Edited version of your written advice

Authorisation Number: 1013122453226

Date of advice: 15 November 2016

Ruling

Subject: Residency - Double Tax Agreement

Question 1

Will Company A be deemed a resident solely of Country A under Article 4 of 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 Country A Convention)?

Answer

Yes.

Question 2

Will the business profits earned in Australia (excluding items of income dealt with separately in other Articles of the Country A convention) by Company A be taxable in Australia in accordance with Article 7 of the Country A Convention?

Answer

No.

This ruling applies for the following periods:

20XX to 20YY

The scheme commences on:

20XX

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.

1. Company B is a wholly owned Country A company offering expert advice around the world.

2. Company B has X (X) Directors who are residents of Country A.

3. Company A is a wholly owned subsidiary of Company B.

4. Company A was incorporated in Australia.

5. Company A does not have any employees or offices located in Australia.

6. Company A has Y (Y) Directors. X (X) of the Directors are residents of Country A (the same Directors of Company B) and Z (Z) Director located in Australia.

7. A Director was appointed in Australia to satisfy the requirement under the Corporations Act 2001 for an Australian company to have at least one (1) Australian resident Director.

8. The ultimate responsibility for the management and operations of Company A is held by the X (X) Directors of Company B located in Country A.

9. All board meetings are held in Country A. The Director located in Australia does not attend any board meetings.

10. The decision to incorporate Company A was made for various commercial reasons.

11. The establishment of a bank account in Australia was solely for the purpose to provide merchant facilities to Australian customers to prevent foreign currency fluctuations from affecting the customer's payments.

12. The Director in Australia does not have access to any bank accounts associated with Company A. The bank accounts can only be accessed by the Directors of Company B in Country A.

13. The role of the Australian Director is to sign documents as authorised by the Directors in Country A.

14. Contact with Company A is via an enquiry form or telephone (as detailed on their website).

15. Company A and Company B each has a website. Company A's website is a replica of Company B's website.

16. All enquiries to Company A are directed to Country A.

17. All business activities such as advice are undertaken by Company B in Country A.

18. Company A is considered a resident of Country A for taxation purposes under the laws of Country A.

Relevant legislative provisions

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 Article 4

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 Article 7

Income Tax Assessment Act 1936 subsection 6(1)

International Tax Agreements Act 1953

Reasons for decision

Question 1

Will Company A be deemed a resident solely of Country A under Article 4 of the Country A Convention?

Detailed reasoning

The term resident or resident of Australia is defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). Under the statutory definition, a company is a resident of Australia if it is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia.

Company A is a private company incorporated in Australia and is therefore a resident of Australia for taxation purposes.

Company A is also considered a resident of Country A for taxation purposes under the laws of Country A.

Australia has entered into special treaties with many countries to avoid the incidence of double taxation and fiscal evasion. These treaties are commonly referred to as 'double tax agreements' (DTA). The primary legislation governing DTA's in Australia is the International Tax Agreements Act 1953. Most DTA's include a 'tie-breaker' test under which a dual resident is deemed, for double taxation purposes, to be a resident solely of one of the two contracting countries.

The DTA between Australia and Country A is known as the Country A Convention.

Article 4 of the Country A Convention specifically deals with residency. Paragraph 3 of Article 4 of the Country A Convention provides that where a company is a resident of both Australia and Country A for taxation purposes, the company is deemed to be a resident only of the country in which its 'place of effective management' is situated.

The term 'place of effective management' is not defined in the Country A Convention. However, ATO Interpretative Decision ATO ID 2006/127 Income Tax: Dual residency under the double tax agreement between Australia and Country A (the Country A Convention) states that the Commissioner accepts that it is appropriate to have reference to the OECD Commentary on the Model Tax Convention on Income and on Capital (Condensed Version 2010) (the OECD Commentary) to define 'place of effective management'.

The OECD Commentary states that:

… The place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the entity's business as a whole are in substance made. All relevant facts and circumstances must be examined to determine the place of effective management. An entity may have more than one place of management, but it can have only one place of effective management at any one time.

The 'place of effective management' test is very similar to that of the 'central management and control' test as discussed in Taxation Ruling TR 2004/15 Income tax: Residence of companies not incorporated in Australia - carrying on business in Australia and central management and control.

Paragraph 13 of Taxation Ruling TR 2004/15 states that:

….This level of management and control involves the high level decision making processes, including activities involving high level company matters such as general policies and strategic directions, major agreements and significant financial matters. It also includes activities such as the monitoring of the company's overall corporate performance and the review of strategic recommendations made in the light of the company's performance.

The place of central management and control will usually be where the Directors meet to do the business of the company. The central management and control of a company may also be divided between two places, in which case the company will be a resident in both places.

Company A is an incorporated company in Australia and is wholly owned by Company B in Country A. The ultimate responsibility for the management and operations of Company A is held by the X (X) Directors located in Country A. All board meetings are held in Country A. The Director located in Australia does not attend any board meetings.

The appointment of the Director in Australia was to satisfy the requirements under the Corporations Act 2001 for an Australian company to have at least one resident Director.

Company A does not have any employees or an office located in Australia and all business activities and enquiries with Company A are directed to staff located in Country A.

Considering the above, it is apparent that the key management and commercial decisions relating to the operations of Company A are being made in Country A. Country A is therefore where the 'place of effective management' is located.

Following from this, Article 4 of the Country A Convention applies such that Company A will be deemed to be a resident solely of Country A for taxation purposes.

Question 2

Will the business profits earned in Australia (excluding items of income dealt with separately in other Articles of the Country A convention) by Company A be taxable in Australia in accordance with Article 7 of the Country A Convention?

Detailed reasoning

Article 7(1) of the Country A Convention provides that the profits of a business (excluding items of income dealt with separately in other Articles of the Country A convention) are only taxable in the country where the business is a resident for taxation purposes unless the enterprise carries on a business through a permanent establishment in the other country.

The term 'permanent establishment' is defined in Article 5 of the Country A Convention as a fixed place of business through which the business of the enterprise is wholly or partly carried on. This includes a place of management, a branch, an office, a factory or a workshop.

As previously stated, Company A does not have an office or employees located in Australia and its place of effective management is situated in Country A as all business activities and enquiries are directed to staff located in Country A.

It is therefore considered that Company A does not operate through a permanent establishment in Australia as listed in Article 5 of the Country A Convention.

As Company A is a resident solely of Country A under Article 4 of the Country A Convention and does not operate through a permanent establishment in Australia, any business profits of Company A (excluding items of income dealt with separately in other Articles of the Country A convention) are taxable only in Country A in accordance with Article 7 of the Country A Convention.