Foreign companies may soon become tax residents

On 20 December 2018, the Australian Taxation Office finalised Practical Compliance Guideline 2018/9 titled “Central management and control test of residency: identifying where a company’s central management and control is located.”

The paper outlines the ATO’s change in compliance approach to identifying whether an overseas incorporated company may be considered to be an Australian tax resident. This paper follows the release of Tax Ruling TR 2018/5 “Income tax: central management and control test of residency.”

Historically, it was generally accepted by the ATO, that if an overseas company undertook an active trading business outside of Australia, then the overseas company would not be considered as an Australian tax resident even if the business had its central management and control in Australia.

However, the ATO changed this position and has taken the view that if the central management and control of the business is arguably in Australia, then by extension, for Australian tax purposes, the overseas company will also be considered to be undertaking business in Australia.

This change in position is significant and was opportunistically taken by the ATO after a High Court case provided comments on the application of the central management and control concept in Bywater Investments Limited & Ors v Commissioner of Taxation.

This change of approach unfortunately places higher compliance and governance requirements especially for private family groups that have made the investment and taken the risk to expand their operations into new global markets through the incorporation of foreign companies.

In particular, given Australia has a higher corporate tax rate than most of our Asia Pacific neighbours, if a foreign company is deemed to be an Australian tax resident, this could increase permanent tax liabilities. The issue can also be compounded if the company is considered to be an Australian tax resident under the change in approach and also a tax resident in a foreign country and therefore subject to double taxation (e.g. Australian does not have a Double Tax Agreement with Hong Kong).

Considerations to consider whether central management and control is in Australia

Fundamentally, the question of whether a foreign company will be deemed to have central management and control in Australia is based on the facts and circumstances of each taxpayer. However, the practical compliance paper provides the following headers for consideration:

  1. Where a company has kept board minutes.
  2. Whether a company has kept board minutes.
  3. Identifying high-level decision making – the relevance of a company’s activities.
  4. Is a person merely influential or the real decision maker?
  5. Decision making within a corporate group.

Helpfully however, the Practical Compliance Paper does provide specific examples for how a foreign company can consider and plan to ensure that it does not unnecessary become exposed to being an Australian tax resident. Examples include where and how Board meetings are held and documented by the foreign company.

Transitional relief period

Importantly, the Tax Commissioner will not apply his resources to review or seek to disturb a foreign-incorporated company’s status as a non-resident during the transitional period (i.e. 15 March 2017 to 30 June 2019) if there is sufficient evidence that the taxpayer has:

  1. changed its governance arrangements, so that its central management and control is exercised outside Australia by the end of the transitional period
  2. does not commence carrying on business in Australia (other than because its central management and control is exercised in Australia), and
  3. does not undertake or enter:
    a. any artificial or contrived arrangements that affect the location of its central management and control, or
    b. any tax avoidance scheme whose outcome depends, in whole or part, on whether it is a resident or non-resident.

Therefore there is still time to ensure that these new laws are considered and plans are put in place to mitigate against risk of a foreign company being an Australian tax resident by 30 June 2019.