Private ruling: Permanent establishment in Australia
Published: January 2012
Ruling period: Financial year ended 30 June 2011 | Financial year ended 30 June 2012 | Financial year ended 30 June 2013 | Financial year ended 30 June 2014 | Financial year ended 30 June 2015
Date scheme commenced: Financial year ended 30 June 2011

Ruling: Q1: Will the rulee have a fixed place of business in Australia through which it carries on its business and therefore have a permanent establishment ('PE') in Australia? | A1:  | Q2: Will the rulee be deemed to have a PE in Australia under the relevant Articles of the tax treaty between Australia and the rulee's home country ('the Country X Agreement') as a result of the activities of the employees of the rulee in Australia in respect of the Event? | A2:  | Q3: Will the rulee be deemed to have a PE in Australia under the Country X Agreement as a result of the activities of the Entity B in Australia in respect of the Event? | A3:  | Q4: Will the rulee be deemed to have a PE in Australia under the Country X Agreement as a result of the activities of Entity A in Australia in respect of the Event? | A4: 

Relevant facts and circumstances: The rulee is a company that is registered in a foreign country and is not a resident of Australia for income tax purposes. The rulee also owns certain commercial rights. The rulee has entered into an exclusive agreement with Entity A to negotiate the licensing of the rulee's commercial rights to other parties for a limited period. Entity A will be undertaking activities in Australia under the agreement in relation to a major event (which is comprised of a series of smaller events, together known as the Event). Entity A will also provide certain services to the licensees. The rulee's representatives may attend the negotiations with the potential licensees but their participation will be limited to a support role. Under the agreement, Entity A will: · have limited authority to execute some agreements in Australia on behalf of the rulee · will receive income from licensees, being the fees for securing commercial rights agreements with licensees and for the services provided to the licensees, and · is not prevented from entering into agreements with other third parties. It is not the intention of the rulee and Entity A to carry on business together as partners. Entity A is not a resident of Australia, and is unrelated to the rulee. The rulee will also enter into a separate agreement with Entity B, which is incorporated in Australia, and is wholly owned by an Australian entity that is unrelated to the rulee. Under this agreement Entity B will derive income from sales and marketing to the public in relation to the Event. In return Entity B must undertake certain preparatory activities in relation to the Event at its own expense. There will be no sharing of expenses, Entity B will bear the majority of the costs, however the agreement clearly sets out which expenses the rulee will be responsible for. The rulee also has approval powers over certain aspects of Entity B's activities. The rulee together with Entity A and/or Entity B may undertake promotional, publicity and marketing activities to promote the Event. The agreement also provides that the rulee will retain the right to exploit its other commercial rights in relation to the Event. There will be no funding, subsidy, reimbursement of expenses or losses paid to Entity B under the agreement, and it does not create either a partnership or agency relationship between the rulee and Entity B. In addition, Entity B will not have any authority to conclude contracts that are binding on the rulee, or on behalf of the rulee. Entity B is a company registered in a country outside of Australia, and is not a resident of Australia. The rulee will not set up an office in Australia either before or during the Event, however Entity A and Entity B may provide space within their own premises, or external venues for the temporary use of the rulee's representatives. The rulee's representatives will visit Australia from time to time leading up to the Event, however those representatives be present in Australia for less than 6 months in any year. The place at which the rulee's representatives undertake their activities in Australia may be constantly changing. For example, the representatives may attend meetings, functions and conduct inspections of venues held at different locations around Australia. While in Australia prior to the Event, the rulee's representatives' main objective is to ensure that Entity B is performing its various obligations under the agreement. During the Event, the rulee's representatives will perform a range of activities in Australia including attending a series of events in different locations, attending functions and generally overseeing the Event.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 6(1)

Reasons for decision: Summary: The rulee will not have a fixed place of business in Australia through which it carries on its business such that it is considered to have a PE. | Detailed Reasoning - Detailed reasoning: The concept of PE is relevant in determining the right of a country to tax the profits of an enterprise of another country. For example, under the Country X Agreement, Australia cannot tax the business profits of the rulee, which is not a resident of Australia unless the rulee carries on business in Australia through a PE situated in Australia. The Country X Agreement provides the definition of PE as follows: 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. Taxation Ruling 2001/13 discusses the Commissioner's views about interpreting tax treaties. Paragraphs 101 to 105 explain the Commissioner's view that the Commentaries on the OECD Model are relevant to interpreting Australia's tax treaties. The relevant article of the Country X Agreement is consistent with the primary meaning of PE in Article 5(1) the OECD Model. The OECD Commentary on Article 5(1) of the OECD Model says that it 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; · this place of business must be "fixed", i.e., it must be established at a distinct place with a certain degree of permanence; · 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 4 of the OECD Commentary on Article 5 states that the term 'place of business' covers any premises, facilities or installations used for carrying on the business of an enterprise, whether owned, rented or otherwise at the disposal of the enterprise. Paragraph 4.1 of the OECD Commentary on Article 5 suggests that the term place of business is broadly defined and 'the mere fact that an enterprise has a certain amount of space at its disposal which is used for business activities is sufficient to constitute a place of business'. Article 5(2) contains a broad list of what can be regarded as constituting a PE, including a place of management, an office or a branch. Under the agreement between the rulee and Entity B, the rulee may request access to office space within the Entity B headquarters, and the rulee may request exclusive access to other facilities. It is considered that each of these places could be a place of business to the extent that they are at the disposal of the rulee. However it is necessary to determine whether there will be the necessary degree of permanence for the place (or places) of business to be a 'fixed place of business'. | Detailed Reasoning - Fixed place of business (geographic and temporal permanence): Paragraph 5 of the OECD Commentary on Article 5 indicates that for a place of business to be "fixed" there will generally have to be a link with a specific geographical point. Paragraph 6 suggests that, since the place of business must be fixed, it follows that a PE 'can be deemed to exist only if the place of business has a certain degree of permanency, i.e. if it is not of a purely temporary nature.' Taxation Ruling TR 2002/5 discusses the concept of PE for the purposes of subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). Whilst this ruling is applicable to the ITAA 1936, the guidance contained in the ruling is relevant in determining whether an entity has a PE in Australia. Paragraph 27 of TR 2002/5 provides that PE requires both geographic and temporal permanence. Permanence must be construed in the context of each particular business and is a question of fact and degree. | Detailed Reasoning - Geographic permanence: TR 2002/5 states at paragraph 9 that the subsection 6(1) definition of PE is based on the concept of PE used in Australia's tax treaties. Paragraph 29 of TR 2002/5 states: A place at or through which a person carries on any business in the context of the definition of PE in subsection 6(1) must be geographically permanent. Any area, viewed commercially and as a whole, may, in relation to the business concerned, be a place. The example shown at paragraph 39 also indicates that geographic permanence means a fixed (as opposed to itinerant) place. If the business activities of the rulee are being undertaken at numerous locations, it needs to be determined whether the those locations constitute a single place of business that satisfies the requirements of being a fixed place of business as discussed in paragraph 5.1 of the OECD Commentary on Article 5: ... 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.' Although the rulee's 'place of business' moves from one location to another these locations could be considered to be a single place of business if they can be said to constitute a 'coherent whole commercially and geographically'. The rulee's activities are performed under a single agreement however the Event will take place in a number of Australian locations. The business activities of the rulee's representatives are irregular and itinerant in nature. Although the activities of rulee relating to the Event are carried on as part of a single project which constitutes a coherent commercial whole, the various locations from which the activities are undertaken lack the necessary geographic coherence to be considered a single place of business. This view is consistent with paragraph 5.4 of the OECD commentary on Article 5: … For example, where a consultant works at different branches in separate locations pursuant to a single project for training the employees of a bank, each branch should be considered separately… Therefore each of these locations needs to be considered separately to determine whether they constitute a fixed place of business. | Detailed Reasoning - Temporal permanence: The general rule as stated in the OECD commentary and paragraph 33 of TR 2002/5 is where the '... business operates at or through a place continuously for six months or more that place will be temporally permanent'. Whilst the six month rule is not a bright line test, it is highly indicative of a fixed place of business. Although generally this period is required to be continuous, Paragraph 7 of the OECD commentary states, '... 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. ...' Thus, where a particular place of business is used for only very short periods of time but such usage takes place regularly over a long period of time, the place of business should not be considered to be of a purely temporary nature. TR 2002/5 also states that temporal permanence may be established even in cases where the enterprise is in Australia for less than 6 months but the connection with Australia is very strong. The example provided is where the enterprise returns to a particular location in Australia on an on-going and regular basis but for short periods each time (see paragraph 34 of TR 2002/5). It should be noted that there is nothing to exclude the period extending over a number of years. The main part of the Event will be held in Australia over a relatively short period of time. However during the preparatory stage leading up to the Event, the rulee's representatives will be present in Australia from time to time to ensure that the requirements under the agreement are being complied with by Entity B. The activities carried out include inspecting venues and other facilities to determine that they satisfy the rulee's standards (but not to supervise any work on the sites) and attending promotional activities, meetings and conferences with Entity B and third parties in relation to the organisation of the Event. During the Event, the activities of the rulee's representatives include attending the individual events, functions and administration duties. In the financial year in which the Event is held and for a period prior to the Event, a number of rulee representatives may be present in Australia for short periods of time, which in aggregate will be substantially less than six months. In the period leading to the and during the Event, the rulee will not set up an office in Australia. Entity B will on request by the rulee provide within its premises sufficient space for the temporary and non-exclusive use of the rulee representatives. During the Event, Entity B will provide the rulee's representatives with facilities and access to office space in the various locations around the country. The periods which the space and facilities are at the disposal of the rulee are either for a 'once off' timeframe or too short to satisfy the permanence requirement. There will not be the necessary degree of geographic and temporal permanence for the rulee to be considered to have a fixed place of business. Consequently, the rulee will not have a fixed place of business in Australia through which it carries on its business and therefore have a PE in Australia. | Summary: The rulee will not be deemed to have a PE in Australia under the Articles of the Country X Agreement as a result of the activities of the employees of the rulee in Australia in respect of the Event. | Detailed Reasoning - Detailed reasoning: The Country X Agreement provides that an enterprise of that country shall be deemed to have a permanent establishment in Australia and to carry on business through that PE if it carries on supervisory activities in Australia for more than six months in connection with a building site, or a construction, installation or assembly project which is being undertaken in Australia. The employees of the rulee will be in Australia to perform inspections of facilities to determine whether or not they satisfy the rulee's standards. The employees will not be supervising any construction or other work carried out on the sites. The Country X Agreement also provides that an enterprise of that country shall be deemed to have a PE in Australia and to carry on business through that PE if it furnishes services, including consultancy services, in Australia through employees or other personnel engaged by the enterprise for such purpose, but only where those activities continue (for the same or a connected project) within Australia for a period or periods aggregating more than three months within any twelve­month period. The employees of rulee when present in Australia are not providing services to any entities in Australia but are acting for the rulee and in the interests of the rulee. They may be present at negotiations between Entity A and potential clients but only in a support role. The Country X Agreement also provides that a person acting in Australia on behalf of an enterprise of Country X (other than an agent of an independent status) shall be deemed to be a PE of that enterprise in Australia if he has, and habitually exercises in Australia, an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise. Paragraph 32 of the OECD Commentary on Article 5 provides that only persons having sufficient authority to conclude binding contracts in the enterprise's business activity and who make use of the authority repeatedly can lead to a PE of the enterprise maintaining them. Paragraph 33 of the OECD Commentary on Article 5 states that '... the authority to conclude contracts must cover contracts relating to operations which constitute the business proper of the enterprise'. Paragraph 33 goes on to explain that the maintenance of a fixed place of business solely for the purposes listed in paragraph 4 is deemed not to constitute a PE and as such a person whose activities are restricted to such purposes does not create a PE either. The purposes listed in paragraph 4 include purchasing of goods or merchandise, or for collecting information or for activities which have a preparatory or auxiliary character such as advertising. The employees of the rulee in carrying out their activities in Australia are acting in Australia on behalf of the rulee. They are not agents of independent status as they are subject to the instructions of, and control by, the rulee. While present in Australia, these employees will not ordinarily have the duty or the authority to conclude business contracts on behalf of the rulee except in very limited circumstances. Therefore the activities of the rulee's employees will not cause the rulee to be deemed to have a PE in Australia under any of the relevant Articles of the Country X Agreement. | Summary: The rulee will not be deemed to have a PE in Australia under the Country X Agreement as a result of the activities of the Entity B in Australia in respect of the Event. | Detailed Reasoning - Detailed reasoning: The Country X Agreement provides that a person acting in Australia on behalf of an enterprise of that country (other than an agent of an independent status) shall be deemed to be a PE of that enterprise in Australia if he has, and habitually exercises in Australia, an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise. Paragraph 32 of the OECD Commentary on Article 5 provides that persons whose activities may create a PE for the enterprise are dependent agents i.e. persons, whether employees or not, who are not independent agents falling under paragraph 6 of Article 5. Paragraph 32 further adds: Also, the phrase "authority to conclude contracts in the name of the enterprise" does not confine the application of the paragraph to an agent who enters into contracts literally in the name of the enterprise; 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. In relation to independent agents within paragraph 6 of Article 5, paragraph 37 of the OECD Commentary provides that a person will not constitute a PE of the enterprise on whose behalf he acts only if: (a) He is independent of the enterprise both legally and economically, and (b) He acts in the ordinary course of his business when acting on behalf of the enterprise. Entity B is a wholly-owned subsidiary of another Australian entity, which is unrelated to the rulee. The arrangement between the rulee and the Entity B in relation to the Event include the following features: · The rulee will not be entitled to receive any payment from the Entity B, nor share in any profits derived by the Entity B. · Entity B is economically independent of the rulee. Entity B receives no funding, subsidy or reimbursement of losses from the rulee. · Entity B will not have any authority to conclude contracts that are binding on or on behalf of the rulee. · There will not be a joint venture, partnership, agency or similar relationship between the rulee and Entity B. The above features indicate that Entity B is an independent agent, and the rulee will not be deemed to have a PE in Australia under the Country X Agreement as a result of the activities of the Entity B in Australia in respect of the Event. | Summary: The rulee will not be deemed to have a PE in Australia under the Country X Agreement as a result of the activities of the Entity A in Australia in respect of the event. | Detailed Reasoning - Detailed reasoning: The Country X Agreement provides that a person acting in Australia on behalf of an enterprise of that country (other than an agent of an independent status) shall be deemed to be a PE of that enterprise in Australia if he has, and habitually exercises in Australia, an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise. Paragraph 32 of the OECD Commentary on Article 5 provides that persons whose activities may create a PE for the enterprise are dependent agents i.e. persons, whether employees or not, who are not independent agents falling under paragraph 6 of Article 5. Paragraph 32 further adds: Also, the phrase "authority to conclude contracts in the name of the enterprise" does not confine the application of the paragraph to an agent who enters into contracts literally in the name of the enterprise; 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. Paragraph 6 of Article 5 of the OECD Model Tax Convention states: An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. Entity A carries on its own marketing and management business in its country of residence and the surrounding region. The rulee has entered into an exclusive agreement with Entity A. Under this Agreement Entity A: · is the sole and exclusive representative for the licensing to third parties (licensees) of certain commercial rights owned by the rulee in relation to the Event. · will secure contracts to license those commercial rights, and will provide certain services to the licensees. · has the authority to execute agreement on behalf of the rulee in limited circumstances.. · is not prevented from entering into agreements with other third parties. · will not carry on business in partnership with the rulee. In entering into the commercial rights agreements with the licensees, Entity A is acting as an agent of the rulee. Being the representative of the rulee is part of the ordinary course of business for Entity A. There is no condition in the Agreement to restrict Entity A to acting solely for the rulee. Consequently, we consider that Entity A is an independent agent carrying on the activities in the normal course of its own business. As a result the rulee will not be deemed to have a PE as a result of the business activities carried on through Entity A as an agent of the rulee.

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. | Reasons for decision: Note: All Article references are references to the Agreement between the Government of Australia and the Government of the country of residence of the rulee ('the Country X Agreement') which operates to avoid the double taxation of income received by Australian and Country X residents. | All references to the OECD Commentary are references to the July 2010 update of the Commentaries on the OECD Model Tax Convention on Income and on Capital.