Supreme Court confirms lower-court ruling on permanent establishment
A Peruvian company (Company A) offered its services in Chile and had a commercial relationship with a Chilean company (Company B). Both companies were under shared ownership.
The Tax Administration decided to assess withholding taxes for services that Company A rendered for Company B, as it considered the latter to be a permanent establishment of the former in Chile.(1)
Company B challenged the assessment, but the Valparaiso Tax Court found in favour of the Tax Administration. The decision was appealed before the Valparaiso Appeal Court, which confirmed the previous judgment (Docket 238/2014, August 1 2014). Company B challenged the appeal court decision before the Supreme Court, which rejected the challenge, leaving the prior decision standing (Docket 24303/2014, September 26 2015).
In its challenge of the assessment, Company B argued that Company A did not have a permanent establishment in Chile under the terms of the tax treaty between Chile and Peru. Further, Company B argued that Company A had not been party to the proceedings, as the Tax Administration had conducted an assessment of Company B only, so the decision against Company B could not affect Company A.
The appeal court stated that the latter argument was unacceptable, as the Tax Administration had moved against Company B for failing to withhold the applicable taxes.
In order to dismiss the first argument, the appeal court cited the Vienna Convention on the Law of Treaties 1969. It argued that the different interpretations of what constitutes a permanent establishment under the tax treaty between Chile and Peru are not limited to those expressly mentioned therein. As Article 5(3) uses the expression “also includes”, there might be other circumstances in which a foreign company could have a permanent establishment that do not fulfil any of Article 5’s requirements in that regard.
According to the appeal court, under the terms of Article 5(1), Company A had been operating in Chile from at least 2009 through a permanent establishment (Company B). The court considered Company B to be a fixed place of business through which Company A carried out part of its business activities in Chile.
The court supported its conclusion with the following arguments:
- Company B acknowledged during the proceedings that it had paid funds to Company A from at least September 2009 to January 2012.
- Company B had acquired 26% equity in Company A.
- Company B had promoted the services of Company A in Chile, introducing the latter to clients in Chile.
- Technicians from Company A would occasionally travel from Lima to Company B in Chile.
- Company B’s legal representative acknowledged that it had shares in Company A and that the companies had a reciprocal relationship in which each used the other as a business presence in its respective country.
- The remittances that Company B paid to Company A corresponded to the prices that the former charged for services provided to domestic clients, subtracting the final price charged to local clients and costs relating to collection, sales and exchange rate differences.
- A witness whom Company B called, the controller of Company A, declared that Company A occasionally signed contracts with third parties in Chile through Company B. Another witness declared that Company B, as a local company, served as a trusted domestic contact for potential local clients of Company A.
According to the appeal court, these facts confirmed the existence of a permanent establishment under Article 5(1) of the tax treaty between Chile and Peru (a provision that follows the 2010 Organisation for Economic Cooperation and Development Model Tax Convention), and thus the first-instance decision had to be confirmed.
The Supreme Court decided that the appeal court had applied the terms of the tax treaty correctly and rejected the challenge.