On 6 November, the Danish Parliament issued a bill to implement the revised permanent establishment ("PE") definition reflected in the 2017 OECD Model Tax Convention in Danish domestic law. If enacted, the considerations described as "artificial avoidance of a PE" in the OECD BEPS Project will also be a part of Danish national tax legislation. Earlier this year, Denmark implemented the Multilateral Convention ("MLI"), which implements the same changes following the 2017 OECD Model Tax Convention in relation to the already concluded double tax treaties ("DTT"). However, in order for the DTT to be updated properly, both contracting states must implement the changes following the MLI in their national tax legislation.
Denmark adopted the changes following the MLI in 64 of Denmark's DTTs. However, a couple of DTTs remain uncovered by the MLI, one of which is the Nordic DTT, as it has been agreed with the contracting parties that the implementation of the MLI will in the form of amended protocols to the current Nordic DTT. Further, a new DTT with Japan implementing the changes following the MLI was recently concluded..
Besides the internal legal basis now being in place to provide for a usage of the new PE definition in the DTTs covered by the MLI, the bill also means that the proposed new definition of a PE will apply to cross-border situations where Denmark has not entered into a DTT with the relevant other country, e.g. currently France and Spain.
The proposed changes primarily relate to the agent rule and the rules relating to auxiliary and preparatory activities.
The changes to the current PE definition are proposed to have effect from 1 January 2020.
Traditionally, the OECD Model Tax Convention has listed the activities that most often can be considered preparatory and auxiliary, i.e. so-called PE-exempted activities. In the 2017 OECD Model Tax Convention, this list of PE-exempted activities still exists, but the article and the related comments have been updated to the effect that the listed activities per se are no longer exempted. Instead, an evaluation of whether the activities based on the relevant facts and circumstances actually qualify as auxiliary or preparatory is required.
As these PE-exempted activities listed in OECD Model Tax Convention are non-exhaustive, and an evaluation of the relevant facts and circumstances is always required, these PE-exempted activities are not listed in the proposed revised PE definition in the draft bill. However, according to the comments to the bill, this does not reflect a substantive difference between the content of the revised PE definition in the bill and the definition reflected in the 2017 OECD Model Tax Convention.
Further, an anti-fragmentation rule will be implemented directly into Danish legislation with the effect that a PE will be created in Denmark, if the entity or a closely related entity carries on business activities at the same place or at another place in Denmark, and the overall activity resulting from the combination of the activities carried out in Denmark is not of a preparatory or auxiliary character. This would, for instance, be the case where a foreign company has a warehouse in Denmark, which normally does not trigger a PE in Denmark, but where the existence of a Danish group company conducting other activities that constitute complementary functions to the warehouse activities can result in the warehouse in Denmark could potentially trigger a Danish PE.
The agent rule will be adjusted for both dependent and independent agents. For dependent agents, it is proposed that it is no longer a precondition for a PE to be established that the agent enters into agreements on behalf of the foreign company. If the agent on behalf of the enterprise habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise, a PE could be triggered.
As such, a commissionaire who enters into agreements in his own name but on behalf of the enterprise can now trigger a PE.
Generally, independent agents do not trigger a PE, if they act on behalf of the enterprise in the ordinary course of that business. However, it is proposed that a PE will be triggered, if the independent agent acts exclusively or almost exclusively on behalf of the enterprise to which the agent is closely related.
The changes in the agent rule will affect foreign companies operating in Denmark by use of dependent agents who do not conclude contracts but can now be viewed as playing the principal role leading to the conclusion of contracts. As well, the changes now affect commissionaires closely related to the foreign enterprise, which thereby now trigger a PE as a dependent agent"
Furthermore, the Danish rule that construction and installation activities create a PE from the first day will still exist.
Finally, the Danish special rule that distance selling does not trigger a PE will be cancelled.
If you are interested in learning more about the details of the proposed changes to the PE definition, please join our Tax Navigation seminar on Thursday, 14 November 2019 in Hellerup and Tuesday, 19 November 2019 in Aarhus. Please note that the seminars will be in Danish.