Permanent Establishments Series #2: Data Centers And Servers – New York Office Snippet

Loyens & Loeff NY regularly publishes ‘Snippets’ on EU tax and legal topics. This is the second Snippet in a series on permanent establishment (PE) risks for U.S. multinationals (US MNEs) in Europe. This Snippet focuses on PE risks in relation to data centers and servers.

For US MNEs relying on data centers in Europe, a key question is whether the presence of servers in Europe can give rise to a PE for the foreign enterprise that owns or operates them. As US MNEs active in AI and cloud solutions expand their European server footprints, it becomes increasingly relevant to determine whether those servers constitute a “fixed place of business” and therefore a PE. Under OECD guidance, followed by most European countries like the Netherlands, Luxembourg, Belgium and Switzerland, a PE requires:

1. a physical place of business that is fixed to a location; and 
2. that the enterprise’s business is carried on through that place. 

A server can itself qualify as a fixed place of business, even without personnel present, if the enterprise operates and controls it at a specific location for a sufficient duration. The enterprise must have the server “at its own disposal,” meaning it owns or leases the server and actively operates it. In practice, dedicated servers located in a country for the company’s exclusive use tend to meet this test.

The use of cloud-based services without a specific, exclusive ring-fenced server generally creates a lower risk on a PE, as the foreign enterprise lacks a distinct fixed location at its disposal. For example, where the European operations rely on a third-party cloud provider’s shared server, no single server or site is effectively “at the disposal” of the foreign enterprise. Similarly, servers in Europe that are used only for preparatory or auxiliary activities such as mirroring data for backup or content caching, may fall under treaty exemptions and therefore do not create a PE. The key considerations are control and permanence: co-location agreements or private data centers that provide a foreign company with identifiable, exclusive server space are more likely to create a PE, whereas multi-tenant cloud usage generally carries a lower risk.

If a server constitutes a PE, the analysis shifts to how much profit should be attributed to that PE. This depends on the functions performed, assets used and risks assumed. Where a server plays only a limited or auxiliary role, the attributable profit may be modest. However, where personnel are present or the server is involved in the MNE’s core business, more significant profits may be allocated to such PE. The fourth Snippet in this series will further explore the profit attribution to PEs.

Want to know more about this topic? Read more of our New York office Snippets or reach out to one of our advisers mentioned below.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.