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Tax Alert on PE case in Spain
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Tax Alert on PE case in Spain

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  • 1. New Resolution from the Spanish Central Tax Court determines existence of a PE in Spain Summary The Spanish Central Tax Court issued a resolution (dated 15 March, 2012) where it upholds that a Spanish entity belonging to an international group constitutes a permanent establishment of another Irish entity of the group under both the “fixed place of business” and the “dependent agent” clauses. The resolution is of special interest in the interpretation of the “fixed place of business” clause, as it follows the trend set by the recent decision from the Spanish Supreme Court, which upheld that a Spanish company that manufactured and promoted sales for a single non-Spanish resident entity, pursuant to comprehensive instructions from the latter, constituted a Spanish permanent establishment of the non-Spanish entity (see our Global Tax Desk Alert, Principal structure constitutes permanent establishment, Spanish Supreme Court rules, dated 2 March 2012 for additional information). Background to the Tax Court’s resolution SpainCo is part of a multinational group (MNC) that manufactures products outside Spain, with an entity of the group, IrelandCo, operating as distributor for most Europe. IrelandCo has appointed related entities that operate as its commissionaires in several countries; SpainCo and FranceCo are part of this commissionaire network. The MNC operates through a direct sales model so that purchase orders are placed in a web page or call center. 9 July 2012 International Tax Alert
  • 2. International Tax Alert2 SpainCo had operated as a full- fledged distributor, undertaking strategic activities in Spain until 1995, when it entered into the commissionaire agreement with IrelandCo to serve medium and large sized customers of the MNC. These latter customers, in many cases, require specialized attention and SpainCo’s relationship personnel are available to serve them. Sales to Spanish small sized customers are made by FranceCo, through a call center and a web page. Analysis The Central Tax Court recognizes that a stand-alone analysis of the facts and transactions between IrelandCo, SpainCo and FranceCo would not lead to the conclusion that a permanent establishment (PE) existed. However, the comprehensive analysis of the structure and the behavior of the parties as a whole, supports the conclusion that a “complex business set up” was “at the disposal” of IrelandCo, and that a core part of its distribution activities in Spain – i.e., not preparatory or ancillary activities – are conducted therein, thus creating a Spanish PE under the “fixed place of business clause.” This conclusion is reached based on the following fact pattern, which, in the Court’s view, is sufficiently proven: • There were no substantial changes to SpainCo’s structure and size upon the transition to the commissionaire role. • IrelandCo had no employees and no material means to carry out its business activity, and SpainCo provided services relating to IrelandCo’s core business in Spain. • The functional analysis provided to the Court (and in the Mutual Agreement Procedure initiated by IrelandCo) showed that SpainCo assumed a substantial part of the functions related to IrelandCo’s distribution role. • There was, in practice, no clear separation of functions and resources between the three cited related entities. For instance, the entities used a common bank account; SpainCo and FranceCo offered the same business terms and conditions, and operated in a way such that customers were unclear on which entity they were entering into agreements with; after sales activities which should have been rendered by IrelandCo were, in fact, rendered by SpainCo; some employees worked for SpainCo and FranceCo (under secondments) without any changes to their functions, etc. • IrelandCo carried on business in Spain through a website and used personnel located in Spain for the localization of the website for the Spanish market. Also, domain names and personal data protection registries are owned by SpainCo. The Central Tax Court notes that according to the OECD Model Commentaries an internet web site constitutes a place of business where the server on which the website is stored has a physical location and such location constitutes a “fixed place of business.” However, the Central Tax Court also notes that Spain has expressed a number of reservations on the Report “Clarification of the permanent establishment definition in e-commerce,” and that the same were included in the OECD Model Commentaries of 2003 and 2005 (commentary 45.6) and concludes that the web site formed part of IrelandCo’s business activity in Spain. Commentary 45.6 was deleted from the OECD Updated Commentaries of 2010 but the Central Tax Court does not refer to this change. The Court accepts, as proposed by the tax audit, that sales to Spanish customers that were made through FranceCo should be allocated to the Spanish PE, based on arguments, such as, that FranceCo’s sales are carried out by means of SpainCo’s human and material resources, the lack of definition of the client segment of the entities, the use of a common bank account throughout a certain period and of identical commercial terms and the fact that technical support services were rendered by SpainCo’s personnel. The Court accepts the allocation of expenses relating to the distribution and sales promotion activities to the Spanish PE. Secondly, in an interpretation that is clearly aligned with the OECD Commentaries to the Model Convention, the Court takes the view that SpainCo acted as a
  • 3. 3International Tax Alert For additional information with respect to this Alert, please contact the following: Ernst & Young Abogados, International Tax Services, Madrid • Laura Ezquerra +34 91 572 7570 laura.ezquerraMartin@es.ey.com • Ramon Palacin +34 91 572 7485 ramon.palacinsotillos@es.ey.com • Antonio Pina +34 91 572 5141 antonio.pinagil@es.ey.com • Octavio Garcia +34 91 572 5099 octavio.garciaterrones@es.ey.com Ernst & Young LLP, Spanish Tax Desk, New York • Inigo Alonso Salcedo +1 212 773 8692 inigo.alonsosalcedo@ey.com dependent agent of IrelandCo given that it had authority to bind the latter and lacked independence because it operated exclusively for IrelandCo under comprehensive control and instructions from the same. Conclusionandrecommendations It is foreseen that the Central Tax Court’s resolution will be appealed, and it remains to be seen whether its interpretation will be upheld by the High and Supreme Courts. The Central Tax Court follows the Supreme Court’s interpretation of the “fixed place of business clause” (decision dated 12 January 2012). The resolution supports the view that the Supreme Court’s decision represents a precedent that is likely to be followed by the Spanish Tax Authorities in similar situations and highlights the need to carefully review not only the inter-company agreements but also the factual pattern and behavior of the parties in limited risk structures to assess the potential PE risk. A case-by-case consideration should be given to all similar structures already in place, as well as to any further related planning.
  • 4. 4 International Tax Alert www.ey.com © 2012 EYGM Limited. All Rights Reserved. EYG no. CM2885 This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor. About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 152,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com. Ernst & Young Abogados is a member firm serving clients in Spain. International Tax Services About Ernst & Young’s International Tax services practices Our dedicated international tax professionals assist our clients with their cross-border tax structuring, planning, reporting and risk management. We work with you to build proactive and truly integrated global tax strategies that address the tax risks of today’s businesses and achieve sustainable growth. It’s how Ernst & Young makes a difference. Ernst & Young Assurance | Tax | Transactions | Advisory Ernst & Young International Tax Services • Global and EMEIA ITS, Alex Postma • Americas, Jeffrey Michalak • Asia Pacific, Alice Chan • Japan, Kai Hielscher • Argentina Carlos Casanovas Buenos Aires • Australia Daryn Moore Sydney • Austria Roland Rief Vienna • Belgium Herwig Joosten Brussels • Brazil Gil Mendes Sao Paulo • Canada George Guedikian Toronto • Central America Rafael Sayagues San José • Chile Osiel Gonzalez Santiago • China Becky Lai Beijing • Colombia Ximena Zuluaga Bogota • Czech Republic Libor Frýzek Prague • Denmark Niels Josephsen Soborg • Finland Katri Nygård Helsinki • France Claire Acard Paris • Germany Stefan Koehler Frankfurt • Hong Kong Christian Pellone Hong Kong • Hungary Botond Rencz Budapest Balazs Szolgyemy Budapest • India Hitesh Sharma Mumbai • Indonesia Peter Ng Jakarta • Ireland Joe Bollard Dublin • Israel Sharon Shulman Tel Aviv • Italy Domenico Borzumato Rome • Japan Kai Hielscher Tokyo • Korea Kyung-Tae Ko Seoul • Luxembourg Frank Muntendam Luxembourg • Malaysia Hock Khoon Lee Kuala Lumpur • Mexico Koen van ‘t Hek Mexico City • Middle East Tobias Lintvelt Abu Dhabi Michelle Kotze Dubai • Mongolia Christian Pellone Hong Kong • Netherlands Johan van den Bos Amsterdam • Norway Oyvind Hovland Oslo • Peru Roberto Cores Lima • Philippines Ma Fides Balili Makati City • Poland Andrzej Broda Warsaw • Portugal Antonio Neves Lisbon • Russia Vladimir Zheltonogov Moscow • Singapore Andy Baik Singapore • South Africa Justin Liebenberg Johannesburg • Spain Federico Linares Madrid • Sweden Erik Hultman Stockholm • Switzerland Daniel Gentsch Zurich • Taiwan Alice Chung Taipei • Thailand Anthony Loh Bangkok • Turkey Feridun Gungor Istanbul • United Kingdom Matthew Mealey London Anna Anthony London • United States Jeffrey Michalak Detroit Phil Green New York • Venezuela Jose Velazquez Caracas • Vietnam Nitin Jain Hanoi Ernst & Young Member Firm Contacts