Tax Requirements When Expanding Your Australian Company To Singapore

Matthew Marcarian   |   20 May 2021   |   3 min read

Singapore is often chosen as a regional business hub for Australian companies looking to expand into Asia or beyond. This is largely because Singapore is one of the countries where there are limited restrictions on foreign businesses setting up. Accordingly it is possible for a fully Australian owned company to operate a business in Singapore. 

This blog considers the potential tax implications of running a business in Singapore through an Australian resident company.

What is an Australian Resident Company?

A company may be an Australian company due to one of three possibilities: 

  • Incorporation in Australia
  • Central management and control being exercised from Australia, or 
  • Voting power is controlled by shareholders who are Australian residents.

This means that even if the decision is made to incorporate a company in Singapore to oversee the business, the company may still be considered an Australian company if the business is managed in Australia, or if the controlling shareholders are Australian residents.

Singapore Company

A company is considered a Singapore tax resident when the control and management of the company is in Singapore. This means that even if a company is incorporated in Singapore, if it is controlled and managed in Australia, then the company will simply be an Australian resident company. 

However, if the company is incorporated in Australia but controlled and managed in Singapore then both Australia and Singapore will consider the company to be a resident company. When this situation occurs the company will need to consider the double tax agreement between Australia and Singapore.

For the purposes of this blog we are looking at a company that is an Australian resident company operating a business in Singapore through a subsidiary incorporated in Singapore.

Australian Taxes

An Australian resident company is subject to Australian taxes on income from worldwide sources. This means that all business income and any capital gains, will need to be reported in an annual income tax return.

Singapore Taxes

If the company is not a resident company in Singapore but it operates a business in Singapore  then the company is usually only taxed on the Singapore-sourced income that is generated through the business. 

The Singapore company tax rate is a flat 17%, but many concessions can apply to reduce the effective tax rate. 

The company may also be required to register for GST in Singapore. Other local taxes may also be payable. 

Double-Taxation

Under the double-taxation agreement between Australia and Singapore an Australian resident company only has to pay taxes in Australia. However, where the Australian company runs a business in Singapore through a permanent establishment in Singapore then Singapore has taxation rights over the profits generated through this permanent establishment.  

As a business operating in Singapore the company will be required to pay income tax on such business income at a rate of 17%. 

When the income is reported in the Australian tax return the company will be eligible to claim the foreign tax paid as a credit against the Australian tax assessment. This ensures that the company will only be paying taxes at the higher Australian tax rate. 

When you decide to expand your business into Singapore it is important to ensure that you get your structuring right, and that you understand the full tax implications of your various options. There are a range of questions that need to be addressed including profit repatriation to Australia, withholding tax, transfer pricing, debt/equity and foreign currency issues. 

Make sure that you speak to an experienced international tax expert before making your move. 

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Expanding to the USA (Part 3) – Setting up a C-Corporation

Matthew Marcarian   |   23 Nov 2017   |   2 min read

In our Expanding to the USA (Part 2) blog post we discussed that many Australian companies and entrepreneurs set up their US operations by using an Limited Liability Company (an LLC). However they are often later surprised to find out that the LLC is treated like a partnership under US tax law and also as partnership under Australian law if the foreign hybrid rules apply.

The alternative to establishing an LLC, which we think is commonly overlooked, is for Australian business and entrepreneurs to establish a C-Corporation. The name stems from the fact that a C-Corporation is governed by subchapter C of the Internal Revenue Code.

In many respects the C-Corporation in America works exactly like an Australian Private company.

The C-Corporation has directors, shareholders (stock holders) and has its own tax identity that is separate from its stock holders. By default it is taxed as an entity, keeping profits and taxation separate from the stock holders until such time as a dividend is declared by the corporation. Tax is payable at US Federal Rates (graduated rates between 15%-39%) but state income tax may also apply depending upon the state of incorporation and where business is carried on. As compared to a flow through LLC the C-Corporation is a simply structure because US tax filings are not required to be made by Australian shareholders.

In the case of Australian resident shareholders owning a C-Corporation, when dividends are declared, a dividend withholding tax arises on the dividend paid. This means that Australian shareholders will receive a dividend paid to them net of US withholding tax. If the reduced tax treaty rate applies then that dividend withholding tax can be reduced to 5% in certain situations.

Depending on a client’s situation in Australia, a C Corporation may be the appropriate US business structure.

CST focuses on advising clients with international tax issues, many of whom expand into and invest in the United States.

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Expanding to the USA (Part 2) – Establishing an LLC

Matthew Marcarian   |   11 Jul 2017   |   4 min read

Each year hundreds of Australian businesses establish US operations. The question which is most often asked by our clients is whether they should establish a Limited Liability Company (LLC) or a C Corporation.

We often find that clients proceed with the establishment of an LLC simply because it is cheaper and more cost effective than a C-Corporation but without really knowing the tax consequences of that choice. In this blog post we explain simply what an LLC actually is and describe the general tax treatment in the US and Australia.

What is an LLC?

An LLC is an innovation of American law. It is a simplified form of company which is established under the corporate laws of the relevant US State of incorporation. A US LLC is quite a different beast to an Australian company and it is a mistake to think of it in the same terms.

In America, an LLC is a Limited Liability Company, which has members (i.e shareholders) but does not have Directors. The importance of not having directors cannot be overstated. LLC’s are not managed by Directors, they are managed by the members or an appointed manager. This is completely different to an Australian company (which also has limited liability) which is managed not by its shareholders, but by its directors who owe statutory duties under Australia’s Corporations Act.

The ownership of an LLC is with the members who have membership interests in the LLC. You will not typically hear of an American accountant or attorney speaking about ‘shares’ in an LLC, but rather they will refer to the ‘membership interests’.

How is an LLC typically taxed?

In the USA if an LLC is chosen as a business structure the tax consequences are usually that the LLC is treated for tax purposes as if it was a partnership. This means that the profits are taxable to the members of the LLC, similar to the way that partners in an Australian partnership are taxable on the profits of a partnership.

Example (all names entirely fictional)

Pineapple Co LLC (“Pineapple”) is formed by two members who each own 50% of the interests in Pineapple. The two members of Pineapple are Geoff Gates, an American who lives in Park City, and Scott Cannon, an Australian who lives in Melbourne.

Assume that Pineapple makes $500,000 of net profit by the end of the tax year. By default, unless certain elections are made, Geoff and Scott would be taxable on $250,000 each. The LLC, Geoff and Scott would need to lodge income tax returns with the US Internal Revenue Service and include their share of Pineapple’s income in their tax returns.

If a loss had been made, then generally speaking each member, Geoff and Scott, would also be able to take their share of the loss.

What are the consequences for Scott the Australian?

For Scott Cannon, the consequences of having an LLC would simply be that he would need to include $250,000 in his Australian tax return as partnership income.

This treatment arises under Division 830 of the ITAA 1997 which treats an LLC, not as a corporation for Australian tax purposes, but rather as a partnership.

US income taxes are paid on Scott’s share of the LLC’s profits which would generally be claimable as a credit in Scott’s Australian tax return.

More complexity, but also more opportunity, would arise if Scott decided to hold his membership interest through an Australian company or Australian trust. That is something that Scott should take integrated Australian and US tax advice on before establishing the LLC.

If Scott is the sole owner of the LLC, and did not have an American partner then the LLC would be known as a sole member LLC. An LLC with a sole Australian member creates some significant issues namely that often partnership treatment under Australian law is not available creating potential double taxation between Australia and the US.

If you are an Australian resident and need advice in relation to a US LLC please contact CST.

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Expanding to the USA – (Part 1) Setting up in the USA

Matthew Marcarian   |   17 Mar 2017   |   4 min read

For Australian entrepreneurs, the excitement and the promise of establishing a business in the United States can often be too much to resist! Indeed in this day and age it can be all too easy to establish a US entity. However, in the rush to do so one needs to be very clear about the tax consequences.

We are often approached by Australians entrepreneurs who have established US entities without a proper understanding of the tax consequences & filing obligations. As a result they have faced fines and penalties that they would never have expected.

In a later blog we will address the question of whether to establish an LLC or a C-Corporation, which is the typical starting point for an Australian business wanting to set up in the USA.

However before addressing this question, we wanted to make some basic observations which we will feel will help people and will encourage them to seek advice on their situation. The American tax systems is not a DIY system !

Basic starting points to note about establishing an entity in the USA;

  • There are plenty of states to choose from, other than the usual suspects, such as Delaware and Nevada;
  • Despite being a very complex business tax system, the US system is also a very flexible one. For example, in Australia it is not possible to establish an entity and choose the basis on which the entity is taxed so that it better suits your situation. But this is exactly what is achievable in the US. A business is essentially able to choose whether it wishes to have flow through taxation, where the members are taxed on the income of the entity, or whether the business will be taxed at the entity level.
  • In the US you can set up a business entity without needing to have a U.S based director. This provides opportunities for quick expansion of your business presence, but you also need to understand that from an Australian perspective, it is likely that the US entity will be treated as an Australian tax resident, paying Australian company tax on profits but also paying US tax without the ability to claim tax credits. Not exactly the result most people would want or expect.
  • Don’t assume that you can set up a US entity, leave it dormant and not have to file taxes – false assumption and a very costly one to make. Australian’s are often caught out by filing deadlines in the US – perhaps it is cultural but in the United States – a deadline is a hard deadline. The Australian ‘she’ll be right mate attitude’ to deadlines will not fly. So even dormant entities are expect to file, and penalties for late filing will arise.
  • The US tax year end is the calendar year, so don’t get caught out with the 30 June mentality. In addition if you are a member of an US LLC, take note that if flow through taxation applies then you will be expected to lodge a tax return with the IRS in the U.S in respect of your membership interest in the LLC.
  • It is important to plan how the Australian shareholders will be able to access US business profits. Clients need to be aware of the US branch profits tax, how foreign income tax offsets can be claimed in Australia and what the effective global tax rate is on their US sourced business income, after taking into account US and Australian tax;
  • Always consider the tax residency issues of the entity you are setting up the US and speak to your tax accountant about ensuring that your not unwittingly taxed twice on the same income by the IRS and the ATO. Never assume that the U.S. – Australia Double Tax Agreement would necessary work to ensure you are not taxed twice. Unfortunately it can happen.

If you are planning to set up your business in the USA or if you have already set up a US entity – our US tax team would be delighted to assist you. We are very passionate about helping clients navigate the complexities that they will face on tax so that they can go about focusing on the growth of their US business.

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