If your company is taking the exciting step of expanding its business and operations into the Australian market, then one of the key decisions that you will make will be how you structure your business venture in Australia. This will come down to choosing between a foreign branch or subsidiary. Whichever structure is ultimately decided upon, there are advantages and disadvantages to each that need to be taken into account. At the end of the day, there is no clear-cut option that is the directly ‘better’ option, and the decision will ultimately depend on the specifics of each business and their ongoing plans in Australia.
There are a few questions that will initially be asked when deciding on the right type of entity for your set-up in Australia. These include:
- What is the overall global structure of your business?
- What are your strategy and aims in setting-up in Australia?
- What are your long-term plans for the future of the business? For example, what will your company look like in five years’ time?
- What are the taxation implications of each structure and how do they apply to your business? For example, is there a Double-Taxation Agreement (DTA) in place with the home country?
We will now discuss some of the different aspects of a foreign branch versus a subsidiary.
Operating as a foreign branch means that the Australian business will operate directly as an overseas branch of the existing overseas business. Importantly, this means the new office will not be a separate legal entity, but it will still need to comply with Australian laws and regulations.
The process to open and register a foreign branch in Australia with the Australian Securities and Investments Commission (ASIC) is much more complex than starting a subsidiary company, and in particular far more documentation will be required.
In addition, a foreign branch will need to have an Australian registered office that is open to the public on a daily basis. An agent representative will need to be appointed to take care of this, and carry out any actions required of the company. In addition, a public officer must be appointed to take care of all tax requirements. Annual returns and financial statements will need to be lodged with ASIC every year.
While the registration process is much more complicated, a foreign branch can provide a number of tax benefits if the foreign company is tax resident of a country that Australia has entered into a DTA with. If this is the case, the Australian branch of the business may not be taxable in Australia if it isn’t considered a permanent establishment by the ATO. In considering this, it will be taken into account:
- Whether the company has a fixed place of business within Australia;
- Whether the representatives in Australia undertake core work of the business; and
- How much time staff are spending in Australia.
If a branch is taxed in Australia, it is done so on all Australian income. In contrast with a subsidiary, a branch may not have to pay withholding tax on profits sent overseas. Furthermore, any losses can be utilised in the home company.
As a foreign branch does not have its own legal personality, corporate liability is able to be traced directly back to the home company.
The other option will be setting up an Australian subsidiary. This is a company that is owned and controlled by the parent company, and will likely be set up as a proprietary company limited by shares. A subsidiary company is recognised as a separate legal entity with its own legal personality, and will be an Australian resident for tax purposes.
Setting up and registration of a proprietary company is a relatively simple and cost-effective procedure, which similar to a foreign branch is also conducted via ASIC, but with much less documentation needed. However, there are a few requirements that foreign start-ups need to comply with in regards to directors and office-holders. These include:
- At least one director must be an Australian resident and all must be at least 18 years old;
- The company must have a registered Australian office; and
- The company must have a public officer who will be responsible for complying with tax requirements.
In our experience, this step is the most likely to slow down or complicate the set-up process for Australian businesses, so careful planning with your legal and set-up team is required to ensure everything goes smoothly.
In addition, a number of linked services must be applied for in order for the business to operate in Australia, including a tax file number (TFN), Australian Business Number (ABN), GST and PAYG taxes. Annual returns will be lodged with ASIC, along with financial reports in most cases.
In regards to tax, in Australia a subsidiary is taxed on its worldwide income from all sources at a rate of 27.5—30%. The exact rate will depend on the business turnover and the type of income derived. Losses will be trapped in a subsidiary company.
A subsidiary can provide greater protection for the parent company, as generally liability will stop with the subsidiary. However, it is important to note that there have been several cases around the world where courts have pierced the corporate veil in order to pass on liability to a parent company in certain circumstances, particularly in cases of fraud or injustice. Furthermore, there have been key cases recently that show that the corporate veil may be able to be pierced in regards to human rights violations and victims’ claims.
Choosing between a branch and a subsidiary company is one of the most important decisions a foreign start-up will make in Australia, and it is also one of the most complex. In particular, tax considerations will need to play a major consideration in the decision, along with other key procedural factors. Careful planning will need to be made to make sure the right structure is chosen for your business’ particular circumstances. If you have any questions about how to structure your business in Australia, our experienced team is available to assist in determining the best option and next-steps.
Harris Gomez Group is a Common Law firm, with offices in Santiago, Bogotá, and Sydney. We also have legal teams in Peru, Bolivia, Ecuador, Brazil, and Argentina. Over the last 18 years, we have been supporting foreign companies with their growth in Australia and Latin America. Many of our clients are technology companies, service providers and engineering companies that focus on the mining, energy and infrastructure markets.
To better understand how we can support your management team in the Region, please contact us at firstname.lastname@example.org