Conducting International Business: The Tax Considerations

In Short

• Overseas Tax Regimes: Understand the tax systems of countries where you operate, including company taxation and dividend withholding taxes.​

• Australian Tax Obligations: Australian residents are taxed on worldwide income; however, certain foreign income may be exempt.​

• Double Tax Agreements (DTAs): Australia’s DTAs with countries like the US, UK, Singapore, Germany, and China aim to minimise cross-border double taxation.​

Tips for Businesses

Before expanding overseas, seek professional advice to understand foreign tax obligations and how they interact with Australian tax laws. Review existing DTAs to optimise tax efficiency. Ensure compliance with both local and international tax regulations to avoid unexpected liabilities.

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Table of Contents

• 1. Overseas Tax Regime
• 2. Income Tax in Australia
• 3. Capital Gains Tax (CGT)
• 4. Application of GST
• 5. Employing Australians
• 6. Non-Resident Shareholders/Beneficiaries
• 7. Related Party Dealings
• Key Takeaways
• Frequently Asked Questions

Expanding your activities overseas is an exciting step in the growth of your business. However, you may be exposed to increased tax liability, which may result in changes in your tax obligations. To prevent double taxation and the facilitation of foreign tax credits, you should be on top of your tax before making the move. This article outlines seven key tax considerations you should know when expanding your business overseas.

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1. Overseas Tax Regime

Like Australia, most foreign jurisdictions have their own personal and corporate tax systems. You should seek professional advice in the relevant countries about the tax consequences of running your business there. This will help you understand how the foreign tax system works and interacts with the Australian system, particularly:

• how the foreign country taxes companies;
• whether the foreign country has a withholding tax system, generally for payments of dividend, royalty and interest; and
• how Australia will tax those foreign dividends.

2. Income Tax in Australia

The general rule is that an Australian resident is taxed on their worldwide income from all sources. A company is an Australian resident for tax purposes if:

• it is incorporated in Australia; or
• it carries on business in Australia and either has:
  • its central management and control in Australia; or
  • its voting power controlled by Australian residents.

Certain types of foreign income may be exempt from this rule. These include:

• foreign dividend income in the hands of an Australian company shareholder with at least 10% shareholding in the foreign company; and
• foreign branch profits of Australian companies are subject to transfer pricing rules.

You should also check whether Australia has entered into a double tax agreement (DTA) with the relevant foreign country. DTAs are bilateral agreements that may benefit Australian companies because the intentions of both revenue authorities in Australia and the relevant foreign country is to minimise cross-border double taxation of taxpayers that are active in both countries. Australia currently has a number of DTAs in countries including the US, the UK, Singapore, Germany, and China.

3. Capital Gains Tax (CGT)

As Australian tax residents are taxed on their worldwide income, generally, an Australian company is taxed in Australia regardless of the source of the income. Therefore, in its annual company tax return to the Australian Taxation Office (ATO), an Australian company must disclose:

• any domestic or foreign capital gain they receive; and
• any foreign tax already paid on that capital gain (which is credited against its Australian tax liability on that gain).

There is a special concession for Australian companies selling shares in certain active foreign subsidiaries. This concession allows you to reduce the relevant capital gain during the period that the foreign subsidiary was ‘active’.

4. Application of GST

You may export goods and/or services from Australia as part of your expansion. Generally, GST does not apply to these goods and services. However, you should still confirm this in relation to your particular circumstances, as various exceptions may apply to pull you back into the Australian GST net.

5. Employing Australians

If your overseas expansion involves hiring key personnel from Australia, complex tax considerations and obligations may arise.

You will need to ensure that your business adequately deals with the following issues:

• PAYG withholding (unless exempt): if the individuals you hire remain Australian tax residents, you may need to withhold tax from their salary or wages and remit this amount to the ATO;
• fringe benefits tax: determine whether the Australian resident employee will receive non-cash benefits during and after moving overseas and therefore, may fall within the fringe benefits tax system; and
• superannuation: determine whether the Australian resident employee will continue to be covered by Australia’s compulsory superannuation rules.

6. Non-Resident Shareholders/Beneficiaries

Tax residency is an essential factor affecting how and where the government taxes you. It is different to immigration residency. You and your employees must understand the following issues before relocating overseas to avoid any nasty surprises.

Exit Tax

When an individual, company or trust ceases to be an Australian tax resident, they trigger Australia’s exit tax. This means the ATO deems that you have disposed of certain assets at their market value. Consequently, the individual, company or trust becomes liable to pay CGT on those assets.

The ATO’s deemed disposal generally applies to assets other than Australian real property. These assets include:

• shares in companies;
• units in unit trusts; and
• any foreign assets.

Exit Election

Individuals, such as shareholders and beneficiaries, can defer the taxing point until actual disposal. This is known as an exit election.

An exit election defers the tax liability until the individual actually disposes of the assets, but it keeps the assets within the Australian CGT net. Consequently, assuming the individual is still a foreign resident on actual disposal:

• if the assets were acquired after 8 May 2012, they will be taxed in Australia without the benefit of the 50% CGT discount (as they will not be entitled to the discount for the time that they were a foreign tax resident during the ownership period); and
• if the assets were acquired on or before 8 May 2012 and the individual had a period of Australian residency after 8 May 2012, the 50% CGT discount may be pro-rata based on the number of days that the individual was an Australian resident after 8 May 2012; 
• as a foreign tax resident, they will be taxed at the higher foreign resident tax rates; and
• they will likely be taxed in the relevant foreign country as well (although they should be eligible for a foreign tax credit for the Australian tax paid).

7. Related Party Dealings

When you are expanding overseas, you may set up related parties or subsidiaries to your Australian entity. Most businesses that have related parties will have monetary and/or non-monetary dealings with each other.

Australia has a transfer pricing regime that seeks to ensure that companies in the same group but operating in different countries deal with each other at ‘arm’s length’. Accordingly, these companies must treat each other as independent third parties rather than related entities.

This means, for example, a company in a low-taxing country cannot charge a related company in a high-taxing country more than the ordinary market price for goods or services. Another example would be when the income generated in the high-taxing country is artificially reduced, and the income in the low-taxing country is artificially increased. This would also capture situations where the licence of the intellectual property held by an entity in one country is used without any licence fee being paid by a related entity in another country.  In this situation, there is a missing license fee and a missing royalty withholding tax associated with this license fee.

Key Takeaways

Your business expansion will be accompanied by new tax considerations. When planning to take your business overseas, it is vital to seek tax advice to understand your tax obligations and ensure you optimally structure your business.

If you are considering overseas expansion, our experienced taxation lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

What should I know about overseas tax regimes when expanding my business?

Each foreign country has its own tax system. Seek professional advice on how the foreign tax system interacts with Australia’s, particularly concerning company taxes, withholding taxes, and dividend taxation.

How does Australian income tax apply to foreign income?

As an Australian resident, you are taxed on worldwide income. However, certain foreign income may be exempt, such as foreign dividends or profits from foreign branches. Double tax agreements (DTAs) can also reduce tax liabilities.