Private ruling: residency, permanent establishment, source and assessability of income and withholding obligations
Published: October 2014
Ruling period: A number of income years.
Date scheme commenced: During the 2013 income year.

Ruling: Q1: Is X Co a foreign resident for the purposes of section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Is X Co a resident of an overseas country for the purposes of that country's Double Tax Agreement (DTA)? | A2: Yes. | Q3: Does X Co have a permanent establishment in Australia for the purposes of the overseas country's DTA? | A3: Yes. | Q4: Does X Co's assessable income include only its ordinary and statutory income derived indirectly or directly from all Australian sources and other ordinary and statutory income that a provision contains in its assessable income on some basis other than having an Australian source in accordance with subsections 6-5(3) and 6-10(5) of the ITAA 1997? | A4: Yes. | Q5: Is the income derived by X Co under the X Co Agreement with Overseas Co, Australian sourced in accordance with section 6C of the Income Tax Assessment Act 1936 (ITAA 1936)? | A5: Yes. | Q6: Does the exclusion to the royalty article in the overseas country's DTA apply to X Co such that the business profits article of the overseas country's DTA applies to X Co's receipts under the X Co Agreement? | A6: Yes. | Q7: Is X Co a foreign resident for the purposes of the foreign resident withholding provisions under paragraph 12-315(2)(a) of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953)? | A7: Yes. | Q8: Will X Co have an obligation to withhold an amount in accordance with section 12-245 of Schedule 1 to the TAA 1953 from the interest payments made by it to Finance Co under the Loan Agreement? | A8: Yes.

Relevant facts and circumstances: X Co 1. X Co is a company incorporated in an overseas country, and also has its effective place of management in an overseas country. 2. X Co is treated as a tax resident of that overseas country. 3. X Co is a member of Overseas Group. 4. X Co owns substantial equipment (the X Co Equipment) and leases the X Co Equipment to members of Overseas Group. 5. Other than the physical presence of the X Co Equipment in Australia for more than 12 months, X Co has no other presence in Australia. Overseas Co 6. Overseas Co is an operating entity of Overseas Group. 7. Overseas Co is a company incorporated in the same overseas country as X Co. 8. Overseas Co is treated as a tax resident of an overseas country and its effective place of management in respect of its business activities is in an overseas country. 9. The Commissioner has ruled that, for Australian tax purposes, Overseas Co carries on a business in Australia at or through a permanent establishment in Australia. Finance Co 10. Finance Co is a company incorporated in the same overseas country as X Co, and also has its effective place of management in that overseas country. 11. Finance Co's address is in that overseas country. 12. Finance Co is treated as a tax resident of that overseas country. 13. The Commissioner has ruled that Finance Co is a foreign resident for Australian tax purposes. 14. Finance Co is the financing arm of Overseas Group, negotiating and concluding loan agreements in the overseas country. 15. Finance has no presence in Australia. The X Co Agreement 16. As stated above, in order to undertake work in Australia, Overseas Co entered into the X Co Agreement with X Co to lease the X Co Equipment from X Co. 17. The X Co Agreement was negotiated and executed in the overseas country. 18. The Commissioner has ruled that, for Australian tax purposes, the payments made by Overseas Co to X Co under the X Co Agreement will be incurred in carrying on Overseas Co's business at or through a permanent establishment in Australia. 19. The X Co Equipment will be in Australia for more than 12 months. 20. During this time, Overseas Co will be responsible for any maintenance activities in respect of the X Co Equipment. The Loan Agreement 21. The X Co Equipment was financed via an intercompany loan between X Co and Finance Co under the Loan Agreement. 22. The Loan Agreement between X Co and Finance Co was executed in the overseas country. 23. Interest is payable by X Co to Finance Co under the Loan Agreement.

Relevant legislative provisions: Subsection 6(1) of the ITAA 1936. | Subsection 6C(1) of the ITAA 1936. | Subsection 128B(2) of the ITAA 1936. | Subsection 6-5(3) of the ITAA 1997. | Subsection 6-10(5) of the ITAA 1997. | Section 995-1 of the ITAA 1997. | Section 12-245 of Schedule 1 to the TAA 1953. | Section 12-300 of Schedule 1 to the TAA 1953. | Section 12-315 of Schedule 1 to the TAA 1953.

Reasons for decision: Summary: Yes. X Co is a foreign resident for the purposes of section 995-1 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subsection 995-1(1) of the ITAA 1997 provides that 'foreign resident' means a person who is not a resident of Australia for the purposes of the ITAA 1936. For the purposes of the ITAA 1936, paragraph 6(1)(b) of the ITAA 1936 defines a 'resident of Australia', in respect of a company, as a company which is incorporated in Australia, or which, not being incorporated in Australia carries on a business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia. X Co is a company incorporated in an overseas country. Furthermore, X Co's effective place of control and its business is carried on in that overseas country, and it is wholly owned by a resident company of that overseas country. X Co does not therefore meet the definition of 'resident of Australia' under paragraph 6(1)(b) of the ITAA 1936, and as such, is a 'foreign resident' for the purposes of section 995-1 of the ITAA 1997. | Detailed Reasoning - Question 2: Is X Co a resident of an overseas country for the purposes of that country's DTA? | Summary: Yes. X Co is a resident of an overseas country for the purposes of that country's DTA. | Detailed Reasoning - Detailed reasoning: Question 1 above confirms that X Co is not a resident of Australia for Australian tax purposes and that it is in fact a foreign resident for Australian tax purposes. As such, X Co does not satisfy the definition of a resident of Australia for the purposes of the overseas country's DTA. As the overseas country's DTA provides that a person is a resident of the overseas country, if the person is a resident of that overseas country for the purposes of its tax, X Co is treated as a tax resident of that overseas country for the purposes of its DTA. | Detailed Reasoning - Question 3: Does X Co have a permanent establishment in Australia for the purposes of the overseas country's DTA? | Summary: Yes. X Co has a permanent establishment in Australia for the purposes of the overseas country's DTA. | Detailed Reasoning - Detailed reasoning: An entity can be deemed to have a permanent establishment under the overseas country's DTA. X Co meets the criteria to have a deemed permanent establishment in Australia. X Co therefore has a permanent establishment in Australia for the purposes of the overseas country's DTA. | Detailed Reasoning - Question 4: Does X Co's assessable income include only its ordinary and statutory income derived indirectly or directly from all Australian sources and other ordinary and statutory income that a provision contains in its assessable income on some basis other than having an Australian source in accordance with subsections 6-5(3) and 6-10(5) of the ITAA 1997? | Summary: Yes. X Co's assessable income only includes its ordinary and statutory income derived indirectly or directly from all Australian sources and other ordinary and statutory income that a provision contains in its assessable income on some basis other than having an Australian source in accordance with subsections 6-5(3) and 6-10(5) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subsection 6-5(3) of the ITAA 1997 provides that: If you are a foreign resident, your assessable income includes: (a) the ordinary income you derive directly or indirectly from all Australian sources during the income year; and (b) other ordinary income that a provision includes in your assessable income for the income year on some basis other than having an Australian source. Subsection 6-10(5) of the ITAA 1997 further provides that: If you are a foreign resident, your assessable income includes: (a) your statutory income from all Australian sources; and (b) other statutory income that a provision includes in your assessable income on some basis other than having an Australian source. Question 1 above confirms that X Co is a foreign resident for Australian tax purposes. As such, subsections 6-5(3) and 6-10(5) of the ITAA 1997 apply to X Co such that its assessable income only includes its ordinary and statutory income derived indirectly or directly from all Australian sources and other ordinary and statutory income that a provision contains in its assessable income on some basis other than having an Australian source in accordance with subsections 6-5(3) and 6-10(5) of the ITAA 1997. | Detailed Reasoning - Question 5: Is the income derived by X Co under the X Co Agreement with Overseas Co, Australian sourced in accordance with section 6C of the ITAA 1936? | Summary: Yes. The income derived by X Co under the X Co Agreement with Overseas Co is Australian sourced in accordance with section 6C of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Section 6C of the ITAA 1936 deals with the source of royalty income derived by a non-resident. Under subsection 6C(2) of the ITAA 1936, for the purposes of sections 6-5 and 6-10 of the ITAA 1997, royalties are deemed to have been derived from a source in Australia, if the royalties constitute income to which section 6C applies. Paragraph 6C(1)(b) of the ITAA 1936 provides that section 6C applies to income derived on or after 1 July 1968 by a non-resident and consists of royalty that: …is paid or credited to the non-resident by a person who is…a non-resident and is, or is in part, an outgoing incurred by that person…in carrying on a business in Australia at or through a permanent establishment of that person…in Australia. Non-resident payer and payee Subsection 6(1) of the ITAA 1936 defines 'non-resident' as a person who is not a resident of Australia. The Commissioner has ruled that Overseas Co (the payer) is a foreign resident for Australian tax purposes, this includes for the purposes of being a 'non-resident' under section 6C of the ITAA 1936. Question 1 above confirms that X Co (the payee) is also a foreign resident for Australian tax purposes, including for the purposes of being a 'non-resident' under section 6C of the ITAA 1936. Royalty According to subsection 6(1) of the ITAA 1936, 'royalties' include any amount paid or credited, however described or computed, and whether the payment or credit is periodical or not, to the extent to which it is paid or credited, as consideration for (inter alia): … (a) the use of, or the right to use, any industrial, commercial or scientific equipment; (b) the supply of scientific, technical , industrial or commercial knowledge or information; and (c) the supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of,…any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c);… Taxation Ruling IT 2660 (IT 2660) provides the Commissioner's views on the definition of 'royalty' and 'royalties' in subsection 6(1) of the ITAA 1936. The payments made by Overseas Co to X Co under the X Co Agreement are consideration for use of the X Co Equipment, which constitutes industrial, commercial or scientific equipment. As such, the payments made by Overseas Co to X Co under the X Co Agreement constitute royalties for Australian tax purposes. This income will also be derived by X Co after 1 July 1968. Incurred in carrying on a business in Australia at or through a permanent establishment in Australia. As stated above, the Commissioner has ruled that Overseas Co, for Australian tax purposes, carries on a business in Australia at or through a permanent establishment and that the payments made by Overseas Co to X Co under the X Co Agreement will be incurred in carrying on Overseas Co's business through that permanent establishment. Conclusion As all elements of paragraph 6C(1)(b) of the ITAA 1936 are satisfied, subsection 6C(2) of the ITAA 1936 will deem the payments made by Overseas Co to X Co under the X Co Agreement to be Australian sourced for the purposes of sections 6-5 and 6-10 of the ITAA 1997. | Detailed Reasoning - Question 6: Does the exclusion to the royalty article in the overseas country's DTA apply to X Co such that the business profits article of the overseas country's DTA applies to X Co's receipts under the X Co Agreement? | Summary: Yes. The exclusion to the royalty article in the overseas country's DTA applies to X Co such that the business profits article of the overseas country's DTA applies to X Co's receipts under the X Co Agreement. | Detailed Reasoning - Detailed reasoning: The overseas country's DTA allows for particular royalties to be excluded from the ambit of the DTA's royalty article if: • the person beneficially entitled to the royalties carries on a business through a permanent establishment in Australia; • the payments arise in Australia; and • the asset giving rise to the royalties is effectively connected to the payee's permanent establishment. Question 3 above confirms that X Co has a permanent establishment in Australia and is deemed to be carrying on a business through that permanent establishment for the overseas country's DTA purposes. Question 5 above also confirms that the royalty payments received by X Co under the X Co Agreement are Australian sourced - and therefore arise in Australia. The asset giving rise to the royalties paid is also effectively connected to X Co's deemed permanent establishment in Australia. As such, the payments from Overseas Co to X Co under the X Co Agreement are 'excluded royalties'. As the payments received by X Co under the X Co Agreement constitute business profits, the business profits article of the overseas country's DTA will apply to X Co in respect of those payments, thereby attributing taxing rights to Australia on such payments to the extent that they are attributable to X Co's permanent establishment in Australia. | Detailed Reasoning - Question 7: Is X Co a foreign resident for the purposes of the foreign resident withholding provisions under paragraph 12-315(2)(a) of Schedule 1 to the TAA 1953? | Summary: Yes. X Co is a foreign resident for the purposes of the foreign resident withholding provisions under paragraph 12-315(2)(a) of Schedule 1 to the TAA 1953. | Detailed Reasoning - Detailed reasoning: Question 1 above confirms that X Co is a foreign resident for Australian tax purposes, including for the purposes of paragraph 12-315(2)(a) of Schedule 1 to the TAA 1953. As such, X Co is a foreign resident for the purposes of the foreign resident withholding provisions under paragraph 12-315(2)(a) of Schedule 1 to the TAA 1953. | Detailed Reasoning - Question 8: Will X Co have an obligation to withhold an amount in accordance with section 12-245 of Schedule 1 to the TAA 1953 from the interest payments made by it to Finance Co under the Loan Agreement? | Summary: No. X Co will not have an obligation to withhold an amount in accordance with section 12-245 of Schedule 1 to the TAA 1953 from the interest payments made by it to Finance Co under the Loan Agreement. | Detailed Reasoning - Detailed reasoning: Section 12-245 of Schedule 1 to the TAA 1953 deals with interest payments to an overseas person. Under this provision, an entity must withhold an amount from 'interest' (within the meaning of Division 11A of the ITAA 1936) it pays to an entity if (inter alia) the recipient has an address outside Australia. The payments made by X Co to Finance Co under the Loan Agreement are amounts in the nature of interest in accordance with paragraph 128A(1AB)(a) of the ITAA 1936. Furthermore, Finance Co's address is outside Australia. Section 12-245 of Schedule 1 to the TAA 1953 therefore applies to the interest paid by X Co to Finance Co under the Loan Agreement, and X Co has a prima facie obligation to withhold an amount in accordance with section 12-245 of Schedule 1 to the TAA 1953 from any such payments. However, section 12-300 of Schedule 1 to the TAA 1953 provides limits on amounts withheld under Subdivision 12-F. Paragraph 12-300(a) of Schedule 1 to the TAA 1953 states that an entity is not required to withhold an amount from interest if no withholding tax is payable in respect of the interest. The Note to section 12-300 of Schedule 1 to the TAA 1953 explains that section 128B of the ITAA 1936 deals with withholding tax liability. Withholding tax liability Subparagraph 128B(2)(b)(ii) of the ITAA 1936 is the relevant provision in this case, and provides that section 128B applies (and a withholding tax liability exists) to income that is derived by a non-resident during the 1994 or a later income year and consists of a royalty that: is paid to the non-resident by a person who…is not a resident and is, or is in part, an outgoing incurred by that person…in carrying on a business in Australia at or through a permanent establishment of that person…in Australia. As such, a withholding tax liability will arise to X Co under subparagraph 128B(2)(b)(ii) of the ITAA 1936 if: • the payments made by X Co to Finance Co under the Loan Agreement consist of 'interest'; • X Co and Finance Co are 'non-residents'; • X Co has a permanent establishment in Australia; and • X Co incurs the payments to Finance Co in carrying on a business in Australia at or through that permanent establishment. Interest As stated above, the payments from X Co to Finance Co under the Loan Agreement constitute interest for the purposes of Division 11A of the ITAA 1936, this includes for the purposes of section 128B of the ITAA 1936. Non-resident Subsection 6(1) of the ITAA 1936 defines 'non-resident' as a person who is not a resident of Australia. The Commissioner has ruled that Finance Co is a foreign resident for Australian tax purposes, this includes for the purposes of being a 'non-resident' under section 128B of the ITAA 1936. Question 1 above confirms that X Co is also a foreign resident for Australian tax purposes, including for the purposes of being a 'non-resident' under section 128B of the ITAA 1936. Permanent establishment in Australia Subsection 6(1) of the ITAA 1936 defines 'permanent establishment' as: …a place at or through which the person carries on any business and…includes: … (b) a place where the person has, is using or is installing substantial equipment or substantial machinery;… Taxation Ruling TR 2002/5 confirms that the definition of permanent establishment in subsection 6(1) of the ITAA 1936 also applies for the purposes of Schedule 1 to the TAA 1953. X Co satisfies the definition of permanent establishment in Australia for the purposes of paragraph 6(1)(b) and subparagraph 128B(2)(b)(ii) of the ITAA 1936. Incurred in carrying on a business in Australia at or through that permanent establishment Despite having satisfied the subsection 6(1) definition of permanent establishment, it does not automatically follow that X Co is carrying on a business in Australia at or through that permanent establishment for the purposes of Australian tax law, nor that the interest payments are an outgoing incurred by X Co in carrying on a business at or through that permanent establishment. Whether or not a person is carrying on a business in Australia is a question of fact and degree in each case. Taxation Ruling TR 97/11 provides indicators to consider in answering this question. No one indicator is decisive and the indicators must be considered in combination and as a whole. Whether a business is being carried on depends on the general impression gained from looking at all the factors and whether the operations have a 'commercial flavour'. X Co's operations in Australia are limited to only a passive lease of the X Co Equipment. X Co's business is carried on in an overseas country, and accordingly the X Co Agreement was negotiated and executed in that overseas country. No activities are carried out in Australia by X Co in respect of its lease of the X Co Equipment to Overseas Co and X Co's only activity is to receive rental receipts from Overseas Co in respect of the X Co Agreement. Furthermore, X Co has no presence in Australia. Finally, the mere presence of the X Co Equipment in Australia is not sufficient to determine that X Co is carrying on an enterprise in Australia. Viewed as a whole then, X Co will not be carrying on a business at or through its permanent establishment. As all of the requirements of subparagraph 128B(2)(b)(ii) of the ITAA 1936 are not satisfied, X Co will not have a withholding tax liability in respect of such payments. On the basis that no withholding tax is payable in respect of the interest under section 128B of the ITAA 1936, section 12-300 of Schedule 1 to the TAA 1953 will apply. Accordingly, X Co (despite having a prima facie obligation to withhold an amount from the interest payments it makes to Finance Co under the Loan Agreement) will not be required to withhold an amount from such payments by virtue of paragraph 12-300(a) of Schedule 1 to the TAA 1953.

Is X Co a foreign resident for the purposes of section 995-1 of the ITAA 1997?