So your client wants to set up a foreign company? You may need to talk them out of it.

Updated: Jan 20

From experience we know that many clients believe that setting up a foreign company is what they should do if they have a product or service they are selling internationally. They are often under the impression that there must be a tax saving for them if they can incorporate overseas (in a more lowly taxed country than Australia) through which to sell their product internationally. Sometimes there is no rhyme or reason why clients want to do it - its often just a feeling they have.

They read in the press that large multinationals can benefit from weird and wonderful tax structures (the now infamous Double Irish structures) and question why they should not be able to do the same.

We know of course that there are many reasons why an SME can't use tax structures designed in different times for billion dollar corporations, and so its often a matter of a little education - which can go a long way towards pointing a curious client down the right path. We find that there are two main reasons why many Australian SME's should not incorporate overseas, despite the allure of potential tax savings.

1. Firstly many SME's are either not able or are unwilling to devote the necessary resources to building a real management team in a foreign country. The risk is that any foreign company that might be set up is in effect controlled and managed by a board of directors in Australia, because there is simply not the necessary team on the ground overseas.

2. Secondly there is often a lack of understanding about how Australia's CFC rules apply to the operations of any foreign company, even if the foreign company is non-resident.

The key to dealing with these issues, and the management of the client expectations, is to understand the why. Why does the client want a foreign company? If the client wants a foreign company merely for tax reasons then that is where the conversation should stop. Our role as accountants, notwithstanding our earnest desire to please our clients is to bring a healthy dose of reality to the table.