40. For the purpose of this study a foreign enterprise may be defined as a non-resident enterprise — i.e., belonging to an individual residing abroad, or to a partnership or company which has its registered office in a foreign country. If the real centre of management of a partnership or company is in a country other than that of its registered office, the former will determine its place of residence (see paragraphs 7 and 23).

41. A general rule regarding the liability of foreign enterprises cannot be given, as, under the Ordinance, it is necessary to examine the circumstances of each case. A foreign enterprise is taxable if it derives income from economic relations with N.E.I., such as by carrying on business in N.E.I. for more than three months, or by having an establishment there (see paragraphs 9 and 25). It is also taxable on income from certain specified sources, such as income from participations in a resident partnership, income from real property, interest on mortgage loans (see paragraph 45), and mining royalties. With regard to income from the taxable sources indicated, other than income from a profession or business, the liability exists irrespective of whether it is received at a N.E.I. establishment or abroad.


(a) Dividends

42. As a rule, dividends on shares of a company incorporated in N.E.I. are not taxable when received by non-resident individuals, partnerships or companies. They may be taxed only when considered business income. For example, when a non-resident enterprise carries on a business in N.E.I. and invests its reserve funds or surplus cash temporarily in shares of any company, N.E.I. or foreign, the dividends are considered to be a part of the business income of the establishment in N.E.I., and are therefore taxable as such.

(b) Interest

43. Interest on Bonds.1 — Interest on bonds issued by N.E.I. companies are not taxed when received by a non-resident enterprise unless, as has been described above in connection with dividends, the non-resident enterprise has in N.E.I. a business which invests its reserve funds or cash in such bonds.


44. Interest on Secured Loans. — When loans made by non-residents are secured by mortgage or otherwise on immovable property situated in N.E.I., the interest is taxable as from January 1st, 1933 (Income-Tax Ordinance, 1932, Article 2 (b) and a similar amendment to the Company-Tax Ordinance 1932, both effective January 1st 1933). The creditor is required to declare this income, together with his other taxable income from N.E.I., and pay tax thereon at the rate applicable to individuals or companies according to the status of the taxpayer.

45. Interest on Unsecured Loans. — Interest on unsecured loans paid by a local company to a foreign enterprise and interest on bank deposits are not taxable unless they constitute income from an investment of reserve funds or cash of the business in N.E.I. as described above in paragraph 43.

46. Interest on capital invested by non-resident limited partners in a N.E.I. partnership is considered taxable income on the same basis as other profits derived from such partnership.

(c) Directors’ Percentages

47. Directors’ percentages are taxed at the source as profits of the company. The non-resident, whether an individual or company, receiving the tantième is exempt from tax.

(d) Royalties for Use of Patents, Copyrights, Trade-Marks, Secret Processes, Formulæ and Similar Income

48. As a rule, such royalties are not taxable, and, in fact, there are very few instances where foreign patents, copyrights, etc., are licensed to local enterprises.

49. Foreign enterprises having an establishment within N.E.I., and engaged in the profession of buying and selling copyrights, are taxable on the income derived therefrom.

(e) Rents from Real Estate, Mining Royalties and Similar Income

50. Such income is, as a rule, subject, on the basis of a declaration, to income tax if the beneficiary is an individual or partnership, or to the company tax in all other cases. The only exception is that royalties paid to a non-resident company which are computed as a percentage of the whole profit of the exploiting company and are taxed as a part of such profit are not taxed again as income of the recipient. Such royalties received by a foreign individual or partnership may, however, be taxed again, as the Income-Tax Ordinance does not contain an exemption for the recipient of royalties which have been taxed at source.

(f) Gain from the Purchase and Sale of Real Estate, Securities or Personal Property

51. These profits are only taxable in case they are considered to be part of the income derived from the business activity of the enterprise within the country. A foreign company, which has no establishment here, is not taxed for the gain derived from the purchase and sale of real estate or securities. If such company has such an establishment here, and is therefore considered a taxpayer, the profits derived from the sale of any assets belonging to the N.E.I. business — e.g., plant, rubber or tea estates — or gain from purchase and sale of securities purchased out of reserve funds, such profits are included in the taxable income of the accounting year. The Company-Tax Ordinance includes profits acquired through the disposal of goods not intended for sale, and, in general, every gain made through such transactions, even if received after the business has ceased to operate.

(g) Salaries, Wages, Commissions and Other Remuneration for Services

52. The recipient of any of these items of income will be taxable if he is in N.E.I. for more than three months, the liability extending to what he has earned since the beginning of that period. Under the Income-Tax Ordinance, this liability arises from the fact of carrying on a professional activity within N.E.I. for more than three months. In practice, a foreign company would be taxable under this head, only if the remuneration were received for services rendered by an establishment within N.E.I. The maintenance of an employee in the country for more than three months might be construed to constitute an establishment. Employers established in N.E.I. must file an information return of amounts paid to employees. If the employee receives more than 1,200 florins, he also must file a return.

(h) Income from a Trust

53. The trust does not exist in the law of N.E.I. In the case of a foreign trust deriving taxable income from N.E.I., the question as to whether the taxpayer will be the beneficiary or the trustee depends upon the provisions of the deed of trust. The taxpayer’s status will determine whether the income tax or company tax is payable.

(i) Income from carrying on a Business or Industry through

(54. The term “carrying on a business” applies, not only to producing or selling in N.E.I., but also to purchasing through a permanent establishment.)

55. (1) A Local Commission Agent or Broker. — Where a local commission agent or broker is carrying on business independently as such, and does not belong to the staff of the foreign enterprise, the income derived by the latter from selling or purchasing through such an intermediary cannot be taxed. The most frequent example of this class of business is where a foreign enterprise sends a consignment of cotton goods to a local commission agent who sells them, for the account of the consignor, to merchants throughout the islands. The fact that the local commission agent receives a del credere commission would, as a rule, be taken as an indication of his independence. Still, there is reason to study each case, as an enterprise not settling down in this country ought not to be in a more favourable position than an enterprise having an establishment in N.E.I. The question may be of great importance when the country is the special buying market for some product, as N.E.I. is for sugar. Though it is not very probable that a foreign enterprise will abstain from founding an establishment only on account of tax liability, the circumstances of each case ought to be studied in order to ascertain if the relations between the commission agent and the foreign enterprise are of such a nature that the latter may be regarded as carrying on business itself.

56. (2) A Local Dealer or Distributor. — As long as this dealer is buying and reselling for his own account, whether he has or not the exclusive right to sell the goods in a particular district, the foreign enterprise itself is not taxable on profits made on the goods sent to this dealer. This is true even though the foreign enterprise has in N.E.I. an engineer to supervise the installation of machines sold by the dealer, or to inspect the goods from time to time. If the dealer or distributor is not, in fact, independent — for example, if he has not sufficient capital of his own — but is selling goods belonging to the foreign enterprise, which carries the risk of bad debts, the latter can be considered as carrying on business, and the tax will be levied on its profits.

57. (3) A Travelling Salesman, whether or not having Power to conclude a Contract. — Under the Income-Tax Ordinance, if the foreign enterprise sends to N.E.I. an employee who travels from place to place taking orders or closing contracts for the sale of goods, the enterprise is taxable on its profits if the salesman remains in N.E.I. for more than three months, and the salesman is likewise taxable on his remuneration. Although the Company-Tax Ordinance does not contain a similar provision, by analogy the company would be taxable on profits derived from carrying on the business in N.E.I. for more than three months. Thus, in practice, liability would arise if the foreign company maintains a salesman in N.E.I. for more than three months, and, consequently, might be regarded as having become established. Liability does not depend upon where the contract of sale is actually closed, but rather upon the fact that the profits resulted from the activities of the employee in N.E.I. for the indicated period.

58. If the travelling salesman does not belong to the staff of the foreign enterprise, but is a local person receiving a commission only when sales are made, the enterprise is generally not taxable.

59. (4) A Local Agent with a Power of Attorney. — The question of liability under this head depends upon the extent of the powers given the agent. If the local agent has an independent position (e.g., a local individual operating from his own home or office), and is merely authorised to collect orders for the foreign enterprise, for which he receives a commission, whereas the transaction is closed directly between the foreign company and the buyers, and the goods are sent directly to the latter, the foreign enterprise cannot be considered as itself carrying on business in N.E.I. The situation is not altered even if the agent acts as intermediary for the payments and eventually for claims, and even if the goods are shipped to the agent for distribution to the purchasers. If the powers of the agent are broad enough to close contracts for the sale of goods or services which bind the non-resident enterprise, the latter is taxable on its profits.

60. (5) An Agent selling out of a Stock belonging to the Foreign Enterprise. — This is a case that seldom arises in practice. In the light of general principles of liability, however, if the stock is maintained in a godown or warehouse belonging to, or leased by, the foreign enterprise, and if the agent makes sales in the name of the foreign enterprise, the latter would be regarded as having an establishment and would be taxable on its profits. On the other hand, if the foreign enterprise consigns goods to an independent merchant who disposes of them in his own name, the foreign enterprise is not taxable.

61. (6) A Permanent Establishment of Any Kind. — As has been mentioned before, in such a case the foreign enterprise is considered to carry on business itself through an “organ”, and it is taxable on all income derived from this source. In the N.E.I. fiscal law no definition is given of the term “permanent establishment”, because such term is not used. For the purposes of this study, the term “permanent establishment” includes the centre of direction, the real centre of management, branches and agencies, factories, offices and premises, and the representation by a member of the staff of the foreign enterprise. In the past, a subsidiary company has not generally been considered as a permanent establishment, even when it is independent only in legal form.


62. For the purposes of this study, an enterprise is a national enterprise if it belongs to an individual, partnership or company resident in N.E.I. as defined in paragraphs 5, 7 and 23.

63. Both the ordinances declare liable to tax the whole income of national enterprises, including the income derived from foreign sources. To avoid double taxation, both ordinances allow certain relief against the N.E.I. tax (see paragraphs 18 and 31).

64. It is unnecessary to discuss the different items of income of a national enterprise as its total income is taxable, whether under income tax or company tax. The income tax is generally levied on the partners in a resident partnership and not on the partnership itself (see paragraph 6).