Behind Australia’s stable, strong economy lies substantial opportunities for foreign companies to set up in Australia. If you are contemplating doing business in Australia, choosing the structure of your Australian entity, branch vs subsidiary, will be one of your considerations.
Foreign companies can choose to establish a business in Australia –
- As a branch of a foreign company, or as
- A wholly owned subsidiary of a foreign company.
Understanding the framework of each entity will be important in making the right decision for your business when setting up in Australia.
There is no advantage of one entity over the other, however choosing between a branch or a subsidiary will affect costs, reporting, profit and long-term growth. Your decision should also consider taxation, legal considerations, and commercial considerations including, running costs, funding requirements at the local level, risks, and third-party requirements.
We do recommend you get expert advice before proceeding in either direction. There is a lot to consider.
Firstly, let’s define what each entity is –
What is a foreign branch?
A foreign branch operates as the Australian branch of your overseas business.
This structure allows your overseas business to trade in Australia however, it is not a separate legal entity. It must comply with Australian legislation.
Setting up a foreign branch
When setting up a foreign branch of an overseas company in Australia, you are required to provide extensive corporate documentation to ASIC, much more than if you were setting up an Australian subsidiary.
Once your foreign branch is set up, you will be required to annually lodge a balance sheet, profit and loss and any other report your foreign company is required to prepare by law in its country of origin. If ASIC deems these reports insufficient, they may request audited financial reports.
What are the taxation regulations of a foreign branch?
Taxation will depend on whether ASIC determines your operations as a Permanent Establishment (PE). Factors that determine permanent establishment include the fixed place of business and its plant and equipment in Australia, how long your staff are spending in Australia and the delegates closing the contracts in Australia, and if construction projects taking place.
Please note: If Australia has a double-taxation agreement with your country of origin, the meaning of permanent establishment is determined by the agreement.
Other taxation details –
- A foreign branch may not have to pay withholding tax depending on whether the two countries have a double tax agreement. If not, the foreign branch in Australia will be taxed on its taxable income at a rate of 30%.
- Losses can be utilised in the country of origin.
- Any sale of branch assets will be generally subject to capital gains tax (CGT).
For further details and clarification on the taxation of foreign branches, please click here.
What is an Australian subsidiary?
When an overseas company establishes a new company in Australia, this new company becomes a subsidiary of the foreign company. This Australian subsidiary company is free to conduct business and trade in Australia.
The foreign company owns and holds shares in the subsidiary company. It is recognised as a separate legal entity and is required to register with the Australian Securities and Investments Commission (ASIC) and pay taxes.
Setting up an Australian subsidiary
Setting up a new Australian subsidiary which operates as an Australian company, requires standard new business documentation such as choosing a business name, creating a constitution, electing officeholders – Australian resident director and public officer – and registering it with ASIC and the Australian Taxation Office.
Each year, the Australian subsidiary must submit an annual review statement verifying the shareholders, directors, business addresses as well as a solvency resolution signed by the directors.
What are the taxation regulations of an Australian subsidiary?
- Depending on the business’ annual turnover, the tax rate is between 27.5 – 30%.
- From the 2018-20 income year, a 27.5% company tax rate applies to eligible
The corporate income tax rate for these companies will decrease to 26% by 2020-21 and 25% from 2021-22. - If an unfranked dividend were to be paid from the Australian subsidiary to the parent company, the profit repatriation will be lost.
- A capital gains tax exemption may apply when shares are disposed of in the Australian subsidiary.
- Losses are trapped in the subsidiary company.
Other information to consider
Double tax agreement (DTA) – is your country listed?
Double tax agreements between Australia and other countries, profits derived by a foreign entity that carries on business in Australia will only be taxable in Australia if the foreign entity carries on business in Australia through a permanent establishment (PE).
Click here for more information on ATO International tax agreements
Transfer pricing
Artificial pricing and charges between entities are being closely scrutinised by the Australian Taxation Office. Transactions between these related entities in Australia and overseas will need to be proven as reasonable and comply with the commercial arms-rate principal, including providing detailed documentation to satisfy the transaction. Significant fines and penalties will be enforced.
Click here for more information on transfer pricing.
There is a lot to consider when deciding between foreign branch or Australian subsidiary when setting up business in Australia. Specific advice will help you consider your options for your business. Call us on +61 2 8916 6259 or contact us now, with over 20 years’ experience we have helped countless businesses like yours weigh up their options and get off to a strong start.
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