Permanent establishment in Australia: selling, staff and registration without a local company

A foreign company can owe Australian income tax without ever incorporating here, if it has a permanent establishment (PE) in Australia. Separately, the Corporations Act requires a foreign company that carries on business in Australia to register with ASIC. The two tests are different, and so is a third obligation that often arrives first: GST on sales to Australian consumers. This guide explains each, with the remote-employee scenario that most often trips up foreign groups, and when forming a subsidiary is the cleaner answer.

This is general information, not tax or legal advice. Whether a PE exists depends on detailed facts and, usually, a tax treaty. Speak to an adviser with cross-border experience before relying on any conclusion.

Three questions, three regimes

A company can trigger one without the others. A software seller with no Australian staff may need to register for GST but have no PE and no ASIC obligation. A company that leases a Sydney office will usually be caught by all three.

The domestic PE definition

Section 6(1) of the Income Tax Assessment Act 1936 defines a permanent establishment as a place at or through which a person carries on any business. Without limiting that, it includes:

• a place where the person carries on business through an agent
• a place where the person has, is using or is installing substantial equipment or substantial machinery
• a place where the person is engaged in a construction project
• in some related-party manufacturing and distribution arrangements, the place where goods are manufactured, assembled, processed, packed or distributed for the person.

It excludes, among other things:

• dealings through a bona fide commission agent or broker acting in the ordinary course of their business at a customary rate
• an agent who does not have, or does not habitually exercise, a general authority to negotiate and conclude contracts for the person
• a place maintained solely to purchase goods or merchandise.

The two agent exclusions only apply if the person does not otherwise carry on business at that place.

What 'a place' means in practice

The ATO's view of 'a place at or through which a person carries on any business' is in TR 2002/5. The ruling requires a distinct place with a degree of permanence, and the business being carried on through that place. On timing, it says that as a guide, a business operating at or through a place continuously for six months or more will have temporal permanence, but a shorter period can be enough if the connection with Australia is very strong.

One of its examples: a Hong Kong company sends four employees to train an Australian client's staff for six months, and the client gives them a room in its office. Because the room is at the company's disposal for six months and it carries on its business there, the ATO treats it as a place at or through which the company carries on business in Australia.

Tax treaties change the analysis

Where the foreign company is resident in a country that has a tax treaty with Australia, the treaty's PE article generally governs whether Australia can tax its business profits. Australia's treaties are listed on Treasury's income tax treaties page.

Treaty PE articles commonly cover:

• a fixed place of business, such as an office, branch or workshop
• a dependent agent, broadly a person in Australia with authority to conclude contracts for the company who habitually exercises it, which mirrors the agent wording in the domestic definition
• building, construction or installation projects that last longer than a period set in the treaty
• in some treaties, substantial equipment or services provided in Australia over a set period
• exclusions for certain limited activities, which vary by treaty.

The time periods and wording differ from treaty to treaty. Some of Australia's treaties have also been modified by the OECD Multilateral Instrument, and Treasury's list shows which. Don't apply one country's rule to another. Read the specific treaty with your adviser.

The remote employee problem

The most common modern PE question is a foreign company hiring one person to work from home in Australia. The risk depends on what the person does and how:

• Sales staff who sign deals. An employee with a general authority to negotiate and conclude contracts for the foreign company, who habitually exercises it, is the classic agent risk under both the domestic definition and treaty dependent agent rules.
• A fixed place at the company's disposal. A home office the company requires, pays for or relies on, or a co-working desk it rents, can start to look like a place of business, especially over long periods.
• Senior people running the business from here. If a group's directors or executives make the foreign company's key decisions from Australia, the question moves beyond PE to residency. See company tax residency and central management and control.
• Limited support roles. Some treaties exclude certain limited activities from the PE definition, which can help for narrow roles, but the boundary is fact-specific and treaty-specific.

During COVID-19, the ATO published a temporary approach for foreign companies whose employees were stuck in Australia because of travel restrictions. It applied to unplanned, short-term presence caused by the pandemic. It is not a general rule for deliberate remote hiring.

A PE is not the only issue a remote hire raises. The foreign employer may also have PAYG withholding, superannuation and state payroll tax obligations. Options such as an employer of record are compared in employer of record vs subsidiary, and payroll tax is covered in payroll tax for foreign-owned companies.

Corporations Act: 'carrying on business' and ASIC registration

Section 601CD of the Corporations Act 2001 says a foreign company must not carry on business in Australia unless it is registered. Section 21 says a body corporate with a place of business in Australia carries on business here. It also lists things that do not count on their own, including:

• holding directors' or shareholders' meetings, or other internal affairs
• maintaining a bank account
• effecting a sale through an independent contractor
• soliciting or procuring an order that becomes binding only when accepted outside Australia
• securing or collecting debts, or investing funds or holding property
• an isolated transaction completed within 31 days that is not one of a series of similar transactions.

Those are exclusions from the corporate law test only. They don't decide the tax PE question.

ASIC registers foreign companies and gives them an Australian Registered Body Number (ARBN). A registered foreign company must keep a registered office, display its name, appoint a local agent and report to ASIC. ASIC also says that if the foreign company forms an Australian subsidiary to conduct the business, and does not itself carry on business here, it does not have to register. ASIC recommends getting your own advice if you're unsure which applies. The local agent role is covered in local agent for a foreign company.

Anti-avoidance for large groups

The multinational anti-avoidance law (MAAL) targets schemes where a foreign entity supplies goods or services to Australian customers, an associated or commercially dependent Australian entity undertakes activities connected with the supply, the income isn't attributable to an Australian PE, and a principal purpose is an Australian tax benefit. The ATO's MAAL page says it applies to certain schemes from 1 January 2016.

The MAAL, and the diverted profits tax, apply only to significant global entities. Broadly, for income years from 1 July 2019, that means a global parent with annual global income of A$1 billion or more, or a member of its accounting-consolidated group. Most founder-led businesses expanding into Australia are well below that, but a subsidiary of a large group may not be.

GST for offshore sellers

GST can apply long before any PE or ASIC question. From 1 July 2017, GST applies to sales of imported services and digital products by overseas businesses to Australian consumers, according to the ATO's guidance on imported services and digital products. An affected business may need to register, charge GST, lodge and pay. The SaaS-specific version of this is in SaaS and tech subsidiaries, and the registration choices in GST registration for foreign-owned companies.

When to form a subsidiary instead

Many foreign companies reach a point where keeping the Australian activity inside the foreign entity creates more questions than it answers. Signs it may be time to consider a subsidiary:

• you're hiring more than one or two people, or someone who will sign contracts
• you need an office, a warehouse or local equipment
• customers or partners want to contract with an Australian entity
• you're already registered with ASIC as a foreign company and want local results ring-fenced.

A subsidiary is its own taxpayer, resident in Australia by incorporation, and contracts in its own name. That doesn't automatically remove PE risk for the parent: if the parent's own staff still do business here, or the subsidiary habitually concludes contracts for the parent, the question can remain. The subsidiary also needs related-party pricing that holds up; see transfer pricing for an Australian subsidiary. The full trade-offs are in subsidiary vs branch.

A proprietary company needs at least one Australian-resident director under s201A. If you go the subsidiary route, that is where our service fits: see resident director requirements, our pricing or start here.

General information about Australian law and practice, not legal or tax advice for your circumstances. Check the official sources, or ask your adviser, before you act.