The rules regarding permanent establishment are changing. The implementation of the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting (“Multilateral Instrument”, or MLI) will provide new definitions and views of permanent establishment. The MLI was signed by the Netherlands on 7 June 2017. It is expected that the MLI will be ratified and will enter into force on 1 January 2020 in the Netherlands.
Introduction of the MLI may cause the existing definition of permanent establishment to change in a tax treaty with the Netherlands. However, a wider permanent establishment definition may not be effectuated in the Netherlands due to the lack of such wider definition in Dutch tax law. Amending Dutch law regarding permanent establishment will be considered by the Dutch Government after the MLI has been implemented, as recently announced in Parliament. It is unclear what the impact will be of the MLI in combination with future legislation.
Given the expected ratification of the MLI in 2020, we recommend investigating the impact of the MLI on your business. What is considered an exempt activity under the current treaty (e.g. warehousing) may not be regarded as an exempt (auxiliary) activity under the new MLI definition, resulting in a permanent establishment. Taking a non-defendable tax position regarding the (non-)existence of a permanent establishment could be qualified as tax fraud by the authorities. Apart from the penalties that could be imposed, a risk of double taxation and reputational risk also exist.
To avoid risks regarding the (non-)existence of a permanent establishment, the Dutch tax authorities provide the certainty of an Advance Tax Ruling (ATR), in which these authorities confirm the (non-)existence of a Dutch permanent establishment. Given the differences in the definition of a permanent establishment for corporate income tax, wage tax and VAT, certainty avoids many tax issues, especially regarding the correct VAT invoicing in the Netherlands.
During the past decade, WTS NL has successfully applied for many ATRs, often also in combination with an Advance Pricing Agreement, thus obtaining certainty on the transfer pricing remuneration method. One example of a non-existent permanent establishment ATR was for a foreign company that leased an installation together with operating personnel, for more than 12 months, to a Dutch affiliated company. It avoided a substantial administrative burden of salary split calculations, social security premium allocations, cost reimbursement reclassifications and interrelated costs, plus calculations to determine the taxable profit for corporate income taxation.
What is often not recognised in practice is that personnel from a permanent establishment in their home country, who visit the head office outside their home country, are often taxable for wage tax purposes in the country of the head office. When anticipating such a tax obligation, the financial consequences are often minimal compared to repairing the situation retroactively via a self-disclosure procedure, or compared to the consequences of a tax audit (high penalties).
Changing the rules on permanent establishment are therefore a good reason to investigate the status of (possibly) existing permanent establishments in the light of the expected changes.