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Tax Treaty Case Law around the Globe 2014 - Schriftenreihe IStR Band 89 (Ausgabe Österreich)
1Chapter 1 Spain: Are Activities in Vessels, Geographically Concentrated Areas and Director's Homes PEs?
Adolfo Martín Jiménez
In the judgment of the (AN) of 25 April 2013, 169/2010, the main issue was whether an Estonian company (M) had a permanent establishment (PE) in Spain. 1 The controversy refers to tax years (2000-2001) in which the tax treaty between Spain and Estonia was not in force (the treaty entered into force on 28 December 2004 and was applicable as of 1 January 2005). The fact that the case refers to tax years prior to the applicability of the tax convention is not very relevant since the domestic definition of "permanent establishment" was modelled on article 5 of the OECD Model and the Spanish tax authorities as well as courts usually take into account the OECD's materials to interpret not only the PE concept in tax treaties but also the domestic definition. 2 , 3 This was certainly the case in the judgment by the AN of 25 April 2013. As a consequence, the decision by the AN would have probably been the same if the factual pattern of the case referred to years covered by the Spain-Estonia Tax Treaty.
1.2. Facts of the case
The Estonian company M conducted fishing activities in 2000-2001. For that purpose, it used Estonian fishing quotas. The ship was a freezing and factory vessel where, in addition to fishing, the fish were cleaned, gutted, cut into pieces and filleted. All the activities were conducted in international 4waters where the final product was sold to a Spanish company (F). The fish were unloaded in Spanish ports, most likely in Vigo, although this is not clearly stated in the decision.
The Spanish tax inspector took into account the following findings of fact, some of which were obtained with the help of the Estonian tax authorities (it is not clear whether this information was obtained in the context of the tax treaty between Spain and Estonia or the EU Directive 77/799 on exchange of information, which was the EU instrument in force at that time):
The company was set up in Estonia in January 2000 but was not regarded as a taxpayer in Estonia until 30 May 2002.
The company had two directors; one an Estonian national, the other a Spanish citizen with a domicile in Vigo, Spain; both had powers to represent the company.
The company purchased the freezing vessel in December 2000 from another company (N), also represented by the Spanish director of M. It appears - although again it is not entirely clear - that M entered into a charter agreement with that company until 2002. N was a resident in Spain.
M had two bank accounts in Spain in which the authorized persons were the directors of the company. In one of the accounts, promissory notes were discounted and bank transfers abroad and expenses such as salaries or social security of employees were also charged.
F (the company importing the fish into Spain and having contracts with M) paid invoices sent by the latter with promissory notes that were cashed in one of the Spanish accounts (there is some confusion on this issue since apparently the promissory notes were discounted in an account of N, from which account the cash was sent to the account of M).
M made payments to Spanish companies, mostly shipping agents but also for repairs of the ship.
The tax inspectors also took into account that the income obtained by M was not taxed in Estonia because for the years 2000-2001 the company was not a taxpayer in that country.
5On those facts the tax inspectors drew the conclusion that M earned income from Spanish sources through a fixed place of business located at the domicile in Vigo of the Spanish director of the company. It seems that this place was chosen because all the mail related to the bank was sent from and received at that postal address. The tax inspectors linked the domicile of the Spanish director to all income from fishing activities obtained by M even though most of the activity did not take place within Spanish territory.
Obviously, M rejected that conclusion and appealed the decision, first, before the Administrative Tribunal of Galicia, second, on appeal, before the Central Administrative Court, prior to it bringing an action to the AN.
There are a couple of additional relevant details: (i) the attitude of the taxpayer was not cooperative at all, e.g. the taxpayer did not show its accounting books to the tax inspector and its income was therefore estimated by resorting to the so-called indirect method of calculation of the tax base and (ii) the decisions of the administrative courts (Regional and Central) were not made public and therefore they could not be consulted for a more accurate description of the facts.
The AN also considered that the following facts were proved by the company:
All the fishing (with Estonian quotas) and processing activity took place in international waters.
M sold all the products to F and all the sales were agreed and occurred before they entered into Spanish territory.
M had the vessel repaired and supplied in Spain (Vigo) on several occasions by Spanish companies.
The Spanish director of the company was resident in Vigo, Spain, and had a power to manage the Spanish accounts where (i) payments from sales of fish were deposited or promissory notes discounted and (ii) payments to Spanish suppliers were made.