On February 22 2019, Luxembourg's tax authority issued an
administrative circular to clarify new rules surrounding
permanent establishments (PEs).
The Luxembourg law, dated December 21 2018 and applicable
from January 1 2019, includes measures that amend the domestic
definition of a PE to apply where a double non-taxation
situation can arise under a tax treaty.
The February circular confirms that if a relevant tax treaty
contains a definition of a PE, that definition will prevail.
However, if there is no definition, Luxembourg's domestic law
will apply to determine whether a Luxembourg taxpayer has a PE
in another country.
The following additional conditions must also be fulfilled
for a Luxembourg taxpayer to have a PE:
- Independent activity: The taxpayer must
bear the responsibility and risk for the activities, and not
be acting within the scope of a dependent relationship;
- Participation in economic life: The
relevant activity, when considered in isolation, constitutes
an independent activity of an industrial or a commercial
nature, and represents a "participation in the general
economic life in the foreign state". Despite the contrary
position expressed in some commentaries to the law due to an
interpretation of this concept in Luxembourg case law, the
requirement cannot exclude financing and intellectual
property rights activities per se. This must be determined on
a case-by-case basis, taking into account the type of assets,
the size of the transaction and the organisational
- Proof from the PE state: The Luxembourg
tax authorities may require confirmation that the authorities
of the state where the PE is located and carries out
activities recognises the PE.
The latter point is dependent on the following
- When the relevant treaty does not include
a provision similar to Article 23(a)(4) of the 2000 OECD
model treaty (i.e. providing that Luxembourg will not be
required to grant an exemption for income when the other
state's interpretation of the treaty results in an exemption
or limited taxation), the taxpayer is always required to
provide the confirmation; and
- When the treaty does contain a provision
similar to Article 23(a)(4), the Luxembourg tax authorities
may request the confirmation when the assessment of the
relevant facts is not straightforward (e.g. when the PE's
activities do not involve material infrastructure or human
In both cases, the circular clarifies that the recognition
of PE status may be demonstrated through any type of
documentation issued by the competent authorities of the PE
state, such as a tax assessment.
However, simply producing a document authorising the PE to
carry out commercial activities in the country is insufficient.
The absence of such proof will result in the denial of PE
The new statutory provision embraces the international tax
efforts inspired by the BEPS project and addresses double
non-taxation situations arising from the misinterpretation of a
treaty that may potentially not be captured by the OECD
In practice, the determination of whether a PE exists
essentially remains an analysis of the facts and circumstances,
with a more sophisticated appreciation of the PE's
However, the proof of recognition in the PE state seems to
add a new element of formality to the analysis. How these new
rules will be applied in practice may provide useful guidance
in the future.
Christophe De Sutter (firstname.lastname@example.org) and Veronika Lavore (email@example.com)