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Foreign company setting up shop – be prepared to pay income tax

Companies incorporated overseas continue to have an interest in doing business in the various industries that make up the Jamaican economy. One variable that tends to remain constant in multiple jurisdictions is that income earned by a company may be subject to a tax applied at a specified rate. In Jamaica, income tax may be imposed on the profits of foreign companies that have a permanent establishment in this jurisdiction. Double taxation treaties to which Jamaica is a party serve the purpose of making provision for the same income to not be taxed in Jamaica as well as the foreign company’s country of residence.

Under the Companies Act, a company incorporated outside Jamaica which establishes a place of business in this jurisdiction, is required to register at the Companies Office of Jamaica (COJ) as an overseas company, generally within one month of establishing the place of business. In compliance with the legislation, overseas companies often get registered at COJ when they set up an office in this jurisdiction. Notwithstanding that, for tax purposes, it is immaterial whether a company is registered under the Companies Act as an overseas company. The Income Tax Act refers to a company having a permanent establishment in Jamaica, which does not even have to be an office. In each year of assessment, a determination would need to be made as to whether a company has a permanent establishment and is therefore subject to pay income tax.

The Income Tax Act defines permanent establishment as a fixed place of business through which the business of a business organization is entirely or partially carried on, and includes:
(a) a place of management;
(b) a branch;
(c) an office;
(d) a factory;
(e) a workshop; and
(f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.

A business organization may be deemed to have a permanent establishment in Jamaica if an agent, who is not of an independent status, is acting on behalf of the organization and has, and habitually exercises, in Jamaica an authority to conclude contracts in the name of the organization.

An organization will however not be deemed to have a permanent establishment merely because it carries on business in Jamaica through a broker, general commission agent or any other agent of an independent status, if any such broker or agent is acting in the ordinary course of its business.

A company may have a presence in Jamaica and still not have a permanent establishment in the island. A permanent establishment does not include:
(a) a building site or construction or installation project that does not last for more than three months;
(b) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise` belonging to the business organization;
(c) the maintenance of a stock of goods or merchandize belonging to the organization solely for the purpose of processing by another business organization;
(d) the maintenance of a fixed place of business solely for the purpose of (i) purchasing goods or merchandize for the organization, (ii) collecting information for the organization, or (iii) carrying on for the organization any activity of a preparatory or auxiliary character.

Double taxation treaties generally provide for the treatment of different types of income or gains including business profits, income from real property, dividends, royalties and capital gains. The double taxation treaty between Jamaica and the United States for example, provides that business profits of an enterprise of a contracting state are taxable in that enterprise’s state of residence, unless the enterprise carries on business in the other contracting state through a permanent establishment. In the latter case, business profits of the enterprise attributable to that permanent establishment may be taxed in the country within which the permanent establishment is located. Similar to what obtains in the case of a local company, an overseas company is allowed to deduct from taxable income, expenses which are reasonably allocable to the income of that permanent establishment.

Note that profits arising from the operation in international traffic of ships or aircraft are generally taxable in the state of residence of the enterprise conducting the operations. As such, airlines do not automatically have a permanent establishment in Jamaica simply because their aircraft land in this jurisdiction.

Double taxation treaties to which Jamaica is a party generally provide that the state of residence of an enterprise will not tax that enterprise in relation to income that is already properly taxed in the other contracting party. Separate from terms expressly provided for in double taxation treaties, Jamaica may also enter into a mutual agreement with a state in specific cases where issues arise as to which country should tax the income of a particular company or enterprise.Foreign companies doing business in Jamaica should seek appropriate advice if uncertain as to their tax liability in this jurisdiction.

Kimberley Brown is an attorney at Myers, Fletcher & Gordon and a member of the firm’s Commercial Department. She may be contacted at kimberley.brown@mfg.com.jm or through the firm’s website www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.

This article is for general information purposes only and does not constitute legal advice.

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