Private ruling: Permanent establishment
Date of advice: 16 June 2022
Published: September 2022
Ruling period: 1 July 20xx to 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Does ForeignCo have a permanent establishment in Australia under Article 5 of the Convention? | A1: No. | Q2: Is any income derived by ForeignCo in Australia assessable income under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A2: No.

Relevant facts and circumstances: 1. ForeignCo is a company incorporated in Country X. ForeignCo is a tax resident of Country X. 2. Based in Country X, ForeignCo provide services to clients both in Country X and overseas, including Australia. 3. ForeignCo's directors are both based in Country X (the Directors). 4. ForeignCo has ordinary shares on issue and its Country X resident shareholders are the Directors. 5. ForeignCo delivers their services to clients either in a face-to-face format or online. 6. ForeignCo promoted their products through a mix of their website, direct marketing (from Country X) and at conferences in both Country X and Australia. 7. The majority of ForeignCo's work and income was derived from delivering training and performance coaching to managers (mainly frontline supervisors) in Country X only. A minority of ForeignCo's work and income was delivering their services in Australia. 8. Preparation for the delivery of all services was undertaken in Country X. 9. ForeignCo does not operate an Australian bank account. Clients paid for services by an invoice raised in Country X in Australian dollars and payment was made by bank transfer to ForeignCo's Country X bank account, PayPal or credit card. 10. ForeignCo has no office or any other physical presence in Australia. 11. ForeignCo has no employees or agents in Australia. Directors One and Two conduct most of ForeignCo's business activities, and are authorised to conclude contracts on behalf of ForeignCo. Face-to-face 12. The face-to-face services were delivered as 'public' programs where ForeignCo promoted the program and hired a third party venue, typically a conference centre or similar, to deliver it. Participants registered to attend through ForeignCo's website. 13. Some services were contracted by an organisation as an in-house program - here the organisations registered their participants and provided the venue for ForeignCo to deliver the program. 14. Clients would engage ForeignCo by: a. contacting ForeignCo directly or registering via its Country X website/Eventbrite booking system, and b. pay by invoice, PayPal or credit card (all facilitated by the Eventbrite booking system or through Xero) 15. Directors One and Two would deliver the two-day long program. They would typically fly from Country X, stay overnight in hotels and then fly back to Country X once the program had completed. 16. Directors One and Two were not present in Australia for 183 days or more in any income year. 17. The vast majority of ForeignCo's revenue is attributable to Country X and online operations. Less than 50% of ForeignCo's gross revenue is attributable to its Australian face to face operations. Online 18. Public programs were delivered online by ForeignCo from Country X. 19. Clients would engage ForeignCo either directly or online to request and register their participation in a programme. Being an online programme, the client base was mixed, with some Australian clients registered for online sessions. 20. Australian customers entered into contractual terms and conditions with ForeignCo through the ForeignCo website. 21. ForeignCo does not have an agency relationship with the internet service provider (ISP) or website hosting provider. Cessation of business 22. Directors One and Two decided to close ForeignCo in 20xx, ceasing to operate from 20yy.

Relevant legislative provisions: ITAA 1997 subsection 6-5(3) | Income Tax Assessment Act 1936 section 6 | International Tax Agreements Act 1953 subsection 3AAA(1) | International Tax Agreements Act 1953 subsection 5(1) Convention Article 1 | Convention Article 3 | Convention Article 5 | Convention Article 7

Reasons for decision: Summary: ForeignCo does not have a permanent establishment in Australia. ForeignCo does not have a fixed place of business at its disposal in Australia, either physically or through its online presence. Additionally, the face-to-face services in Australia provided to clients of ForeignCo by Directors One and Two are not sufficient to lead to a deemed permanent establishment arising. | Detailed Reasoning - Detailed reasoning: In order to determine if a permanent establishment exists under Article 5 of the Convention, it is necessary to firstly determine whether the Convention applies to ForeignCo. | Detailed Reasoning - The Convention - application to ForeignCo: Article 1 of the Convention applies to 'persons who are residents of one or both of the Contracting States. Therefore, ForeignCo must be considered both a 'person' and a 'resident of a Contracting State' for the Convention to apply. Subparagraph 1(j) of Article 3 of the Convention defines 'person' to include: ... an individual, a trust, a partnership, a company and any other body of persons. ForeignCo is a company incorporated in Country X, which is managed and controlled in Country X and is not considered an Australian resident company. Accordingly, the Convention applies to ForeignCo as it meets the requirements of Article 1. | Detailed Reasoning - The Convention - business profits: Article 7 of the Convention states that if an entity is operating through a permanent establishment, the profits of the enterprise may be taxed in that State but only so much of the profits that is attributable to that permanent establishment. | Detailed Reasoning - The Convention - does a permanent establishment exist in Australia?: Article 5 of the Convention is relevant in determining whether ForeignCo is operating through a permanent establishment in Australia. Article 5 relevantly provides the following: 1. For the purposes of this Convention, the term " permanent establishment " means a fixed place of business through which the business of the enterprise is wholly or partly carried on. 2. The term " permanent establishment " includes especially: c) an office; ... 4. Notwithstanding the provisions of paragraphs 1, 2 and 3, where an enterprise of a Contracting State: a) performs services in the other Contracting State (i) through an individual who is present in that other State for a period or periods exceeding in the aggregate 183 days in any twelve month period, and more than 50 per cent of the gross revenues attributable to active business activities of the enterprise during this period or periods are derived from the services performed in that other State through that individual, or (ii) for a period or periods exceeding in the aggregate 183 days in any twelve month period, and these services are performed for the same project or for connected projects through one or more individuals who are present and performing such services in that other State; ... such activities shall be deemed to be carried on through a permanent establishment of the enterprise situated in that other State, unless the activities are limited to those mentioned in paragraph 7 which, if exercised through a fixed place of business, would not make this place of business a permanent establishment under the provisions of that paragraph. ... 8. Notwithstanding the provisions of paragraphs 1 and 2, where a person - other than an agent of an independent status to whom paragraph 9 applies - is acting on behalf of an enterprise and: a) has, and habitually exercises, in a Contracting State an authority to substantially negotiate or conclude contracts on behalf of the enterprise; or b) manufactures or processes in a Contracting State for the enterprise goods or merchandise belonging to the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in paragraph 7 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph. | Detailed Reasoning - Article 5(1) fixed place of business: Article 5 of the Convention provides that a 'permanent establishment', in relation to an enterprise, means a fixed place of business through which the business of the enterprise is wholly or partly carried on. Article 3(3) of the Convention states that: As regards the application of this Convention at any time by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the laws of that State for the purposes of the taxes to which this Convention applies, any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State. As such, the definition of the term 'place of business' applying to various venues in relation to establishing a permanent establishment in Australia shall be guided by the context of its use in the Convention or, without such context, by the laws of Australia for the purposes of taxation. Tax Ruling TR 2001/13 Income Tax: Interpreting Australia's Double Tax Agreements (TR 2001/13) provides that: 72. The undefined terms provision of the General Definitions Article picks up the meaning that the relevant term has for the purposes of the domestic tax laws of the country applying the DTA 'unless the context otherwise requires'. This aspect of the General Definitions Article in Australia's DTAs is closely based on the corresponding OECD Model Convention provision. For the reasons dealt with at paragraphs 101 to 111 of this Ruling, it is therefore highly relevant to consider what the OECD Commentaries to that Model say about this provision. ATO Interpretive Decision ATO ID 2011/13 Income Tax Interest withholding tax: interest arising in Australia paid to a New Zealand Limited Partnership - 'beneficially owned' (ATO ID 2011/13)provides guidance in relation to the use of relevant context for interpreting Australian tax treaties and is therefore instructive in considering the application of paragraph 1 of Article 5 of the Convention. It further provides guidance in relation to the definition of 'place of business'. ATO ID 2011/13 states the following: Relevant context for the purposes of interpreting an Australian tax treaty includes the Commentaries on the OECD Model Tax Convention on Income and on Capital (the OECD Commentary). Paragraph 104 of Taxation Ruling TR 2001 / 13 states that the OECD Commentary provides important guidance on interpretation and application of the OECD Model Tax Convention and will often need to be considered as a matter of practice, in interpreting tax treaties, at least where the wording is ambiguous. Therefore, the term 'place of business' should be used in a purposive sense in light of the operation of the Convention. The OECD Commentaries on the Model Tax Conventions (Commentaries) may be used to interpret the meaning of 'place of business'. The Commentaries on Article 5 explain that: 10. The term "place of business" covers any premises, facilities or installations used for carrying on the business of the enterprise whether or not they are used exclusively for that purpose. A place of business may also exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal. It is immaterial whether the premises, facilities or installations are owned or rented by or are otherwise at the disposal of the enterprise. A place of business may thus be constituted by a pitch in a market place, or by a certain permanently used area in a customs depot (e.g. for the storage of dutiable goods). Again the place of business may be situated in the business facilities of another enterprise. This may be the case for instance where the foreign enterprise has at its constant disposal certain premises or a part thereof owned by the other enterprise. The place of business must also be a fixed place of business. The Commentaries on Article 5 explain: 28. Since the place of business must be fixed, it also follows that a permanent establishment can be deemed to exist if only if the place of business has a certain degree of permanency, i.e. if it is not a purely temporary nature. A place of business may, however, constitute a permanent establishment even though it exists, in practice, only for a very short period of time because the nature of the business is such that it will only be carried on for that short period of time. It is sometimes difficult to determine whether this is the case... The Commissioner notes in Taxation Ruling TR 2002/5 Income tax: Permanent establishment - What is a place at or through which a person carries on any business' in the definition of permanent establishment in subsection 6(1) of the Income Tax Assessment Act 1936? (TR 2002/5) that although it is a question of fact and degree, as a guide, a business operating at or through a place continuously for six months or more will likely be temporally permanent. In situations where the time is shorter, indicators that may be sufficient to suggest a permanent establishment arises are where there is a strong connection to Australia, such as where the business returns to the same location in Australia on an ongoing and regular basis but for short periods. It is necessary to apply the above Article to determine whether ForeignCo's business activities give rise to a permanent establishment in Australia. The activities are: • Director One and Two's face to face sessions, • ForeignCo's promotion of its programmes at industry conferences, and • Sessions conducted live online through ForeignCo's website. Of relevance is whether the location(s) where the above activities are undertaken constitute a fixed place of business at ForeignCo's disposal. When in Australia, Directors One and Two rented out various venues such as conference centres on a short-term basis, or were provided access to a client's in-house space through which to carry on ForeignCo's business of conducting their sessions. Based on the above paragraph, these venues, whether they were rented out or not by ForeignCo, may constitute a place of business. However the sessions were generally conducted for a maximum of two days at different venues across Australia at different times. On completion of the training, two directors would fly back home to Country X. The venues that ForeignCo have at their disposal for delivery of the program lack the geographical or temporal permanence to be seen as a fixed place of business as they are there fleetingly, for short periods of time, and in a non-continuous manner. As such, ForeignCo does not have a permanent establishment in Australia under Article 5(1) of the Convention as a result of its business activities undertaken in Australia. | Detailed Reasoning - ForeignCo website: A question arises as to whether ForeignCo's website and online presence constitutes a fixed place of business per Article 5(1) of the Convention. As stated above, the definition of the term 'place of business' applying to a website in relation to establishing a permanent establishment in Australia shall be guided by the context of its use in the Convention or, without such context, by the laws of Australia for the purposes of taxation. Therefore, the term 'place of business' should be used in a purposive sense in light of the operation of the Convention. The Commentaries may be used to interpret the meaning of 'place of business.' In the context of websites, the Commentaries state: 123. Whilst a location where automated equipment is operated by an enterprise may constitute a permanent establishment in the country where it is situated (see below), a distinction needs to be made between computer equipment, which may be set up at a location so as to constitute a permanent establishment under certain circumstances, and the data and software which is used by, or stored on, that equipment. For instance, an Internet web site, which is a combination of software and electronic data, does not in itself constitute tangible property. It therefore does not have a location that can constitute a "place of business" as there is no "facility such as premises or, in certain instances, machinery or equipment" (see paragraph 6 above) as far as the software and data constituting that web site is concerned. On the other hand, the server on which the web site is stored and through which it is accessible is a piece of equipment having a physical location and such location may thus constitute a "fixed place of business" of the enterprise that operates that server. 124. The distinction between a web site and the server on which the web site is stored and used is important since the enterprise that operates the server may be different from the enterprise that carries on business through the web site. For example, it is common for the web site through which an enterprise carries on its business to be hosted on the server of an Internet Service Provider (ISP). Although the fees paid to the ISP under such arrangements may be based on the amount of disk space used to store the software and data required by the web site, these contracts typically do not result in the server and its location being at the disposal of the enterprise..., even if the enterprise has been able to determine that its web site should be hosted on a particular server at a particular location. In such a case, the enterprise does not even have a physical presence at that location since the web site is not tangible. In these cases, the enterprise cannot be considered to have acquired a place of business by virtue of that hosting arrangement. However, if the enterprise carrying on business through a web site has the server at its own disposal, for example it owns (or leases) and operates the server on which the web site is stored and used, the place where that server is located could constitute a permanent establishment of the enterprise if the other requirements of the Article are met. Based on the Commentaries, a website therefore does not constitute a fixed place of business. Additionally, ForeignCo does not have a server in Australia at its disposal. ForeignCo's website and online presence therefore does not satisfy Article 5(1) of the Convention. | Detailed Reasoning - Conclusion: Neither ForeignCo's business activities in Australia nor its website meet the conditions of Article 5(1) of the Convention to cause ForeignCo to have a permanent establishment. | Detailed Reasoning - For 183 days or more: Paragraph 4 of Article 5 of the Convention deems a permanent establishment to arise in Australia where in an income year, an individual carrying on ForeignCo's enterprise provides their services in Australia for an aggregate total of 183 days or more with 50% gross revenue attributable to this period. While Directors One and Two carried on ForeignCo's enterprise in Australia, they were not present in Australia for aggregate total of 183 days or more, nor was 50% of ForeignCo's gross revenue attributable to their activities conducted in Australia for any relevant period. | Detailed Reasoning - Conclusion: ForeignCo does not meet the conditions of Article 5(4) of the Convention and as such does not have a permanent establishment in relation to the face-to-face sessions. | Detailed Reasoning - Article 5(8) dependent agent permanent establishments: Paragraph 8 of Article 5 of the Convention may next be considered to determine whether a person - other than an independent agent - is acting on ForeignCo behalf to substantially negotiate and habitually conclude contracts. If they do so, this may cause ForeignCo to have a permanent establishment. | Detailed Reasoning - Are Directors One and Two ForeignCo's dependent agents?: Directors One and Two are the only employees or representatives of ForeignCo and undertake all of its business activities. Directors One and Two have the authority to conclude contracts on behalf of ForeignCo. | Detailed Reasoning - Conclude contracts and habitually exercise: Directors One and Two must habitually exercise the authority to conclude contracts on ForeignCo's behalf: Unisys Corporation Inc v Federal Commissioner of Taxation 2002 ATC 5146. The term 'concludes contracts' in relation to establishing a permanent establishment in Australia shall be guided by the context of its use in the Convention or, without such context, by the laws of Australia for the purposes of taxation. Therefore, the term 'concludes contracts' should be used in a purposive sense in light of the operation of the Convention. The Commentaries provide the following in respect of the meaning of 'conclude contracts' (at paragraphs [87]-[88]): The phrase "concludes contracts" focusses on situations where, under the relevant law governing contracts, a contract is considered to have been concluded by a person. A contract may be concluded without any active negotiation of the terms of that contract; this would be the case, for example, where the relevant law provides that a contract is concluded by reason of a person accepting, on behalf of an enterprise, the offer made by a third party to enter into a standard contract with that enterprise . Also, a contract may, under the relevant law, be concluded in a State even if that contract is signed outside that State; where, for example, the conclusion of a contract results from the acceptance, by a person acting on behalf of an enterprise, of an offer to enter into a contract made into by a third party, it does not matter that the contract is signed outside that State. In addition, a person who negotiates in a State all elements and details of a contract in a way binding on the enterprise can be said to conclude the contract in that State even if that contract is signed by another person outside that State. ...The phrase ["concludes contracts"] must be interpreted in the light of the object and purpose of paragraph 5, which is to cover cases where the activities that a person exercises in a State are intended to result in the regular conclusion of contracts to be performed by a foreign enterprise, i.e. where the person acts as the sales force of the enterprise. The principal role leading to the conclusion of the contract will therefore typically be associated with the actions of the person who convinced the third party to enter into a contract with the enterprise....where such principal role is performed in that State, the actions of that person will fall within the scope of paragraph 5 even if the contracts are not formally concluded in the State, for example, where the contracts are routinely subject, outside that State, to review and approval without such review resulting in a modification of key aspects of these contracts. (emphasis added) As well as delivering the programmes, Directors One and Two would only promote their training sessions by speaking at industry conferences in Australia. They would not substantially negotiate or enter into contracts with attendees at these conferences for the future provision of training programmes. Instead, if clients sought ForeignCo's services, they would engage ForeignCo by: a. contacting ForeignCo directly or registering via its Country X website/Eventbrite booking system, and b. pay by invoice, PayPal or credit card (all facilitated by the Eventbrite booking system or through Xero) ForeignCo does not operate an Australian bank account. Clients paid for services by an invoice raised in Country X in Australian dollars and payment was made by bank transfer to ForeignCo's Country X bank account, PayPal or credit card. Therefore, Directors One and Two did not substantially negotiate or habitually conclude contracts on ForeignCo's behalf at these conferences. | Detailed Reasoning - Conclusion: The Directors' activities did not cause ForeignCo to have a permanent establishment under Article 5(8) of the Convention. | Detailed Reasoning - Website and ISP: Whether an ISP creates a permanent establishment was examined in Taxation Determination TD 2002/5 - Income tax: does a resident of a country with which Australia has a Tax Treaty, have a permanent establishment solely from the sale of trading stock through an internet website hosted by an Australian resident internet service provider? : 8. Where an ISP is only in the business of providing access to the internet it operates as a mere conduit for the business activities of the non-resident enterprise. The agreement with the ISP would not typically specify which server the website will be hosted on and the ISP may change the server used at their discretion. The space used for a specific website on the server of the ISP is not at the disposal of the entity that owns the website. Thus, the enterprise does not have a fixed place of business in Australia. ... 11. In most cases, an ISP will not constitute a permanent establishment by virtue of it being a dependent agent, because the ISP is not an agent of the enterprise and would lack the authority to conclude, and would not regularly conclude contracts on behalf of the non-resident enterprise. The website itself does not constitute a dependent agent as it is not a 'person' as defined in Australia's tax treaties. Furthermore, the ISP could constitute an independent agent acting in the ordinary course of their business if, amongst other things, they host websites for a number of different enterprises. The ISP/website hosting provider does not have an agency relationship with ForeignCo. As such, the ISP is not a dependent agent permanent establishment of ForeignCo. | Detailed Reasoning - Conclusion: The ForeignCo website does not meet the conditions of Article 5(8) of the Convention to cause ForeignCo to have a permanent establishment. | Detailed Reasoning - Conclusion: Based on the above, ForeignCo does not have a permanent establishment in Australia under Article 5 of the Convention. | Detailed Reasoning - Question 2: Is any income derived by ForeignCo in Australia assessable income under subsection 6-5(3) of the ITAA 1997? | Summary: As ForeignCo does not have a permanent establishment in Australia, the overriding effect of Article 7 of the Convention is such that the income ForeignCo derives in Australia is not assessable under subsection 6-5(3) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a non-resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources. In determining liability to Australian tax on Australian sourced income received by a non-resident, it is necessary to consider not only the income tax laws but also the Convention. Under Article 7, the business profits of an enterprise of Country X shall be taxable only in Country X unless the enterprise carries on business in Australia through a permanent establishment situated in Australia. As concluded in Question One, ForeignCo does not have a permanent establishment in Australia under Article 5 of the Convention. As such, the business profits of ForeignCo, being the amounts it receives from Australian customers for delivery of its training programmes, are not taxable in Australia. | Detailed Reasoning - Conclusion: As ForeignCo does not have a permanent establishment in Australia, the overriding effect of Article 7 of the Convention is such that the income ForeignCo derives in Australia is not assessable under subsection 6-5(3) of the ITAA 1997.