Private ruling: Permanent Establishment
Published: April 2012

Ruling: Q1: Do the Australian operations of Company X give rise to a permanent establishment (PE) located in Australia for the purposes of the Country Z tax treaty? | A1: Yes. The operations of Company X in Australia give rise to a PE in Australia for the purposes of the Country Z tax treaty.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. Company X is incorporated under the laws of Country Z. Company X is a distributor in Australia for international companies requiring representation in Australia. Company X's operations in Australia are a result of the particular terms of its contract with international companies for the distribution of their products in Australia. The contract requires Company X to promote and market the relevant products in Australia and notify the manufacturer of any adverse comments or complaints from Australian customers regarding the products. Company X has also undertaken, on request, to provide on site in-service education, training and user support to its Australian customers in relation to the products, including routine operator training and configuration and advanced trouble shooting training. Central Management and Control Company X is controlled and managed in Country Z, which is where its board and the executive team is situated and meet. The members of the board and executive team are residents of Country Z. Company X has an office in Australia for a few years through which the business of the company is carried on as detailed below: The office is used for a few hours per month for phone calls and meetings, primarily by an independent consultant to actively promote and market the sale in Australia of some of the company's supplies. The consultant provided services exclusively to Company X on an agreed fixed daily rate. The consultant also managed the independent agents for the product in question. The office is also used by a member of the executive team based in Country Z for a limited time per month. During this time, the executive attends to the Australian business of Company X among other things. Company X has employees in Australia that provide services to the company's customers in Australia. The employees provide services to ensure customer satisfaction in respect of the supplies made by Company X. In this regard, they visit the customers on a regular basis to assist with any problems in respect of the supplies. The employees do not have access to any dedicated office space at the premises of the customers. The employees have no authorisation to enter into any agreement on behalf of Company X and as a matter of practice the Australian employees do not negotiate or sign contracts. All contracts for the Group are signed by the executive team in Country Z. The employees report to the executive team in Country Z. Further, the employees in Australia do not act as contact persons on behalf of Company X. The first point of contact for all enquiries is the company's staff in Country Z who then direct the staff in Australia to manage and handle issues raised in the enquiries 'on the ground' in Australia. Company X allows the employees to complete their general administrative tasks, such as booking travelling arrangements, from their home. No business meetings are held in their private homes and Company X has no right, under the employment agreements or other company policies, to access their homes. Company X has engaged a number of brokers in Australia that provide their service in relation to the company's supplies in Australia. The brokers provide their services in the normal course of their business activities and those services are not provided exclusively to Company X. Essentially, the brokers encourage the relevant retail outlets to stock the product. The brokers are generally paid on a commission basis. Additionally, they do not have an authority to enter into contracts in respect of the conduct of their business. Company X has a warehousing and logistics agreement with Company Y in Australia. Under the agreement, Company Y arranges delivery of the goods belonging to Company X on receipt of orders from the company's customer call centre based in Country Z.


Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. Permanent Establishment (PE) In a treaty context, the existence of a PE in Australia is critical in determining the Australian tax position of a non-resident. This statement is confirmed by the fact that virtually all of Australia's current tax treaties use the PE as the main instrument for the allocation of taxing jurisdiction over a non-resident's unincorporated business activities. The question of whether a non-resident enterprise has a PE in Australia is a question of fact and degree, which must be determined by reference to the individual circumstances of each case with relevance to the provisions of the applicable tax treaty. Australia's right to tax the income from business activities of a Country Z enterprise is subject to the provisions of the Country Z tax treaty. The Country Z tax treaty provides that Australia may tax the income derived by a Country Z enterprise if the enterprise carries on a business in Australia through a PE situated in Australia. Basic Rule PE The most crucial part of the PE principle is the requirement of a qualified connection between the enterprise's 'place of business' and the land within the jurisdiction of the relevant tax treaty. In this regard, the Country Z tax treaty relevantly provides that: - the term 'permanent establishment' (PE) is a 'fixed place of business' through which the business of an enterprise is wholly or partly carried on; - the examples of a PE include, a place of management, branch, an office, a factory, or a workshop; - an enterprise will not be deemed to have a PE merely because it has the use of facilities solely for the purpose of the storage of goods and/or maintains stock for the purpose of storage. The Commentaries on the OECD Model Tax Convention on Income and on Capital ('the Commentary') are accepted for their important guidance in tax treaty interpretation (paragraphs 90 and 104, Taxation Ruling TR 2001/13). Accordingly, the Commentary on what constitutes a PE will often need to be considered in interpreting the PE rules contained in the Country Z tax treaty. The 2010 Commentary on Article 5 (contained in paragraphs 2 to 39) may be summarised as follows: The 'fixed place of business test' is in fact composed of three cumulative tests, namely: - the existence of a "place of business", i.e. a facility such as premises; - the maintenance of the place of business at a distinct place with a certain degree of permanence; and - the performance of the significant business activities of the enterprise through this 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. Agency PE The agency clause of tax treaties encompasses persons 'acting on behalf of an enterprise' with authorisation to 'conclude contracts'. Under the agency clause, an agent is a PE if he or she is a dependent agent and habitually exercises the authority to conclude contracts on behalf of the principal. A PE is thus constituted on the basis of the activity of the agent regardless of whether the agent or the principal has a 'place of business.' In this regard, the Country Z tax treaty deems a dependent agent of an enterprise to be a PE of that enterprise if that agent has and habitually exercises an authority to conclude contracts on behalf of the enterprise in respect of its core business activities. Further, for the purposes of the Country Z tax treaty, where an enterprise carries on business through a person who is a broker, general commission agent or any other agent of an independent status who is acting in the ordinary course of his or her business, the enterprise is not considered to be carrying on business through a PE. The Commentary on Article 5 raises the following salient points at paragraphs 32, 32.1 and 33 respectively, in respect of a dependent agent's authority to conclude contracts on behalf of the enterprise: . Persons whose activities may create a PE for the enterprise are the so called dependent agents i.e. persons, whether employees or not, who are not independent agents... Such treatment is to be limited to persons who in view of the scope of their authority or the nature of their activity involve the enterprise to a particular extent in business activities in the State concerned. . The paragraph applies equally to an agent who concludes contracts which are binding on the enterprise even if those contracts are not actually in the name of the enterprise. Lack of active involvement by an enterprise in transactions may be indicative of a grant of authority to an agent... . A person who is authorised to negotiate all elements and details of a contract in a way binding on the enterprise can be said to exercise this authority, even if the contract is signed by another person situated in the State of residence of the enterprise. In the present circumstances, the issue for the Commissioner to consider is whether or not Company X is operating through a PE in Australia. Basic Rule PE The Commentary on Article 5 provides at paragraph 7 that, for a place of business to constitute a PE, the enterprise using it must carry on its business wholly or partly through it. The activity need not be of a productive character. Furthermore, the activity need not be permanent in the sense that there is no interruption of operation, but operations must be carried out on a regular basis. The serviced office of Company X in Australia satisfies the primary meaning of a PE in that: - it is a place of business; - the place of business is fixed both in terms of physical location and in terms of time; and - the business of Company X is carried on through this fixed place. The office is used to make phone calls and hold meetings by an independent consultant who is engaged by Company X to actively promote and market the sale of some of the products it distributes in Australia. The consultant also managed the independent agents for some of those products. The consultant's services were provided exclusively in this regard on an agreed fixed daily rate. The office is also used by a member of the executive team based in Country Z among other things to attend to the business of Company X. Although intermittent, the extended period during which those activities were performed leads to the conclusion that they were carried out on a regular basis. It is also relevant that a long term lease was maintained over the office premises. Therefore, it is considered that the office of Company X is a 'fixed place of business' through which it carries on its business in Australia. Company X does not have a ' place of business' at the facilities of its customers in Australia as discussed below: Paragraphs 4.1 to 4.5 of the Commentary on Article 5 discuss situations where the premises of a third party enterprise (client) can constitute a PE on account of the presence of a representative of the non-resident enterprise at those premises. The length of time of occupancy of the client's premises and the significance of the activities performed are important factors in determining whether the premises constitute a PE of the non-resident. The employees of Company X do not have any dedicated space at their disposal in the customer premises. They provide services at many different locations and the time spent in each centre, even over the course of an income year, is not sufficient to categorise any one centre as a 'place of business' through which Company X carries out its Australian operations. The homes of the employees of Company X do not constitute a 'a place of business' for the following reasons: In Permanent Establishment - Erosion of a Tax Treaty Principle, Kluwer, Boston 1991, Arvid A Skaar (Skaar), at 204, it is stated that: 'the overall conclusion ( from various court decisions ) seems to be that a dwelling does not constitute a place of business, even if some minor business activities are conducted there. Also crucial to the PE status of a home office are the activities performed there, e.g., sales and other core business activities (emphasis added).' In the present circumstances, Company X allows the employees to complete their general administrative tasks, such as booking travelling arrangements, from their home. No business meetings are held in their private homes and Company X has no right, under the employment agreements or other company policies, to access their homes. The facilities used by Company X in a warehouse in Australia belonging to a third party, does not constitute a 'place of business' of Company X as explained further: Company X has the title in the goods stored in the warehouse of Company Y. However, Company X does not have a right of access to the warehouse unless permitted by Company Y nor is a specific part of the warehouse dedicated to the use of Company X. Accordingly, the warehouse is not a 'place of business' in respect of Company X's operations in Australia. Agency PE Company X's Australian employees ('dependent agents') have no authorisation to enter into any agreement on behalf of Company X and as a matter of practice, the Australian employees do not negotiate or sign contracts. All contracts for Company X are signed by the executive team based in Country Z. Further, the employees in Australia do not act as contact persons on behalf of Company X. The first point of contact for all enquiries is the company's staff in Country Z who then direct the staff in Australia to manage and handle issues raised in the enquiries 'on the ground' in Australia. The Judgement in Unisys Corp v. FC of T (2002) 2002 ATC 5146; (2002) 51 ATR 386 ( Unisys Corp ) provides an extract, at paragraph 70, from Arvid A Skaar's Permanent Establishment - Erosion of a Tax Treaty Principle , Kluwer, Boston, 1991. The extract (at 527 of A Skaar's book) deals with a situation where an employee of a company provides consultancy services to another entity and provides that: "In general, the agency clause is designed to deal with agents who engage their principals in foreign business activities through the use of their authority to conclude contracts, typically sales contracts. The agency clause is therefore inadequate for consultancy services, because it is the services of the consultant, not the conclusion of a contract, which involve the principal in business activities in the other country..." Therefore, the employees of Company X do not constitute a deemed PE of Company X in Australia. The brokers engaged by Company X provide their services on a commission basis to Company X in the normal course of their business activities and do not provide those services exclusively to Company X. Additionally, they do not have an authority to enter into contracts in respect of the conduct of their business. Accordingly, they are specifically excluded from the creation of a deemed PE in Australia pursuant to the Country Z tax treaty. Services PE Relevantly, the Country Z tax treaty deems an enterprise to have a PE in a country if it provides services in that country. The services should be performed for a period or aggregated periods exceeding 183 days in any twelve month period for the same project or for connected projects through one or more individuals who are present and performing those services in that country. Company X's operations in Australia are a result of the particular terms of its contract with international companies for the distribution of their products in Australia. The contract requires Company X to promote and market the relevant products in Australia and notify the manufacturer of any adverse comments or complaints from Australian customers regarding the products. Company X has also undertaken, on request, to provide on site in-service education, training and user support to its Australian customers in relation to the products it distributes, including routine operator training and configuration and advanced trouble shooting training. Accordingly, the operations of Company X in Australia are an essential and significant part of its service to its Australian customers. These services are provided by the employees of Company X based in Australia. Accordingly, for the purposes the Country Z treaty, the employees of Company X, i.e. the dependent agents, provide services in Australia on behalf of Company X. The services are provided in respect of a single project, being the post-sale services to the Australian customers, for a period exceeding 183 days in the 12 months representing Company X's financial year. In conclusion, Company X has a PE in Australia for the purposes of the Country Z tax treaty, being the serviced office in Australia. Further, Company X has a deemed PE in Australia for the purposes of the Country Z tax treaty on account of the services provided by its employees in Australia. Accordingly, the profits of Company X attributable to its Australian PE are subject to Australian tax pursuant to the Country Z tax treaty.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Does Part IVA apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. cancelled. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'. | Reasons for decision: These reasons for decision accompany the Notice of private ruling for Company X.