If a corporation practices its activity in a foreign country, it may be the case that the installation/people it develops its business through will be considered a Permanent Establishment (PE), and thus the profits obtained in such country may be taxed if they were obtained through a PE and are attributable to the said PE. Similarly, under Portuguese tax law, profits that are attributable to a PE in Portuguese territory are subject to corporate income taxation in Portugal.
Under the Portuguese CIT Code, a PE can consist of a fixed place of business through which the business of an enterprise is wholly or partially carried on. As of 2021, a PE of a foreign enterprise can also result from an activity of rendering services, including consulting services, performed by an enterprise through its own staff or subcontractors hired to carry such activity in Portugal when such activity lasts for a period or periods exceeding in the aggregate 183 days in any twelve-month period starting or ending in the relevant tax year.
In similar terms to those established in article 5 (5) of the OECD Model Convention (OECD MC), an enterprise shall be deemed to have a PE in Portugal when an agent – referred to as «a dependent agent» –, that is not deemed to qualify as an independent agent, acts in Portugal on behalf of an enterprise and, in doing so:
- has powers to intermediate and conclude binding agreements for the enterprise and does so habitually[1],
- habitually concludes said agreements, or habitually plays the principal role leading to the conclusion of such agreements, that are routinely concluded without material modification by the enterprise; or
- maintains a stock of goods/merchandise in Portuguese territory for delivery in the name of the enterprise, even if it does not conclude agreements in respect of such goods or merchandise nor has any intervention in the conclusion of such agreements.
The concept of a “major role played on a habitual basis in the negotiation of agreements in the name of the enterprise” bears, to my mind, quite a few interpretative doubts, especially when the OECD MC, in its commentaries to article 5 (5), states that even if the agent does not sign such agreements, and even if they are signed in another country, the agent may be deemed dependent, and thus a PE, just via this controverted concept.
An in-depth analysis through the Commentaries on the 2017 OECD Model Convention provides further explanation on the meaning of dependent agent, in the sense that “[a] person is acting in a Contracting State on behalf of an enterprise when that person involves the enterprise to a particular extent in business activities in the State concerned.”, and offers several examples such as “where an agent acts for a principal, where a partner acts for a partnership, where a director acts for a company or where an employee acts for an employer”.
The French Conseil d’État, deciding on a case related to the qualification of an enterprise as a permanent establishment in France of a US-based corporation (“Valueclick Case”), via the dependent agent rule judged that if the transactions, even though they are not formally concluded by the French entity in the name of the foreign corporation, are habitually decided by the French entity and are merely approved, on a routine basis, by the foreign entrepreneur which is then legally bound by these transactions, then a permanent establishment shall be considered to exist[2].
A dependent agent typically concludes contracts on behalf of the enterprise on a regular basis, even though he may not be involved in the negotiations of such contract, or if there is no negotiation whatsoever: “A contract may be concluded without any active negotiation of the terms of that contract”. However, and more pertinent to the discussion, the opposite situation may also be considered to define the actions of a dependent agent: “A person who negotiates in a State all elements and details of a contract in a way binding on the enterprise can be said to conclude the contract in that State even if that contract is signed by another person outside that State”[3].
Regarding, for example, the situation of a Director or Manager of a foreign company, who has powers to sign agreements in the name of the company, and establishes himself/herself in another country, the situation is particularly fluid. On the one side, the Signature powers will not be enough evidence of a permanent establishment, as the requirements of the dependent agent rule are material, rather than formal, and thus the Tax Administrations would still need to prove that such person intermediated and signed agreements in the name of the company on a regular basis.
The opposite position, in which such person would have no Signature powers but would participate in the intermediation of contracts that would then be signed by other representative of the company, is also quite interesting, and the OECD MC commentaries state the following: “where the conclusion of a contract directly results from the actions that the person performs in a Contracting State on behalf of the enterprise even though, under the relevant law, the contract is not concluded by that person in that State”, destined to apply to cases“where the activities that a person exercises in a State are intended to result in the regular conclusion of contracts to be performed by a foreign enterprise”[4]. However, the burden that would fall, for example, on a simple consultant that rendered services to a foreign company and ended up participating with a major role in the negotiations of those company’s agreements with other parties due to his/her expertise and market awareness, in case he/her was considered a dependent agent, would be completely disproportionate attending to his/her material activity.
I would say that this criteria of playing a major role in a negotiation being sufficient to activate the dependent agent rule is to fluid on several levels: first of all, it may disregard the material activity that the agent performs; also, in any part do the comments refer to an assessment of a direction power of the company over the agent regarding the negotiation of the terms, which I believe would be a relevant criterion.
[1] namely (i) in the name of the enterprise, (ii) for the transfer of the ownership of, or for the granting of the right to use, property owned by that enterprise or that the enterprise has the right to use, (iii) or for the provision of services by that enterprise;
[2] Conseil d’État, no. 420174, 11 December 2020.
[3] Commentaries on article 5, no. 5, para. 87, Model Tax Convention on Income and Capital, 2017, p. 142.
[4] Commentaries on article 5, no. 5, para. 87, Model Tax Convention on Income and Capital, 2017, p. 142.
José Saraiva
maio 2022