Private ruling: Permanent establishments under double tax agreements
Date of advice: 27 April 2018
Published: August 2018
Ruling period: Income year ending 30 June 20XX
Date scheme commenced: July 20XX

Ruling: Q1: Does Entity X have a permanent establishment (PE) situated in Australia pursuant to Article 5 of the Convention between the Government of Australia and the Government of the Relevant Country for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (Relevant DTA)? | A1: Yes

Relevant facts and circumstances: Entity X is a company incorporated in the Country A. Entity X’s headquarters are in the Country A. Entity X is an engineering and design firm. From July 20XX, Entity X has several employees working in Australia at two different locations: The above-mentioned offices in which Entity X’s employees undertake their work duties do not belong to Entity X, but belong to the clients of Entity X. The Entity X employees who work in Australia are involved in engineering and design work pertaining to contracts between Entity X and its clients. It is expected that the Entity X’s employees will continue working from the two locations past 30 June 20XX. Entity X does not have in Australia, its own place of management, branch, office, factory or workshop, a building or construction site, assembly or installation project. Entity X does not have subcontractors, either acting alone or together with Entity X’s employees, to carry out Entity X’s business operations in Australia. Entity X does not have an agent or authorised representative in Australia.

Relevant legislative provisions: Convention between the Government of Australia and the Government of the Country A for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income Article 5

Reasons for decision: Summary: For the purposes of the Country A DTA, the term ‘permanent establishment’ means a fixed place of business through which the business of an enterprise is wholly or partly carried on. The Country A DTA also relevantly goes on to say that the term ‘permanent establishment’ shall include among other things, a place of management; a branch; an office, a factory or a workshop. In Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements , the Commissioner accepts that in interpreting the wording of a tax treaty, it is appropriate to have reference to the OECD Commentary on the Model Tax Convention on Income and on Capital 2017 (the OECD Commentary). Paragraph 6 of the OECD Commentary on Article 5 explains that the definition of ‘permanent establishment’ contains the following conditions: ● the existence of a “place of business”, i.e. a facility such as premises or, in certain instances, machinery or equipment; ● the place of business must be “fixed”, i.e. it must be established at a distinct place with a certain degree of permanence, and ● the carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated. | Detailed Reasoning - Place of business: Paragraph 10 of the OECD commentary provides that 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. It further provides that: ● a place of business may also exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal; ● it is immaterial whether the premises, facilities or installations are owned or rented by or otherwise at the disposal of the enterprise, and ● 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. Paragraph 12 of the OECD Commentary provides that whether a location may be considered to be at the disposal of an enterprise in such a way that it may constitute a ‘place of business through which the business of that enterprise is wholly or partly carried on’ will depend on that enterprise having the effective power to use that location as well as the extent of the presence of the enterprise at that location and that activities that it performs there. On the other hand, the mere presence of an enterprise at a location does not necessarily mean that that location is at the disposal of that enterprise. A location is considered to be at the disposal of the enterprise where the enterprise is allowed to use a specific location that belongs to another enterprise or that is used by a number of enterprises and performs its business activities at that location on a continuous basis during an extended period of time. To illustrate this, the OECD Commentary provides some examples. Paragraph 15 of the OECD Commentary illustrates a situation where an employee of a company who, for a long period of time, is allowed to use an office in the headquarters of another company in order to ensure that the latter company complies with its obligations under contracts concluded with the former company. In that case, the employee is carrying on activities related to the business of the former company and the office that is at the disposal of the employee at the headquarters of the other company will constitute a permanent establishment of the employer, provided that the office is at the disposal of the employee for a sufficiently long period of time so as to constitute a fixed place of business and that the activities that are performed there go beyond the activities referred to in paragraph 4 of Article 5. In the present case, Entity X is a company incorporated in the Country A and provides its engineering and design to their Australian clients. Entity X has up to 10 employees working in Australia in two premises belonging to the clients of Entity X. While these offices do not belong to Entity X, Entity X’s clients have made these offices available to Entity X so that the employees of Entity X can carry out the work under the contracts. Entity X’s employees have worked in the offices of Entity X’s clients at those locations from July 20XX and are expected to continue working from those locations beyond 30 June 20XX. Therefore, we consider the two offices of the Entity X’s clients are at the disposal of Entity X and thus a place of business of Entity X in Australia. | Detailed Reasoning - The place of business must be fixed: The definition of PE requires that a place of business must be fixed. In the normal way, there has to be a link between the place of business and a specific geographical point. The OECD Commentary provides guidance on what is required for the ‘place of business’ to be considered ‘fixed’ both geographically and temporally. A single place of business will generally be considered to exist where, in light of the nature of the business, a particular location within which the activities are moved may be identified as constituting a coherent whole commercially and geographically with respect to that business. Conversely, an area where activities are carried on as part of a single project which constitutes a coherent commercial whole may lack the necessary geographic coherence to be considered as a single place of business. Therefore, if two places of business are occupied and the other requirements of Article 5 of the Country A DTA are met, Entity X will have two permanent establishments. Based on the facts provided, the two locations where Entity X’s employees are working from are considered two places of business. This is because although the activities carried out at these locations may constitute a coherent commercial whole, they lack the necessary geographic coherence to be considered as a single place of business. That is, the necessary geographic coherence between the two locations does not exist for them to be considered a single place of business. Since July 20XX, Entity X has had several employees working in Australia from the two offices of Entity X’s clients. Therefore, these offices are both geographically and temporally fixed places of businesses | Detailed Reasoning - The carrying on of the business of the enterprise through the fixed place of business: For a place of business to constitute a permanent establishment the enterprise using it must carry on its business wholly or partly through it. Paragraph 6 of the OECD Commentary provides that this requirement usually means that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated. Entity X is an engineering and design firm providing services to the Australian clients under contracts. From July 20XX, several Entity X employees have been conducting Entity X’s business at the offices of the Entity X’s clients. Therefore, we consider that the business of Entity X is at least partly carried on in Australia by these employees through the fixed places at which they are employed. Subparagraph 3(e) of Article 5 of the Country A DTA provides that an enterprise of one of the Contracting States shall not be regarded as having a permanent establishment solely as a result of the maintenance of a fixed place of business for the purpose of activities which have a preparatory or auxiliary character, such as advertising or scientific research, for the enterprise. Paragraph 59 of the OECD Commentary provides that the test to distinguish between activities which have a preparatory or auxiliary character and those which do not is whether or not the activity of the fixed place of business in itself forms an essential and significant part of the activity of the enterprise as a whole. In this case, Entity X’s employees who work in Australia are involved in engineering and design work pertaining to contracts between Entity X and its Australian clients. Based on the facts, there is no evidence to suggest that activities carried on by Entity X’s employees in Australia have a preparatory or auxiliary character. We consider that the engineering and design work carried on by the employees is an essential and significant part of the business activities of Entity X as a whole as those engineering and design activities constitute core functions involved in fulfilling Entity X’s obligations under the contracts. In conclusion, we consider that Entity X has a permanent establishment situated in Australia pursuant to Article 5 of the Country A DTA .