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Overseas Companies and Franchisors “doing business” in Australia

By November 19, 2021 No Comments
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A company may grant rights or seek to do business in Australia from overseas and the question then is whether the entity may still need to register as a Foreign Company in Australia under the Corporations Act 2001 and also whether the entity may be considered a resident and “doing business” in Australia for tax purposes.

There are always options to be considered here whether the Franchisor should:

(a) Register their entity as a foreign company to carry on its business in Australia from
its overseas headquarters; or

(b) Establish a wholly owned Australian subsidiary to operate in Australia.

There are a number of considerations such as tax, corporate compliance, risk and protection of the overseas entity and also operational considerations.

Registration as a Foreign Company with ASIC.

The first key issue is whether the overseas company should register as a foreign company with ASIC the Corporate Regulator.

The Corporations Law provides that a foreign company must not carry on business in Australia unless it is registered with ASIC. There is no definition of what “carrying on business” means in the Act.

The key issues are if it has a place of business in Australia it must register and also if it carries on business.

Section 21(2) states a body corporate carrying on business in Australia, or in a State or Territory, includes a reference to the body:

(a) establishing or using a share transfer office or share registration office in Australia, or in the State or Territory, as the case may be; or
(b) administering, managing, or otherwise dealing with, property situated in Australia, or in the State or Territory, as the case may be, as an agent, legal personal representative or trustee, whether by employees or agents or otherwise.
What is not carrying on a business?
Section 21(3) states despite subsection (2), a body corporate does not carry on business in Australia, or in a State or Territory, merely because, in Australia, or in the State or Territory, as the case may be, the body:
(a) is or becomes a party to a proceeding or effects settlement of a proceeding or of a claim or dispute; or
(b) holds meetings of its directors or shareholders or carries on other activities concerning its internal affairs; or
(c) maintains a bank account; or
(d) effects a sale through an independent contractor; or
(e) solicits or procures an order that becomes a binding contract only if the order is accepted outside Australia, or the State or Territory, as the case may be; or
(f) creates evidence of a debt, or creates a security interest in property, including PPSA retention of title property of the body; or
(g) secures or collects any of its debts or enforces its rights in regard to any securities relating to such debts; or
(h) conducts an isolated transaction that is completed within a period of 31 days, not being one of a number of similar transactions repeated from time to time; or
(j) invests any of its funds or holds any property.

Summary.

It seems clear that carrying on any regular business activity means that an entity is doing business and needs to be registered. Australian case law and an ATO Draft Taxation Ruling TR 2017/D7 confirm the following are indicators of an entity carrying on a business:

whether a company’s activities have a purpose and prospect of profit
Organisation of activities in a systematic and business-like manner
Business activities carried on as a going concern.
An intention to make a profit.
Where the business activities are repetitive.
Where books and records are kept and maintained.

If a foreign company carries on a business in Australia, they are required to be registered with the Australian Securities and Investment Commission (ASIC) and a failure to do so is an offence under Australian law.

Taxation Test (ATO)

The test for “carrying on business” is a somewhat different test for taxation purposes.

The test of an Australian resident for tax purposes depends on whether the “central management and control” of the company is in Australia or overseas which is a matter of fact.

ATO Ruling TR 2017/D2 sets out 4 matters the ATO will look at:

i. Does the company “carry on a business” in Australia?;

ii. What does central management and control mean in the circumstances?;

iii. Who exercises that central management and control? e.g. Is there one person making the decisions? Are they the resident director? Or is it an overseas Board?;

iv. When and where central management and control exercised is a factor?

Summary:

Based on the High Court decision in Bywater Investments Ltd and Ors v Comm of Taxation: Hug Weng Bank Berhad V Comm of Taxation (2016) HCA 45 (Bywater Investments) and the ATO Ruling a company will generally have its place of central management and control in the location where the person(s) who make the critical decision’s actually make those decisions.

Registering as a Foreign Company with ASIC:

A “foreign company” under the Corporations Act 2001 (Cth) (Corps Act) is a body corporate incorporated outside Australia that does not have its head office or principal place of business in Australia.

Register as a foreign company:

If your “foreign company” wants to “carry on a business” in Australia, your foreign company must be registered as a foreign company under the Corporations Act with ASIC.

Registration requirements:

If you are doing business (apart from the above exceptions) in Australia the following documents must be provided to ASIC to register as a foreign company:

certified copy of a current certificate of incorporation or registration, or a document of similar effect;

certified copy of constitution;

list of directors containing personal details of those directors;

a memorandum stating the powers of any directors who are resident in Australia and members of a local board of directors;

certain information and documents relating to registrable charges on property of the foreign company;

notice of the registered office of the foreign company in its place of origin (if it has one) or otherwise its principal place of business; and

notice of the foreign company’s registered office in Australia which complies with section 601CT of the Corps Act.

Australian registered office, local agent, and public officer:

In addition to an Australian registered office, you will need to appoint an Australian local agent/representative who is personally liable for anything the foreign company is required by law to do, and a public officer for taxation purposes must also be appointed.

Australian Registered Business Number ARBN: ASIC will issue your foreign company with an Australian Registered Body Number (ARBN). Foreign companies must ensure that their ARBN and their name (as registered with ASIC) and place of origin are shown on their public documents.

Establishing a Subsidiary entity:

This involves registering a proprietary company (i.e., one with less than 50 shareholders) as a subsidiary of the foreign company.

The Subsidiary entity carries on business and trades in Australia and is required to be registered with ASIC and the ATO.

There must be at least one Australian director, an Australian registered office, and there are ongoing reporting requirements with ASIC. Australian companies must maintain a company register and unless an exemption applies lodge audited financial statements each year.

On registration the company is given an Australian Business Number, (ABN) Tax File Number (TFN), and typically register for Goods and Services Tax (GST) (assuming annual turnover exceeds $75,000) and Pay As You Go (PAYG) withholding tax where it has employees or contractors, or the business makes payments to other businesses, that do not quote an ABN.

Does a Foreign company need to apply for an ABN (Australian Business Number) with the ATO?

Non-Resident entities: may be entitled to an ABN where they are either: carrying on an enterprise in Australia or in the course of carrying out an enterprise or makes sales connected with Australia. The entity does not have to be located in Australia.

You need to register for an ABN for GST and PAYG withholding tax. The ATO will issue a unique 11-digit identifier The ABN should be on all invoices and documents for sales made. A failure to do so means the other business may withhold from their payment 47% (from 1/7/2107) under the PAYG system.

When applying for the ABN you can then register for tax obligations such as GST and PAYG.

A business will need to register for GST where their annual turnover is $75,000.00 or more and register within 21 days of reaching or exceeding it.

A business can elect to register if their turnover is below that threshold but then they must charge GST.

So, if a small business and you are unlikely to reach that turnover, you can offer prices without charging the 10% GST and be competitive or charge the same as your competitors and retain the extra as profit.

GST issues specific to Franchising:

(a) GST payable by franchisees to non-resident franchisors:

i. GST is payable on franchise fees paid on or after the 1/7/2000 unless the franchise services are exempt as a financial supply.

ii. Royalty payments made to a non-resident franchisor require the franchisee to withhold a flat rate of 30% from the gross amount of a royalty payment and 10% from the gross amount of an interest payment.

iii. The double tax agreement with the non-residents country of residence may reduce that rate.

iv. The franchisee remits that sum in its BAS activity statement for the reporting period (usually quarterly) with an annual report.

v. The amount of the royalty payment can only be deducted as a business expense to the franchisee where the franchisee has withheld the tax from the royalty or interest, and it has been paid to the ATO.

If the amount withheld is not the same as the amount the payee owes, they could apply for a refund if the amount withheld and paid to the ATO is more than tax owed or make a top up payment to the ATO if the amount withheld is less than the tax owed.

Payments made by a franchisee to a franchisor will generally include GST where the franchisor is GST registered. The franchisee where registered will receive a GST credit for the GST paid, included in the initial franchise fees; Franchise renewal fees; Franchise royalties; Advertising marketing fees; Transfer fees; and Training fees.

Tax Deductibility of Franchise Fees:

The Initial or upfront franchise fee or transfer fee is not deductible as a business expense, it is a capital cost forming part of the cost base of the business.

Franchise Renewal fees may be part of the cost base but if not included in your cost base it may be deductible as a business expense subject to prepayment rules.

Royalties and interest payments and ongoing training fees are a deductible business expense in the year you incur them.

(b) Business name and Trade marks

If the foreign company or Australian subsidiary wishes to trade under a name other than its own name (as registered with ASIC) it must register it as a business name with ASIC.

Whether or not the foreign company is trading under its own name or some other new name, a trade mark search must be done to minimise the risk of potential infringement of another business or parties existing registered or unregistered rights in the proposed name and avoid any claim for misleading or deceptive conduct under the Competition and Consumer Act 2010 (Cth).

(c) Trade mark registration

Trade mark registration confers a monopoly right to the holder of the trade mark to use the mark in respect of the goods or services for which it is registered. You should do the searches to avoid infringement and protect your brand by registering your name in the relevant classes before entering into any foreign country.

(d) FIRB Federal laws for foreign investment

Foreign investment approval may be required if a foreign person (including a foreign company) acquires a substantial interest in an Australian company[. There are various special circumstances where approval will always be required, and approval will need to be sought from the Foreign Investment Review Board for foreign government investors, investment in certain land, the media sector, and mining and production tenements.

What if you do not have a resident Director or Agent in Australia?

MMRB can be your required Australian registered office and also (subject to certain requirements) be your resident Director, Public Officer or Agent where you may not have any trusted contacts in Australia.

Access to Specialist Tax consultants regarding:

Transfer pricing- setting prices of goods and services exchanged between subsidiary, affiliate or commonly controlled companies.

Thin capitalisation- debt and equity tests to identify which finance arrangements constitute debt to prevent multinational entities shifting profits out of Australia by funding their Australian entity with high debt level to reduce the tax payable. The

Australian Govt is tightening these rules to provide that entities align the value of their assets with the value in their financial statements.

Double tax agreements- tax treaties (DTA) agreements between countries to avoid double taxation of business and personal income. Australia has signed treaties with more than 40 countries.

Local operational Support for Foreign Companies

We have access to trusted consultants who can provide support in the areas of accounting and ASIC and ATO compliance and company secretarial support.

MMRB have Accredited Specialist Lawyers in the areas of Corporate and Business Law Franchise and Licensing, Employment Law, Contracts and Consumer Law and regulatory compliance to assist overseas clients.

We know what business sectors are doing in the Australian market and can provide our overseas clients real on the ground feedback about the market.