Tax, IP and company incorporation - things to consider when expanding to the US or UK
TECHNOLOGY & IP ASSOCIATE
1. Setting Up the Company
The company registration process is approximately 48 hours after all information has been provided to the UK lawyer (i.e. officers, addresses etc).
The company registration process is approximately 48 hours after all information has been provided to the US lawyer (i.e. officers, addresses etc).
Private Company Limited by Shares
Generally, the most common structure is a Private Company Limited by Shares in the UK (i.e. similar to a proprietary limited company in Australia).
Generally, the most common structure for non-US owners is a C-Corporation in Delaware (due to tax reasons detailed below).
The company may need to register for Corporations Tax (the rate is 20% on profits less allowances and relief) and VAT (where it is anticipated the VAT taxable turnover, being turnover sourced from supplies in the UK, is (or will be) more than £85,000 per annum).
The financial year in the UK runs from 1 April to 31 March of the following year.
Tax in the US can be quite complicated as generally there is federal tax rates (i.e. 30% of revenues) and state-based taxes (depending on the state that the company was registered).
In Delaware, “out-of-state” income is not subject to state tax, making Delaware often the preferred location of company registration.
A “C Corporation” structure in the US may avoid an Australian-based parent company being subject to US taxation (which may occur where an LLC company is the wholly owned subsidiary of the Australian-based parent company).
Office in the UK, and at least 1 director and 1 shareholder
A company registered in the UK must always have an office in the UK (even if it carries on business abroad), must have at least one director (who must be a real person, but that person does not need to be resident in the UK), and must have at least one shareholder.
At least 1 director and 1 shareholder
The company should have at least one director (who is a real person, but does not need to be a resident in the US) and must have at least one shareholder.
2. Operational Considerations
Including Tax and Duties
Distributions and dividends received from the Australian-based subsidiaries (that are based in the UK and US) will not be subject to tax in Australia (assuming tax is paid in the UK and US) as the Australian-based parent company will hold more than 10% voting interest in the subsidiary and the US and UK subsidiaries are residents of “listed” countries under Income Tax Regulations 1936 (ITR). If the subsidiaries were resident of “unlisted” countries under the ITR, the Australian-based parent company may be subject to accruals taxation on any dividends or interests received from the subsidiaries in accordance with the Controlled Foreign Company rules.
International Dealings Schedule
Where transactions or dealings with the UK and US subsidiaries exceed $2m, an “international dealings schedule” must be prepared and lodged (along with the tax return of the Australian-based parent company).
To avoid the application of the transfer pricing provisions (which prohibit the shift of Australian profits to low-tax jurisdictions through the setting of uncommercial and unrealistic prices for commercial or financial dealings with foreign related parties), the arrangements between the Australian-based parent company and the subsidiaries must be at arm’s length.
Any capital gains derived on foreign assets are subject to taxation in Australia. If tax is paid on the capital gain in a foreign jurisdiction, a foreign income tax offset may be claimed in Australia (to avoid double taxation).
Thin Capitalisation Rules
Where more than $2m is claimed in interest or other debt deductions (in any given year), the thin capitalisation rules may apply to limit the available deductions of the Australian-based parent company, where the amount of debt used to fund the Australian-based parent company exceeds the specified limit.
If Australian employees will be posted overseas to assist (on a temporary basis) with the set-up of the subsidiary, the same tax and superannuation obligations apply (as if those employees were still working in Australia), subject to a few exceptions.
It is critical you protect your intellectual property rights in all jurisdictions that the Australian-based parent company and/or their subsidiaries are carrying on business. For example, to review whether a trade mark registration will be possible in the US or UK, you can review the international trade mark register at https://www3.wipo.int/branddb/en/. It’s always best to get the ball rolling on this sooner rather than later as the registration process usually takes approximately 8 months where the process goes off without a hitch (i.e. no oppositions from third parties disputing the registration of the trade mark).