Court of Appeal Antwerp requires proof of actual business activities, having a certain degree of permanence, at a specific location

On 19 February 2019, the Antwerp Court of Appeals rendered decision 2017/AR/1184 on the issue whether a Belgian IT consulting firm had a permanent establishment in Morocco (articles 5, 7 and 23, 2, a) of the Belgium – Morocco Income Tax Treaty 2006).

(a) Facts. A Belgian company provided, through its managing director, IT services to a telecom firm established in Morocco. The managing director exercised his activities partly in the Moroccan offices of the telecom firm and partly from a rental apartment located in Rabat, Morocco.

The telecom firm withheld a tax of 10% on the fees for the services provided.

In the corporate tax return for the year 2007, the Belgian company exempted the Moroccan profit. It believed it had a permanent establishment in Morocco.

Upon an audit the Belgian Tax administration disagreed. Notwithstanding the fact that the company presented time sheets and other documents from which it could be derived that the managing director had been present in Morocco (service agreement, cost apartment, maintenance vouchers and Car wash, bills of water and electricity,…), the Belgian Tax Administration was of the opinion that the company did not have a permanent establishment at its disposal in Morocco.

On 27 February 2017, the Antwerp court of first instance ruled in favor of the Belgian Tax Administration. The court found that the taxpayer merely, for purpose of the exemption, tried to puzzle together the existence of a permanent establishment.

 (b) Legal background. In accordance with article 7 and 23 of the Treaty,  Belgium must exempt profit if business in carried on in Morocco through a permanent establishment. 

c) Decision. The court confirmed the decision of the court of first instance. The taxpayer must proof that it carried out its business activities in Morocco by means of, and thus through, a permanent establishment established in Morocco.

The court referred to Liège, 20 May 2015, to underline that actual activities must take place at the location of the establishment, and to the commentary on article 5 of the OECD Model Convention (2014), to emphasis the importance of a specific geographical location with a certain geographic coherence.

The evidence presented by the taxpayer did not provide sufficient proof that this is the case. There was no evidence that the IT services were actually rendered with a certain degree of permanence in the offices of the telecom firm or in the rental apartment of the managing director. From the time sheets, as such, it could not be inferred that work was effectively performed at the offices of the telecom firm.

Also, that services have actually been rendered at the client’s offices could not be inferred from the contractual provisions of the service agreement and from the fact that the taxpayer had an access badge, in particular, because it was not apparent for which offices the badge was issued (geographic connecting factor). The court further stated that having an access badge, of for that matter the presence of the Managing Director on Moroccan territory, does per definition not demonstrate that services have been rendered with a certain degree of permanence at the telecom firm’s offices even if the agreement stated that an office is made available or for that matter in the rental apartment.

Finally the court stated that, although filing a Moroccan non-resident corporate income tax return, having a Moroccan bank account number, or VAT number are, as the court of first instance ruled,  not constitutive for the existence of a  permanent establishment, these elements are relevant in order to determine the taxable person’s intentions regarding the place of effective performance of the service, thereby underlining the fact that, for all documents relating to the performance of the services agreement, the company used its registered office in Belgium.

Note: On 12 February 2019 (2017/AR/1301) the same court rendered a similar decision in respect of an inbound situation (a Luxembourg consultant working for a Belgian bank) stating that the Belgian tax administration failed to provide evidence for the existence of a permanent establishment at the offices of the Belgian bank, notwithstanding the fact that it was clear the taxpayer worked in Belgium.

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