Edited version of private advice

Authorisation Number: 1052044881752

NOTICE

This edited version has been found to be misleading or incorrect. It does not represent the ATO’s view of the relevant law.

This notice must not be taken to imply anything about:

● the binding nature of the private advice issued to the applicant

● the correctness of other edited versions.

Edited versions cannot be relied upon as precedent or used for determining how the ATO will apply the law in other cases.

Date of advice: 12 October 2022

Ruling

Subject: International issues - residency and source

Question 1

Is Foreign LLP an Australian tax resident within the meaning of section 94T of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

Question 2

Does Foreign LLP have a permanent establishment (PE) in Australia within the meaning of Article 5 of the XYZ Convention (Convention)?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Foreign LLP

1.         Foreign LLP is an international law firm with its head offices located in XYZ Country. Foreign LLP carries on a business of providing legal services with a view to deriving profits for partners of the firm.

2.         Foreign LLP is a limited liability partnership registered in XYZ Country.

3.         Foreign LLP is a Corporate Limited Partnership (CLP) for Australian taxation purposes pursuant to section 94D of the ITAA 1936.

4.         Mr ABC is a limited liability partner of LLP.

5.         All partners worldwide are limited liability partners of Foreign LLP. As at 31 January 20XX, Foreign LLP had XX partners, over XX other lawyers and over XX legal assistants and administrative staff.

6.         Foreign LLP's primary operations are in XYZ Country, but it also has offices in other foreign countries.

7.         Prior to the establishment of Aus Co, Foreign LLP had no related entities or branches in Australia.

8.         Foreign LLP is not focused on the Australian market. Where advice has been provided to Australian clients in the past, it has been through one of Foreign LLP's offices. Foreign LLP is not registered to practice Australian law.

9.         Foreign LLP's partners are taxed on their share of Foreign LLP's profits. The taxation of these partners depends on the tax profile of the individual partners (e.g., their tax residency etc).

Mr ABC

10.       Mr ABC is an Australian citizen and an equity partner of Foreign LLP.

11.       Mr ABC moved to DEF Country with his family in 20XX, from which time he was a non-resident of Australia for taxation purposes and was taxable in DEF Country on his partnership earnings from Foreign LLP.

12.       During his time in DEF Country, Mr ABC held XYZ Country practising certificates and only advised clients on XYZ Country law. Mr ABC did not practice Australian law and has not provided Australian legal advice to any clients (Australian or otherwise) during the years he has worked with Foreign LLP.

13.       Mr ABC is a member of the Global Finance team at Foreign LLP and focuses on advising clients on XXXXXX projects in the HIJ region.

14.       Mr ABC's duties include collaborating with other lawyers on client matters to deliver legal advice and assist clients in closing transactions.

15.       Mr ABC's role also includes other standard partnership duties such as:

•                assisting with the recruitment of lawyers and support staff in the DEF Country office

•                undertaking and contributing to continuing legal education sessions in DEF Country

•                reviewing and settling legal advice and legal documentation in connection with client matters, and

•                generally supporting and servicing firm clients.

16.       Mr ABC does not hold any formal management positions within Foreign LLP.

Change of personal circumstances

17.       Last year, Mr ABC relocated to Australia and re-established his Australian taxation residency on 1 July 20XX (the date he returned from DEF Country). Mr ABC and his family now reside in Australia.

18.       Mr ABC continues to work for Foreign LLP from their offices in DEF Country and has an apartment in DEF Country.

19.       Mr ABC has a home in both DEF Country and Australia and intends to divide his time between the two locations to enable him to see his family regularly and intends to work while he is in Australia.

20.       Foreign LLP wants to ensure it can meet the personal circumstances and needs of partners. To facilitate Mr ABC's request, Foreign LLP has established a local subsidiary company, Aus Co, which will employ Mr ABC when he works from Australia. Details of the arrangements between Foreign LLP, Aus Co and Mr ABC are set out below from Fact 24.

Aus Co

21.       Aus Co was incorporated and registered with ASIC on XX date. Aus Co is 100% owned by Foreign LLP and Mr ABC is the sole Director, Public Officer and Secretary.

22.       Australian law requires Mr ABC to have an Australian Practising Certificate as a Principal of Aus Co even though Mr ABC does not intend, and is not authorised by Foreign LLP, to provide Australian legal advice to clients.

23.       To satisfy this regulatory requirement in Australia, Mr ABC received his Australian Practising Certificate and professional indemnity insurance was paid by Aus Co.

Legal and financial relationships

24.       The following legal and financial relationships exist between Foreign LLP, Aus Co and Mr ABC.

Sub-contract arrangement

25.       Foreign LLP and Aus Co will enter into the Services Agreement for the provision of legal services by Aus Co. With regards to specific client engagements involving Mr ABC while he is in Australia, Aus Co will be engaged by Foreign LLP via a sub-contract arrangement through which AUs Co will provide legal services to Foreign LLP rather than direct to the client.

26.       Aus Co will charge Foreign LLP for services rendered by Mr ABC while Mr ABC is in Australia, calculated by reference to hours charged in respect of client engagements (as recorded in Foreign LLP's Daynotes System using unique client matter numbers) at a specified hourly billing rate.

27.       Aus Co will also charge Foreign LLP for expenses incurred by Aus Co, including:

•                accounting, tax and audit fees (as applicable)

•                professional indemnity insurance, and

•                Payroll Tax (if any).

28.       Clients will continue to engage Foreign LLP directly, and where necessary, Aus Co will be engaged via Foreign LLP under the sub-contract arrangement provided for in the Services Agreement. Aus Co will not contract with any clients. Aus Co's sole client will be Foreign LLP.

Employer / Employee

29.       Mr ABC will act as Principal and Director of Aus Co and will work from his Australian residence. Mr ABC will be employed by Aus Co.

30.       Mr ABC will be paid a salary and bonus by Aus Co (inclusive of Superannuation) funded by the payments received by Aus Co from Foreign LLP. Essentially, the salary will be calculated by reference to hours charged to client engagements (in Foreign LLP's systems) at the stipulated hourly billing rate referred to above while Mr ABC is in Australia.

31.       A draft employment contract (Employment Contract) has been provided and the key terms are detailed below.

Employment Contract

32.       Clause 1 of the Employment Contract states Mr ABC will employed on a full-time basis in the position of Director and Company Secretary, and that the role will be primarily based in Australia.

Services performed

DEF Country

33.       Mr ABC will remain a Partner of Foreign LLP and when in DEF Country, will represent himself as a Partner of Foreign LLP and not as Principal of Aus Co.

34.       While in DEF Country, Mr ABC will undertake routine responsibilities as a Partner of Foreign LLP which includes engaging with and providing advice to clients on behalf of Foreign LLP.

35.       Mr ABC intends to be in DEF Country throughout the year on a very regular basis as many of his partnership duties will be carried out there.

36.       While Mr ABC is in DEF Country, he typically works from Foreign LLP's office.

Australia

37.       While Mr ABC is in Australia, all work that he undertakes will be in his capacity as an employee of Aus Co.

38.       Mr ABC will represent himself as Principal of Aus Co and perform work in accordance with the Services Agreement and Employment Contract, and all formal advice will be provided through Foreign LLP to its clients.

39.       Although Aus Co's registered office is in Australia, Mr ABC does not work from there and there is no physical Aus Co office at that location.

40.       While Mr ABC is in Australia, he typically works from his separate home study which includes standard office equipment.

41.       Where Mr ABC communicates with and advises clients by email, this will be in his capacity as a principal of Aus Co performed under the authorisation of Foreign LLP in accordance with the engagement agreement (contract) between Foreign LLP and the client, in conjunction with the Services Agreement between Foreign LLP and Aus Co.

42.       Generally, all legal work undertaken by Mr ABC as an employee of Aus Co will be provided directly to clients without modification or review. The delivery of this advice is predominantly done over email and (while he is physically located in Australia) Mr ABC will indicate in the signature block of his email that he is providing advice on behalf of Aus Co. Accordingly, Mr ABC will use two different signature blocks depending on whether he is inside or outside of Australia.

Arrangement in practice

43.       The purpose of the arrangement is not to create a divide between the work matters undertaken in DEF Country and those in Australia.

44.       Going forward, it is intended that Mr ABC will typically spend around 1 - 2 weeks in DEF Country and then 1 - 2 weeks in Australia on a rotating basis. Mr ABC will also travel elsewhere in the HIJ region on business on a very regular basis.

45.       It is difficult to estimate the split between the two locations with any certainty, however, there are likely to be periods when Mr ABC is in DEF Country for longer periods, for example during major deal negotiations or if his family are visiting. There may also be periods when he is in Australia for longer periods, for example over school holiday periods or if a family member is unwell and Mr ABC needs to spend time with them.

46.       Mr ABC will continue to work on the same client matters as he moves between DEF Country and Australia and therefore over time can be expected to work in both capacities for a particular client.

47.       As is standard for law firms, all of Mr ABC's time working on client matters is recorded in a Daynotes System and this requires that Mr ABC specify his physical location when entering time. This feature enables Mr ABC's time to be easily and accurately allocated between the two respective roles / capacities.

48.       If a client requires immediate phone contact with Mr ABC while he is in Australia, the client is able to reach Mr ABC directly in the usual ways, typically through phone or email.

49.       Mr ABC has full authority to communicate with clients of Foreign LLP while in Australia and may do so on his own (i.e. no one else from Foreign LLP needs to be present).

50.       Mr ABC may have ad hoc discussions with clients about potential engagements while he is in Australia, but to maintain the distinction in capacities, Mr ABC will arrange for another party of Foreign LLP to sign any client engagement letters or any other formal documents on Foreign LLP letterhead if this can't wait until Mr ABC returns to DEF Country.

51.       Mr ABC has not concluded any engagement contracts on behalf of Foreign LLP since being in Australia and there is no intention that Mr ABC will conclude engagement contracts on behalf of Foreign LLP whilst Mr ABC is in Australia in the future.

52.       Mr ABC works on large projects which typically run for many years and much of the work that he does is a continuation of prior matters / engagements. For this reason, new engagements are relatively infrequent.

53.       Mr ABC has not advised Australian clients since being in Australia and is not currently advising any Australian clients. Further, Mr ABC is not authorised by Foreign LLP to provide Australian law advice to clients.

54.       Mr ABC has separate office furniture and other office equipment such as printers in each location.

55.       Mr ABC uses the same firm laptop whilst in DEF Country and Australia, which he carries with him when travelling. Mr ABC uses a standard LLP VPN connection regardless of where he is located.

56.       Mr ABC has a DEF Country mobile and an Australian mobile. While in Australia, Mr ABC generally uses his Australian mobile, and this number is indicated on his Australian signature block. While outside Australia, Mr ABC almost exclusively uses his DEF Country mobile.

57.       Mr ABC or AUS Co are solely responsible for Mr ABC's Australian mobile and office equipment in Mr ABC's home. All other equipment that Mr ABC uses regularly is in DEF Country and the responsibility of Foreign LLP.

58.       Mr ABC is responsible for all expenses arising in connection with Mr ABC's home office in Australia.

59.       Mr ABC stores certain records relating to Aus Co, including copies of the Aus Co constitutional documents, his Australian practising certificate and Aus Co's professional indemnity insurance policy, in his home office in Australia.

60.       Most client advice is provided by email and stored electronically on Mr ABC's laptop or in the Foreign LLP computer system.

61.       Mr ABC has the same access to Foreign LLP resources while he is physically located in Australia (or elsewhere in the world). Access is through the same user login details.

62.       Neither Foreign LLP nor Aus Co require Mr ABC to display their signage in Mr ABC's home office and there is no intention for such requirement to arise in the future.

Other relevant facts

63.       The key-decision making body of Foreign LLP is the Committee comprising the Chairman of the firm and XXX other elected partners. There are also partners who serve in other specified leadership or managerial positions, including the firm's Executive Director, heads of Practice Groups and heads of office or regions. Various other executive functions are performed by non-partners of the firm, such as the Chief Financial Officer and office managers.

64.       Mr ABC does not hold any of the aforementioned management positions within Foreign LLP. Furthermore, Mr ABC does not carry out, nor have the authority to significantly influence or direct any high-level or strategic decisions of Foreign LLP.

65.       Foreign LLP has various committees tasked with improving or managing the internal processes of its business which are generally run by one or more partners. One of these committees is the Revenue Committee, which monitors the firm's efforts in this space. Mr ABC is currently a member of the Revenue Committee as a representative for HIJ region.

66.       Much of the work undertaken by the Revenue Committee takes place in the final quarter of each calendar year in preparation for year end. Mr ABC's principal responsibilities in this role are to monitor the performance of Foreign LLP's DEF Country based partners and report to other committee members in the head office in XYZ Country. Most of this work is performed by Mr ABC while he is physically located in DEF Country as this enables him to meet with those partners to discuss the issues.

67.       On occasion, partnership matters may arise requiring Mr ABC's attention while he is in Australia. This may include attendance on a Revenue Committee call or dealing with staff issues that arise from time to time. However, this only occurs on an ad hoc basis and these matters are generally limited in scope.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 94T

Reasons for decision

Question 1

Is Foreign LLP an Australian taxation resident within the meaning of section 94T of the ITAA 1936?

Summary

Foreign LLP is not a resident of Australia for taxation purposes as the requirements of section 94T of the ITAA 1936 are not satisfied.

Detailed reasoning

Section 94T of the ITAA 1936 contains the provisions governing the residency status of CLPs. Subsection 94T(1) of the ITAA 1936 states:

For the purposes of the income tax law, the partnership is:

(a)       a resident; and

(b)       a resident within the meaning of section 6; and

(c)       a resident of Australia; and

(d)       a resident of Australia within the meaning of section 6;

if and only if:

(e)       the partnership was formed in Australia; or

(f)        either:

(i)        the partnership carries on business in Australia; or

(ii)       the partnership's central management and control is in Australia.

Foreign LLP is a CLP for Australian tax purposes that was not formed in Australia. Therefore, the formation test in paragraph 94T(1)(e) of the ITAA 1936 does not apply and subparagraphs (1)(f)(i) and (ii) of the ITAA 1936 must be considered, which are referred to as 'Limb One' and 'Limb Two' respectively.

Limb One

Limb One refers to the 'carrying on a business in Australia' test in subparagraph 94T(1)(f)(i) of the ITAA 1936.

Taxation Ruling TR 2019/1 - Income tax: when does a company carry on a business? (TR 2019/1) sets out the Commissioner's views on when a company carries on a business within the meaning of section 23 of the Income Tax Rates Act 1986 and section 328-110 of the Income Tax Assessment Act 1997 (ITAA 1997). TR 2019/1 also provides some relevant commentary for the purposes of considering Limb One.

Relevantly, TR 2019/1 provides at paragraph 18 that the case law highlights that it is not possible to state a precise test for whether an entity is carrying on a business. Rather, whether the activities of an entity constitute the carrying on of a business is a question of fact, and must be answered based on a wide survey and the overall impression gained of the activities of the entity having regard to the indicia of carrying on a business as a whole.

TR 2019/1 sets out the key indicia considered by the courts in determining whether the activities carried on by an entity amount to the carrying on of a business at paragraph 21:

•                whether the person intends to carry on a business

•                the nature of the activities, particularly whether they have a profit-making purpose

•                whether the activities are

-           repeated and regular

-           organised in a business-like manner, including the keeping of books, records and the use of a system

•                the size and scale of a company's activities including the amount of capital employed in them, and

•                whether the activity is better described as a hobby, or recreation.

TR 2019/1 provides at paragraph 34 that relevant to whether activities have a profit-making purpose, is whether they have a prospect of profit. If the activities in question are carried out in a way that means they have no prospect of ever making a profit, it is unlikely that the activities themselves can be said to have a profit-making purpose.

The commentary in footnote 4 to Taxation Ruling TR 2018/5 - Income tax: central management and control test of residency (TR 2018/5) sheds some further light on the carrying on of a business test, albeit in the context of whether a company is carrying on a business:

Whether a company is carrying on a business ultimately depends on an overall impression of the company's activities. However, where a limited or no liability company is established and maintained to make a profit for its shareholders, and invests its assets in gainful activities that have both a purpose and prospect of profit, it is likely to be carrying on business within the meaning of the central management and control test of company residency. In these circumstances, it is likely the other indicia of carrying on business will support this conclusion ... This is so even if the company's activities are relatively limited, and its activities primarily consist of passively receiving rent or returns on its investments and distributing them to its shareholders ...

As indicated in the above extract, the indicia of carrying on a business are set out in case law. It is ultimately a question of fact, and must be answered based on a wide survey and the overall impression gained of the activities of the entity having regard to the indicia of carrying on a business as a whole. Generally, relevant factors include whether there is an intention to carry on business, the nature of the activities, whether there is a profit-making purpose, whether the activities are repeated, regular, and organised in a business-like manner, and the size and scale of the company's activities.

Relevantly, TR 2018/5 incorporated the High Court's decision in Bywater Investments Limited & Ors v FC of T (2016) ALR 39 (Bywater) and replaced the Commissioner's previous view in Taxation Ruling TR 2004/15W Income tax: residence of companies not incorporated in Australia - carrying on business in Australia and central management and control (TR 2004/15W).

TR 2018/5 provides that the central management and control of a business is factually part of carrying on that business. TR 2018/5 reversed the Commissioner's view in TR 2004/15W, which provided that the statutory test involved two separate requirements, i.e., the requirement to carry on business in Australia was separate from and in addition to the requirement to have the company's central management and control in Australia.

In light of the above, TR 2018/5 does not deal with previous observations of the 'carrying on business in Australia' requirement that was in the withdrawn TR 2004W/15. However, given that section 94T of the ITAA 1936 has the separate tests / limbs for determining the residency of a CLP (that is no longer relevant for the corporate residency test), the Commissioner's former views regarding what constitutes 'carrying on a business in Australia' are nevertheless relevant to whether LLP is carrying on business in Australia.

The former TR 2004W/15 stated at paragraphs 9 to 12:

Carries on business in Australia

9. The question of where business is carried on is one of fact. It requires a consideration of where the activities of the company are carried on and is dependent on the facts and circumstances of a case. However, the Commissioner's approach to this factual determination is to draw a distinction between a company with operational activities (for example trading, service provision, manufacturing or mining activities) and a company which is more passive in its dealings. It is appreciated that there will be some overlap in any particular situation.

10. For the purposes of the second statutory test, a company that has major operational activities relative to the whole of its business carries on business wherever those activities take place and not necessarily where its CM&C is likely to be located. Operational activities include major trading, service provision, manufacturing or mining activities. For example, the place of business of a large industrial concern is wherever its offices, factories or mines are situated.

11. On the other hand, a company whose income earning outcomes are largely dependent on the investment decisions made in respect of its assets, carries on its business where these decisions are made. This is often where its CM&C is located.

12. It is considered that for the purposes of paragraph 6(1)(b), the concept of carrying on a business may be wider than its ordinary meaning and extends to undertakings of a business or a commercial character. For example, for the purpose of the second statutory test, a company may be carrying on business even if its only activity is the management of its investment assets.

The former TR 2004W/15 further stated at paragraphs 24 to 27:

Carries on business in Australia

24. It is necessary to examine all the relevant facts and circumstances of a company's activities to determine whether it carries on business in Australia.

25. A practical approach which provides a starting point for determining the location of the business is to draw a distinction between a company with operational activities (for example, major trading, service provision, manufacturing, or mining activities relative to the whole of the business) and a company that is more passive in its operations.

26. It is arguable that an industrial company carries on business wherever its major operational activities relative to the whole of its business take place, notwithstanding that its CM&C may be located elsewhere. However, operational activities alone are not sufficient to make a company resident in Australia under the second statutory test, the company's CM&C must also be in Australia.

27. Where a company does not carry on major operational activities and essence of its business is the investment of assets, it carries on business where those high level investment decisions are made - which may be where its CM&C is located. In these situations, the location of CM&C is indicative of where the company carries on business and vice-versa.

Relevantly, TR 2004W/15 provides at paragraph 41 that it is considered that major operational activities which are the essence of a company's income earning activities and which are carried out with a high degree of autonomy would be sufficient to constitute the carrying on of business in Australia where those activities occur in Australia.

Further, paragraph 42 provides that if the objects of a company are business objects and the company actually carries out those business objects, then the company is carrying on business.

The AAT considered the question of whether an insurance company was 'carrying on a business in Australia' in Crown Insurance Services Ltd v FC of T [2011] AATA 847 (Crown Insurance). The relevant facts of the case included:

•                the applicant, Crown Insurance Services Ltd (CISL), was an insurance company incorporated in Vanuatu

•                Mr P was the controlling mind of CISL

•                CISL entered into contracts with Australian 'member companies' which provide funeral benefits to the Aboriginal community in Australia

•                the 'member companies' were based in offices in Coolangatta, Queensland

•                CISL contended that it did not carry on business in Australia; it was in the business of reinsurance and it conducts that business in Vanuatu, and

•                the Commissioner contended the contrary; in reality, CISL is a captive group insurer whose business is inextricably interwoven with that of the 'member companies', which are CISL's 'administrators' in Australia and carry on the insurance business by which premium amounts are derived.

The Tribunal Member determined that the business of CISL was confined to the entering into of the various contracts with the member companies, whereby in consideration of the payment of the premiums, CISL agreed to pay the defined benefit to the member company.

The Tribunal Member determined that the taxpayer did not carry on business in Australia. The Tribunal Member's reason was that it was not possible to find any Australian element to the taxpayer's business beyond the presence in Australia of the various entities insured under those contracts. The two essential elements of performance of those contracts, being receipt of premiums and payment of claims, took place in Vanuatu.

In relation to external indicia concerning the taxpayer, the AAT provided that the taxpayer's registered office and business premises, account preparation, primary documents, auditors, company meetings and corporate and financial records were all maintained / prepared in Vanuatu.

In relation to contentions concerning the formation of the contracts between the taxpayer and member companies, the AAT provided that Mr P was conscious of the restrictions on carrying on business as an insurer in Australia without appropriate approvals. Further, that the entire arrangement was structured to ensure the taxpayer did not accept the proposal except in circumstances where the acceptance occurred in Vanuatu.

Based on the AAT's decision in Crown and the Commissioner's former view in TR 2004W/15 (the specifics of which were not reversed by the Commissioner releasing TR 2018/5), it is necessary to determine what an entity's operating activities are and where those activities are carried out, which are to be determined objectively based on the relevant facts and circumstances, in order to reach a conclusion as to where a company carries on its business (when the central management and control (CM&C) of the entity is not relevant to the analysis).

It is generally accepted that there are three main types of business activities, being operating, investing and financing activities. It can be construed from TR 2004W/15 that operational activities are the essence of a company's income earning activities and that it is the location of where those operating activities are carried out that is arguably the location that a company carries on its business.

Operating activities are the functions of a business directly related to providing its goods or services to the market. These are the entity's core business activities and are the daily activities of the entity involved in producing and selling its product / service to generate revenue. It also includes general administrative and maintenance activities.

Operating activities are distinguished from investing or financing activities, which are functions of a company not directly related to the provision of goods / services. Instead, financing and investing activities help the company function optimally over the longer term.

Foreign LLP carries on a business of providing legal services with a view to deriving profits for partners of the firm. The operating activities of Foreign LLP therefore include engaging clients, managing clients and their legal matters, preparing and providing legal advice to the clients, executing legal transactions on behalf of their clients and billing clients.

The financing activities of Foreign LLP likely include managing the finances of the firm (i.e., ensuring sufficient level of cash flow is maintained) and the investing activities likely include firm strategy and planning, business development, office and asset maintenance, and staff management and training.

The Foreign LLP partners (including Mr ABC) provide legal advice to overseas clients and do not provide legal advice on Australian law. Other than Mr ABC, the partners of Foreign LLP are permanently located overseas.

The following activities of Foreign LLP are carried on outside of Australia:

•           the management of the business of Foreign LLP

•           engaging clients and preparation of legal advice for clients

•           provision of formal letters of advice to clients and client meetings

•           regular meetings among the decision-makers (i.e., partners of Foreign LLP) in which high-level decisions will be made in respect of Foreign LLP

•           the annual partner conferences

•           the administrative functions that comprise the business of Foreign LLP (i.e., location of support staff, recruitment, staff training and CLE training sessions etc.)

•           declaration of partnership distributions, and

•           the location of the head office (XYZ Country) and other Foreign LLP offices.

In comparison, the activities of Foreign LLP that are carried on in Australia by Aus Co / Mr ABC are limited to:

•           preparation and delivery of informal legal advice to clients overseas (none of whom receive advice on Australian law)

•           preparation of formal advice to be delivered to clients when Mr ABC returns to DEF Country (none of whom receive advice on Australian law)

•           emails / phone calls to and from clients (none of whom receive advice on Australian law), and

•           ad hoc non-core partnership duties that arise, including staffing matters that arise from time to time or Revenue Committee calls.

Whilst Foreign LLP do currently have Australian clients, the number of clients and work performed for Australian clients is insignificant when compared to Foreign LLP's global practice. Further, there is no intention for Foreign LLP to enter the Australian market and likewise no intention for Foreign LLP to provide advice on Australian law.

Based on a holistic assessment of the facts and circumstances pertaining to Foreign LLP, it is reasonably arguable that Foreign LLP is not carrying on business in Australia as very few of Foreign LLP's operating activities and none of Foreign LLP's financing or investing activities will take place, or be, in Australia. Further, only one out of Foreign LLP's XX partners are located in Australia on a part-time basis and the work performed by that partner, being Mr ABC, has had no connection to Australia as it has not involved Australian clients or advice pertaining to Australian law.

The activities of Foreign LLP in Australia via Aus Co / Mr ABC lack commercial and economic substance when the activities of Foreign LLP are considered as a whole. Rather, the activities of Foreign LLP in Australia have been confined to Mr ABC preparing formal advice to be delivered to clients when he returns to DEF Country, preparing and delivering informal advice to overseas clients, and ad hoc discussions with clients and non-core partnership duties. The activities of Foreign LLP in Australia via Aus Co / Mr ABC has not included, and there is no intention for it to include, the provision of Australian legal advice.

In other words, they are activities that contribute to Foreign LLP delivering its operating activities but are not 'business activities carried on in Australia' in their own right as there is no connection to Australia. The activities undertaken by Mr ABC do not derive profit from an Australian source as Mr ABC is merely present in Australia whilst he is preparing and delivering legal advice on foreign law and responding to client emails / phone calls.

It is therefore reasonable to conclude that the 'carrying on business in Australia' test in Limb One is not satisfied.

Limb Two

Limb Two refers to the 'CM&C' test in subparagraph 94T(1)(f)(ii) of the ITAA 1936.

CM&C refers to the control and direction of company's operations. TR 2018/5 states at paragraph 11:

The key element in the control and direction of a company's operations is the making of high-level decisions that set the company's general policies, and determine the direction of its operations and the type of transactions it will enter.

TR 2018/5 confirms at paragraph 18 that the nature of a company's activities and business defines which acts and decisions are an exercise of CM&C.

In relation to what constitutes decision making, TR 2018/5 states at paragraph 15:

A person, or group of people, make a decision if they actively consider and decide to do, or not to do something based on it being in the best interests of the company. It does not include the mere implementation, or rubberstamping, of decisions made by others...

In relation to who exercises the CM&C of a company, TR 2018/5 states at paragraph 19:

Identifying who exercises central management and control is a question of fact. It cannot be determined solely by identifying who has the legal power or authority to control and direct a company. The crucial question is who controls and directs a company's operations in reality.

TR 2018/5 further states at paragraph 27:

The distinction turns on what amounts to decision making for the central management and control test of residency. In Bywater, the High Court observed that this turns on whether the people said to make the decisions of the company, actually consider whether to do what they are told, or are advised to do, and make a decision to do it because it is in the best interests of the company. If they do, they are the relevant decision maker and exercise central management and control of the company. If they do not, and merely mechanically implement or rubberstamp company decisions already made by others based on what they are told or advised to do, the person who gave the instruction is the real decision-maker and exercises central management and control of the company.

In relation to where the CM&C of a company is exercised when the controllers of a company are located in different places, TR 2018/5 states at paragraph 31:

Control and direction of a company may be undertaken by those controlling a company in multiple places. This means a company's central management and control may be divided between more than one place. However, a company's central management and control will only be exercised in a place for the purpose of the central management and control test if it is exercised in the place to a substantial degree, sufficient to conclude the company is really carrying on business there.

TR 2018/5 further states at paragraph 34:

Where a company's central management and control is exercised is not determined by where the directors, or other persons, who control and manage it, are resident or live. What matters is where they actually perform the activities to control and direct the company.

The matters that are most likely to determine where those who control and direct the operations of a company do so are listed at paragraph 36 of TR 2018/5:

•                where those who exercise central management and control do so, rather than where they live

•                where the governing body of the company meets

•                where the company declares and pays dividends

•                the nature of the business and whether it dictates where control and management decisions are made in practice, and

•                minutes or other documents recording where high-level decisions are made.

TR 2018/5 provides at paragraph 35 that no single factor alone will necessarily determine where the CM&C of a company is exercised, and that the relevance and weight to be given to each will depend on the facts and circumstances of the case and surrounding circumstances.

As provided by TR 2018/5, the CM&C of an entity will only be exercised in a place for the purpose of the CM&C test if it is exercised in that place to a substantial degree, sufficient to conclude the company is really carrying on business there.

Mr ABC is not in a managerial partner role at Foreign LLP and is not authorised to significantly influence or direct any high-level or strategic decisions of Foreign LLP.

The Committee convene outside of Australia and the annual partner conference takes place in XYZ Country. The Committee therefore make decisions regarding the strategic direction of Foreign LLP and decisions regarding partnership distributions outside of Australia.

The partnership duties that Mr ABC may undertake in Australia will be ad hoc matters arising due to staffing issues or occasional Revenue Committee matters requiring attention that cannot wait until Mr ABC returns to DEF Country. Except in limited circumstances, Mr ABC will undertake his partnership duties while he is outside Australia (i.e. in DEF Country or other overseas locations).

It is reasonable to conclude that Mr ABC will not undertake any activities that comprise the CM&C, or contribute to the control and direction, of Foreign LLP while he is in Australia. Therefore, Mr ABC's activities do not satisfy the CM&C test in Limb Two.

Conclusion

For the reasons outlined above, as neither subparagraphs 94T(1)(f)(i) and (ii) of the ITAA 1936 are satisfied, Foreign LLP does not meet the requirements of section 94T of the ITAA 1936 such that it is not a resident of Australia for taxation purposes.

Question 2

Does Foreign LLP have a PE in Australia within the meaning of Article 5 of the Convention?

Summary

Foreign LLP does not have a PE in Australia within the meaning of Article 5 of the Convention.

Detailed reasoning

Subsection 6-5(3) of the 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, 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 (Agreements Act).

Section 4 of the Agreements Act incorporates the Agreements Act with the ITAA 1936 and the ITAA 1997, so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Section 5 of the Agreements Act provides that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 of the Agreements Act has the force of law. The Convention is listed in section 5 of the Agreements Act and operates to avoid the double taxation of income received by residents of Australia and XYZ Country.

To summarise, Article 7 of the Convention provides that if the profits of an enterprise are not attributable to the PE of the enterprise, they are not taxable in the country in which the PE is situated even if they are sourced in the country.

Article 5 of the Convention states:

(1)        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.

(2)        The term "permanent establishment" shall include especially:

(a)       a place of management;

(b)       a branch;

(c)       an office;

(d)       a factory;

(e)       a workshop;

...

(3)        Notwithstanding paragraphs (1) and (2), an enterprise of one of the Contracting States shall not be regarded as having a permanent establishment solely as a result of one or more of the following:

...

(e)       the maintenance of a fixed place of business for the purpose of activities which have a preparatory or auxiliary character, such as advertising or scientific research, for the enterprise;

...

(4)        Notwithstanding paragraphs (1) and (2), an enterprise of one of the Contracting States shall be deemed to have a permanent establishment in the other Contracting State if:

(a)       it carries on business in that other State through a person, other than an agent of independent status to whom paragraph (5) applies, who has authority to conclude contracts on behalf of that enterprise and habitually exercises that authority in that other State, unless the activities of such person are limited to those mentioned in paragraph (3) which, if exercised through a fixed place of business, would not make that fixed place of business a permanent establishment under the provisions of that paragraph;

...

(5)        An enterprise of one of the Contracting States shall not be deemed to have a permanent establishment in the other Contracting State merely because that enterprise carries on business in that other State through a broker, general commission agent, or any other agent of independent status, where such broker or agent is acting in the ordinary course of his business as a broker, general commission agent or other agent of independent status.

(6)        The fact that a company which is a resident of one of the Contracting States controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.

The Convention therefore provides a two-pronged analysis to the question of whether a PE exists, being:

(i)     a fixed place of business PE (paragraph 5(1) of the Convention), and

(ii)    a dependent agent PE (paragraphs 5(4) and (5) of the Convention).

If the fixed place of business analysis does not result in a finding of a PE, it is then necessary to consider the dependent agent PE analysis. The possible PEs that could potentially exist in this instance are:

•           Aus Co / Mr ABC as a fixed place of business PE, and

•           Aus Co / Mr ABC as a dependent agent PE.

Fixed place of business PE

Taxation Ruling TR 2001/13 - Interpreting Australia's Double Tax Agreements (TR 2001/13) sets out the Commissioner's view on interpreting Australia's double tax agreements and provides at paragraph 104 that commentaries on the interpretation and application of the OECD model convention will often need to be considered.

Commentaries on the OECD Model Tax Convention on Income and Capital released in 2017 (OECD Commentary) provides guidance on the fixed place of business PE. Relevantly, the OECD Commentary provides at paragraph 6 that the definition of 'permanent establishment' contains the following conditions:

1. the existence of a 'place of business', i.e. a facility such as premises or, in certain instances, machinery or equipment
2. the place of business must be 'fixed', i.e. it must be established at a distinct place with a certain degree of permanence, and
3. the carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated.

In order to determine whether Foreign LLP has a fixed place of business PE under Article 5(1) of the Convention, it is necessary to consider whether Mr ABC's home office is a fixed place of business through which the business of Foreign LLP is wholly or partly carried on.

Paragraph 18 of the OECD Commentary explains that even though part of the business of an enterprise may be carried on at a location such as an individual's home office, that should not lead to the conclusion that that location is at the disposal of that enterprise simply because that location is used by an individual (e.g. an employee) who works for the enterprise. Paragraph 40 of the OECD Commentary indicates that the same applies for subcontractors.

Paragraph 18 further explains that where a home office is used on a continuous basis for carrying on business activities for an enterprise and it is clear from the facts and circumstances that the enterprise has required the individual to use that location (e.g., by not providing an office to an employee in circumstances where the nature of the employment clearly requires an office), the home office may be considered at the disposal of the enterprise.

Paragraph 19 includes an example that notes where a cross-border worker performs most of their work from their home situated in one jurisdiction rather than from the office made available to them in the other jurisdiction, one should not consider the home at the disposal of the enterprise because the enterprise did not require that the home be used for its business activities.

It can be construed from paragraphs 18 and 19 of the OECD Commentary that whether the individual is required by the enterprise to work from home or not is an important factor in this determination.

The Commissioner has considered the issue of home office PEs on a number of occasions under the Convention as well as under the Australia-New Zealand treaty.

In ATO Interpretive DecisionID 2006/263 Income tax Assessability of income received by a US resident company with an employee in Australia (ATO ID 2006/263), the taxpayer was a USA resident company (US Co) that sold and maintained specialist publication and document management software products to Australian customers. US Co held no substantial equipment in Australia, was registered for GST and had one employee who worked from a home office (costs were reimbursed by US Co). The employee could not enter into contracts on behalf of US Co as an accounting firm had been appointed as its agent and to administer its Australian bank account.

The Commissioner concluded that US Co had a PE in Australia because the home of the employee was a fixed place of business through which its business was being carried on in Australia. Relevantly, the Commissioner provided that it is not necessary to rely on the various circumstances in which a PE will be deemed to exist, and that the activities performed by the employee were customer relationship activities and therefore an essential and significant part of the service that US Co provided to its Australian customers.

In support of this conclusion, the Commissioner referenced the decision of the United States Tax Court in Georges Simenon v Commissioner of Internal Revenue (1965) 44 T.C. 820 (Georges). In Georges, the United States Tax Court held that a well-known author's home office was their fixed place of business and therefore a PE. The Court's reasoning included:

...The issue is whether the US source royalties derived from contracts executed by petitioner with others are taxable by the United States or exempt from our income tax. Royalties do not spring, full-fledged, from a pen or a typewriter, like Athena from the brow of Zeus (although many writers wish that they would). Royalties grow out of contracts; the contracts result from negotiations and are business and commercial agreements; the amount of the royalties results from sales. ... In the United States, petitioner had an office and he engaged in a business... Petitioner may have been able to, and probably did, develop plots for his stories while sitting out in a park or driving through the country, all of which is immaterial under the particular question. And he probably did part of his business negotiations in the office of a prospective publisher or producer. On the other hand, it appears that is was ordinary, necessary, and appropriate in relation to his author-business for him to have a fixed place of business, in view of the regularity, continuity, and extent of his business activities as author who wrote for profit...The evidence, considered as a whole, established, in our opinion, that petitioner's office at his house was his fixed place of business where he carried on a substantial part of this author-business activities; that his maintenance and use of that office was proximately related to his author-business; and that his office therefore was a 'permanent establishment' ofhis in the United States within the treaty definition of and meaning in Article 7 of that term.

In ATO Interpretive Decision ID 2005/289 Income tax Assessability of income derived by a New Zealand resident company (ATO ID 2005/289), the Commissioner concluded that the income derived by a New Zealand resident company (NZ Co) from the sale of company products in Australia was attributable as the taxpayer was carrying on business through a PE situated in Australia.

The relevant facts of ATO ID 2005/289 were:

•           NZ Co sold company products to unrelated parties in Australia

•           the sales orders were taken by two sales employees who email the orders to New Zealand for approval

•           the employees receive bonus payments per quarter based on average sales over the period

•           the employees act as the contact person for NZ Co in Australia in their respective locations

•           the employees are provided with a vehicle, computer, telephone and a fax machine

•           the employees communicate with NZ Co through phone, email or by fax

•           NZ Co does not own or rent any premises in Australia; however, the employees use a room of their house as an office to deal with NZ Co's business

•           NZ Co has an Australian bank account, and

•           the products are despatched directly to the customers from New Zealand, or through a warehouse in Australia managed by a third party.

The Commissioner concluded that NZ Co had a PE in Australia as NZ Co was carrying on a business in Australia through a fixed place, being the home of the employees. Likewise with ATO ID 2006/263, Georges was referenced.

Relevant to the decision reached in ATO ID 2005/289 and ATO ID 2006/263 is that the foreign companies had customers located in Australia and that the employees located in Australia were customer contacts for the foreign companies in Australia. The foreign companies did not provide the employees with offices in Australia and therefore the employees were required to perform their duties at their home offices.

The views expressed in ATO ID 2005/289 and ATO ID 2006/263 also demonstrate that international case law is relevant to considering questions of treaty interpretation in Australia.

The Tax Court of Canada considered the meaning of 'permanent establishment' in Article 5 of the Convention between Canada and the United States of America with respect to Taxes on Income and on Capital (US-Canada Treaty) in Knights of Columbus v R 10 ITLR 827 (Knights) and American Income Life Insurance Company v Canada 11 ITLR 52 (AIL) and provided guidance on the phrase 'at the disposal'.

The cases both concerned the question of whether an American insurance company carrying on business in Canada did so through a PE so as to be liable to tax in Canada on the profits from that business. The US-Canada Treaty did not contain a specific paragraph in the definition of PE dealing with insurance companies. Therefore, the cases turned on standard language found in treaties based on the OECD Model, which included whether the USA company have a fixed place of business in Canada.

In Knights, the taxpayer (Knights) was an organisation based in New Haven, USA. It ran an insurance business in the USA and Canada through agents. The chief agent in Canada was responsible for recruiting and administering general agents, whose main business in turn was recruiting and administering general field agents. Field agents operated from their own houses and generally went to visit prospects and customers at their homes or elsewhere. At their own homes, the field agents kept their records and ran their businesses. Once a prospect was signed up, the insurance proposal was sent to New Haven where it was examined by the headquarters staff and accepted, either with or without further inquiry, or rejected.

Miller J found in favour of the taxpayer that the field agents' home offices were not a fixed place of business PE.

Miller J provided that for the field agent's office to be a fixed place of business PE for the Knights, there must be:

(i)      a place of some permanence

(ii)     that is a place of business, and

(iii)   through which the Knight's business is carried on.

Miller J confirmed that the home offices are a place of permanence and also that they are places of business as the field agents organised their business activities, arranged for their solicitation meetings with potential applicants, kept records, completed reports and did what commission salespeople do, other than the actual face-to-face solicitation, at their home offices. Therefore, the question turned on the third condition.

Miller J stated at paragraph 78 with regard to 'at the disposal':

For the field agents' residences to be considered fixed places of business of the Knights of Columbus, the Knights of Columbus must have a right to disposition over these premises. A right of disposition is not a right of the Knights of Columbus to sell an agents' house out from under him. The Knights of Columbus might be viewed as having the agents' premises at its disposal, for example, if the Knights of Columbus paid for all expenses in connection with the premises, required that the agents have that home office and stipulate what it must contain, and further required that the clients were to be met at the home office and in fact the Knights of Columbus' members were met there. In such circumstances, although the Knights of Columbus may not have a key to the premises, the premises might be viewed as being at the disposal of the Knights of Columbus.

Further factors were provided at paragraph 79 and included that the Knights make no operational decisions at the field agent's premises, had no officers, directors or employees visit the home offices, and all risks connected with carrying on business at the home offices were borne by the agents. Inherent in the analysis is a consideration of whose business the agent is carrying on from the home office.

In AIL, the taxpayer was an insurance company based in the USA (AIL) and which operated in Canada in a similar way to the facts in Knights.

AIL is an American insurance company carrying on insurance business in the USA, New Zealand and Canada. AIL does not operate through a separate company in Canada, but utilises a hierarchy of agents. The fixed place of business for the agents was their home office.

In relation to the fixed place of business PE, Miller J noted at paragraph 47:

2. The enterprise need not own or lease property for it to be a fixed place of business.

3. The premises need not be used exclusively by AIL.

4. To determine if AIL's business is being carried on from the fixed place of business, the following factors should be considered:

•         use of premises by AIL

•         control by AIL over premises

•         legal right to exercise control over premises

•         degree to which premises identified with AIL business

•         who paid for expenses of premises

•         who paid for equipment used at premises

•         who made management decisions

•         what contracts were concluded from premises

•         what AIL products were kept on premises

•         did AIL have any Canadian employees

•         who bore the risk of the operation from premises

•         how many principals were represented by the agent

•         were agents subject to detailed instructions of comprehensive control.

The factors that Miller J relied on in concluding the home offices were not a fixed place of business PE of AIL are contained at paragraph 56 and 57:

56. ...

•         None of the executive, managerial or operational decisions in respect of AIL's business were made in the office of any subordinate agents; such decisions were made in the appellant's office in the United States.

•         None of AIL's directors, officers or managers were located in the offices of any agent.

•         The appellant does not own or rent any of the home offices or other facilities in Canada out of which an agent works.

•         Those assets that AIL does maintain in Canada, for example financial assets, are maintained in order to comply with Canada's insurance laws, and not kept in any agent's offices.

•         There is no space in any of the subordinate agent's offices at the disposal of employees of the appellant, who would have no occasion to visit a home office in any event.

•         AIL's agents in Canada are independent contractors.

•         The agents incur the expenses required to maintain and operate their home offices, and the appellant does not reimburse them for such expenses.

•         The agents maintain their own books and records and are responsible for the preparation of their own financial information for tax and other business purposes.

•         To the extent that agents negotiate their level of sales commissions, the negotiations take place with a provincial general agent, not with the appellant.

•         Agents undertake all of the risk inherent in their own business.

•         Agents have no involvement in the appellant's decisions regarding whether, and in what terms, the appellant will accept or reject risks.

•         Agents are not involved in the issuance of insurance policies, ongoing premium collection, policy renewals or the evaluation or payment of claims.

57. I conclude it is the agent's business being carried on out of the home office, notwithstanding the exclusivity of the product.

It can be construed from the above case law and ATO view documents, being ATO ID 2006/263 and ATO ID 2005/289, that the Commissioner considers a home office is 'at the disposal' of an enterprise if the following factors are present:

•         the business of the enterprise is carried on through the home office

•         management decisions are made in the home office i.e., decisions regarding the control and direction of the enterprise

•         customers / clients of the business are located in the same country as the home office and attend the home office

•         the enterprise pays expenses connected with the home office

•         the enterprise stipulates what the home office must contain e.g., display signage of the enterprise

•         the enterprise supplies the equipment used in the home office

•         assets / records of the enterprise are located in the home office, and

•         perhaps most importantly, and consistent with OECD Commentary, the individual is required to work from their home office.

In this case, Foreign LLP does not have an office in Australia and Mr ABC performs his role as an employee of Aus Co and partner of Foreign LLP from his home office in Australia (when Mr ABC is in Australia) and from the offices of Foreign LLP when in DEF Country.

Mr ABC works from his home office because he wants to spend time with his family who recently started to reside in Australia. Foreign LLP / Aus Co do not require Mr ABC to work from his home in Australia but instead merely allow Mr ABC to do so.

The mere fact that employees work from their home does not mean their home is at the disposal of their employer. The factors outlined above need to be considered before a conclusion can be reached.

Each of the above factors are considered below.

Business of the enterprise

Mr ABC / Aus Co's activities that are conducted in the home office are limited to:

•         preparation and delivery of informal legal advice to clients overseas (none of whom receive Australian legal advice)

•         preparation of formal advice to be delivered to clients when Mr ABC returns to DEF Country (none of whom receive Australian legal advice)

•         emails / phone calls with clients (none of whom receive Australian legal advice), and

•         ad hoc non-core partnership duties that arise, including staffing matters that arise from time to time or Revenue Committee calls.

Mr ABC / Aus Co are distinguishable from the facts outlined in ATO ID 2006/263 and ATO ID 2005/289 where the ATO determined there was a PE on the basis that whilst Foreign LLP may have clients located in Australia, Mr ABC / Aus Co has not performed a customer relationship / engagement role with clients connected to Australia and there is no intention for Mr ABC / Aus Co to perform such role.

Unlike the scenarios in the ATO IDs, the work performed by Mr ABC / Aus Co has no temporal connection to Australia. Rather, Mr ABC has merely performed tasks connected to overseas clients that contribute to the delivery of Foreign LLP's operational activities and ad hoc non-core partnership duties whilst in the home office.

It is therefore arguable that the business of Foreign LLP is not being carried on through the home office, Mr ABC is merely located in the home office when he is undertaking tasks in connection with the business of Foreign LLP carried on overseas.

Management decisions

Whilst a limited liability partner of Foreign LLP, Mr ABC does not hold any formal management positions and any partnership duties that arise for Mr ABC in Australia are ad hoc and non-core matters.

Therefore, no Foreign LLP management decisions comprising the control and direction of Foreign LLP are made in the home office.

Location of clients

Whilst an insignificant portion of Foreign LLP's clients have been located in Australia, Foreign LLP does not provide, and there is no intention that Foreign LLP will provide, Australian legal advice or enter the Australian market.

Further, Mr ABC has not advised any Australian clients whilst he has been in Australia and no Australian clients have or will attend the home office.

The work performed by Mr ABC / Aus Co in the home office therefore has had no direct connection with Australian clients.

Home office expenses

Mr ABC will be liable for all home office expenses.

Signage

Neither Foreign LLP nor Aus Co require Mr ABC to display their signage at the home office.

Home office equipment

In Australia, Mr ABC uses the same Foreign LLP laptop he carries with him when travelling (i.e., Foreign LLP provide the laptop) and uses a standard Foreign LLP VPN connection regardless of where he is located.

Mr ABC has the same access to Foreign LLP resources while he is physically located in Australia (or elsewhere in the world) and access is through the same user login details.

Mr ABC uses separate mobile phones when in DEF Country and Australia.

With regards to the other home office equipment and the Australian mobile, Mr ABC / Aus Co are solely responsible for the equipment.

All other equipment that Mr ABC uses regularly is located in DEF Country and the responsibility of Foreign LLP.

Assets / records

Mr ABC stores certain records related to Aus Co in the home office, including copies of the Aus Co constitutional documents, his Australian practising certificate and Aus Co's professional indemnity insurance.

Most client advice is provided by email and stored electronically on Mr ABC's laptop or the Foreign LLP computer system. Other than the laptop and the records on the laptop, no assets of Foreign LLP are stored in the home office.

Requirement to work from the home office

Foreign LLP have set up this arrangement with Mr ABC / Aus Co so that Mr ABC is able to spend more time in Australia with his family. Foreign LLP do not require Mr ABC to work from the home office. Rather, Foreign LLP are merely allowing / facilitating Mr ABC to work from the home office.

Conclusion

In accordance with the above, it is reasonable to conclude that Mr ABC's home office in Australia does not constitute a fixed place of business PE of Foreign LLP.

As a fixed place of business PE has been determined not to exist, it is necessary to consider whether Foreign LLP has a dependent agent PE in Australia.

Dependent Agent PE

In order to determine whether Foreign LLP has a dependent agent PE in accordance with Article 5(4) of the Convention, it is necessary to first consider whether Mr ABC / Aus Co has authority to conclude contracts on behalf of Foreign LLP and that that authority is habitually exercised.

If that authority exists and is habitually exercised, it is then necessary to consider whether Mr ABC / Aus Co:

1. is not an independent agent, and
2. their activities are not limited to those contained in Article 5(3) of the Convention.

These requirements are considered below.

The OECD Commentary provides the following in respect of the meaning of 'conclude contracts' at paragraphs 87 and 88:

The phrase "concludes contracts" focusses on situations where, under the relevant law governing contracts, a contract is considered to have been concluded by a person. A contract may be concluded without any active negotiation of the terms of that contract; this would be the case, for example, where the relevant law provides that a contract is concluded by reason of a person accepting, on behalf of an enterprise, the offer made by a third party to enter into a standard contract with that enterprise. Also, a contract may, under the relevant law, be concluded in a State even if that contract is signed outside that State; where, for example, the conclusion of a contract results from the acceptance, by a person acting on behalf of an enterprise, of an offer to enter into a contract made by a third party, it does not matter that the contract is signed outside that State. In addition, a person who negotiates in a State all elements and details of a contract in a way binding on the enterprise can be said to conclude the contract in that State even if that contract is signed by another person outside that State.

...The phrase ["concludes contracts"] must be interpreted in light of the object and purpose of paragraph 5, which is to cover cases where the activities that a person exercises in a State are intended to result in the regular conclusion of contracts to be performed by a foreign enterprise, i.e. where the person acts as the sales force of the enterprise. The principal role leading to the conclusion of the contract will therefore typically be associated with the actions of the person who convinced the third party to enter into a contract with the enterprise....where such principal role is performed in that State, the actions of that person will fall within the scope of paragraph 5 even if the contracts are not formally concluded in the State, for example, where the contracts are routinely subject, outside that State, to review and approval without such review resulting in a modification of key aspects of these contracts.

In Case 23/93 (1993) 26 ATR 1056, the AAT held that a husband and wife resident in New Zealand, who invested in Australian securities through a share dealer employed by a Sydney stockbroking firm, were carrying on business through a dependent agent PE in Australia.

Relevantly, the dealer had the husband's general power of attorney and arranged contracts of sale or purchase and, on occasions, signed transfer forms in the name of the husband and wife. The dealer also operated cash management accounts in the couple's name, which were used for holding surplus funds from the share trading enterprise as well as interest and dividends, which were used for reinvestment. All interest income derived by the taxpayers was earned as a result of the accounts opened by the dealer in their names. The dealer kept in regular contact with the couple and usually telephoned them before the purchase / sale of shares. However, in the absence of a call, the dealer would telephone after the event to tell them what he had bought / sold.

The taxpayers submitted that their share trading was carried on through a broker / independent agent in the ordinary course of business. The Commissioner, however, submitted that the dealer habitually exercised an authority to conclude contracts on behalf of the couple in Australia and, therefore, the dealer was deemed to be a PE under Article 4(5) of the Convention between Australia and New Zealand for the Avoidance of Double Taxation with Respect to Taxes on Income an Fringe Benefits and the Prevention of Fiscal Evasion [2010] ATS 10 (the wording of which is similar to the Article 5 of the Convention i.e., 'habitually exercises ... an authority to conclude contracts on behalf of the enterprise').

The AAT held that the dealer habitually exercised in Australia an authority to conclude contracts on behalf of the taxpayers in their share trading activities. Whilst the dealer was little more than the Australian end of the applicant's share trading enterprises, the dealer habitually exercised his authority as an attorney and agent to conclude contracts on their behalf.

In Unisys Corporation Inc V FC of T [2002] NSWSC 1115, the NSW Supreme Court considered whether a USA Corporation had a PE in Australia.

Gzell J held that the existence of a general authority to conclude contracts was not sufficient to constitute a permanent establishment. In this case, the only contracts executed that constituted the business activity were a licence and sub-licence agreement in relation to intellectual property. There was not a sufficient repetition of contractual activity to constitute the habitual exercise of a general authority to conclude contracts.

Relevantly, paragraphs 67 to 69 of the judgment state:

67. Klaus Vogel on Double Taxation Conventions, 3rd ed, Kluwer, London, 1997 at 332-333, points out 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 agent being taxed. An additional requirement is that his activities have a certain permanence that is why, Professor Vogel says, there is the additional requirement in the OECD models that the authority to conclude contracts must be exercised habitually. 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. Professor Vogel says that in cases of doubt, the continuity of such a person's exercise of authority should be measured by application of the same criteria as those applied under the general permanent establishment concept laid down in art 5(1). The decisive factor in this case is whether the activity was, from the outset, devised for a lengthy period or only as a temporary expedient. He points to a decision of the Norwegian Høyesterett in which an agent who merely extended a contract on three successive occasions, was held not to have habitually exercised that authority.

68. In Huston J and Williams L, Permanent Establishments a planning primer Kluwer, Boston, 1993 at 90 the authors state that the mere possession of the requisite authority is not sufficient. It must be exercised regularly or habitually. Even a general power of attorney is not sufficient if not regularly exercised. The relevant authority is that which is exercised, not that which is given.

69. 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 outlined above, the mere authority to conclude contracts on behalf an enterprise is not sufficient on its own to constitute a dependent agent PE. The authority must actually be performed by the agent and exercised habitually.

Mr ABC has not concluded any contracts on behalf of Foreign LLP whilst he has been in Australia and it is the intention of both Foreign LLP and Aus Co that Mr ABC will not conclude contracts on behalf of Foreign LLP whilst Mr ABC is in Australia in the future.

Mr ABC may have ad hoc discussions with clients about potential engagements while he is in Australia, however, any client engagement letters will be signed by another partner of Foreign LLP. Given the nature of Mr ABC's work that involves large projects expanding several years, new engagements and fee negotiations are relatively infrequent, and the expectation is that Mr ABC will be able to do most of this while physically located in DEF Country.

Whilst Mr ABC technically does have authority to conclude contracts on behalf of Foreign LLP whilst he is in Australia given that he is a partner of Foreign LLP, Mr ABC has not exercised that authority and there is no intention that Mr ABC will exercise that authority in the future.

As Mr ABC does not habitually exercise the authority to conclude contracts on behalf of Foreign LLP, it is not necessary to consider whether Mr ABC / Aus Co is an independent agent or whether the activities performed in Australia are limited to those contained in Article 5(3) of the Convention.

It is therefore reasonable to conclude that Mr ABC / Aus CO does not constitute a dependant agent PE of Foreign LLP in Australia.

Conclusion

Foreign LLP does not have either a fixed place of business PE or dependent agent PE in Australia.