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4.2. Foreign PE of a Domestic Entity

The same tests used to determine the existence of a Luxembourg permanent establishment for a foreign enterprise, are used to determine whether the activities of a resident enterprise abroad are constitutive of a permanent establishment in the foreign jurisdiction.

In the context of the BEPS and EU harmful tax practices drive, Luxembourg reviewed its regulations effective from 1 January 2019 in order to limit the use of the Luxembourg subsidiary / Swiss financial branch structures. Pursuant to the new rules, the recognition of the existence of a permanent establishment in situations covered by a tax treaty is henceforth based exclusively on the criteria set out in the relevant tax treaty. In this regard, and unless a tax treaty provides otherwise, a taxpayer will be deemed to have a permanent establishment abroad only if the activity performed abroad constitutes, when viewed in isolation, a separate activity and a participation in the economic life of the host country.  The Luxembourg enterprise is required to substantiate the existence of a PE abroad (confirmation through a certificate of registration or other official notification from the relevant foreign authorities), whether mandatorily or at the request of the Luxembourg tax authorities. Where the relevant treaty contains the equivalent of Art. 23A(4) of the OECD Model Tax Convention (switch-over clause in case the host state does not recognize a PE), the confirmation needs to be filed only if requested by the tax authorities. In contrast, it is required to be filed in all cases where the relevant treaty does not contain the equivalent of Art. 23A(4) of the OECD Model Tax Convention.