Given the sheer size of global markets relative to Australia, international expansion is usually a necessary step for Australian startups and scaleups on their journey to a successful exit.
Yet this decision is not one to be rushed – regardless of the size of your business, once you’ve decided to go global, you must navigate a host of complexities that come with being a multinational corporation.
In our experience working with tech companies of all sizes, there are a few key international structuring issues that founders and business leaders should be aware of prior to pulling the trigger on going global. There’s also a wealth of funding and other government support available for those that make the move. We’ve outlined these considerations (and more) below.
Prior to international expansion, founders should review their existing corporate structure to ensure that they have a solid starting point. Some of the structuring fundamentals we typically recommend include:
- Operating the businesses through a company to allow for access to key government grants such as the R&D Tax Incentive and to provide limited liability for directors.
- Holding the shares in the company through a family trust for asset protection and income splitting purposes.
- Using a corporate group structure to protect Intellectual Property (IP).
Further information on structuring and restructuring your scaleup can be found here.
Once the decision has been made to go global, the most common ways to structure international operations include:
- Overseas subsidiary: where the Australian company owns the shares in a new foreign company.
- Overseas head company: where a new foreign holding company is interposed between the Australian company and its existing shareholders (otherwise known as a “flip-up”).
The ideal structure will naturally depend on each business’s specific circumstances, but some general rules of thumb include:
- If the reason for entering an overseas market is to access the market or hire new employees, then an overseas subsidiary is usually recommended.
- If the reason is to access capital or potential acquirers who insist on an overseas entity, then an overseas head company is usually recommended.
Setting up an overseas head company is much more complicated than incorporating a foreign subsidiary. This is due to the nature of the flip-up process, which involves existing shareholders of the Australian company disposing their shares to the new foreign company in exchange for shares in foreign company. This means those shareholders will prima facie have a tax liability unless they can access specific tax concessions to reduce or defer any taxable gain on sale of those shares.
Further information on the tax issues specifically relating to flip-ups can be found here.
Funding & Incentives
Export Market Development Grant
Government grants are often an essential source of non-dilutive capital for tech companies. The most relevant grant for businesses looking to expand internationally is the Export Market Development Grant (“EMDG”). The EMDG is a Federal Government grant that subsidises the costs of eligible international marketing and promotion expenditure.
The EMDG scheme changed from 1 July 2021 and is now a tiered grant system:
|Tier 1: Ready to export
|First time exporters
|Maximum $40,000 per year for 2 years
|Tier 2: Expanding
|Businesses already exporting that are looking to expand promotion activities
|Maximum $80,000 per year for 3 years
|Tier 3: Expanding and strategic shift
|Businesses already exporting that are looking to expand promotion activities and make a strategic shift such as targeting a new market or new type of customer
|Maximum $150,000 per year for 3 years
Applications for the 2021 and 2022 years close 30 November 2021, so contact us now if you require any assistance with preparing the applications.
Further information on the new EDMG scheme can be found here.
Many founders and business leaders are aware of the EMDG and R&D tax incentive, however an often-overlooked form of government support is the Entrepreneurs’ Programme. This programme is specifically designed to help scaleups that have a turnover of at least $1.5M to improve different areas of business performance.
Through the programme the business’s leaders meet with an experienced government facilitator who provides recommendations to improve a specific business area (e.g. technology, security, marketing, internal processes). Should the business then action the recommendations made, co-funding of up to $20,000 is provided under the Business Growth Grant to help the business implement those recommendations.
Further, should the facilitator identify a new market opportunity for the company (including an overseas market) then a further $20,000 of co-funding under the Accelerated Growth Grant may be available for the company to pursue this opportunity.
Other government support
There are hundreds of grants available at a State and Federal level. Each grant has its own eligibility criteria (e.g. industry, location, turnover), so we encourage our clients to see what grants may be available for their business – Click here for more information..
The Australian government also offers support through the Landing Pads program. This is run by AusTrade and provides startups and scaleups with access to Innovation Hubs in San Francisco, Tel Aviv, Shanghai, Berlin and Singapore through a 90-day residency in a co-working space, along with introductions to a network of investors, mentors and strategic partners.
International tax obligations
Any business looking to expand internationally should be aware that Australian businesses operating in multiple countries can be subject to numerous complex international tax provisions including:
- Withholding taxes on payments of interest, royalties and dividends to overseas persons
- “Digital services tax” on certain types of transactions with users in the UK or the EU
- Sales tax or Value Added Tax (similar to GST) on services provided to users in other countries (noting that the threshold for registration in some countries is as low as $10k)
- Transfer pricing, which is in place to ensure Australian taxpayers are conducting all dealings with international related parties at market rates, and
- Tax on certain types of “passive” or “tainted” income made by overseas subsidiaries.
Complying with these requirements is complex and often thrown in the “too hard basket”. However, unaddressed issues don’t go away by themselves. The Australian Taxation Office (ATO) has access to much of this information through the “International Dealings Schedule” that gets lodged alongside the company tax return, while data on cross border money flows is routinely shared with government departments by AUSTRAC.
Finally, not addressing these issues could impact on your business valuation or become a roadblock to a future exit, so be sure to seek advice from an international structuring expert before going global.
Tax planning is essential for all businesses looking to go-global; loss-making startups included. Just because an Australian company is not currently paying tax, this may not be the case with a foreign subsidiary or head company. Withholding taxes and other intercompany charges could result in the foreign company being in a taxable position, so ongoing proactive tax advice is recommended to manage your group’s overall tax profile.
William Buck is part of the Global Praxity Alliance, the world’s largest and fastest growing alliance of independent accounting firms. We have the expertise and experience to take Australian tech companies global. Contact the authors of this article now for our free “10-point Global-Readiness Checklist”.