Edited version of your written advice

Authorisation Number: 1012766625761

Ruling

Subject: Permanent Establishment through appointment of Agent

Question 1:

Is Company X, a Country Y resident, considered to carry on a business in Australia through a permanent establishment ('PE') under the PE Article of the Country Y Convention, through the appointment of Company Z as its Australian agent?

Answer:

Yes. Company X, a Country Y resident, is considered to carry on a business in Australia through a deemed PE under the PE Article of the Country Y Convention, through the appointment of Company Z as its Australian agent.

Relevant facts and circumstances

Background

The primary activities of Company X are the management of investment accounts on behalf of individuals and various types of non-individual entities.

Company X does not currently have a place of business in Australia and holds no property in Australia, including investments and bank accounts.

Company X appointed Company Z, an Australian resident company, as its agent in relation to transactions entered into by Company X with various third parties.

Company Z

Company Z, on its website, describes itself as an investment management company servicing various types of investor clients.

As the agent of Company X, Company Z provides investment management and associated advisory services in respect of arrangements entered into by Company X with various third parties. In particular, in its capacity as the agent of Company X, Company Z has undertaken to carry out the duties and obligations of Company X under various investment management agreements between Company X and third parties as though it (Company Z) was named as Company X under those agreements ('third party agreements').

Accordingly, Company Z, with full powers of substitution, has the authority to sign, execute, certify, swear to, acknowledge, deliver, file, receive and record any and all documents in the name, place and stead of Company X, in connection with its role under the third party agreements in question.

Company Z, under its agreement with Company X ('the agency agreement') undertakes:

• not to do anything or omit to do anything that would cause Company X to be in breach of any of its third party agreements

• to maintain proper books of account and complete and accurate record of all transactions and other actions undertaken or performed by it under the third party agreements

• upon request, to render statements or copies of such books or accounts and complete and accurate records to Company X where Company X is required to comply with any statutory or contractual obligations contained in any of its third party agreements

• to provide information, as is reasonably requested by Company X, in connection with all enquiries or statutory audits of Company X or the third parties, by government agencies

• to maintain the competence, training, education and experience necessary to provide the various services under the agency agreement, and

• to permit Company X or its professional advisers and consultants to enter Company Z's premises during business hours and observe the performance of the services by Company Z, if reasonably requested by Company X by providing a few business days' notice in writing at any time.

Direction by Company X

The agency agreement between Company X and Company Z provides that:

• Company Z agrees to perform its duties under the agreement in accordance with the reasonable direction of Company X, and

• The performance by Company X from time to time of any or all of the duties of Company Z will not relieve Company Z of its obligations to perform such duties at the reasonable direction of Company X pursuant to the terms of the agreement.

Additionally, in respect of one of the third party agreements, the agency agreement requires that prior to issuing any report, Company Z must provide a final draft of that report to Company X for its approval. To the extent Company X provides any comments on the final draft, Company Z must incorporate those comments on the final draft report prior to it being issued.

Compensation of Company Z

In consideration of Company Z performing its duties under the agency agreement, Company X agrees to pay Company Z a fee equal to each fee amount received by Company X under the third party agreements.

Termination

Agency agreement

The agency agreement, in summary, provides for the termination by Company X of Company Z with immediate effect:

• by providing written notice to Company Z

• if Company Z ceases to hold the relevant regulatory permission to perform its services

• if Company Z becomes insolvent, or

• if Company Z breaches any law or regulation in relation to the performance of services.

Third party agreements

In general, the third party agreements will be terminated only upon maturity unless Company X resigns or is removed from its role under the agreements.

Each of the third party agreements do not mature until several years later.

Relevant Legislative Provisions:

Section 6-5(3) Income Tax Assessment Act 1997

Article 5 Convention between the Government of Australia and the Government of Country Y for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains (Country Y Convention)

Subsection 359-35(3) Taxation Administration Act 1953 (TAA 1953)

Reasons for decision

These reasons for decision accompany the private ruling for Company X LIMITED.

While these reasons are not part of the private ruling, we provide them to understand how we reached our decision.

Question 1

Section 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.

In determining liability to Australian 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 tax treaties contained in the International Tax Agreements Act 1953 (the Agreements Act).

Schedule S to the Agreements Act contains the tax treaty between Australia and Country Y ('the Country Y Convention'). The Country Y Convention operates to avoid the double taxation of income received by Australian and Country Y residents.

The Business Profits Article of the Country Y Convention governs the taxation of business profits derived from Australia by a resident of Country Y and vice versa. Under the Business Profits Article, the business profits of a Country Y enterprise shall be taxable only in Country Y unless the enterprise carries on business in Australia through a PE in Australia.

Permanent Establishment

The term 'permanent establishment' is defined in the PE Article of the Country Y Convention as a fixed place of business, of which a list of examples are contained in the PE Article, through which the business of an enterprise is wholly or partly carried on.

Company X does not have a place of management, an office, a branch, a factory or a workshop during the period under consideration. Accordingly, Company X does not have an Australian PE for the purposes of the PE Article of the Country Y Convention.

If a non-resident enterprise does not conduct activities itself through a fixed place of business in Australia, it may still, in some circumstances, be 'deemed' to carry on business through a PE under specific articles of the relevant tax treaty.

Relevantly, the Dependent Agent Article of the Country Y Convention provides that a PE will be deemed to exist if a Country Y enterprise carries on business in Australia through a person (other than an independent agent) who has authority to conclude contracts on behalf of the enterprise and habitually exercises that authority in Australia.

The Independent Agent Article of the Country Y Convention provides that a Country Y enterprise will not be deemed to have a PE if:

• it exercises its activities in Australia through a broker, general commission agent or other agent of independent status, and

• the broker, general commission agent or other agent of independent status, when exercising activities on behalf of the enterprise, acts in the ordinary course of their business.

However, if one of these conditions has not been satisfied, the situation must be reviewed by reference to the Dependent Agent Article.

As to whether or not the activities of Company Z under the agreements with Company X give rise to a 'deemed' Australian PE of Company X, must be determined in the first instance through interpretation of the concept of an 'independent agent' under the Country Y Convention.

Independent Agent

The Commissioner's view in paragraphs 101 to 105 of Taxation Ruling TR 2001/13 is that, when interpreting a tax treaty recourse must be had to the Commentary on the OECD Model Tax Convention on Income and on Capital ('OECD Commentary') as a supplementary means of interpretation.

The OECD Commentary on the independent agent's article, as it read on 15 July 2014, provides at paragraph 37 that a person will come within the scope of the Independent Agent Article, i.e. the 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.

a) Independence

Whether a person is independent of the enterprise represented depends on the extent of the obligations which this person has vis-à-vis the enterprise.

The OECD Commentary notes the following characteristics of 'independence':

• Independence is determined by consideration of the extent to which the agent exercises freedom in the conduct of business on behalf of the principal within the scope of the authority conferred by the agreement

• An independent agent will typically be responsible to his principal for the results of his work but not subject to significant control with respect to the manner in which that work is carried out. He will not be subject to detailed instructions from the principal or comprehensive control by the principal as to the conduct of the work.

• Although not determinative by itself, independent status is less likely if the activities of the agent are performed wholly or almost wholly on behalf of only one enterprise over the lifetime of the business or a long period of time.

• The provision of substantial information is not in itself a sufficient criterion for determination that the agent is dependent unless the information is provided in the course of seeking approval from the principal for the manner in which the business is to be conducted

The chapter 'Regarding Article 5(6)' in Klaus Vogel on Double Taxation Conventions Third Edition 1997 contains an explanation of the concept of 'independence' at paragraphs 169 -171a which is summarised below:

• An independent agent acts as an independent entrepreneur, or a self-employed person, on his own responsibility, using his own trade name. Such an agent should generally be regarded as an independent agent as long as, in legal or economic respects, the agent does not become 'personally dependent' on the enterprise he represents.

• If an agent is 'independent' it is immaterial whether he possesses the power to contractually bind the principal.

• An agent is materially dependent on the enterprise if he is bound to follow the latter's instructions. An independent agent is also materially dependent in his 'internal relations' with the represented enterprise, but he is in business on his own and therefore, as a rule personally independent of such enterprise.

• An agent who is both bound to follow the instructions of, and is also personally dependent on the enterprise he represents will be considered to be a 'dependent agent' for the purposes of the dependent agents article.

• An agent is 'personally dependent' when his obligation to obey instructions is not merely related to specific transactions, but is of a comprehensive nature, viz. he is subject to an obligation to make his services as comprehensively available (as he would have to under a contract of employment).

• An agent's personal independence may also be questioned if the agent, while retaining his independent status in legal respects, were to work for only one principal and were, therefore, to be economically dependent on the principal. It is common in such situations that, an agent is bound, though not legally, but at any rate factually - to obey his principal's instructions to the same degree as an employee and consequently to be regarded as a dependent agent.

• If an agent is found to be dependent in the above sense, there is no point, regardless of his position as an independent entrepreneur or self-employed person under private law, in examining whether he is acting in the ordinary course of his business when working for the enterprise he represents.

Is Company Z effectively independent of Company X both legally and economically?

Company Z is a proprietary limited company with an Australian financial services licence.

Company Z describe themselves as an investment management company servicing various types of clients. No further information is provided in this regard.

Company Z represents itself as an independent entrepreneur, in a business of its own, carried under its own trade name. However, the facts support a conclusion that Company Z does not undertake comprehensive economic activities of its own other than the services provided to Company X under the agency agreements.

That Company Z's business activities are wholly or almost wholly devoted on behalf of Company X can be evidenced from the details of its business relations with Company X as follows:

Company Z is subject to an obligation to provide comprehensive services to Company X by assuming the role of Company X under the third party agreements.

The full power of substitution carries with it the power and authority to sign, execute, certify, swear to, acknowledge, deliver, file, receive and record any and all documents in connection with the roles of Company X under the third party agreements.

Company Z is obliged to provide extensive administrative services under each of the agency agreements including:

• maintaining proper books of account and complete and accurate record of all transactions and other actions performed

• rendering statements or copies of such books or accounts and complete and accurate records to assist Company X comply with any statutory or contractual obligations

• providing information, as is reasonably requested by Company X, in connection with all enquiries or statutory audits of Company X and the third parties by government agencies, and

• maintaining the competence, training, education and experience necessary to provide the services.

Company X agrees to pay Company Z a fee equal to the fee amount Company X receives under the third party agreements.

Of significance is the fact that Company Z has undertaken under the agency agreements to permit Company X or its professional advisers and consultants to enter Company Z's premises during business hours and observe the performance of the services at any time, if reasonably requested.

Additionally, in particular instances, Company Z must provide a final draft of any report prepared to Company X for its approval. Furthermore, to the extent Company X provides any comments on that final draft, Company Z must incorporate those comments on the final draft report prior to it being issued.

The relationship between Company X and Company Z in respect of the agency agreements can be best summarised as follows:

• Company Z is economically dependent on Company X.

• Company X exercises significant control with respect to the manner in which Company Z carries on its work.

• Company Z's activities are carried on wholly or principally for Company X.

Accordingly, it is considered that Company Z provides its services as an 'exclusive agent' on behalf of Company X.

In this regard, the OECD Commentary provides that:

'Although not determinative by itself, independent status is less likely if the activities of the agent are performed wholly or almost wholly on behalf of only one enterprise over the lifetime of the business or a long period of time'.

The OECD Commentary also provides that:

'...an independent agent will not be subject to significant control with respect to the manner in which that work is carried out. He will not be subject to detailed instructions from the principal or comprehensive control by the principal as to the conduct of the work'.

It is considered that Company Z is significantly 'economically dependent' on Company X as it provides its services 'exclusively' to Company X. Further, there is significant control by Company X as to the conduct of services by Company Z. In summary, Company Z is economically dependent on Company X in terms of its business.

The fact that Company Z's appointment under the agency agreements is not indefinite does not detract from the conclusion that Company Z's agency is one of a 'dependent status'.

a) Ordinary Course of Business

The question of whether Company Z is providing services to Company X in the 'ordinary course of its business' needs to be explored only if Company Z is legally and economically independent of Company X. This discussion is not relevant in light of the finding that Company Z is an exclusive agent of and therefore economically dependent on company X.

Dependent Agent Article

Whether Company Z's services create a PE of Company X in Australia must now be determined by application of the provisions of the 'dependent agent article' of the Country Y Convention to Company Z's circumstances.

The OECD commentary considers the following as relevant in determining whether the maintenance by an enterprise of a 'dependent agent' leads to a deemed PE for that enterprise:

• ...such treatment ('that of a dependent agent PE'), is to be limited to persons who in view of the scope of their authority or the nature of their activity involve the enterprise to a particular extent in business activities in the State concerned.

• The authority to conclude contracts in the name of the enterprise' is not be interpreted as 'entering into contracts literally in the name of the enterprise' but as applying equally to an agent who concludes contracts which are binding on the enterprise.

• The authority to conclude contracts must cover contracts relating to operations which constitute the business proper of the enterprise.

• The authority has to be 'habitually exercised' in the State concerned which is to be determined on the basis of the commercial realities of the situation.

Power to bind the principal

Klaus Vogel on Double Taxation Conventions, 3rd edition, Kluwer, London, 1997 points out, at paragraph 142, that the mere existence of an authority to conclude contracts does not signify that the person so authorised is actually engaged in business in a way that would justify the principal being taxed. An additional requirement is that the agent's activities have certain permanence. The frequency with which the agent concludes contracts will be sufficient if it corresponds to what is normal in the actual line of business concerned. The decisive factor is whether the activity was, from the outset, devised for a lengthy period or only as a temporary expedient.

In Arvid A Skaar, Permanent Establishment Erosion of a Tax Treaty Principle, Kluwer, Boston, 1991 at 525 the author states that the basic rule of the OECD models requires a special connection between the business activity and the place of business. The business activity must be carried out 'through' the place of business. While the dependent agent provision does not explicitly provide for a business connection test, authorisation to perform a business activity on behalf of the principal does not of itself suffice for the constitution of a permanent establishment. The business of the principal has to be actually performed by the agent and, more specifically, the agent must exercise the authority habitually.

As Professor Skaar clarifies at 527:

'In general, the agency clause is designed to deal with agents who engage their principals in foreign business activities through the use of their authority to conclude contracts, typically sales contracts. The agency clause is therefore inadequate for consultancy services, because it is the services of the consultant, not the conclusion of a contract, which involve the principal in business activities in the other country...'

As Company Z is not an 'independent agent' for the purposes of the Country Y Convention, its power to contractually bind Company X becomes material in determining whether Company X has a PE in Australia by virtue of Company Z's appointment as its Australian agent.

Under its Agency Agreements with Company X, Company Z undertakes to carry out the duties and obligations and perform the services of Company X under the third party agreements. This is as if it (Company Z) was named in place of Company X in the third party agreements.

By virtue of assuming the role of Company X, Company Z has the power and authority to sign, execute, certify, swear to, acknowledge, deliver, file, receive and record any and all documents in connection with Company X's role under the third party agreements.

In particular, Company Z (as Company X's agent) would negotiate and execute all necessary and appropriate documents and instruments as the true and lawful agent and attorney-in-fact agent of the third parties. This includes purchase and/or sale agreements with respect to assets managed such as Securities, Equities and Investments.

It is considered that the scope of Company Z's authority under the agency agreements is sufficiently extensive to involve Company X in business activities in Australia for the following reasons:

• Company Z's performance of investment management and advisory services under its agreements with Company X equates to business of Company X actually performed by Company Z through its place of business in Australia.

• Company Z has authority to conclude contracts relating to operations which constitute the business proper of Company X.

• Company Z's performance under the agency agreements with Company X has the requisite degree of permanence. In this regard it is noted that there is nothing in the agreements that indicate that Company Z's appointment serves as a temporary measure.

• In view of the diverse responsibilities assumed by Company Z under the agency agreements with Company X, it is reasonable to conclude that Company Z would enter into contracts in the name of Company X with a level of frequency that is normal in the financial services business.

In conclusion, it is considered that for the purposes of the Dependent Agent Article of the Country Y Convention, Company X has a deemed Australian PE by virtue of its business carried on in Australia through Company Z, a dependent agent who has authority to conclude contracts on behalf of Company X, and habitually exercises that authority in Australia.

ATO View documents:

Taxation Ruling TR 2001/13

ATO Interpretive Decision ATO ID 2007/143

Practice Statement PS LA 2011/8