Navigating overseas growth: Top 10 international tax considerations for Aussie businesses
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- Structuring the expansion
- Capital gains tax
- Australian tax residency
- Impact on Aussie shareholders
- Taxation of profits when coming back
- Taxation of gains on disposal
- Effective tax rate to shareholders
- Intragroup transactions and transfer pricing
- Foreign withholding taxes on intragroup transactions
- ESS and ESOPs
- Summary
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Expanding your business overseas can be a strategic and exciting move to tap into new markets and unlock growth opportunities. But before you book those tickets, there are some complex international tax issues to think about.
From structuring your overseas presence to managing cross-border transactions, careful planning is critical to ensure compliance and optimise tax outcomes.
In this article we’ll explore the top 10 tax considerations that Australian businesses should keep in mind when venturing beyond home shores.
1. Structuring the expansion: Foreign branch, subsidiary, or holding company
You’ll need to decide how to structure your overseas presence, get it right at the start and you won’t have to deal with headaches later on! Our advice is to keep things as simple as possible, because you’ll have enough going on without worrying about complex business structures and international agreements.
So will it be a foreign branch, subsidiary, or a foreign holding company? Each option has distinct tax implications, and understanding the nuances is crucial for making informed decisions. To help make this decision ask yourself the following questions:
- Why are we expanding overseas?
- What are the tax obligations of each structure?
- How will we get funds back to Australia, and what are the tax implications?
Learn more about the different business structures with our free Expanding to the UK guide.
2. Capital gains tax: rollover relief
If opting for a foreign holding company, you should explore the availability of CGT rollover relief. CGT is the tax on the profit made from selling/disposing of assets (shares, property, valuable items etc). Determining whether the foreign holding company will be deemed an Australian tax resident company is vital for compliance so is up the top of our list of tax issues to investigate.
3. Australian tax residency
A foreign subsidiary will be considered an Australian tax resident company, and you will have to lodge a company tax return. Keep in mind there will be increased compliance obligations to go along with this.
4. Understanding the impact on Aussie shareholders
Controlled foreign corporation (CFC) rules are part of the tax system to prevent delaying tax payments by using low-taxed entities abroad. These rules apply when the income of an entity isn’t currently taxed for its owners. If a foreign company isn’t considered an Australian tax resident, you’ll need to figure out whether its income is ‘passive’ or ‘tainted’. Assessing whether controlled foreign company rules apply helps in managing potential tax liabilities.
5. Taxation of profits when coming back to Australia
When bringing profits back to Australia you’ll need to understand how tax jurisdictions handle double taxation. Many countries aim to prevent double taxation by either exempting dividends already taxed elsewhere, or providing a tax credit for foreign taxes paid. While most tax policies aim to avoid double taxation practical challenges may arise. An example is that Australia’s franking regime presents scenarios where offshore profits – taxed abroad – might face additional taxation for Australian shareholders, without comprehensive double tax relief. Understanding these nuances is essential for effective cross-border financial management and optimising the cash flow. But there are alternative solutions to avoid this international tax burden so let us know the situation and we can help.
6. Taxation of gains on disposal: asset sale vs share sale
Considering the method of disposal, whether through an underlying asset sale or a share sale, is crucial for understanding how gains will be taxed in the long run. Assets like shares or property are treated on capital account where you avail yourself of CGT discount, while sales of income or derivations of income (like dividends, consulting, earnings) are treated on revenue account and taxed at higher marginal tax rates.
7. Effective tax rate on foreign profits/gains to shareholders
Understanding the effective tax rate on foreign profits and gains flowing up to the ultimate shareholders is essential for evaluating the overall financial impact of the expansion.
8. Intragroup transactions and transfer pricing
International transactions must adhere to rules that include transfer pricing, and follow the ‘arm’s length’ principle. This means they must behave as if they were dealing with each other at arm’s length and not related, to guarantee fair market conditions.
9. Foreign withholding taxes on intragroup transactions
Certain intragroup transactions may trigger foreign withholding taxes, such as royalty withholding taxes. Identifying and managing these obligations is crucial for a smooth international expansion. Look into where a foreign tax credit is available so there is no additional tax on top.
10. Employee Share Schemes (ESS) and Employee Share Ownership Plans (ESOPs)
If your employees have shares, you’ll likely already have an ESS in place. If they have share options, you’ll have an ESOP in place.
For Australian companies with existing ESS or ESOPs, moving them up to the foreign group parent company requires meticulous planning to avoid triggering adverse tax consequences for participants. Learn more about ESS and ESOPs and why share options might be the better choice in this article.
International tax summary
Jet-setting into international territories unleashes a rollercoaster of tax considerations that need savvy navigation. Being proactive to ensure compliance and minimise tax liabilities will mean positioning yourself for success in the global marketplace. Aussie founders relocating for business expansion also need to look at personal tax residency issues, and we’re here to help with every step, be it business or personal. You can find us here.
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