Advocaten / Avocats / Lawyers

Thursday, 03 November 2016

Permanent establishments: recent developments

The notion of permanent establishment (‘PE’) and the attribution of profits to a PE continue to develop at an ever-increasing pace. Enterprises engaged in cross-border activities should keep a close eye on these developments.

The position of the Belgian tax authorities

In its 2008 Report on the Attribution of Profits to PEs, the OECD introduced the Authorised OECD Approach (‘AOA’) to provide more certainty and uniformity in this regard. Under this approach, a PE’s activities and responsibilities should be identified through a functional and factual analysis. A PE is then treated as if it is a separate enterprise associated with the remainder of the enterprise, and it then enters into dealings with the remainder of the enterprise and other parties. The remuneration arising from any internal dealings should be determined in accordance with the rules applicable to associated entities. The 2008 Report was not fully compatible with the wording of Article 7 of the OECD MC (as it was drafted at that time). As a result, Article 7 has been redrafted in 2010, together with a new Commentary.

The Belgian tax authorities are currently working on a circular concerning the application of the AOA on the 2010 update of Article 7 and on older versions. Recently, a draft version was published for public consultation. While it is too early to draw any final conclusions, this draft is a good indication of the position that the Belgian tax authorities are likely to take.

This draft makes clear that the tax authorities will not hesitate to apply the AOA also in the context of a pre-2010 version of Article 7, at least to the extent possible under the wording of that version of Article 7. This approach is not surprising at all and in accordance with the 2008 Commentary, but it leaves unanswered fundamental issues about the legal value of the Commentary and the dynamic interpretation of double tax treaties.

The draft circular also confirms that the transfer of assets from a Belgian head office to a foreign PE is not taxable in Belgium at the moment of the transfer. It provides detailed guidelines and examples about how to deal with such situations.


The OECD is working on additional guidelines concerning the attribution of profits to PEs, and recently published a draft version of its report as well.

These additional guidelines should clarify how to attribute profits to a PE taking into account the developments to the definition of PE as proposed in Action 7 of the BEPS-project (‘Preventing the Artificial Avoidance of PE Status’). Action 7 limits the possibilities to be considered as not having a PE with, for example, new rules on preparatory and auxiliary services, a principle purposes test and an anti-fragmentation rule, and it includes fundamental changes to the concept of a personal PE. As a result of the modifications in BEPS Action 7, the presence of an enterprise in another country is more likely to be considered as a PE than before.

In the draft additional guidelines, the OECD states that there is no need to fundamentally change the rules on the attribution of profits as a result of Action 7 and that additional guidelines on some specific topics are required. The draft guidelines are limited to i) dependent agent PEs and ii) warehouses. These topics are discussed mainly on the basis of examples.

As a result, this draft version of the additional guidelines is not comprehensive enough to provide certainty on several issues of profit attribution in the post-BEPS era, in particular on how the AOA actually applies in this new setting. There is no solution yet to avoid mismatches with other BEPS Actions, in particular Actions 8-10 on the “Aligning Transfer Pricing Outcomes with Value Creation”. Hence, significant changes to the actual draft version are expected in the final version (potentially preceded by a second draft version).

The clock is ticking because the OECD intends to include these changes in the Multilateral Instrument (‘MLI’, BEPS Action 15). The MLI will also include the BEPS output on hybrid mismatches, treaty abuse and dispute resolution. The OECD aims to finalise the MLI by the end of the year, in order to become applicable as from 2018. Enterprises engaged in cross-border activities should take into account this strict timing when assessing the impact of BEPS on their tax position.

For more information, please contact:
Bernard PEETERS - Partner (
Thomas GERNAY - Associate (


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