B Law & Tax
21 August 2023

Tax Advisor: The Supreme Court defines how to register expenses of a foreign branch in the Corporate Income Tax

In recent rulings, the Supreme Court establishes that, when calculating the income from activities carried out by a company in a foreign branch, exempt under article 22 of the Consolidated Text of the Corporate Income Tax Law (TRLIS), the general management and administration expenses that contribute to the purpose of the branch can be apportioned proportionally to that branch, whether in the same country or elsewhere. The issue in the proceeding was how to determine the income of a foreign branch exempt under Article 22 TRLIS, and it is concluded that general expenses benefiting the branch should be allocated proportionally, as they are not individualizable with respect to the branch.

The company questioned the selection of expenses made by the Tax Inspectorate. In summary, it argued that only management and administrative expenses directly related to its objectives should be imputed to the permanent establishment, and that the Inspectorate did not properly assess the distribution of these expenses. For its part, the Inspectorate argued that, in order to determine the profit attributable to the permanent establishment, and thus apply the exemption, certain expenses, such as research and development, management and administration, and financial expenses of the business group, should be excluded to the extent attributable to the permanent establishment. The company had not imputed any amount for these items in several corporate income tax years.

Both parties and the DTAA agreed that proportional expenses can be deducted in calculating the profit of the permanent establishment. The dispute centered on whether all the general management and administrative expenses of the head office can be distributed proportionally or only those related to the establishment. Finally, the Supreme Court concluded that only the expenses related to the permanent establishment are deductible under the Convention.

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