Dell Case: Interpretation of "permanent establishment" by the Spanish Supreme Court

The Spanish Supreme Court (the Court) has issued a judgment, dated 20 June 2016, in which, agreeing with the Spanish Tax Inspectorate, it states that the Irish resident company of a technological multinational group (which was operating in Spain through a subsidiary which formally acted as a low-value adding sales commissionaire) had in the Spanish territory, through its Spanish subsidiary, a permanent establishment (PE) with very wide functions, leading to the allocation to the PE of a significant part of the income of the Irish company and its corresponding taxation in Spain.

The Court confirms that the Irish company has a fixed place of business in Spain at its disposal by de facto managing the activities of the staff of the Spanish subsidiary for the development of the activities of the corporate purpose of the former company (in particular, the subsidiary was performing the following functions on behalf of its Irish parent company: (i) promotion, sale and attraction of customers; (ii) management of orders and control of reception and distribution of products; (iii) marketing and advertising for all its customers in Spain; (iv) warehousing and logistics services; (v) installation services; (vi) collection management for all its customers in Spain; and (vii) solvency and credit control).

Additionally, the Court considers that the principal-commissionaire agreement entering into between the Irish and the Spanish company also generates a PE under the concept of "dependent agent", after confirming that the functional and factual analysis carried out by the Administration and the lower courts led to the conclusion that there is a dependence of substantial scope and not merely ancillary between the activities of both entities, and a lack of legal and economic independence for lack of autonomy of the commissionaire in taking decisions on sales of the products of the Irish company.

According to the Court, all the above is covered by the obligation to interpret the provisions of the Tax Treaties taking into account the current reality, which is "a globalized market where multinational companies try to shift the profits obtained in other States to one of low taxation", thus ruling out the static and literal interpretation that courts in other jurisdictions have been able to make on the same provisions of Article 5 of Tax Treaties which are analogous to the case discussed here.

The importance of this judicial pronouncement is that it supports the actions that the Spanish Tax Inspectorate may continue carrying out in the coming years to tax in Spain the income obtained by those multinational groups which may be using structures similar to the case discussed here with the aim of billing a large part of its income from companies established in territories with a taxation lower than the resulting one if the income would have been reported in Spain.