Permanent establishment: the Spanish Supreme Court issues ruling in Dell case

On 20 June 2016, the Spanish Supreme Court ruled on the appeal filed by Dell and upheld the Spanish National Court’s findings against the appellant’s position. The Spanish Supreme Court, therefore, concludes that Dell had operated in Spain through a “fixed place of business” permanent establishment. The Court also found that Dell had acted through a dependent agent, although its conclusions in such respect are obiter dicta.

To sum up the facts, the Dell group was operating in Spain, through a structure which legal commentators have described as “a multifaceted operative deployment of its businesses”. Sales were carried out in Spain through a group subsidiary acting as a commissionaire on behalf of an Irish group company. Such Spanish subsidiary was also responsible for coordinating several tasks complementary to the sales functions (technical support, guaranties, maintenance, etc.).

The Spanish Supreme Court concluded that the Irish company was effectively operating in Spain through a permanent establishment. Changing the order followed by the National Court, the Supreme Court first addressed the issue of the fixed place of business. The Court found that, since the functions corresponding to the business of the Irish Dell Group company were being performed by Spanish subsidiary, the material and personal means of such Spanish subsidiary should be deemed to be at the disposal of the Irish company.

Both the Spanish National Court and the Supreme Court considered irrelevant the fact that these activities were also performed or could also be performed in Ireland. However, this element had carried considerable weight with the Tax Authorities in their original finding, in which they considered that, since the Irish company had no local means to perform the functions, such functions could only be deemed to be performed from Spain. This important fact is nowhere to be found in the courts’ rulings, where the performance of the functions in Spain is simply considered to have been proven.

This case has given rise to much interest in other jurisdictions as the operative described was set up by the Dell group in other countries. In fact, the Dell case was also analysed by Norwegian Tribunals, where the exact opposite conclusion was reached. The Spanish Supreme Court does not overlook his fact and specifically states that permanent establishment findings should not be based on excessively formalistic or literal interpretations of the applicable provisions, as other jurisdictions have done.

The ruling of the Supreme Court clearly follows the trend adopted by tax authorities and courts in recent years, which have made an extremely wide interpretation of the permanent establishment requirements. This trend was noted by the OECD in its relevant BEPS report. In this context, certain countries have chosen to enact new legislation to capture tax revenue which is lost as a result of tax planning percieved as overly agressive (for instance, UK or Australia and their diverted profits tax legislation). Spain, on the other hand, favours the application of the criteria and constructs relating to interpretation the double tax treaties, as proposed by the OECD. However, the results to which the Spanish Tribunals arrive evidence the tension which arises when attempting to apply old-fashioned concepts – despite all of the OECD’s efforts to make such criteria relevant – to situations resulting from an increasingly flexible business environment.