ATO ID 2004/602: Permanent establishment: non-resident - services provided by resident subsidiary - no authority to bind non-resident
Date of decision: 28 May 2004
Year of income: Year ended 30 June 2001
Business line: Public Groups and International

Issue
Is a non-resident company deemed to have a permanent establishment in Australia when services are provided to it by an Australian resident subsidiary company, which does not have the authority to conclude contracts in a manner binding on the non-resident company?

Decision
No. A non-resident company that receives services provided by an Australian resident subsidiary company is not deemed to have a permanent establishment in Australia, if the Australian company does not have the authority to conclude contracts in a manner binding on the non-resident company.

Facts
A non resident company enters a service arrangement with an Australian resident subsidiary company. The services involve the Australian company providing prospective clients with advice on products available from the non-resident company. Clients are then referred to the non-resident company to purchase the product directly from overseas.

Reasons for decision
Summary: In general, Australia does not tax the profits of an enterprise resident in a country with which it has a double tax agreement unless the enterprise carries on business through a permanent establishment in Australia. The question of whether a non-resident enterprise has a permanent establishment in Australia is a question of fact and degree, which must be determined by reference to the individual circumstances of each case. A fixed place of business of an enterprise through which its business is wholly or partly carried on will generally constitute a permanent establishment. However, if a non-resident enterprise does not conduct activities itself through a fixed place of business in Australia, it may still, in some circumstances, be 'deemed' to carry on business through a permanent establishment, either under the provisions in the domestic law or under specific articles of the relevant DTA (See Unisys Corp v. FC of T (2002) 2002 ATC 5146; (2002) 51 ATR 386 ( Unisys Corp) and Case 23/93 93 ATC 288; AAT Case 8775 (1993) 26 ATR 1056). For a non-resident enterprise to be deemed to have a permanent establishment in Australia, the 'Permanent Establishment' Article of a double tax agreement generally requires four conditions to be satisfied. Therefore, for a non-resident enterprise to be deemed to have a permanent establishment in Australia, not only must the non-resident enterprise have a person acting for them in Australia, that person must have the authority to conclude contracts in a manner that is binding on the non-resident enterprise. Further, the mere possession of the requisite authority is not enough; it must also be exercised regularly or habitually. (See Unisys Corp ). The non-resident company does not have a permanent establishment in Australia because: Accordingly, the non resident company does not have a permanent establishment within Australia for the purposes of the double tax agreement.

Legislative references: International Tax Agreements Act 1953 The Act
Case references: Unisys Corp v. FC of T 2002 ATC 5146 (2002) 51 ATR 386
Related public rulings and determinations: Taxation Ruling TR 2001/13
Subject references: Amendment of assessments Deductions & expenses Double tax agreements Income International law International tax Permanent establishment Tax administration Tax assessments Treaties