Internal Revenue Service
Revenue Ruling
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smRev. Rul. 62-31
1962-1 C.B. 367
Sec. 882
IRS Headnote
The maintenance of a sales office or showroom in the United States, by a foreign corporation managed and controlled in the United Kingdom, used by a group of salesmen for sales promotion constitutes engaging in trade or business in the United States through a permanent establishment situated therein within the meaning of the provisions of the United States-United Kingdom income tax convention. Accordingly, income derived by the corporation from sources within the United States is subject to United States income tax.
Revenue Ruling 54-588, C.B. 1954-2, 657, revoked.
Full Text
Rev. Rul. 62-31
A foreign corporation has inquired whether the opening of an office in the United States, under the circumstances indicated below, will constitute engaging in trade or business in the United States through a permanent establishment therein within the meaning of the income tax convention between the United States and the United Kingdom, Treasury Decision 5569, C.B. 1947-2, 100.
The corporation, managed and controlled in the United Kingdom, opened an office in the United States for the purpose of promoting its sales of British merchandise. The employees in the United States office, consisting of salesmen and general clerks, are empowered only to run the office, to arrange for the appointment of distributing agents for the merchandise offered by the corporation, and to solicit orders generally. These employees do not have the authority to negotiate and conclude contracts on behalf of the corporation, nor do they have a stock of merchandise from which to fill orders on its behalf. Any negotiations entered into are under the corporation's instructions and subject to its approval as to any decision reached. The only independent authority which the employees have is in the appointment of distributors to whom the corporation is to sell the merchandise. However, even here, the corporation retains the right to approve or disapprove these buyers on receipt of information as to their standing.
The factual situation here is analogous to that considered in Revenue Ruling 54-588, C.B. 1954-2, 657, in which the M Company, Limited, maintains a showroom in New York City where its salesmen solicit orders from samples for merchandise produced by the N Company, Limited. Both corporations are foreign corporations managed and controlled in the United Kingdom. Orders are transmitted by mail direct to the N Company which ships the merchandise to the customer who remits directly to the N Company. The N Company pays a commission on sales of its merchandise made through the sales organization of the M Company. Neither corporation maintains any stock of goods in the United States from which sales are made. The Revenue Ruling holds that the activities in the United States of the M Company, on behalf of the N Company, do not constitute a trade or business through a permanent establishment situated in the United States for purposes of the United States-United Kingdom income tax convention and that, accordingly, by reason of Article III(1) of the United States-United Kingdom income tax convention, the commissions received by the M Company are not subject to United States income tax.
The Internal Revenue Service has reconsidered Revenue Ruling 54-588 upon a reexamination of the factual situations and the applicable law and regulations. Article III of the United States-United Kingdom income tax convention provides, in part, that a United Kingdom enterprise shall not be subject to United States tax in respect of its industrial or commercial profits unless it is engaged in trade or business in the United States through a permanent establishment situated therein.
Article II(1)(l) of the convention states, among other things, that the term `permanent establishment' when used with respect to an enterprise of one of the contracting parties means a branch, management, factory or other fixed place of business. It also states that the fact that such an enterprise maintains in the territory of the other contracting party a fixed place of business exclusively for the purchase of goods or merchandise shall not of itself constitute such fixed place of business a permanent establishment of such enterprise.
The maintenance of an office or showroom used by a group of salesmen for sales promotion is a fixed place of business. The exception to an office or fixed place of business constituting a permanent establishment is an office or fixed place of business exclusively for the purchase of goods or merchandise. An office or showroom used for sales promotion does not fall within such exception.
Accordingly, it is held that the maintenance in the United States, by a foreign corporation managed and controlled in the United Kingdom, of an office or showroom used by a group of salesmen for sales promotion, under the facts set forth above, constitutes engaging in trade or business in the United States through a permanent establishment situated therein within the meaning of the provisions of the United States-United Kingdom income tax convention.
Revenue Ruling 54-588, in holding that M Company does not engage in a trade or business in the United States through a permanent establishment situated therein, relief upon another part of the definition of the term `permanent establishment' to the effect that the term does not include an agency unless the agent has and habitually exercises a general authority to negotiate and conclude contracts on behalf of the enterprise or has a stock of merchandise from which he regularly fills orders on its behalf. While that part of the definition would have been relevant had the question been whether N Company, for which M Company solicits orders, maintains a permanent establishment in the United States, the question instead was whether M Company maintains a permanent establishment in the United States so as to become subject to United States income tax upon the commissions which it received from N Company on the orders obtained. Since M Company maintains a showroom in the United States for the solicitation of such orders, that company clearly has a fixed place of business in the United States, constituting a permanent establishment within the meaning of the convention, for the carrying on of its commission business. The conclusion reached was therefore erroneous, and Revenue Ruling 54-588 is hereby revoked.
Whether the enterprise derives any income from sources within the United States that will be subject to United States income tax is to be determined with regard to sections 861 to 864 of the Internal Revenue Code of 1954 and the regulations issued thereunder.
Pursuant to the authority contained in section 7805(b) of the Code, the provisions of this Revenue Ruling will not be applied with respect to income derived prior to March 12, 1962.