Most Australian businesses don’t fail in the United States because the market rejects them. 

They fail because the structure underneath them wasn’t built for the way the US actually works.

From a distance, the US looks like one market. 

In practice, it’s a federal system sitting on top of fifty separate state regimes, each with its own tax rules, registration requirements, employment laws and compliance triggers. What works neatly in Australia can become awkward very quickly once you have people on the ground, customers in multiple states, or inventory crossing state lines.

That’s why the first mistake is usually asking the wrong question.

The question isn’t “Should we set up in Delaware?”
The real question is “What are we actually building in the US?”

If the plan is to test the water,  a small team, early customers, limited capital at risk and a structure that needs to stay flexible. If the plan is to scale, raise capital, issue equity to US hires and keep exit options open, the structure needs to look like something the US market already understands.

Most Australian businesses end up in one of those two lanes, whether they realise it or not.

Where the ambition is serious growth, the default answer is often a US C-Corporation. 

Not because it’s clever, but because it’s familiar. US investors, banks, lawyers and employees all know how to deal with it. Equity can be issued cleanly. Option plans work the way people expect. Governance is recognisable. Due diligence is faster because the shape of the company makes sense to the people looking at it.

The trade-off is that C-Corps come with formality and tax layering. There is corporate tax at the company level and tax again when profits are distributed. Board processes matter. Records matter. But that discipline is usually the price of admission if you want to play properly in the US growth market.

At the other end of the spectrum sits the LLC, which often gets sold as the “simple” option. And in the right circumstances, it can be. LLCs offer limited liability, fewer rigid corporate rules and a lot of flexibility in how economics and control are documented.

The catch though and it’s a big one for Australians is that simplicity in the US domestic context doesn’t always translate neatly across borders. The way an LLC is treated for US tax depends on elections and ownership, and foreign owners can find themselves pulled into US tax filings and reporting in ways they didn’t anticipate. Add state-level fees and compliance, and the “easy” structure can become anything but if it hasn’t been thought through properly.

That doesn’t make LLCs wrong. It just means they need to be chosen deliberately, not by default.

Then there are the structures that sound familiar but rarely fit. S-Corporations are popular with small US businesses, but they generally don’t work for Australian expansion because of tight ownership and equity restrictions. Partnerships can be excellent for joint ventures and specific commercial arrangements, but when foreign partners are involved, withholding and reporting obligations in the US can quickly outweigh the flexibility they offer.

What often gets missed entirely in early conversations is whether a US subsidiary is even the right first step. Some Australian businesses initially operate in the US as an Australian entity registered at the state level, particularly where activity is limited or transitional. In other cases, a clean US subsidiary is essential from day one to contain risk, satisfy customers or prepare for an eventual sale. There’s no universal rule but the choice has real consequences for liability, tax exposure and how easy it is to unwind or exit later.

Another blind spot is the assumption that incorporation solves everything. 

It doesn’t. In the US, obligations are driven less by where you’re incorporated and more by where you actually operate. 

Hire people in one state, warehouse goods in another, sell software into several more, and you can quickly find yourself dealing with multiple tax authorities and registration regimes. Sales tax in particular has a habit of appearing earlier than expected, especially for digital and e-commerce businesses.

And then there’s the question that almost always gets left until too late, how does the money come home?

Funding a US operation, charging for IP, repatriating profits and documenting intercompany arrangements are not clean-up exercises. 

They’re foundational. The longer they’re left, the more value gets trapped behind structures that weren’t designed to move it efficiently.

The same applies to people. The moment you hire in the US, everything becomes real, payroll, employment compliance, benefits, insurance, and expectations around equity. 

This is another reason growth-oriented businesses often gravitate to C-Corp structures early, US employees understand them, and equity incentives actually work the way they’re supposed to.

The pattern, after years of watching Australian businesses expand into the US, is fairly consistent. The companies that do well are not the ones with the cleverest structures. They are the ones that chose a structure that matched their ambition, accepted the discipline that came with it, and put the foundations in place before momentum made change difficult.

The ones that struggle usually weren’t reckless. They were just early optimists. They picked something that worked “for now” and assumed they’d fix it later. In the US, later tends to arrive during fundraising, diligence or a dispute when flexibility is at its lowest and the cost of change is at its highest.

General information only. Not advice. But if you’re planning a US expansion, it’s worth remembering this, the market is big, forgiving and full of opportunity but it has very little patience for structures that don’t match the story you’re trying to tell.

CHECKLIST: Australia – US Market Entry Checklist

Why This Matters?

Many Australians arrive in the US with sensible portfolios at home such as ASX listed exchange traded funds, listed investment companies, unit trusts or managed funds, and sometimes investments held through family trusts or private companies. In the US those vehicles can fall under the Passive Foreign Investment Company (PFIC) regime. That regime can impose punitive tax, interest charges, and heavy reporting. In addition, attribution rules can make you a PFIC shareholder even when you do not hold the shares directly. Understanding the touchpoints early allows you to restructure intelligently and avoid unnecessary cost and compliance friction.

What Is A PFIC?

A foreign corporation is a PFIC if it meets either of two tests in the Internal Revenue Code. The income test looks for at least seventy-five per cent of gross income being passive. The asset test looks for at least fifty per cent of assets that produce or are held to produce passive income. 

In practice many non-US pooled funds are PFICs for US purposes. These include mutual funds, exchange traded funds, listed investment companies, and some investment companies. 

Classification of Australian unit trusts depends on US entity classification rules and the facts. Many widely held, manager controlled vehicles are not treated as trusts for US tax and end up analysed as corporations, but this is fact specific.

Default Taxation And The Main Elections

If no election is made, PFICs are taxed under the excess distribution regime. Excess distributions and gains are allocated back over your holding period, taxed at the highest historic rates for each year, and layered with an interest charge that is not deductible. Two elections can improve outcomes.

• Qualified Electing Fund Election – You include your share of the PFIC ordinary earnings and net capital gain each year. The practical hurdle is that you need a PFIC annual information statement from the fund. Australian funds rarely provide it.

• Mark To Market Election – If the PFIC stock is marketable you mark to fair value each year. Increases are ordinary income and decreases are ordinary loss subject to limits. Marketable stock requires regular trading on a qualified exchange or market with published quotations. The ASX typically satisfies the regulatory criteria.

New US Residents And The Helpful Basis Rule

When an individual first becomes a US person and makes a timely Mark to Market election the regulations allow a basis step up. For Mark to Market purposes your adjusted basis is treated as the greater of cost or fair market value on the first day of US residency. That ring fences pre immigration appreciation from the Mark to Market computation. Other basis rules may still apply for non-Mark to Market purposes, so records matter.

Once A PFIC Always A PFIC And Purging

PFIC taint follows the stock. If the company was ever a PFIC during your holding period the stock remains PFIC stock until you make an appropriate election or purge. The law allows a purge by recognizing gain as of the last PFIC year. Planning before arrival is powerful. Disposing of PFICs before US residency or arranging elections in time can avoid years of complexity.

Reporting And Form 8621 With Small Holder Relief

A US person who is a direct or indirect shareholder in a PFIC generally files Form 8621 each year if they receive distributions, recognize gain, report a QEF or Mark to Market inclusion, make certain elections, or otherwise hold PFIC stock that triggers reporting under the statute. The instructions also explain who counts as an indirect shareholder.

There is limited relief. You may omit Part I of Form 8621 for a section 1291 fund if the aggregate value of all PFICs is not more than twenty-five thousand US dollars at year end or fifty thousand US dollars for joint filers and you had no excess distributions or gains. For indirect PFIC stock a five thousand US dollar per fund threshold applies. This is a Part I exception only. Other parts still apply if you made QEF or Mark to Market elections or had income. In most expat cases with meaningful balances or any distributions or sales Form 8621 is still unavoidable.

Attribution Rules And Why You Can Be A Shareholder Without Holding The Shares

Attribution rules sit in section 1298. Key points follow.

• Partnerships Trusts and Estates – PFIC stock owned by these entities is considered owned proportionately by partners and beneficiaries.
• Corporations – Normally attribution up from a corporation requires owning at least fifty per cent of that corporation by value. However, if you are a shareholder of a PFIC the fifty per cent limitation is waived for purposes of looking through that PFIC to its lower tier holdings. As a result, a PFIC that holds other PFICs can push those up to you even if you own only a small percentage of the top company.
• Options – Options to acquire stock are treated as ownership. Successive attribution applies so treated ownership can be pushed further up the chain.

What This Means For Australians?

Family Trusts That Are Not Grantor Trusts

A US beneficiary may be an indirect PFIC shareholder when distributions are attributable to PFIC income or gains. The Form 8621 rules indicate that a US beneficiary of a foreign non grantor trust generally does not complete Part I unless they have made a QEF or Mark to Market election or had an excess distribution or gain. When those occur, reporting applies.

Private Companies

If you own at least fifty per cent of an Australian private company that itself holds PFIC stock, attribution can push PFIC ownership up to you. If the company is itself a PFIC, look through can apply to its lower tier holdings without the fifty per cent threshold.

CFC Overlap Which Can Be Useful

If you control an Australian company and it is a controlled foreign corporation for US purposes, the CFC overlap rule prevents the same entity from being both a CFC and a PFIC with respect to you during the period you are a US shareholder. It is treated as a CFC only. This is often helpful for active businesses that might otherwise drift into PFIC status due to large cash or portfolio assets. It does not rescue widely held funds.

Treaty Relief Is Limited For PFIC

The US Australia income tax treaty contains a saving clause that allows the US to tax its citizens and residents as if the treaty did not exist subject to limited exceptions. As a practical matter the treaty does not neutralize PFIC outcomes for US residents.

Common Australian Holdings And Practical Choices

ASX listed exchange traded funds listed investment companies and managed funds usually require PFIC analysis. If you intend to keep them, consider Mark to Market if the marketability criteria are met. For new US residents, a timely Mark to Market election can use the first day basis rule. Otherwise, the default excess distribution regime is often costly.

1. Unit Trusts Require A US Classification Analysis First – Many manager-controlled widely held unit trusts are analyzed as corporations but not always. PFIC status hinges on corporate status.
2. Superannuation Requires Separate Analysis – US treatment is complex and can involve trust or deferred compensation concepts. Even where the Form 8621 instructions provide limited references for certain foreign pensions, the saving clause and lack of robust mutual pension recognition mean that PFIC exposure inside super is not automatically fixed. Specialized advice is essential.
3. Direct Shares On The ASX Are Not PFICs – For many expats shifting from funds to directly held portfolios or to US domiciled exchange traded funds that provide global exposure is the cleanest approach.

Pre-Immigration And Early Residency Planning

1. Prepare an inventory and classification of all non-US vehicles before moving. Confirm US entity status and PFIC status.
2. Decide whether to exit PFICs before the move or to plan for a QEF or Mark to Market election where possible. For listed vehicles Mark to Market is often the pragmatic choice. For Australian funds QEF is rarely available.
3. Use the Mark to Market first year rule where available to ring fence pre arrival gains.
4. Map attribution through family trusts partnerships and private companies. Document the chain so you know who files Form 8621 and when.
5. Do not rely on treaty relief to soften PFIC outcomes.

In Summary

For Australian expats building a life in the US the PFIC regime is more of a compliance hazard than an investment edge. Where possible migrate to US domiciled exchange traded funds even for global exposure or build separately managed or directly held share portfolios. If you truly need to keep ASX funds, a timely Mark to Market election usually provides a better long term result than the default excess distribution method. The most costly mistakes are assuming unit trusts cannot be PFICs missing indirect ownership through family structures and overlooking the first year Mark to Market basis relief.

This is general information only and not tax advice. For client matters confirm facts entity classification and filing positions against the current year rules and instructions.

Navigating U.S. tax rules can be complex, especially for foreign-owned U.S. businesses. One key form to know about is Form 5472. This guide explains who needs to file it, deadlines, and tips to stay compliant.

Who Needs To File Form 5472?

If your business fits any of these categories, you need to file Form 5472:

• 25% Foreign-Owned U.S. Corporation – If a U.S. corporation is at least 25% foreign-owned and has reportable transactions with its foreign shareholder(s), it must file Form 5472. A “25% foreign-owned” corporation means one or more foreign shareholders directly or indirectly own at least 25% of the company during the tax year.
• Foreign Corporations Operating In The U.S. – A foreign corporation conducting trade or business in the U.S. must file Form 5472 for reportable transactions with related parties. “Related parties” include direct and indirect 25% foreign shareholders or entities connected through ownership or control.
• Disregarded Entities (DEs) – If a U.S. disregarded entity (e.g., a single-member LLC) is fully owned by a foreign person, it must file Form 5472, even if it doesn’t need to file an income tax return.

Deadlines For Filing Form 5472

• Calendar-Year Corporations – If your corporation’s tax year ends on December 31, Form 5472 is due April 15 of the following year.

Example: For a tax year ending December 31, 2024, the filing deadline is April 15, 2025.

• Fiscal-Year Corporations – For businesses operating on a fiscal year (e.g., ending June 30), Form 5472 is due on the 15th day of the third month after the tax year ends.

Example: If your tax year ends on June 30, 2025, the filing deadline is September 15, 2025.

Important: Missing these deadlines can result in penalties.

Need More Time? Extension Options

You can request a 6-month extension by filing Form 7004. This moves the deadline for Form 5472 to October 15 (for calendar-year filers). However, keep in mind:

• Taxes owed are still due by the original deadline (e.g., April 15 for calendar-year taxpayers).
• Extensions only apply to filing, not payments.

Special Rules For Foreign-Owned Disregarded Entities

• Filing Requirements – Even if a foreign-owned U.S. disregarded entity (DE) doesn’t owe income tax, it must still file a pro forma Form 1120 with Form 5472 attached. The pro forma return acts as a cover page and only requires basic details like the entity’s name and address.
• Submission Method – Unlike most forms, DEs cannot file electronically. You must send Form 5472 by fax or mail to the IRS at the designated address or number (available on the IRS website).

Penalties For Non-Compliance

Failure to file Form 5472 or maintain proper records can lead to penalties of $25,000 per failure, with more added if non-compliance continues. To avoid these costs, stay on top of deadlines and keep detailed documentation.

Conclusion

Filing Form 5472 correctly and on time is essential for foreign-owned U.S. businesses. Know your deadlines, request extensions if necessary, and ensure compliance to avoid penalties.

The US has similar payroll tax requirements to Australia. From withholding taxes on wages, to payment of payroll taxes assessed on wages paid, and lodgement of employee forms, there is a range of compliance requirements that your company must fulfill.

There are a wide variety of payroll tax considerations, including tax withholding and taxes payable on the amount of wages. These taxes are levied to fund social security, Medicare, unemployment and disability benefits, and other State and Local requirements.

Withholding Taxes

• Employers are responsibility for withholding taxes from wages and paying this to the Federal government.
• Some States also require withholding taxes to be withheld in relation to the income taxes on employee wages.
• Employers must typically make regular payroll tax deposits and file quarterly payroll tax returns with the IRS.
• State and Local tax agencies often have their own reporting and payment requirements.
• Withholding taxes go towards the individual employee’s income tax obligations.

Payroll Tax Requirements

Federal Insurance Contributions Act (FICA) Taxes

• Funds social security and Medicare.
• Social security tax rate is 6.2% for the employee plus 6.2% for the employer.
• Medicare tax rate is 1.45% for the employee plus 1.45% for the employer.
• Additional Medicare is payable at 0.9% for the employee when their wages exceed $200,000 in a year.

Federal Unemployment Tax Act (FUTA) Taxes

• Funds state workforce agencies and unemployment insurance.
• FUTA is payable by the employer and is calculated at 6% on the first $7,000 paid to each employee.
• Payment of state unemployment taxes can often be used as a tax credit to bring the FUTA tax rate down to as low as 0.6%.

State Payroll Taxes

• State Payroll Taxes may apply depending on the location of your business.
• The most common State tax is State Unemployment Tax (SUTA), which is payable by the employer.

Local Payroll Taxes

• Additional payroll taxes may be payable based on the zip code, county or municipality where your business is located.

Employee Forms

• At commencement of employment, employees fill out a Form W-4. This guides employers on how much income tax to withhold.
• At the end of each year, employers must provide employees with Form W-2, which reports the employee’s annual wages and tax withholdings.
• On commencing employment, employers are required to verify an employee’s eligibility to work in the US. This is typically done through the I-9 Form.

Other Payroll Considerations

• Workers Compensation Insurance
• State Disability Insurance
• Paid Leave
• Health Care Costs for Employees
• Retirement Plan Contributions 
• Reimbursements and Stipends

Penalties For Missed Or Late Payments

The IRS may charge a late fee for employment taxes that are not paid on time. This is called a “Failure to Deposit Penalty”.

Payroll tax penalties are:

• 1-5 days late: 2% of the overdue payment
• 6-15 days late: 5% of the overdue payment
• Over 15 days late: 10% of the overdue payment
• More than 10 days from first notice: 15% of overdue payment

Other Employee Benefits

Other Employee Benefits you may be required, or choose, to pay, can include:

Retirement Plans

One of the tax advantageous retirement savings plans is known as a 401(k). Under this plan you would pay a percentage of each paycheck into your employee’s retirement savings account instead of directly to them.

Health Insurance

Employers must offer affordable health insurance that provides minimum value of 95% to full time employees (working 30hrs or more a week) and their children (until they turn 26).

Stock and Stock Options

Stock and stock options can be offered as a form of equity compensation.

The US has a complex tax system, with multiple taxes, including income taxes, often being imposed on a State level as well as a Federal level. Some types of taxes also apply locally, meaning that even within the same State you can pay very different taxes to other parts of the State.

• The US Corporate tax system operates on a Federal, State and Local system. This means taxes and other compliance costs may be charged from all three levels.
• Filing requirements, lodgement deadlines, and available deductions or credits often differ between locations.
• Due to the complexity of Local variances, compliance with the Local tax laws requires specialised Local knowledge for the area or areas in which your business operates.
• To optimise your corporate tax strategy, it is recommended that you consult with experienced tax professionals who have a Local understanding of US taxes, as well as international taxes.
• Tax returns are typically based on a calendar year.

Choosing Your State

Since every State has different laws, it can be important to select the right State for your business operations. You will be required to register in every State that you operate in, however if you have no particular business requirement for which State or States you operate in, then it can be advantageous to select a State that has more well known and simple tax laws.

For instance, Delaware has no state income tax, a fairly straight forward tax system, and well-known corporate laws across the US.

Types of Taxes

Income Taxes (Federal And State)

• The Federal tax rate for companies is 21% 
• 44 States levy corporate income taxes. These taxes vary from 0% to 11.5%, with some states assessing taxes on a flat rate and others using tax brackets in the same manner that individual income taxes are assessed.
• 43 States levy state income taxes, 41 tax wage and salary income, New Hampshire exclusively taxes dividend and interest income and Washington only taxes capital gains income. Seven states don’t impose any individual income taxes. Some states use a flat income tax rate, while others have a graduated tax rate depending on the individual’s income.

Sales Taxes (State And Local)

• Sales taxes are similar to GST or VAT in certain parts of the world. However, as sales taxes are only imposed on a State level, the rates vary between 0% and 7.25% depending on the State.
• There are also various Local governments within 35 States that impose an additional sales or use tax, which ranges from 1% to 5%.

Property Taxes (State And Local)

• Local authorities such as cities, counties, and school boards, typically impose property taxes on the value of the property, including the land and the structure on the land.
• Each State imposes different parameters on property taxes.
• Property taxes can also be payable on purchase and/or sale of property.
• Most States have a “homestead” exemption which reduces or eliminates the cost of property tax on your primary residence, subject to a variety of qualifications or limits, which vary State to State, or even within States.

Payroll Taxes (Federal, State And Local)

• Federal payroll tax is paid by both the employer and the employee.
• Some States and Local authorities also require some form of payroll tax to be paid. The most common type is State Unemployment Insurance (SUTA tax), which is payable by the employer.

Franchise Of Privilege Tax (For Doing Business In A State)

• Some States require certain business organisations to pay a franchise tax, otherwise known as a privilege tax, for doing business in the State.
• This tax is typically calculated on the net worth of capital held by the entity.
• Some States use an economic and physical presence test to determine whether a business is taxed, while others have no written interpretation of the basis of their test for determining who is required to pay the franchise tax.

Gross Receipts Tax (State)

• Some States apply a gross receipts tax on a company’s gross sales, without consideration of deductions for expenses.
• Gross receipts tax applies to businesses, regardless of whether sales relate to business-to-business transactions or business-to-consumer transactions.

Business Licenses (State, Local, With Some Federal Regulations)

• Business licences or permits may be required on a Federal, State, or Local level.
• Business licenses can take some time to be processed, and they should be completed prior to commencing operations. The complexity of the application depends on your industry, as well as the locality managing the license.
• Licences and permits typically need to be renewed on a regular basis.

Due to the complexity of the wide variety of Local, State, and Federal taxes, it is important that you obtain qualified advice regarding your business. If your business expands into additional locations you will need to get updated advice regarding the new location in which you are operating.

Expanding to the US means you are entering a complex tax system. From international tax concerns, to different Local, State, and Federal requirements, there are many factors to consider. The type of legal structure you choose will impact your compliance and tax considerations obligations.

Type Of Entities

C Corporation (C Corp)

• Separate Legal Entity that works like an Australian private company does.
• Offers some asset protection due to legal structure.
• Taxed at the corporate level and when profits are distributed as dividends, these are taxed in the hands of shareholders.
• Has Directors, shareholders (stockholders) and a separate tax identity to the shareholders.
• Federal income tax rate is currently 21%. State income taxes may also apply.
• In some instances dividends may have a reduced withholding rate of 5% when paid to foreign shareholders.
• Allows for capital raising, new shareholders or selling the business completely by selling shareholdings to new investors.
• High compliance requirements including meetings, quorums, minutes, and other management formalities.

Limited Liability Company (LLC)

• This is a simplified form of a company. In operation it is similar to an Australian partnership where control is in the hands of the members and profits flow through to the owners rather than being taxed at the entity level.
• Provides similar protection, and more flexibility than a C Corp.
• LLCs are not managed by Directors. They are managed by the members or an appointed Manager.
• It is possible for an LLC to have a sole member.
• Members do not need to be US residents.
• Tax returns need to be filed if there are two or more members, however the profits are distributed to the members who pay tax on their share of the profits.
• Can elect to be taxed as a C Corporation instead of being taxed in the hands of the members.
• Can elect how profits are distributed to members. For instance, profits may be split equally between members, based on capital contributions, or in other agreed ways.
• If foreign tax is paid on the profits to an Australian member, they can claim the foreign tax paid as a tax credit on their own assessment of profit distribution received.

Branch (No New Entity)

• No separate legal entity, meaning Australian entity is directly responsible for tax and compliance requirements.
• Branch profits may be subject to US tax as well as Australian tax, depending how the branch is established in the US. In this instance the Australian company can typically claim the foreign tax paid as credits to reduce the impact of double taxation.
• As there is no additional entity there may be less compliance issues to consider with transferring profits from the US to Australia. 
• Whether you need to establish a US entity or not, will depend on the nature of the business you are operating.

Taxation Issues To Consider With Your Chosen Legal Structure

Both Australian and US tax laws need to be considered regardless of the legal structure used to establish the US business operations. International tax issues will also need to be considered where members, Directors or owners remain residents of Australia.

Australian Taxation

• If the US entity is controlled in Australia it may be treated as an Australian tax resident.
• The Australian parent company will need to consider how the fees paid between the US and the Australian entities are taxed in Australia.
• US generally imposes a 30% withholding tax on payments to foreign entities.

US Taxation

• The US may tax income earned from any business established in the US, regardless of whether the operating company is a US or Australian resident.
• Australian resident members or Directors may be subject to US taxes before considering Australian taxes on income generated from the US branch or entity.

Fees Between Entities

• US transfer pricing rules require transactions between related parties to be at arm’s length. This means that the value of fees may be adjusted where it is not arm’s length.
• Proper documentation is essential for consulting or management services between entities, including basis for fees charged. This can assist in ensuring that fees paid between the US and Australian entities are treated as required for tax purposes.
• Fees must be ordinary and necessary business expenses in order to be tax deductible to the paying entity.

If you or any of your key employees will be moving to the US when expanding your business, they may have unique tax considerations.

With both Australia and the US taxing their residents on their worldwide income, and taxing non-residents on income that is sourced within the respective country, it is important to be aware of double taxation provisions that help ensure an individual isn’t taxed twice on the same income.

Tax Residency

It is important to determine which country an individual is a tax resident of, as this will impact how that individual is taxed in each country.

When an Australian resident moves to the US for work purposes they will typically become a US tax resident if they establish a home in the US and reside there on a “permanent” basis. Factors that will be considered in determining whether residency changes include whether family is brought overseas with them, if they buy or rent a home to live in, and if they disconnect with ties back in Australia. 

Conversely an individual who lives in the US on a short-term basis, staying in temporary accommodation, and leaving their family back home in Australia, is more likely to remain an Australian tax resident.

A US resident who moves to Australia will face a similar situation. However, the US is fairly unique in taxing citizens on their worldwide income, even if they change their country of residency for tax purposes.

Expatriate Taxation Rules

It is important that you familiarise yourself with both the Australian and US tax rules related to expatriates, so that your key employees who travel from one country to the other have the right information to manage expatriate taxation concerns.

Foreign Earned Income Exclusion

When certain conditions are met, individuals from the US may qualify for the foreign income exclusion. This applies for individuals who reside in a foreign country and earn foreign income. As US citizens are typically taxed on their worldwide income, regardless of their tax residency status, this allows eligible individuals to exclude certain income from their US federal income tax return.

Foreign Tax Credit

Both Australian and the US allow provision for foreign tax credits to be claimed in their resident tax return.

This ensures they are not taxed twice for the same income from both the source country and their country of residence.

Tax Equalisation Policies

Tax equalisation policies are policies that aim to neutralize the impact of an individual’s tax liability when they are working on a global assignment. The objective of these policies is to ensure that the tax burden on an individual is similar to what the individual would have faced if they had merely remained living in their home country.

Australian Help Debts

In the event that you move an Australian employee to the US on a permanent basis, they may become a US tax resident. Ordinarily this would mean that they only need to lodge an Australian tax return to declare any Australian sourced income.

However, if the individual has an outstanding HELP, TSL or VSL debt, they will need to declare their worldwide income. While a foreign resident is not liable for Australian taxes on foreign sourced income, they are still liable for HELP debt repayments based on the value of their worldwide income.

Individual Tax Obligations In The US

As the employer you should be prepared to provide guidance to any key employees that you relocate from Australia to the US. This helps ensure that they aren’t caught unaware of their obligations and tax requirements while residing in the US.

Familiarise your employees with US filing requirements, which are not only different, but can be significantly more complex than Australian requirements.

• The US tax return is based on the calendar year and the filing deadline is mid-April.
• In the US, Individual tax brackets vary from 10% to 37%. The US does have a tax withholding system, that is similar to Australia, to help individuals manage their tax obligations.
• Unlike Australia, where each individual must always file their own return, individuals in the US can file as a single person or jointly as a married couple, or separately as a married couple.
• The US requires individuals to lodge a Federal Tax Return. However, depending on the State in which the individual resides, they may need to file a State income tax return as well.
• Non-residents who receive US income are also required to file a tax return. This means that any employee who is only in the US on a temporary basis will need to file a US return as a non-resident.
• Local Income Taxes may also need to be considered.

Employee Benefits

The US has similar benefits and options for employees as Australia does, however there are some key differences that an individual employee should be aware of so that they can make appropriate plans and decisions for their individual care.

Retirement Plans

US employers are not obligated to contribute towards retirement in the way that Australian employers are required to pay the Superannuation Guarantee. Most employers voluntarily provide retirement benefits through a 401(k) plan (similar to Superannuation).

Health Insurance

While the US has a federal health medical system, Medicaid, to provide free or low-cost health coverage, this is typically limited to low income and disadvantaged individuals. Without a universal healthcare system it is important to consider health insurance, which is commonly provided as an employee benefit.

As an Australian business expanding into the US you will need to consider US, Australian and international taxation issues. Depending on how your business is structured it may be required to pay taxes in both the US and in Australia. As a shareholder, you may also face tax obligations in both the US and Australia.

Residency

The first issue to address with International Taxation is the issue of residency. Your residency, and the residency of your company, is the primary factor in determining which tax jurisdiction has taxation rights over your income.

Both Australian and US residents are taxed on their worldwide income, which means it is important to understand the ways in which double taxation is mitigated.

If you set up a US structure to operate in the US, you will face Australian taxation consequences if the owners and/or managers of the business are Australian residents, and for any interactions you have between your US company and your Australian company.

Conversely, if you use your Australian company to operate a business within the US, you will need to consider the US taxation consequences due to the source of that branch income being in the US.

Tax Treaty

The primary way that double taxation issues are mitigated is through the International Tax Treaty between Australia and the US. When it comes to an Australian business operating in the US, some of the key factors that this Tax Treaty covers include:

• Business profits of an Australian enterprise are only taxable in Australia unless the enterprise carries on business in the US through a permanent establishment there. This means if you establish a permanent presence in the US, your business will be taxed under US regulations. A permanent place of business can be a broad term and may include:

1. A physical place of business including offices, factories, branches, workshops, stores, a place of management, or other physical presence for business operations. 
2. A sales representative of your business who has a permanent establishment who conducts business deals for your business.
3. A permanent provision of services in a specified location, even without a physical presence in that location.

• Transfer Pricing Rules mean that if you have a US entity and an Australian entity, any fees paid between these two entities must be paid on an arm’s length basis. This means there must be a business reason for the fees and a market value basis for calculation of these fees.
• Double taxation is mitigated by both countries typically allowing foreign tax credits to be applied against local taxes.
• The treaty also includes provisions for exchange of information and mutual agreement procedures to resolve disputes.
• A non-discrimination clause ensures that nationals of one country are not subject to taxation in the other country that is more burdensome than that imposed on nationals in the same circumstances.

Withholding Taxes

The Tax Treaty also deals with withholding tax requirements for certain types of income. In some cases, these withholding requirements limit the amount of foreign tax that can be paid on the specified income types.

Dividends

If a US corporation pays dividends to an Australian company that owns 10% or more of the voting stock of the corporation, the rate of US tax on the gross amount of the dividend generally cannot exceed 5%. For other dividends, the rate generally cannot exceed 15%.

For any Australian resident shareholders, this means you will pay either 5% or 15% in US taxes on any dividends distributed to you from your US company. This income is then included in your Australian tax return and you claim the tax paid as a foreign tax credit to offset the Australian tax assessed on this income.

Interest

Interest arising in one of the countries and paid to a resident of the other country generally may be taxed in both countries. However, the rate of tax imposed by the source country generally cannot exceed 10% of the gross amount of the interest.

As an Australian resident any interest income you receive from a US source will be taxed in the US at 10%. The US sourced income then needs to be included in your Australian tax return and you can claim the 10% tax paid as a foreign tax credit to offset the Australian tax assessed on this income.

Royalties

Royalties arising in one of the countries and paid to a resident of the other country generally may be taxed in both countries. However, the rate of tax imposed by the source country generally cannot exceed 5% of the gross amount of the royalties.

As an Australian resident any royalties you receive from a US source will be taxed in the US at 5%. The US sourced income then needs to be included in your Australian tax return and you can claim the 5% tax paid as a foreign tax credit to offset the Australian tax assessed on this income.

International Tax Planning Strategies

Due to the potential complexities involved in dealing with taxes from multiple countries, and the rules and regulations of managing income from multiple countries, it is important to seek appropriate tax advice. International tax planning strategies allow you to optimise your global tax position by factoring in your options around the types of structure, business, and interactions that your business has in the US and in Australia.

Setting up your business overseas is one of the most exciting things that many of us will do in our business career.

Not only are we, as business Founders or C Suite executives, moving with the business – but the idea that we are taking our business proposition to a new foreign market is a thrill and a bit daunting in many respects.

Establishing my business in Singapore in March 2004 was a completely foreign experience in so many respects. There were many logistical challenges to deal with including adjusting to a new business environment, a new regulatory regime and building a totally new market for our product and services.

For most of you setting up or moving a business you will be pre-occupied with establishing revenue earning operations.

This means that often tax and other planning is left until you arrive.

This, of course, is way too late.

This article covers some issues to address ahead of time.

Expecting The Unexpected

Make sure you really examine how to manage a number of common risks as you expand into your new markets including:

• The real financial cost of expansion (it will take longer and cost a lot more to break even)

• The cultural divide between domestic and foreign markets (get a copy of the book The Culture Map by Erin Meyer) which is to say that the way people understand communication and make decisions is often a major reason why the business will not succeed in the new location

• Regulatory differentials between domestic and foreign markets (expect the approach of the regulator in your new country to be vastly different from your home country)

• Download a copy of my book ‘Expatland’ from our Expatland website 

Setting Up Business

Planning your overseas expansion generally requires you working with your accountants in both countries for between six and twelve months before you head overseas.

One of the key things to understand is that if a subsidiary or a branch pays tax overseas there is some form of tax credit when profits are remitted to the parent company.

Sometimes the best country to pay tax in is where the majority of shareholders live. 

This is so that shareholders might be able to get a credit for tax paid by the company.

Foreign tax paid at the company level is generally not something that shareholders in another country get a tax credit for.

You need to spend some time thinking about the best form of business structure also. 

In my experience, while the main forms of business entities can vary from country to country, those countries with English common law regimes, generally have similar types of structures.

Many countries have structures that provide limited liability to owners but are treated as ‘flow-through’ vehicles for tax purposes, so only the owners are taxed. A classic example is a US LLC (limited liability company).

Other Tax Issues To Consider

Your focus should be on the key issues to consider on departure such as:

Issue 1: How does the foreign country tax system work?

In a number of countries, the US being a prime example, there can often be three levels of tax. For example, in New York, there is federal tax, state tax and city tax to contend with. In other countries like Hong Kong, foreign income is exempt from tax.

Issue 2: Transfer pricing issues

What transfer-pricing issues will you have to deal with. Having prices above or below market value for transactions between related companies is a major tax risk in the present global environment.

As an example, recently a prospective client in the global travel business told us that they had a ‘back office’ for their IT department in San Francisco. 

They then told us that their previous accountant had told them they did not have to worry about filing a US tax return – because the branch was not charging any expenses back to Australia and they were just covering their direct costs!

Great news, they thought, until we had to tell them that it was totally incorrect.

Upon a review of the facts of the case, it actually turned out that they had a ‘permanent establishment’ in the US. This gave them a US tax filing obligation.

The previous accountant also completely missed that transfer pricing rules demand that a market price be charged by the San Francisco office to the head office for the services being provided to head office.

Our client had no idea about these issues.

This is one of the challenges we regularly face when dealing with clients coming to us from domestic-only focused firms.

Firms that focus only on single country tax systems with little or no expertise in international tax, nonetheless, often seek to advise clients going overseas. 

Rather than admitting ‘they don’t know what they don’t know’ and looking to work with a specialist firm to get some outside help, they try to do it in-house.

Usually, this leads to expensive mistakes.

Issue 3: Using debt or equity to fund the foreign expansion

In using capital to start your foreign business, one of the key issues to consider is how to get money into your foreign business operation and then how to get profits out.

Many people are tempted to take the view that lending money into the foreign business is easier because it can be ‘repaid’ with little or no complexity. 

The general thinking being that money that goes in as a loan can come out as a loan, right? 

Well, it is not always that simple.

Many foreign countries have rules that require the payment of interest on inter-company loans.

Issue 4: How to send profits to the home country

Having considered how to fund your foreign business and make it profitable, the next question to think about is how profits can be remitted to your home country.

There are a number of techniques that can be used to send profits home. These include dividends, interest, or royalty payments. 

Other techniques include management fees and head office recharge. 

One of the issues to consider here, includes the likely imposition of a foreign withholding tax on payments out of the country. 

Planning profit repatriation is a key issue to consider.

Issue 5: Review your intercompany pricing model don’t assume

Many businesses – especially large American businesses adopt a ‘one size fits all’ approach.

Rather than take a country-by-country approach to looking at how to price transactions between group companies, larger businesses just assume they can apply a Group Policy across the board.

That is not acceptable in most advanced tax regimes.

Consider the real-life case study that I dealt with recently.

CabinetMaker Inc (not their real name)

‘We don’t do things that way’ was what the US-based CFO told me when I suggested they get an arm’s-length review of their ‘global transfer pricing model’ by an Australian transfer pricing specialist.

‘CabinetMaker Inc’, was supplying IT products and services from the US to Australia.

They decided that the Australian company would, ‘just like all other overseas subsidiaries’, receive an 8 per cent payment from the US office for the services it provided the US office from Australia.

A couple of months before, the CFO had called me following a referral from a US client.

Given we have a US–Australia tax specialisation, they called us to see if we would prepare their Australian income tax return for their sole Australian company.

The company in Australia had a ‘representative office’ function.

Its purpose was to source leads in the Australian market and then refer those leads to the US office to complete the sales process and the forming of the business relationship.

The US company was being very careful that what it did in Australia did not give it a ‘taxable presence’.

All reasonably standard stuff they thought.

When I asked how they arrived at the 8 per cent, they mentioned that they had a pricing model in Chicago.

They said that the ‘Chicago model’ was used globally to justify how 8 per cent was ‘payment enough’ for sourcing sales in Australia.

I persisted with a few questions, as follows:

So, with three questions, I could see that CabinetMaker Inc. was relying on a home country pricing model developed with no understanding of the Australian market.

A fatal mistake to make when you are a new company expanding abroad.

I attempted to acquaint them with the realities of doing business away from the US.

They were in another country now and they had to adapt to the differences in the market.

Needless to say, when the CFO hit me with the comment, ‘I will take it to the Board of Directors and come back to you’, I heard nothing more from them.

The aftermath to the above is that recently a story broke in the Australian media that the company, a subsidiary of a US tech company, was being audited by the Australian Taxation Office.

The media reports noted that their transfer pricing practices were suspect.

The global giant failed to adapt its pricing model between group companies and did not want to listen to advice.

They did not want to unlearn what they thought they knew.

They persisted in trying to apply an overseas model without adapting to their new surroundings. 

As a result, their business practices were found wanting in Australia and abroad.

The above mistake is reasonably common; that is, companies expanding abroad believe they can bring their own way of doing business with them. 

Nine times out of ten that is incorrect.

When companies expand to a new country, it pays to go back to first principles, get proper advice and assume nothing. 

Adapting to your new surroundings is essential.

We understand that business owners and entrepreneurs require specific advice from experienced professional advisers in multiple jurisdictions and that a migration tax plan has to be prepared for a company – just as it does for an individual.

Examples Of Unintended Arrival

Example 1 

A foreign company establishes a branch in the arrival country.

This occurs when senior directors of a foreign company remain directors of the foreign company and they change their personal tax residence.

As is commonly the case, the directors continue to ‘run the foreign company’ from their new location. They often do this without realising that they have unwittingly brought the foreign company into the purview of their arrival country.

This triggers tax filing and other reporting obligations.

Example 2

Shareholders leave their home country to live abroad, and while they may not be directors of the foreign company, they remain nonetheless individual shareholders.

In this instance, many tax regimes will demand that tax be paid on the earnings of the foreign company as the profit belongs to the shareholders now living in their new country.

This tax exposure would arise by the ‘controlled foreign corporation’ legislation that many countries have.

If one or both of these unintended actions has occurred, then there is a need to value the assets of the company and understand the value of the shares in any foreign company.

Often, the ‘starting cost base’ of the company assets is relevant because that is the basis upon which future capital gains are calculated. 

Most clients miss this step unless properly advised.

Companies that ‘arrive’ on an unintentional basis now have two tax returns to do one in their home country and one in their arrival country!

Planned Arrivals

When we have an opportunity to work with clients ahead of their departure, we can plan how best to ‘move the company’.

Taking your business abroad is an exciting time for most people. Full of challenges and new opportunities, it is often a make-or-break time for a corporate group.

My view is that if you undertake a proper tax planning exercise covering some or all of the above issues before you leave, then the thrill of setting up your business overseas will not be overshadowed by unintended tax and business issues.

This article relates to foreign business founders with an active business, who are moving to the US. There is a risk that foreign earnings may be double taxed when your organisation is taxed as a US entity. This is due to the application of US attribution rules (Controlled Foreign Corporation (CFC) rules) and Passive Foreign Investment Company (PFIC) rules.

To avoid being double taxed and ensure that foreign tax credits can be appropriately applied, it may be advisable to make a check-the-box election. This election essentially means that foreign corporations are choosing to elect their US tax status at the point in time that the US tax system becomes ‘relevant’ to them.

This check-the-box system is a tax regime that doesn’t just impact organisations that are set up in the US. It can also impact Australian businesses and global businesses when the foreign founder of the corporation moves to the US.

When does the US tax system become ‘relevant’ to a foreign corporation:

The US tax system is considered to be ‘relevant’ to a foreign corporation when one of the following applies:

a) the foreign corporation derives US sourced income;

b) the foreign corporation is required to file an income tax return in the US; or

c) the owner of a foreign corporation becomes a US tax resident (ie a US Person).

Why might a check-the-box election be made?

The most basic reason for making the check-the-box election is to ensure that the owner of the corporation in the US is properly credited with the foreign tax payments. A check-the-box election will avoid the attribution of income under CFC rules or the loss of long term capital gains tax rate discounts when shares are transferred in a passive foreign investment company (PFIC).

When will a foreign corporation be a CFC?

When US shareholders own more than 50% of the shares, either directly or indirectly, then the foreign corporation will be considered to be a controlled foreign corporation (CFC). To be considered a ‘US shareholder’ the person must own more than 10% of the voting rights or stock value of the foreign company.

When is a foreign corporation a PFIC?

A passive foreign investment company (PFIC) exists when one of the following two conditions are satisfied:

1. Passive investments generate at least 75% of a corporation’s gross income (as opposed to regular business activities); or
2. At least 50% of the corporation’s assets create passive income. Passive income includes interest, dividends and capital gains.

What is a foreign eligible entity?

A foreign eligible entity is defined by whether a member has limited liability or not. This is a default classification under the check-the-box regulations. When all members of the corporation have limited liability the US taxes the foreign eligible entity as a corporation. When at least one member does not have limited liability the entity is not a foreign eligible entity.

An eligible entity may make a check-the-box election to opt out of the default classifications.

Warning on making an election after default classification has been made

It is important to make your election prior to the default classification being applied. This is because making a later election will change the organisation’s classification. Such a change in classification can trigger a liquidation event.

When you should make a check-the-box election:

To ensure the check-the-box election is made appropriately you should consider making the election when you meet all of the following conditions:

1. you own a foreign corporation
2. the US tax system is relevant for your corporation
3. you need to apply foreign tax credits against your US corporate tax regime
4. you wish to avoid applying the CFC or PFIC rules.