Within an international context, it is important to know whether or not your company is judged to be operating a so-called ‘permanent establishment’ in another Contracting State in order to determine where its realized profits will be taxed.
The OECD Model Tax Convention defines the term ‘permanent establishment’ in article 5. When nations within a bilateral context reach some form of tax agreement, this model generally serves as their starting point.
Let us illustrate this with an example.
Example
Imagine that a Luxembourg company concludes a service agreement with a number of Belgian clients that requires personnel from the Luxembourg concern to become physically employed on the premises of the Belgian companies.
Based on the Double Tax Treaty (DTT) between Luxembourg and Belgium, the Belgian Tax Office may decide whether or not there is question here of a permanent establishment in Belgium on the part of the Luxembourg enterprise. If that is the case, the generated profits will have to be taxed in Belgium (rather than in Luxembourg).
Double Tax Treaty: permanent establishment
Article 5 of the Double Tax Treaty between Belgium and Luxembourg describes a permanent establishment as a fixed place of business through which the business of an enterprise is wholly or partially carried on.
More specifically, this is defined as:
1° a place of management;
2° a branch;
3° an office;
4° a factory;
5° a workshop;
6° a mine, quarry or other place of extraction of natural resources;
7° a building site or construction or assembly project which exists for more than six months.
Factual assessment
Whether there can effectively be question of a permanent establishment is not infrequently merely a question of actual fact.
In the case before the Appeals Court of Liège of 20 May 2015, it was described within a service agreement in which manner the personnel of a Luxembourg company would be employed in the workplaces of the various Belgian contracting partners. For instance, specific agreements were concluded concerning the personnel’s working hours, the separate rooms in which they would be carrying out their activities, the hygienic conditions, and the like.
Moreover, the daily activities would be conducted for more than one year and a half on the premises of the Belgian clients.
Decision by the Appeals Court
On the grounds of all such factual observations, the Appeals Court ruled that there was, de facto, clear evidence of a “permanent establishment” within Belgium and judged it irrelevant that the Luxembourg company was carrying on activities on different locations. Ergo, it suffices that there exists a permanent establishment where a company conducts its operations either wholly or in part.
Source: Liège 20 May 2015, Fiscale Koerier 2015/17, pp. 827 – 831.
