Establishing a presence in Australia as a foreign business can be a complicated process. Business owners must choose between establishing a subsidiary company or a foreign branch — here’s some guidelines to help you make the right choice.
International businesses seeking to establish a presence in Australia are confronted with a complex question: is it better to set up a foreign branch, or an Australian subsidiary? Deciding between the two depends on the particular needs, goals, and plans on how the business in Australia will operate.
Depending on your specific requirements, the best option will provide the most efficient tax strategy, beneficial contractual obligations, and human resources aspects such as the employment of staff and immigration visas. We’ll proceed to break down the differences between a subsidiary and a foreign branch office.
Business Structure: What to Consider
- There are a number of factors that should be considered when deciding on the best business structure in Australia. These factors include:
- How is your existing business structured in the other countries in which it operates?
- What are the strategic goals of your organisation? When assessing the structure of your business in Australia, it’s essential to factor in your expansion strategy covering timeline and extent of business undertaken.
- What are your long-term goals? The future plans of your organization, such as the global structure of your company in two, five, and ten years from now should be considered, as well as predicted human resources requirements.
- What is your tax strategy? Establishing either a subsidiary or a foreign branch can imply different tax obligations. Some global businesses are able to benefit from double taxation treaties when operating in Australia — companies should consider any potential tax benefits when selecting a business structure.
Business Structure Options
Foreign businesses, in most cases, select between two options when establishing a presence in Australia — operation as a foreign branch, or as an Australian subsidiary.
An international organisation that chooses to operate as a foreign branch will establish an Australian branch of an existing overseas business. In this case, the overseas business trades in Australia, and does not operate as a separate legal entity. The Australian branch, however, must comply with Australian legislative requirements.
In order to open and register a foreign branch in Australia an international organisation is obligated to prepare a significant amount of corporate documentation and supporting documentation. This documentation is often requested by the ATO, ASIC & the banks, and is far more rigorous than the normal process of establishing an Australian business.
Once operational, a foreign branch is subject to the same regulations as other Australian companies. ASIC requires that foreign branches lodge Form 406, and any other documents that the business is legally required to provide in its country of origin.
International businesses are not required to undergo an audit, but ASIC does possess the authority to request audited financial reports or audit documentation if previously submitted documentation is deemed insufficient.
- Other Foreign branch key points:
- Foreign branches are not separate legal entities
- Foreign companies may be required to register with ASIC, and will be provided with a unique identifying number — an ARBN, or Australian Registered Body Number
- Liabilities are those of the foreign company
- Australian resident local agent officeholders are required in the business governance structure
- Similarly, an Australian resident public officer is required
- Foreign companies may be required to lodge audited financials with ASIC if part of a large group
- Foreign branches are subject to Australian income tax based on income generated within Australia. Corporate tax rate for foreign branches is often 27.5 percent
- Withholding tax is applied to various international payments
- Foreign branches are not subject to branch profits tax
- Foreign branches may not be required to undergo an audit, but ASIC does have the authority to request additional financial documentation
In the case of an Australian subsidiary, an international company establishes an Australian company. This company functions as a subsidiary of the international company, with the Australian subsidiary company trading and operating in Australia. In most cases, the international company will own the shares of the Australian subsidiary company.
Australian subsidiary companies are recognised as a separate legal entity with limited liability which functions as an Australian resident for tax purposes. An Australian subsidiary can be wholly owned by a foreign shareholder but is required by law to have at least one Australian resident director.
Australian subsidiaries are required by ASIC to submit an annual review statement that verifies the shareholders, directors, and addresses of the subsidiary, alongside an annual fee. Subsidiaries are also obligated to provide a solvency resolution signed by the directors.
- Some key facts about Australian subsidiaries:
- Australian subsidiaries are separate legal entities to the overseas parent company.
- Subsidiaries must register with ASIC and are provided with an ACN, or Australian Company Number
- Liabilities remain with the subsidiary in absence of guarantees and like arrangements, or if the subsidiary trades while insolvent
- Australian subsidiaries are required to have an Australian resident director and an Australian resident public officer
- Subsidiaries must lodge annual returns alongside financial reports to ASIC, but are exempt from lodging financial reports if relieved from doing so under Corporations Law
- Subsidiaries are subject to Australian income tax on income generated from worldwide sources. Foreign income may be exempt or subject to foreign income tax offsets
- Corporate tax for Australian subsidiaries ranges between 27.5 percent and 30 percent, with withholding tax applicable to various international payments
- Auditing of Australian subsidiaries may be required under Australian Corporations Law if the subsidiary is controlled by a large foreign corporation
- Class relief may be available in some cases, eliminating the need for an audit
Australian Taxation Laws
Taxation laws can vary greatly between different countries. Australian tax law can be fairly complex for international companies, so it’s essential that you understand the tax obligations that your Australian operations will be subject to. Remaining tax compliant is essential, so it’s important to establish an effective tax strategy.
Australian Taxation for Foreign Branches
A foreign branch may or may not be taxable in Australia depending on a number of factors, which constitute whether or not the branch is a permanent establishment in Australia. Classification as a permanent establishment considers factors such as whether the branch has a fixed place of business in Australia, the representatives in Australia closing contracts, how long the staff of the foreign company spend in Australia, and the plant and equipment in Australia if construction projects are taking place.
A branch may not have to pay withholding tax. In some cases, losses can be utilized in the home company. The sale of branch assets are, in most cases, subject to capital gains tax (CGT) on disposal.
Australian Taxation for Australian Subsidiaries
Australian subsidiaries are taxed in Australia on taxable income, with rates varying between 27.5 percent and 30 percent depending on the annual turnover of the subsidiary. Profit repatriation is lost if an unfranked dividend from the Australian subsidiary is paid to the parent company. Losses are trapped in the subsidiary company. The ultimate disposal of shares in the Australian subsidiary may benefit from a capital gains tax (CGT) exemption.
The primary difference between Australian subsidiaries and foreign branches is the treatment of assessable income. The assessable income for branches includes all Australian source income, whereas assessable income for subsidiaries includes all worldwide income of the business, subject to various deductions or credits.
The Double Taxation Agreements
Both Australian subsidiaries and foreign branches are subject to the application of Double Taxation Agreements. Double Taxation Agreement vary across different countries, and affect the tax rules regarding the repatriation of profits and dividend withholding tax.
The dividend withholding rate under the Double Tax Agreement varies depending on a country-by-country basis, and is typically capped at 15 percent. In some cases, however, the dividend withholding rate is as low at 0 percent. For a full list of countries with which Australian has a DTA and further information on Australian tax treaties, see the ATO website.
Determining whether a branch or a subsidiary is the right choice for your Australian operations is a highly complex decision that requires careful planning and consideration before actioning. If you’re unsure of the best choice for your business, reach out to Fullstack for professional guidance today.