The tax administration in Luxembourg issued tax circular No. 19 clarifying the new Permanent Establishment (PE) definition as set forth in article 16(5) of the Tax Adaptation Law (StAnpG).
The circular reiterates that to the extent PE is defined in the tax treaty, the recognition of a PE will be based exclusively on the criteria set forth by the tax treaty concluded with that country. However, if PE does not define in the existing treaty (specifically “business activity”), Luxembourg will apply its domestic PE definition.
In accordance with this new provision, a taxpayer will be considered carrying out wholly or partly its activity in the other contracting state if this activity on an isolated basis can be considered an independent activity representing participation in the economic life of the other contracting state. The circular seems to indicate that the focus to define PE is carried out and not on the level of substance. The absence of an extensive infrastructure or a substantial and permanent presence of human resource would not seem to automatically result in Luxembourg not recognizing the existence of a PE in the other country.
To confirm the existence of the PE, the Luxembourg tax authorities may request the taxpayer to provide confirmation that the other contracting state recognizes the existence of a PE whenever the activities are performed in the other state. If the countries whose tax treaties with Luxembourg do not contain a provision similar to article 23a(4) of the OECD Model 2017, the confirmation has to be provided by taxpayers and must be submitted together with their annual income tax return.
The Article 23a(4) of the OECD Model 2017 refers to tax treaties that do not contain a provision allowing Luxembourg not to exempt income derived or capital owned by one of its residents where the other contracting state applying the provisions of the tax treaty exempts such income or capital from tax.
Where the taxpayer does not provide the aforementioned confirmation, the tax administration will consider that the taxpayer has no PE in the other contracting country. Luxembourg taxpayers will need to carefully assess PEs where a treaty exemption is claimed to assure that the PE definition is met and that they will be able to produce confirmation from the competent authority of the other Contracting State recognizing the existence of a PE.
Source: The Government of Luxembourg
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