Tuesday 10 October 2023

When Might a Foreign Company Be Considered an Australian Tax Resident?

If your company conducts its affairs in multiple jurisdictions, how it is taxed in Australia will depend on whether that company is considered an Australian resident for tax purposes. A company incorporated overseas may be an Australian resident for tax purposes where it is carrying on a business in Australia and either its ‘central management and control’ (CM&C) is in Australia, or its voting power is controlled by Australian shareholders. This article will discuss what it means to be an Australian tax resident, what CM&C is and who has it, and when a company’s voting power is controlled by Australian shareholders. 

Definition of ‘Resident of Australia’

Broadly, a company will be a ‘resident of Australia’ when: 

  1. it has been incorporated in Australia; or 
  2. it has not been incorporated in Australia but carries on business in Australia, and:
    • has either its CM&C in Australia (the CM&C test); or 
    • its voting power is controlled by shareholders who are residents of Australia. 

Where you incorporate your company in Australia (such as under the Corporations Act 2001 (Cth)), it will be an Australian resident. Where that company has foreign directors or shareholders, it may also be a tax resident in another country. If this is the case, residency will vary depending on what other country the company is resident in.

Does a Company Carry on a Business in Australia?

A company will be an Australian resident where it is carrying on a business in Australia, and its CM&C is in Australia. However, if a company has its CM&C in Australia, it will be considered to be carrying on a business in Australia, even if there are no other business operations in Australia. 

This means that if the relevant company operates anywhere in the world and has its CM&C in Australia, it will likely be deemed to be carrying on a business in Australia. Likewise, the ATO may deem the foreign company as an Australian tax resident regardless of its place of incorporation.

What Does CM&C Mean? 

CM&C refers to the control and direction of a company’s operations, not necessarily where the day-to-day conduct and operations occur. It refers to where a company makes high-level decisions, such as setting general policies and determining the direction of operations. 

You would determine CM&C on what actually happens rather than what should happen based on policies or procedures. It will depend on the company’s overall business activities. Each factual circumstance will be different, and no one factor alone will be determinative.

Examples of central management and control: 

  • setting investment and operational policies, such as when to buy and sell stock or significant assets;
  • appointing company officers (such as directors and secretaries) and agents and granting them power to carry on the company’s business, and supervising them while they do so; and
  • deciding on financial matters, such as the use of company profits and declaring dividends.

Examples which may not equate to central management and control: 

  • day-to-day operation of the business, or supervision of the day-to-day operation of the business;
  • matters of company administration, such as maintaining the company’s share register;
  • keeping the company accounts; and
  • performing the minimum duties required to maintain the company’s registration.

For decision-making to be CM&C, the decision-makers must actively consider what is in the company’s best interests. They cannot just implement or approve decisions others make without properly considering their own. 

Who Exercises CM&C of a Company? 

You cannot establish CM&C just by looking at who has the legal authority to direct a company (which would ordinarily be a company’s directors). It depends on who is making the decisions in reality.

While directors generally run a company according to its constitution and relevant corporate laws, this is not the end of the inquiry. There needs to be more than mere legal power or authority to manage a company to establish the exercise of CM&C.

Where is CM&C Located? 

Where a company’s CM&C is located is a question of fact. It is not necessarily where: 

  • the company records or formalises decisions; 
  • the company is incorporated; or 
  • where the company’s constitution requires it to be controlled. 

Generally, where board meetings occur is the starting point for determining the location of the company’s CM&C. However, there might be no board meetings, no record of minutes, or the minutes are unclear. In that case, you would consider other evidence to determine where the company exercises CM&C, including:

  • papers circulated to board members in advance;
  • contemporaneous emails and correspondence that show the board’s deliberations and each director’s role in the company’s decision-making.

If the board is considered to be rubberstamping or merely implementing decisions made by others, the location of the board meetings or directors will be less relevant.

Decisions Made in Multiple Places 

Where a company makes decisions in multiple places, the important considerations are:

  1. where high-level decisions of the company are made as a matter of substance and fact; and 
  2. whether central management and control is exercised in that place to a substantial degree, which must be sufficient to conclude the company is truly carrying on business there. 

It is not necessary to consider all of the circumstances. However, the following will be particularly relevant in determining where CM&C is when there are multiple relevant locations: 

  • instances of decision-making amounting to an exercise of central management and control at board meetings and where those meetings take place;
  • any instances where decision-making amounting to central management and control is done outside board meetings and where this occurs;
  • the nature of the decisions and control being exercised in each place and their significance to the business; and
  • whether one or more of the directors or another person is really making the decisions to the exclusion of the other directors (relevant to this is whether certain directors have special powers). 

Voting Power Controlled by Shareholders Who Are Residents of Australia

A company will also be a resident of Australia where the foreign company carries on a business in Australia, and its “voting power is controlled by shareholders who are residents of Australia”. 

ATO ID 2011/74 considered what it meant to have “voting power controlled” (albeit in a slightly different context). The ATO’s view is that to hold a controlling interest in a company, a shareholder must hold the “majority of voting power” in that company. This suggests that Australian resident shareholders must own a majority of shares in a foreign company to satisfy this condition. 

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