When a foreign business decides to trade in Australia, one of the first decisions it needs to make is which structure will work best for them. The choice generally comes down to whether to operate through an Australian branch of their existing overseas entity, or to incorporate a subsidiary. Below we give an analysis of the two options
A foreign entity can trade in Australia without establishing a separate Australian entity. When this occurs, the tax treatment of the branch will depend on the activities undertaken in Australia, and the extent of those activities. Where the business activities amount to a “permanent establishment” (PE), the branch is subject to income tax in Australia on the profit earned here, as well as GST.
A PE is, generally, a fixed place of business other than a storage or display facility in Australia.
Where the business activities don’t reach the level of a PE, income tax will not apply to its Australian income, but GST must be considered.
If there is no PE in Australia –
- The foreign entity will need to register for GST if its turnover exceeds the annual threshold of AUD75,000. GST turnover comprises sales that are “connected with Australia”, which are basically all goods sold in Australia, as well as services and digital supplies to Australian consumers. Services and digital supplies to Australian GST registered businesses are not “connected with Australia”.
- The foreign entity will have the choice of a simplified GST registration, which is only available for supplies of digital products or services, or for goods valued at no more than AUD1,000. The registration process is fast and can be managed from offshore with no need to prove identity but does not allow for GST credits to be claimed back and is therefore not appropriate in many cases.
- A full GST registration requires an Australian Business Number (ABN) application. This requires proof of identity of the business entity, as well as its directors. Because of this, the registration process can take several weeks.
If there is a PE in Australia –
- the foreign company must register as a foreign company with the Australian Securities and Investment Commissions (ASIC). The company needs to register an Australian registered office (usually an accountant or lawyer’s office), and must appoint a person who ordinarily resides in Australia to act as Local Agent and Public Officer.
- Once registered, the branch must file the foreign company’s annual accounts and comply with other reporting requirements.
- The foreign company requires an ABN application in order to register for GST, as well as PAYGW if it has Australian employees, and a Tax File Number (TFN) for income tax purposes. The proof of identity requirements are the same as where there is no PE.
- The profit attributable to that permanent establishment is subject to tax in Australia at the corporate rate, which is currently either 26% (reducing to 25% from 1 July 2021) for businesses with group turnover of up to AUD 50 million, or 30% for larger groups.
- Transfer pricing rules require transactions between the Australian PE and its overseas related parties to be conducted on arm’s length terms and be appropriately documented.
Private companies are used for private ventures, as subsidiaries of public companies, and of other foreign entities. They can’t have more than 50 non-employee shareholders and must have at least one director who ordinarily resides in Australia.
To establish operations in Australia through an Australian subsidiary –
- Choose a company name and consult the ASIC business names register to check that it is available.
- Decide on share structure, share ownership, proposed directors and Public Officer for tax purposes.
- Lodge application forms with ASIC, along with applicable fee.
- Apply for ABN, GST, PAYGW and TFN registrations. If there are foreign shareholders and/or directors, proof of identity requirements are the same as for a branch.
- Once incorporated, the directors must ensure that relevant corporate obligations (both tax and financial reporting) are complied with.
- Transfer pricing rules require transactions between the Australian subsidiaries and its overseas related parties to be conducted on arm’s length terms, and be appropriately documented.
- The company’s profit is subject to tax in Australia at the corporate rate, which is currently either 26% (reducing to 25% from 1 July 2021) for businesses with group turnover of up to AUD 50 million, or 30% for larger groups.
Income Tax in the Shareholders Country of Residence
You’ll note from the above discussion that profits of a PE in Australia are taxed at the same rate as the profits of an Australian subsidiary. Ultimately though, it needs to be determined what final tax will apply in the shareholder’s country of residence on the Australian profit. Depending on the tax residence of the shareholder, this may be significantly different.
Typically, the profits of an Australian branch will be subject to tax in the country of residence of the foreign entity, with a credit for any income tax that has been paid in Australia. The rate of tax in the foreign country compared to the tax credit received for tax already paid in Australia, will then have an effect on whether there is any more tax payable in that foreign country.
The tax treatment of dividends paid by an Australian company to a foreign shareholder, however, can vary considerably from country to country depending on their domestic tax law. Some countries allow shareholders to elect to treat an investment in a wholly owned foreign subsidiary as a transparent entity, and in these cases the tax outcome will be the same as for a PE. In other countries, tax will be imposed on dividends when received, with a credit for withholding tax paid (if applicable). Some countries also apply a foreign income accrual system, and tax profits as they accrue in a subsidiary rather than when dividends are received.
The choice of operating structure is important and complex, and there is always a need for effective collaboration between advisors in multiple countries. The table below is intended to provide some perspective on the key issues in relation to the choice of operating structure for a foreign entity considering investing into Australia.
|Income Tax Rate||1.||N/A||26%/30%||26%/30%|
|Transfer pricing rules apply||No||Yes||Yes|
|Disclosures on Income Tax Return||N/A||Yes – more complex||Yes – less complex|
|Dividend Withholding Tax||N/A||N/A||Yes|
|Capital Gains Tax||2.||N/A||Only on Taxable Australian Property||Yes|
|Dealing with Australian Banks and Suppliers||Hardest||Harder||Easy|
|Risk/Liability||Foreign Parent||Foreign Parent||Australian Subsidiary|
|ASIC Disclosure/Reporting||3.||N/A||Yes||Yes, but exemptions often apply|
- The 26% rate applies to corporate groups with annual turnover of up to AUD 50 million. This will reduce to 25% from 1 July 2021.
- Generally, Taxable Australian Property is real estate, and assets used in carrying on a business through a PE.
- Small proprietary companies meeting certain requirements are eligible to apply for exemptions. The requirements are discussed in detail here.
If you have questions in relation to the above don’t hesitate to contact your client manager.
Correct as of 26 May 2021
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