Private ruling: International - Company residency and source
Date of advice: 9 June 2017
Published: October 2017
Ruling period: 1 July 2016 to 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Is Company A a resident of Australia under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)? | A1: Yes | Q2: Does any of the income derived by Company A from the operations set out in the facts have an Australian source? | A2: No | Q3: If Company A is a resident of Australia for Australian tax purposes, would it have a permanent establishment in Country X for the purposes of section 23AH of the Income Tax Assessment Act 1936 ? | A3: No | Q4: If Company A is a resident of Australia for Australian tax purposes, will all or part of its income be 'foreign income’ for the purposes of section 23AH of the Income Tax Assessment Act 1936? | A4: Yes | Q5: If Company A is a resident of Australia for Australian tax purposes, can Holding Company and Company A form a tax consolidated group? | A5: Yes

Relevant facts and circumstances: Company A 1. Company A (Company A) is a company incorporated overseas in Country A. The current director of Company A is a resident of Country A. 2. The sole shareholder of Company A is Holding Company, an Australian resident company which is wholly owned by an Australian resident trust. The director of Holding Company is an Australian resident individual, Individual H. 3. Individual H attended to the establishment of Company A on behalf of Holding Company. Company A was incorporated using the services of a company management business. At the time it was incorporated an application form was completed by Individual H who understood that the company management business would arrange for an appropriate director of Company A. 4. Company A is carrying on an online sales business and holds all operational contracts relating to the business. Business activities 5. Company A sells products, primarily to customers outside of Australia, through a website hosted on a server located outside of Australia. 6. Company A does not sell any of its products in Australia. 7. The retail prices for the products were first set by Individual H before Company A was established. Since then those prices have not changed. 8. Company A engages a manufacturer outside of Australia to produce and package the products. The products are designed by the manufacturer who owns the intellectual property associated with the product. The initial contact with the manufacturer was made by Individual H, the director of Holding Company, prior to Company A being established. There is no formal agreement in place between Company A and the manufacturer. 9. The manufacturer sets the price for the product it makes and does not negotiate these prices with Company A. The manufacturer is not an entity associated with, or related to, either Company A, Holding Company or Individual H. Company A does not have exclusive rights to sell the product range. 10. Company A engages a factory outside of Australia to produce the packaging for the product. The manufacturer is sent the packaging by the factory and then packages the product and sends the final product to a separate warehouse in the manufacturer’s resident country. The product is stored in this warehouse until it is sold, at which time the warehouse ships the product to the customer. 11. Company A has a contract with a third party employment provider in the Country X to provide staff members, office space and office equipment for the day to day management and operation of the business of Company A, the responsibility for which rests with one of the three staff members, Staff A. The applicant states there is no person who specifically manages this contract. Country X employment service provider 12. The Country X employment service provider is a resident entity of Country X. It provides its employment services to clients generally. Company A is one of the firms to which it provides its services. Customer orders 13. Customers place their order on the website or by calling the phone number on the website. Customers purchase the products through a regular subscription. New customers are referrals, recommendations or people who have found the website on the internet. 14. The contracts entered into by customers with Company A for purchasing the products online are subject to the laws of the Country A and subject to the exclusive jurisdiction of the Country A courts. 15. Company A has a contract with a third party call centre provider that provides three exclusive staff and all equipment, infrastructure and office space necessary for the call centre. The call centre is located in a country outside of Australia and the staff are residents of that country. The contracts with the call centre provider and the employment provider in Country X were first signed in Australia. Both documents were executed prior to the establishment of Company A. 16. The call centre has the authority to accept and execute orders on behalf of Company A. Manufacturer orders 17. Company A places an order with the manufacturer and the manufacturer then fulfils that order. Both the warehouse and Staff member A in Country X monitor the product inventory levels and provide input into the order quantities. The identity of the manufacturer must be kept secret and is therefore a risk management issue. Accordingly, the order is passed on to the contract manufacturer by Holding Company. If there are problems identified with the manufacturer’s order this information will be provided to Holding Company by Staff member A and Holding Company will communicate this information to the manufacturer. 18. Responsibility for managing Company A’s website rests with a developer in another country outside of Australia. The website is hosted on a server located in yet another country outside of Australia. The website developer was found by Individual H. The website developer did not ask for a written contract to be signed. The terms of the agreement between Holding Company and the website developer authorises Holding Company to instruct the website developer to make strategic updates to the Company A website. The applicant states there is no person who specifically manages the contract with the website developer on an ongoing basis. 19. Country X’s operational staff may raise issues in relation to website operational matters and these issues are then passed on to Holding Company who informs the website developer. This approach has been adopted because the website developer also maintains Company A’s customer relationship management system, in addition to managing the Company A website. The customer relationship management system includes highly sensitive and valuable information about Company A’s clients and therefore protecting that data from theft is a significant risk management issue for Company A. To address that risk, the identity of the developer is kept secret and Holding Company solely communicates with the website developer. If an update or change to the Company A website relates to a strategic matter, this would require the authorisation of Holding Company. Payment and accounting 20. The merchant facility and payment processor for the collection of customer payments and the issuing bank are located in countries outside of Australia. An accountant located overseas does the bookkeeping work for Company A. Management and operations 21. The staff members in Country X deal with daily management and operational issues including but not limited to processing orders, checking addresses are correct and liaising with the warehouse for the dispatch of orders. The staff members are full time and their remuneration is billed hourly at a rate that includes the service provider’s fee. The third party service provider also charges for other services provided such as infrastructure and overheads such as telephone calls made by the staff. 22. Staff member A is responsible for customer relations, operations and logistics of Company A. The following dot points describe Staff member A’s specific responsibilities: ● oversee forecasting and inventory. Regularly monitor inventory and ensure proper stock levels ● oversee and co-ordinate order processing, shipments and returns ● identify product quality issues ● handle major client escalations and resolve complaints ● manage the daily relationship with the warehouse partner ● manage the daily relationship with the call centre ● manage the other two staff members in Country X ● approve and issue refunds as necessary ● motivate team members ● handle client retention, and ● monitor back-end systems. 23. Staff member A has the authority under the contract between Company A and their Country X employer to make all decisions related to their responsibilities. Examples of the decisions they have made include entering and accepting orders, refunds and offering discounts to customers. Staff member A makes decisions that affect customer service, fulfilment of orders, warehousing etc. 24. Certain matters, such as order processing issues and refunds, are escalated by the call centre to the office in Country X. Staff member A has the authority to make decisions on such issues. The three call centre staff also report to Staff member A 25. Staff member A works autonomously. Most of Staff member A’s interactions are with key vendors, such as the call centre operator and warehouse. These issues are addressed directly with them. 26. Holding Company is available to provide guidance on non-routine and strategic matters as required. Staff member A will contact Holding Company where they: ● identify any strategic and risk management issues ● need to pass on feedback and requests to the manufacturer, ● need to pass on feedback and requests to the website developer. 27. There is a project manager that works for the employment provider in Country X whose responsibility it is to ensure the Country X staff are performing their duties in accordance with the contract with the employment provider. Director 28. The current director of Company A is not an Australian resident and is tasked with the following directorship roles and responsibilities: ● Be aware of the company’s financial position at all times ● Review the financial position each month ● Maintain corporate documents and registers at the registered office ● Make all statutory filings for the company ● Corporate governance of the company ● Adhere to regulatory requirements in the Country A, and ● Act in the best interests of the company. 29. However, the current director’s roles and responsibilities are limited to ensuring compliance with the regulations and laws of Country A in relation to Company A’s activities. They do not in any way control or influence the operational aspects of Company A and does not otherwise exert any control over its management. Role of Holding Company 30. Individual H as director of Holding Company is involved in strategic matters and high level decisions, governance, risk and policy matters of Company A. Individual H is also available to provide guidance on non-routine matters as required. They also: a. attended to the establishment of Company A and executed the contracts, through which Company A operates, with a number of third parties b. set the initial retail price c. possesses significant business information relating to Company A’s business d. is solely responsible for the final submission of the monthly product orders to the manufacturer e. is the only person who communicates with the manufacturer and Company A’s website developer, and f. deals with any strategic and risk management issues identified.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 6 | Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1936 paragraph 6(1)(b) | Income Tax Assessment Act 1936 section 23AH | Income Tax Assessment Act 1997 subsection 6-5(2) | Income Tax Assessment Act 1997 section 703-5 | Income Tax Assessment Act 1997 section 703-10 | Income Tax Assessment Act 1997 section 703-15 | Income Tax Assessment Act 1997 section 703-20 | Income Tax Assessment Act 1997 section 995-1

Reasons for decision: Detailed Reasoning - Detailed reasoning: 2. The term 'resident’ in relation to a company is defined within subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936), and is defined at paragraph (b) of that term as: (b) a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on 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. 3. The definition sets the criteria necessary to establish residency of a company. The first element of the definition states that a company which is incorporated in Australia, is a resident of Australia ( the incorporation test ). For a company incorporated in Australia, this is where the inquiry ends. 4. A company will be a resident under ' the central management and control test ’ of company residency in paragraph (b) if it carries on business in Australia and has its central management and control in Australia. 5. Alternatively, a company may be a resident under ' the voting power test ’ if its voting power is controlled by shareholders who are Australian residents and it carries on business in Australia. 6. Draft Taxation Ruling TR 2017/D2 Income tax: Foreign Incorporated Companies: Central Management and Control test of residency sets out the Commissioner’s preliminary view on how to apply the central management and control test of company residency following Bywater Investments Limited & Ors v. Commissioner of Taxation; Hua Wang Bank Berhad v. Commissioner of Taxation [2016] HCA 45; 2016 ATC 20-589 (Bywater). When the final ruling is issued, it is proposed to apply from 15 March 2017. 7. Thus, for the income years ending 30 June 2017 to 2019, the Commissioner will apply his view of the law as set out in Taxation Ruling TR 2017/D2. 8. The Commissioner's previous view of the central management and control test was contained in Taxation Ruling TR 2004/15 Income tax: residence of companies not incorporated in Australia - carrying on business in Australia and central management and control . TR 2004/15 was withdrawn with effect from 15 March 2017. 9. Thus, for the income years ended 30 June 2015 and 2016, the Commissioner will apply his view of the law as set out in Taxation Ruling TR 2004/15 (withdrawn). | Detailed Reasoning - Years ended 30 June 2015 and 2016: 10. A company will be a resident under the second statutory test if two separate requirements are met. The first is that the company is carrying on business in Australia, and the second is that the company has either its central management and control (CM&C) in Australia, or its voting power controlled by shareholders who are residents of Australia. 11. Paragraphs 6 of TR 2004/15 states: 6. If no business is carried on in Australia, the company cannot meet the requirements of the second statutory test and, in these circumstances, it is not a resident of Australia under the second statutory test. In these situations there is no need to determine the location of the company's CM&C, separate from its consideration of whether the company carries on business in Australia. If the company carries on business in Australia it also has to have its CM&C in Australia to meet the second statutory test. | Detailed Reasoning - Central management and control (CM&C): 12. As discussed at paragraph 13 of TR 2004/15, CM&C focuses on management and control decisions that guide and control the company’s business activities. This level of management and control involves the high level decision making processes, including activities involving high level company matters such as general policies and strategic directions, major agreements and significant financial matters. 13. Determining CM&C involves a focus on the who, when and where of the strategic decision making of a company and essentially focuses on management and control decisions made at the highest levels in the company. 14. The location of the company’s CM&C is a question of fact to be determined in light of all the relevant facts and circumstances. | Detailed Reasoning - Carries on business in Australia: 15. Whether a company carries on business in Australia is a question of fact to be decided on the particular facts of the case under consideration. The nature and extent of activities conducted in Australia are relevant. 16. Paragraph 9 and 10 of TR 2004/15 state: 9. The question of where business is carried on is one of fact. It requires a consideration of where the activities of the company are carried on and is dependent on the facts and circumstances of a case. However, the Commissioner’s approach to this factual determination is to draw a distinction between a company with operational activities (for example trading, service provision, manufacturing or mining activities) and a company which is more passive in its dealings. It is appreciated that there will be some overlap in any particular situation. 10. For the purposes of the second statutory test, a company that has major operational activities relative to the whole of its business carries on business wherever those activities take place and not necessarily where its CM&C is likely to be located. Operational activities include major trading, service provision, manufacturing or mining activities. For example, the place of business of a large industrial concern is wherever its offices, factories or mines are situated. 17. In considering the notion of 'carrying on business’ in Australia, paragraph 12 of TR 2004/15 states: 12. It is considered that for the purposes of paragraph 6(1)(b), the concept of carrying on a business may be wider than its ordinary meaning and extends to undertakings of a business or a commercial character. For example, for the purposes of the second statutory test, a company may be carrying on business even if its only activity is the management of its investment assets. 18. Paragraphs 22-27 of TR 2004/15, explain that in determining whether or not an entity is 'carrying on a business’ it is necessary to examine all the relevant facts and circumstances of the entity’s activities to determine whether it carries on business in Australia. | Detailed Reasoning - Voting power control: 19. If a company carries on business in Australia, a second requirement to satisfy the residency definition is that the voting power of that company is controlled by shareholders who are residents of Australia. | Detailed Reasoning - Residency: 20. Company A is a company incorporated in the Country A. Company A does not satisfy the first element of the definition of resident in subsection 6(1) of the ITAA 1936 as Company A is not incorporated in Australia. | Detailed Reasoning - Voting power control: 21. The 100% shareholder of Company A is Holding Company, an Australian resident company. Therefore, Company A satisfies the voting power control requirement in subsection 6(1) of the ITAA 1936 as Company A’s voting power is controlled by an Australian resident shareholder. | Detailed Reasoning - Central management & control (CM&C): 22. It is apparent that Individual H, director of Holding Company, is responsible for setting the directions and goals for Company A. It is noted the director of Company A is primarily concerned with administrative and regulatory matters in Country A and is not involved in any strategic direction or decision making for Company A. Consequently, they do not exercise any control over the business activities of Company A. 23. The CM&C activities of Company A are further discussed below. 24. Based upon the facts, the activities of Individual H constitute CM&C activities of Company A and are consistent with the description of CM&C provided in TR 2004/15. These CM&C activities are conducted in Australia. Therefore Company A satisfies the CM&C in Australia requirement in subsection 6(1) of the ITAA 1936. | Detailed Reasoning - Carrying on business in Australia: 25. Despite satisfying both the voting power and the CM&C requirements, Company A will also need to be carrying on business in Australia for it to be a resident under the second statutory test in subsection 6(1) of the ITAA 1936. To determine whether or not Company A is 'carrying on business’ in Australia it is necessary to examine all the relevant facts and circumstances of Company A’s business activities. | Detailed Reasoning - Company A’s business activities: 26. The primary activity performed by Company A in relation to its business is customer sales. Company A sells products via a website hosted on a server located outside of Australia. The website is the primary method through which most customers place orders for Company A’s products. When a customer submits an online order via the website, they are entering into a sales contract with Company A. 27. Customers can also place orders by calling the Company A call centre. Customers purchase the products through a regular subscription. New customers are referrals, recommendations or people who have found the website on the internet. 28. It is accepted that Company A is carrying on a business of selling products to customers via their website. Essentially, Company A’s primary business is the sale of products on the internet. This is an undertaking of a commercial character leading to the derivation of income for Company A. | Detailed Reasoning - Third party contracts: 29. Company A has no employees. In order to conduct its business and fulfil customer orders Company A has engaged a number of third party providers to carry out its business operations. The following points summarise these business activities, including their location: ● Manufacturer: Company A engages the manufacturer to produce and package the products. The products are designed by the manufacturer who owns the intellectual property associated with the product. The terms of the agreement between Company A and the manufacturer are that Company A places an order with the manufacturer and the manufacturer then fulfils that order. Holding Company pass on the product order to the product manufacturer as the identity of the manufacturer must be kept secret and is therefore a risk management issue. The manufacturer sets the price for the product that it makes and does not negotiate these prices with Company A. ● Packaging: Company A engages the packaging factory to produce the packaging for the products. The manufacturer is sent the packaging by the factory and then packages the product. ● Warehouse: The manufacturer sends the final product to a separate warehouse within the same country. The product is stored in this warehouse until it is sold, at which time the warehouse ships the product to the customer. ● Payment: The merchant facility and payment processor for the collection of customer payments and the issuing bank are located in countries outside of Australia. ● Accounting: An accountant located outside of Australia does the bookkeeping work for Company A. ● Website: Responsibility for managing Company A’s website rests with the developer, who lives outside of Australia. The website is hosted on a server located outside of Australia. The terms of the agreement between Holding Company and the website developer authorises Holding Company to instruct the website developer to make strategic updates to the Company A website. Holding Company also passes on operational updates to the website from the staff in Country X. ● Operations: Company A has a contract with a third party employment provider in Country X which provides three exclusive staff members, office space and office equipment for the day to day management and operation of the business of Company A. The employment provider’s staff are responsible for the review, placement and maintenance of customer orders. ● The most senior staff member provided by Country X employment provider, is Staff member A, who is responsible for the operational management of the business activities that relate to their responsibilities, including customer relations, operations, logistics and the entire customer chain in relation to the products. This responsibility includes ensuring that orders placed with the manufacturer are ultimately delivered to the customer and that the customer is satisfied with the purchase. The other staff members in Country X and all call centre staff report to Staff member A. Staff member A is the person responsible for managing and ensuring that the terms of the contract between Company A and the call centre are adhered to. ● Call centre: Company A has a contract with a third party call centre provider that provides exclusive staff and all equipment, infrastructure and office space necessary for the call centre. The call centre has authority to accept and execute orders on behalf of Company A. The call centre staff are responsible for providing customers with customer support services as well as taking telephone orders placed by customers. The call centre is located outside of Australia and the staff are residents of that country. 30. The above list of business activities are activities which other entities are carrying out on behalf of Company A, but these activities are not being carried out by Company A in its own right. Essentially, Company A has contracted out the majority of its day to day business functions to third parties. | Detailed Reasoning - Agency relationship: 31. An agent is authorised to do something of another entity (the principal) and the activity done by the agent on behalf of the principal is taken to be an activity done by the principal. The facts in your circumstances indicate there is an agency relationship arising from the contract between Company A (the principal) and the employment provider (the agent). The Country X staff are employed by an employment agency and are directed by the employment agency to provide services for the exclusive benefit of Company A. They have authority to deal with daily management and operational issues on behalf of Company A. Staff member A has the authority to make all decisions related to their responsibilities. Examples of the decisions they have made include entering and accepting orders, refunds and offering discounts to customers. They make decisions that affect customer service, fulfilment, warehousing etc. Therefore, the activities performed by the Country X staff are taken to be activities done by Company A. This agency relationship also extends to the contract between the call centre and Company A, such that the activities of the call centre staff are taken to be activities done by Company A. | Detailed Reasoning - Role of the director: 32. As outlined in the facts, the director of Company A’s responsibilities are limited in so far as they relate to corporate governance or financial oversight to ensuring compliance with the regulations and laws of Country A. Essentially, they are responsible for administrative functions. The director of Company A is not responsible for managing any third party contracts and is not involved in the day to day running of Company A’s business. They do not control any operational aspects of, or exert any influence on, Company A outside of ensuring regulatory and legislative compliance in Country A. | Detailed Reasoning - Location of Company A’s business activities: 33. It is accepted that Company A is a company carrying on a business of selling products to customers. A number of Company A’s business activities are not undertaken by Company A in its own right, but are performed under contract by third party providers on behalf of Company A. 34. The location of the business activities performed by or on behalf of Company A is discussed below: ● Sales activity: The sales activities of Company are carried on automatically via a website which is hosted on a server located in another country outside of Australia. You have stated that the contracts entered into by customers with Company for purchasing the products are subject to the laws of Country A and subject to the exclusive jurisdiction of the Country A courts. ● Directorship responsibilities – The director of Company A is responsible primarily for regulatory and administrative matters. The director of Company A is located in Country A and is not an Australian resident. ● Operations: The operational management of Company A’s business relating to fulfilment of customer orders and management of the customer relationship is performed by labour agency staff located in Country X. ● Call centre: The call centre activities are located outside of Australia. 35. None of the activities listed above are undertaken in Australia. | Detailed Reasoning - Does Company A also carry on business in Australia?: 36. The test for carrying on business does not require business to be carried on in only one location, rather an entity can carry on business in a number of locations. 37. The following points develop an understanding of the activities undertaken by Holding Company, and its director, Individual H in relation to the business of Company A. ● The contracts with the call centre provider and the employment provider in Country X were executed prior to the establishment of Company A and were signed in Australia. These contracts were executed in Australia. The applicant states there is no person who specifically manages this contract. ● Holding Company pass on the product order to the product manufacturer as the identity of the manufacturer must be kept secret and is therefore a risk management issue. The staff in Country X and the warehouse monitor the stock levels and prepare the order quantities in submitting the order. ● Holding Company pass on operational website update issues to the website developer when these issues are identified by the staff in Country X. This approach has been adopted because the developer, in addition to managing the Company A website, also maintains Company A’s customer relationship management system. The customer relationship management system includes highly sensitive and valuable information about Company A’s clients and therefore protecting that data from theft is a significant risk management issue. To address that risk, the identity of the developer is kept secret and is only known by Individual H. ● The retail prices for the products were first set by Individual H before Company A was established. Since then those prices have not changed. ● Holding Company is available to provide guidance on non-routine matters if required. It is noted that Staff member A will contact Holding Company in the following situations: ● if they identify any strategic and risk management issues ● if they need to pass on feedback and requests to the manufacturer, ● if they need to pass on feedback and requests to the website developer. 38. In essence the director of Holding Company, Individual H, was responsible for setting up the initial operational structure for the business of Company A. Following this initial set-up, Company A’s sales business has been structured to predominantly be run automatically via the website. The day-to-day operational activities are contracted to be performed by the employment provider in Country X. 39. However Holding Company holds key information that is considered a significant risk management issue for Company A, such as the identity of the website developer and the manufacturer. The arrangement with the manufacturer is not a formal agreement and no contract has been entered into between Company A and the website developer. Holding Company is responsible for liaising with the website developer in relation to any strategic or operational updates or changes to the Company A website. Holding Company is also responsible for communicating the monthly orders to the manufacturer and any issues that arise with respect to the quality of the product. Essentially, all communications with the manufacturer and the website developer come from Holding Company. This involvement with the manufacturer and the website developer, key elements of the business model of Company A, indicates that significant operational activities are being performed by Holding Company in relation to the ongoing business of Company A. 40. The director of Company A does not have authority or responsibility to be involved in the business operational activities of Company A. The director of Holding Company, Individual H, made the key decisions in relation to the third party contracts with the call centre and employment provider, including executing these contracts on behalf of Company A. The applicant has stated that no person manages the Country X employment provider contract and that no dispute or issue has arisen in relation to this arrangement. In considering the facts in your circumstances, it is concluded that Individual H would be the relevant person responsible for resolving any issues under this contract. There is no evidence that any person other than the director of Holding Company has authority to make decisions relating to the ongoing contractual arrangements in place relevant to the operations of Company A. 41. It is noted the retail price for the products sold by Company A was first set by Individual H before Company A was established. Even though the retail price has not changed since this time, there is no evidence that anyone other than Individual H has the authority to change the retail price, even though they have not been required to do so. 42. The involvement of Individual H as director of Holding Company in the managerial and business activities of Company A is considered integral to the daily business operations of Company A. These activities include final submission of monthly product orders and responsibility for all communications with the manufacturer, executing and ongoing responsibility for Company A’s third party contracts, possession of significant business information, ongoing responsibility for providing guidance on non-routine matters and risk management issues associated with the fulfilling customer orders, and communicating with the website developer. These activities constitute more than just CM&C activities, as outlined in paragraph 48 of TR 2004/15, and are critical to the ongoing success of the operational business of Company A. 43. The Commissioner’s view was that a company with operational activities generally carries on business where its major operational activities relative to the whole of its business take place, notwithstanding that its CM&C may be located elsewhere (see paragraph 10 of TR 2004/15). The importance of relativity is stressed by the Commissioner in this paragraph, and also at paragraph 26 of TR 2004/15. 44. In these circumstances the business activities conducted in Australia by the director of Holding Company are considered significant relative to the whole of the business activities of Company A. The business of Company A would not take place without Holding Company’ involvement in submitting monthly product orders, communicating with the manufacturer, liaising with the website developer, overseeing contractual arrangements and holding sensitive information. The element of the business activities conducted in Australia are significant relative to the operational activities undertaken by Company A. | Detailed Reasoning - Example 5 in TR 2004/15: 45. The present circumstances are comparable in some respects to example 5 outlined at paragraphs 78 to 83 of TR 2004/15. In example 5, Boom Co a company incorporated in Hong Kong was set up by Ben, an Australian resident. Boom Co owns and leases commercial properties. Whilst the Australian resident does not attend board meetings in Hong Kong, the decisions of the directors are only binding if the Australian resident concurs with them. The example provides four possible outcomes in relation to the residency of Boom Co, depending upon the types of decisions and activities the Australian resident beneficial owner undertakes. While this example is for an investment business, it provides examples of activities that do and do not constitute the carrying on of a business in Australia. The key factor differentiating these two possible outcomes is the location at which the day to day operational activities are conducted, which demonstrates the carrying on of a business. 46. In possibility 3 of example 5, Ben solely exercises the power to make high level decisions regarding Boom Co’s activities, meaning its CM&C is solely located in Australia. However, Ben does not participate in the day-to-day management activities of the company, and as such Boom Co is not carrying on business in Australia. 47. In contrast possibility 4 of example 5 extends Ben’s involvement in Boom Co to include managing the day to day activities such as the payment of expenditure, vetting of all tenants and the detailed monitoring of rental payments via the internet. Essentially, all high level and operational decisions in respect of Boom Co are made in Australia, and Boom Co is carrying on business in Australia. 48. In your circumstances, Individual H as director of Holding Company has made, and continues to make, all the high level decisions in relation to the company’s activities. Additionally, as previously discussed, Individual H continues to perform activities that are integral to the operational business of Company A. These activities are in addition to the CM&C function of Company A being undertaken in Australia. While some of the day to day operational management has been contracted to the Country X employment provider, Individual H in Australia is involved in operational decision making and their activities are conducted in Australia. Therefore, Company A is carrying on business in Australia and its CM&C is located in Australia. | Detailed Reasoning - Conclusion on carry on business in Australia: 49. Whether a corporation is carrying on business in Australia is very much a question of fact. One needs to look at the totality of the company’s business. It is accepted that Company A carries on an operational business of selling products and a number of the operational activities of Company A do not take place in Australia. However, the Commissioner considers that managerial activities and operational activities are performed by the director, Individual H, of Holding Company in Australia that go beyond high level strategic CM&C activities. In applying the Commissioner’s view in TR 2004/15 to the nature and location of Company A’s operational activities, Company A carries on business in Australia, notwithstanding that it also carries on business overseas. | Detailed Reasoning - Conclusion on residency for the years ended 30 June 2015 and 2016: 50. Accordingly, Company A is a resident within the meaning of subsection 6(1) of the ITAA 1936 for the income years ended 30 June 2015 and 2016. | Detailed Reasoning - Years ending 30 June 2017 to 2019: 51. Following the Bywater High Court decision, the approach the Commissioner took in TR 2004/15 in relation to the earlier High Court decision in Malayan Shipping Company Ltd. v. Federal Commissioner of Taxation (1946) 71 CLR 156 (' Malayan Shipping ’) can no longer be sustained. 52. Paragraph 5 of TR 2017/D2 states: 5. If a company has its central management and control in Australia, and it carries on business, it will carry on business in Australia within the meaning of the central management and control test of residency. It is not necessary for any part of the actual trading or investment operations from which its profits are made to take place in Australia. This is because the central management and control of a business is factually part of carrying on that business. It follows that a company carrying on business does so both where it's trading and investment activities take place, and where the central management and control of those activities occurs. 53. This paragraph reflects the High Court decision in Bywater where at [57] the majority of the court clearly agreed with Williams J’s rejection in Malayan Shipping of the contention that where a company has its central management and control in Australia it must, to be a resident of Australia, in addition also carry on its business operations in Australia. Therefore if a company carrying on business has its central management and control in Australia it will necessarily carry on business in Australia. That is so even when the only business carried on in Australia consists of that central management and control, and trading operations are conducted outside this country. | Detailed Reasoning - Central management and control: 54. As outlined at paragraph 6 of TR 2017/D2, central management and control is the control and direction of a company’s operations. The key element is the making of high-level decisions that set the company’s general policies and determine the direction of its operations and the type of transactions it will enter. Paragraph 10 of TR 2017/D2 provides examples of acts that can involve exercising central management and control. 55. Paragraph 11 of TR 2017/D2 outlines that matters of company administration are not acts of central management and control. These administrative acts include keeping a company’s share register, keeping a company’s accounts and the minimum acts necessary to maintain a company’s registration. 56. Identifying who exercises central management and control is a question of fact. The crucial question is who controls and directs a company’s operations in reality. 57. A company will be controlled and directed where those making its decisions do so as a matter of fact and substance. 58. Further, a person may control and direct a company without ongoing active intervention in the company's affairs provided they: ● have appointed agents or managers whom they tacitly control to conduct the company's day-to-day business ● tacitly control and regularly exercise oversight of the affairs of the company, including monitoring the company's performance, and ● do not need to actively intervene because the company's affairs are running smoothly and in the manner they desire. | Detailed Reasoning - Incorporation test: 59. Company A is a company incorporated in the Country A. Company A does not satisfy the first element of the definition of resident in subsection 6(1) of the ITAA 1936 as Company A is not incorporated in Australia. | Detailed Reasoning - Central management & control test: 60. As noted above, the director of Company A does not exercise any control over the business activities of the company. 61. A factual analysis of Company A’s business activities has been undertaken to consider who in reality controls and direction Company A’s operations. | Detailed Reasoning - Company A’s business activities: 62. The business activities, including Company A’s third party contracts, operational management, agency relationships and location of business activities have been described above. | Detailed Reasoning - Role of the Company A director: 63. The director of Company A’s tasks as a director have been described above. They do not exercise any control over the business activities of Company A. Consistent with paragraph 11 of TR 2017/D2, the director of Company A’s activities are not acts of central management and control. | Detailed Reasoning - Australian activities: 64. The Australian activities have been described above. 65. Individual H was the initial decision maker responsible for setting the direction and structure of Company A’s operations, given they executed a number of third party contracts prior to Company A being in existence and set the initial retail price. It is evident that Individual H remains the person with ongoing responsibility and oversight of the contracts. For example, Individual H is responsible for attending to any non-routine, strategic and risk management issues that are referred by Staff member A. They are also responsible for all communications with the website developer and manufacturer. This supports the conclusion that Individual H as director of Holding Company has the authority to manage and control the direction of Company A. 66. The ongoing involvement of Individual H as director of Holding Company in the managerial and business activities of Company A is considered integral to the business operations of Company A. These activities include communicating with the manufacturer and website developer. The activities performed by Individual H on behalf of Holding Company are critical to the ongoing success of Company A’s operational business. The continuing involvement of Individual H in these aspects of the operation support that they are the person that has control over the direction of the company’s operations. The purchase and sale of these particular products online is the business model of Company A. There is nothing in the facts that would support that anyone other than Individual H could make decisions regarding any changes to the policy and strategic direction of Company A e.g. diversifying the business of Company A. There is no evidence that anyone other than Individual H could make changes to the pricing of the products for sale or the contractual terms on which a customer places an order over the website. Individual H has full knowledge of the sensitive business information. There is no factual basis for concluding that there is anyone other than Individual H who can control and direct the operations of the business even if active intervention in the operations is not required because no problems are arising under the contracts and the activities are running smoothly and in accordance with the original direction established by Individual H. 67. The Commissioner is satisfied that Individual H, as director of Holding Company, exercises the central management and control of Company A and the activities perform also constitute part of Company A’s business. The decision making and business activities performed by Individual H and Holding Company are performed in Australia. Therefore, the central management and control of Company A is clearly in Australia. | Detailed Reasoning - Conclusion: 68. Consistent with the High Court decision in Bywater and the Commissioners view in TR 2017/D2, the central management and control of Company A’s business is factually part of carrying on that business. Therefore Company A is a resident of Australia under paragraph (b) of subsection 6(1) of the ITAA 1936 for the years ending 30 June 2017 to 2019 as it carries on business in Australia and has its central management and control in Australia. | Detailed Reasoning - Question 2: 69. The income derived by Company A from the operations set out in the facts do not have an Australian source. | Detailed Reasoning - Detailed reasoning: 70. Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) defines Australian source as “ordinary income or statutory income has an Australian source if, and only if, it is derived from a source in Australia for the purposes of the Income Tax Assessment Act 1936 .” 71. Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes the ordinary income derived by the taxpayer directly or indirectly from all sources, whether in or out of Australia, during the income year. On the basis that Company A is a resident of Australia under subsection 6(1) of the ITAA 1936 (as established in Question 1 above), Company A will be taxed on derived income from all sources, whether in or out of Australia. | Detailed Reasoning - Nature of the test to determine source: 72. In relation to the nature of the test to be applied to determine the source of an item of income, paragraphs 19 to 23 of Taxation Determination TD 2011/24 (TD 2011/24) state the following: 19. Determining the source of an item of income is a matter of fact to be determined having regard to the facts and circumstances of each case. This was originally stated by Isaacs J in Nathan v. FC of T : The Legislature in using the word 'source' meant, not a legal concept, but something which a practical man would regard as a real source of income. Legal concepts must, of course, enter into the question when we have to consider to whom a given source belongs. But the ascertainment of the actual source of a given income is a practical, hard matter of fact. 20. In Tariff Reinsurances Ltd v. Commissioner of Taxes (Vic), Rich J said that both the form and substance of a transaction are relevant to the question of source: We are frequently told, on the authority of judgments of this court, that such a question is 'a hard practical matter of fact'. This means, I suppose, that every case must be decided on its own circumstances, and that screens, pretexts, devices and other unrealities, however fair may be the legal appearance which on first sight they bear, are not to stand in the way of the court charged with the duty of deciding these questions. But it does not mean that the question is one for a jury or that it is one for economists set free to disregard every legal relation and penetrate into the recesses of the causation of financial results, nor does it mean that the Court is to treat contracts, agreements and other acts, matters and things existing in the law as having no significance. 21. In Spotless Services Ltd & Anor v. FC of T (Spotless), Lockhart J said: The cases demonstrate that there is no universal or absolute rule which can be applied to determine the source of income. It is a matter of judgment and relative weight in each case to determine the various factors to be taken into account in reaching the conclusion as to source of income. 22. On appeal to the Full Federal Court, Beaumont J agreed with Lockhart J's views and said: As has been noted, Lockhart J stated, correctly in my view, that the test to be applied in determining the source of income is to 'search for the 'real source' and to judge the question in a practical way'. As his Honour went on to say (at ATC 4409-10), it is a matter of 'judgment' and 'relative weight' in each case to determine the various factors to be taken into account in reaching this conclusion. I also, with respect, agree with his Honour's statement (at ATC 4410 - cited above) as to the relative importance, for present purposes, of the place or places where the contract was made and the money lent. 23. Thus, to summarise, as Bowen CJ said in FC of T v. Efstathakis : ... the answer is not to be found in the cases, but in the weighing of the relative importance of the various factors which the cases have shown to be relevant. 73. There have been numerous court cases that have considered the question of source of income. Matters the courts have considered include the place where a contract is entered into, the place where a contract is negotiated, the place of payment, the place where a service is performed and the place where business operations are carried on. 74. In the end, it is the 'practical, hard matter of fact’ test that determines which factor or factors are important in any given case. An examination of the case law shows that in applying this test the courts will look to the process by which the income in question arises and focus on what is productive of the income in a practical business sense. Geographical source is then determined by looking to where that activity occurs (e.g. see Commissioner of Taxation (NSW) v. Meeks (1915) 19 CLR 568). 75. Essentially, there are two considerations: 1) What activities give rise to the income in question? 2) Where did those activities take place? | Detailed Reasoning - Business activities – value add: 76. In the case of Commissioner of Taxation (WA) v D & W Murray Limited (1929) 42 CLR 332 the company, which was incorporated in England, carried on the business of wholesale softgoods warehousemen in Western Australia and other States of Australia. The head office in London bought and exported goods required by the Australian branches. The goods were sold in Australia. 77. It was held by the Full High Court that the profit realised by the selling business conducted in Western Australia was one profit and was made wholly in Western Australia. The view was taken by the Court that no value or wealth had been produced by the company outside Australia so that the whole of the profit was attributable to the place where the goods were sold. The Court pointed out that whilst skill and judgment in purchasing the goods contributed to the profits, they were immaterial in determining the source, since the question was not why but where the profits were made. The Court said that in the case before it, the company's business operations conducted in England consisted only of buying which did not give any added value to the goods which were purchased. | Detailed Reasoning - Wares or stock in trade: 78. The location of wares or stock in trade may also be relevant in determining the source of a taxpayer’s income and whether apportionment of income is required. 79. In Australian Machinery & Investment Co Ltd v Deputy Commissioner of Taxation , the taxpayer acquired mining interests in Western Australia which were sold to other Australian companies in exchange for shares in those companies. Subsequently, the taxpayer entered into contracts in the United Kingdom for the sale of the shares in Australian companies in exchange for cash or shares in UK companies. The taxpayer then sold in the UK the shares in the UK companies for a profit. The sales of shares took place in the UK. For the purpose of this case the company was treated as being engaged in a profit-making enterprise, namely the business of dealing in shares in England, such shares representing the wares or stock in trade of the company. 80. Latham CJ quoted a passage from the judgment of Rich J at first instance: I feel no doubt that if a person, trading in wares which are locally situated in one country, makes a profit by selling them in another country, the source of his profit is in part the wares and in part the contracts of sale, and the locality of the source is in part the locus of the wares and in part the locus of the contracts. 81. His Honour then left it for the Commissioner to determine the proper apportionment of income between the two sources. | Detailed Reasoning - Where the contracts are executed: 82. The sales activities of Company A are carried on automatically via a website which is hosted on a server located overseas. 83. The contracts entered into by customers with Company A for purchasing the products are subject to the laws of Country A and subject to the exclusive jurisdiction of Country A courts. 84. The ATO has been provided with the contractual terms that customers are provided with in entering into a purchase contract with Company A via the website. 85. All customers are located outside of Australia. 86. It is accepted that the place where the customer sales contract is entered into is not in Australia. | Detailed Reasoning - Elements of the business transaction: 87. The activities of the business conducted by Company A involved in the sale of products have been discussed in detail in response to question 1. 88. In short, Company A’s business consists primarily of contracting with customers via their website or via the call centre and operational staff activities in Country X. A number of other crucial business elements have been contracted to be performed by third party providers, including manufacturing of the goods, payment processing and warehousing/distribution activities. Notwithstanding the intangible nature of a website, each of the physical activities required to carry on the online sales business of Company A are conducted outside of Australia. | Detailed Reasoning - Wares or stock in trade: 89. In applying the reasoning in Australian Machinery & Investment Co Ltd to your circumstances, the goods for sale are located outside Australia and the location of the contracts are considered not to be in Australia. Both these matters point to the source of the income being outside Australia. Hence, in your circumstances, the question of any apportionment of dual source to Australia does not arise. | Detailed Reasoning - Role of Holding Company: 90. The Australian director of Holding Company makes strategic and operational decisions on behalf of Company A, including the purchasing of the product and initially setting the price. These activities have minimal weighting in determining the source as the question is where the profits are made, per D & W Murray Ltd. 91. In your circumstances, it is the selling of goods and contracting with customers via your website that realise the profit for Company A. These activities are performed outside Australia. | Detailed Reasoning - Conclusion: 92. Based on the facts provided by the applicant, it is the Commissioner’s view that the income derived by Company A is not directly or indirectly sourced in Australia. | Detailed Reasoning - Question 3: 93. Company A does not have a permanent establishment in Country X for the purposes of section 23AH of the ITAA 1936 . | Detailed Reasoning - Detailed reasoning: 94. Broadly, section 23AH of the ITAA 1936 treats certain foreign branch income derived directly or indirectly by Australian resident companies as non-assessable non-exempt (NANE) for income tax purposes. 95. Subsection 23AH(2) of the ITAA 1936 expressly requires that the relevant income be derived by a company that is carrying on a business at or through a permanent establishment (PE) of the company. Where there is a tax treaty, subsection 23AH(15) defines permanent establishment to have the same meaning as in the tax treaty, but otherwise the definition in subsection 6(1) of the ITAA 1936 applies. | Detailed Reasoning - Country X Agreement: 96. The Double Tax Agreement between Australia and Country X (DTA) operates to avoid the double taxation of income received by Australian and Country X resident entities. 97. Article Z of the DTA states that the business profits of an Australian enterprise shall be taxable only in Australia unless the enterprise carries on business in Country X through a permanent establishment situated in Country X. | Detailed Reasoning - Permanent establishment: 98. Article X(1) of the DTA concerns the definition of permanent establishment and provides: For the purposes of this Agreement, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 99. The phrase 'fixed place of business’ is not defined in the DTA. 100. Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements (TR 2001/13) discusses the Commissioner’s views about interpreting tax treaties. Paragraphs 102 to 105 of TR 2001/13 explain that the Commentaries on the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention on Income and on Capital ('OECD Commentary’) provide important guidance on interpreting tax treaties. This approach was also accepted by the High Court in Thiel v. Federal Commissioner of Taxation (1990) 171 CLR 338; 90 ATC 4717. Accordingly, the OECD Commentary is relied upon in interpreting the DTA, and where relevant, is discussed in detail below. 101. The OECD Commentary on Article X (which in the OECD Model Tax Convention is the article defining 'permanent establishment’) explains that in relation to the general definition contained in paragraph 1 of Article X of the OECD Model Tax Convention, three conditions are required to be met for a permanent establishment to exist: ● there must be a place of business; ● the place of business must be fixed so that there is a distinct location with a certain degree of geographical and temporal permanence; and ● the business of the enterprise must be conducted through that fixed place. 102. Paragraph 4 of the OECD Commentary on Article X provides: 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 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 the enterprise or are otherwise at the disposal of the enterprise. … 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. | Detailed Reasoning - Article X(2): 103. Article X(2) of the DTA contains a list of examples that can be regarded, prima facie, as constituting a permanent establishment. As discussed at paragraph 12 of the OECD Commentary on Article X, these examples only constitute a permanent establishment if they also meet the general definition in Article X(1). | Detailed Reasoning - Article X(3): 104. Article X(3) of the DTA lists a number of business activities which are treated as exceptions to the general definition of permanent establishment under Article X(1). Under these exceptions, an enterprise shall not be deemed to have a permanent establishment merely because certain activities are conducted, even if the activities are carried on through a fixed place of business. | Detailed Reasoning - Article X(4): 105. An entity will be deemed to have a permanent establishment and to carry on business through that permanent establishment under Article X(4) of the DTA if substantial equipment is being used in Country X for more than six months by, for or under contract with the entity. | Detailed Reasoning - Article X(5): 106. Article X(5) of the DTA provides that a person acting in a Contracting State on behalf of an enterprise of another Contracting State, will be deemed to be a permanent establishment of the enterprise in the first Contracting State if they have and habitually exercise the authority to conclude contracts on behalf of the enterprise in that State. This does not apply if the person is an agent of independent status according to Article X(6), or where their authority is limited to the purchase of goods for the enterprise. 107. The OECD Commentary on Article X outlines that only people “having the authority to conclude contracts can lead to a permanent establishment for the enterprise maintaining them.” The authority to conclude contacts must cover contracts relating to operations which constitute the business proper of the enterprise. 108. Further, the mere possession of the requisite authority is not enough; it must also be exercised regularly or habitually, per Unisys Corp v. FC of T [2002] NSWSC 1115; 2002 ATC 5146 ( Unisys Corp ). | Detailed Reasoning - Article X(6): 109. Where an entity carries on business dealings in another country through a broker, general commission agent or any other agent of an independent status, where that broker is acting in the ordinary course of his business as such a broker or agent, Article X(6) of the DTA provides the entity will not be deemed to have a permanent establishment. 110. In relation to Article X(6), the OECD Commentary summarises that “where an enterprise of a Contracting State carries on business dealings through a broker, general commission agent or any other agent of an independent status, it cannot be taxed in the other Contracting State in respect of those dealings if the agent is acting in the ordinary course of his business”. 111. The OECD Commentary considers various facts and circumstances that might distinguish between an independent and dependent agent. | Detailed Reasoning - Article X(7): 112. Article X(7) of the DTA provides that the existence of a subsidiary company does not, of itself, constitute that subsidiary company a permanent establishment of its parent company. | Detailed Reasoning - Contract with the Country X service provider: 113. Company A has a contract with a third party employment provider in Country X which provides exclusive staff members, office space and office equipment for the day to day management and operation of the business of Company A. 114. Staff in Country X are employed by the employment provider and are directed by the employment provider to provide services for the exclusive benefit of Company A. They have authority to deal with daily management and operational issues on behalf of Company A. The third party service provider is akin to an employment agency and charges for other services provided such as infrastructure and overheads such as telephone calls made by the staff. | Detailed Reasoning - Articles X(1) and X(2): 115. Company A does not have a permanent establishment under Article X(1) of the DTA as Company A has no fixed place of business in Country X. The office where the contract staff members in Country X provide their services to carry out operational activities on behalf of Company A is not a business premises at the disposal of Company A, per the OECD Commentary on Article X. The office space and office equipment are provided by the third party employment provider as part of the contractual arrangement with Company A and are at the disposal of this third party entity. 116. Company A has a contractual arrangement in place with a third party employment provider to provide services exclusively for Company A. Company A does not employ the staff in Country X, they are employed by a third party service provider. The remuneration for these staff members is billed hourly to Company A and the hourly rate includes the service provider’s fee. 117. The staff members of Country X are conducting the business of the third party service provider by performing contracted activities on behalf of Company A. Consequently, the business of Company A is not being carried on wholly or partly in Country X, rather certain activities are being performed on behalf of Company A via a third party service provider. 118. As Company A does not have an office at its disposal in Country X, Article X(2)(c) of the DTA will not be satisfied. None of the other specific inclusions within Article X(2) of the DTA are relevant for Company A’s circumstances. | Detailed Reasoning - Article X(3): 119. The exclusions in paragraphs (a) to (d) of Article X(3) of the DTA are not relevant to your circumstances. Company A is not using facilities in Country X for the purpose of storage, display or delivery of its goods as all of Company A’s merchandise is stored in another country. Company A does not maintain any merchandise or stock of goods in Country X. 120. For completeness, based on the facts provided, the only contracts concluded by staff employed by the Country X service provider relate to matters excluded under Article X(3) of the DTA, as being of a preparatory or auxiliary character. As discussed below, the activities performed by the Country X service provider do not go beyond those listed in paragraph (e). Therefore, the activities performed by any 'dependent agent’ would not amount to a permanent establishment due to the exclusion in paragraph (e) of Article X(3). | Detailed Reasoning - Article X(4): 121. Article X(4) of the DTA is not relevant in Company A’s circumstances as Company A is not using substantial equipment in Country X. | Detailed Reasoning - Article X(5): 122. Article X(5) of the DTA will deem a permanent establishment in Country X if: the employment agency staff are acting in Country X on behalf of Company A, they are not an agent of an independent status, and, they satisfy the conditions in paragraph (a) of Article X(5). Paragraph (b) and (c) of Article X(5) will not be met in your circumstances as the staff in Country X do not maintain, manufacture or process a stock of goods or merchandise in Country X on behalf of Company A. 123. To satisfy Article X(5)(a), it must be shown that the staff members acting in Country X on behalf of Company A have an authority to conclude contracts on behalf of Company A and habitually exercise this authority. 124. The staff members in Country X deal with daily management and operational issues including but not limited to processing orders, checking addresses are correct and liaising with the warehouse for the dispatch of orders. The most senior staff member is Staff member A, who is responsible for customer relations, operations and logistics of Company A. Staff member A has the authority to make all decisions related to her responsibilities. Examples of the decisions they have made include entering and accepting orders, refunds and offering discounts to customers. Staff member A makes decisions that affect customer service, order fulfilment and warehousing. 125. The authority to conclude contacts must cover contracts relating to operations which constitute the business proper of the enterprise, per paragraph 33 of the OECD Commentary. In your circumstances, the business of Company A is online sales of products to customers. When a customer purchases a product from the Company A website they enter into an online sales contract with Company A. While Staff member A has authority to make decisions related to their responsibilities, it is not evident Staff member A has authority to substantially alter the terms of the customer contract entered into online. 126. Based upon the facts in this private ruling, there is no evidence that Staff member A or any of the staff members in Country X has the power to conclude contracts or a general authority to negotiate and conclude the business proper of Company A. The staff in Country X do not have, or habitually exercise, an authority to conclude contracts on behalf of Company A in Country X relating to the business proper of Company A. There has been no evidence provided of a habitual exercise of a power to conclude contracts in the relevant sense referred to in Unisys Corp . 127. The activities performed by the staff in Country X do not satisfy paragraph (a) of Article X(5). Therefore, Company A will not be deemed to have a permanent establishment in Country X under Article X(5). | Detailed Reasoning - Article X(6): 128. For completeness we consider whether the relationship between Company A and the staff in Country X constitutes an independent or dependent agency relationship. 129. As previously discussed, the staff in Country X are employed by a third party employment provider to provide services exclusively to Company A. The applicant states there is no person who specifically manages this contract. The service provider bills Company A for the hours worked by the staff at an hourly rate that includes the service provider’s fee. 130. The activities performed by the staff are to fulfil the service contracts they hold with the employment service provider, who holds a service contract with Company A, and are done so in a manner largely independent of control from Company A. There is a project manager that works for the employment provider in Country X whose responsibility it is to ensure the staff in Country X are performing their duties in accordance with the contract with the employment provider. 131. Even though the staff in Country X are performing services exclusively for Company A, the staff are employed by the service provider and the performance of the staff is ultimately overseen by and monitored by the Country X service provider. 132. Essentially, Company A has contracted with a Country X service provider to undertake daily management and operations activities in order to facilitate the ongoing business of Company A. The activities undertaken by the Country X service provider are in the furtherance of its ordinary business as an employment service provider. With regards to the OECD Commentary on Article X, the activities performed by the Country X service provider do not belong economically to the sphere of Company A but rather constitute activities relating to the furtherance of their own business operations in fulfilment of a contract of service provision. 133. The staff employed by the third party service provider are acting in the ordinary course of their employment to the service provider, which in turn is acting in the ordinary course of their own business. Article X(6) is satisfied and the employment service provider and their staff in Country X are considered to be an agent of independent status and a permanent establishment will not be deemed even if Article X(5) was satisfied. 134. You have stated that the facts of this case are analogous to that of Case 23/93 (93 ATC 288; (1993) 26 ATR 1056). However, in this case the dealer acted outside of their employment relationship with a Sydney stockbroking firm and solely for the New Zealand principal and did not hold themselves out to be ready to work for clients generally. In the alternative, the services they provided to the taxpayers was not in the ordinary course of the business of the Sydney stockbroking firm. In the present case, the service provider provides employment services to clients generally and holds itself out as such. The provision of their services to Company A is in the ordinary course of their business. | Detailed Reasoning - Article X(7): 135. Article X(7) is not relevant to your circumstances. | Detailed Reasoning - Conclusion: 136. Company A does not have a permanent establishment in Country X as Article X of the DTA has not been satisfied. Therefore, Company A does not have a permanent establishment in Country A for the purposes of section 23AH of the ITAA 1936. | Detailed Reasoning - Question 4: 137. Company A’s income will be 'foreign income’ for the purposes of section 23AH of the ITAA 1936 . | Detailed Reasoning - Detailed reasoning: 138. Subsection 23AH(2) of the ITAA 1936 provides that, subject to other parts of section 23AH, foreign income derived by a company, at a time when the company is a resident in carrying on a business, at or through a PE of the company in a listed country or unlisted country is not assessable income, and is not exempt income, of the company. 139. For the purposes of 23AH of the ITAA 1936, foreign income is defined in subsection 23AH(15) as including an amount that: a. apart from the operation of section 23AH, would be included in assessable income under a provision of the tax legislation other than the capital gains tax provisions, and b. is derived from sources in a listed country or unlisted country. 140. Listed country has the meaning given by subsection 320(1) of the ITAA 1936, being a foreign country, or a part of a foreign country, that is declared by the regulations to be a listed country for the purposes of Part X. Regulation 19 of the Income Tax Assessment (1936) Act Regulation states: For the definition of listed country in subsection 320(1) of the Act, each of the following is declared to be a listed country for the purposes of Part X of the Act: (a) Canada; (b) France; (c) Germany; (d) Japan; (e) New Zealand; (f) United Kingdom; (g) United States of America. 141. Unlisted country has the meaning given by subsection 320(1) of the ITAA 1936, being: (a) a foreign country that does not (either in whole or in part) consist of a listed country or listed countries; or (b) if one or more parts of a foreign country are listed countries -- the remainder of that foreign country. | Detailed Reasoning - Application to your circumstances: 142. As concluded in response to question 2 of this private ruling, the income derived by Company A is not Australian sourced income. It follows therefore that the Company A’s income is derived from sources in either a listed country or unlisted country, as all countries outside Australia are either listed or unlisted. 143. (Note: it is not the subject of this private ruling to determine the source country of all of Company A’s income). 144. Company A as an Australian resident company would ordinarily include income from all sources, whether in or out of Australia, in its assessable income under subsection 6-5(2) of the ITAA 1997. 145. Therefore, Company A’s income satisfies the definition of foreign income in subsection 23AH(15) of the ITAA 1936 and will be considered foreign income for the purposes of section 23AH. | Detailed Reasoning - Question 5: 146. Holding Company and Company A can form a tax consolidated group. | Detailed Reasoning - Detailed reasoning: 147. A consolidatable group is defined in section 703-10 of the ITAA 1997 and consists of a single head company and all the subsidiary members of the group. A company can choose to form a consolidated group pursuant to section 703-5. | Detailed Reasoning - Members of a consolidated group or consolidatable group: 148. Section 703-15 of the Income Tax Assessment Act 1997 (ITAA 1997) sets out the requirements for companies to be head companies and subsidiary members of consolidated groups respectively. | Detailed Reasoning - Head company: 149. An entity is a head company of the group if all the requirements in item 1 of the Table in subsection 703-15(2) are met. | Detailed Reasoning - Subsidiary: 150. Under section 703-15 of the ITAA 1997, a 'subsidiary member’ can be a member of a consolidatable group. A company must satisfy the conditions set out in Item 2 of the Table in subsection 703-15(2) to qualify as a 'subsidiary member’. 151. Table in subsection 703-15(2): Head companies and subsidiary members of groups | Detailed Reasoning - Ownership requirements: 1 Head company The entity must be a company (but not one covered by section 703-20) that has all or some of its taxable income (if any) taxed at a rate that is or equals the * corporate tax rate The entity must be an Australian resident (but not a * prescribed dual resident) The entity must not be a * wholly-owned subsidiary of another entity that meets the requirements in columns 2 and 3 of this item or, if it is, it must not be a subsidiary member of a * consolidatable group or * consolidated group 2 Subsidiary member The requirements are that: (a) the entity must be a company, trust or partnership (but not one covered by section 703-20); and (b) if the entity is a company - all or some of its taxable income (if any) must be taxable apart from this Part at a rate that is or equals the * corporate tax rate; and (c) the entity must not be a non-profit company (as defined in the Income Tax Rates Act 1986 ) The entity must: (a) be an Australian resident (but not a * prescribed dual resident), if it is a company; or (b) comply with section 703-25, if it is a trust; or (c) be a partnership The entity must be a * wholly-owned subsidiary of the head company of the group and, if there are interposed between them any entities, the set of requirements in section 703-45, section 701C-10 of the Income Tax (Transitional Provisions) Act 1997 or section 701C-15 of that Act must be met 152. Exclusions are provided in section 703-20 of the ITAA 1997 to specify certain entities that cannot be members of a consolidated group. Broadly, these specified entities include an entity whose income is exempt from income tax and a company recognised as a credit union or a pooled development fund. 153. Prescribed dual resident is defined in subsection 6(1) of the ITAA 1936 and is broadly a company resident both in Australia and another country which: a. is treated as resident solely in another country for the purposes of one of Australia’s double taxation agreements, or b. qualifies as resident in Australia solely because their CM&C is in Australia, but the company also has their CM&C in another country. | Detailed Reasoning - Head company: 154. Holding Company is an Australian resident company whose income is taxed at the corporate tax rate. Holding Company is wholly owned by an Australian resident trust. Holding Company is not covered by any of the exclusions in section 703-20 of the ITAA 1997 and is not a prescribed dual resident company. 155. Therefore, Holding Company satisfies the requirements for a company to be a head company of a consolidatable group for the purposes of section 703-15 of the ITAA 1997. | Detailed Reasoning - Subsidiary: 156. Company A is a wholly owned company of Holding Company. Company A is not covered by section 703-20 of the ITAA 1997 and it is not a non-profit company. As concluded in response to question 1 of this private ruling, Company A is an Australian resident. 157. Because Company A is an Australian resident company and is not a company which qualifies for any special tax rates, it will be regarded as an entity which is subject to the normal corporate tax rate. 158. Company A is not a prescribed dual resident under subsection 6(1) of the ITAA 1936 because it is not treated as a resident of another country and its CM&C is solely in Australia. 159. As Company A satisfies all the relevant conditions, Company A qualifies as a 'subsidiary member’ of a Holding Company consolidatable group for the purposes of section 703-15 of the ITAA 1997. | Detailed Reasoning - Conclusion: 160. Holding Company, as the head company, and Company A, as a subsidiary company, meet the definition of a consolidatable group in section 703-10 of the ITAA 1997 and can choose to form a consolidated group pursuant to section 703-5.

1. Company A is a resident of Australia under subsection 6(1) of the ITAA 1936