H. Jacob Lager

Control key ingredient for Spanish, Indian aggressive pursuit of permanent establishments

In Foreign taxes, Offshore Accounts on March 19, 2012 at 9:05 am

What might cause a business to be taxed in a foreign jurisdiction?  Control, according to a pair of recent decisions out of Spain and India.

No stranger to aggressive long-arm taxation (see Vodafone litigation), India’s Authority for Advance Rulings (AAR) just issued a February 7 ruling that deemed a French data network provider’s control over certain undersea cables in Indian territory a sufficient presence to justify permanent establishment status in India.  The ruling specifically noted that whether the French company owned or leased the equipment was irrelevant, so long as it has the power to control the equipment.  Similarly, the AAR further noted that a PE could be triggered by a mere computer or data server in India if a business is conducted through such equipment.

One month earlier, Spain’s Supreme Court teached its long-awaited decision in Roche Vitamins Europe Ltd., ruling that the company’s Spanish subsidiary created a permanent establishment via agency for Roche Vitamins Europe, a Swiss company.  Because all of the Spanish company’s activity was directed, organized, and managed by the Swiss company, the Court held that the subsidiary operated as a dependent agent as it carried on, under the two contracts, activities (manufacturing and distribution) that could have been performed directly through a fixed place of business.

The fact that the Spanish sub had no capacity to contract or negotiate for its Swiss parent did not prevent the court from broadly applying the dependent agency clause of the Spain-Switzerland tax treaty. Even though the sub did not “habitually [exercise] authority to conclude contracts that are binding for the” parent (as required by the treaty), the court nonetheless ruled that the parent’s control of the sub was sufficient to attribute to the Spanish PE the profits derived from the sub’s activities (manufacturing and distribution).

These two cases present strong reminders for multinational taxpayers to reexamine structures in which a group member performs, under one or more contracts, activities for nonresident related entities.  In particular, taxpayers should determine whether the evidence supports an argument that the local entity has sufficient autonomy and that its operations and/or assets are not subject to a foreign parent’s discretion.

  1. It certainly seems as if there are going to be fewer places for tax evaders to “hide,” even in foreign countries. How will this affect US companies trying to do business in Spain/India?

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