Skattenytt nr 10 2018 s. 684
Jacobsson, Linus: Permanent establishment through related persons – A study on the treatment of related persons under article 5 of the OECD Model Tax Convention, Uppsala Universitet
The doctoral thesis of Linus Jacobsson titled “Permanent establishment through related persons – A study on the treatment of related persons under article 5 of the OECD Model Tax Convention” was publicly examined and approved on Friday April 27 at the University of Uppsala. I acted as the faculty opponent. The English language book consists of 332 pages, a bibliography and a Swedish language summary.
The doctoral thesis has been written on a very central international tax law concept. The permanent establishment concept basically determines when a country, other than the state of residence of an enterprise, has the right to tax business profits of the enterprise. This is the case especially in tax treaty situations, i.e. in situations in which a country has concluded a tax treaty with the other state concerned. Other states than the state of residence have taxing rights only if there is a permanent establishment. In a non-treaty situation, the taxing rights may be somewhat broader depending on the domestic laws of the state concerned.
Sweden has a tax treaty with more than 100 states. This means that many bilateral situations, but not all, are covered by tax treaties. The thesis, however, has been delimited to discuss the concept of permanent establishment only in tax treaty context. Actually, the thesis does not even look at actual bilateral situations covered by actual tax treaties but the thesis looks at the concept of permanent establishment in the context of the OECD Model tax convention. The OECD Model tax convention forms the basis of most tax treaties. However, many tax treaties differ in detail from the OECD Model or they do not follow the most recent version of the OECD Model. This is important to keep in mind when reading the book.
In any case, in order to determine the extent to which states other than the state of residence of a taxpayer has taxing rights, it must be determined whether the taxpayer has a permanent establishments in certain other states. This determination must be done both in the residence state and in the state in which there may be a permanent establishment.
The existence of a permanent establishment may be unclear especially if there are related group companies in the other states. Especially, in the related company situations the permanent establishment status may be purposefully either avoided or established for tax planning purposes. Determining these unclear related person situations is the core of the thesis.
Some thorough research on the concept of permanent establishment exists already. Worth mentioning, is the fundamental comprehensive work of Arvid Skaar titled Permanent Establishment from year 1991.  Also for example, the regularly updated work of Eckeheart Reimer and others titled Permanent Establishments  may be mentioned.
Considering the already existing research on permanent establishments, it may be questioned whether there was room for doctoral thesis level research on the topic. Globalization, digitalization and the BEPS-developments, however, make the topic especially interesting. There are still many unclear issues that deserve to be researched on. The related person focus makes the research topic focused and different from the existing research. The BEPS developments could have been given even more room in the book.
The thesis is a traditional legal dogmatic study with some policy considerations (neutrality, legal certainty and complexity, prevention of tax avoidance, fairness). The thesis is based on the OECD material, English and Swedish language literature and case law. The thesis takes into account many central works and case law on permanent establishments and thus gives a good picture of the existing discussion. However, more literature and case law would have been available.
The reader will miss especially the German language literature on the topic but also certain English language works, such as the IBFD Global Tax Treaty Commentaries chapter titled “Article 5: Permanent Establishment”, written by Arnold, Brian J. It is also important to note that even though the book was closed on November 30, 2017, it does not include the 2017 version of the OECD Model published on November 21, 2017. This is a pity, although the author does take into account the BEPS proposals and the drafts for the 2017 amendments to the OECD Model. Taking the fact that especially the future of the permanent establishment concept involves many not yet researched unclear issues and uncertainties, a more comprehensive discussion on the relevance of the BEPS changes would have been desirable.
The author mentions that “the objective of the thesis is to analyse and define the scope of the permanent establishment concept, when applied to related persons”: There are three main research questions: 1. to determine the scope of the related person clause in Article 5(7) (subsidiary PE), 2. to determine the application of the permanent establishment concept to situations with related persons and 3. to determine the functions of the permanent establishment concept in the prevention of tax avoidance. These questions are looked at from the perspective of the OECD Model. The thesis does not look at actual bilateral tax treaties nor domestic laws. In addition, actual tax consequences are outside of the scope of the thesis, which limits to the scope of the permanent establishment concept.
Despite the selected delimitations, the book provides a good overall picture of the permanent establishment concept from the perspective of the OECD Model. The book concept is not discussed strictly only from the perspective of related persons, but the concept is discussed more generally. This approach means that in addition to the thorough parts directly related to related persons, there are also long descriptive parts in the thesis that mainly bring together the already existing discussion on the topic. Even though the scientific value of these parts may be questioned, they make the book a coherent whole and make the book as an important reference book in regard to the whole permanent establishment concept. The approach, thus, is justified and it adds on the practical relevance of the book.
The research questions are well formulated and the thesis is rather well delimited from the perspective of research topic and the research questions. The practical relevance of the book, however, would have been greater, if the research questions had been discussed broadly than only from the perspective of the OECD Model concept. Actual tax treaty examples and deviations from the OECD Model would have been interesting. Even examples of domestic tax laws could have been added to bring the discussion to a more concrete level. The thesis does include discussion of relevant case law from several countries from the perspective of the OECD Model concept. More interesting case law, however, would have been available. Also actual tax consequences could have been discussed more in order to highlight the relevance of the different conceptual interpretations.
The thesis is strictly delimited also in the respect that it does not include any EU tax law approach. EU tax law and especially the jurisprudence of the EU Court on non-discrimination and the basic TFEU freedoms would have been interesting when discussing neutrality and tax avoidance.
The discussion of the tax avoidance aspect in general leaves the reader disappointed. Even though the author mentions the tax avoidance aspect as one of the three main research questions, the room given to the discussion is modest. Taking the fact that tax avoidance considerations in practice have an important relevance when determining whether a permanent establishment exists or not, more discussion of this aspect would have been desirable. The tax avoidance aspect would have deserved its own separate main chapter.
The thesis does refer in many places to the substance over form approach in determining the scope of the permanent establishment concept. However, the discussion is not quite precise and convincing. The thesis leaves it unclear as to what is the difference between, normal interpretation, the substance over form approach and actual anti-tax avoidance provisions, such as GAARs in determining the scope of the permanent establishment concept.
The outline of the study is divided into three parts. Part one consists of chapters 1–3 and is focused on principles and theories relevant to the permanent establishment concept. Furthermore, it includes the related person permanent establishment in general, i.e. the first research question. These chapters establish a background and a general understanding of the permanent establishment concept, which the second and third part will build on.
Chapters 4–6 make up the second part of the study. This part is more specific and deals with the different kinds of PEs in detail. The second part mainly deals with the second research question. Part three consists of chapter 7 and evaluates the results in the second part and discusses briefly the third research question, i.e. whether the concept can, and should, be used in order to prevent tax avoidance. This part also includes general conclusions and a summary of the study.
The structure of the book is consistent and it serves the research questions. However, a separate thorough chapter on the tax avoidance aspect would have completed the discussion. It may also be asked, whether a different structure following the OECD Model Article 5 paragraph order would have lessened repetition and cross-references in the book. Now the specific related person clause is discussed first and only then the general fixed place of business clause.
The thesis forms a coherent whole, which is written in good English language. It is an independent thorough study of the selected topic, which provides new scientific knowledge on the permanent establishment concept in related person situations. The book is essential reading for anyone dealing with permanent establishments.
Marjaana Helminen, Professor of International Tax Law, University of Helsinki.
Skaar, A.A. 1991, Permanent establishment: erosion of a tax treaty principle, Kluwer.
Reimer, E., Schmid, S., Orell, M. (eds.), 2015, Permanent establishments: a domestic taxation, bilateral tax treaty and OECD perspective, 4th edition, Kluwer.