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17 Jan 2001, Hong Kong

Dr. Ecommerce,

We have tried to open a merchant account overseas, however, some of the countries require an establishment before a Merchant can be opened.

Do you have any idea whether Bermuda, Hong Kong, Singapore, US etc. have such requirements? Is there any location which does not require a local establishment?.

Several banks allow an overseas company to open a merchant account in Europe.

Is there is any tax impact if a company has only a merchant account in Europe, but is not registered in EU, and has no operations server or anything else in Europe?

But some of the customers may be from Europe. Will they be liable to pay European tax?

Silky

Dear Silky:

I cannot tell you the requirements of banks in Bermuda, Hong Kong, Singapore, US regarding merchant accounts. I don't know, different banks may have different policies in the same country and policies change.

If you were to open a merchant account in Europe, you would not be subject to any European taxation on income earned. You would, of course, be subject to Hong Kong tax on that income.

However, your customers, regardless of where they live in the world, would be liable for customs duty and VAT (if applicable) on any goods you ship to them from overseas. Theoretically, this is payable at the port of entry. In practice, with small parcels, the customer pays at the post office or to the courier company delivering the product. In fact, small, low value parcels are very often not charged any duties or taxes at all.

If you are selling business-to-business, the same situation applies, but there may be tax benefits for your customer depending on the nature of the goods. It would be up to your customer to explore this possibility.

If you are selling a digital product which is downloaded from the Internet, your customers are still liable to duty and taxes. But it is up to them to inform their local tax office that they have downloaded a product from overseas (I think we can guess how many consumers will do that!).

Again, these are taxes your customers will have to pay and have nothing to do with you. However, it is a good idea to inform them on your web site that they may be subject to tax on imported products. Businesses will know this already. But some consumers may not and if they are presented with a tax bill in order to receive your product, they may be annoyed and may even refuse delivery of the product (I have heard several cases of this happening.)

Finally, if you are selling digital products that are downloaded via the Internet (considered 'services' in European Union legislation), there is a possibility that you may in future be required to have a VAT presence in Europe, provided your sales exceed a certain threshold. There is proposal for a directive on this now being considered. For more information, take a look at COM(2000) 349 final. . Watch this site for more information.

Good luck,

Dr. Ecommerce