Subsidiary (Pty Ltd) vs. branch office: Which business entity should you set up in Australia?

*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).  

Setup requirements

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. 

Taxation

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. 

Setup requirements 

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. 

Taxation

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.