A foreign branch’s recognition as a permanent establishment under Article 5 of the OECD Model Tax Convention is crucial to obtaining tax relief with respect to income generated and assets held through that branch. Proper recognition also ensures that profits are allocated correctly between a head office in Luxembourg and a foreign purported permanent establishment in accordance with Article 7 of the OECD Model Tax Convention. Several recent Luxembourg court decisions emphasize the substantive and evidential requirements for recognizing a branch as a foreign permanent establishment under their respective double tax treaty. This article analyzes the recent case law that helps clarify the criteria.

The first decision under review was held by the Administrative Tribunal in May 2023,¹ and subsequently upheld by the Administrative Court.²  In this case, a Luxembourg company declared a permanent establishment in the US and accordingly claimed exemptions from corporate income tax (CIT), municipal business tax (MBT), and net wealth tax (NWT) for its attributed income and assets. The central issue was whether the company indeed had a financing permanent establishment in the US.

Both the Administrative Court and the Administrative Tribunal reiterated that all three elements must be met to constitute a permanent establishment under Article 5 of the Luxembourg-US double tax treaty:

1. There must be a place of business.
2. This place of business must be fixed, meaning that it must have a connection to a specific geographical point and demonstrate a certain degree of permanence.
3. The business activities must have been carried out entirely or partially through this fixed place of business.

This reasoning differs from that of the director of the Luxembourg tax administration, who seemed to consider the absence of commerciality as the basis to deny the existence of the US permanent establishment.

The court further emphasized it is the taxpayer that bears the burden of proving the existence of a real, specific, and fixed physical establishment, concretely demonstrating the alleged permanent establishment’s day-to-day activities, actual performance, and concluded agreements with as much evidence as possible.

Subsequently, both the Administrative Tribunal and the Administrative Court expressed doubts regarding the following:

• The identification of the branch address, since it was unclear from which location the activities were being carried out
• The payment of fees and expenses incurred, since there was no record of payments under the office-sharing and service agreements
• The opinion of the Luxembourg entity's US counsel, as it was considered insufficient to confirm the existence of a US permanent establishment and merely addressed its possible US taxation
• The absence of a dedicated branch bank account
• The terms of the financial flows in relation to the loans granted

Moreover, the court noted that the taxpayer failed to present any concrete evidence of operational activity or management choices made by its alleged US permanent establishment. Specifically, there was no documentation from client or internal meetings nor records of management decisions related to the branch. As the taxpayer was unable to provide concrete evidence that the criteria outlined in Article 5 of the Luxembourg-US double tax treaty were met, the Administrative Court denied the existence of such a permanent establishment in the US.

Similarly, in July 2024, the Administrative Tribunal addressed another case of a purported US permanent establishment by focusing on the double tax treaty between Luxembourg and the US. The tribunal observed that the Luxembourg company maintained a fixed place of business, thereby satisfying the first two cumulative conditions of the permanent establishment definition under Article 5 of the treaty³ However, the activities conducted in the US were limited, and the Luxembourg company did not demonstrate activities carried out through its US branch, thus failing to meet the third cumulative condition. Specifically, the US branch was unable to provide bank account statements with payments that proved the branch manager was dedicating one to two hours per month to its affairs.

Since the Luxembourg company could not substantiate its limited activities through its branch or the actual execution of the contracts concluded, the Administrative Tribunal concluded that the US branch could not be classified as a permanent establishment under the double tax treaty. No appeal was made with respect to this decision.

In another decision held in April 2025, the Administrative Court refused to recognize yet another branch, this time in Malaysia, as a permanent establishment.⁴  Considering Article 5 of the relevant double tax treaty and the OECD commentaries, the court held that the taxpayer’s alleged branch office in Malaysia was not fixed or clearly identifiable since the exact location of the office varied and lacked clarity. Despite claims from the taxpayer that certain documentation aligned with the current state of affairs, contradictory management reports indicated different addresses for the branch.

Moreover, several elements cast doubt on the reality of services delivered according to the service level agreement (SLA) and the reality of the fixed place of business. This included:

• Retroactive effect of the SLA, signed over a year after the effective date, without sufficient justification
• Head office services which were intended but never provided, with revenues booked that were not substantiated by actual serviced delivered
• Failure to provide proof of payment for fees owed under the SLA
• Lack of documentation substantiating that tasks were executed as detailed in the SLA, such as preparing accounts and performance reports
• Delayed opening of a bank account for the alleged permanent establishment, which was only opened in 2020, despite associated services supposedly being rendered since 2016

Regarding the involvement of the alleged branch’s manager, a lack of documentation and participation in significant meetings raised further doubts about their role and the actual management activities carried out from Malaysia. Ultimately, the court rejected the existence of a permanent establishment there, aligning with the tribunal's initial decision.

While most of the cases above required the taxpayer to prove the existence of a permanent establishment abroad, in a January 2023 decision from the Luxembourg Administrative Tribunal, it was the Luxembourg tax authorities who attempted to establish its existence.⁵ In this case, the parties disagreed on whether a fixed place of business in Italy constituted a permanent establishment of the Luxembourg company, arguing that it had not conducted any commercial activities from its fixed place of business in Italy, and it only carried out activities of a preparatory or auxiliary nature related to its main activity in Luxembourg. In this specific instance, the Luxembourg tax authorities, rather than the taxpayer, asserted the presence of a permanent establishment in Italy.

Despite the company's fixed place of business in Italy, as defined by the double tax treaty and its receipt of licensing income from Italy-based research and development (including seminar and certifications), the Administrative Court found insufficient evidence to prove substantial activity. This conclusion also considered the absence of an Italian bank account.

Most recently, in June 6, 2025, the Administrative Tribunal again examined the evidence submitted by a taxpayer and concluded that there was no fixed place of business and no activity carried out by the taxpayer through its US branch.⁶ The evidence included board resolutions setting up the US permanent establishment, service agreements between the Luxembourg companies and the US parent company, internal management agreements, photographs of the office, activity reports, and bank statements (among others).

The tribunal concluded that the documents provided were considered to be “internal” and that the US parent company—not the US branch—performed the activities, as the contracts transferred the obligations via the Luxembourg head office on to the US parent. It also noted that the representatives of the permanent establishment in the US lacked genuine authority to manage it, particularly due to their absent signatory power for banking transactions. Additionally, the lack of detailed invoices, tangible evidence of decision-making in the US, and authentic operational independence made it impossible for the tribunal to verify the purported activity in the US.

Conclusion

In all their recent decisions, the courts consistently highlighted that the recognition of a permanent establishment must be based on the criteria outlined in the relevant double tax treaties, particularly Article 5, rather than internal provisions like Paragraph 16 of the Tax Adaptation Law, or Steueranpassungsgesetz (StAnpG).⁷  While the criteria pre-date the introduction of § 16, paragraph (5), StAnpG, it is interesting to note that the Administrative Tribunal affirmed the taxpayer was justified, in all of these cases, to challenge the applicability of § 16, paragraph (5), StAnpG. This is because an internal provision cannot impose conditions that would determine the existence of a permanent establishment located abroad where a double tax treaty is in place.⁸

Throughout these various cases, it has become clear that to prove the existence and operation of a permanent establishment, the taxpayer bears the burden of providing concrete documentation, such as lease agreements, registration certificates, bank statements, and records of actual business activities. As demonstrated in the cases alleging permanent establishments in the US, Malaysia, and Italy, failure to meet these criteria can lead to their rejection.

These rulings reinforce that for a foreign branch to be recognized as a permanent establishment under Luxembourg law, it must meet all substantive conditions outlined in the applicable double tax treaty, supported by strong and concrete evidence of its operational activities and fixed presence. Hence, taxpayers should take heed, and diligently document and substantiate that their foreign operations meet the permanent establishment criteria of the relevant double tax treaties.