In recent years, significant changes in the Australian corporate tax residency rules have created an unexpected risk that foreign companies with Australian central management and control (CMC), will be treated as Australian tax resident companies, despite being incorporated overseas.

This arises following a High Court Decision (Bywater), and the release of the ATO’s guidance (PCG 2018/9), where it is now deemed that any company that has it’s CMC in Australia is automatically deemed to be carrying on a business in Australia and therefore, will be considered a tax resident of Australia.

Foreign subsidiaries with Australian Directors

Any foreign subsidiaries with Australian resident Directors will now likely be considered Australian tax resident companies.

While companies are generally treated as tax residents of the country in which they were incorporated, dual residency can arise when Australia asserts tax residency based on CMC. In such cases, reliance on the relevant Double Tax Agreement (DTA) is required to determine tax residency using the tiebreaker provisions.

Potential tax exposures

Without the determination from the relevant tax authorities, the following tax benefits provided under a DTA are at risk:

  • Reduced Withholding Rates – Many tax treaties provide for a lower withholding rate for Interest (Default 10%), Unfranked Dividends (Default 30%) and Royalties (Default 30%).
  • Business Profits Article – Under the business profits article, the profits in one jurisdiction are only taxable in that jurisdiction, unless a Permanent establishment exists in the other jurisdiction. For a foreign incorporated company that has CMC in Australia, without the mutual agreement of the tax authorities, the foreign company will be treated as an Australian tax resident, and be taxed on its worldwide income, albeit with foreign tax credits or foreign branch exemptions available.

Seeking certainty and relief

Following the release of the OECD’s Muli Lateral Instrument (MLI), to receive the benefits of a DTA where a corporate entity is a dual tax resident, the corporate entity is required to submit a written application to the ATO who will liaise with the foreign tax authority to determine the company’s residency based on several factors.

The process of receiving a determination will require a detailed written application tailored to the circumstances of the Applicant.

Impacted countries

These rules apply broadly to subsidiaries in most foreign countries. However, 11 jurisdictions remain unaffected or unmodified by the OECD’s MLI, including the United States and Germany—both notable exceptions.

Next steps

For Australian multinational groups with foreign incorporated companies, we recommend a proactive review the tax residency status of these entities to avoid potential tax liability issues and optimise tax positions.

If you’re uncertain about the residency status of your foreign subsidiaries, contact your HLB Mann Judd tax adviser for assistance.

Co-Authored – Senior Tax Manager Tom Peskett Melbourne