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Deemed Permanent Establishment, But Not Carrying On Business

2009-05-01

The Australian Tax Office (“ATO”) recently held that a U.S. resident head lessor had a deemed permanent establishment in Australia under Article 5, paragraph 4(b) of the Australia-U.S. Income Tax Treaty (the “Treaty”).  However, because the U.S. resident was not carrying on business in Australia, Australia was precluded, under Article 7, paragraph 1 of the Treaty, from taxing the business profits of the U.S. resident.  See ATO Interpretive Decision 2009/21.

Permanent Establishment

Article 5, paragraph 4 of the Treaty provides in part:

[A]n enterprise of one of the Contracting States shall be deemed to have a permanent establishment in the other Contracting State if: . . . (b) it maintains substantial equipment for rental or other purposes within that other State (excluding equipment let under a hire-purchase agreement) for a period of more than 12 months.

The U.S. head lessor leased equipment to an Australian resident company who subleased the equipment to third parties in Australia.  The ATO held that the taxpayer was considered to be maintaining substantial equipment for rental purposes within Australia for a period of more than 12 months.  Accordingly, the taxpayer was deemed to have a permanent establishment in Australia in relation this equipment leasing activity.

Carrying On Business

Article 7, paragraph 1 of the Treaty provides in part:

The business profits of an enterprise of one of the Contracting States shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein.

The ATO provided that where the lease contracts are entered into outside Australia and the activities of the lessor in Australia only consist of the drafting of the lease but not the receipt of lease rentals, the mere leasing of equipment by the U.S. lessor in Australia does not, of itself, constitute the carrying on of business in Australia through the deemed permanent establishment.  The ATO stated that for business to be carried on in Australia through the deemed permanent establishment, a US lessor would need undertake more activities within Australia, for example, undertaking inspection or maintenance checks on the equipment in Australia, or conducting lease negotiations in Australia.

As a result, Australia was precluded from taxing the business profits of the U.S. head lessor under the Treaty.

Andrew Mitchel is an international tax attorney who advises businesses and individuals with cross-border activities.

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