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Luxembourg tax authorities clarify permanent establishment definition

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Luxembourg tax authorities issued a circular on February 22 that clarifies recently added paragraph 5 to § 16 StAnpG of October 16, 1934 (‘New Paragraph 5’). This paragraph was introduced by Draft Bill 7318 (dated December 21, 2018), which implemented anti-tax avoidance directive 1 (ATAD 1) into Luxembourg domestic tax law.

New Paragraph 5 is not related to ATAD 1 implementation, but instead is designed to resolve conflicts of interpretation on the existence of a permanent establishment (PE) resulting from the interaction between domestic law and relevant tax treaty provisions.

Under New Paragraph 5, Luxembourg tax authorities may request from a taxpayer evidence that the other contracting state effectively recognizes a PE in its territory. The circular clarifies how the taxpayer should provide this evidence.

New Paragraph 5 applies to tax years beginning on or after January 1, 2019.

The takeaway

The circular helps clarify, and in some cases confirms, the recognition of a PE in a tax treaty country.

Taxpayers should assess their fact pattern and, if appropriate, prepare evidence that a PE is recognized in a tax treaty country.

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Doug McHoney

International Tax Services Co-Leader, PwC US

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