Why a Swedish Court's PE Ruling Could Affect Your Global Business
By Tom Lickess, Director, International Tax
A Swedish Court has held that a German company has a permanent establishment (PE) in Sweden despite the fact that the company’s local activities were limited to short-term testing functions and the company maintained no physical office or storage facility in Sweden. The case reflects a trend of evolving and increasingly strict PE regulations around the world. This post explains why the case is important for multinationals everywhere and what they can do to protect themselves from PE-related risks.
The German company engages in the development, design, marketing and sale of tire inflation pressure software systems in Germany, not Sweden. For three to four months each year since 2008, however, the company has transported its testing equipment and a limited number of employees to Sweden to product test and collect data in Sweden’s harsh winter climate. This data is then analyzed back in Germany. The company has no permanent building or storage facility in Sweden.
Based on the above facts, and taking into account the Organization for Economic Cooperation and Development’s most recent PE guidance, the Swedish Court concluded the following:
- The German company’s activities in Sweden were not of a preparatory or auxiliary character — in other words, they represented part of the company’s core business — and so were not subject to a PE exemption;
- The annually recurring presence and nature of the German company’s business in Sweden was such that the German company had a “fixed place of business” in Sweden.
The Court essentially analyzed the German company’s Sweden-based activities in light of the company’s overall business. The Court was of the opinion that the winter testing of the software — which required Sweden’s harsh winter climate — was of such significance to the overall business of designing, testing and manufacturing the tire inflation software system that the Sweden-based activities could not be deemed to be preparatory or auxiliary in nature.
The recurring annual short-term visits to Sweden, moreover, involved the same specialized employees that were instrumental in the design and testing of the product in Germany. Given this, the Court deemed that the recurring visits to Sweden constituted a fixed place of business, notwithstanding their short-term nature.
As I discussed in a blog post last year, rules dictating what constitutes PE in jurisdictions around the world are constantly evolving. The problem for companies with global operations is that the PE provisions are being implemented on a country-by-country basis, with revenue authorities administering rules in a stricter manner than was previously the case.
This increasingly strict interpretation and enforcement is widespread among OECD tax authorities, particularly European ones. The May 2016 raid of Google’s Paris offices is one prominent example. And the Swedish Court’s recent ruling is evidence that courts across the world are now beginning to follow suit, often referencing the OECD’s updated PE guidelines in their rulings.
What Global Businesses Can Do to Protect Themselves
Given that tax jurisdictions everywhere are tightening PE rules and enforcement, multinationals should review their global activities in light of PE risks. As mentioned, this can be challenging given that each country has its own evolving laws, but the risks involved will almost certainly justify the efforts. Each organization’s situation is unique, but keep in mind the following:
- Revenue authorities are increasingly reviewing the activities of employees working under a non-resident employer arrangement.
- If you are using offshore representative office or a non-resident employer structure to conduct activities — even with a limited number of employees — beware that your operations may come under scrutiny.
- Don’t assume any PE-related advice you received in the past is relevant to your current situation.
- Revenue authorities are also scrutinizing foreign-based multinationals that are using cost-plus subsidiaries to assist with marketing and support activities in-country.
- Under evolving PE laws, authorities may deem that the in-country activities constitute a greater proportion of the business than mere “support” activities and therefore could trigger a PE.
For a detailed look at the subject of PE, download Radius’ Permanent Establishment Playbook: What PE Is, How It’s Changing and How to Protect Your Organization.