Expanding your activities to overseas shores is an exciting step in the growth of your business. But with resulting changes in your tax obligations, you may find yourself exposed to increased tax liability. To prevent structural double taxation and the facilitation of foreign tax credits, you should be on top of your tax before making the move. This article sets out seven key tax considerations you should be aware of when expanding your business overseas.
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 dividend withholding tax system; and
- how Australia will tax those foreign dividends.
2. Income Taxed 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 are exempt from this rule. These include:
- foreign dividend income in the hands of an Australian company shareholder; and
- foreign branch profits of Australian companies.
You should also check whether Australia has entered into a double tax agreement (DTA) with the relevant foreign country. DTAs are bilateral agreements that are beneficial to Australian companies because they minimise cross-border double taxation. Australia currently has a number of DTAs with countries including the US, the UK, Singapore, Germany and China.
Tip: Your tax position often depends on the Australian tax law, relevant foreign tax laws and any overriding provisions of an applicable DTA.
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 gain. 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).
Note that there is a special concession for Australian companies selling shares in certain active foreign subsidiaries. This concession allows you to reduce the relevant gain during the period that the foreign subsidiary was ‘active’.
4. Application of GST
As part your expansion, you may export goods and/or services from Australia. 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 from taxation): if the individuals you hire will remain Australian tax residents, you will 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 and therefore fall within the fringe benefits tax system; and
- superannuation guarantee: determine whether the Australian resident employee is covered by Australia’s compulsory superannuation rules.
6. Non-Resident Shareholders/Beneficiaries
Tax residency is an important factor affecting how and where the government taxes you. It is different to immigration residency. It is important that you and your employees understand the following issues prior to relocating overseas to avoid any nasty surprises.
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 some of their 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.
Individuals, such as shareholders and beneficiaries, have the option of deferring 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:
- 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
- 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).
Note: Special rules may apply under a particular DTA to alter this outcome based on your particular situation.
7. Related Party Dealings
When you are expanding overseas, you may set up related parties or subsidiaries to your Australian parent entity. Most businesses that have related parties will have dealings with each other.
Australia has a transfer pricing regime which seeks to ensure that companies who are 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. Otherwise, the income generated in the high-taxing country would be artificially reduced and the income in the low-taxing country artificially increased.
The transfer pricing regime aims to combat this outcome (known as ‘international profit-shifting’), so that each country receives their fair share of tax revenues.
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.
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