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| Tiago Cassiano Neves |
Dinis Tracana |
The Portuguese tax authorities (PTA) issued a ruling on July
21 2017 that has the novelty of providing for the first time
some guidance on the interpretation of the permanent
establishment (PE) concept for corporate income tax (CIT)
proposes in the framework of some operating models. The
following is a brief summary of the facts and conclusions
underpinning this ruling.
A non-resident company (jurisdiction not identified) without
physical presence in Portugal that is engaged in manufacturing
and distributing several products within the EU market inquired
the PTA on whether the activities taking place in Portugal
would give rise to a local PE, namely:
- Manufacturing of products through toll
manufacturing contracts with non-related Portuguese resident
companies – non-resident company provided raw
materials for the local Portuguese manufacturing services
while maintaining ownership of the goods. Portuguese
manufacturers would be responsible for product quality and
bear the product defect risk but were subject to detailed
instructions regarding the production schedule. All
Portuguese manufacturers (except one single manufacturer)
were not exclusively engaged with the non-resident company;
and
- Distribution of products via outsourcing
of logistics, warehousing and distribution services to a
non-related Portuguese resident company – Portuguese
distributor rendered storage and delivery services of
finished goods to customers without acquiring ownership of
the products. The non-resident entity would control the
logistic process through a storage management system. The
Portuguese distributor would not bear inventory risk, product
quality risk, supplier selection risk or freight provider
selection risk.
The PTA concluded on the ruling that neither the toll
manufacturing process nor the distribution activity gave rise
to a PE in Portugal for the non-resident entity.
From the outset the PTA ruled that the manufacturing and
distribution activities outsourced to Portuguese service
providers did not imply that the fixed place of business was
available and therefore concluded that no fixed PE of the
non-resident entity may be deemed to exist in Portugal.
For the purposes of analysing the existence of an agency PE,
the PTA started by analysing the legal dependence of the
Portuguese service providers. On this point, the PTA considered
that despite indications of strong legal dependence one may not
argue that this is an "absolute dependence" since Portuguese
companies were not subject to a general control, were able to
carry out legal acts in its own name and maintain the right to
decide the manner in which the work should be carried out
(including the choice of employees).
The PTA went on to analyse the potential economic dependence
of the Portuguese companies (agent). On this point, the PTA
indicated that no information on the remuneration of the toll
manufacturers was provided that would indicate that their
remuneration would not be at arm's length (as this could be
relevant for this analysis). The PTA also ruled that only the
toll manufacturer working exclusively to the non-resident
entity could be deemed as economically dependent.
On the last point of the ruling, the PTA considered that the
Portuguese service providers (both toll manufacturer and
distributors) do not enter into contracts with customers in the
name and on the behalf of the non-resident company.
In short, the PTA considered that the facts and
circumstances indicated that no agency PE would be deemed to
arise in Portugal as a result of the activities of the
Portuguese manufacturers or distributors. The PTA did not
address on the part of the ruling made available any particular
aspect of the applicable tax treaty or whether the segregation
of businesses could be deemed an artificial fragmentation of
contracts or other BEPS Action 7 related developments.
A final note to mention that under the Portuguese
provisional list of expected reservations to the MLI, Portugal
reserves the right for the entirety of Article 12 (artificial
avoidance of permanent establishment status through
commissionaire arrangements and similar strategies) and Article
14 (splitting-up of contracts) not to apply to its covered tax
agreements.
Tiago Cassiano Neves (tiago.cassiano.neves@garrigues.com)
and Dinis Tracana (dinis.tracana@garrigues.com)
Garrigues
Tel: + 351 231 821 200
Fax: +351 231 821 290
Website: www.garrigues.com