Expanding your business overseas -
5 tax questions you need to ask first
Sally Preston
Expanding your business overseas can open up new customers, new markets and new growth opportunities. However, international expansion also brings significant Australian and foreign tax issues. Before a business hires people overseas, signs foreign contracts, establishes a foreign company, opens a bank account or moves intellectual property offshore, it should understand how the expansion will be taxed, reported and managed in both Australia and the overseas jurisdiction.
The tax consequences of expanding internationally depend on the structure used, the country involved, the location of people and assets, the terms of contracts, and the way profits are moved through the group. Getting these issues right at the start can reduce double taxation, avoid unexpected withholding tax, support transfer pricing positions and help ensure the business remains compliant as it grows.
Key message: The question is not just “where will the profits be made?” It is also “which country can tax them, how will they be reported, and how will cash come back to Australia?”
1. What structure will you use?
An Australian business expanding overseas may sell from Australia without a local presence, operate through a foreign branch or permanent establishment, or establish a separate foreign company or other legal entity. Each option can have different income tax, asset protection, banking, employment, reporting and commercial risk consequences.
For example, selling directly from Australia may be simpler at the start, but it may not work once the business needs local staff, a local bank account, a local licence or greater commercial substance in the foreign country. A foreign entity may provide clearer separation, but it can also create additional tax, legal and compliance obligations.
2. Could you create a permanent establishment?
A permanent establishment risk may arise where the business has a fixed place of business overseas, dependent agents, employees negotiating contracts, people habitually exercising authority on behalf of the Australian business, or other substantial activities in the foreign country. If a permanent establishment exists, the foreign country may seek to tax the profits attributable to that presence.
This issue should be reviewed before staff, contractors or founders start working overseas. Remote work arrangements, co-working spaces, local sales representatives and contract negotiation activities can all create unexpected tax and registration issues depending on the country and any relevant double tax agreement.
3. How will related-party transactions be priced?
Transfer pricing rules require international related-party dealings to reflect arm’s length conditions. This can apply to management fees, royalties, intercompany loans, guarantees, inventory, shared services, cost recharges and intellectual property arrangements.
The pricing should be considered before the transactions begin, not after year-end. Businesses should document the commercial reason for each charge, the method used to calculate the amount, and how the arrangement compares with what independent parties might have agreed.
4. Will withholding tax apply?
Cross-border payments such as interest, royalties and unfranked dividends can trigger withholding tax. Treaty relief may reduce the rate, but this depends on the country, the nature of the payment, the beneficial owner, and the required documentation.
Withholding tax should be considered when drafting intercompany agreements and cashflow models. If it is not planned for, the group may find that the amount received by the overseas or Australian entity is lower than expected, or that withholding obligations have been missed.
5. How will overseas profits come back to Australia?
If profits are earned directly by the Australian business, the cash may already be in the Australian structure. However, if a foreign company or other foreign entity is used, the business needs a plan for how profits will be returned to Australia or to the ultimate owners.
This may involve dividends, management fees, royalties, interest, loan repayments or other payments. Each method can have different tax consequences, including withholding tax, foreign tax credits, transfer pricing requirements, franking implications and timing differences. Modelling the after-tax outcome before the structure is implemented can prevent unpleasant surprises later.
Other international tax factors to consider
Some international tax issues will not be relevant to every expanding business, but they should still be considered early so they do not become an unexpected problem later. These issues may include foreign hybrid mismatch rules, Australia’s hybrid mismatch rules, controlled foreign company rules, foreign resident CGT issues, anti-avoidance rules, country-by-country style reporting obligations, and, for large multinational groups, Pillar Two global and domestic minimum tax rules.
For most privately owned Australian businesses, the immediate focus will usually be on structure, permanent establishment risk, transfer pricing, withholding tax, foreign tax credits, employment obligations and local reporting. However, groups with more complex funding, intellectual property, cross-border entities or significant scale should also review whether these broader international tax regimes could affect the expansion plan.
Hybrid mismatch rules can be particularly important where the same payment is treated differently in two countries, or where a structure produces a deduction in one country without corresponding income being taxed in another. These rules can be highly technical, but they should be checked before implementing cross-border financing, partnership, trust or entity arrangements.
Practical checklist before expanding
☐ Identify where contracts will be made and performed
☐ Confirm whether a foreign entity, branch or representative office is needed
☐ Model Australian and foreign tax on profits
☐ Consider withholding tax on payments between countries
☐ Prepare transfer pricing support for related-party charges
☐ Review GST, VAT, customs and employment tax issues
☐ Check whether hybrid mismatch, controlled foreign company, anti-avoidance or Pillar Two rules could apply
☐ Plan how profits will be repatriated to Australia or the business owners
☐ Consider whether foreign tax credits will be available
☐ Check reporting obligations in both Australia and the foreign country
Need help?
Smart Solutions Tax Advisory can assist with Australian international tax advice for business expansion overseas, including structuring, permanent establishment risk, transfer pricing, withholding tax, foreign income tax offsets and profit repatriation planning.
International expansion should be planned before the business becomes operational overseas. Once people, contracts, intellectual property and cashflows are already in place, it can be harder and more expensive to correct the tax structure.
Disclaimer: This article contains general information only and should not be relied on as tax or legal advice. Australian and foreign tax advice should be obtained before implementing an international expansion structure.
References / Useful links
ATO Pillar Two: Global and domestic minimum tax | Australian Taxation Office
ATO transfer pricing: Transfer pricing | Australian Taxation Office
ATO foreign resident CGT: Foreign residents and capital gains tax | Australian Taxation Office