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“In this world nothing can be said to be certain, except death and taxes”.

If you want to explain what taxation is to a child, probably Benjamin Franklin’s quote is the most reliable description ever made. Indeed, taxation was born a long time ago and will continue to exist by the end of the world.

Non human being can live without paying taxes, because without them you have no access to elementary needs, like home, work and more other more technical like social securities, i.e. pension, hospitality, etc. Any human being is subject to taxation with respect the goods it has, with the work rendered, or with the income derived. Thus, there is a certainty of taxation, this being also most important principle in taxation literature. People needs to be certain that from a specific event they are going to be subject to taxation, but with certain limits in order to avoid the double taxation of the same transaction.


Hence, it seems that the aforementioned concepts, death and taxes, are most certain facts in the world, non of them having a specific beginning and most probably non of them will met a specific ending.

Does “taxation” concept means extracting money from the people by the government, or is it a “fee” we pay for the privilege of living in an organised society? The trite point at issue is that taxes represent a payment imposed by governments to raise funds. On the other side, tax evasion would be a form of resistance to mandatory taxation environment.

Tax is a cultural phenomenon. While British income tax represents the vanguard of modern tax, the first known records of tax date back to Ancient Egypt in the reign of King Scorpion I. A tax is rarely rescinded, however, there are historical records of such practices.


1. Romanian taxation of PEs

Romanian taxation environment is not so old or developed like other EU Member States jurisdictions (e.g. United Kingdom, the Netherlands, Luxembourg etc.), being considered relatively new taking into account that the first comprehensive tax legislation entered into force as at January 1st, 2004 – Law no. 571/2003 regarding Fiscal Code.

Until the aforementioned date, there where separate legal acts for each type of tax, such as Law no. 414/2002 regarding Corporate Income Tax, Law no. 345/2002 regarding VAT, Government Ordinance no. 26/1995 regarding Dividend Tax, Government Ordinance 
no. 7/2001 regarding Personal Income tax etc. Thus, January 1st, 2004, is considered to be a key moment in Romanian taxation, being the moment when all tax legislation was consolidated in one legal act, namely first Romanian Fiscal Code. Also, at that date entered into force Order no. 92/2003 regarding Fiscal Procedural Code, establishing the Romanian taxation procedures for all taxpayers that are subject to taxation in Romania.

Twelve years later, on January 1st, 2016, the initial tax legislation were repealed, and new legislations entered into force with the purpose to update the Romanian taxation system with international taxation standards – Law no. 227/2015 regarding Fiscal Code, respectively Law no. 207/2015 regarding Fiscal Procedural Code.

Concerning the Permanent Establishment, we will further analyse this concept starting with the current Romanian legislation and will move forward through the international legislation up to current challenges in BEPS era.

But why is so important a PE analysis? First of all, it is worldwide accepted that the states want to tax the revenues derived within their territories. Thus, if taxation of local companies’ income is relatively easy, being took into account the specific domestic regulations (e.g. revenues of a Romanian resident entity will be taxed with 16% for corporate income taxpayer, respectively 1% or 3% for microenterprise taxpayers), taxation of non-residents should be analysed from a case by case, in order to avoid a double taxation for the same type of income. Hence, whether after an in depth analysis is performed, a PE is born within a state’s territory, all the related income derived by the non-resident will be subject to taxation in that state – e.g. if a Dutch entity is carrying on transactions in Romania through which a PE is born, all the revenues derived from that specific activity will be subject to 16% corporate income tax rate in Romania.

¬ What is a Permanent Establishment as per the Romanian tax legislation

As per art. 8 para. (1) of Law no. 227/2015 regarding the Fiscal Code, “a permanent establishment is defined as a place through which a non-resident’s business activity is totally or partly carried on, either direct or through a dependent agent”.

Thus, it can be noticeably that there are two main elements that cumulatively can born a PE in Romania:

(i) an extraneity element – the non-resident;

(ii) a business activity carried on within Romanian territory.

If both conditions are met, it should be analysed what is and what is not considered a PE according with the Romanian tax legislation. In this regard, according with on our analysis there are several types of PEs, as follows.

¬ Fixed place PE

In this case a PE is considered a fixed place of management, a branch, an office, a factory, a shop, a workshop, as well as a mine, an oil or gas well, a quarry or any other place of extraction of natural resources, as well as a place through which on a continuity basis is carried on an activity with assets and liabilities of a Romanian entity subject to a reorganisation process (e.g. merger, spin-off etc.).

¬ Installation PE

A PE is considered also a building or construction site, an installation project, or assembly, or supervision activities related to the aforementioned ones, only if the site, project or activities lasts longer than 6 months. In this case, the specification of the PE is the duration, by meaning longer than 6 months

¬ Agency PE

A non-resident is considered to have a PE with regards to the activities rendered by a person, other than an independent agent, in the name of the non-resident, 
if the person acts in Romania in the name of the non-resident and if one of the following conditions is met:

• the person is authorised and is exercising authority in Romania to conclude agreements in the name of the non-resident, with exception to the activities limited at art. 8 para. (4) lit. a) – f) of the Fiscal Code;

• the person maintains in Romania a stock of goods or products from where are delivered goods or products in the name of the non-resident.

¬ Service PE

These are the cases when an employee of the non-resident render activities in Romania in the name of the non-resident for a specific period of time.

¬ What is not considered a Permanent Establishment in Romanian

As general rule, the aforementioned situations are deemed to born a PE and should be considered essentially when analysing the PE impact in Romania. However, by exception to the above-mentioned situations, a PE is not considered:

a) using of an installation only with depositary purposes or exposition of products or goods that belongs to a non-resident;

b) maintaining of a stock of products or goods that belongs to a non-resident only with depositary or exposition purposes;

c) maintaining of a stock of products or goods that belongs to a non-resident only with the purpose of being processed by another person;

d) selling of products or goods that belongs to a non-resident, that were exposed during expositions or fairs without permanent character or occasional, if the products or goods are sold not later than one month after closing of exposition or fair;

e) keeping of a fixed place of activity only with the purpose of acquisition of goods or products or collecting information for a non-resident;

f) keeping of a fixed place of activity only with the purpose of carrying out of ancillary or preparing activities by a non-resident;

g) keeping of a fixed place of activity only for a combination of the activities mentioned at points a) – f) above, with the condition that the entire activity rendered at the fixed place to have a preparing or ancillary nature.

Moreover, a non-resident is not considered having a PE in Romania whether it carries on activities through a broker, agent, general commissionaire or intermediary agent with independent statute, in case such activities are the daily activities of the agent, according with the description from the incorporation documents. However, in case the activities of the agent are rendered totally or partly in the name of the non-resident, and as per the commercial and financial relations between the non-resident and the agent exists different conditions by the ones that would exist between independent persons, then the agent is not considered with independent statute.

¬ Procedural obligation of a PE in Romania

The provisions of Fiscal Procedural Code states that any person or entity that is subject of a fiscal juridical report has the obligation to register in Romania for taxation purposes, receiving a Tax Identification Number (“TIN”). Moreover, the fiscal registration statement should be submitted by entities within 30 days from registration date as per the tax legislation.

As per the Procedure of fiscal registration of non-residents that carries on activities in Romania through one ore more PEs, for registration purposes the non-resident needs to fill in and submit Form 013 “Statement for Fiscal Registration / Mentions / De-registration for non-resident taxpayers which are rendering activities in Romania through one ore more PEs”. Such tax registration statement should be filled in in 2 original versions, one submitted with the Romanian Tax Authorities (“RTA”) and a copy, containing the registration number, is kept by the non-resident. Based on the above-mentioned Form 013 and copies of the documents for supporting the information presented in the registration statement, the RTA will give the non-resident a TIN and will issue the related Tax Registration Certificate.

In case changing of any of the initial information declared, the non-residents have the obligation to submit a Form 013 for mentions / de-registration purposes, in term of 30 days from the occurring event (e.g. in case the non-resident is changing the Romanian PE address).

2. OECD Model Tax Convention and related Commentaries

Due to the lack of extensive jurisprudence in our legislation, the Romanian Fiscal Code expressively mention that when define a PE are taken into account also the commentaries from art. 5 “Permanent Establishment” of the Model Convention for avoidance of double taxation of Organisation for Economic Co-operation and Development (“OECD”), even though for the moment Romania is not OECD member.

¬ Double taxation and historical background of OECD

Double taxation concept can be generally defined as taxation of the same taxpayer in two States with respect to the same subject of income which relate to the same period of time. Its harmful effects on exchange of goods, services and movements of capital, technology and persons (i.e. these being also the basic freedoms within the European Union), are so well known that it is scarcely necessary to stress the importance of removing the obstacles that double taxation presents to the development of economic relations between the countries.

There are two categories of double taxation:

a) Economic double taxation – when tax is imposed on the same transaction, income or capital, during the same period of time (domestic double taxation) or by two or more States (international economic double taxation), but at the hands of different taxpayers; a well-known example is the distribution of dividends from the profit of a company – the latter is subject to CIT, while the shareholders are subject to personal income tax on the dividend income which is derived from the already taxed profits of the company. In such cases the profit of the company is taxed twice, however the subjects of taxation are different;

b) Juridical double taxation – when comparable taxes are levied on the same taxpayer in respect of the same subject matter for identical periods, in two or more States.

From my practical experience, juridical double taxation occurs almost always in cross-border situations and thus, as a result it harmful the international economic relations between the countries.

Thus, taking into account the negative impact that the double taxation has for the countries, the OECD members recognised the necessity to clarify, standardise and confirm the tax situations of taxpayers that are engaged in international transactions (i.e. commerce, finance etc.) through the application by all countries of common solutions for identical cases of double taxation.

The first recommendation related to the double taxation issue was published in 1955 by the Organisation for European Economic Co-operation (i.e. the predecessor of OECD), by that time being already in force double tax conventions between several countries, as well one of the first model bilateral conventions, i.e. Model Conventions of Mexico (1943) and London (1946). However, neither of these Model Conventions were fully and unanimously accepted by countries. After the Second World War, when the economic interdependence and co-operation between the countries increased due the so known globalisation process, the OECD members showed increasingly of the importance of measures to be taken for preventing the international double taxation.

In 1963 the Fiscal Committee presented the first Draft Convention, envisaging that it might be revised on a later stage. Further on, all the efforts of the Fiscal Committee of OECD and, after 1971, its successor the Committee of Fiscal Affairs, resulted in the publication of the Model Tax Convention and Commentaries, in 1977.

Due to the extended influence of the Model Tax Convention far beyond the OECD member countries, the Committee decided that the revision process should be open also for input of non-member countries, international organisations or other interested parties. This led to publication of newly enacted Model Convention in 1992 – since then it was updated 10 times (i.e. in 1994, 1995, 1997, 2000, 2002, 2005, 2008, 2010, 2014 and 2017). The 2017 update included a large number of changes resulting from the OECD/G20 Base Erosion and Profit Shifting (“BEPS”).

¬ Role of OECD Model Convention and Commentaries

The increased conclusion of Double Tax Conventions (“DTC”) led to necessity of continuously update the Model Tax Convention and Commentaries (“MTC”). Probably the main function of the MTC is linked to harmonisation function, by laying down unified set of allocation rules and determination of DTC’ scope. The MTC’s commentaries present interpretations where Vienna Convention on Law of Treaties (“VCLT”) lack to provide coherent and appropriate law interpretations. My consideration is the logical consequence that VCLT is applicable to all international treaties, covering a wide rage of general situations interpretations, and on the other side the OECD MTC, being more specific, is able to give precise guidance in double taxation field.

The other more practical function of the MTC is determination of basic outlines for allocating the taxation rights between the countries. It serves as a template for concluding bilateral DTC and facilitates the process of negotiations.

Nowadays, a wide range of states recognise and apply the MTC, its effect going beyond the OECD member countries, being used as basic reference during DTC negotiations between OECD member state and a non-member state, as well as between two non-member states, too. The growing importance of MTC also contributes to the wide recognition of its Commentary as guideline for interpretation of DTCs.

Moreover, it is important to determine the legal status of MTC. As it can be noticed, MTC does not qualify as legislation and there is no international rule to prescribe its mandatory applicability, thus it is not a legally binding document.

However, taking into account that the MTC and its Commentaries are adopted by the OECD’s Council, such decisions requiring unanimity led to the assumption that the provisions of MTC reflect the intentions of all member states.

As per art. 31 para. (4) of VCLT, special meaning can be attributed to a term if it is established that the parties so intended. In case od DTCs of OECD member states that followed the MTC without changes, it can be considered that the MTC as historical tool of interpretation of DTC and that the intention of the parties was to use it for resolving their potential interpretation conflicts.

In my opinion, taking into account the countries’ freedom to make observations to the provisions of the MTC when disagree the interpretation laid down, at the moment of concluding or negotiating a DTC, it can be binding considered for them in the absence of any additional commentary that they tacitly agreed with the related MTC Commentaries. Please note that, such assumption is strongly applied only for OECD member states, the non-member states having the possibility to invoke their less power in negotiation of the MTC’s Commentaries.

¬ PE concept

From a practical point of view, if an entity decides to carry on cross-border business activities, there are three basic methods:

a) Parent-Subsidiary structure – by setting-up a foreign subsidiary to operate on foreign market. From a legal perspective are two different entities, but are subject to Transfer Pricing regulations;

b) Short-time activities – by carrying on activities in other country, however due to the lack in type, duration or geographical presence there is no PE existence.

c) PE structure – by establishing a specific business (e.g. factory, shop etc.) which is not incorporated according with the foreign legislation. Such structure is the most complex and problematic, due to the fact the tax law treatment does not follow the private law, according to which the activities of the headquarter are inseparable to the ones of PE and therefore are assigned to the enterprise itself instead of certain part of the enterprise.

Thus, not every unincorporated cross-border business activity leads automatically to the born of a PE. The presence of the foreign entity must reach a certain threshold in the source state, such as particular level o business activity and a substantial economic interest.
The standard PE concept is described at art. 5 Permanent Establishment of MTC (i.e. excerpt of the MTC article can be analysed at Appendix

2). In this part of the thesis will scrutinise the different PE concepts of art. 5 of MTC (e.g. classical, construction, agency), by pointing out their possible weak points which expose the PE rules to potential fraud or abuse.

a) Classical PE

Art. 5 (1) of MTC provides the definition of the classical, basic PE concept, according to which it is a fixed place of business through which the business of an enterprise is wholly or partly carried on. In order to establish that a PE exists based on this definition, several tests have to be met…

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