In order to avoid double taxation of business entities earning income outside the country, governments enter into bilateral agreements allowing income to be taxed in one country where the entrepreneur has their registered office or a permanent establishment. An exception to this rule allows for the taxation of a portion of profit generated by a permanent establishment in the country where that establishment operates, separated from the entire enterprise. Due to differences in tax rates, it may therefore become profitable to maintain one establishment outside the country and serve customers through that establishment. Interestingly, in the age of the information society, an establishment does not have to be a physical office with employees present. A server providing online sales services on behalf of an entrepreneur can be considered a permanent establishment. The condition for recognizing a server as a permanent establishment is its material connection to the territory of the country in which we want to tax the income. For electronic activity conducted by a server to be considered the activity of a permanent establishment, the server should carry out as much of the sales process as possible – receive orders, provide services in the form of making electronic product formats available, issue invoices, and accept payments. The larger the part of the sales process handled by the server, the easier it is to convince the tax authorities that the server is a separate permanent establishment of the enterprise. Of course, it is ideal if the entire sales process is conducted by the server-establishment, but this is not necessary. As is the case with most online transactions, the actual provision of the service or delivery of goods can take place through traditional, non-internet channels. Balancing the number of elements of the sales process performed by the establishment is the key to conducting this type of activity, because according to Art. 5 of the 1992 OECD Model Tax Convention on Income and on Capital, a permanent establishment is a “fixed place of business through which the business of an enterprise is wholly or partly carried on.” In particular, the concept of a permanent establishment therefore includes a place of management, a branch, an office, a factory, a workshop, a mine (…). However, it does not include facilities such as warehouses, those collecting information, or facilities conducting preparatory and auxiliary activities (Art. 5, § 4, items e) and f) of the Convention).
To avoid potential disputes with the tax office, we recommend that if you wish to take advantage of the above advice, you apply to the Ministry of Finance for an opinion on the specific case of your business activity and the separate server-establishment. The Ministry of Finance should issue a binding opinion on this matter within 6 months. In the event that an answer is not provided within this time, the interpretation proposed by the applicant will become binding*.
More information on the taxation of electronic commerce and many other aspects of conducting business on the Internet could be learned during the 23rd seminar of the “Computer Law Academy” series organized on June 21, 2006, by the IT Promotion Center. Media patronage over the seminar was provided by the magazine e-Fakty – everything about e-Business.
* M. Myka, Taxation of electronic commerce, documentation of business activity, materials from the 23rd seminar of the Computer Law Academy series, IT Promotion Center, Warsaw 2006.
