1. Case Introduction

D Products Ltd. is a resident company registered in Ireland by the American D Group (hereinafter referred to as “D Ireland”), responsible for the sales of D products in Europe. D Ireland established a subsidiary in Spain (hereinafter referred to as “D Spain”), responsible for the sales of D products in Spain and other European countries. D Ireland signed a commissionaire agreement with D Spain. D Spain signed sales agreements with customers in its own name, but the risks and responsibilities were borne by D Ireland, and D Spain received 1% of the sales as commission. At the same time, D Ireland also sold to Spanish customers through web pages, and D Spain employees adjusted the content of the web pages according to the Spanish market, but the web pages were hosted on servers outside Spain.

2. Focus of the Dispute

The focus of the dispute in this case is whether D Spain constitutes D Ireland as a permanent establishment in Spain.

D Ireland believed that D Spain’s place of business in Spain belonged to D Spain and was not under the control of D Ireland, and D Ireland did not engage in business activities in Spain, so it did not constitute a permanent establishment.

The Spanish tax authorities believed that although D Spain signed the sales agreement with the customer in its own name, the instructions were issued by D Ireland, the price was determined by D Ireland, D Ireland could decide to accept or reject the delivery request, D Spain had to report to D Ireland regularly, and D Spain needed D Ireland’s authorization to purchase products. Considering the above factors, D Spain actually became a non-independent agent of D Ireland, constituting an agency-type permanent establishment.

Company D was dissatisfied and filed a lawsuit.

3. Final Decision

In 2012, the Central Economic and Administrative Tribunal of Spain issued a ruling supporting the view of the Spanish Tax Administration. The Administrative Tribunal also held that D Ireland’s e-commerce activities were conducted through D Spain, which constituted a permanent establishment of D Ireland in Spain. D appealed to the Spanish National Court of Appeal. In 2015, the National Court of Appeal ruled to continue to support the view of the Spanish Tax Administration. D continued to appeal. In June 2016, the Spanish Supreme Court made a final ruling supporting the view of the Spanish Tax Administration.

The Supreme Court held that D Spain undertook many important business functions of D Ireland, including promotion, sales and customer acquisition, order management, product distribution management, marketing and advertising, warehousing and logistics, installation services, accounts receivable management, etc. D Ireland had control over the activities and employees of D Spain, thus constituting a permanent establishment. The agency agreement between the two also made it an agency-type permanent establishment.

4. Implications for “Going Global” Enterprises

First, we should pay attention to the concept of permanent establishment. The determination of permanent establishment involves the tax obligations of “going out” enterprises in the host country. We should understand the definition of permanent establishment and the provisions on profit attribution in the domestic laws and tax treaties of the host country, make good plans, and read the explanatory documents or relevant cases issued by the country on the terms of the treaty to avoid compliance risks.

Second, pay close attention to changes in international tax rules. D’s sales model in many European countries is similar to that in Spain. In 2012, the Norwegian court made a ruling contrary to the Spanish court, holding that D’s Ireland did not constitute a permanent establishment in the country. Experts pointed out that in recent years, the international community has continued to pay attention to the issue of tax base erosion and profit shifting. The seventh action plan of BEPS has put forward suggestions for dealing with arrangements for artificially avoiding permanent establishments. We should pay attention to the inclusion of the results and suggestions of the action plan in tax treaties by various countries and do a good job in tax compliance management.

Third, this case lasted nearly 10 years and was heard by three levels of courts before reaching a final conclusion. When choosing legal remedies, enterprises that “go global” should fully understand the costs of time, taxes, possible fines and interests, and make the most favorable choice for themselves.