Introduction

Tax treaty provisions similar to Art. 7(2) of the OECD Model Convention require a permanent establishment to be treated in a manner as if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing independently with the enterprise of which it is a permanent establishment. This requirement is generally referred to as ‘the separate enterprise hypothesis’ or ‘the independent enterprise hypothesis’. But, recently, the tax authorities in some important jurisdictions – such as France, Spain, and the United Kingdom – have attempted to leverage on that requirement and attribute notional capital to a permanent establishments of foreign banks. On that basis, they have attempted to deny expense deduction (at least in part) for the interest ‘payment’ by foreign banks’ permanent establishments to their head offices. Relatively recently, the French Conseil d’Etat and the Spanish equivalent of the Court of Appeal have rejected such attempts.

This article focuses on the above-mentioned decisions from the French and Spanish courts.