Australia continues to be an attractive destination for foreign investments which account for about 4% of its GDP. Between 2016 and 2017, the Foreign Investment Review Boards (FIRB) approved 14,357 investment applications representing AUD 193 billion of proposed investments. A seasoned expert for cross-border investments into Australia, Dr Angelika Yates (Addisons) sheds light on the legal framework for European firms seeking to do business there. This first part focuses on corporate and tax matters.
Dr Yates, what advantages exist for European firms seeking to expand in the Australian market?
Yates: Despite having a population of less than 25 million, Australia is one of the largest and most resilient economies in the world, with a GDP of AUD 1.84 trillion. Having experienced constant growth for over 20 years, Australia is a very attractive market for European firms seeking to expand their business. Based on factors like the ease of registering a company and obtaining relevant permits, Australia was ranked by the World Bank as the fourth-best large economy with regards to “ease of doing business”. The EU is currently Australia’s second largest trading partner, with bilateral trade being valued at EUR 45.5 billion per year. Notwithstanding certain hurdles to be overcome in the area of taxation and employment matters, the prospect of an Australia-EU Free Trade Agreement (FTA) means that the business relationship between these two markets will only continue to grow.
What business structures can be used to conduct business in Australia?
Yates: Foreign companies can choose to either incorporate an Australian subsidiary or establish an Australian branch by registering as a foreign company with the relevant regulator, the Australian Security and Investments Commission (ASIC). It is important to note that in the latter case, registered branches of foreign companies are not separate legal entities and thus all liabilities incurred in the Australian business fall directly to the foreign company. When establishing a subsidiary, the most commonly used type of company is the so called “proprietary company limited by shares” designated by the letters “Pty Ltd”. These companies may be 100% foreign owned and may have foreign directors. However, they must have at least one Australian resident director. The role of the resident director is often fulfilled by a service provider. Under Australian law there is no minimum share capital requirement. It is not unusual for a Pty Ltd to be established with only AUD 1.00 share capital.
What tax implications should foreign firms be aware of?
Yates: An Australian company is subject to Australian income tax which is applied at the flat rate of 30% or 27.5% for certain small businesses. All goods and services sold or imported into Australia are subject to a Goods and Services Tax (GST) of 10%. The Australian GST system is similar to “value added tax” indirect tax models adopted by most OECD countries. In particular, companies that are registered for GST are entitled to input tax credit for GST paid by them to their suppliers for goods and services received by them for business purposes.
When is a foreign company subject to Australian taxation?
Yates: This can only be the case if it can be shown that it has a permanent establishment in Australia. The general definition of this is a fixed place of business (premises) where employees of the enterprise carry on the work of the business. Merely advertising in Australia or selling to Australian customers from a website hosted outside Australia does not reach this threshold. Foreign firms, especially those in the early stages of entering into the Australian market, often seek to avoid having a permanent establishment in Australia for various reasons, including a higher administrative burden as well as potentially losing out on more advantageous tax rates in the home country.
Are there any frameworks of cross-border taxation?
Yates: Australia has over 40 bilateral double taxation agreements which define what constitutes a permanent establishment, including agreements with many EU member states. For instance, recent developments in this area of tax law include the widening of the definition of “permanent establishment” in the Double Taxation Agreement (DTA) between Australia and Germany in order to reflect a push by the OECD to broaden the definition of this term to avoid profit shifting. Under the German Australian DTA, it will be deemed that a German entity has a permanent establishment in Australia if the enterprise has someone in Australia who “habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise” including contracts for the transfer of goods or services for the enterprise or in the name of that enterprise. In a similar way, if a purportedly independent agent acts exclusively or almost exclusively on behalf of the foreign enterprise and is so closely related with that firm that all major business decisions come from the foreign firm, the agent will be deemed a dependent agent and thereby create a permanent establishment of that foreign firm in Australia.