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Switzerland France Execution of contracts The French tax authorities’ arguments were overruled by the Court of Appeals of Paris because the activities carried out by Interhome Gestion were legally different from those of Interhome AG and the former did not have legal authority to bind the latter. 27 Later on, the case was brought before the Supreme Administrative Court, which held that Interhome Gestion would only constitute a PE of its parent company if the requirements of article 5 of the France- Switzerland treaty, equivalent to article 5(5) of the OECD model, were met. In other words, such characterization would only occur if Interhome Gestion could not be considered an independent agent and if it habitually exercised in France an authority, legal or factual, to conclude contracts in the name of Interhome AG that relate to ordinary business activities of that company. 28 Therefore, the Supreme Administrative Court maintained the core part of the decision of the Court of Appeals of Paris, rejecting the characterization of Interhome Gestion as a PE of its parent company. Despite this outcome (that is, no characterization of the subsidiary as being a PE of its parent company), the relevance of this case to the present analysis is that the Supreme Administrative Court of France clearly described the requirements by which a subsidiary might constitute a PE of its parent company, emphasizing the possibility of a subsidiary binding de facto its parent company and not only legally. According to 27 Court of Appeals of Paris, decision 96-859 2e (released June 13, 2000). 28 Klaus Vogel in cooperation with the IBFD’s Tax Treaty Unit, ‘‘1. Subsidiaries as Permanent Establishments?’’ Bulletin — Tax Treaty Monitor, Tax Treaty News (Oct. 2003), p. 474. Figure 1. Interhome Interhome AG Interhome Gestion SPECIAL REPORTS Other European States Mandate contracts with house owners Payment of commission on the rents the Conseil d’Etat, the exercise of the authority to bind the Swiss parent should be determined not only by reference to a legal mandate, but also by reference to the actual circumstances. This factual approach adopted by the Conseil d’Etat would prove to be decisive in a later case — Zimmer — analyzed below, that was heavily criticized by some scholars. B. Philip Morris The importance of the Philip Morris case29 to the present work resides not only in that it involves a dependent agent that is a subsidiary of its principal, but also, and most important, because of the particular features envisaged by the Italian Supreme Court for the characterization of what it called a ‘‘multiple PE’’ — a PE within a group of companies. Philip Morris involves an audit carried out by the Italian tax authorities regarding the character of the activities performed by Intertaba SpA, the Italian company of the Philip Morris group, which was structured at the time of the facts as shown in Figure 2. The decision of the Supreme Court of Italy stated that because of the activities carried out by Intertaba SpA in supervising the performance of the licensing and distribution contracts concluded among the other companies of the Philip Morris group and its participation in negotiating such contracts, the company could be deemed to be a ‘‘place of management’’ at the disposal of the entire group. Intertaba SpA was then considered to constitute a ‘‘multiple subsidiary’’ PE in 29 Italian Supreme Court, Dec. 20, 2001, decisions 3367 and 3368; Italian Supreme Court, Dec. 20, 2001, decision 7682; and Italian Supreme Court, Dec. 20, 2001, decision 10925. TAX NOTES INTERNATIONAL FEBRUARY 2, 2009 • 425 (C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
SPECIAL REPORTS U.S. Germany Switzerland FTR Italy Italy under the notion provided in article 5(1) of the OECD model convention, as well as an agency PE as provided in article 5(3). 30 The reasoning of the Supreme Court of Italy is that the incorporation of Intertaba SpA was intended to disguise the existence of a PE in Italy to avoid full taxation of the royalties derived from the licensing contracts concluded with the Italian state monopoly for the sale of tobacco products. 31 In addition to the introduction of the concept of a multiple PE, the Supreme Court of Italy identified the following principles to determine the existence of a PE: 32 • an Italian company may be a multiple PE of foreign companies belonging to the same group and pursuing a common strategy; • the supervision or control of the performance of a contract cannot, in principle, be considered an 30 Gazzo, supra note 4, at 259. 31 Id. at 258. Royalties Italian State Monopoly Co. 32 Caterina Innamorato, ‘‘The Concept of a Permanent Establishment Within a Group of Multinational Enterprises,’’ Eur. Tax’n (Feb. 2008), p. 81. Figure 2. Philip Morris Sale of filters Philip Morris U.S. 98% 2% Intertaba SpA Philip Morris Europe auxiliary activity within the meaning of article 5(4) of the OECD model convention and the corresponding article of the Germany-Italy tax treaty; • the participation of representatives or employees in a phase of the conclusion of a contract may be regarded as an authority to conclude contracts; • the entrusting of the management of business transactions to a resident company by a corporation that is not resident in Italy makes the resident company a PE of the foreign corporation; and • the existence of a PE should be verified by adopting a substantial rather than formalistic approach. The line of reasoning of the Supreme Court of Italy has been extensively criticized. The criticism focused on the characteristics that the Italian Supreme Court took into account to determine the existence of a PE, which somewhat deviates from what is provided in article 5 of the OECD model convention and the treaty applicable to the case. Indeed, the reasoning of the decision and especially the statement that the participation in the negotiation of contracts was sufficient to create an agency PE caused great concern and repercussions in the international tax community. Apparently, that was not the intention of the Court. Justice Enrico Altieri from the Tax Division of the Italian Supreme Court later stated that the Court did not 426 • FEBRUARY 2, 2009 TAX NOTES INTERNATIONAL (C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
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tax notes international Volume 53,
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