A proper understanding of international tax rules requires an appreciation of the laws of Australia as well as rules and practices of other countries. Since the tax rules are intended to discourage tax avoidance strategies across borders they are unavoidably complex and difficult to grasp.

The Australian system of tax liability is based on the residence of the taxpayer and the source of relevant income. If a company or individual is resident in Australia they will have an Australian tax liability regardless of the source of their income. Any company incorporated in Australia will also be subject to Australian taxation. Even if a company is established outside Australia it will be taken to have its residence in Australia if:

• it carries on business in Australia; and either
• has its central management and control in Australia; or
• its voting power is controlled by shareholders who are resident in Australia.

A resident company may be exempt from taxation on some of its income such as in the case of dividends from foreign companies or foreign branch profits. Double tax agreements (DTAs) are an integral part of international taxation. Australia has entered into a series of DTAs with other countries. The function of these agreements is to avoid persons resident in the countries that are party to the agreement from being taxed in both countries in respect of the same income. Relief for taxpayers is in the form of exemption from tax in one country or tax credits for taxes paid in the other country on the same income. The other aspect of DTAs is the withholding tax limit set on dividends, interest and royalties arising in one country party to the agreement. In addition to the DTAs Australia has also entered into several information exchange agreements (IEAs) with other countries. IEAs allow certain information about residents to be exchanged between countries.

Like most other countries Australia also operates a controlled foreign company (CFC) regime under which income accrued abroad in foreign companies will be taxable in Australia. Foreign income that may be of concern to Australian companies can include the following:

• dividend income derived from shares held in a foreign company;
• accrued income under the CFC and transferor trust rules;
• foreign branch income; and
• capital gains from disposal of capital gains tax (CGT) assets in foreign companies.

This Legal Guide on International Taxation Law provides a broad outline of the law as it applies to Australian resident companies. It also addresses the most significant issues that arise in the international dealings of companies. International tax law rules applicable to individuals are different and they are not addressed here. Before making important decisions it is advisable to obtain legal advice specific to your situation. LegalEagle’s™ free directory profiles all lawyers in Australia. You can use it to Find a Lawyer near you.

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Warning: Information provided through LegalEagle™ is for general guidance. It is not legal advice. Laws and procedures referred to may change and differ between states, territories and nationally. There may also be important exceptions or qualifications. Only a lawyer providing formal legal advice can assess your particular circumstances to determine how the law will apply.