Edited version of your private ruling

Authorisation Number: 1012128792549

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Subject: Permanent Establishment

Question 1

Will the Rulee have a 'permanent establishment' in Australia for the purposes of Article 5 of the Convention between the Government Of Australia and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains ('the United Kingdom Agreement') at any time in the period 1 January 2010 to 30 June 2012?

Answer

No.

Question 2

Are any software licence fees derived by the Rulee from its Australian customers over the period 1 January 2010 to 30 June 2012 subject to withholding tax as royalties or included in the Rulee's Australian assessable income?

Answer

No.

Question 3

Are any business profits derived by the Rulee from on site services relating to software implementation, user training and support supplied by the Rulee to its Australian customers over the period 1 January 2010 to 30 June 2012 included in the Rulee's Australian assessable income?

Answer

No.

This ruling applies for the following periods:

· 1 January 2010 - 30 June 2010

· 1 July 2010 - 30 June 2011

· 1 July 2011 - 30 June 2012

The scheme commences on:

1 January 2010.

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.

The company is a private company incorporated and based in the United Kingdom. Corporate headquarters are located in the United Kingdom and it has regional offices in other countries.

The company is a resident of the UK.

The company provides software to customers for projects at various locations around the globe. Most of the customers are in a particular industry.

The software system was wholly designed and built in the United Kingdom and released a number of years ago.

The company's principal source of income is the sale of licence fees to customers for the use of the software.

As an ancillary part of its business the company provides on-site services to its customers relating to implementation, user training and support for the use of the software. The ancillary services are provided by staff based in the United Kingdom (non-residents of Australia) who travel to customer sites for short periods.

The company does not own or lease any servers itself but has a hosting agreement with an independent United Kingdom company to deliver global access to its software for the customers of the company. Servers are located in the United Kingdom. The hosting company does not own any servers In Australia.

The company does not have an office or any other facility in Australia, and never has had an office in Australia. Staff continue to be managed from the United Kingdom, even when doing work in Australia.

The company has a limited number of customers in Australia and is negotiating with a small number of new customers.

Accommodation for consultants from the company is provided at the expense of the customers.

Total consultant time spent at any one customer site is less than 75 days. This is expected to be the continued practice until 30 June 2012.

Contracts for the licences are signed in the United Kingdom and consultants visiting Australia, are not authorised to enter into any contracts, nor negotiate contract terms, on the company's behalf.

All techniques, algorithms and methods or rights thereto owned by the Licensor at the time of the agreement, or Licensor modified techniques, algorithms and code, and employed by the Licensor in connection with the Hosting Services shall be and remain the property of the Licensor.

The Licensor alone shall own all right, title and interest, including all related Intellectual Property Rights, in and to the Licensor Technology, the Content, and the Service and any suggestions, ideas, enhancement requests, feedback, recommendations or other information provided by the Licensee or any other party relating to the Service. The Agreement is not a sale and does not convey to the Licensee any rights of ownership in or related to the Service, the company Technology or the Intellectual Property Rights owned by the company. The company name, the company logo, and the product names associated with the Service are trademarks of the company or third parties, and no right or license is granted to use them

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

International Agreements Act 1953 Section 4

The Convention between the Government of Australia and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains (United Kingdom Convention) Articles 5,7,9,12.

Reasons for decision

Subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a non resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources during the income year.

In determining liability to tax on Australian sourced income received by a non resident, it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1997 where there are inconsistent provisions (except for limited provisions).

Schedule 1 of the Agreements Act contains the United Kingdom Agreement

Article 5 of the UK Agreement provides a general definition of 'permanent establishment' is found and states;

For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

This definition is based on the OECD Model Tax Convention on Income and Capital (OECD Model). Paragraph 104 of Taxation Ruling TR 2001/13 comments on the use of the OECD Model Taxation Convention's official Commentaries (the commentary) in interpreting Double Tax Agreements based on the OECD Model. It states that;

The Commentaries, with the various Observations and Reservations of OECD Member countries which they reproduce, therefore provide important guidance on interpretation and application of the OECD Model and as a matter of practice will often need to be considered in interpretation of DTAs, at least where the wording is ambiguous, which is inherently more likely in treaties than in general domestic legislation.

According to the commentary the general definition contains the following three conditions:

1. The existence of a "place of business", i.e. a facility such as premises.

The term "place of business" covers any premises used for carrying on the business of the enterprise. The location must be at the disposal of the enterprise but need not be a physical establishment established under formal legal rights. Paragraph 4.3 of the Commentary of Article 5 of the OECD Model provides the example of a place of business as the use of an office over a long period of time, by an employee of a company, in the headquarters of another company in order to ensure that the latter company complies with contractual obligations. In this case the office is at the disposal of the enterprise and constitutes a place of business.

In the company's case, it has entered into contracts with various companies. Included in this contract is an agreement to provide on-site training and support as part of provision of a license to operate the contract management software system. One or two employees will provide this support and will work from training rooms supplied by the customer. The training room could be considered a place of business subject to meeting the requirement of geographic or temporal permanence.

2. This place of business must be fixed, i.e. it must be established at a distinct place with a certain degree of permanence

For a place of business to be fixed it must have a degree of both geographical and temporal permanence.

The place of business of the company is not fixed. The training room changes with each implementation. When requested to provide on-site training or support, the company will provide services at various establishments.

According to Taxation Ruling TR 2002/5 at paragraph 33, in relation to the definition of "permanent establishment" in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936):

Whether temporal permanence exists is a matter of fact and degree. However, as a guide, if a business operates at or through a place continuously for six months or more that place will be temporally permanent.

Paragraph 42 of TR 2002/5 offers the following example of a company having a permanent establishment in Australia:

HKco is a computer service provider and a resident of Hong Kong. It successfully tenders to train the employees of Ausco, a company resident in Australia, in a new computer system. To undertake the training, HKco sends four of its employees to Australia for six months. Ausco provides HKco employees with a room in one of its offices for that six months. Because HKco has at its disposal a room in Ausco's offices for six months and carries on its business at or through that room, HKco has a place at or through which it carries on its business in Australia.

Copies of contracts provided and records of staff movement into and out of Australia show that an aggregate of six months in the one business site has not been reached nor is likely to be reached

There is no fixed place of business. This is expected to be the continued practice until 30 June 2012.

3. The carrying on of the business of the enterprise through this fixed place of business.

The contracts between the company and its customers require the company to provide on-site training and support for the licensed software that it supplies. It is stated that these services are ancillary to the provision of the licensed contract management software. Although the provision of these services are consistent with the carrying on of the business of the company in Australia they are not carried on through a permanent establishment.

Under Article 5 of the United Kingdom Agreement, the company does not have a permanent establishment in the period 1 January 2010 to 30 June 2012 (see above). Pursuant to Article 7 of the United Kingdom Agreement:

The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated in the other State.

The company wholly designed and developed the software outside of Australia. Contracts for a license to use the software were signed in the United Kingdom. The software was provided via servers provided by an independent UK company. The company did not have a permanent establishment in Australia and is therefore not liable for tax on business profits arising from the sale of software license fees, contracted in the United Kingdom, to operations in Australia.

Paragraph 3 of Article 12 of the United Kingdom Agreement does not include as a 'royalty' payments for the simple use of software programs. Under contracts provided all copyright and other intellectual rights for the contract management software system are protected.

Paragraph 4 of Taxation Ruling TR 93/12 provides that 'payments for the granting of a licence which allows simple use of the software' and 'payments for the provision of services in the modification or creation of software' are 'generally not royalties for income tax purposes'.

Contract documents characterise the licence fee payment as a payment for simple use of the software program and are therefore not subject to a withholding tax as a royalty and for the purposes of Australian income tax law are not subject to section 128B of the Income Tax Assessment Act 1936.

Under Article 5 of the United Kingdom Agreement, the company does not have a permanent establishment in the period 1 January 2010 to 30 June 2012 (see above). Pursuant to Article 7 of the United Kingdom Convention business profits:

The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated in the other State.

As previously advised, the company does not carry on its business through a permanent establishment in Australia. Business profits arising from the provision of on-site training and user support in Australia in the period 1 January 2010 to 30 June 2012 are not assessable in Australia.