Permanent Establishment in Australia

Last Updated: March 2026

By James Carey, CA CTA JP

Disclaimer: This guide is for general informational purposes only and does not constitute tax advice. Permanent establishment is a complex area of international tax law and the consequences of an incorrect assessment can be significant. We strongly recommend engaging a qualified Australian tax adviser for advice specific to your company’s circumstances.

One of the most critical tax questions for any foreign company operating in or with Australia is whether it has a permanent establishment (PE). A PE creates a taxable presence – meaning Australia can tax your business profits even if you have not incorporated a local entity. Understanding PE rules is essential for managing tax risk and structuring your Australian operations correctly.

What Is a Permanent Establishment?

A permanent establishment is a fixed place of business through which a foreign enterprise carries on business in another country. It is the threshold concept that determines whether a country can tax the business profits of a non-resident enterprise.

If a foreign company has a PE in Australia, Australia can tax the profits attributable to that PE – even if the company has not registered a subsidiary or branch. Conversely, if there is no PE, Australia generally cannot tax the company’s business profits (though other income like royalties, interest, and dividends may still be subject to withholding tax).

The PE concept exists in both Australian domestic law and in Australia’s bilateral double tax agreements (DTAs). Where a DTA applies, the treaty definition takes precedence.

Australian Domestic Law Definition

Under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936), a permanent establishment is defined as:

“A place at or through which the person carries on any business.”

The domestic definition is intentionally broad. Without limitation, it specifically includes:

• (a) A place where the person is carrying on business through an agent
• (b) A place where the person has, is using, or is installing substantial equipment or substantial machinery
• (c) A place where the person is engaged in a construction project

This domestic definition is broader than most treaty definitions – it has no minimum time threshold and no specific exclusions for preparatory or auxiliary activities.

Source: ITAA 1936 s6(1) – AustLII

Tax Treaty Definition (OECD Article 5)

Australia has DTAs with over 45 countries. Where a DTA exists, the treaty definition of PE applies. Most of Australia’s treaties follow the OECD Model Tax Convention Article 5, which provides a more structured (and generally narrower) definition than domestic law.

Under Article 5(1), a PE is:

“A fixed place of business through which the business of an enterprise is wholly or partly carried on.”

Three conditions must be met:

1. A place of business exists – premises, facilities, equipment, or machinery
2. The place is fixed – established at a distinct location with a degree of permanence
3. Business is carried on through it – personnel dependent on the enterprise conduct business activities at the location

Article 5(2) provides a non-exhaustive list of PE examples: a place of management, a branch, an office, a factory, a workshop, and a mine, oil or gas well, quarry, or other place of extraction of natural resources.

Types of Permanent Establishment

1. Fixed Place PE

The most common type. A fixed place PE arises when a foreign company operates from a specific, stable location in Australia. This includes offices, warehouses, workshops, retail premises, or any facility where business activities are regularly conducted.

Key requirement: The ATO applies a temporal permanence test. As a guide, per Taxation Ruling TR 2002/5, if a business operates at or through a place continuously for six months or more, that place will generally be considered temporally permanent.

2. Dependent Agent PE

A PE can exist even without a physical office if a person in Australia habitually exercises authority to conclude contracts on behalf of the foreign enterprise. Under OECD Article 5(5), a dependent agent PE arises when:

• The agent acts on behalf of the enterprise
• The agent habitually exercises authority to conclude contracts in the enterprise’s name (or contracts that are binding on the enterprise)
• These activities are not limited to preparatory or auxiliary activities

An agent is independent (and does not create a PE) if the agent is both legally and economically independent of the enterprise and is acting in the ordinary course of their own business.

Note: Following the 2017 BEPS updates (implemented via the Multilateral Instrument), the dependent agent PE concept was broadened. It now also captures agents who habitually play the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise – even if the agent does not formally sign contracts. Whether this expanded definition applies depends on whether the relevant DTA has been modified by the MLI.

3. Construction or Installation PE

Under most of Australia’s DTAs (following OECD Article 5(3)), a building site or construction or installation project constitutes a PE only if it lasts more than 12 months. However, specific thresholds vary by treaty – for example, the Australia-US DTA uses a 9-month threshold. The domestic definition in s6(1)(c) has no minimum duration.

4. Services PE

Some of Australia’s newer DTAs (particularly with developing countries and those following the UN Model) include a services PE provision. This treats the furnishing of services in Australia as creating a PE if employees or other personnel are present for more than a specified number of days (commonly 183 days in any 12-month period).

What Triggers a PE in Australia

The ATO takes a substance-over-form approach. Formal contractual arrangements matter less than the actual activities being conducted. The ATO focuses on:

• Where key decisions are made – not just where contracts are signed
• Who controls operations – where management and operational authority sits
• Continuity of presence – whether the Australian presence is ongoing, not merely occasional
• Economic value creation – where the substance of business activity occurs

Activities that commonly create a PE include:

What Does Not Trigger a PE

Under OECD Article 5(4), certain activities are specifically excluded from constituting a PE, even if conducted from a fixed place. These are activities of a preparatory or auxiliary character:

• Using facilities solely for storage, display, or delivery of goods belonging to the enterprise
• Maintaining stock solely for processing by another enterprise
• Maintaining a fixed place solely for purchasing goods or collecting information
• Maintaining a fixed place solely for advertising, supplying information, scientific research, or similar preparatory/auxiliary activities

Other low-risk activities that generally do not create a PE:

• Occasional business travel to Australia for meetings, conferences, or negotiations
• Using an independent agent who operates in the ordinary course of their own business
• Marketing and promotional activities without contract authority
• Short-term presence without operational continuity
• Attending trade shows or exhibitions (unless contracts are concluded)

Important: The ATO’s anti-fragmentation rules (introduced through the Multilateral Instrument and BEPS Action 7) can treat individually auxiliary activities as creating a PE if they form part of a cohesive business operation when viewed together.

Tax Consequences of Having a PE

If a foreign company has a PE in Australia, the tax consequences are significant:

Profit Attribution (Subdivision 815-C)

Subdivision 815-C of the Income Tax Assessment Act 1997 governs how profits are attributed to a PE in Australia. While it applies arm’s length principles, Australia does not fully adopt the OECD’s Authorised OECD Approach (AOA). Unlike the AOA’s functionally-separate-entity methodology, Australian law does not recognise notional internal dealings (such as notional interest or management fees) between the PE and its head office – only actual income and expenditure with external parties can be allocated to the PE.

Key principles:

• Functions, assets, and risks must be analysed to determine what profit is attributable to Australian activities
• Actual income and expenditure is allocated to the PE based on the functions performed, assets used, and risks assumed in Australia
• The ATO can adjust the taxable income if actual conditions differ from arm’s length conditions, creating a transfer pricing benefit

In practice, this means:

• The PE must maintain accounting records that separately identify its income and expenses
• A functional analysis must identify the significant people functions performed by the PE
• Capital must be attributed to the PE based on the assets and risks it manages
• Documentation must support the profit attribution methodology

Source: ATO – Permanent Establishments

PE vs Subsidiary vs Branch

Understanding the difference between these three forms of Australian presence is critical for structuring decisions:

Key takeaway: A PE is often unintentional. Unlike a branch or subsidiary, companies may create a PE without realising it – and the tax and compliance consequences only emerge when the ATO identifies the presence. This is why proactive PE risk assessment is critical.

Remote Workers and PE Risk

The rise of remote work has created new PE risks for foreign companies. If a foreign company’s employee works from Australia on a regular or ongoing basis, this may create a PE – even if the employee works from home.

Key considerations:

• An employee’s home can constitute a fixed place of business if it is used as a regular and continuous base for the enterprise’s business
• The OECD’s 2025 update to the Model Tax Convention introduced a two-part framework: (1) if an employee works remotely for less than 50% of total working time over a 12-month period, no PE is generally presumed; (2) if the 50% threshold is exceeded, there must be a genuine commercial reason (beyond employee convenience or cost savings) for the employer to operate at that location
• A senior employee making strategic decisions from Australia poses higher PE risk than a junior employee performing routine tasks
• The ATO’s assessment is fact-specific – duration, nature of activities, and level of authority all matter

Practical guidance: Foreign companies with employees or contractors based in Australia should document the nature and scope of their Australian activities and seek professional advice on PE risk before establishing any ongoing presence.

Managing PE Risk

Foreign companies can take several steps to manage PE risk:

1. Conduct a PE risk assessment before commencing Australian operations – identify whether your planned activities could trigger a PE under the relevant DTA
2. Use independent agents rather than employees for Australian activities where possible – agents who are legally and economically independent and act in the ordinary course of their own business do not create a PE
3. Limit the authority of Australian personnel – ensure no one in Australia has authority to conclude contracts binding on the foreign company
4. Monitor project durations – keep construction and installation projects under the 12-month threshold where applicable
5. Document everything – the ATO’s assessment is documentation-driven; maintain clear records of who does what in Australia, the scope of their authority, and the duration of their presence
6. Consider formal registration – if PE risk is high, registering a branch (ARBN) or subsidiary (Pty Ltd) provides certainty, limits retroactive exposure, and enables proper tax planning

If you determine that a PE exists or is likely, the safest approach is often to formalise your Australian presence by registering with ASIC – either as a branch office or an Australian subsidiary.

How Aus Business Register Can Help

Aus Business Register works with foreign companies at every stage of their Australian market entry, including PE risk assessment and structuring. Our services include:

• PE risk review – analysis of your current or planned Australian activities against the relevant DTA and domestic law definitions
• Structure advice – whether a branch, subsidiary, or other arrangement best suits your operations
• Company registration – Pty Ltd incorporation or ARBN branch registration with ASIC
• Resident director and local agent services for ongoing compliance
• Tax compliance – company tax returns, BAS lodgement, and transfer pricing documentation
• Bookkeeping and financial reporting – including audit-ready financial statements for foreign-controlled entities

Contact us on +61 2 8599 9890 or request a quote to discuss your situation.

Frequently Asked Questions

What is the time threshold for creating a PE in Australia?

Under ATO Taxation Ruling TR 2002/5, a place of business that operates continuously for six months or more will generally be considered temporally permanent. However, the domestic law definition in s6(1) ITAA 1936 has no minimum time threshold. For construction projects, most DTAs require a duration exceeding 12 months. The specific threshold depends on the type of PE and the applicable DTA.

Can an employee working from home in Australia create a PE?

Yes, potentially. If the employee uses their home as a regular and continuous base for the foreign enterprise’s business, this can constitute a fixed place PE. The risk is higher for senior employees with decision-making authority. The OECD’s 2025 update introduced a two-part framework: if an employee works remotely for less than 50% of total working time over a 12-month period, no PE is generally presumed. If the 50% threshold is exceeded, there must be a genuine commercial reason (beyond employee convenience or cost savings) for the employer to operate at that location.

What happens if the ATO determines my company has an undisclosed PE?

The ATO can issue retroactive tax assessments for prior years, plus shortfall penalties of up to 75% and interest charges. The company would also be required to register for tax, lodge returns for all affected years, and meet ongoing compliance obligations. This is why proactive PE risk assessment is strongly recommended.

Does having a local agent create a permanent establishment?

An independent agent acting in the ordinary course of their own business generally does not create a PE. However, a dependent agent – one who habitually exercises authority to conclude contracts on behalf of the foreign enterprise and is not legally and economically independent – can create a PE. The distinction depends on the agent’s legal and economic independence and whether they act exclusively or nearly exclusively for one enterprise.

What is the difference between a PE and registering a branch?

A PE is a tax concept – it determines whether profits are taxable. A branch registration is a corporate law concept – it involves formal registration with ASIC under Part 5B.2 of the Corporations Act 2001. A registered branch will also constitute a PE, but a PE can exist without formal branch registration. The risk of an unregistered PE is that tax and compliance obligations arise unexpectedly.

How are profits attributed to a PE?

Under Subdivision 815-C ITAA 1997, profits are attributed to a PE based on arm’s length principles. A functional analysis identifies the significant people functions performed at the PE, the assets used, and risks assumed. Unlike the OECD’s Authorised OECD Approach, Australia does not recognise notional internal dealings between the PE and head office – only actual income and expenditure with external parties is allocated. Documentation must support the methodology used.