I have an offshore software company that sells software on the Internet. I rent a server in the US to host my website where I distribute the software from as well as facilitate the paypal payments from my customers to my offshore corp. I'm concerned that my choice of using a US-based server imposes a tax-liability on me that I might be able to avoid if I chose an offshore server instead. Can you please shed some light on this?
State/Country relating to question: Florida
Please answer this question in the context of both federal and state tax liabilities
This is a very complicated area of the U.S. tax code. In a nutshell if you are doing business in the U.S. your foreign company will be subject to U.S. taxation on the U.S. income.
So what constitutes doing business in the U.S.? Well if you have a permanent establishment (a fixed place of business), or employ someone, or advertise, etc. in the U.S. you may be considered to be doing business in the U.S.
The U.S. focuses on whether the seller of tangible personal property is engaged in a U.S. trade or business. Internal Revenue Code §§871(b) and 882(a) imposes a tax on income that is effectively connected with the conduct of a trade or business within the U.S. If the seller is not engaged in a U.S. trade or business, its sale into the U.S. via the Internet will not attract U.S. tax, regardless of where title passes.
So does holding a server in the U.S. constitute a permanent establishment? If the seller's home page on a computer server located in the U.S. permits not only the viewing of merchandise but also placing and accepting orders, a strong case can be made for treatment of the site as a fixed place of business, like a catalog store. On the other hand, if no individual is making decisions or taking action in the U.S., the mere fact that sales-related software is located in the United States may well not be considered a "particular site" or other fixed base under a treaty, regardless of attempts to paint the facts with labels such as a "virtual" storefront.
This area taxation is complex and using computer/internet sales make it even more complex. I believe you are probably safe with your server in the U.S. but there is a chance that it is not. If you want to be 100% in the "safe zone" (to be free from U.S. taxation) you might consider moving your hosting needs to an offshore location.
I hope this helps. Let me know if you have any further questions.
US Taxation specialist.