In which country do I have to pay taxes?

[Brillo]

Hi everyone, I know the question seems to be trivial ... but in my case I think it is not. At least for me.

I recently moved my tax residence to Malta and incorporated a LTD with the 5% structure.

To date, however, this great doubt arises.

I do Webhosting and I mainly sell VPS and physical servers.
The system is obviously all automated, but all my network infrastructure and servers in general is in the Netherlands. Many suppliers I buy from and many of the companies I source from are Dutch companies. So practically my center of interest let's say that it is in Netherlands as all my "capital" (hardware) is in 2 different Dutch datacenters.
From Malta, I usually reply to emails and take care of paying bills.
According to this, Where do I have to pay taxes? In the Netherlands or in Malta? If there is a lawyer here on the forum or someone who can answer this question I would be grateful ...

Thank you

 

[Sols]

It's a valid concern but it's unlikely this would create enough of a connection to the Netherlands to be taxable there. Just make sure you handle VAT correctly and pay Dutch VAT where applicable, and you are probably completely fine paying tax in Malta and not Netherlands.

What you're after here is the definition of a Permanent Establishment. If we look at Article 5 at the 2017 tax treaty model from OECD (https://www.oecd.org/ctp/treaties/articles-model-tax-convention-2017.pdf), we find this:

2. The term “permanent establishment” includes especiall
a) a place of management;
b) a branch;
c) an office;
d) a factory;
e) a workshop, and
f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.
3. A building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months.

You don't fit any of these.

4. Notwithstanding the preceding provisions of this Article, the term “permanent establishment” shall be deemed not to include:
a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;
b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery;
c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;
d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise;
e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity;
f) the maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs a) to e),

A pretty good argument could be made that, even if you don't fit any of paragraph 2 or 3, you would still be exempt by paragraph 4(a).

It wouldn't hurt to get a Maltese and/or Dutch lawyer or licensed tax adviser to confirm, though.

 

[forbidd3nknowl3dg3]

It's a valid concern but it's unlikely this would create enough of a connection to the Netherlands to be taxable there. Just make sure you handle VAT correctly and pay Dutch VAT where applicable, and you are probably completely fine paying tax in Malta and not Netherlands.

What you're after here is the definition of a Permanent Establishment. If we look at Article 5 at the 2017 tax treaty model from OECD (https://www.oecd.org/ctp/treaties/articles-model-tax-convention-2017.pdf), we find this:

You don't fit any of these.


A pretty good argument could be made that, even if you don't fit any of paragraph 2 or 3, you would still be exempt by paragraph 4(a).

It wouldn't hurt to get a Maltese and/or Dutch lawyer or licensed tax adviser to confirm, though.

Great answer Sols!

OP, you should be very thankful.

 

[Brillo]

Thank you very much for the answer @Sols . Really really helpful.

let me change a little bit the question now.
If I move my personal residence in Italy or Spain, but I open a Dutch company, an office, and I also hire an employee in Netherlands. I will be taxed in Italy/Spain or in Netherlands based on my business?

 

[forbidd3nknowl3dg3]

Thank you very much for the answer @Sols . Really really helpful.

let me change a little bit the question now.
If I move my personal residence in Italy or Spain, but I open a Dutch company, an office, and I also hire an employee in Netherlands. I will be taxed in Italy/Spain or in Netherlands based on my business?

A lot of countries have deeming provisions whereby corporations incorporated in that particular jurisdiction past a certain date will be deemed resident for tax purposes. Canada is one such example. You need to speak with a tax lawyer in the Netherlands. In my experience, western countries tend to mirror each other when it comes to rules regarding residency.

 

[Sols]

If I move my personal residence in Italy or Spain, but I open a Dutch company, an office, and I also hire an employee in Netherlands. I will be taxed in Italy/Spain or in Netherlands based on my business?

The company risks being taxable in both and having to use a tax treaty to figure out your tax burden in each jurisdiction (the burden may end up being zero). But on the other hand, it's possible the company would be tax resident only in Netherlands and you'd just be on the hook for personal taxes on your own income (salary, dividends) in Spain/Italy. You'd have to sit down with lawyers/tax advisers for the relevant jurisdictions to sort out the details.

 

[lacomaco]

It's a valid concern but it's unlikely this would create enough of a connection to the Netherlands to be taxable there. Just make sure you handle VAT correctly and pay Dutch VAT where applicable, and you are probably completely fine paying tax in Malta and not Netherlands.

What you're after here is the definition of a Permanent Establishment. If we look at Article 5 at the 2017 tax treaty model from OECD (https://www.oecd.org/ctp/treaties/articles-model-tax-convention-2017.pdf), we find this:

You don't fit any of these.


A pretty good argument could be made that, even if you don't fit any of paragraph 2 or 3, you would still be exempt by paragraph 4(a).

It wouldn't hurt to get a Maltese and/or Dutch lawyer or licensed tax adviser to confirm, though.

You forgot to attach the first rule in the OECD model treaty Paragraph 5:
1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

That is why Rule 2 says “especially”, outlying possible occassions but not all setups which are PEs.

Here is a link to why a server is a PE in Sweden:
https://www.taxathand.com/article/1...r-can-be-considered-a-permanent-establishmentSame for Italy:
https://www.bacciardistudiolegale.it/en/server-permanent-establishment-taxation-italy/
Now this opens up a huge can of worms if you think about possible taxation of AWS servers operating in many countries… I expect that the OECD will also clarify its stance in the future. I think we should be careful in giving out our opinion if the question is related to a Western country’s tax system.

And of course I might be wrong

 

[Sols]

Here is a link to why a server is a PE in Sweden:
https://www.taxathand.com/article/1...r-can-be-considered-a-permanent-establishmentSame for Italy:
https://www.bacciardistudiolegale.it/en/server-permanent-establishment-taxation-italy/

Interesting. The times I've seen this argument brought up there have been other aspects that tie the company/person to the jurisdiction. But the Swedish statement in particular is very aggressive. I wonder if it would hold up in court. I did a quick search and couldn't find any examples of this being enforced, but a more thorough research might reveal some.

I get the impression that the Italian statements and rulings seem to be typical anti-Big Tech behavior and less about going after small businesses. But it's something to be mindful of, for sure.

Now this opens up a huge can of worms if you think about possible taxation of AWS servers operating in many countries… I expect that the OECD will also clarify its stance in the future. I think we should be careful in giving out our opinion if the question is related to a Western country’s tax system.

The reason I was (still am) confident in OP not being taxable in NL is there are hundreds of web hosting companies — big and small — that offer servers across the world and the only local taxes they have to worry about are VAT and import duties if they move servers there.

It doesn't seem like a generally accepted practice to tax based on server alone.

And of course I might be wrong

You're not wrong because these laws, agreements, and guidance notes are written with vague wording intentionally. The danger with making laws too specific is they become easy to circumvent by malicious actors. (The danger with vague laws is you can run into very unusual interpretations.) All we can do is look for rulings, statements, and legal summaries/opinions.

 

[lostguy]

Most often it's simple. You have to pay tax from where you manage the company. It requires substance to convince the tax office that a company is not managed from where you are located.

 

[RealDude]

In the German Wikipedia there is an article on the topic „server permanent establishment“. It starts with:

The server permanent establishment is a concept in international tax law. The question of whether a server can establish a taxable permanent establishment in a state is of great importance, particularly at the unilateral (Section 49 (1) No. 2a EStG) and international law level (Art. 5 OECD-MA).[1] By establishing a permanent establishment through a server, a tax connecting factor would arise in the state in which the server permanent establishment is located. Furthermore, it is questionable how high the taxable profit is that can be attributed to a server permanent establishment.

https://de.m.wikipedia.org/wiki/Server-Betriebsstätte

 

[Sols]

Look at the dates of these statements and articles. There seems to have some activity around this about 10+ years ago but I'm not finding any rulings anywhere using server locations as a PE, other than a May 2022 ruling in Italy against Netflix. Obviously, not all tax cases make it to the news but if the only successful case so far is against Netflix, I don't see any major risks for web hosting.

Has anyone had any luck finding other rulings?

Spain wants to tax big streaming services, but aren't going after server location as such. It seems focus has shifted away from servers as PEs towards actual provision of services.

If enforced broadly, it would simply lead to an exodus of data centers from some countries and a big increase elsewhere. That would mean a lot of lost jobs and shuttered businesses.

All in all, I don't see any impact for OP. It would be the companies using the servers that risk creating a PE, not OP by providing the servers for rent.

 

[lacomaco]

Look at the dates of these statements and articles. There seems to have some activity around this about 10+ years ago but I'm not finding any rulings anywhere using server locations as a PE, other than a May 2022 ruling in Italy against Netflix. Obviously, not all tax cases make it to the news but if the only successful case so far is against Netflix, I don't see any major risks for web hosting.

Has anyone had any luck finding other rulings?

Spain wants to tax big streaming services, but aren't going after server location as such. It seems focus has shifted away from servers as PEs towards actual provision of services.

If enforced broadly, it would simply lead to an exodus of data centers from some countries and a big increase elsewhere. That would mean a lot of lost jobs and shuttered businesses.

All in all, I don't see any impact for OP. It would be the companies using the servers that risk creating a PE, not OP by providing the servers for rent.

Servers are in The Netherlands, webhosting is done in The Netherlands, VPS sare running on servers located in The Netherlands, the servers which are sold are in The Netherlands and clients are also from The Netherlands. Let's say that the possibility of taxation of the PE in The Netherlands is not that low... So yes, without the ruling I see some risks

 

[Sols]

Servers are in The Netherlands, webhosting is done in The Netherlands, VPS sare running on servers located in The Netherlands, the servers which are sold are in The Netherlands and clients are also from The Netherlands. Let's say that the possibility of taxation of the PE in The Netherlands is not that low... So yes, without the ruling I see some risks

More concisely: servers are in the Netherlands and clients are in Netherlands.

VAT is to be charged for non-exempt clients in the Netherlands (just like any other EU member state). That's already clear and well understood.

The servers being in the Netherlands has no precedent for creating a PE for the web hosting company. But if OP signs a deal with some major streaming service, that streaming service could be at risk of creating a PE in Netherlands. Why do you think Italy went after Netflix (streaming service provider) and not AWS (web host)?

Or have you found statements/rulings that implicate the web host?

 

[lacomaco]

More concisely: servers are in the Netherlands and clients are in Netherlands.

VAT is to be charged for non-exempt clients in the Netherlands (just like any other EU member state). That's already clear and well understood.

The servers being in the Netherlands has no precedent for creating a PE for the web hosting company. But if OP signs a deal with some major streaming service, that streaming service could be at risk of creating a PE in Netherlands. Why do you think Italy went after Netflix (streaming service provider) and not AWS (web host)?

Or have you found statements/rulings that implicate the web host?

No, I am just cautious