Tag: entity

US-AU DTA: Article 9 – Associate Enterprises

Posted on by Peter Harper

BACKGROUND

This week, we will have a closer look at Article 9 of the US/AUS DTA. Article 9 of the DTA incorporates into the treaty the US and Australian arm’s-length principles reflected in the transfer pricing provisions of the Internal Revenue Code Section 482 and in Australia the transfer pricing provisions in ITAA 1997 Division 815.

An arm’s-length transaction is a transaction between independent parties. For the purposes of this blog, a simple example will help in understanding the basic concept of what an arm’s-length transaction is and when transfer pricing provisions will apply to a specific transaction. 

Example: USCO A and B are both US companies and co-shareholders of AusCo, a company in Australia. The directors of both USCO A and B are John and Jane who are married.  Further, each owns 50% of the stock in AusCo. USCO A is considering selling its 50% stake in AusCo and determined that the market related value of the 50% stake is $10m. However, after further consideration and the adverse tax implications on disposal, John and Jane decided that USCO A should rather sell its 50% stake to USCO B. John and Jane decided that it will sell the 50% stake for $100, to avoid the tax implications and streamline their current structure. 

IMPLICATIONS

If USCO A sold the 50% stake for $10million to USCO B it would have been sold at arm’s-length as this is the market related price. 

USCO A however sold it to USCO B for $100. They would not have sold the same stake to an independent party for $100. Hence the transaction is not at arm’s length and a transfer pricing adjustment needs to be made.  

INTRODUCTION

Article 9 provides that when enterprises which are related engaged in a transaction and the enterprises engage in a transaction on terms that are not arm’s length, the Contracting States may make appropriate adjustments to the taxable income and tax liability of such related enterprises to reflect what the income and tax of these enterprises with respect to the transaction would have been had there been an arm’s-length relationship between them. 

INTERPRETING ARTICLE 9 OF THE DTA – ASSOCIATED ENTERPRISES 

Article 9 provides that, where related persons engage in transactions which are not at arm’s length, the Contracting States may make appropriate adjustments to their taxable income and tax liability.

It should be noted that it is generally accepted that Article 9 is intended to be permissive. It allows contracting states to apply the transfer pricing rules that form part of their tax legislation. It is generally considered that; Article 9 does not create a stand-alone right for countries to make transfer pricing adjustments that go beyond what is authorized by their own domestic rules. This is mainly because the basic purpose of a DTA is to relieve double taxation and it would go way beyond this purpose if a DTA imposed harsher tax treatment on a particular transaction between country A and country B than would have applied if the same transaction had taken place between country A and another country,

Article 9(1) sets out the general rule for this Article and when it will be applicable. Where an enterprise of one Contracting State (US) and an enterprise of the other Contracting State (Australia) are related through management, control, or capital and their commercial or financial relations differ from those which would prevail between independent enterprises, the profits of the enterprises may be adjusted to reflect the profits which would have accrued if the two enterprises had been independent. 

Where a reallocation of profits is affected under this paragraph, in such a manner that the profits of an enterprise of one country are adjusted upwards, a form of double taxation would arise if the profits so reallocated continued to be subject to tax in the hands of an associated enterprise in the other country.

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Article 9(2) states that where one of the Contracting States has increased the profits of an enterprise of that State to reflect the amount that would have accrued to the enterprise had it been independent of an enterprise in the other Contracting State, the second State shall make an appropriate adjustment, decreasing the amount of tax which it has imposed on those profits. 

In determining such adjustments, due regard is to be had to the other provisions of the DTA and the competent authorities of the two States (IRS and ATO) shall consult each other if necessary, in implementing this provision.

Article 9(3) states that each Contracting State may apply its internal law in determining liability for its tax. For example, although Articles 9(1) and 2 refer to allocations of profits and taxes, it is understood that such terms also include the components of the tax base and of the tax liability, such as income, deductions, credits, and allowances. 

The US will apply its rules and procedures under section 482 of the IRC and Australia on the other hand will apply the transfer pricing provisions in ITAA 1997 Division 815.  It is important that such determinations must be consistent in each case with the principles of arm’s length transactions.

CONCLUSION 

This Article is a great example of how the domestic transfer pricing provisions of the US and Australia are applied on international transactions. 

At Asena Advisors, we have years of experience in dealing with transfer pricing issues and how to ensure that both domestic transfer pricing provisions and the DTA’s transfer pricing provisions are applied correctly.

Shaun Eastman

Peter Harper

US-AU DTA: Article 7 – Business Profits

Posted on by Peter Harper

INTRODUCTION

Covid has changed the way business is done globally. Two of the most common changes are 

– Remote working (Employee sitting in Australia could be working for an employer in the US); and

– The increase in e-commerce businesses and being able to grow and expand these businesses globally without actually leaving the house. 

That being said, have you ever as an employer considered what the potential tax implications could be for the company by having employees working remotely?  

And does your e-commerce business create a permanent establishment in another country perhaps? 

Make sure you have taken proper steps to mitigate any unnecessary tax implications due to the ‘new norm’.

Article 7 is one of the more complex and technical articles in the DTA as it has various components to consider. However, I will try and provide a brief summary of its interpretation.

The first overriding principle of double taxation treaties is that a company resident in one country will not be taxed on its business income in the other State unless it carries on that business in the other country through a Permanent Establishment (PE) situated in that country.

The second principle is that the taxation right of the State where the PE is situated does not extend to income that is not attributable to the PE. The interpretation of these principles has differed from country to country. Some countries have pursued a principle of general force of attraction, which means that all income such as other business profits, dividends, interest and royalties arising from sources in their territory was fully taxable in that country if the beneficiary had a PE there, even though such income was clearly not attributable to that PE. 

In this week’s blog we will have a look at Article 7 of the US/AUS DTA and highlight some key aspects. 

INTERPRETING ARTICLE 7 OF THE DTA – BUSINESS PROFITS

Article 7 sets out the limits of the source state’s taxing rights in relation to business profits. If an enterprise resident in a contracting state has a Permanent Establishment (PE) in the other state through which it carries on business it can be taxable in that other state, as well as the state of residence. The tax is limited in the source state to no more than the profits attributable to the PE. 

Article 7(1) states the basic principle which is that the profits of an Australian enterprise may be taxed in the US only if it carries on business in the US through a permanent establishment and vice versa. In the case of an Australian enterprise, the US can only tax the profits of the enterprise to the extent that they are attributable to the permanent establishment.

It should be noted that dual-resident corporations are excluded from the term “enterprise of one of the Contracting States” by reason of the definition of an Australian or a US corporation contained in Article 3(1)(g) and the definition of residence contained in Article 4.  Such dual-resident corporations are treated as a resident of neither country for convention purposes, and therefor denied the benefit of this article and other provisions in the convention. 

The phrase ‘business profits of an enterprise’ is critical to the operation of Article 7.

The term ‘profits’ is not defined in the agreement and the question arises as to whether it includes profits which are ordinarily regarded as capital in nature or which are not derived from the carrying on of a business.

Article 3(2) of the DTA provides that, unless the context otherwise requires, a reference to profits of a business is a reference to the taxable income of the business. As capital gains are included in taxable income, the section arguably supports the view that Article 7 applies to capital gains. 

The 2006 U.S. Model Treaty Technical Explanation attempts to define business profits more generally in Article 7(1), providing that business profits are ‘income derived from any trade or business’.

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Article 7(2), which is subject to Article 7(3), provides that the profits to be attributed to a permanent establishment are those, which it might be expected to make if it were an independent enterprise engaged in similar activities under similar conditions. The profits must reflect arm’s length prices. For example, the profits of a branch must be calculated as if it were a separate entity distinct from its head office and on the basis that the branch was dealing wholly independently with its head office.

The practical application of Article 7(2) is not as straightforward as it seems. Quite often, a functional analysis needs to be done to ensure that arm’s length principles are applied properly. This includes the proper characterization of the transaction and the commercial risks undertaken by the enterprise.

Article 7(3) states that expenses that are reasonably connected with the profits of the permanent establishment and would have been deductible if the permanent establishment were an independent entity are deductible. Further, these expenses are deductible whether incurred in the Contracting State in which the permanent establishment is situated or elsewhere including executive and general administrative expenses.

Article 7(4) states that no profits are to be attributed to a permanent establishment by reason of mere purchase by that permanent establishment of goods or merchandise for that enterprise. 

Article 7(5) states that unless there is a good and sufficient reason to the contrary, the same method of determining the business profits attributable to a permanent establishment shall be used each year.

Article 7(6) states that where business profits include items of income dealt with in other articles of the Convention the provisions of those other articles override the provisions of this Article. 

Categories of income not specifically included in the definition of business profits are subject to the “overlap” rule of Article 7(6), which provides that a treaty article that governs a specific category of income (for example, the article pertaining to interest or dividends) takes precedence over the business profits article. If the item of income is attributable to a permanent establishment, it may ultimately be taxed under the business profits article anyway, because many of the treaty articles addressing specific categories of income (such as dividends and interest) provide that if the income is attributable to a permanent establishment, it is subject to taxation under the business profits article. 

Article 7(7) allows the ATO and IRS to apply any of its domestic laws to determine a person’s tax liability where the information required to make an appropriate attribution of profits to a permanent establishment is inadequate. 

Article 7(8) provides that nothing in Article 7 prevents each country from applying its domestic law to tax insurance business income provided that such law remains the same (or is modified in only minor respects) since the date the Convention was signed. or will tax the net income of a US trade or business. 

Article 7(9) applies where a fiscally transparent entity, such as a trust, has a permanent establishment in a Contracting State and a resident of the other Contracting State is beneficially entitled to a share of the business profits (beneficial owner).

Where the above requirement is satisfied then the beneficial owner is treated as carrying on a business through the permanent establishment in the Contracting State and therefore its share of the business profits of the fiscally transparent entity are taxable due to Article 7(1). 

For example, if a trust with a US beneficiary carries on a business in Australia through its trustee, and that trustee’s actions rise to the level of a permanent establishment then the US beneficiary will be treated as having a permanent establishment in Australia. This has the consequence that the profits of the trust attributable to the US beneficiary will be treated as business profits subject to Australian tax.

Article 7(9) was introduced at the request of Australia because the trustees of a trust, as the legal owner of the trust property, might be regarded as the only person having a permanent establishment.

CONCLUSION 

This article is probably one of the more difficult articles to comprehend in the DTA. For purposes of this blog, it’s important to know that a source country can’t attribute any business profits in terms of Article 7 if there is no permanent establishment in that source country. 

Our diverse team of International Tax specialists at Asena Advisors, will be able to assist you with applying this article correctly and how to accurately attribute profits to a permanent establishment. 

Shaun Eastman

Peter Harper

LLC Australia

Posted on by Peter Harper

LLC Australia

With ties and clients in Australia, we here at Asena Family Office often get questions about how to set up an LLC there, including if there are differences that one should know about between Australia and the U.S. Today, we will be going over what an Australian LLC looks like, operates, and the people behind it.

What does LLC Company mean?

In the U.S., you can set up an LLC, which is short for a Limited Liability Company. However, in Australia, it is a company that is primarily called either a Proprietary Limited Company or a Private Proprietary Company.

What is Limited Liability Company in Simple Words?

It is the Australian equivalent of a US LLC, a Proprietary Limited Company, or a Private Proprietary Company.

What are the Characteristics of an LLC in Australia

Some of the most essential requirements for both public and private limited companies in Australia are:

    • Shares – Private companies can privately issue shares, while public companies can offer their shares to the public if the company operates as a listed company;
    • Directors – Public companies must have three or more company directors, and two must be Australian residents, while private companies must have one or more directors who are Australian residents;
    • Corporate meetings – Also known as annual meetings;
    • Taxes – The rates for two corporate incomes are considered applicable as 30% and 27.5% for small companies, but beginning in 2021, the reduced corporate tax has been charged at a lower rate. 

Why Would A Company Be An LLC?

Australia does not have a check-the-box regime (CTB rules) as the U.S. does. 

For Australian purposes, an LLC is incorporated as per the Corporations Act; investors can incorporate a private or a public company when the company first goes into operation. There is no separate definition or election for tax purposes in Australia.  

Is An LLC The Same As A Company?

It is similar to a US LLC to limit the business owner’s risks. However, for Australian purposes, it is a Company called either a Proprietary Limited Company or a Private Proprietary Company in Australia.

Can An LLC Be A Private Company?

Absolutely. With various options, please speak with one of our advisors about which option will be the best for you.

What is the Difference Between LLC and LTD Company?

To simply put, there is no difference. An LTD Company is a type of LLC, and when registering an LLC in Australia, it is registered as a company. On the other hand, an LTD Company is a type of LLC in Australia, which is a public limited company, and shares are open to the public. 

What is an S Corporation in Australia?

Australia does not have the option to elect your company as an S Corporation as the U.S. does for federal tax purposes. There are no CTB regimes in Australia as there are in the U.S. 

What is the Difference between PTY LTD and LTD?

Some key points to note when understanding the differences between these two forms of company are:

  • Shares – a private company can privately issue shares, while a public company can provide its shares to the public if the company decides to operate as a listed company; and
  • Directors – the public company is required to have at least three, preferably more, company directors, with two required to be Australian residents. Meanwhile, the private company must preferably have one or more directors who are also residents;
Is PTY LTD a Limited Liability Company?

Yes. A Limited Liability Company is often incorporated according to the Corporations Act, and when registering the company, investors can either incorporate a private or a public company. 

What is a PTY LTD Company in Australia?

Pty Ltd is a Private Limited Liability Company and is the most common company used by business owners in Australia. It is often considered restricted by current and future entrepreneurs as it is not allowed to have more than 50 non-employee shareholders. A Pty Ltd is also limited by one or more shares, as it is usually incorporated along with a share capital that is made up of shares claimed by each initial member upon the company’s incorporation. Members are also legally liable only to the point of any unpaid amounts that are on their shares. That is, their personal assets are not at risk in the event of the company being wound up. And it’s prohibited from offering shares to anyone other than existing company shareholders, employees, or a subsidiary company.

Why Do Companies Have PTY LTD?

A proprietary company with a limited liability decreases the risks of doing business because it is regarded as wholly independent from the company’s founders and members, and liability limits its share capital. 

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Can You Make An LLC in Australia?

The short and direct answer is yes. A Limited Liability Company is to be incorporated according to and under the Corporations Act. When first starting the company, investors can include private or public companies. There is no need to subscribe to a minimum paid-up company for either business form. However, there are specific provisions: the public company cannot have a maximum number of specified shareholders. However, the private one must have a maximum of fifty shareholders who are under employment within the company. For both Australian LLCs, the minimum number of shareholders is one.

What Is A Limited Liability Company Australia?

It is a company that is incorporated in terms of the Corporations Act 2001, and when first opening the company, investors can either incorporate a private or a public company. 

What are the Basic Steps for Company Incorporation in Australia?

Typically, your first step to forming an Australian company is choosing your business type. Suppose you’ve decided to start a Proprietary Limited Company (LLC) in Australia. In that case, the next steps are as follows: 

  • Reserve your company and/or business name;
  • Appointing a Company Director and other statutory officeholders;
  • Drafting and signing any bylaws for your LLC in Australia;
  • Registering your Proprietary Limited Company (LLC) in Australia;
  • Get your business and tax identification numbers and
  • Open a corporate bank account.

What Are The Bylaws of an Australian Limited Liability Company?

There’s more than one way to choose the kind of governance of your Australian Proprietary Limited Company (LLC) will have. To do this, you can choose to either:

  • Operate your company under the replaceable rules that are listed under the Corporations Act;
  • Create a unique constitution or incorporate elements from the replaceable rules and include your own; and
  • Appoint a sole director to your Proprietary Limited Company who is also a single shareholder and doesn’t need a formal internal governance system.

Opening an LLC in Australia

Each initial startup steps are unique for every Australian. Below are common courses of action to consider unless there is another that would be the most beneficial for you and the structure of your business.

Requirements for an LLC in Australia

When starting a Proprietary Limited Company or Private Proprietary Company in Australia, the minimum requirements include the following:

    • Zero minimum share capital;
    • One shareholder;
    • One company director; and
    • One resident director.

Once you have the proceeding, you’ll need to produce annual financial statements. However, you won’t need to register for a GST (Goods and Service Tax) unless your sales exceed A.U. $75,000 in the year.

What Licenses Are Necessary To Open A LLC In Australia

Standard Australian licenses and permits for any business either:

    • Give approval to your business to do an activity; or
    • Protect your business and employees with additional legal security.

Licensing and permit requirements will often vary by local laws, state, and industry; what you’ll need depends on your business type, business activities, and location.

What are the Main Steps in Registering an LLC in Australia?

Once you have selected the LLC type (either the public or the private one), you need to consider conserving a suitable trading name. Just like within other jurisdictions around the world, the Australian company’s trade name that is soon to go onto the market has to be unique nationwide. When deciding on a trading name, verifying if the chosen name has not already been activated or if it is already registered as a trademark in Australia is compulsory. You can always find experts at Asena Family Office for cases concerning intellectual property regulations.  

Another critical step is to prepare the company’s statutory documents. It is required that the documents are to be processed through which the legal entity will inherit a legal personality, being a separate entity from its founders. It is also vital to choose directors, followed by registering with the local institutions for tax purposes, per the law’s regulations. Another legal obligation to check off your list is to have an official business address, including your company’s headquarters and the development of its activities. This is a critical step for all companies registered in Australia, not only for LLCs. 

One thing to note about LLCs is that they are suitable for most of Australia’s development of economic activities, including importing and exporting raw materials and other goods. Regarding its taxation, investors must know that your company will be liable for all corporate taxes applied under your local tax law and benefits from the treaties signed to avoid double taxation. 

An Australian Private Limited Liability Company is not always required to finalize and turn in an audit. When drafting any statutory documents, you will be required to add provisions concerning the internal management rules of the company, its shareholding structure, and the rights and obligations of any parties that are involved with or in the company, such as shareholders and directors.

How Do I Form an LLC in Australia?

I like to recommend the following six checkboxes for clients when beginning the process of starting a Proprietary Limited Company or a Private Proprietary Company.

Reserve Your Company and/or Business Name

Each company in Australia must have its unique company name that does not infringe on another. 

If you don’t decide on a company name when forming your Australian LLC, the Australian Company Number (ACN) will be your company name during the formation process.

It is important to note that Business names don’t create new, separate entities, and your business name is your trading name.

Draft and sign bylaws for your LLC in Australia

Following the name selection, you need to make a decision on the governance of your Proprietary Limited Company (Australian LLC). Multiple courses of action are available, as you can choose to:

    • Operate your company under the replaceable rules that are listed under the Corporations Act;
    • Design a unique constitution;
    • Add elements of the replaceable rules and include your own; and
    • Select a Proprietary Limited Company with a sole director (who also acts a single shareholder) and doesn’t need a formal internal governance system.
Appoint a Company Director and Other Statutory Officeholders

First and foremost, you’ll need to hire on a legal representative currently residing in Australia to create your LLC. Usually, another name for their role in Australian entity formation is the Company Director, with every proprietary company requiring at least one for initial and long-term needs. The reason why is that the Company Director, as the resident legal representative, is responsible for overseeing the affairs of the new local company.

Foreign companies can also appoint a Nominee Director. They are an external legal expert hired onto the company but are authorized, similar to the Company Director, to make legal decisions on its behalf. Both directors are responsible for ensuring the company fully complies with all Corporations Act obligations.

Register your Proprietary Limited Company (LLC) in Australia

It’s possible to register your company either on paper or online, with Australia’s Business Registration Services providing an online portal for application completion if you are unable to be at their office in person. 

There are, however, certain cases where a company can’t register online. 

Once it is approved, your Proprietary Limited Company will be sent its Australian Company Number (ACN), Australian Business Number, registration certificate, and a corporate key to securely update your company information.

Get Your Business and Tax Identification Numbers

Following your initial registration, you will need to file for the appropriate taxes for your Australian LLC. One example is that every business must have a tax file number (TFN) to start tax filing, which is automatically produced when you obtain your Australian Business Number (also known as ABN for short).

The ABN is a distinctive 11-digit number that is used to identify your business to not only the government but your local community, too. Done on paper at the office, the process can also be completed over the Internet through the Business Registration Service website.

Depending on your circumstances and industry, you may be required by the BRS to register for any goods and services (GST) withholding, income, and fringe benefits taxes. 

Open a Corporate Bank Account

Once the above steps are completed and your company has been registered, you can get started on setting up a corporate bank account. 

Australia’s Anti-Money Laundering and Counter-Terrorism Financing Act in 2006 has set up rigid regulations for banks to undertake their due diligence with new applicants. For this reason, you can expect to provide a wide range of documentation confirming information, identification, and details of your newly-registered company.

Important Things to Know When Setting Up an LLC in Australia

Your Australian LLC (Proprietary Limited Company or Private Proprietary Company) will need an official business building or office, such as a registered address where it is to have a physical place of business for meetings (most often optional) and receive all official documents. 

This is part of the registration process; all Australian LLCs are required to have a physical address that can be used for business purposes and activities. During the registration, all institutions involved with the procedure will be required to provide information and all evidence that confirms where your company’s headquarters will be. 

The official business address can be any location that works best for your structure, such as an apartment, an office building, or another type of premises. Your final decision will depend on the needs of the business, such as necessary space and the type of activity carried out, whether administrative or otherwise. One can also build an office if one finds it necessary and more affordable than buying or renting a space. 

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How Much Is A Business License In Australia?

It will depend on the type of industry you are categorized in, with some starting at AUD $300. 

What are the Registration Costs for a Company in Australia?

The most common cost often ranges from AUD $443 to AUD $538. Your final amount will be dependent on the type of company you register. 

How Much Does an LLC Cost in Australia?

Same as above and will be dependent on the type of company and industry. 

How Much Does a PTY LTD Cost?

Pty Ltd costs are similar to the typical company numbers for registration. However, there are cases where it can go at a lower number, such as AUD $400 to AUD $500.

Australia – Classification and Tax Considerations

Reviewing your thoughts on what we’ve discussed and how it may factor into your company, there are additional base notes to understand Australia’s tax and classification system and expectations before coming to a conclusion.

What are the Main Taxes for a Limited Liability Company in Australia

A crucial consideration for companies in Australia is the country’s taxation system that applies to them. Companies often recognized as corporate structures, including an L.L., whether private or public, will be taxed following the Australian corporate tax system. 

If the company has an annual turnover that is above AUD $75,000, it is crucial to obtain an Australian Business Number (ABN).

How is an LLC taxed in Australia? 

If the company has an income below a certain threshold in a financial year, it will be taxed using a 27.5% corporate tax rate, representing a corporate tax that has been reduced.

However, for the last year (2021 as of this posting), the lower tax rate has been reduced to only 26%. It is predicted to further reduce in the next financial year (2022 as of this posting) to 25%, as according to the Australian Taxation Office, as the standard corporate tax rate charged to Australian companies is 30%. And in 2017-2018, the threshold in which the reduced corporate tax rate had been applied summed up to a total of AUD $25 million. However, beginning in 2018-2019, the threshold increased to a total of AUD $50 million.  

Please take into consideration that the Australian financial year is different from the standard financial year in other countries (from 1st January to 31st December). In Australia, the financial year begins on 1st July and ends on 30th June, but companies can decide to follow the worldwide financial period. 

Is An LLC Company Good?

An LLC in Australia is a company type suitable for those who want to form a small or medium-sized entity. For those interested in a public limited company, it is vital to find out that the legal entity can be listed on the Stock Exchange. 

Contact the Experts to Form Your LLC in Australia

Our experts at Asena Family Office have extensive experience advising entrepreneurs and setting up businesses in Australia that suit their needs. Please do not hesitate to contact us if you require assistance.

 

Connect with us in the righthand column to learn how to get started on your own LLC in Australia.

Shaun Eastman

Peter Harper