Cloud Computing under Double Tax Treaties: A German Perspective

Abstract

Cloud Computing is one of the most recent trends in the IT-industry. Based on refined existing technologies a new set of services in the fields of IT-services is rendered to customers. Typically, Cloud Computing is about the provision of software and hardware capabilities to the customer via the Internet. Cloud Service Providers often operate cross-border. Therefore, from an international tax perspective it is particularly of interest how the right to tax the compensation for 'Software-as-a-Service' (SaaS) is allocated in a cross-border scenario. Further, it is the question whether the compensations will be subject to withholding taxes in the source state. With regard to the provision of hardware capabilities (Infrastructure-as-a-Service - IaaS) there may be an issue around the creation of a permanent establishment (PE) and, given a PE, the profit allocation. The thoughts on Cloud Computing under double tax treaties from a German tax perspective show that the analysis of the tax consequences of the Cloud Services may be complex in a given case. The tax impacts will in particular depend on the nature of the rights regarding the use and exploitation of the software and the technical set-up of the Cloud Service Provider. More complexity may be added in cases of mixed contracts, where different kinds of services are offered to the customer in the form of a bundle of services.