Choosing between a subsidiary and a branch office when planning to expand operations to Australia requires strategic planning and extensive analysis of what makes one better than the other in key areas of comparison.
Similar to other business entities in Australia, both options have their own advantages and disadvantages, so there is no definite answer on which one is the better choice. What will set them apart are your business plans and preferences on how to deal with legal, tax, and commercial considerations associated with starting a company in Australia.
Guide for Setting Up a Business in Australia: Subsidiary vs. Branch Office
Where should you start with choosing which one is suitable for your market-entry plans? We can first look at the key differences that may affect your decision:
|Subsidiary (Pty Ltd)||Branch Office|
|Legal Entity||Has separate legal entity from parent company||No separate legal entity from parent company|
|Liability||Has limited liability; parent company is not liable except when the subsidiary becomes insolvent after incurring debt||Parent company incurs liabilities|
|Business Requirement||Treated as an Australian resident company so requires an Australian Company Number (ACN) from ASIC||Treated as a foreign company so requires an Australian Registered Body Number (ARBN) from ASIC|
|Tax||Worldwide income and GST||Australian-sourced income and GST|
|Ownership||Can be wholly or partly owned by parent company (depends on share structure)||100% owned by the parent company|
|Officeholder Requirements||Must appoint at least 1 resident director and a public officer||Not required to have a resident director but must appoint a resident agent and a public officer|
|Reporting Requirements||Must file annual returns and financial reports to ASIC*||Must file annual returns and financial reports to ASIC|
*May be subject to audit (as a foreign-owned company) or eligible for audit relief if company meets the conditions specified under ASIC Corporations (Audit Relief) Instrument 2016/784 for small companies controlled by foreign corporations.
Considerations for Setting Up a Subsidiary in Australia
In Australia, most subsidiaries are set up as proprietary companies (or Pty Ltd) limited by shares. Though the foreign parent company owns and holds shares in the subsidiary, the latter is recognised by Australian laws as a separate entity that must register with the Australian Securities and Investments Commission (ASIC) and fulfil compliance obligations similar to local Australian companies.
Each year, they must submit an annual review statement to verify their corporate details with ASIC. As well as lodge annual returns and financial reports to ASIC (can apply for exemption from submitting financial reports if qualified).
Subsidiaries are treated as resident companies and require an Australian Company Number (ACN) from ASIC to legally operate in Australia. To be granted an ACN, they must present the following requirements to ASIC for incorporation:
- company name showing the legal status (i.e., “Proprietary Limited” or “Pty Ltd”)
- company officeholders
- directors (at least 1 resident director)
- 1 public officer
- principal office address (must not be a P.O. Box)
If you do not have anyone residing in Australia to act as a resident director, we are ready to help you with our Nominee Director services.
Subsidiaries are liable to pay Australian taxes on income and capital gains derived from all sources, within or outside Australia. The corporate tax rate is currently at 27.5–30%, imposed on the company’s net income. As such, the exact tax rate will depend on turnover and type of income derived.
No dividend withholding tax is payable if fully franked dividends (dividends derived from profits on which Australian corporate tax has been paid) are remitted by an Australian subsidiary to its foreign parent company. If dividends are unfranked, the dividend withholding tax rate imposed is payable on the gross unfranked amount only.
Advantages of Registering a Subsidiary in Australia
Easier to Set Up
After compiling all setup requirements, a subsidiary can be incorporated as soon as reasonably possible. Since it’s treated as an Australian resident company, it requires less documentation than a branch office.
Eligible for Audit Relief
Audit relief is the exemption from submitting audited financial reports and other audit requirements to ASIC. A subsidiary can apply for audit relief if it satisfies two of the following criteria:
- the consolidated gross revenue for the financial year of the company and any entities it controls is less than $25 million
- the value of the consolidated gross assets at the end of the financial year of the company and any entities it controls is $12.5 million or less
- the company and any entities it controls have less than 50 employees at the end of the financial year
Liabilities are Limited to the Subsidiary
Any liability, debts, or obligations that the Australian subsidiary will incur will not extend to the foreign parent company. However, it must be noted that a parent company can be held liable if:
- the subsidiary was insolvent or becomes insolvent at the time of incurring debt;
- there were reasonable grounds for suspecting that insolvency; and
- the parent company, or one of its directors, suspected insolvency or should reasonably have suspected insolvency.
Access to Government Grants
Since it is treated as a resident company for tax purposes, a subsidiary is eligible to apply for government grants available to Australian companies. Government grants are provided on both federal and state levels. Local councils can also run grant programs that may not be featured in the federal or state grant directories. Depending on your eligibility, you can capitalise on these opportunities to secure funding for your business.
Considerations for Setting Up a Branch Office in Australia
Foreign companies seeking to do business through an Australian branch office are required to register with ASIC, similar to subsidiaries. With no separate legal entity from their parent company, branch offices are treated as foreign companies and must present extensive corporate documentation during registration. Despite being treated as foreign companies, they are still required to comply with Australia’s corporate laws and tax regulations.
To set up a branch office in Australia, the foreign parent company needs to present the following to ASIC:
- Certificate of Incorporation/Registration
- company constitution
- memorandum of appointment of the resident agent or power of attorney in favour of the resident agent
- memorandum stating the powers of certain directors
Before coming to Australia, you need to make sure your documents are notarised in the parent company’s country of residence. If your documents are not in English, you must provide a certified English translation.
After registering with ASIC, the branch office will be granted an Australian Registered Body Number (ARBN), which will be used to identify the branch office for its business dealings in Australia. It is subject to the same compliance obligations as subsidiaries, and must file annual returns and financial reports to ASIC.
The parent company is legally required to appoint a resident agent who will be authorised to receive, on behalf of the parent company, official communications sent to the Australian branch office. They must also appoint a public officer who shall be responsible for ensuring compliance with Australian income tax rules and regulations. If you do not have anyone residing in Australia who can fulfil these roles, we can assist you.
If the parent company is a resident of a country that entered into a Double Taxation Agreement (DTA) with Australia, the branch office will not be considered a “Permanent Establishment” by the Australian Taxation Office (ATO) and thus, may not be taxable in Australia. If in any case it is considered taxable, it will only be taxed on income derived within Australia. Compared to subsidiaries, it may not be subject to withholding tax on profits sent overseas.
Advantages of Registering a Branch Office in Australia
Easier to Consolidate Corporate and Financial Affairs
Perhaps the most obvious advantage of establishing a branch office is the ability to consolidate the corporate and financial affairs of the Australian branch with those of the head office abroad. Submitting financial reports will be easier because ASIC requests the entire company’s latest financial statements, and not just from the Australian branch.
Greater Level of Control
With no separate legal entity, the parent company has full control over managing business activities and executing decisions for the branch office.
Tax Benefits Under DTA
The branch office can enjoy tax benefits under DTA if its parent company is a resident of a country that has DTA with Australia. If eligible, the branch office may not be taxed in Australia and will only have to comply with accounting standards set by ATO. You can reach out to us to check what tax benefits your branch office is qualified for.
Transact with Clients Better
Unlike subsidiaries, branch offices are recognised as having no separate legal personality from their parent company so they can directly do business with the parent company’s clients in Australia. With this, business transactions and their associated paperwork are easier to manage and consolidate.
Establish the Right Business Structure in Australia with Our Expert Team
Deciding between a subsidiary and a branch office is no walk in the park. Critical considerations have to be taken into account to ensure the right decisions are made. We at Company Set Up Australia have years of experience in providing multinational corporations with the best professional advice for their market-entry plans and long-term strategies for growth. Start your journey with us.