Tax Points of Concern

Permanent Establishment, Case Study - ADIT Exam June 2010

Cella Inc. is a company resident in the state of Corfe. Dux Ltd is a wholly owned subsidiary of Cella Inc. and is resident in the state of Duncandia. The business of Cella Inc. is the manufacture and distribution of expensive medical diagnostic equipment. The business in Duncandia is undertaken as follows: Cella Inc. maintains a warehouse in Duncandia. Cella Inc. purchases components for the equipment and stores them in its warehouse. It sells the components to Dux Ltd which is licensed by Cella Inc. to manufacture the equipment and sell the whole of its production to Cella Inc. The completed equipment is stored in the warehouse by Cella Inc for sale to customers. Cella Inc. sells the equipment to customers in Duncandia via a website on a server situated in Corfe.
The website collects payment and arranges delivery of the equipment by sending a message to Dux Ltd which arranges delivery of the equipment from the warehouse to the customer on behalf of Cella Inc. Marketing representatives employed by Dux Ltd make visits to potential customers in Duncandia and demonstrate the equipment, but instead of taking orders, refer the potential customer to the website. Customers who enter the representative’s details on the website qualify for a discount and the representative in question receives an incentive payment for each such sale. In view of the low risks to Dux Ltd, it charges a modest, but arm’s length, mark up on the cost of manufacturing and services provided to Cella Inc. The tax treaty between Corfe and Duncandia is identical to the OECD Model Tax Convention.
You are required to advise the tax administration in Duncandia whether Cella Inc has a permanent establishment in Duncandia.