Borders have become increasingly transparent for Australian businesses.

Danny runs an online shoe store. He designs the shoes, but the manufacture of the shoes largely occurs in the Philippines. While the website he has set up helps him avoid the costs of renting shop space to reach his Australian customers, it has also had the unexpected and added benefit of reaching a growing number of Korean customers. They love his designs; his popularity only requires a change in his shipping practices to result in fresh profits.

Julia has finally been able to fulfil a long-term goal. She has opened her travel agency. While she has been renting a small office where she can meet clients, her business partner Horatio has invested considerable time and effort into setting up a bookings website. Since her company runs boutique tours primarily to Bolivia and Argentina, the influx of online bookings from all over the world suddenly makes it harder for her to rely on outsourcing the tour services to Bolivian and Argentinian tour operators. She decides to close her office, hire tour consultants in South America, and make plans to set up a competent and large-scale tour company of her own overseas that can manage the successful flow of customers from her website.

While it is easy to start selling or outsourcing resources overseas, eventually many small businesses find that they need to set up some kind of presence in a foreign market. This may be an office, a number of employees, or the presence of marketing consultants. If you do this, then it makes sense to set up a company overseas also. This will isolate the tax, customer, legal, and employee risks inherent in the foreign market from any impact on your local company.

Once you set up this overseas company, you inject capital into it. It then begins to gain a profit. And this leaves you with a taxing question: how do you ensure the bulk of these profits are repatriated back to Australia?

The challenges of repatriating money vex many businesses owners and advisors. Multinational corporations engage scores of accountants and lawyers for this very purpose. You do not have this luxury. The costs of foreign taxation and business set-up, the costs of your company tax on money transferred back to Australia, and the costs you and your shareholders pay on dividends can add up to remove a significant amount of your profits and hand it over to tax offices here and overseas.

While you are compensated by the ATO for foreign tax payments so as to prevent you from being taxed twice on earnings, there are fees you pay for transferring money back to your Australian business from overseas earnings. Combine this with the Australian corporate tax rate and personal tax rate, and increasing interest from the ATO to ensure Australian businesses do not hide income in overseas tax havens, and you may well be left scratching your head as to whether or not an attractive overseas market is, in the end, as profitable as it first seemed.

There are different ways to be smart about repatriation, and the key is finding a strategy that works in your individual circumstances.

Consider, firstly, how you set up your overseas company and inject capital into it. You could loan the money to your overseas company, or invest the capital and claim it in the form of shares or equity. In so doing, you would recoup the money from your overseas company by

  1. Charging interest on the loan or asking the overseas company to repay it out of its profits.
  2. Declaring a dividend on the profits gained on your overseas shares.
  3. Receiving a payment from the overseas company in exchange for a service your local company provides.

These three options can work in tandem. The crux of the matter is that using any of these options sees your local company taxed differently and at different points in the repatriation process. We explore some of the nuances in balancing all three options in the next article. This approach helps and your international tax and business advisors plan early and clearly for effective profit repatriation.

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.

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