Luxembourg: Luxembourg’s tax authority seeks verification of permanent establishments

International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX

Copyright © Legal Benchmarking Limited and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Luxembourg: Luxembourg’s tax authority seeks verification of permanent establishments

Sponsored by

Sponsored_Firms_deloitte.png
intl-updates-small.jpg

On February 22 2019, Luxembourg's tax authority issued an administrative circular to clarify new rules surrounding permanent establishments. The Luxembourg law includes measures that amend the domestic definition of a PE to apply where a double non-taxation situation can arise under a tax treaty.

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 substance.

  • 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 situation:

  • 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 capital).

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 status.

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 multilateral instrument.

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 activities.

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.

more across site & bottom lb ros

More from across our site

Despite China and India’s hesitation towards pillar two, there’s still enough movement in other countries for clients to start getting ready, James Badenach also tells ITR
The investigations dated back to 2015 and alleged that the companies received huge financial advantages from TP rulings; in other news, Australia is set to adopt a CbCR regime
Taxpayers would have to register controlled commodity transactions and declare information to the Brazilian tax authorities under the proposed regulations
The Senate passed three bills with amendments that will enact the OECD’s 15% minimum corporate tax rate on multinationals
Despite fears that the UK’s increase in national insurance contributions could cripple some employers, those aspiring to equity partnership may spy a novel opportunity
ITR invites tax firms, in-house teams, and tax professionals to make nominations for the 2025 ITR Tax Awards in the Americas, EMEA, and Asia-Pacific
The US can veto anything proposed by the OECD, Alex Cobham of UK advocacy group Tax Justice Network argues
US partner Matthew Chen was named as potentially the first overseas PwC staffer implicated in the tax leaks scandal, in a dramatic week for the ‘big four’ firm
PwC alleged it has suffered identifiable loss and damage arising out of a former partner's unauthorised use of confidential information; in other news, Forvis Mazars unveiled its next UK CEO
Luxembourg saw the highest increase in tax-to-GDP ratio out of OECD countries in 2023, according to the organisation’s new Revenue Statistics report
Gift this article