Setting Up Business in Australia: Branch Or Subsidiary?

One of the most common questions we get asked from international businesses wanting to establish in Australia is whether they should set up a foreign branch office or an Australian subsidiary company.

This can be a complex decision and there are many implications to consider.

There are no clear-cut rules which entity is the best choice – both setups have their advantages and disadvantages over the other. The decision lies in the specific situation of each business and the intention of the business in Australia.

Your decision will most likely be based on the most beneficial outcome in terms of taxation, contractual obligations, employment of staff and immigration visas, and from an efficiency and operational viewpoint.

Key considerations

The key considerations when deciding which is the best structure to set up your business in Australia include:

Today – How are your existing business structures set up globally?
Strategy – Looking at the big picture of your global entity and seeing how your expansion in Australia will fit in with this strategy. What are the aims of your business wanting to set up in Australia?
Future – Your plans for the future. What will your global company look like in two years, five years, ten years’ time? Will you be hiring employees?
Taxation – The taxation implications of the different structures and what is the most effective way to structure your business in Australia. There are double taxation treaties available for some global businesses, can you benefit from these?

Although we will not attempt to tell you the best setup for your business, as this depends entirely on a case by case basis, it does help to distinguish between a foreign branch or an Australian subsidiary.

Start the conversation with us as to the best option for your business and which solution offers the most beneficial outcome.

Business structure options

Let’s start from the very beginning.  Foreign businesses generally have two options when establishing operations in Australia:

Operate as a foreign branch

This is the establishment of an Australian branch of your existing overseas business.

The overseas business trades in Australia.  A foreign branch office is not a separate legal entity, however, the branch must comply with Australian legislation.

Set up an Australian subsidiary company

The foreign company establishes an Australian company.  This becomes a subsidiary of the foreign company, and it is this Australian subsidiary company which trades in Australia.  In most instances, the foreign company will own the shares of the Australian company.

An Australian subsidiary is recognised as a separate legal entity with limited liability and is an Australian resident for tax purposes.

The subsidiary can be wholly owned by a foreign shareholder, however, it is required to have at least one Australian resident director (this can be arranged by International Accounting Solutions).

Branch vs. subsidiary; which is best for my business?

Here is a brief overview of each entity.

Foreign branch

To open and register a foreign branch in Australia, you will need to provide considerable corporate and supporting documentation to the Australian Securities Investment Commission (ASIC), much more than if you were starting an Australian company.

A branch will then be subject to Australia regulations.

ASIC requires foreign branches to annually lodge a balance sheet, P&L and any other documents the company is required to prepare by law in its country of origin.

No audit is required, however, ASIC has the authority to request audited financial reports if previously lodged reports are insufficient.

Australian Subsidiary

ASIC requires Australian companies to submit an annual review statement verifying their shareholders, directors, and addresses with a small annual fee.  A solvency resolution signed by the directors must be drawn, as well.

Branch or Subsidiary Comparison Table

Operation	Subsidiary	Branch
Corporation Law (regulated by ASIC)	Separate legal entity Registered with ASIC and given a unique identifying number, an ACN (Australian Company Number) Liabilities remain with subsidiary in the absence of guarantees and like arrangements or if the subsidiary trades while insolvent	Not a separate legal entity Foreign company may be required to register with ASIC and be given a unique identifying number, an ARBN (Australian Registered Body Number) Liabilities are those of the foreign company
Officeholders	Australian resident director is required Australian resident public officer is required	Australian resident local agent is required Australian resident public officer is required
Ongoing administrative responsibilities	Must lodge annual returns and usually financial reports with ASIC Exemption from lodging financial reports if relieved from doing so under Corporations Law	Must lodge annual returns with ASIC Foreign company must lodge financial reports, including profit and loss, balance sheet, and statement of cash flows with ASIC
How is the entity taxed in Australia	Subject to Australian income tax on income from worldwide sources Foreign source income may be exempt or subject to a Foreign Income Tax Offset	Subject to Australian income tax on income sourced in Australia
Applicable taxation rate	Corporate tax rate is 27.5% - 30% Withholding tax applies to various international payments	Corporate tax rate is 30% Withholding tax applies to various international payments No branch profits tax
Auditing	Audit required under Australian Corporations Law if controlled by a foreign corporation Class relief may be available removing the need for audit	Audit not required ASIC has the authority to request audited financial reports if previously lodged reports are insufficient

What about Australian taxation laws?

Taxation laws vary greatly between countries, and Australia’s tax laws can be complex for foreign companies.

That’s why it’s important to understand the tax implications of how to set up your Australian operations, to ensure your business is compliant with Australia’s tax laws, as well as effective and efficient.

Taxation details of a foreign branch

• The foreign branch may not be taxable in Australia depending on whether it constitutes a ‘permanent establishment’ in Australia. Permanent establishment includes considerations such as a fixed place of business in Australia, the representatives in Australia closing contracts, the plant and equipment in Australia if construction projects are taking place and how long your staff are spending in Australia.
• A branch may not have to pay withholding tax.
• Losses can be utilised in the ‘home’ company
• A sale of branch assets will generally be subject to capital gains tax (CGT).

Here is further information on taxation of branch profits.

Taxation details for an Australian subsidiary

• It is taxed in Australia on taxable income at a rate of 27.5 – 30%, depending on annual turnover.
• Profit repatriation is lost if an unfranked dividend from the Australian subsidiary were to be paid to its parent company.
• Losses are trapped in a subsidiary company
• A capital gains tax (CGT) exemption may apply upon the ultimate disposal of shares in the Australian subsidiary.

The treatment of assessable income for Australian tax purposes is where the two entity considerations differ greatly.

Assessable income for branches includes all Australian source income, while assessable income for subsidiaries includes all worldwide income, subject to any deductions or credits.

However, both branches and subsidiaries are subject to the application of Double Taxation Agreements. These tax agreements vary between countries.

The Double Tax Agreement (DTA)

The tax rules regarding the repatriation of profits and dividend withholding tax are more complex.

The dividend withholding rate under the DTA depends on each DTA and is generally capped at 15% but can be as low as 0%.

List of countries with which Australia has a Double Tax Agreement
Argentina	Ireland	Russia
Austria	Italy	Singapore
Belgium	Japan	Slovakia
Canada	Kiribati	South Africa
Chile	Korea	South Korea
China	Malaysia	Spain
Czech Republic	Malta	Sri Lanka
Denmark	Mexico	Sweden
Fiji	Netherlands	Switzerland
Finland	New Zealand	Taipei
France	Norway	Thailand
Germany	Papua New Guinea	Turkey
Hungary	Philippines	United Kingdom
India	Poland	United States
Indonesia	Romania	Vietnam

Can we help?

As you have read, choosing between a branch versus subsidiary company is a complex decision and needs careful thought and planning to choose the right structure suitable for your business.

International Accounting Solutions would love to help you go through your options to work out the best structure when setting up your business in Australia.

Get in touch via the contact form, or call us on +61 2 8298 5301, we would be happy to arrange a convenient time to go through your business, address any concerns and outline the timeline for a speedy setup.

We want to get you up and running, so you can start kicking goals in Australia.

Want to know more?  Download our Doing Business in Australia guide for a comprehensive overview of everything you need to know and do to set up business in Australia. Don’t miss it!