When your client expands their business overseas there is one foundational question you need to ask: “Is the client’s overseas company a tax resident in Australia?”
This foundational question will shape the tax advice required for a proposed or existing company that operates a business in another country.
With a growing number of Australian businesses looking to expand overseas, accountants will increasingly have clients who have overseas subsidiaries. As their accountant, you are their first point of contact for guidance as to the types of tax issues involved in expanding internationally.
If international tax isn’t your specialty, you might be wondering; how do I determine corporate tax residency?
As international tax specialists, we have developed an online tool to guide with the initial consideration of issues.
Our corporate tax residency decoder covers the essential tests used to determine corporate residency. These include:
- Place of incorporation
- Location of management and control of the company
- Country where business is conducted
- Residence of shareholders with voting power
It is important to note that different countries will have different residency rules. This tool is a residency determination for Australian corporate residency only.
Determining Tax Residence
A foreign company is considered to be resident of Australia (See Section 6(1)(b) of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) if it:
(i) carries on a business in Australia; and either
(ii) has its central management and control in Australia, or has its voting power controlled by shareholders who are residents of Australia.
Location of Management and Control
We consider that the threshold issue when considering the residency of a foreign company is to determine where the central management and control (CM&C) of the company is located.
It may be wondered why that is the threshold issue, when the construction of the test of corporate tax residency seems to start with the question of whether a business is carried on in Australia.
We take the view that the correct starting point is the location of CM&C, because of several key decisions in case law, recently endorsed by the Federal Court in the Bywater case.
The effect of those decisions is that if central management and control is exercised in Australia then it will follow that the company must be carrying on a business in Australia. That is because the act CM&C of a company usually carried on by a board of directors is an exorable part of the carrying on of a business.
Accordingly, if a foreign company has its central management and control in Australia it will almost certainly be resident of Australia as the test is currently understood. The ATO has softened its position in relation to this issue because it is wary of the problems that may be caused by an overzealous application of this approach for large Australian corporate groups, however it is an issue that small business must especially be mindful of because of the lack of separation of ownership and control and the often dominant influence.
However, if your client’s company manages and controls the company from outside of Australia, then you will need to consider other factors as well.
You can read more additional details in the following resources:
- ATO Taxation Ruling TR 2018/5 Income Tax: Central Management and control test of residency, and
- ATO Practical Compliance Guide PCG Guideline PCG 2018/D3 Income Tax: central management and control test of residency: identifying where a company’s central management and control is located.
Country where the business is carried on
An important question remains whether the foreign company in question actually carries on a business in Australia.
Whether a company carries on a business in Australia is a question of fact.
It is critical to note that the expression carrying on a business has its common law meaning, which would include those activities which obviously give rise to the company income but also includes activities related to the management of a company.
As we have noted, where central management and control is located in Australia, then the company will also be considered to be carrying on a business.
However, often foreign companies will have their central management and control overseas but may nonetheless still be carrying on a business in Australia.
An example would be an overseas engineering company which is controlled by a board of directors in Singapore, which sends engineers to Australia to work regularly on projects in Australia. Such a company would clearly be carrying on a business in Australia and consequently may be resident in Australia if its voting power is controlled by Australian resident shareholders.
Keep in mind that even if the company is not considered a resident under these factors, it may still be a Controlled Foreign Corporation (CFC).
Residence of shareholders with voting power
At our final step we look at the ultimate control of the company, being that of the voting shareholders.
If your client’s company carries on business in Australia and the company is controlled by shareholders who are residents of Australia, then the company is a resident.
Conversely, if your client’s company carries on business in Australia but does not have its central management and control here and also does not have its voting power controlled by shareholders who are residents of Australia, then the company is not a resident.
It is possible that your client’s company may be a tax resident of Australia and a tax resident of another country under the tax laws of that jurisdiction.
In these instances, you will need to consider any relevant double taxation provisions as well as the residency rules of each country.
Decoding Corporate Tax Residency
For a simple way to check if a company is an Australian tax resident we refer you to our online residency decoder.
Is Your Client’s Company a Corporate Tax Resident?
In summary, residency is about location of control of the business. This is determined by an assessment of the location of incorporation, location of the business and the location of those who manage or control the business or the company. When a company is incorporated in Australia it is automatically an Australian resident corporation. However a company that is incorporated overseas will also be an Australian resident where it carries on business in Australia and is controlled within Australia or by Australian resident shareholders.