Should I set up a foreign subsidiary or take my current company overseas?

Australian small business will do well to eye overseas markets. There are ample opportunities even with the fluctuations we are currently experiencing in local and global economies. Yet how you take your business overseas is as important as the decision to target selling in a foreign market. There are number of incentives, such as the EMDG grant. But are you in a stronger position if you simple take your current business and broach a foreign market with your Australian goods and services, or set up a foreign subsidiary?

From March to April this year, there was an 8% increase in the trend estimates for the balance on goods and services for Australia’s international trade. Exports in April 2019 stood at a total value of $41,009 million. This follows a 13.2% increase in export value from 2017 to 2018. Over the past five years, coal and natural resources have continued to lead the way in export, yet education related travel, personal travel, professional services, financial services, meat, and alcoholic beverages also features as popular and successful export commodities. The continued success of Australia’s export and the popularity of commodities that small business can produce points to the inherent wisdom of small business owners exploring overseas options.

One chief boon for such a consideration is the EMDG (Export Market Development Grant). The grant seeks to boost the capacity of business of varied size and industry-focus to access and be successful in foreign markets. It has helped a large number of Australian businesses overcome the financial challenges of maintaining a successful sales presence overseas, and is particularly geared toward to small businesses. You can access up to 8 grants over 8 financial years, and in so doing will have up to 50% of your eligible export promotion expenses above $5,000 reimbursed (provided that your total export expenses are at least $15,000). You can be reimbursed for a wide range of export and export promotional activity, covering goods, services, trademarks and marketing.

Taking both the market opportunities and the backing of the EMDG into account, ostensibly it is much easier for you to export using your Australian company. You need to set up a foreign license and then start selling your goods or services overseas. The application process for the EMDG grant is simpler also since you can clearly demonstrate relevant Australian export activity. This option is also attractive in a broader sense for small businesses which do not need to set up much infrastructure overseas, or if the bulk of your profits will company from your overseas sales, since this will simply business set up and tax compliance.

However, there are risks in taking your Australian company overseas. Namely, this opens up your local business to any risks faced doing business overseas. Likewise, should your foreign endeavours prove successful and require you to expand your presence overseas by setting up infrastructure, employees, client contact, offices, and the like, this will usually require a subsidiary or local company. You may also miss out on a lower foreign tax rate should your overseas profits be taxed in Australia.

Hence a foreign subsidiary allows you more scope to grow and develop in a foreign market, without leaving you tied down to infrastructure and tax obligations half a world away in Australia. Yet it will be tougher to claim the EMDG since applicants generally have to be Australian companies. If your Australian company is removed from any overseas expenses, it will be hard to claim these as export expense that should be reimbursed under the EMDG. You would need to get your Australian company involved in some way – for example, you may use the Australian company to hire marketing and promotion agents, while your foreign subsidiary would then acquire the resultant clients and pay your Australian company a fee for these marketing services. In the second year and beyond you need to show income that is not a dividend coming into Australia when claiming the EMDG, so generally a foreign subsidiary will need to pay its Australian equivalent.

In summary, while an expanding and developing overseas business often needs to be a foreign subsidiary to deal with increasing demand on overseas infrastructure, the EMDG is best utilized by small businesses without a foreign subsidiary but with some kind of nascent yet genuine presence overseas (such as a basic office or staff) so as to succeed in attaining the reimbursement and to make it worthwhile. It is best to approach EMDG funding experts to help decide which business structure suits you and how to best apply.

Calibre Business Advisory invests more time than most firms into finding solutions for our clients. Contact our business advisors and tax accountants to discover new options for your business in Australia and beyond.

Important Disclaimer: Readers should not act solely on the basis of the material on this page. Items herein are general comments only and do not constitute or convey advice. Legislation and proposals of legislation are also subject to constant change. We therefore recommend that formal advice be sought before acting in any of the areas. This news article is issued as a guide to the readers. Calibre Business Advisory Pty Ltd and its associated entities disclaims any losses that may be incurred as a result of the reader undertaking any action based on this article.