Configuration of a permanent establishment

23 April, 2024

The cases of configuration of a Permanent Establishment (PE) are regulated in Article 3 of the Income Tax Law Regulations. Therefore, when one of the assumptions is fulfilled, the PE must be registered in the RUC (Registro Único de Contribuyentes – Single Taxpayer Registry/TIN) and operate as a domiciled taxpayer. Conversely, if there is no registered EP, the inconvenience of determining the person in charge of the tax generated by the activity of the non-domiciled company arises. 

Through RTF No. 08193-2-2022, published on November 11, 2022, the case of a taxpayer who rendered handling services to a non-domiciled company, which rendered carriage by sea of merchandise to several clients, was hereby notified. The issue was focused on determining whether the services rendered constituted a PE: 

Administration’s Position 

Due to the audit performed, the Tax Administration concludes that the taxpayer obtained an assumed net income from the international carriage by sea service as a permanent establishment of a non-domiciled company. It alleges that the PE is a general agent and maritime representative in the country of the non-domiciled company by virtue of subsection 2 (a) of Article 3 (2) of the Income Tax Law Regulations.  

Taxpayer’s Position 

On the other hand, the taxpayer claims that the handling service is only to ease the merchandise to the non-domiciled party. It specifies that this service is auxiliary and complementary to the service rendered by the non-domiciled party (transportation of merchandise). Therefore, there would not be a PE situation. 

Assessment and Conclusions of the Tax Court  

The Court agrees that the taxpayer acted as a representative of the non-domiciliary, having to determine the PE’s existence. Conversely, its status as representative does not imply it is the PE of the non-domiciled party. In addition, the Court points out the following: 

“if in the process of an audit procedure initiated to a taxpayer, the Administration detects income on which a different taxpayer should be taxed, as for a permanent establishment of a non-domiciled company, similar to the case of cars, the Administration can initiate a tax audit procedure, due to the power thereof, of the non-domiciled company, considering the facts found and/or issue a resolution of determination to the mentioned company for the income detected.” 

According to the aforementioned RTF, the non-registration of a PE confuses the determination of the obligor to pay the tax. The Court has clarified that the representative of a non-domiciled person is not automatically a PE thereof, having to comply with the requirements established by the law for its constitution. Thus, if the representative is not responsible for the tax, then who is? According to the Court, the non-domiciled taxpayer would have to be audited, but how could this be done without a domiciled taxpayer to which to link it? 

Indeed, the tax audit of a non-domiciled taxpayer’s income is usually performed through its relationship with domiciled taxpayers. Therefore, those performing activities with non-domiciled taxpayers must be cautious in observing the type of service rendered, observing aspects such as keeping a documentary dossier on their own transactions, especially differentiating them from those of the foreign company. Therefore, at VAG GLOBAL, we have the best tax advice, which will ease your business with an integral evaluation of its activities, thus avoiding tax contingencies such as those described above. 

Source: Tribunal Fiscal