Residence of foreign companies for tax purposes

A foreign company is resident in Australia if it carries on business in Australia and has its central management and control in Australia or its voting power controlled by shareholders who are residents of Australia.

In the important decision of Baywater Investments & Ors v Commissioner of Taxation [16 November 2016] the High Court reviewed the decided cases regarding the “central management and control” of a company and confirmed that this is a question of fact and degree to be answered according to where the management and control actually takes place. Ordinarily, a foreign company is resident where the meetings of its board are conducted, but that result will not follow where the board of directors does no more than note and implement decisions made by an outsider.

On the facts in Baywater Investments Limited every decision of consequence was made by an individual in Australia and there was no occasion for the directors to exercise any judgment and they did not. The real business of the company was conducted by that individual. The central management and control of the company was therefore in Australia.

Full case report.

Our Comment: The case emphasises the need to examine the business and trading activities of the company when determining the question of residency for tax purposes. An important factor remains the degree of management and control exercised by the overseas directors.

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