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Spanish Supreme Court anticipates the effects of the BEPS Project

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The Supreme Court has ruled that a dependent agent in Spain can constitute a PE of a foreign enterprise. The judgment said that activities have to be considered in the context of a globalised world where tax treaties have to be interpreted with wider international standards on tax.


Abelardo Delgado Pacheco

On June 20 2016, the Spanish Supreme Court handed down an important judgment (Supreme Court judgment 2861/2016) on what is referred to as the Dell case.

In its judgment, the Supreme Court upheld the substantial elements of the judgment handed down on June 8 2015 by the National Appellate Court on a case in which a permanent establishment (PE) was deemed to exist as a result of activities pursued in Spain by an entity with tax resident status in Ireland. These activities consisted mainly of promoting sales and soliciting customers, processing orders, marketing and advertising, storage and logistics services, installation services, collection management and solvency and creditworthiness checks.

The Spanish tax authorities held that there was a PE in Spain due to the existence of a fixed place of business and to the presence in Spain of a dependent agent, in accordance with Article 5 of the Spain-Ireland tax treaty. The appellant had denied that it had a fixed place of business because the activities supposedly pursued in Spain were carried on by the group subsidiary resident in Spain. It had also rejected the idea that the subsidiary had furnished the Irish entity with premises or facilities located in Spain, stating that they belonged to the Spanish entity and were used by it for its own activity.

The Supreme Court gave its own particular interpretation of the commentaries on Article 5 of the OECD Model Convention, when it took the view that the premises can be furnished to a non-resident entity, who uses them for its activity even if it lacks a formal title for doing so. On this basis, it agreed that the Spanish subsidiary's activity for the account of the Irish entity is sufficient to deem facilities to have been furnished by the former to the latter.

The Supreme Court emphasised that, in today's world, tax treaties must be interpreted in the light of the commercial globalisation which, in turn, requires an interpretation of applicable legislation consistent with this new reality, having regard to the substance of the new business activity models. The Supreme Court therefore said the facts deemed to have been proven by the instance court and the relative confusion entailed by this view between the activities of the subsidiary itself and those of the non-resident group company.

The position taken in connection with the notion of a dependent agent is even clearer and more innovative. The judgments reinterpreted the concept of an agent acting for the account of an enterprise, with powers of attorney to contract in the name and for the account of the said enterprise. Despite the wording of Article 5 of the Spain-Ireland tax treaty and of domestic Spanish legislation, the Supreme Court upheld the position taken by the tax authorities and affirmed that representation does not have to be direct. Instead, it is sufficient for the agent to be able to execute agreements under which the economic consequences are binding on the non-resident entity, even if the commission agent acts in its own name vis-à-vis third parties.

The Supreme Court consciously distanced itself from the position taken by other foreign courts, in particular, by the French Council of State in the Zimmer case of March 31 2010. If the commission agent is economically dependent and the internal relationships between the principal and the commission agent are binding on the principal, the commission agent is, in the opinion of the Spanish courts, actually acting in the name of its principal.

In this context, the Supreme Court also takes the view that international taxation should seek the equitable allocation of business profits among the states, in a globalised market on which multinational companies attempt to transfer the profits obtained in other states to a state with lower taxation. For this very reason, a strict, literal or static interpretation can no longer be given to tax treaties.

Thus, in its judgment, the Spanish Supreme Court followed the course it initiated with the judgments of January 12 2012 and June 18 2014, sharing the view taken by the tax authorities in favour of a flexible interpretation of Article 5 of the tax treaties and a broad use of the PE provision in Spain, as well as denying treatment as ancillary or preparatory activities to the complex presence in Spain of multinational groups through commission, sales promotion or toll manufacturing structures.

Lastly, in all such cases, the debate on how much income is to be allocated to the presumed PE has become secondary, given that the starting point was a situation in which the non-resident entity denied that it had a PE. The tax authorities determined the tax base on the sales made in Spain through the resident subsidiary. We are already well aware of the difficulties inherent in the functional analysis of an establishment deemed to exist by virtue of the tasks carried out by a resident subsidiary. The latest efforts of the OECD in the context of Action 7 of the BEPS Project highlight these difficulties most notably, especially when avoiding confusion between the compensation of the PE and that of the resident subsidiary itself.

Abelardo Delgado Pacheco (, Madrid



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