At a time when companies’ activities and mobility are constantly increasing, the notion of permanent establishment often appears to be misunderstood or misrepresented, whether in international tax or VAT matters.
This incomprehension, which is easily excusable, is essentially due to two reasons.
On the one hand, the concept of permanent establishment in direct tax matters is often confused with the concept of permanent establishment in VAT matters.
Although these concepts have a common objective, namely to determine the place of taxation, they have their own scope and, above all, distinct legal bases.
Furthermore, the concept of permanent establishment lacks precision in the various European and national legal frameworks, whether in the European Directives or in the various national tax and VAT codes.
- In international taxation: The concept of permanent establishment is primarily a connecting factor for taxing profits generated in a given jurisdiction. It is defined in Article 5 of the Model Convention established by the Organization for Economic Co-operation and Development (“OECD”) on which the Double Taxation Conventions are based. As a reminder, the main objective of these conventions is to distribute the taxation power between two jurisdictions when they perform their activities in several territories. The Belgian Income Tax Code (Article 229 CIR92 et seq.) also contains a definition of “Belgian establishment” and refers to foreign companies performing activities on Belgian territory via a fixed place of business, the presence of employees or via the provision of services. The main criteria for assessing the presence of a permanent establishment are fixity, dependence and productivity. For many years, the concept of permanent establishment has been continuously expanded by the OECD through various projects and conventions. The tax authorities of OECD member jurisdictions obviously take account of these developments which – in practice – make activities performed abroad taxable, whereas they were not necessarily taxable before. Examples include the “commissionaire” structure, the independent agent structure and the problem of contract splitting. The concept of permanent establishment is also closely linked to the issue of transfer pricing as it is required to attribute profit to the locally taxable permanent establishment. To this end, the OECD has produced various reports detailing how the attribution of profits should be calculated.
- In VAT matters: The determination of a permanent establishment remains central for a company. The existence or not of a permanent establishment will determine the place of supply of services, the person liable to pay VAT, the possibility of deducting VAT and the rules on invoicing.
For this purpose, the real source of useful clarification of the concept of permanent establishment is the case law of the Court of Justice of the European Union. The Court, because of its mission, is confronted with specific cases and applies general principles to concrete cases. According to this case law, a permanent establishment is understood to be an establishment with a sufficient degree of permanence and a sufficient structure in terms of human and technical resources to be able to provide services and/or supplies of goods or to be able to receive and use the services rendered to it. For a company, when these elements are met, there may be the existence of a permanent establishment. This factual situation must be studied in order to correctly understand the VAT obligations that arise from it.
As business leader, you are strongly advised to consider whether your company has a permanent establishment abroad.
– Do your employees visit customers abroad from time to time?
– Do you have a computer server abroad?
– Do you have a subsidiary or a representative office in another country?
– Are your warehouses located in a cross-border area?
– Do you have construction sites abroad?
– Do you have dependent agents abroad who can commit your company to local contracts?
If so, contact the Tax Consult team! Anne Georges (VAT specialist) and Laurie Bourgys (Transfer Pricing specialist) will explain to you how to deal with this matter in order to manage your business in a appropriate manner.