German tax authorities have ruled that an Internet server used for e-commerce does not create a permanent establishment. The pronouncement was dated November 11, 1998, but published only recently.

The ruling was not issued by the Federal Finance Ministry (FFM), which would normally have jurisdiction in such matters, but by a lesser body, the Supervisory Office -- although the pronouncement states that it reflects an agreement reached by the heads of the international tax departments of the FFM and the state finance ministries.

The ruling, short but to the point, addresses whether a server installed by an unnamed German company in a foreign jurisdiction constitutes a permanent foreign establishment.

In the case under review, foreign customers of a German company were able to obtain general information on the company and its products and were also able to submit orders.

The ruling is in force"for the time being'', pending discussions at the Organisation for Economic Co-Operation and Development (OECD).

The decision is unlikely to affect Bermuda directly, although potential German e-commerce clients may think twice before siting their server in Bermuda, which is an integral part of the island's e-commerce formula.

Experts have pointed out that, in the case under review, the German company actually installed its own server. A different ruling may apply in the case where a Bermuda e-commerce company installs and manages the server, but the German courts have not yet ruled on that. It seems unlikely the German courts would look more favourably on the Bermuda model.

Further, the ruling relates only to e-commerce "of a preparatory nature''. In cases where orders are placed and fulfilled by the server, with credit card numbers and other personal information being supplied by the customer, courts will have a harder time striking down the concept of a permanent establishment.