Permanent establishment (2024)

Monday 8 April 2024

Report on a session at the 13th annual IBA Finance & Capital Markets Tax Virtual Conference in London

Monday 15 January 2024

Session Chair

Raul-Angelo Papotti, Chiomenti Studio Legale, Milan


Sven Eric Bärsch, Flick Gocke Shaumburg, Frankfurt am Main

Anders Oreby Hansen, Beierholm, Aalborg

Jessica Kemp, White & Case, London

Guadalupe Díaz-Súnico Aboitiz, Gómez-Acebo & Pombo, Barcelona

Annabelle Bailleul Mirabaud, CMS Francis Lefebvre, Neuilly-sur-Seine


Luis Cuesta, Gómez-Acebo & Pombo Abogados, Barcelona


The concept of permanent establishment (PE) is one of the key issues in international taxation, as it determines the allocation of taxing rights between source and residence countries. However, the traditional PE concept, based on physical presence and agency, is facing new challenges in the context of hybrid and distance working, the digital economy and multilateral instruments. This panel, held at the International Bar Association (IBA) congress on 15 January 2024, aimed to explore the recent developments and difficulties related to the PE concept from different perspectives and jurisdictions. The panel was chaired by Raul-Angelo Papotti, and featured five speakers from Denmark, France, Germany, Spain and the United Kingdom.

Panel discussion

Papotti opened the discussion by introducing the topic of the investment management exemption (IME) in Italy, which was introduced by the 2023 Budget Law and is subject to the enactment of a ministerial decree and a regulation on transfer pricing by the tax authorities. He explained that the IME regime is a safe harbour that allows asset or investment managers who act on behalf of non-resident investment vehicles or their controlled entities to be considered independent and, therefore, they do not create a PE of the investment vehicle or its non-resident controlled entities, if certain conditions are met. He pointed out that traditionally the tax authorities have been aggressive on this topic, not only in Italy but also in France and Spain. He highlighted some of the key issues and open questions regarding the definition of investment vehicle, the independence of the investment vehicle and the requirements of an agent.

Bärsch followed by discussing two recent German cases that dealt with the concept of deemed service PE, which arises when a non-resident enterprise provides services to a resident enterprise through a person who has a certain degree of authority or control over the service activities. He presented the facts and the rulings in the cases. The first case related to a UK service provider working on a regular basis in a German airport and the fact, among other circumstances, that he was entitled to a locker room led to the existence of a service-related PE. The second case involved a German service provider of property management services to a Luxembourg entity in the real estate sector. In this case, no service-related PE was triggered due to the substance of the Luxembourg entity.

Oreby Hansen then addressed the consequences of establishing a PE in Denmark, and the criteria for determining whether a PE exists or not when an employee works from home in another country. He focused on the notion of ‘fixed place of business’ and ‘seat of management’, and how they are applied in Danish tax practice and case law. He also examined the specific situation of home offices, and the factors that may indicate the existence of a PE, such as the availability of other permanent workspaces, the agreement or facilitation of the employer, the regularity or irregularity of the work and the interest of the employer in the work being carried out in Denmark. He illustrated his points with some examples related to Danish–Swedish and Danish–German cross-border scenarios.

Kemp moved on to the UK perspective. First she explained that in December 2022, the UK government issued the Office of Tax Simplification (OTS) report on hybrid and distance working, with the aim of establishing a landmark approach by the UK government in the new world of cross-border working. However, she pointed out that one of the main problems was the administrative burden or paperwork involved. However, in opposition to such an approach, the current proposals made by the UK government are aimed at reforming the UK rules on PE, transfer pricing and diverted profits tax. She explained that the proposals are partly motivated by the need to align the UK rules with the Organisation for Economic Co-operation and Development (OECD) standards and the multilateral instrument (MLI), and partly by the desire to address the challenges posed by the digital economy and hybrid and distance working. She outlined the main features of the proposals, such as closer alignment with Articles 5 and 7 of the OECD Model Tax Convention, the introduction of a framework and guidance on financial transactions and its interaction with other areas, the abolition of the separate diverted profits tax and the introduction of a diverted profits assessment. She concluded that it is a very technical document, but less complex than expected.

Díaz-Súnico Aboitiz and Bailleul Mirabaud jointly presented the last part of the panel, which focused on the evolution of the PE concept in the digital world, and the different approaches adopted by Spain, France and other countries. They traced the historical development of the digital PE concept, from the OECD’s Base Erosion and Profit Shifting (BEPS) Action 1 in 2013, to the EU proposals for a digital services tax and a significant digital presence in 2018, to the OECD’s Pillar One rules and the UN Model Tax Convention Article 12B in 2021. They also compared and contrasted the national implementation of the digital PE concept or the digital service tax by the three countries that have adopted this concept: India, Israel and Slovakia. Mirabaud then explained the French approach to the matter with the Google case, in which the French authorities applied the ‘substance over form’ interpretation. However, two courts issued judgments favourable to Google, which led to a final settlement between the parties to avoid criminal liability, and a payment by Google of around €1bn. Díaz-Súnico Aboitiz explained that the Spanish tax authorities have historically applied a broad concept concerning the definition of PE, even before BEPS/MLI and that approach has been enforced by the Spanish Supreme Court in several cases. She also mentioned a quote from a Spanish court which included a reference to a ‘virtual PE' in 2012. Finally, it was explained that the main changes in the PE concept from the MLI refer to the predominant role in the conclusion of a contract as the key element to conclude the existence of a dependent agent PE or not.

Conclusion and final remarks

The panel concluded with some final remarks by the chair, Papotti, who highlighted the similarities and differences among the countries in terms of the thresholds, scope, concepts and enforcement concerning the digital PE. He concluded by pointing out the challenges and uncertainties that still exist in this area, and the need for global consensus and coordination. The speakers also emphasised the importance and complexity of the PE concept in the current and future tax landscape.