INTM264700 - Non-residents trading in the UK: permanent establishment: domestic and treaty law: Industry focus 1: e-commerce

E-commerce, e-tailers, servers and internet trading – The Commentary view

Fixed place of business

The Commentary states that an internet web site does not itself constitute tangible property (it is a combination of software and electronic data). It therefore does not have a location that can constitute a ‘place of business’. However, a server (on which the web site is stored and accessed) is a piece of equipment having a physical location and such location may thus constitute a ‘fixed place of business’ of the enterprise that operates the server (but see below for UK’s position).

However, in order for the place where the server is located to constitute a permanent establishment the enterprise carrying on the business through the website must have the server at ‘its own disposal’, i.e. it must own (or lease) and operate the server on which the web site is stored and used. If the website is hosted by an Internet Service Provider (‘ISP’), although fees may be paid to the ISP under such arrangements for disk space (to store data and software required by the website) these contracts typically do not result in the server and its location being at the disposal of the website.

The UK does not concur with other OECD Member States on whether a server of itself can constitute a fixed place of business permanent establishment. Accordingly the UK has made an observation to that effect in the commentary to the Model Treaty Article 5.

In the UK, we take the view that a server either alone or together with web sites could not as such constitute a PE of a business that is conducting e-commerce through a web site on the server. We take that view regardless of whether the server is owned, rented or otherwise at the disposal of the business (see HMRC Press Release, 11 April 2000).

Dependent agent

As noted it is common for ISPs to provide the service of hosting the websites of other enterprises on their own servers. The question is whether Article 5(5) of the OECD Model tax treaty (see INTM264300) is applicable.

The OECD Commentary states that generally Article 5(5) will not apply because the ISPs will not constitute an agent of the enterprises to which the web sites belong, because they will not have authority to conclude contracts in the name of these enterprises and will not regularly conclude such contracts or because they will constitute independent agents acting in the ordinary course of their business (as evidenced by the fact that they host web sites of many different enterprises). (See also INTM262230 for place of contract in e-commerce.)