Company Setup - Abdera Australia

Behind Australia’s stable, strong economy lies substantial opportunities for foreign companies to set up in Australia. If you are contemplating doing business in Australia, choosing the structure of your Australian entity, branch vs subsidiary, will be one of your considerations.

Foreign companies can choose to establish a business in Australia –

As a branch of a foreign company or as
A wholly owned subsidiary of a foreign company.

Understanding the framework of each entity will be important in making the right decision for your business when setting up in Australia.

Choosing between a branch or a subsidiary will affect costs, reporting, profit and long-term growth. Your decision should also consider taxation, legal considerations, and commercial considerations, including running costs, funding requirements at the local level, risks, and third-party requirements.

We do recommend you get expert advice before proceeding in either direction. There is a lot to consider.

Firstly, let’s define what each entity is –

What is a foreign branch?

A foreign branch operates as the Australian branch of your overseas business.

This structure allows your overseas business to trade in Australia. However, it is not a separate legal entity. It must comply with Australian legislation.

Setting up a foreign branch

When setting up a foreign branch of an overseas company in Australia, you must provide extensive corporate documentation to ASIC, much more than if you were setting up an Australian subsidiary.

Once your foreign branch is set up, you will be required to annually lodge a balance sheet, profit and loss and any other report your foreign company is required to prepare by law in its country of origin. If ASIC deems these reports insufficient, they may request audited financial reports.

What are the taxation regulations of a foreign branch?

Taxation will depend on whether ASIC determines your operations as a Permanent Establishment (PE). Factors that determine permanent establishment include the fixed place of business and its plant and equipment in Australia, how long your staff are spending in Australia and the delegates closing the contracts in Australia, and if construction projects taking place.

Please note: If Australia has a double-taxation agreement with your country of origin, the meaning of permanent establishment is determined by the agreement.

Other taxation details

A foreign branch may not have to pay withholding tax depending on whether the two countries have a double tax agreement. If not, the foreign branch in Australia will be taxed on its taxable income at a rate of 30%.
Losses can be utilised in the country of origin.
Any sale of branch assets will be generally subject to capital gains tax (CGT).

For further details and clarification on the taxation of foreign branches, please click here.

What is an Australian subsidiary?

When an overseas company establishes a new company in Australia, this new company becomes a subsidiary of the foreign company. This Australian subsidiary company is free to conduct business and trade in Australia.

The foreign company owns and holds shares in the subsidiary company. It is recognised as a separate legal entity and is required to register with the Australian Securities and Investments Commission (ASIC) and pay taxes.

Setting up an Australian subsidiary

Setting up a new Australian subsidiary which operates as an Australian company, requires standard new business documentation such as choosing a business name, creating a constitution, electing officeholders – Australian resident director and public officer – and registering it with ASIC and the Australian Taxation Office.

Each year, the Australian subsidiary must submit an annual review statement verifying the shareholders, directors, business addresses as well as a solvency resolution signed by the directors.

What are the taxation regulations of an Australian subsidiary?

Depending on the business’ annual turnover, the tax rate is between 25% – 30%.
Eligibility for the lower company tax rate depends on whether you are a base rate entity from the 2017–18 income year and onwards.
If an unfranked dividend were to be paid from the Australian subsidiary to the parent company, the profit repatriation will be lost.
A capital gains tax exemption may apply when shares are disposed of in the Australian subsidiary.
Losses are trapped in the subsidiary company.

	Australian subsidiary company of foreign business	Foreign branch office of foreign business
Corporations Law (Australia’s code of company law, regulated by the Australian Securities and Investment Commission (ASIC)	A separate legal entity Registered with ASIC and given a unique identifying number, an ACN (Australian Company Number) Liabilities remain with subsidiary in the absence of guarantees and like arrangements or if the subsidiary trades while insolvent	Not a separate legal entity Foreign company may be required to register with ASIC and be given a unique identifying number, an ARBN (Australian Registered Body Number) Liabilities are those of the foreign company
Officeholders	Australian resident director Australian resident public officer	Australian resident local agent Australian resident public officer
Audit Requirements	Audit required under Australian Corporations Law if company is a disclosing entity, a public company, or is a large proprietary company. Class relief may be available, removing the need for audit.	Audit required under Australian Corporations Law if controlled by a foreign corporation Class relief may be available, removing the need for an audit
Ongoing Administrative Responsibilities	Must lodge annual returns Filing fee	Must lodge annual returns with ASIC Foreign company must lodge financial reports, including profit and loss, balance sheet, and statement of cash flows with ASIC
Taxes	An Australian resident company is subject to company tax. A non-resident company is taxed on its Australian source income at the same rate as a resident company Foreign	Subject to Australian income tax on income sourced in Australia
Australian Tax Rate	Corporate tax rate is 25-30% Withholding tax applies to various international payments	Corporate tax rate is 30% Withholding tax applies to various international payments No branch profits tax

Other information to consider

Double tax agreement (DTA) – is your country listed?

Double tax agreements between Australia and other countries, profits derived by a foreign entity that carries on business in Australia will only be taxable in Australia if the foreign entity carries on business in Australia. Click here for more information on ATO International tax agreements h a permanent establishment (PE).

Click here for more information on ATO International tax agreements

Transfer pricing

The Australian Taxation Office is closely scrutinising artificial pricing and charges between entities. Transactions between these related entities in Australia and overseas will need to be proven as reasonable and comply with the commercial arms-rate principal, including providing detailed documentation to satisfy the transaction. Significant fines and penalties will be enforced.

Click here for more information on transfer pricing.

Deciding between establishing a foreign branch or an Australian subsidiary can be a complex process. It is important to consider all the factors before making a final decision. If you need specific advice for your business, feel free to reach out to us. With over 20 years of experience, we have assisted numerous businesses like yours to make informed decisions and start their operations strongly.

You can call us on +61 2 8916 6259 or contact us now for assistance.