Article
Foreign corporations receiving royalties in Washington state have nexus, even without a physical presence
Nov. 7, 2016 · Authored by Roy Deaver, Adam Cline
Foreign entities receiving royalties in Washington create nexus in the state, according to a determination by the Administrative Review and Hearings Division (ARHD). The position comes from Washington Tax Determination (WTD) No. 15-0251, 35 WTD 230 (2016), which was released by the Department of Revenue’s ARHD on May 31, 2016.
The key takeaway: Tax treaties don’t preclude the state of Washington from imposing tax on foreign companies, even if those companies don’t pay U.S. tax at the federal level. We give some background and details on the determination in this Insight.
Background
The United States has negotiated income tax treaties with 66 countries. These aim to eliminate or at least limit the potential for double taxation of taxpayers, and they’re most often applied to investment income (dividends, royalties, and interest) and personal services income. These treaties also define a taxable presence in the state, and refer to businesses that meet the threshold as permanent establishments (PEs).
In the Treasury Department’s Model U.S. income tax treaty, a PE is generally defined as a “fixed place of business through which the business of an enterprise is wholly or partly carried on.” It goes on to expressly list several examples of PEs:
- Places of management, branches, and offices
- Factories or workshops
- Mines, oil or gas wells, quarries, and any other place of extraction of natural resources
Additionally, a person that habitually exercises the ability to conclude binding contracts may create a PE.
Based on this definition, foreign entities that have neither a physical presence in the United States nor agents concluding contracts within U.S. borders generally won’t be subject to federal tax.
U.S. income tax treaties are all based on either the model published by the Organisation for Economic Co-operation and Development or the U.S. Treasury model, but they may differ in specifics. The federal government of the United States and the foreign jurisdiction may also negotiate special terms.
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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.