Edited version of your written advice

Authorisation Number: 1012963554789

Date of advice: 26 February 2016

Ruling

Subject: Permanent Establishment

Question 1

Do the activities undertaken by the Employee in their private residence in Australia for Company X constitute a permanent establishment in Australia within the meaning of Article 4(1) of the Australia and Country X's Double Tax Agreement (Country X agreement)?

Answer

No.

Question 2

If the answer to Question 1 is yes, will the income attributable to that permanent establishment be included in Company X's assessable income under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Not applicable.

This ruling applies for the following periods:

1 July 20XX to 30 June 2016

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1. Company X is a resident company incorporated in Country X and is a resident of Country X for tax purposes. It is in the business of providing investment management services to investment funds (the Funds).

2. The value of the Funds' assets under management is approximately US$X billion. Australian investments account for less than 10% of this amount.

3. Company X has a small number of employees, which include Position Managers, who make investment recommendations based on research and due diligence conducted by themselves and the relevant research analysts, and the Chief Investment Officer (CIO), who makes investment decisions for the Funds. Neither the CIO nor Company X's Position Managers are Australian tax residents.

4. In addition to research conducted on the particular investment, the CIO takes into account the following factors when making investment decisions:

• other competing investments and their relative risk-return

• the stage of the sector and global cycle at the time the investment is proposed to be made

• geo-political, fiscal and other structural considerations relevant to the investment and the portfolio as a whole

• the risk of the overall portfolio and whether the risk associated with the proposed investment is correlated or non-correlated to the current risk profile of the portfolio

• other factors that the CIO deems relevant in the context of the investment.

5. In assessing these factors, the CIO may conduct their own research and solicit input from other research analysts and Position Managers as appropriate.

6. Company X's meetings and investment decisions take place in Country X.

7. All of Company X's research analysts are currently located in Country X, with the exception of the Employee, who is employed in Australia.

The Employee

8. The Employee works exclusively for Company X in their private residence in Australia, and is provided with infrastructure by Company X in order to perform thier role. This includes a phone, a laptop that is able to access the Company X network, printer and scanner.

9. As with all other employees of Company X, the Employee reports to the CIO and Chief Operating Officer.

10. In accordance with the employment contract between the Employee and Company X, the responsibilities of the Employee include (but are not limited to) provision of industry and sectoral information, investment analysis, and monitoring and updating of all relevant data and information in relation to relevant investments.

11. The Employee's work involves preparing financial models and analysis of industry related data and macroeconomic data. The Employee also engages in discussions with companies and external industry sources in order to develop investment theses to make recommendations to Company X.

12. There is no commercial rationale for the Employee to be based in Australia - Company X is merely accommodating the personal circumstances of the Employee.

13. The Employee is not responsible for the investment decisions Company X implements for the Funds.

14. Further, the Employee does not:

• trade in securities, nor have access to technology platforms used to undertake trading activities

• conduct client sourcing, marketing, distribution or sales activities

• provide client support or client account data administration and statement preparation

• negotiate or conclude contracts for Company X.

Relevant legislative provisions

Reasons for decision

Question 1

Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a foreign resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources during the income year, and other ordinary income that a provision includes as assessable income on some basis other than having an Australian source.

Any applicable tax treaty referred to by the International Tax Agreements Act 1953 (Agreements Act) must be considered to determine whether Australia has a taxing right in respect of the income derived in Australia by a foreign resident taxpayer.

Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that those Acts are to be read as one and states that the provisions contained in the Agreements Act have effect notwithstanding anything inconsistent with those contained in the Income Tax Assessment Acts.

Relevant to this case, section 7 of the Agreements Act states that the provisions of Country X Agreement, so far as those provisions affect Australian tax, have the force of law.

Article 5 of the relevant agreement states that the business profits of an enterprise of Country X shall be only taxable in Country X unless the enterprise carries on business in Australia through a permanent establishment situated in Australia.

The term 'permanent establishment' is defined in Article 4(1) of the Country X Agreement as:

For the purposes of this Agreement, the term '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.

The phrase 'fixed place of business' is not defined in the Country X Agreement.

Taxation Ruling TR 2001/13 discusses the Commissioner's views about interpreting tax treaties. Paragraph 104 of Taxation Ruling TR 2001/13 states that the Commentaries on OECD Model Tax Convention on Income and on Capital (OECD Commentary) provide important guidance on interpretation and application of the OECD Model and will often need to be considered, as a matter of practice, in interpreting tax treaties, at least where the wording is ambiguous.

Paragraph 2 of the OECD Commentary on Article 5 (which in the OECD Model Tax Convention is the article defining 'permanent establishment') provides further guidance on what constitutes as a 'permanent establishment' and a 'fixed place of business':

The paragraph [paragraph 5(1) of the OECD Model] defines the term 'permanent establishment' as a fixed place of business, through which the business of an enterprise is wholly or partly carried on. This definition, therefore, 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 the person 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.

Further, 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 is immaterial whether the premises, facilities or installations are owned or rented by or is otherwise at the disposal of the enterprise.

Prima facie, based on the above criteria, Company X has a 'permanent establishment' in Australia within the meaning of Article 4(1) of the Country X Agreement as:

• a place of business exists in Australia, being the Employee's private residence set up with infrastructure provided by Company X;

• the place of business is fixed - given that it is the Employee's private residence, it is at the Employee's disposal for a significant period of time and will unlikely be of a purely temporary nature; and

• the Employee is in a paid-employment relationship with Company X, and carries on Company X's business through their private residence.

However, Article 4(4) of the Country X Agreement provides a list of business activities that will not constitute a permanent establishment, even if that activity is carried on through a fixed place of business. Notably, paragraph 4(4)(e) provides:

An enterprise shall not be deemed to have a permanent establishment merely by reason of -

…

(e) the maintenance of a fixed place of business solely for the purpose of activities which have a preparatory or auxiliary character for the enterprise, such as advertising, the supply of information or scientific research

Paragraph 24 of the OECD Commentary elaborates on what is meant by 'preparatory or auxiliary' by stating that the decisive criterion on whether a fixed place of business is conducting activities which are 'preparatory or auxiliary', 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 the present case, it is considered that while financial research and analysis on potential investment opportunities is essential to Company X making appropriate investment decisions for the Funds, the Employee's work in itself is not considered a significant part of Company X's activities for the following reasons:

• there can be more than one research analyst conducting research on a particular investment at one time;

• Australian investments only account for less than 10% of all assets held under management in the Funds;

• the core activities of Company X, being the provision of investment management services by way of investment decision-making and portfolio risk management, is carried out by the CIO based in Country X;

• research conducted on potential investment opportunities by the Employee is but one of many factors the CIO considers when making investment decisions;

• the Employee does not engage in client sourcing, marketing, distribution or sales activities, nor client support or client account data administration and is not involved in the management activities of Company X; and

• the Employee is not involved in the negotiation of contracts, nor do they enter into contracts on behalf of Company X.

Also, the fact that Company X has other research analysts based in Country X carrying out the same or similar work as the Employee supports the view that the Employee's activities carried out in Australia do not constitute a significant part of Company X's operations. The Employee being based in Australia is merely to accommodate the Employee's personal circumstances, as opposed to Company X conducting significant operations in Australia that may constitute as a permanent establishment.

Taking into account all of the factors mentioned above, it is considered that on balance the work of the Employee in their private residence in Australia is, of itself, not a significant part of Company X's core activity of providing investment management services. The Employee's work contributes to only a small portion of the total investments Company X carries out for the Funds. Hence, the Employee's activities are considered preparatory or auxiliary activities of Company X.

Accordingly, although the Employee's private residence in Australia is a fixed place of business under Article 4(1) of the Country X Agreement, it is not considered a permanent establishment by virtue of paragraph 4(4)(e).

Article 4(5) of the Country X Agreement provides an alternate test of whether an enterprise has a permanent establishment. It provides:

A person acting in one of the Contracting States on behalf of an enterprise of the other Contracting State, other than an agent of an independent status to whom paragraph (6) applies, shall be deemed to be a permanent establishment of the enterprise in the first-mentioned Contracting State if -

(a) the person has, and habitually exercises in the first-mentioned Contracting State, an authority to conclude contracts for or on behalf of the enterprise unless the exercise of such authority is limited to the purchase of goods or merchandise for that enterprise; or,…

As mentioned previously, the Employee does not negotiate or conclude contracts on behalf of Company X. Further, the employment contract between Company X and the Employee provides that the Employee has no authority to bind Company X, except to the extent that the Employee is authorised. This would indicate that the Employee does not have, nor habitually exercises, an authority to conclude contracts for or on behalf of Company X. Accordingly, Article 4(5) of the Country X Agreement does not apply.

Having established that the activities that the Employee conducts in their private residence in Australia are not more than preparatory or auxiliary in the context of Company X's activities as a whole, the Employee's residence in Australia is not deemed to be a permanent establishment of Company X, pursuant to paragraph 4(4)(e) of the Country X Agreement, despite being a fixed place of business under Article 4(1) of the Country X Agreement.

Question 2

As the answer to Question 1 is in the negative, this question is not applicable.

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