Luxembourg tax Circular related to Permanent Establishment (PE)
Issued on 22.02.2019 ( n° 19)
The Luxembourg tax authorities issued a tax circular detailing the application of t § 16, alinéa 5 StAnpG related to criteria to determine the existence of foreign PE of Luxembourg taxpayers.
What is at stake ?
Double tax treaties usually tie break the allocation of profit of taxpayer, especially in the presence of activities in various countries. In the presence of PE, the profit generated by the former is in principle taxed in the country where such PE is recognized and exempt in the country where the head-office is located.
A definition of PE is in principle referring to OECD guidelines and domestic rules. It is always question of whether an independant activity is performed and participates in the general economic life of the country. As a consequence, there is sometimes room for interpretation and thus potential double taxation (when PE is not recognized in the country where the head office is located but PE recognized in the other country) or double exemption (when a PE is recognized in the country where the headoffice is located but not recognized in the other country).
With digital economy the determination of a PE based on existing definition is even more complicated to assess.
New requirement by the tax authorities to recognize a foreign PE of a Luxembourg taxpayer
In this context, the Luxembourg tax authorities came up with the requirement to have documents supporting the existence of a foreign PE based on the above-mentioned definition. In some cases an official document from the foreign tax authorities recognizing the presence of a PE in their country would be required.
This circular goes in line with the OECD recommandation and the current tendancy for more transparency and crossborder antitax avoidance measures.
You may find the tax circular here: Tax circular – Permanent establishment – 22.02.2019