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4.2.1. Threshold and Tests

The same tests explained above are applicable in the determination of the existence or otherwise of a foreign permanent establishment of an Australian resident entity apply in determining the Australian permanent establishment of a foreign resident entity. The above tests will be modified to the extent that the provisions of an applicable tax treaty differ from those of domestic law.

Note, however, that for purposes of Australia’s domestic transfer pricing regime, a permanent establishment includes a place at which any property of the taxpayer is manufactured or processed for the taxpayer, whether by the taxpayer or another person.

COVID-19 Emergency Measures

The ATO has updated the guidance on working out the residential status of foreign incorporated companies and whether the presence of their employees in Australia may create a permanent establishment due to the travel disruptions arising from the COVID-19 emergency.

The guidance provides that the foreign company will not be considered as having a permanent establishment in Australia if the following conditions are satisfied:

  • The foreign company did not have a permanent establishment in Australia before the effects of COVID-19;
  • There are no other changes in the company's circumstances;
  • The unplanned presence of employees in Australia is the short-term result of them being temporarily relocated or restricted in their travel solely because of COVID-19;
  • The presence of employees in Australia is because they are temporarily relocated or restricted in their travel due to COVID-19 and will relocate overseas as soon as practicable following the relaxation of the international travel restrictions; and
  • The company has not recognized those employees as creating a permanent establishment or generating Australian source income in Australia for the purpose of the tax laws of another jurisdiction.

The ATO has clarified that the above approach applies until 31 December 2021 (extended from 30 June 2021) and will not be extended further. From 1 January 2022, the companies are  required to consider whether their ongoing arrangements give rise to any permanent establishment in Australia. Companies are advised to contact the ATO and apply for early engagement to discuss the taxation consequences of their ongoing arrangements beyond 31 December 2021.

The ATO has also updated its Taxation Ruling (TR 2002/5) on permanent establishments with effect from 1 March 2020 to provide that a period of six months or more might not constitute a permanent establishment in Australia in certain extraordinary circumstances such as the COVID-19 pandemic. For example, the international travel restrictions and government-mandated lockdowns globally during the COVID-19 pandemic resulted in many businesses having employees present in Australia when they would ordinarily have been located outside of Australia, and therefore, in some situations, a forced presence in Australia for more than six months was considered temporary.