[Code of Federal Regulations]
[Title 26, Volume 18, Parts 500 to 599]
[Revised as of April 1, 2000]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR509.105]

[Page 41-42]
 
                       TITLE 26--INTERNAL REVENUE
 
     CHAPTER 1--INTERNAL REVENUE SERVICE DEPARTMENT OF THE TREASURY 
                               (Continued)
 
PART 509--SWITZERLAND--Table of Contents
 
                       Subpart--General Income Tax
 
Sec. 509.105  Industrial and commercial profits.

    (a) General. (1) Article III of the convention adopts the principle 
that an enterprise of one of the contracting States shall not be taxable 
by the other contracting State upon its industrial and commercial 
profits unless it is engaged in trade or business in the latter State 
through a permanent establishment situated therein. Accordingly, a Swiss 
enterprise is subject to United States tax upon its industrial and 
commercial profits, to the extent of such profits from sources within 
the United States, only if it is engaged in trade or business in the 
United States at some time during the taxable year through a permanent 
establishment situated therein.
    (2) From the standpoint of the United States tax the article has 
application only to a Swiss enterprise and its industrial and commercial 
profits from sources within the United States. Thus, a nonresident alien 
individual who is a citizen of Switzerland, or a Swiss corporation or 
other entity, carrying on an enterprise which is not Swiss, is subject 
to tax on such income of such enterprise pursuant to section

[[Page 42]]

871(c) or section 882(a), Internal Revenue Code of 1954, if such alien, 
corporation, or other entity has engaged in trade or business in the 
United States at any time during the taxable year, even though it has 
not had a permanent establishment therein at any time within such year.
    (b) No United States permanent establishment. A Swiss enterprise is 
not subject to United States tax upon its industrial and commercial 
profits from sources within the United States, nor shall such profits be 
included in gross income, if it has not at any time during the taxable 
year engaged in trade or business in the United States through a 
permanent establishment situated therein. For example, if during the 
taxable year an enterprise carried on in Switzerland by a nonresident 
alien individual who is a resident of Switzerland, or by a Swiss 
corporation, were to sell merchandise, such as watches, dairy products, 
or liqueurs, in the United States through a commission agent or broker 
in the United States acting in the ordinary course of his business as 
such agent or broker, the profits arising from such sale would not be 
included in gross income and would be exempt from United States tax 
under Article III of the convention. Similarly, if during the taxable 
year such enterprise were to secure orders in the United States for such 
merchandise through its sales agents whose sole function in the United 
States is sales promotion, the orders being transmitted to Switzerland 
for acceptance, then the profits arising from such sales would not be 
included in gross income and would be exempt from United States tax.
    (c) United States permanent establishment--(1) General. A Swiss 
enterprise is subject to United States tax upon its industrial and 
commercial profits from sources within the United States to the same 
extent as are nonresident aliens or foreign corporations which are 
subject to tax pursuant to section 871(c) or section 882(a), Internal 
Revenue Code of 1954, if such enterprise has at any time during the 
taxable year engaged in trade or business in the United States through a 
permanent establishment situated therein. If it is so engaged, it is 
subject to United States tax upon its entire income from sources within 
the United States except to the extent otherwise exempt from United 
States tax.
    (2) Allocation of profits. In the determination of the income 
taxable to such enterprise for purposes of the United States tax, all 
industrial and commercial profits from sources within the United States 
shall be deemed to be allocable to the permanent establishment in the 
United States. Hence, if a Swiss enterprise which has a permanent 
establishment in the United States at some time during the taxable year 
were to sell in the United States, through a commission agent therein 
acting in the ordinary course of his business as such, merchandise which 
has been produced in Switzerland, the profits arising from such sale 
would be allocable to the permanent establishment to the extent they are 
derived from sources within the United States, even though the sale is 
made independently of the permanent establishment.
    (3) Independent basis. The industrial and commercial profits of the 
permanent establishment in the United States shall be determined as if 
the establishment were an independent enterprise engaged in the same or 
similar activities under the same or similar conditions and dealing at 
arm's length, or on an independent basis, with the enterprise of which 
it is a permanent establishment.