Tax: Australians with business interests in foreign companies
There are many Australian residents who have business interests in overseas companies. These are often with overseas business partners with both as directors. Also, many people migrating to Australia have these overseas business interests when they arrive. For these companies to remain foreign companies and subject to taxation in the country they reside there are a number of things to consider.
Firstly. If the plan is to have the foreign company remain a foreign company then you do NOT want to have the attributes that will make it an Australian resident company. The residency test, under tax law, will make the company an Australian resident if it carries on a business in Australia and has its central management and control or 50 per cent of the voting interests in Australia.
Generally, if you have your central management and control in Australia you are carrying on a business in Australia. There may be disagreements from other countries on this issue and there may be tiebreaker provisions in double taxation agreements to determine residency.
To avoid this scenario, you need to ensure your high level strategic decisions are made overseas. These can be made in the board meetings. The level of decision making will be different for small to large businesses.
The ATO “Practical Compliance Guideline 2018/9” provides guidance on this issue. Covid has raised issues but the ATO should understand the practical problems in not being able to travel to overseas board meetings.
Secondly. These foreign companies are more likely be a controlled foreign company (“CFC”) and subject to strict rules. The control tests (strict, assumed and defacto) would be satisfied because the ownership percentage as shareholder on your own or including your associates would meet one of these tests. A business partner would be an associate of yourself and included in the test.
Once belonging to a CFC you need to consider whether the foreign company has active business income greater than 95% (active business) test. For the great majority of countries, (non-listed), if this test fails than certain income types such as interest, dividends, sales and service between associates and sale of shares will be attributable to the Australian shareholder each year. This is not so much the case for the 7 listed countries such as the UK and USA. Generally, only a very limited number of income types that are not comparably taxed are attributed.
Owning shares in the foreign companies through an Australian company shareholder has its advantages. If the shares are in the foreign company are sold there will be no capital gains tax due to the participation exemption.
Also, any dividend received in the Australian company will not be subject to tax.
This provides the opportunity to defer taxation on those dividends and investments in property and listed shares in the Australian company. Any dividends paid to the individual shareholders of the Australian company directly or via a trust would be assessable and there may be some franking credits available.
If, however, the business rather than the shares was sold by the foreign company (the CFC) than the gain may not be attributable income in Australia. This is because the business asset sold was used in carrying on a business and therefore not tainted income.
If a person is migrating to Australia and becoming an Australian tax resident then the foreign company shares would be valued at its market value. This market value becomes the cost base of the shares. They could be transferred to the Australian company at this market value. There would no capital gain.
For Australian tax residents transferring their foreign company shares to a new Australian company there are rollover options to be considered to avoid any CGT implications.
If not, then the capital gain may be eligible for a CGT discount of 50%.
6. Selling through overseas platforms or resellers
Many clients sell their products through overseas platforms. The customers are global and the products are manufactured overseas. Other clients sell the access to their Intellectual property through overseas platform commonly referred as “resellers”. These business structures clearly have taxation issues and have approached our firm for advice.
If any doubt about your tax liabilities, we welcome you seeking us out for advice.