Principal Issues: A Canadian company provides data hosting services to a related Non-Resident Company. The Non-Resident places its website on a server in Canada owned by the Canadian. Does the Non-Resident have a permanent establishment in Canada as a result?
Position: No
Reasons: The web-hosting services provided by the Canadian to the Non-Resident would not, in and of themselves, constitute a PE of the Non-Resident.
XXXXXXXXXX
2012-043214
XXXXXXXXXX, 2012
Dear XXXXXXXXXX:
Re: XXXXXXXXXX ("Taxpayers")
Advance Income Tax Ruling Request
This is in reply to your letter of XXXXXXXXXX in which you request an advance income tax ruling on behalf of the above-mentioned Taxpayers. We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations and meetings in connection with your request.
To the best of your knowledge and that of the Taxpayers, none of the issues involved in this request for an advance income tax ruling is:
(i) dealt with in an earlier return of the Taxpayers, or a related person;
(ii) being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of the Taxpayers or a related person;
(iii) under objection by the Taxpayers or a related person;
(iv) before the courts, and no judgement has been issued which may be under appeal; or
(v) the subject of a Ruling previously issued by the Directorate.
Definitions
In this letter, the following terms have the meanings specified below. Unless otherwise noted, all legislative references are to the Act.
(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date of this letter.
(b) "Advertisers" means advertisers who place advertisement on the Taxpayers' websites.
(c) "Agreement" means the proposed XXXXXXXXXX between Canco and USCo and between Canco and NRCo, as described in 21 below.
(d) "Canco" means XXXXXXXXXX.
(e) "Cansub" means XXXXXXXXXX.
(f) "Convention" means the XXXXXXXXXX.
(g) "CRA" means the Canada Revenue Agency.
(h) "Data Centre" means a data centre to be constructed by Canco, as described in the Proposed Transactions.
(i) "Developers" means third-party application developers.
(j) "NRCo" means XXXXXXXXXX.
(k) "Province" means XXXXXXXXXX.
(l) "Taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act.
(m) "Taxpayers" means USCo and NRCo collectively.
(n) "Treaty" means the Canada-United States Tax Convention, as amended by the Fifth Protocol, signed on September 21, 2007.
(o) "U.S." means the United States of America.
(p) "USCo" means XXXXXXXXXX.
Our understanding of the Facts, Proposed Transactions and the Purpose of the Proposed Transactions is as follows:
Facts
1. USCo is a corporation formed under the laws of XXXXXXXXXX. Its address is XXXXXXXXXX. USCo is not resident in Canada for the purposes of the Act. USCo is a resident of the U.S. for the purposes of the Treaty. USCo does not file an income tax return in Canada and does not have a business number with the CRA.
2. NRCo is a corporation formed under the laws of XXXXXXXXXX. Its address is XXXXXXXXXX. NRCo is not resident in Canada for the purposes of the Act. NRCo is a resident of XXXXXXXXXX for the purposes of the Convention. NRCo does not file an income tax return in Canada and does not have a business number with the CRA. NRCo is an indirectly-held, wholly-owned subsidiary of USCo.
3. Cansub is a company incorporated under the laws of Canada, and is a taxable Canadian corporation. Its address is XXXXXXXXXX. Cansub is a directly-held, wholly-owned subsidiary of USCo. Its business number is XXXXXXXXXX. It files its returns with the XXXXXXXXXX and is served by the XXXXXXXXXX Tax Services Office.
4. Canco is a company incorporated under the laws of Canada, and is a taxable Canadian corporation. Its address is XXXXXXXXXX. Canco is an indirectly-held, wholly-owned subsidiary of USCo. Its business number is XXXXXXXXXX. It will file its returns with the XXXXXXXXXX and will be served by the XXXXXXXXXX Tax Services Office.
5. The Taxpayers are engaged in the business of XXXXXXXXXX to users through the Taxpayers' websites, which are accessed by web browser, or through mobile applications. XXXXXXXXXX. Users access the Taxpayers' websites through web browsers via their own internet service providers or through mobile applications via their own mobile carriers.
6. XXXXXXXXXX.
7. The Taxpayers typically enter into written contracts for advertising services with their XXXXXXXXXX Advertisers. XXXXXXXXXX Advertisers typically purchase advertising services online through the Taxpayers' websites under standard terms. The advertising content is typically stored on the Taxpayers' servers. Canadian Advertisers purchase advertising from USCo.
8. The Taxpayers allow third parties, such as Developers, to use its platform to, for example, sell digital content (e.g. XXXXXXXXXX and other digital content) to users. The Taxpayers charge a fee to the Developers for each transaction, which is based on a XXXXXXXXXX earned by the Developers. XXXXXXXXXX. The Developers, not the Taxpayers, make the supply of digital content to the users. This is clearly stated in all applicable terms and conditions. Canadian Developers pay the fees to USCo.
9. XXXXXXXXXX.
10. XXXXXXXXXX. For purchases made by users from the Developers through the Taxpayers' websites, the Taxpayers will process the transaction, retain a percentage of the XXXXXXXXXX paid by the users and remit the balance XXXXXXXXXX to the Developers.
11. XXXXXXXXXX.
12. The Taxpayers' websites are currently hosted at data centres owned or leased by the Taxpayers in the U.S. XXXXXXXXXX. The Taxpayers' websites operate in a manner whereby generally all software and data are contained on servers in multiple locations. This structure results in each of the Taxpayers' data centres generally holding a complete set of user information and associated functionality. However, certain functionality may be limited to one data centre location, particularly as new features are tested and deployed or as new data centre locations are being constructed.
13. The websites hosted in the data centres at the different locations may be used interchangeably, although to improve performance, users in a particular geographic region are generally directed to the server in that same region. In addition, to improve performance, the Taxpayers use XXXXXXXXXX so that traffic to a data centre may be re-directed to another data centre, if necessary.
14. The Taxpayers do not operate country-specific websites; rather, all users access a single site and platform. However, advertising content will be directed at particular users based on the users' demographics. Each data centre hosts user activity for users inside and outside of the country in which the data centre is located. For this reason, the user data is fully replicated on the servers of all of the Taxpayers' data centres.
15. XXXXXXXXXX.
16. USCo and its US affiliates have entered into a services agreement with NRCo whereby, in exchange for an arm's length fee, USCo provides website and data hosting capacity to NRCo, as may be requested by NRCo from time to time.
17. Cansub provides services to USCo in connection with marketing and sales support activities for USCo's development and expansion of the user base, Advertiser and Developer communities in Canada.
18. At the end of XXXXXXXXXX, the Taxpayers and their affiliates had XXXXXXXXXX. Note XXXXXXXXXX to USCo's XXXXXXXXXX which was filed with the U.S. Securities and Exchange Commission on XXXXXXXXXX, reported assets and revenues as follows:
XXXXXXXXXX
Proposed Transactions
19. USCo will invest in, and will arrange for loans from related or unrelated persons to Canco to enable Canco to construct the Data Centre in the Province. Canco will acquire the land and build the Data Centre. The Data Centre will consist of XXXXXXXXXX. For the first phase, it is anticipated that construction will commence in XXXXXXXXXX, and will be completed in XXXXXXXXXX, with a "go-live" date in XXXXXXXXXX.
20. Canco will own the Data Centre, and own or lease all of the servers and equipment contained therein. Canco's employees will operate and maintain the Data Centre. Specifically, the hardware in the Data Centre and the physical premises will be controlled by Canco, as described below.
21. Canco will enter into the Agreement with USCo and NRCo whereby, in exchange for a fee determined in accordance with arm's length principles, Canco will provide USCo and NRCo with website and data hosting capacity, as may be requested by USCo and NRCo from time to time. Payments by the Taxpayers to Canco under the Agreement will commence once the website and data hosting services are provided by Canco to the Taxpayers (and not upon the execution of the Agreement).
22. The servers in the Data Centre will be used to host the Taxpayers' website and data. The servers will provide associated automatic services, including data storage and data processing, transaction processing and other XXXXXXXXXX applications. The servers in the Data Centre will also host advertising content. The Data Centre will operate in a manner consistent with the Taxpayers' data centres that operate in other jurisdictions.
23. The websites and data hosted in the Data Centre will be fully functional as a XXXXXXXXXX website. Specifically, the websites will include the web pages containing the advertising content, XXXXXXXXXX, which directs users to XXXXXXXXXX servers and accesses XXXXXXXXXX applications and content for sale to users, and applications allowing access to and provision of the Taxpayers' XXXXXXXXXX services as described above.
24. To retain the integrity of data control, Canco will not be permitted to use or process the data controlled by the Taxpayers that resides in the Data Centre, except as a data processing service provider on behalf of, and under instructions of the entity that controls the particular data (i.e. USCo or NRCo, as the case may be).
25. Canco will not be party to any agreement under which it is agreed that Canco will provide services directly to the users, Advertisers or Developers. Nor will Canco, as an agent of the Taxpayers, legally bind the Taxpayers, or assume or create any obligations of the Taxpayers.
26. Personnel employed by or under contract to Canco will principally be responsible for the installation, operation, maintenance and repair of the equipment located in the Data Centre. Access to the Data Centre, and other secured areas within the Data Centre, will be restricted to Canco employees. In accordance with the Taxpayers' protocol in place at each of the Taxpayers' data centres, employees of USCo and NRCo will not have unrestricted access to the Data Centre. All employees will be required to show identification and will be escorted upon visiting the Data Centre. A small group of individuals employed by USCo or a related U.S. entity who run the site operations organization for USCo will be authorized by Canco to visit the Data Centre from time to time for the purposes of inspection, maintenance or similar purposes. In any event, the presence of USCo's employees or employees of any U.S. entity related to USCo at the Data Centre will be less than XXXXXXXXXX days in an aggregate in any XXXXXXXXXX month period (with multiple employees of USCo or a related U.S. entity simultaneously present on the same day at the Data Centre counting as one day).
27. Applications and data hosted in the Data Centre will be managed remotely by employees of the Taxpayers located outside of Canada. Such persons will have the ability to monitor performance of the hardware and software located in the Data Centre, install and uninstall applications, perform maintenance on the hosted applications, and otherwise manage the software and data resident in the Data Centre by remote access.
Purpose of the Proposed Transactions
The purpose of the Data Centre is to enhance the user experience for the Taxpayers' XXXXXXXXXX by reducing latency (i.e. "wait times") for users, providing redundancy and disaster recovery risk management and providing overall efficiency of the Taxpayers' website primarily for users in North America, but also for users outside of North America.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant Definitions, Facts, Proposed Transactions and Purpose of the Proposed Transactions, and provided further that the Proposed Transactions are carried out as described above, our rulings are as follows:
A. USCo is entitled to the benefits of the Treaty by virtue of paragraph 3 of Article XXIX-A of the Treaty in respect of such portion of the income described in paragraph 6 above that is derived from Canada.
B. USCo will not be considered to carry on business through a permanent establishment, as defined in Article V of the Treaty, situated in Canada solely as a consequence of the activities described in the Proposed Transactions.
C. NRCo will not be considered to carry on business through a permanent establishment, as defined in Article 5 of the Convention, situated in Canada solely as a consequence of the activities described in the Proposed Transactions.
These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002 and are binding on the CRA provided that the Agreement is effective by XXXXXXXXXX.
Caveats
The above-noted rulings are based on the Act, the Treaty and the Convention in their present form and do not take into account any proposed amendments to the Act, the Treaty or the Convention which, if enacted, could have an effect on the rulings provided herein.
The rulings provided herein are based solely on the Facts, Proposed Transactions and Purpose of the Proposed Transactions described above. Any documents submitted with your request do not form part of the Facts and Proposed Transactions and any other references thereto are provided solely for the convenience of the reader.
Nothing in this letter should be construed as implying that the CRA has reviewed, accepted or otherwise agreed to any tax consequences relating to the Facts and Proposed Transactions described herein other than those specifically described in the rulings given above. Nothing in this letter should be construed as implying that the CRA has considered, examined, agreed to or ruled on whether:
- transfer pricing practices of entities in this letter are in accordance with section 247 of the Act; or
- activities other than those specifically described in the Proposed Transactions carried out in Canada by the Taxpayers (or by Cansub on behalf of the Taxpayers) would create a permanent establishment of the Taxpayers in Canada under the Treaty or the Convention.
Yours truly,
XXXXXXXXXX
For Director
International Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch
