VAT Catch-up: Permanent Establishment Edition 2023

When it comes to managing your VAT obligations, it often helps to look over your shoulder and find examples of previous tax rulings and their outcome. So often, the VAT landscape can feel complex to manage in theory and abstract when it comes to applying regulations to real-life business practices. Fortunately, staying up to date with current and past tax rulings doesn’t have to be a time-consuming or resource-intensive process. 

We’re all caught up, and this month we’re looking at the latest trends and developments regarding Permanent Establishments (PEs). 

What is a Permanent Establishment? 

When determining your VAT obligations, the laws pertaining to Permanent Establishments (PEs) play a significant role in dictating your business's VAT treatment and refund opportunity. Although countries have different criteria for who classifies as a PE for VAT purposes, most PEs refer to companies with a consistent presence outside their origin base in a country or state. Therefore, they are often held liable to taxes imposed by that jurisdiction, ultimately creating a taxable presence outside their home territory. 

As the rules around permanent establishments are country-specific, it's critical to stay updated with any new updates or amendments that could affect your business. Here are some of the latest happenings and changes surrounding PEs. 

Permanent Establishments and tax rulings

Different tax rulings can fundamentally change how companies conduct business activities in foreign countries. Regarding PEs, two significant rulings recently clarified some confusion surrounding remote workers and support activities. 

Tax ruling on PEs and remote workers in The Netherlands

February marked a month of change concerning the non-existence of a PE regarding remote workers. On 21 February 2023, a tax ruling was made involving a non-resident company that had hired three remote employees in the Netherlands in 2021 and 2022. Out of preference, the digital nomad employees worked from the Netherlands. However, there was a dispute over whether this could warrant a permanent establishment. 

In this case, the non-resident company had no office nor alternative activities in the Netherlands, nor did it cover any work-from-home expenses. Another significant deciding factor was that the employees had no authority to conclude contracts on behalf of the non-resident company. Therefore, the Dutch Tax Authorities concluded that without the authority to conclude contracts on behalf of the non-resident company, no dependent agent PE is recognised, which is in line with Dutch tax practice.

Denmark: Tax ruling confirms that support activities do not constitute a PE

A few years ago, a non-resident entity established a branch in Denmark to handle administrative tasks related to shipping goods overseas. This specific branch approached Danish Tax Authorities to gain some clarity into whether or not the branch would constitute a PE. The day-to-day responsibilities of the branch included:

• Managing orders.
• Handling supplier invoices.
• Resolving complaints and transport damages.
• Arranging return packaging.
• Planning transportation.
• Maintaining bookkeeping records.

On 3 February 2023, the Danish Tax Board (DTB) published a binding tax ruling confirming that the branch's activities are classified as support activities, meaning that their primary role is supportive and related to admin and logistics. Additionally, no sales were actively conducted at the branch. 

Due to this, the branch cannot be deemed to be carrying out the foreign entity's core business in Denmark and, as a result, cannot be considered a PE. 

Stay in the loop with VAT IT experts in your corner

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