A)Management company taxation in Malta
The DTT concluded the 28th of June 1974 between Belgium and Malta is based on the OCDE model and settles the double taxation issues.
Following the article 7 DTT, “The profits of an enterprise of a Contracting State shall be taxable only in that State unless the entreprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attribuable to that permanent establishment”.
The management company founded under Maltese law is taxed in Malta for its profits generated in Belgium except the existence of a permanent establishment.
There are two possibilities to have a permanent establishment: material establishment or personal establishment.
– Material establishment:
The article 5 defines the term “permanent establishment” like “a fixed place of business in which the business of the enterprise is wholly or partly carried on”.
This definition, therefore, contains the following conditions:
– The existence of a “place of business”, i.e. a facility such as premises or, in certain instances, machinery or equipment;
– This place of business must be “fixed”, i.e. it must be established at a distinct place with a certain degree of permanence;
– The carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated.
The term “place of business” covers any premises, facilities or installations used for carrying on the business of the enterprise whether or no they are used exclusively for that purpose. A place of business may also exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal.
A place of business may thus be constituted by a pitch in a market place, or by a certain permanently used area in a customs depot. Again the place of business may be situated in the business facilities of another enterprise. No formal legal right to use that place is therefore required.
Since the place of business must be fixed, it also follows that a permanent establishment can be deemed to exist only if the place of business has a certain degree of permanency. The practices followed by the countries to estimate the degree of permanency have not been consistent in so far as time requirements are concerned, experience has shown that permanent establishments normally have not been considered to exist in situations where a business that was maintained for less than six months.
– Personal establishment:
The personal establishment is present when “ a person acting in a Contracting State on behalf of an enterprise of the other Contracting State – other than an agent of an independent status to whom paragraph 5 applies – shall be deemed to be a permanent establishment in the first-mentioned State if he has, and habitual exercises in that State, an authority to conclude contracts in the name of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise”.
Persons whose activities may create a permanent establishment for the enterprise are so-called dependent agents i.e. persons, whether or not employees of the enterprise, who are not independent agent falling under paragraph 6 of the article 5. Such persons may be either individuals or companies and need not be residents of, nor have a place of business in, the State in which they act for enterprise.
It would not have been in the interest of international economic relations to provide that maintenance of any dependent person would lead to a permanent establishment for the enterprise. Such treatment is to be limited to persons who in view of the scope of their authority or the nature of their activity involve the enterprise to a particular extent in business activities in the State concerned.
Therefore, paragraph 5 proceeds on the basis that only persons having authority to conclude contracts can lead to a permanent establishment for the enterprise maintaining them.
The use of the term “permanent establishment” in this context presupposes, of course, that that person makes use of this authority repeatedly and not merely in isolated cases.
Also, the phrase “authority to conclude contracts in the name of the enterprise” does not confine the application of the paragraph to an agent who enters into contracts literally in the name of the enterprise. The paragraph applies equally to an agent who concludes contracts which are binding on the enterprise even if those contracts are note actually in the name of the enterprise. Lack of active involvement by an enterprise in transactions may be indicative of a grant of authority to an agent.
If the person does not answer to the conditions of paragraph 5, that person will not be considered as a permanent establishment.
B)Management company taxation in the United Arabs Emirates (hereafter UAE)
The DTT concluded the 30th September 1996 between Belgium and the UAE has the same structure and the same spirit than the DTT between Belgium in Malta.
The big advantage to avoid permanent establishment and to obtain the taxation on all the profits in the UAE, is that UAE applies corporate income tax only on specific companies.
The taxation for the management company in the UAE will be equal to zero.
However, the problem is the same then with Malta. The risk to have a permanent establishment therefore exists.
The DTT with the EAU contains a specific paragraph concerning the furnishing of services.
“The term “permanent establishment” likewise encompasses:
The furnishing of services, including consultancy services, by an enterprise of a Contracting State through employees or other personnel in the other Contracting State, provided that such activities continue for the same project or a connected project for a period or periods aggregating more than twelve months within any eighteen month period.”
In its circular, the Belgian administration says that if the conditions of the specific disposition are completed, there is a permanent establishment even if it does not exist a fixed place of business.
The risk is higher to have a permanent establishment with the application of the DTT with the EAU.
