Portugal: Can a Servicer Become An Agent Permanent Establishment?
Essers et all (ed.), Tax Treaty Case Law around the Globe 2018
Posted: 14 Aug 2020
Date Written: July 6, 2018
This book contribution focuses on a Portuguese decision concerning the qualification of a "servicer" as a Permanent Establishment.
The case is a perfect illustration of the ongoing issues regarding the allocation of taxing rights between residence and source countries. It is also an illustration that despite the best efforts of the OECD as exemplified by the Base Erosion and Profit Shifting (BEPS) Project, transactions that create discomfort among tax authorities will still be made. BEPS was about aligning taxation with the place where value is created. BEPS was also about combating legal constructions that would allow companies to artificially shift their profits to jurisdictions with lower levels of taxation.
In this case, all the "physical elements" of the transaction are located in Portugal: (i) the underlying debts were granted by Portuguese commercial banks and (likely) to Portuguese residents; and (ii) the material actions for collecting the debts would also take place in Portugal. Outside of Portugal, one will only find the headquarters of the Dutch company (a BV), its board and its employees (if any). But, is this latter location of any relevance to the creation of value? Or is it merely incidental and irrelevant to the overall success of the business?
To answer that question, one could employ the "relocation test": what would be the consequences, for the overall business, of relocating these elements to another jurisdiction? The material tasks for recovering the debt could hardly be performed from another country, since the likely customers are resident in the first country, the assets to be seized are (likely) there too, as are the courts with jurisdiction for the enforcement of collection. In contrast, relocating the Dutch BV to any other jurisdiction (particularly inside the European Union) would have no impact on this operation. Of course, there are many valid tax- and non-tax-related reasons for locating a company in the Netherlands. But there is nothing specific to this operation that needs to be developed or provided from the Netherlands. In brief, a Dutch BV with access to capital decides to buy the NPLs and bear the risks of the operation. Other than that, all remaining business operations take place in Portugal. Nevertheless, most of the profits of this business operation will not be taxed in Portugal (which will only be able to tax profits originating from the servicing fee, after the deduction of expenses. Moreover, as the parties are independent, there is not even the possibility of enquiring whether the agreed prices are adequate (as the transactions are, by nature, conducted at arm's length).
Is there a real alignment between the power to tax and the place where the activity is (materially) exercised? Or are we currently allocating profits mostly based on (mobile) factors such as functions and risks, which can literally be performed from anywhere in the world?
One should also note that BEPS, specifically its Action 7, does not affect this situation. Thus, can we conclude that the allocation of taxing rights in cases such as the one reviewed in this chapter is fair? Or are we in need of a BEPS II? Or do we need a new initiative to further enable source jurisdiction taxing powers in cases where the business operations are mostly taking place at source and the foreign jurisdiction is merely incidentally connected with the material activity?
Keywords: Taxation, Tax law, European taxation
JEL Classification: K33, K34, F13, E62, D78, E62, F02, F23, F42, H20, H22, H23, H25, H26, H87, O19, O23, O24
Suggested Citation: Suggested Citation