The UK today set out its views on the tax status of web sites and servers.

Speaking at a conference in Lisbon, the Director of the Inland Revenue’s International Division, Gabs Makhlouf, said:

“The OECD has been reviewing with the business community the long term future of the `permanent establishment’ concept – the threshold in the OECD’s model tax treaty below which a country will not tax non- residents carrying on a business in that country. This is crucial work. And it is important that it is carried out with due consideration, and in partnership between representatives of Government and business.

“`Permanent establishment’ is a long standing concept. It is tried and tested. And it is widely supported. As yet, we do not know enough about how e-commerce will develop for anyone to make reasoned decisions on whether or not to move away from it. But now is clearly the time for the debate to begin.

“In the meantime, early decisions are needed on the status of web sites and servers under the existing rules of permanent establishment. Businesses need to know where they stand in order to make investment decisions and calculate their tax liabilities.

“A particularly important policy objective is that the outcome is a practical one. One that works in the real world as well in the heads of lawyers. Governments and businesses need an outcome that allows e-commerce to flourish, that keeps down compliance costs, and that is enforceable.

“In the UK, we take the view that a web site of itself is not a permanent establishment. And we take the view that a server is insufficient of itself to constitute a permanent establishment 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.”


1. The Government’s goal is for the UK to be the best environment in the world in which to trade electronically by 2002.

2. The Inland Revenue and Customs and Excise published on 26 November 1999 a comprehensive review of the tax issues concerning e-commerce (“Electronic Commerce: The UK’s Taxation Agenda”). Chapter 8 highlighted a number of outstanding issues to do with the application of international tax rules to e-commerce, including the application of the permanent establishment concept in double taxation treaties.

3. Under the OECD’s model tax treaty, a non-resident business is only taxable in a foreign country to the extent that it is carrying on business there through a permanent establishment. A permanent establishment is defined as being “a fixed place of business through which the business of an enterprise is wholly or partly carried on”.

4. The OECD published a 2nd draft of a consultation note clarifying the position on the status of web sites and servers. It concerns the legal interpretation of the existing Article 5 of the model treaty and records that there are differing views among OECD member countries on whether a server may be a permanent establishment. It is available on the OECD’s web site at:

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