Edited version of private advice

Authorisation Number: 1052235761896

Date of advice: 27 March 2024

Ruling

Subject: Permanent establishments

Question 1

Does the Applicant have a permanent establishment in Australia as a result of the CEO being located in Australia under Article 5 of the XYZ Convention (the Convention)?

Answer

No.

Question 2

Does the Applicant have a permanent establishment in Australia as a result of the CEO being located in Australia under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No.

This ruling applies for the following period:

XXXX

The scheme commenced on:

XXXX

Relevant facts and circumstances

The Applicant

1.    The Applicant is a services company incorporated in and is a resident of Country X under Country X's income tax law.

2.    The Applicant is a wholly owned subsidiary of Parent Co, a company incorporated in Country Y.

3.    The Applicant has a number of key brands in their responsible region (the Group Companies).

4.    The Applicant has YY subsidiaries that are incorporated in Australia, some of which have offices situated in Australia.

5.    All Australian subsidiaries operate independently from one another, each having their own directors and management teams and filing Australian tax returns on a standalone basis.

6.    The Applicant charges management fees for group costs incurred relating to the Australian subsidiaries. However, the Applicant does not directly engage with clients located in Australia in its own capacity.

Working arrangements

7.    The Applicant has XX direct employees in Country X and XX direct employees in Australia, including the CEO of the Applicant.

8.    The Applicant has an office in Country X with sufficient seating and facilities to accommodate all direct employees located in Country X.

9.    The Applicant does not have an office location in Australia.

10.  Under the Applicant's working from home policy, employees may predominantly work from home, with time in the office generally no more than two days a month.

The CEO

11.  The CEO and their family formerly resided in Country X.

12.  In XXXX, the CEO and their family returned to Australia for personal reasons.

13.  The CEO has been working from their family home in Australia since their return. The property is owned by the CEO and the Applicant does not reimburse them for the costs incurred from working from home or provide any costs towards the property.

14.  The CEO's function is to direct, control and administer the day-to-day activities of Group Companies, provide direction to staff in executing the agreed plans of Group Companies, and report to the board of directors regarding the activities of Group Companies against agreed goals and budgets.

15.  The CEO's duties fall under the following categories:

a.    policy, planning and strategic activities.

b.    external relationship management.

c.     staff supervision, training and development.

d.    contribution to Group Companies.

16.  In addition, the CEO is also responsible for:

a.    duties generally and reasonably expected of someone with the title of the Executive,

b.    all ancillary responsibilities, tasks and actions that the Executive might reasonably be expected to perform in the course of Employment, and

c.     all related duties the Executive may owe to Group Companies.

17.  The CEO visits the office locations for the Applicant's subsidiaries both in Australia and overseas as part of their role. However, they do not have a dedicated office space in any of the Australian subsidiaries' premises.

18.  The CEO is not involved in the day-to-day operations or management of any of the Australian or overseas subsidiaries, being responsible for the Group Companies as a whole.

Company decision-making

19.  The sole shareholder of the Applicant is Parent Co, with a separate board of directors to the Applicant.

20.  The board of directors of Parent Co makes final decisions on key matters concerning the Applicant as well as its global portfolio of subsidiaries.

21.  Under a formal policy, Parent Co has delegated certain levels of decision-making authority to the Applicant and the Applicant's subsidiaries. The policy defines which level can approve specified transaction types and the dollar value of a transaction that may be authorised:

a.    the board of directors of the Applicant has delegated authority from Parent Co to make decisions on a limited range of matters, which include entering into contracts. More substantive matters require approval from the board of Parent Co, including where the transaction amount is over $600,000.

b.    the CEO has been delegated limited decision-making authority from Parent Co where the transaction amount is less than $100,000. There is strict adherence to the CEO's delegated decision-making authority.

Entering contracts

22.  The nature of contracts entered into by the Applicant include:

a.    signing employment contracts,

b.    employee bonus letters,

c.     audit fees,

d.    consultant engagement fees for system implementation,

e.    IT system subscriptions, and

f.      purchases of employee-related merchandise (e.g. chargers, caps, polo t-shirts).

23.  Of the above-mentioned contracts:

a.    the Applicant enters into approximately 20 contracts per year.

b.    the CEO alone enters into approximately 10 contracts per year on behalf of the Applicant. The nature of the contracts entered into by the CEO alone relate only to the Applicant's employees (e.g. signing employment contracts and employee bonus letters as a matter of protocol).

Board approval process

24.  The board of directors of the Applicant comprises 4 directors, including the Chairman (based in Country Y, who is also the CEO of Parent Co), the CEO, and 2 directors who are based in Country X.

25.  Most board meetings for the Applicant are held virtually, with each director physically present in the country which they are based for these meetings.

26.  The voting of the board of directors is based on a simple majority. When a vote of the board of directors results in a split decision, the Chairman may cast a deciding vote.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 6

International Tax Agreements Act 1953 Section 7

The Convention Article 5

Reasons for decision

Question 1

Does the Applicant have a permanent establishment (PE) in Australia as a result of the CEO being located in Australia under Article 5 the Convention?

Summary

The Applicant does not have a PE in Australia as a result of the CEO being located in Australia under Article 5 of the Convention.

Detailed reasoning

Permanent Establishments

1. The term 'permanent establishment' is defined in Article 5(1) of the Convention as 'a fixed place of business through which the business of the enterprise is wholly or partly carried on'.
2. Article 5(2) of the Convention (as amended by the first amending protocol) states that a 'permanent establishment' includes:

(a)  a place of management;

(b)  a branch;

(c)   an office;

(d)  a factory;

(e)  a workshop; and

(f)    a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.

3. Article 5(5) provides that a PE may also exist where an enterprise carries on a business in Australia through a person (other than an independent agent) who has authority to conclude contracts on behalf of that enterprise and habitually exercises that authority in Australia.
4. For present purposes therefore, the Convention provides a two-pronged analysis to the question of whether the Applicant has a PE in Australia, being:
   1. a 'fixed place of business PE' as a result of the CEO being located in Australia (Article 5(1) of the Convention), and
   2. a 'dependent agent PE' as a result of the CEO being located in Australia (Article 5(5)) of the Convention).

Does the Applicant have a 'fixed place of business PE' in Australia?

5. To determine whether the Applicant has a fixed place of business PE under Article 5(1) of the Convention, it is necessary to consider whether the CEO's home office is a fixed place of business through which the business of the Applicant is wholly or partly carried on.
6. Taxation Ruling TR 2002/5 Income tax: Permanent establishment - What is 'a place at or through which [a] person carries on any business' in the definition of permanent establishment in subsection 6(1) of the Income Tax Assessment Act 1936? (TR 2002/5) provides the Commissioner's interpretation of the phrase 'a place at or through which a person carries on any business' in the context of subsection 6(1).
7. Having regard to the context in which the definition arose, TR 2002/5 provides that the Commissioner should interpret this phrase to include the concept of geographical permanence (i.e. there must be a place of business) and temporal permanence (i.e. the business must operate at that place for a period of time) to ensure the meaning is broadly consistent with Australia's tax treaties.
8. The relevant OECD Commentaries, previous ATO decisions and international case law all provide important interpretive guidance on this analysis.

OECD Commentaries

9. 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. Paragraph 104 of TR 2001/13 provides that:

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

10. Paragraph 6 of the commentary on Article 5 of the Model Tax Convention on Income and on Capital 2017 (2017 OECD Model Convention) contains the following conditions for the existence of a permanent establishment:

•        the existence of a 'place of business', i.e. a facility such as premises or, in certain instances, machinery or equipment

•        this place of business must be 'fixed', i.e. it must be established at a distinct place with a certain degree of permanence, and

•        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.

11. Paragraph 10 of the commentary on Article 5 of the 2017 OECD Model Convention also states (emphasis added):

The term "place of business" covers any premises, facilities or installations used for carrying on the business of the enterprise whether or not they are used exclusively for that purpose. A place of business may also exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal. It is immaterial whether the premises, facilities or installations are owned or rented by or are otherwise at the disposal of the enterprise.

12. Paragraph 12 of the commentary on Article 5 of the 2017 OECD Model Convention states (emphasis added):

Whether a location may be considered to be at the disposal of an enterprise in such a way that it may constitute a "place of business through which the business of [that] enterprise is wholly or partly carried on" will depend on that enterprise having the effective power to use that location as well as the extent of the presence of the enterprise at that location and the activities that it performs there.

13. Paragraph 18 of the commentary on Article 5 of the 2017 OECD Model Convention helpfully elaborates on the interpretation of a fixed place of business in the context of home offices, stating 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.

Whether or not a home office constitutes a location at the disposal of the enterprise will depend on the facts and circumstances of each case. In many cases, the carrying on of business activities at the home of an individual (e.g. an employee) will be so intermittent or incidental that the home will not be considered to be a location at the disposal of the enterprise (see paragraph 12 above). Where, however, 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 to carry on the enterprise's business (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 to be at the disposal of the enterprise.

14. Paragraph 19 of the commentary on Article 5 of the 2017 OECD Model Convention provides the following examples:

A clear example is that of a non-resident consultant who is present for an extended period in a given State where she carries on most of the business activities of her own consulting enterprise from an office set up in her home in that State; in that case, that home office constitutes a location at the disposal of the enterprise. Where, however, a cross-frontier worker performs most of his work from his home situated in one State rather than from the office made available to him in the other State, one should not consider that the home is at the disposal of the enterprise because the enterprise did not require that the home be used for its business activities.

15. Furthermore, in providing interpretive clarification on the relevance of the examples of a PE listed in Article 5(2) of the Model Convention, the OECD published the following in 2019:

The Committee discussed whether a roving business can be deemed to have a "place of management" in the country in which it operates, even if it has no office or other fixed place at which the management activity is carried out.

It concluded that the examples listed in paragraph 2 are intended to be illustrations of the principle stated in paragraph 1, and that a "place of management" must meet the "fixed place of business" standard in order to qualify as a permanent establishment under that paragraph. In the circumstances described, therefore, the business in fact has no "place of management" within the meaning of Article 5, even if all the management activities take place within the country of its operations.[1]

Previous ATO decisions

16. The Commissioner has considered the issue of home office PEs on a number of occasions.
17. In ATO Interpretive Decision ID 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.
18. 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 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.
19. 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:

...it appears that it 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' of his in the United States within the treaty definition of and meaning in Article 7 of that term.

20. In ATO Interpretive Decision ID 2005/289 Income tax Assessability of income derived by a New Zealand resident company (ATO ID 2005/289), the taxpayer was a New Zealand resident company (NZ Co) who sold company products in Australia via two sales employees working from home offices in Australia. NZ Co did not own or rent any premises in Australia, however the employees were provided a vehicle, computer, telephone and a fax machine and acted as the contact persons for NZ Co in Australia. The employees received bonus payments per quarter based on average sales over the period.
21. 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.
22. Relevant to the decisions reached in ATO ID 2006/263 and ATO ID 2005/289 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.

International case law

23. Paragraph 119 of TR 2001/13 provides that foreign court decisions on identical or similar treaty provisions may give valuable guidance about the meaning of a term.
24. Given the definition of PE contained in Article 5 of the Convention is identical in substance to the Article 5 definition of PE contained in the Convention between Canada and the United States of America with respect to Taxes on Income and on Capital (US-Canada Treaty), court decisions in these jurisdictions that have considered Article 5 may provide useful interpretive guidance.
25. The Tax Court of Canada considered the meaning of 'permanent establishment' in Article 5 of the 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'.
26. 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 had a fixed place of business in Canada.
27. 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.
28. Miller J found in favour of the taxpayer that the field agents' home offices were not a fixed place of business PE.
29. 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.

30. 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.
31. 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.

32. 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.
33. 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.
34. AIL did not operate through a separate company in Canada, but utilised a hierarchy of agents. The fixed place of business for the agents was their home office.
35. In relation to the fixed place of business PE, Miller J noted at paragraph 47:

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.

36. 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:

•         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.

Application

37. It is clear from the facts that the CEO's home office is fixed with a certain degree of permanence (both geographical and temporal), given the home office has been used on a continuous basis for carrying on business activities for the Applicant since XXXX.
38. It is also clear that the business of the Applicant is carried on through the CEO's home office, given the CEO performs core functions (i.e. directs, controls and administers the day-to-day activities of the group) via their home office.
39. The key question to be considered therefore is whether the CEO's home office is 'at the disposal' of the Applicant, in such a way that it may constitute a place of business through which the business of the Applicant is wholly or partly carried on.
40. It can be construed from the OECD Commentaries, previous ATO decisions and international case law that in determining whether a place of business is 'at the disposal' of an enterprise, it is important to consider whether:

•         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.

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

41. In applying the above considerations to the facts of this case, the following factors support the conclusion that the CEO's home office is at the disposal of the Applicant:

•         the business of the Applicant is being carried on through the CEO's home office in Australia. This is supported by the fact that the CEO's duties and functions (i.e. to direct, control and administer the day-to-day activities of Group Companies, provide direction to staff in executing the agreed plans of Group Companies, and report to the board of directors in regard to the activities of Group Companies against agreed goals and budgets) contribute to and are critical to the delivery of the Applicant's operational activities.

•         the CEO participates in management decisions comprising the control and direction of the Applicant, including decisions involving policy, planning and strategic activities, external relationship management, and staff supervision, training and development. The CEO also has delegated authority to execute contracts on behalf of the Applicant under $YYY,000.

42. However, the following factors support the conclusion that the CEO's home office is not at the disposal of the Applicant:

•         the Applicant does not require the CEO to work from the home office. Rather, the Applicant is merely allowing/facilitating the CEO to work from the home office. The Applicant has set up this arrangement with the CEO so that the CEO is able to spend more time in Australia with their family.

•         the Applicant has an office in Country X with sufficient seating and facilities to accommodate all direct employees located in Country X.

•         the Applicant does not reimburse the CEO for costs incurred from working from home or provide any costs towards the property, nor does the Applicant stipulate what the home office must contain.

•         the CEO is solely responsible for all home office equipment.

•         the CEO's home address is not listed as a place of business on the website of the Applicant or in the email signature of the CEO. The home retains its character as a private residence.

•         the CEO does not directly engage with clients located in Australia in their own capacity. However, the Applicant charges management fees for group costs incurred relating to the Australian subsidiaries.

Conclusion

43. On balance, whilst it is arguable that the business of the enterprise is being carried on through, and that key management decisions are being made from the home office, it is not 'at the disposal' of the Applicant given the factors considered above.
44. The present case can be distinguished from the decisions reached in ATO ID 2006/263 and ATO ID 2005/289 given the Applicant does not have clients/customers located in Australia nor has the Applicant required the CEO to work from the home office.
45. Furthermore, whilst the CEO's home office is a clear example of a 'place of management' as listed in Article 5(2) of the Convention by virtue of the functions and duties performed by the CEO from that location, it will not qualify as a PE given it is not 'at the disposal' of the Applicant.
46. In accordance with the above, it is therefore reasonable to conclude that the CEO's home office in State XX does not constitute a fixed place of business PE of the Applicant.

Does the Applicant have a 'dependent agent PE' in Australia?

47. Given a 'fixed place of business PE' has been determined not to exist, the next step is to consider whether the Applicant has a 'dependent agent PE' in Australia.
48. In accordance with Article 5(5) of the Convention, it is necessary to first consider whether the CEO has authority to conclude contracts on behalf of the Applicant and that that authority is habitually exercised.
49. If that authority exists and is habitually exercised, it is then necessary to consider whether:
    1. the CEO is an independent agent, and
    2. the CEO's activities are limited to those contained in Article 5(4) of the Convention.

Authority to conclude contracts

50. Paragraph 97 of the commentary on Article 5 of the 2017 OECD Model Convention states:

The contracts referred to in paragraph 5 cover contracts relating to operations which constitute the business proper of the enterprise. It would be irrelevant, for instance, if the person concluded employment contracts for the enterprise to assist that person's activity for the enterprise or if the person concluded, in the name of the enterprise, similar contracts relating to internal operations only.

51. Paragraphs 87 and 88 of the commentary on Article 5 of the 2017 OECD Model Convention provide the following in respect of the meaning of 'conclude contracts' (emphasis added):

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.

Habitually exercised

52. As outlined above, the mere authority to conclude contracts on behalf of 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.
53. Paragraph 98 of the commentary on Article 5 of the 2017 OECD Model Convention states:

The requirement that an agent must "habitually" exercise an authority to conclude contracts reflects the underlying principle in Article 5 that the presence which an enterprise maintains in a Contracting State should be more than merely transitory if the enterprise is to be regarding as maintaining a permanent establishment, and thus a taxable presence, in that State. The extent and frequency of activity necessary to conclude that the agent is "habitually" concluding contracts or playing the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise will depend on the nature of the contracts and the business of the principal. It is not possible to lay down a precise frequency test.

54. 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.
55. Gzell J held that the existence of a general authority to conclude contracts was not sufficient to constitute a PE. 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.
56. Relevantly, paragraph 67 of the judgment states (emphasis added):

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.

Application

Authority to enter contracts

57. Under Parent Co's formal delegation policy, the CEO has authority to conclude contracts alone where the transaction amount is less than $100,000. However, the nature of the contracts entered by the CEO alone do not relate to the business proper operations of the Applicant as a services company, but rather the internal operations of the Applicant (e.g. signing employment contracts and employee bonus letters as a matter of protocol).

Habitually exercised

58. For a dependent agent PE to exist, there is the additional requirement that the authority to conclude contracts must be exercised habitually.
59. As a services company, it is estimated that the Applicant enters less than 20 contracts each year. The nature of these contracts relates to audit fees, consultant engagement fees, IT system subscriptions and the purchase of employee-related merchandise. The CEO alone enters approximately 10 contracts each year on behalf of the Applicant relating to signing employment contracts and employee bonus letters as a matter of protocol.
60. Given the limited number of contracts entered into by the Applicant each year, it is arguable that the CEO's 10 additional contracts concluded per year demonstrates a habitual exercise of their authority to conclude contracts. However, given the CEO's authority to enter contracts relate only to the internal operations of the Applicant and not to its business proper, a dependent agent PE will not exist regardless of whether the CEO's authority is determined to be habitually exercised.
61. It is therefore reasonable to conclude that the Applicant does not have a dependent agent PE in Australia.

Conclusion

62. The Applicant does not have either a 'fixed place of business PE' or 'dependent agent PE' in Australia as a result of the CEO being located in Australia under Article 5 the Convention.

Question 2

Does the Applicant have a PE in Australia as a result of the CEO being located in Australia under subsection 6(1) of the ITAA 1936?

Summary

The Applicant does not have a PE in Australia as a result of the CEO being located in Australia under subsection 6(1) of the ITAA 1936.

Detailed reasoning

63.  Subsection 6(1) of the ITAA 1936 defines PE as 'a place at or through which a person carries on any business.'

64. Paragraph 6(1)(a) provides that a PE includes 'a place where the person is carrying on business through an agent,' unless the person is carrying on business through an agent who does not have, or does not habitually exercise, a general authority to negotiate and conclude contracts on behalf of the person' (subparagraph 6(1)(f)(i)).
65. TR 2002/5 provides the Commissioner's interpretation of the meaning of the phrase 'a place at or through which [a] person carries on any business.'
66. Paragraph 9 of TR 2002/5 provides that (emphasis added):

The subsection 6(1) definition of PE is based on the concept of PE used in Australia's tax treaties. For the purposes of the definition of PE in subsection 6(1) 'a place at or through which [a] person carries on any business' is a reference to a place used for carrying on that person's business activities. That place must have an element of permanence, both geographic and temporal. Permanence must be construed in the context of each particular business and is a question of fact and degree. Permanent in this context does not mean forever.

67. Paragraph 33 of TR 2002/5 states that whether temporal permanence exists is a matter of fact and degree. However, as a guide, if a business operates at or through a place continuously for six months or more that place will be temporally permanent.

Application

68. The facts suggest that the CEO's home office is both geographically permanent (being a place through which key business activities of the Applicant are being carried by the CEO) and temporally permanent (given the home office has been used by the CEO on a continuous basis for carrying on business activities for the Applicant since XXXX).
69. However, given the subsection 6(1) definition of PE is based on the concept of PE in Australia's tax treaties, the 'fixed place of business' analysis in Question 1 is also applicable in this context. Therefore, for the same reasons outlined in Question 1, the CEO's home office will not constitute a PE under subsection 6(1) of the ITAA 1936 as it is not 'at the disposal' of the Applicant.
70. Furthermore, given the dependent agent wording contained in paragraph 6(1)(a) of the ITAA 1936 is similar in substance to the wording contained in the Convention, the dependent agent analysis in Question 1 also applies equally in this context. That is, given the CEO does not habitually exercise an authority to negotiate and conclude contracts relating to the business proper of the Applicant, the CEO's home office will not be deemed to be a PE under paragraph 6(1)(a).

Conclusion

71. The Applicant does not have a PE in Australia as a result of the CEO being located in Australia under subsection 6(1) of the ITAA 1936.

[1] OECD (2019), "Issues Arising under Article 5 (Permanent Establishment) of the Model Tax Convention", in Model Tax Convention on Income and on Capital 2017 (Full Version), OECD Publishing, Paris.