendment of double tax treaties in breach of the hierarchy of law principle in particular with regard to treaties with non-EU countries. In addition, one could consider that the purpose of preventing double exemption is already served by Article 23 (a) (4) so that the analysis of §16 conditions might not be necessary when the Treaty contains this provision (which would be the case for most Luxembourg treaties upon entry into force of the Multilateral Tax Instrument). Finally, based on the Commentaries, the new provision should not apply to exemptions that are derived from the domestic law of the PE State. However, §16(5) and the Circular do not make any clear distinction for cases where the exemption relies on the Treaty or domestic law.
Indeed, further guidelines from competent authorities and the interpretation of the Court would bring more clarity in this respect. However, beyond those reservations, the PE analysis remains an assessment of factual circumstances. In practice, the new provision could be expected to result in a more stringent appreciation of the PE activity in the light of the participation in economic life criterion, on a case-by-case basis, to be further sustained by available proof of recognition from the PE State.
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