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13 Sep 2000

Dear Dr. Commerce,

The branch office of a non-resident company in Switzerland (i.e. a UK company having a branch office in Switzerland) is buying products from an Italian supplier and selling these products all over Europe through the Swiss branch office.

How would this company be taxed? Which country has the jurisdiction? Does it make any difference where the server/info provider is located?

Thanks for your help.

Serena

Dear Serena:

I asked the e-legal experts at the University of Washington's Center for Law, Commerce, & Technology to answer your question. And answer it they have:

International taxation and Internet taxation are two difficult topics. Your hypothetical case presents only limited facts and therefore we can only provide a limited response. Based on the general facts you have provided us, we have given you some general guidance and issues to think about as w

How would this company be taxed?

Income tax may be levied in England and in Switzerland. The basic rule is that a corporate entity may be subject to taxation wherever it has a permanent establishment. Swiss income tax law generally applies to any "permanent establishment" located in Switzerland,, e.g. a branch office that owns

A more favorable tax treatment might be achieved by establishing a Swiss subsidiary instead of a branch. There is special Swiss legislation giving Swiss subsidiary companies of foreign parent companies an advantageous status.

Which country as jurisdiction?

Every country has jurisdiction to levy taxes on persons and companies active in its territory. In this case, both England and Switzerland do have jurisdiction. This may result in double taxation. Double taxation might be mitigated or eliminated by Double Taxation Treaties.

Does it make a difference where the server or provider is located?

For income tax purposes, the location of the server should not make a difference. In the area of value added (consumption) tax, some companies/persons want to get around VAT laws by locating their servers (their computers through which Internet transactions take place) outside the United Kingdom. They then argue that because their servers are located elsewhere, their activities are not carried out in the UK. This is a gray area that requires careful monitoring. It is widely accepted, however, that server presence alone will not create a permanent establishment for VAT or income tax purposes.

The main question here will be where are the sales taking place for VAT purposes to decide which jurisdictions VAT rules will apply. Both the UK and Switzerland use a destination-based concept for VAT taxation (i.e, the VAT of the country where the goods are delivered/consumed should apply). The websites listed below go further into the VAT question for both Switzerland and the United Kingdom.

What about the purchase of goods in Italy?

The issue of where the supplies were purchased may make a different as to the type of duties that the company has to pay for purchasing the goods and whether they are technically imported into Switzerland and then resold. This is a bit beyond the scope of our answer, however as the main issue here is whether it is the United Kingdom or Switzerland who will tax the income generated from the Internet sales activity of the Swiss branch.

http://www.taxation.ch/english/international.htm (International aspects of Swiss tax law)
http://www.henley-partner.com/swisstax2.htm (Swiss tax issues on corporate and VAT taxation)
http://www/eubusiness.com/cgi-bin
http://www.vated.com (VAT info and analysis of server arguments) http://www.twobirds.com/library/internet/selling.htm (tax issues for sale of goods over the internet)

Good luck!

Dr. Ecommerce

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