Private ruling: Permanent establishment
Date of advice: 21 June 2023
Published: 14 August 2023
Ruling period: 1 July 20XX to 30 June 20YY
Date scheme commenced: 1 July 20XX

Ruling: Q1: Does ForeignCo have a permanent establishment in Australia under Article 5 of the Convention? | A1: No.

Relevant facts and circumstances: 1. ForeignCo is a company incorporated in Country X and a tax resident of Country X. ForeignCo is headquartered in Country X. 2. ForeignCo's products are manufactured by third parties, and they use a variety of suppliers based in Country X, Australia, and worldwide. The majority of suppliers are not based in Australia. 3. ForeignCo was incorporated to make sales to Australian customers through the internet. 4. ForeignCo's principal activities are related to the sale, marketing and distribution of products in Australia and Country X. 5. Some imported and local goods are stored via an independent third-party warehouse and logistics services provider (Service Provider) based in Australia. 6. The warehouse in Australia cannot be accessed by ForeignCo without the operator's permission. ForeignCo can only inspect its goods at the warehouse and has no ability for its own employees to deal with the goods while under Service Provider's control. ForeignCo pay a monthly fee for the warehousing and logistic services provided by Service Provider. 7. ForeignCo does not deal with the warehouse. The warehouse is only used for the storage and delivery of goods. There is no physical modification of the goods in Australia by either ForeignCo, Service Provider or the Australian based suppliers. 8. After ForeignCo receives full payment from customers the goods are dispatched. Some imported & local goods are sent directly from third-party suppliers to customers, with the majority sent from Service Provider's warehouse. 9. Service Provider and the suppliers organise delivery. This is done upon the instructions of ForeignCo as to where the goods are to be delivered. 10. ForeignCo's website is not hosted on servers which are located in Australia. ForeignCo's website's servers are located in Country X, which are not at ForeignCo's disposal. The websites are on servers housed in a data centre provided by a third-party IT provider. There is no physical equipment in Australia. OzCo cannot access these servers in Country X as it is a secure data centre which looks after many other businesses' data. 11. The internet service provider (ISP)/website hosting provider does not have an agency relationship with ForeignCo. The agreement is a standard supply of services agreement. 12. Australian customers enter into contractual terms and conditions with ForeignCo through the ForeignCo website. 13. All sales are processed via an E-commence Platform. E-Commerce Platform is an unrelated third party processing entity. 14. ForeignCo acts as the local importer and deliverer for customs clearance purposes. 15. ForeignCo's staff and support staff (customer service and back-end staff) are based in Country X and other countries not Australia, with the management team based in Country X. Australian customers' orders are processed in the Country Y (loaded by Data Entry Agents) via a financial / CRM system. The orders are audited by a compliance team in Country X at which point they are approved or declined. 16. There are no employees based in Australia. 17. ForeignCo has one director who is a Country X resident. All director meetings are held in Country X. 18. ForeignCo is currently registering with the Australian Securities & Investments Commission as a Foreign Company solely in order to allow the company to set up an Australian bank account. Australian customers' payments will be paid via direct debit into an Australian bank account in that is being established in ForeignCo's name and will then be transferred back into a Country X account. 19. ForeignCo is registered for goods and services tax (GST) in Australia to remit GST on sales to Australian customers.


Reasons for decision: Summary: The ForeignCo website is not a fixed place of business. The servers on which the website operates are not located in Australia. The ISP/website host provider hosting the ForeignCo website does not cause ForeignCo to have a permanent establishment. The warehouse stores products to be delivered to customers. Therefore, ForeignCo does not have a permanent establishment in Australia. | Detailed Reasoning - Detailed reasoning: In order to determine if a permanent establishment exists under Article 5 of the Convention, it is necessary to firstly determine whether the Convention applies to ForeignCo. | Detailed Reasoning - Convention - application to ForeignCo: Article 1 of the Convention applies to 'persons who are residents of one or both of the Contracting States. Therefore, ForeignCo must be considered both a 'person' and a 'resident of a Contracting State' for the Convention to apply. Subparagraph 1(j) of Article 3 of the Convention defines 'person' to include: ... an individual, a trust, a partnership, a company and any other body of persons. ForeignCo is a company incorporated in Country X, which is managed and controlled in Country X and is not considered an Australian company. Accordingly, the Convention applies to ForeignCo as it meets the requirements of Article 1. | Detailed Reasoning - Convention - business profits: Article 7 of the Convention states that if an entity is operating through a permanent establishment, the profits of the enterprise may be taxed in that State but only so much of the profits that is attributable to that permanent establishment. | Detailed Reasoning - Convention - does a permanent establishment exist in Australia?: Article 5 of the Convention is relevant in relation to determining whether ForeignCo is operating through a permanent establishment in Australia. Article 5 provides the following: 1. For the purposes of this Convention, the term " permanent establishment " means a fixed place of business through which the business of the enterprise is wholly or partly carried on. 2. The term " permanent establishment " includes especially: a) a place of management; ... 7. Notwithstanding the preceding provisions of this Article, the term " permanent establishment " shall be deemed not to include: a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise; b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; c) ...; d) ...; e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character; f) the maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs a) to e) of this paragraph, provided that such activities are, in relation to the enterprise, of a preparatory or auxiliary character. It is necessary to apply the above Article to determine whether the activities of ForeignCo cause a permanent establishment to exist for ForeignCo. The activities are: • The use of the ForeignCo website, • The use of the warehouse. | Detailed Reasoning - ForeignCo website: Article 5 of the Convention firstly needs to be applied to the ForeignCo website. The following questions relevantly need to be considered: • Whether the ForeignCo website is a 'place of business'? • Whether it is 'at [ForeignCo's] disposal'? | Detailed Reasoning - Place of business: Article 5 of the Convention provides that a 'permanent establishment', in relation to an enterprise, means a fixed place of business through which the business of the enterprise is wholly or partly carried on. Article 3(3) of the Convention states that: As regards the application of the Convention at any time by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the laws of that State concerning the taxes to which the Convention applies, any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State. For example, the Commentaries explain that ForeignCo's GST registration alone is irrelevant for the purposes of determining whether it has a permanent establishment in Australia: Paragraph 5 of the Commentaries on Article 5. As such, the definition of the term 'place of business' applying to a website in relation to establishing a permanent establishment in Australia shall be guided by the context of its use in the Convention or, without such context, by the laws of Australia for the purposes of taxation. Tax Ruling TR 2001/13 Income Tax: Interpreting Australia's Double Tax Agreements (TR 2001/13) provides that: 72. The undefined terms provision of the General Definitions Article picks up the meaning that the relevant term has for the purposes of the domestic tax laws of the country applying the DTA 'unless the context otherwise requires'. This aspect of the General Definitions Article in Australia's DTAs is closely based on the corresponding OECD Model Convention provision. For the reasons dealt with at paragraphs 101 to 111 of this Ruling, it is therefore highly relevant to consider what the OECD Commentaries to that Model say about this provision. ATO Interpretive Decision ATO ID 2011/13 Income Tax Interest withholding tax: interest arising in Australia paid to a New Zealand Limited Partnership - 'beneficially owned' (ATO ID 2011/13)provides guidance in relation to the use of relevant context for interpreting Australian tax treaties and is therefore instructive in considering the application of paragraph 1 of Article 5 of the Convention. It further provides guidance in relation to the definition of 'place of business'. ATO ID 2011/13 states the following: Relevant context for the purposes of interpreting an Australian tax treaty includes the Commentaries on the OECD Model Tax Convention on Income and on Capital (the OECD Commentary). Paragraph 104 of Taxation Ruling TR 2001 / 13 states that the OECD Commentary provides important guidance on interpretation and application of the OECD Model Tax Convention and will often need to be considered as a matter of practice, in interpreting tax treaties, at least where the wording is ambiguous. Therefore, the term 'place of business' should be used in a purposive sense in light of the operation of the Convention. The OECD Commentaries on the Model Tax Conventions (Commentaries) may be used to interpret the meaning of 'place of business'. The Commentaries on Article 5 explain that: 10. 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 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 are otherwise at the disposal of the enterprise. A place of business may thus be constituted by a pitch in a market place, or by a certain permanently used area in a customs depot (e.g. for the storage of dutiable goods). 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. Further, in relation to a website and its host servers, the Commentaries state the following: 123. Whilst a location where automated equipment is operated by an enterprise may constitute a permanent establishment in the country where it is situated (see below), a distinction needs to be made between computer equipment, which may be set up at a location so as to constitute a permanent establishment under certain circumstances, and the data and software which is used by, or stored on, that equipment. For instance, an Internet web site, which is a combination of software and electronic data, does not in itself constitute tangible property. It therefore does not have a location that can constitute a "place of business" as there is no "facility such as premises or, in certain instances, machinery or equipment" (see paragraph 6 above) as far as the software and data constituting that web site is concerned. On the other hand, the server on which the web site is stored and through which it is accessible is a piece of equipment having a physical location and such location may thus constitute a "fixed place of business" of the enterprise that operates that server. 124. The distinction between a web site and the server on which the web site is stored and used is important since the enterprise that operates the server may be different from the enterprise that carries on business through the web site. For example, it is common for the web site through which an enterprise carries on its business to be hosted on the server of an Internet Service Provider (ISP). Although the fees paid to the ISP under such arrangements may be based on the amount of disk space used to store the software and data required by the web site, these contracts typically do not result in the server and its location being at the disposal of the enterprise..., even if the enterprise has been able to determine that its web site should be hosted on a particular server at a particular location. In such a case, the enterprise does not even have a physical presence at that location since the web site is not tangible. In these cases, the enterprise cannot be considered to have acquired a place of business by virtue of that hosting arrangement. However, if the enterprise carrying on business through a web site has the server at its own disposal, for example it owns (or leases) and operates the server on which the web site is stored and used, the place where that server is located could constitute a permanent establishment of the enterprise if the other requirements of the Article are met. ForeignCo's website's servers are located in Country X, which are not at ForeignCo's disposal. The website is on servers housed in a data centre provided by a third-party IT provider. There is no physical equipment in Australia. ForeignCo cannot access these servers in Country X as it is a secure data centre which looks after many other businesses' data. Therefore, as the website's servers for ForeignCo's website are not located in Australia, it is considered there is no fixed place of business that exists in Australia. ForeignCo does not own the website server, nor is the server at ForeignCo's disposal. Whether an ISP creates a permanent establishment was further examined in Taxation Determination TD 2002/5 - Income tax: does a resident of a country with which Australia has a Tax Treaty, have a permanent establishment solely from the sale of trading stock through an internet website hosted by an Australian resident internet service provider? : 8. Where an ISP is only in the business of providing access to the internet it operates as a mere conduit for the business activities of the non-resident enterprise. The agreement with the ISP would not typically specify which server the website will be hosted on and the ISP may change the server used at their discretion. The space used for a specific website on the server of the ISP is not at the disposal of the entity that owns the website. Thus, the enterprise does not have a fixed place of business in Australia. ... 11. In most cases, an ISP will not constitute a permanent establishment by virtue of it being a dependent agent, because the ISP is not an agent of the enterprise and would lack the authority to conclude, and would not regularly conclude contracts on behalf of the non-resident enterprise. The website itself does not constitute a dependent agent as it is not a 'person' as defined in Australia's tax treaties. Furthermore, the ISP could constitute an independent agent acting in the ordinary course of their business if, amongst other things, they host websites for a number of different enterprises. The ISP/website hosting provider does not have an agency relationship with ForeignCo. The agreement is a standard supply of services agreement. The ISP/website hosting provider that hosts the ForeignCo website is not an agent of ForeignCo and does not allow ForeignCo to determine the ForeignCo website servers' location. Therefore, the ISP hosting the ForeignCo website does not create a deemed dependent agent permanent establishment for ForeignCo, and the ForeignCo website is not considered a place of business. | Detailed Reasoning - At ForeignCo's disposal: Whether the ForeignCo website is at ForeignCo's disposal does not need to be considered further because, as stated above, the website does not operate any servers in Australia which constitute a fixed place of business. | Detailed Reasoning - Conclusion: The ForeignCo website does not meet the conditions of Article 5 of the Convention to cause ForeignCo to have a permanent establishment. | Detailed Reasoning - Use of a warehouse: As stated above, '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. The warehouse used to store goods in Australia could be considered a place of business. Some imported and local goods are stored via an independent third-party warehouse and logistics services provider ('Service Provider') based in Australia. The warehouse in Australia cannot be accessed by ForeignCo without the operator's permission. ForeignCo can only inspect its goods at the warehouse and has no ability for its own employees to deal with the goods while under Service Provider's control. ForeignCo pays a monthly fee for the warehousing and logistic services provided by Service Provider. ForeignCo does not deal with the warehouse. The warehouse is only used for the storage and delivery of goods. There is no physical modification of the goods in Australia by either ForeignCo, Service Provider or the Australian based suppliers. After ForeignCo receives full payment from customers the goods are dispatched. Some imported and local goods are sent directly from third-party suppliers to customers, with the majority sent from Service Provider's warehouse. The warehouse is not considered to be at ForeignCo's disposal because it is provided by Service Provider. ForeignCo does not deal with the warehouse due to it being used for distribution through Service Provider. Subparagraph 7(a) of Article 5 of the Convention applies such that a permanent establishment shall not exist because the use of the warehouse is solely for the purpose of storage and delivery of goods belonging to the enterprise. | Detailed Reasoning - Conclusion: The use of the warehouse does not meet the conditions of Article 5 of the Convention to cause ForeignCo to have a permanent establishment. | Detailed Reasoning - Conclusion: Based on the above, ForeignCo does not have a permanent establishment in Australia under Article 5 of the Convention.