Australian subsidiaries of foreign companies pay corporate tax at 25% (base rate entities with turnover under $50M) or 30% (all others) on Australian-sourced income. Transfer pricing rules, thin capitalisation limits, and withholding taxes on cross-border payments also apply.
Taxation of Foreign Subsidiaries in Australia
Last Updated: March 2026
By Aus Business Register
Disclaimer: This guide is for general informational purposes only and does not constitute tax advice. Australian tax law is complex and changes frequently. We recommend engaging a qualified Australian tax adviser for advice specific to your company’s circumstances. Aus Business Register works with experienced tax partners who specialise in international structuring.
When a foreign company incorporates an Australian subsidiary, that subsidiary becomes an Australian tax resident – subject to Australian tax on its worldwide income. Understanding the tax framework that applies to foreign-owned subsidiaries is essential for structuring your Australian operations effectively and meeting compliance obligations from day one.
This guide covers the key tax rules, rates, and reporting obligations that apply to Australian subsidiaries of foreign companies.
Corporate Tax Rates
Australia has two corporate tax rates (from 2021-22 onwards):
| Rate | Applies To | Criteria |
|---|---|---|
| 25% | Base rate entities | Aggregated turnover under $50 million AND 80% or less of income is base rate entity passive income |
| 30% | All other companies | Companies that do not qualify as base rate entities |
Important for foreign subsidiaries: “Aggregated turnover” includes the turnover of all connected and affiliated entities worldwide. For a subsidiary of a multinational group, the parent company’s global revenue counts toward this threshold. This means most subsidiaries of foreign companies with group turnover exceeding $50 million will pay the 30% rate.
Base rate entity passive income includes corporate distributions, franking credits, royalties, rent, interest, and net capital gains. Subsidiaries that primarily earn passive income (e.g., holding companies receiving intercompany dividends) may also be excluded from the 25% rate even if turnover is under $50 million.
Source: ATO – Company tax rates
Tax Residency Rules
An Australian subsidiary incorporated under the Corporations Act 2001 is automatically an Australian tax resident – regardless of where its directors meet, where decisions are made, or where its shareholders are located.
This means the subsidiary is taxed on its worldwide income, not just Australian-source income. Any income earned by the subsidiary anywhere in the world is subject to Australian tax.
The residency tests for companies (Section 6(1), ITAA 1936) include:
| Test | Application |
|---|---|
| Incorporation test | Incorporated in Australia = automatically Australian tax resident |
| Central management and control | For foreign-incorporated companies that have management in Australia |
| Voting power test | For foreign-incorporated companies controlled by Australian shareholders |
For most foreign companies establishing an Australian subsidiary (Pty Ltd), only the incorporation test is relevant – and it is automatic.
Source: ATO – Working out your residency
GST Registration
An Australian subsidiary must register for GST if its GST turnover is $75,000 or more per year (current or projected). Registration must occur within 21 days of reaching the threshold.
| Scenario | Threshold |
|---|---|
| Standard business | $75,000/yr |
| Non-profit organisation | $150,000/yr |
| Taxi / ride-sourcing | Must register regardless of turnover |
| Voluntary registration | Available below threshold (must stay registered 12 months minimum) |
Once registered, the subsidiary must lodge Business Activity Statements (BAS) – typically quarterly – reporting GST collected and GST credits claimed.
Source: ATO – Registering for GST
Withholding Tax on Payments to the Parent
When your Australian subsidiary makes payments to the foreign parent company, withholding tax may apply:
| Payment Type | Default Rate (No DTA) | Typical DTA Rate |
|---|---|---|
| Franked dividends | Nil (exempt) | Nil |
| Unfranked dividends | 30% | 0-15% |
| Interest | 10% | 10% |
| Royalties | 30% | 5-15% |
The most tax-efficient way to repatriate profits is through fully franked dividends, which are exempt from withholding tax regardless of whether a DTA exists. See our Profit Repatriation Guide for a detailed explanation.
The subsidiary is responsible for withholding the correct amount of tax and remitting it to the ATO when making payments to the non-resident parent.
Source: ATO – Withholding rate
Thin Capitalisation
Foreign-controlled Australian companies are subject to thin capitalisation rules (Division 820, ITAA 1997) that limit the amount of debt deductions (primarily interest) that can be claimed.
From 1 July 2023, the rules were reformed from an asset-based test to an earnings-based test:
| Test | Description |
|---|---|
| Fixed ratio test (default) | Net debt deductions limited to 30% of tax EBITDA. Denied deductions can be carried forward for up to 15 years. |
| Group ratio test (elective) | Uses worldwide group’s net interest/EBITDA ratio from consolidated accounts |
| Third party debt test (elective) | External debt fully deductible; related-party debt denied entirely |
De minimis exemption: Companies with total debt deductions of $2 million or less per year (combined with associates) are exempt from these rules.
The thin capitalisation rules are particularly relevant when a subsidiary is funded by intercompany loans from the foreign parent. If the subsidiary is heavily leveraged with related-party debt, a significant portion of interest deductions may be denied.
Source: ATO – Thin capitalisation rules
Transfer Pricing
All cross-border transactions between the Australian subsidiary and related foreign entities must reflect arm’s length conditions under Subdivision 815-B, ITAA 1997. This applies to:
- Intercompany loans and interest rates
- Management fees and service charges
- Royalties and IP licensing
- Goods supplied between related parties
- Cost-sharing and contribution arrangements
If the subsidiary’s international related-party dealings exceed $2 million per year, an International Dealings Schedule (IDS) must be lodged with the company tax return.
ATO Focus Areas
The ATO particularly scrutinises:
- Management fees paid offshore where the actual work is done by Australian-based staff
- Related-party loans with interest rates above market levels
- Royalty payments to low-tax jurisdictions for IP with no demonstrated commercial value
- Arrangements that mischaracterise the nature of payments to achieve a tax benefit
For groups with global income of $1 billion or more, Country-by-Country (CbC) reporting is required – see Significant Global Entity rules below.
Source: ATO – The arm’s length principle
CFC Rules – What Foreign Parents Need to Know
An important point of clarification: Australia’s Controlled Foreign Company (CFC) rules apply to Australian residents with interests in foreign companies. They do not apply to foreign parents of Australian subsidiaries.
This means:
- If you are a foreign parent with an Australian subsidiary, Australia’s CFC rules are not relevant to you
- Your Australian subsidiary is taxed as a resident on its worldwide income – the CFC rules do not add any additional Australian tax
- However, your home country’s CFC rules may attribute the Australian subsidiary’s income to the parent. For example, the US GILTI regime, UK CFC rules, or Japanese CFC rules may apply to the Australian subsidiary’s income
We recommend that foreign parents consult with tax advisers in their home jurisdiction to understand the CFC implications of holding an Australian subsidiary.
Source: ATO – Controlled foreign company
Significant Global Entity Rules
A company is classified as a Significant Global Entity (SGE) if it is a member of a group where the global parent entity has annual global income of $1 billion or more.
SGEs face additional obligations and significantly higher penalties:
Additional Obligations
| Obligation | Detail |
|---|---|
| Country-by-Country reporting | CbC report + Master File + Local File (within 12 months of year-end) |
| General Purpose Financial Statements | Must lodge GPFS if not already filed with ASIC |
| Multinational Anti-Avoidance Law (MAAL) | Targets schemes to avoid Australian tax on Australian-generated revenue |
| Diverted Profits Tax | 40% penalty tax on profits diverted offshore through contrived arrangements |
Enhanced Penalties
| Offence | SGE Penalty |
|---|---|
| Failure to lodge (28 days late) | $165,000 |
| Failure to lodge (29-56 days) | $330,000 |
| Failure to lodge (57-84 days) | $495,000 |
| Failure to lodge (85-112 days) | $660,000 |
| Failure to lodge (112+ days) | $825,000 |
| Scheme penalties | Doubled compared to standard |
Source: ATO – Significant global entities
PAYG Instalments
Once the ATO assesses your subsidiary as having a tax liability, it enters the PAYG instalment system:
| Feature | Detail |
|---|---|
| Frequency | Quarterly (most companies); monthly if instalment income exceeds $20 million |
| Due dates (quarterly) | 28 Oct, 28 Feb, 28 Apr, 28 Jul |
| Due dates (monthly) | 21st of the following month |
| Calculation | ATO notifies an instalment rate applied to quarterly/monthly income |
| Small amounts | Annual payment may be available if estimated tax under $8,000 |
Source: ATO – When are PAYG instalments due
Lodgement and Reporting Obligations
An Australian subsidiary must meet the following reporting obligations:
| Return / Report | Frequency | Due Date |
|---|---|---|
| Company income tax return | Annual | 28 February (or later with tax agent) |
| Business Activity Statement (BAS) | Quarterly or monthly | 28th of month after quarter; 21st of following month |
| PAYG withholding annual report | Annual | 14 August |
| Taxable Payments Annual Report (TPAR) | Annual (if applicable) | 28 August |
| International Dealings Schedule | Annual (with tax return) | Same as tax return |
| CbC reporting (if SGE) | Annual | Within 12 months of year-end |
| Fringe Benefits Tax return | Annual (if FBT liability) | 21 May (or 25 June with agent) |
| ASIC annual review | Annual | Within 2 months of ASIC review date |
TPAR applies to businesses in certain industries including building and construction, cleaning, courier, IT, road freight, and security services.
Source: ATO – Reports and returns for businesses
How Aus Business Register Can Help
The tax framework for foreign subsidiaries is shaped by decisions made at the time of company formation – share capital, debt structure, intercompany agreements, and choice of financial year. Getting these right from the start can save significant costs and compliance headaches later.
Aus Business Register assists with:
- Company formation – incorporating your Australian subsidiary with tax efficiency in mind
- ABN and GST registration – establishing tax registrations from day one
- Tax adviser referrals – connecting you with international tax specialists experienced in foreign subsidiary structuring, transfer pricing, and thin capitalisation
- ASIC compliance – managing annual reviews, ASIC filings, and statutory registers
- Bookkeeping services – maintaining Australian accounting records that support your tax compliance
- Resident director services – appointing a qualified director who meets the Corporations Act requirement
Request a quote to discuss your Australian subsidiary setup, or call us on +61 2 8599 9890.
Frequently Asked Questions
What tax rate will my subsidiary pay?
Most subsidiaries of foreign companies pay 30%, because aggregated turnover (which includes the worldwide group) typically exceeds $50 million. Subsidiaries of smaller groups (group turnover under $50 million) may qualify for the 25% base rate entity rate, provided no more than 80% of their income is passive.
Is my subsidiary taxed on worldwide income?
Yes. An Australian-incorporated company is automatically an Australian tax resident and is subject to tax on its worldwide income, regardless of where the income is earned or who owns the shares.
What are the thin capitalisation rules?
Since 1 July 2023, the default test limits interest deductions to 30% of tax EBITDA (the fixed ratio test). Companies with total debt deductions under $2 million (including associates) are exempt. The old safe harbour test (60% of assets) no longer applies.
Do Australian CFC rules apply to my foreign parent company?
No. Australia’s CFC rules apply to Australian residents with interests in foreign companies – not the other way around. However, your home country may have its own CFC rules (e.g., US GILTI, UK CFC) that could apply to the Australian subsidiary’s income. Consult a tax adviser in your home jurisdiction.
What happens if we are a Significant Global Entity?
SGE status (group global income of $1 billion+) triggers additional reporting obligations (Country-by-Country reports, General Purpose Financial Statements), the Multinational Anti-Avoidance Law, the Diverted Profits Tax (40%), and significantly higher penalties for late lodgement or non-compliance.
When does our first tax return need to be lodged?
Your first company tax return covers the period from incorporation to the end of the chosen financial year (typically 30 June). It is due by 28 February the following year, or later if lodged through a registered tax agent. Most companies use a tax agent for their first return to ensure all international aspects are correctly handled.
This guide was prepared in March 2026 based on information published by the ATO. Tax rules are complex, change frequently, and their application depends on individual circumstances. Always seek professional tax advice for your specific situation.