Branch vs. Subsidiary - Setting up your Business in Australia

Tuesday 6 March 2018

Article by Stefanie Lowe, Penguin Management

One of the most common questions we get asked from US businesses wanting to establish in Australia is whether they should set up a foreign branch office or an Australian subsidiary.  

Choosing the right business structure for you

There are no clear-cut rules, which entity is the best choice – both set ups have their advantages and disadvantages over the other.  
Your decision will most likely be based on the most beneficial outcome in terms of taxation, contractual obligations, employment of staff and immigration visas, and from an efficiency and operational viewpoint.

Key considerations

The key considerations when deciding which is the best structure to set up your business in Australia include:

Today -  How are your existing business structures set up globally?  

Strategy - Looking at the big picture of your global entity and seeing how your expansion in Australia will fit in with this strategy.  What are the aims of your business wanting to set up in Australia?

Future - Your plans for the future. What will your global company look like in two years, five years, ten years’ time? Will you be hiring employees?

Taxation - The taxation implications of the different structures and what is the most effective way to structure your business in Australia.  There are double taxation treaties available for some global businesses, can you benefit from these?

Business structure options

US businesses generally have two options when establishing operations in Australia:

1. A foreign branch; 
This is the establishment of an Australian branch of your existing US business.  
The US business trades in Australia.  A foreign branch office is not a separate legal entity, however the branch must comply with Australian legislation.

2.      An Australian subsidiary company
The US company establishes an Australian company.  This becomes a subsidiary of the US company, and it is this Australian subsidiary company which trades in Australia.  In most instances, the US company will own the shares of the Australian company.

An Australian subsidiary is recognised as a separate legal entity with limited liability and is an Australian resident for tax purposes.  The subsidiary can be wholly owned by a foreign shareholder, however it is required to have at least one Australian resident director. 

Branch vs Subsidiary 

FOREIGN BRANCH
To open and register a foreign branch in Australia, you will need to provide considerable corporate and supporting documentation to the Australian Securities Investment Commission (ASIC), much more than if you were starting an Australian company. A branch will then be subject to Australia regulations.

ASIC requires foreign branches to annually lodge a balance sheet, P&L and any other documents the company is required to prepare by law in its country of origin.  

No audit is required, however, ASIC has the authority to request audited financial reports if previously lodged reports are insufficient.

AUSTRALIAN SUBSIDIARY
ASIC requires Australian companies to submit an annual review statement verifying their shareholders, directors, and addresses with a small annual fee.  A solvency resolution signed by the directors must be drawn, as well.

What about Australian taxation laws?

Australian tax laws are different to US taxation.  It’s important to understand the Australian tax implications to ensure your business is compliant, as well as effective and efficient.

Taxation details of a foreign branch - 

• The foreign branch may not be taxable in Australia depending on whether it constitutes a ‘permanent establishment’ in Australia.  Permanent establishment includes considerations such as a fixed place of business in Australia, the representatives in Australia closing contracts, the plant and equipment in Australia, if construction projects are taking place and how long your staff are spending in Australia.
• A branch may not have to pay withholding tax.
• Losses can be utilised in the US company
• A sale of branch assets will generally be subject to capital gains tax (CGT).

Here is further information on taxation of branch profits. 

Taxation details of an Australian subsidiary - 

• It is taxed in Australia on taxable income at a rate of 27.5 - 30%, depending on annual turnover.
• Profit repatriation is lost if an unfranked dividend from the Australian subsidiary were to be paid to its parent company.
• Losses are trapped in the subsidiary company
• A capital gains tax (CGT) exemption may apply upon the ultimate disposal of shares in the Australian subsidiary.

The treatment of assessable income for Australian tax purposes is where the two entity considerations differ greatly.  

Assessable income for branches includes all Australian source income, while assessable income for subsidiaries includes all worldwide income, subject to any deductions or credits.  

However, both branches and subsidiaries are subject to the application of Double Taxation Agreement, of which USA has an agreement.  

For more information on tax treaties, check with the ATO here.

As you have read, choosing between a branch versus subsidiary company is a complex decision and needs careful thought and planning to choose the right structure suitable for your business.  

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