Tax Residency of Foreign Companies and impact of COVID-19
Generally, for a company to be considered a resident in Australia, it must:
- Carry on a business in Australia; and
- Have its central management and control (CMC) in Australia; or
- Have its voting powers controlled by shareholders who are residents of Australia.
Whether a foreign company carries on business and has its CMC in Australia has been a focus area of the Australian Taxation Office (ATO) in recent years.
More specifically, the ATO has expressed the view that the CMC of a business is factually part of carrying on that business, thereby intrinsically linking the two concepts. This reverses the ATO’s previous views, and the statutory interpretation, that these are two separate requirements (i.e. the requirement to carry on business in Australia is separate from and in addition to the requirement to have the company’s central management and control in Australia).
Conversely, it is apparent that the purpose of requiring that, in addition to carrying on a business in Australia, central management and control of the business or the controlling shareholders must be resident in Australia. This makes it clear that the mere trading in Australia by a company not incorporated in Australia, will not of itself, be sufficient to cause the company to become a resident of Australia. That is, if a company incorporated elsewhere is merely trading in Australia and its central management and control is abroad, it does not become a resident of Australia unless its voting power is controlled by shareholders who are residents of Australia.
This places significant importance on where CMC is carried out in accordance with the guidance provided in this regard and the facts and circumstances surrounding the foreign company’s operations.
Impact of COVID-19
With global restrictions on travel in place, where CMC is carried out is even more important!
That is, a foreign company with Australian directors may be deemed a resident of Australia for tax purposes, where key decisions are made in Australia by virtue of the current travel restrictions despite the company not actually carrying on a business in Australia.
ATO Temporary Guidance
Where Australian directors are, among other factors, making key strategic high-level decisions in relation to COVID-19 and their affected foreign companies, the ATO has stated that they will not apply compliance resources to determine if the foreign company’s CMC is in Australia. This will thereby, alleviate any pressure to ensure these decisions are not made in Australia, preventing unintended Australian taxation consequences from arising.
Your Corporate Tax Residency
Despite the ATO providing some clarity on the corporate tax residency of foreign companies, this is only an interim solution and we expect the ATO view to change once COVID-19 travel restrictions are eased.
It is important to stay current on any changes that could affect your foreign company.
Co-written by Chelsea Fennell – Bond University student