Tax and commercial considerations when expanding offshore
There are going to be many commercial and legal issues to consider when an Australian business is looking to expand offshore into foreign markets, and tax is just one of them.
Like when considering a transaction structure for an Australian based expansion or acquisition, the tax implications for making a foreign investment need to be considered over each phase of the investment lifecycle:
1. Acquisition phase - entry into the foreign market
2. Ownership phase - growth and profit reinvestment and/or repatriation
3. Exit phase - even if an exit is not intended to occur
It's important to manage the structure through that lifecycle to ensure it is operating as intended and the expanded scope in tax compliance obligations across both countries are being met.
The process to consider the appropriate holding structure and implications across these three phases can generally be summarised into a number of key steps.
Phase 1 - Entry into the foreign market
When considering the design and implementation of the appropriate holding structure for a foreign investment, the following should be considered from a tax and accounting perspective:
Step 1 - Understand the facts and objectives of the expansion:
Nature of the assets being set up or purchased in the foreign country? Is it an active business or passive? Will any real property be acquired or assets just leased?
Ownership and funding sources? Will there be any bank debt used or potential for third party equity investment?
Forecast profit: What does the profit and cashflow profile look like? Will surplus cashflow be reinvested or repatriated back to Australia?
Foreign exchange (FX) management - what currency will the funding be provided in, and which entity in your structure will take the FX risk?
Ongoing operational considerations: How will the foreign operations interact with the Australian group? Will ongoing staff or services be provided by the Australian group to the foreign entity or just working capital? How will the Intellectual Property (IP) be held and how will the rights associated with the IP be shared between the countries?
Step 2 - Understand the tax situation in the foreign country
What are the foreign corporate and withholding tax rates compared to Australia? Are there any notable differences between the foreign tax rules to Australia? For example, unlike Australia, New Zealand doesn’t have a general capital gains tax regime. Is there a double tax agreement (tax treaty) with the country?
Step 3 - Understand the Australian tax implications from making the investment
How will profit distributions be taxed back in Australia? Is there any relief from double taxation in Australia if those profits have already been taxed in the foreign country?
How should capital be invested into the foreign subsidiary? Should shareholder debt be used instead of equity?
How would any exit from the business occur in the future and is there flexibility in the holding structure to allow for this?
Phase 2 - Ownership and holding period
There are a number of features of the foreign holding structure that will need to be addressed during the ownership period, to ensure the structure is managed as intended. These generally include:
Managing tax residency requirements in the foreign country for the foreign business and any Australian staff members travelling regularly to
Managing withholding tax compliance on profit distributions (for example, interest and dividend withholding taxes as relevant)
Foreign exchange management
Transfer pricing and other international tax compliance matters
Local tax compliance and financial reporting requirements in the foreign country
Phase 3 - Exit
Considering the Australian tax implications of the sale of a foreign investment requires a good understanding of the proposed sale structure and process, and proactively working with your legal advisers to ensure the Australian tax and accounting outcomes are understood as the sale negotiations with the buyer evolve. Key considerations during this process can include:
Will the sale occur as a business / asset sale or as a sale of shares in the foreign company that runs the business? What does this mean for any capital gains tax exemptions in Australia?
How will the sale proceeds be transferred by the buyer to the vendor in Australia? Do any related party transactions or shareholder loan balances need to be cleaned up prior to, or as part of the transfer of the proceeds?
What are the currency and foreign exchange considerations for payment of the proceeds (for example, FX movements between signing the sale agreement and receipt of sale proceeds)?
Does the proposed sale agreement terms and conditions including tax indemnities and warranties fairly allocate risk between the parties consistent with what has been agreed commercially? What are the and impact of any completion adjustments under the sale agreement to you as the vendor and impact on your Australian CGT position.
Will there need to be any transitional services provided by the Australian vendor to the new Buyer as part of the sale and how will this be priced and paid for?
The above comments are general in nature and are intended to provide an overview of some of the key tax and structuring considerations when looking to expand offshore.
More information
Please reach out to us if you would like more information and to discuss your specific circumstances in more detail.