Edited version of private advice

Authorisation Number: 1052387418640

Date of advice: 17 April 2025

Ruling

Subject: Business - permanent establishment

Question

Does a non-resident company have a 'permanent establishment' in Australia through services provided to it by a related Australian resident company?

Answer

No.

This ruling applies for the following period:

Year ending DD MM 20XX

The scheme commenced on:

DD MM 20XX

Relevant facts and circumstances

Non-resident company

Company A is a company incorporated in Country A on DD MM 20XX and is a resident of Country A for tax purposes.

Company A is wholly owned by Company XYZ as trustee for XYZ Trust.

Company A is headquartered in Country A. XXXX directors all permanently reside in Country A and all director decisions are made in Country A.

Australian resident company

Company B was incorporated on DD MM 20XX and registered for GST in Australia.

Company B is wholly owned by Company XYZ as trustee for XYZ Trust.

Company B has two directors. One is an Australian tax resident, and the other is a Country A resident. All board meetings are held in Australia.

Business activity

Company A sells items to wholesale customers in Australia using Company B as its Australian agent. The business commenced on DD MM 20XX.

Company A's principal activities are related to the sale, marketing, and wholesale distribution of products in Country A and Australia. Products are primarily manufactured by third party suppliers and shipped to Australian wholesale customers.

Company A orders, invoices, and pays for items from its third-party supplier. It has an office of operations based in in Country A.

Company A engages a third-party logistics services and warehouse provider to store and distribute products delivered to Australia from the supplier. After Company A makes a sale to its Australian customers, it instructs the logistics provider to deliver the goods to the customers.

The warehouse is located in Australia cannot be attended by Company B or Company A without the logistics provider's permission. Company B does not deal directly with the warehouse. The warehouse is only used for the storage and delivery of goods and customers cannot collect goods direct from the warehouse.

Company A deals directly with Australian customers. Australian customers place orders via purchase order to the Country A head office through email. Australian customer's orders are processed in Country A via Company A's software. The entering into the contract is done in Country A by Company A's employees. Company A's software is not hosted on servers located in Australia.

The customer service, back-office administration services, and management team for Company A are all based in Country A. There are no employees based in Australia by either Company B or Company A.

Company B acts as the local importer for Company A's goods customs clearance purposes. Company B Ltd will also issue tax invoices to the customers for the sale of the goods and be invoiced by the logistics provider for the warehousing/delivery costs.

Australian customer payments will be paid via direct debit into an Australian bank account in Company B's name. Company B will remit customer payment to Company A.

Company B and Company A have entered into a formal agency agreement where Company B will be paid an arms-length agency fee for:

•                     facilitating the use of the Company B bank account for the placing and collecting of customer orders issuing invoices, and paying the logistics provider for its logistics / delivery services.

•                     acting as local importer for customs clearing purposes.

Company B does not have any authority to form contracts with customers on behalf of Company A.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1936 subsection 6(1)

Reasons for decision

Assessable income and residency

The rules for when income is assessable based on your residency status are set out under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). For Australian residents, your assessable income includes income from all sources, whether in or out of Australia. For foreign residents, your assessable income includes only income derived from an Australian source.

The term 'resident' in relation to a company is defined within subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). A company will be an Australian resident where it is:

•                     incorporated in Australia, or

•                     not incorporated in Australia, but carries on business in Australia, and has its central management and control in Australia, or

•                     not incorporated in Australia, but carries on business in Australia, and has its voting power controlled by shareholders who are residents of Australia.

In determining liability to tax on Australian sourced income, it is necessary to consider not only the income tax laws but also any applicable tax treaty. The tax treaty between Australia and Country A is the Convention Between Australia and Country A for the Avoidance of Double Taxation with Respect to Taxes on Income and Fringe Benefits and the Prevention of Fiscal Evasion [2010] ATS 10 (the Double Taxation Agreement). The Double Taxation Agreement operates to avoid the double taxation of income received by Australian and Country A residents.

Under Article 7 of the Double Taxation Agreement, the business profits of an enterprise of Country A are taxable in Country A unless the enterprise carries on business in Australia through a 'permanent establishment' situated in Australia.

Permanent establishment

Article 5 of the Double Taxation Agreement states that the term 'permanent establishment' means a fixed place of business through which the business of the enterprise is wholly or partly carried on.

Article 5(10) of the Double Taxation Agreement states that the fact that a resident company is controlled by a non-resident company, or where a company carries on business in the other country (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.

A 'permanent establishment' includes a place of management, a branch, an office, a factory, a workshop, a mine, an oil or gas well, a quarry or any other place of extraction of natural resources, and an agricultural, pastoral or forestry property.

It does not include:

•                     the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;

•                     the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery, or for the purpose of processing by another enterprise;

•                     the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise; or

•                     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.

Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements (TR 2001/13) sets out the Commissioner's view on interpreting Australian's double tax agreements. Paragraph 104 of TR 2001/13 states that commentaries on the interpretation and application of the OECD model convention will often need to be considered as a matter of practice in interpreting tax treaties.

Commentaries on the OECD Model Tax Convention on Income and Capital 2017 (OECD Commentary) gives guidance on determining permanent establishments. Paragraph 6 of the OECD Commentary provides that the definition of 'permanent establishment' contains the following conditions:

•                     the existence of a 'place of business',

•                     this place of business is '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.

The OECD Commentary provides guidance on how these conditions can be satisfied as follows:

•                     the term 'place of business' covers any premises and may exist where 'it simply has a certain amount of space at its disposal' (paragraph 10),

•                     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. No formal legal rights to use that place is required (paragraph 11), and

•                     where an enterprise has an exclusive legal right to use a particular location which is used only for carrying on that enterprise's own business activities (e.g. where it has legal possession of that location), that location is clearly at the disposal of the enterprise (paragraph 12).

If a non-resident enterprise does not conduct activities itself through a fixed place of business in Australia, it may still be deemed to carry on business through a permanent establishment under Article 5(8) of the Double Taxation Agreement. For a non-resident enterprise to be deemed to have a permanent establishment in Australia, the 4 conditions below must be satisfied:

•                     there is a person acting on behalf of the non-resident enterprise in Australia,

•                     that person is not an agent of independent status to whom a subsequent paragraph of the Article applies,

•                     the person has authority to conclude contracts on behalf of the non-resident enterprise, and

•                     the authority is habitually exercised.

This is explored further in ATO Interpretative Decision ATO ID 2004/602 Income tax: Permanent establishment: non-resident - services provided by resident subsidiary - no authority to bind non-resident (ATO ID 2004/602). ATO ID 2004/602 provides that a non-resident company that receives services provided by an Australian resident subsidiary company is not deemed to have a permanent establishment in Australia, if the Australian company does not have the authority to conclude contracts in a manner binding on the non-resident company.

Application to your circumstance

Residency

Company A is incorporated in Country A. Therefore, it is not incorporated in Australia and is not a resident company under the incorporation test.

Company A's directors are based in Country A and all decisions made by the entity are made in Country A. Company A's central management and control is therefore exercised in Country A.

All shareholders are Country A residents, so the voting power test is also failed.

Company A does not satisfy the incorporation, the central management and control, or the voting power tests. Company A is therefore not a resident of Australia under subsection 6(1) of the ITAA 1936. The income will only be assessable in Australia if it has a 'permanent establishment' in accordance with Article 7 of the Double Taxation Agreement.

Permanent establishment

The fact that Company A carries on business in Australia does not of itself constitute either Company A or Company B a permanent establishment of the other, under Article 5(10) of the Double Taxation Agreement.

Company A has an office of operations based in Country A. The customer service, back-office administration services and management team for Company A are all based in Country A. There are no employees based in Australia by either Company B or Company A. As Company A has an office of operations based in Country A the definition of 'permanent establishment' under the Double Taxation Agreement is met.

The only physical location in Australia related to the business is the third-party warehouse where goods are stored and distributed from to Australian customers.

Warehouse

Company A engages a third-party warehouse provider to store and distribute products delivered to Australia from the supplier. Goods are delivered from the warehouse located in Australia to Australian customers. Customers cannot collect goods direct from the warehouse.

Under the OECD Commentary, the definition of 'permanent establishment' is a 'place of business' which is 'fixed', and the carrying on of the business of the enterprise is through this fixed place of business. As the term 'place of business' covers any premise and can be an amount of space available to Company A's disposal, a warehouse could be considered a 'permanent establishment'.

However, the Double Taxation Agreement provides that a permanent establishment does not include the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise. This means that the warehouse based in Australia, which Company A uses for the storage and delivery of goods or merchandise, is not considered to be a permanent establishment.

Agent

Even though Company A does not conduct its business activities through a fixed place of business in Australia, it may still be 'deemed' to carry on a business through a permanent establishment under Article 5(8) of the Double Taxation Agreement.

Company A has an agency agreement with Australian company Company B. Company B is paid an arms-length consideration for providing the following services under the agency agreement:

•                     facilitating the use of Company B's bank account for the placing and collecting of customer orders issuing invoices, and paying the logistics provider for its logistics / delivery services.

•                     acting as local importer for customs clearing purposes.

Company B does not have any employees located in Australia and does not have the authority to form contracts to sell products on behalf of Company A.

Company A does not have a permanent establishment in Australia through its agency agreement with Company B because:

•                     Company A does not occupy premises or carry on activities in Australia in connection with its business

•                     the activities in Australia are carried on by Company B which receives an 'arm's length' consideration

•                     Company B does not have the authority to form or conclude contracts on behalf of Company A in Australia, and

•                     even if it did have the authority, Company B would not regularly or habitually exercise the authority.

Conclusion

Accordingly, Company A does not have a permanent establishment within Australia for the purposes of the Double Taxation Agreement. Under Article 7 of the Double Taxation Agreement, the business profits of an enterprise of Country A shall be only taxable in Country A unless the enterprise carries on business in Australia through a permanent establishment situated in Australia. The income earned by the Company A is therefore not assessable in Australia.

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