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Treaty between Belgium and Netherlands – Court of Appeal Ghent holds stock of goods does not constitute PE — Orbitax Tax News & Alerts

In a decision of 16 January 2007 (reported 31 May 2007), the Court of Appeal Ghent (Hof van Beroep Gent) decided in a case on the existence of a permanent establishment (PE) under the 1970 Belgium-Netherlands tax treaty on income and capital (the "treaty"). Details of the case are summarized below.

(a) Facts. A Dutch distribution centre of an international group is responsible for the maintenance of central and local stock levels of spare parts, which are necessary for maintenance contracts with clients.

In 1995, 1996 and 1998 the Dutch company owned a stock of goods in Belgium for the benefit of the Belgian group company. Based on a service agreement between the Belgian company and the Dutch company, the Dutch company agreed to put the necessary spare parts at the disposal of the Belgian group company in exchange for a periodical payment. The organizational management of the stock was carried out from the Netherlands, whereas the physical management and transport of the goods was left to an unrelated third company. The goods were stored in a building owned by the Belgian group company. The Dutch company did not employ any personnel and did it keep any books and records in Belgium.

The Belgian tax administration reasoned that the Dutch company had a PE in Belgium. The Dutch company was assessed on the deemed profits of the PE. The Dutch company appealed against that decision.

(b) Issue. Whether or not the Dutch company has a PE in Belgium?

(c) Decision. The Court Appeal overturned the decision of the Court of First Instance Ghent of 25 November 2004, which decided that the Dutch company had a PE in Belgium. The Court of Appeal observed that a stock of goods constitutes a PE pursuant to Art. 229(1)(10) of the Belgian Income Tax Code (ITC). In this context, the Court found that it is irrelevant which company managed the stock and which contractual and property rights the Dutch company had on the real estate where the stock was kept. In addition, the Court held that the fact that the Dutch company did not employ any personnel in Belgium and its only activities consisted of the management of the stock from the Netherlands did not prevent a finding that the Dutch company had a PE in Belgium in accordance with Belgian domestic law.

However, the Court observed that in Art. 5(1) of the treaty, a PE is defined as a fixed place of business in which the business of the enterprise is wholly or partly carried on. Contrary to Art.229 of the Belgian ITC, Art. 5(2) of the treaty does not list that a stock of goods and storage place constitutes a PE. The Court noted that the goods were only kept in Belgium for storage, display or delivery in accordance with Art. 5(3)((a) and (b) of the treaty. The stock was only maintained in Belgium to serve the Belgian group company in an efficient way, and to enable it to meet its maintenance obligations towards its Belgian clients.

Based on a textual interpretation, the Court rejected the argument of the tax administration that the exemptions of Art. 5(3) of the treaty only apply if the listed activities do not constitute the main activity of the foreign company, but are of an auxiliary or preparatory nature.

Consequently, The Court held that the maintenance of stock by a Dutch distribution centre in Belgium does not constitute a PE under Art. 5 of the treaty.