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The Supreme Administrative Court: marketing activities did not constitute a permanent establishment

22 December 2021

The SAC has issued a precedent (KHO 2021:171), which concerned the constitution of a permanent establishment in Finland. The case concerned a Swedish company, belonging to a foreign group operating in the pharmaceutical industry. The Swedish company was responsible for many regional activities, such as sales, marketing, customer service and product development. The company had three employees in Finland, who marketed the products to doctors and other experts. The employees did not sign or negotiate contracts or receive orders from clients. The company had no premises in Finland.

I earlier stages of the litigation the Finnish Tax Administration, the Adjustment Board and the Administrative Court had decided that a permanent establishment was constituted. The legal question was whether the activities in Finland could be considered preparatory or auxiliary, in which case a permanent establishment would not be constituted. According to the OECD Commentary, for example advertising can usually be considered as auxiliary. Hence, the nature of the activities in Finland was auxiliary as such.

Yet, according to the OECD Commentary, an activity cannot be considered auxiliary where the activity is part of the core business of the company. This means that even activities that are normally considered auxiliary may constitute a permanent establishment, where they represent the core business. What is auxiliary for many, may not be for some. The decisions issued in previous stages were based on this rule: the activities in Finland were considered to form part of the core business. For example, the Administrative Court had considered that the employees in Finland were engaged in promoting the products, which is intimately connected to sales, which again is the core business of the company.

In essence, the decision hinged on how the activities or functions of the company are categorized: whether a function is separate and merely auxiliary to another, or a part of the other function. Based on the justifications and clarifications given by the company the SAC held the promotion of the products cannot be considered a part of the core business. Even though sales constituted part of the core business, sales can also have auxiliary functions such marketing by product promotion. No permanent establishment was constituted and the previous decisions were overturned.

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Rami Karimeri

Rami Karimeri

Partner, Corporate Taxation, PwC Finland

Tel: +358 (0)20 787 7841

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