Edited version of private advice

Authorisation Number: 1051880104422

Date of advice: 15 October 2021

Ruling

Subject: International - permanent establishment

Question 1

Are management fees charged from Company A to Company B non-assessable non-exempt income?

Answer

No.

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1.            Company A is an Australian incorporated company that is an income tax resident of Australia.

2.            Company B is a Country Z incorporated company that is an income tax resident of Country Z.

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

4.            Company B operates a warehouse facility in Country B.

Foreign Company Operations

5.            Company A engages in no business activities in Country Z and has no physical presence in Country Z.

6.            Company A has no employees or contractors that are based in Country Z.

Management Services

7.            Company A provides a range of management services to Company B in return for a management fee.

8.            Company A provides these management services from its Australian based offices.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 23AH

Reasons for decision

Section 23AH of the ITAA 1936 treats certain foreign branch income derived directly or indirectly by Australian resident companies as non-assessable non-exempt (NANE) for tax purposes.

Subsection 23AH(2) of the ITAA 1936 requires that the relevant income be derived by a company that is carrying on a business at or through a permanent establishment (PE) of the company in a foreign country. Subsection 23AH(15) of the ITAA 1936 states that PE has the same meaning as it does in the relevant tax treaty.

The term 'permanent establishment' is defined in the double tax agreement (DTA) between Australia and Country Z as meaning a 'fixed place of business through which the business of the enterprise is wholly or partly carried on.' The DTA lists a series of locations which would, prima facie, be considered a PE of a company. This list includes; a place of management, a branch, or an office.

Company A does not have a PE under the DTA as it has no fixed place of business in Country Z. The premises where employees and contractors of Company B carry out operational activities is not a business premise that is utilised by Company A to carry out its business activities including the provision of management services.

The DTA provides that the existence of a subsidiary company in Country Z does not establish a PE of the head company in Country Z. Also, the DTA indicates that Company A does not have a PE in Country Z just because it stores or maintains goods in a Country Z warehouse.

The existence of the subsidiary Company B does not mean that Company A carries on a business "at or through a permanent establishment" in Country Z. Whether a corporation is carrying on a business in Country Z is a question of fact. Based on the facts provided, Company A does not carry on a business in Country Z. The management services are provided from Australia. Consequently, the income from "management fees" is not foreign income derived from foreign income derived by Company A in carrying on a business at or through a permanent establishment in Country Z.

In summary, Company A does not have a PE in Country Z under the DTA. Consequently, section 23AH of the ITAA 1936 does not apply to the management fees charged by Company A. Therefore, the management fees charged from Company A to Company B would not be considered NANE income and are assessable income under subsection 6-5(2) of the ITAA 1997.

Other Relevant Comments

How does Section 23AH of the ITAA 1936 interact with the single entity rule (701-1 ITAA 1997) and whether this would alter the tax outcome for Company A?

An Australian tax consolidated group is defined in section 703-10 of the Income Tax Assessment Act 1997 (ITAA 1997) and consists of a single head company and all the subsidiary members of the group. A company can choose to form a tax consolidated group pursuant to section 703-5 of the ITAA 1997.

In order qualify as a subsidiary member of an Australian tax consolidated group, a company must be an Australian resident. (This is outlined in item 2 of the table in subsection 703-15(2) of the ITAA 1997). As a result, Company B would not be able to form part of an Australian tax consolidated group.

Consequently, the single entity rule, as outlined in 701-1 of the ITAA 1997, would not apply in relation to Company A and Company B.