Attribution of Free Capital and Interest Expenses to a Permanent Establishment under the ‘Authorised OECD Approach’ for non-financial Enterprises What is the Impact of Interest Attribution on the Allocation of Profits under the new Approach?

Abstract: This thesis aims at analysing and discussing the rules and opportunities of using permanent establishment within financial structures. Financing structures between related parties can be seen as one of the most common tax planning tools for MNE´s. This planning is tackled by thin capitalization rules and is also under the observation of the transfer pricing guidelines. Whereas permanent establishments combined with financial decisions were not in focus for tax planning issues for a long time. Accompanied by the introduction of the ‘Authorized OECD Approach’ in Art 7 of its Model Tax Convention, the OECD gave up an old position: internal interest dealings for non-financial enterprises are now recognized under certain circumstances. This paper seeks to find out what impact this change has on the attribution of profits to a permanent establishment, in particular if this change will make permanent establishment more attractive and under what special circumstances ‘notional’ interest expenses can be allocated to the permanent establishment. Therefore, this thesis provides an overview of the AOA itself and in particular analyses the different approaches that are provided by the OECD for the attribution of free capital and internal/external interest expenses.