ATO ID 2002/850: Permanent Establishment
Date of decision: 2 July 2002
Year of income: Year ended 30 June 1999 Year ended 30 June 2000 Year ended 30 June 2001 Year ended 30 June 2002
Business line: Public Groups and International

Issue
Whether a foreign company has a Permanent Establishment in Australia.

Decision
The foreign company does have a permanent establishment in Australia under Australian income tax laws.

Facts

Reasons for decision
Summary: In order for the foreign company, to be required to pay income tax in Australia under the provisions of subsection 3-5(1) of the Income Tax Assessment Act 1997 , the Commissioner must consider the provisions of the International Agreements Act 1953 and in particular the Article concerning Business Profits of the relevant Double Tax Agreement (the Treaty). Under the provisions of the Business Profits Article, any profits arising shall not be taxable in Australia unless the enterprise carries on business through a permanent establishment (PE) situated in Australia. A threshold issue for the Commissioner to consider, therefore, is whether or not the foreign company, in fulfilling its terms of the contracts, entered into with a third party, is operating through a PE in Australia. For the purposes of the Treaty the term permanent establishment has been defined as a fixed place of business through which the business of an enterprise is wholly or partly carried on. The term has been given a wide meaning and would include a place of management, a branch, an office, a factory, a workshop, etc and would also include a building site or a construction, installation or assembly project, only if it exists for more than twelve months. In light of the facts provided by the foreign company in respect of the contracts for the project, it is considered by the Commissioner that the foreign company has a PE in Australia. As the head contractor for the project, the foreign company bears the ultimate legal obligation and risk regarding performance of the project work in Australia, ie the foreign company has undertaken the performance of a comprehensive project that has a construction and installation period greatly in excess of twelve months. It is considered by the Commissioner that it is irrelevant whether or not the foreign company itself performs any activities in Australia in connection with the project or undertakes the project work or subcontracts the work to others, either wholly or partly. The commentary to the 1977 OECD Model Convention states that: 'If an enterprise (general contractor) which has undertaken the performance of a comprehensive project, subcontracts parts of such a project to other enterprises (subcontractors), the period spent by a subcontractor working on a building site must be considered as time spent by the general contractor on the building project.' It is therefore considered that there is no requirement that the construction or installation project be directly carried out by the foreign company.

Legislative references: Income Tax Assessment Act 1997 subsection 3-5(1)
Related public rulings and determinations: Taxation Ruling TR 2001/13
Other references: 1977 OECD Model Convention Introductory Commentary
Subject references: Permanent establishment