Luxembourg: U.S. branch denied permanent establishment status (administrative court decision)

The Luxembourg administrative court on 26 May 2023 upheld (Tribunal administrative n° 45030) the tax authority’s decision to deny permanent establishment (PE) status to the U.S. branch of a Luxembourg resident company.

The decision was based on the Luxembourg concept of PE applicable before 1 January 2019.

The taxpayer established a branch in the United States in 2013 with the intention to perform intra-group financing activities and filed a tax ruling request claiming recognition of a U.S. PE. The tax authority in 2015 issued tax assessments for the year 2013 and then informed the taxpayer that no answer would be given to the ruling request as the company had already been assessed for the year 2013. The tax authority then in 2019 issued final tax assessments for tax years 2014 to 2017, refusing the recognition of the U.S. branch as a PE. The taxpayer then brought the case to the administrative court. 

The administrative court reaffirmed what constitutes a PE according to the Luxembourg-U.S. income tax treaty, mentioning the need for a place of business (i.e., a physical installation such as those listed in the treaty), which must be fixed (i.e., it must, have a link with a specific geographical point and be characterized by a certain permanence), and that the activity of the enterprise must have been carried on wholly or partly from or through this fixed place of business. The court found based on the following facts that the taxpayer did not provide any evidence that its financing branch was actually located in the United States, or to rule out the notion that it was fictitious:

• The address of the alleged U.S. branch was not clearly identified, as the address in the office share agreement was different from the one in the IRS Form 8858, which in turn was not the one used in the framework of the service agreement.
• No payment was made by the U.S. branch under the terms of the office share agreement and the services agreement.
• The persons mandated in the services agreement were managers of the taxpayer.
• The opinion of a U.S. attorney relied upon by the taxpayer did not support the taxpayer’s position because although it concluded that the taxpayer did have a U.S. PE, it also stated that the taxpayer did not need to file a U.S. tax return because it had no “considerable, continuous, and regular” activity in the United States and did not carry on any U.S. “trade or business.”
• There was no evidence that the U.S. branch had its own bank account in the United States.
• When the financing activity was put in place, the funds were transferred directly “in the interests of economic efficiency” without flowing through the alleged PE.

Read a July 2023 report prepared by the KPMG member firm in Luxembourg