Navigating the Process of Securing Funding for Your Cross-Border Entity

In Short

• Cross-border funding must be structured and documented properly to meet ATO and international tax obligations.
• Related-party loans should follow arm's-length terms, and low-level loans (≤$50M at ~5.61% interest) attract less scrutiny.
• Strong documentation reduces compliance burden and helps leverage simplified transfer pricing record-keeping options.

Tips for Businesses
Keep clear, written loan agreements-especially with foreign parties-and evidence why terms are commercially reasonable. Track total cross-border loan balances and interest rates against ATO limits. Periodically review arrangements to ensure continued compliance and avoid unexpected tax risks.

Expanding your business operations across borders presents significant growth opportunities but also introduces complex financial and tax considerations. Securing funding for your cross-border entity requires careful planning to comply with international tax laws. It also helps avoid unintended tax consequences. This article outlines key funding aspects with a focus on ATO guidelines and common pitfalls.

Understanding Inbound Foreign Funds

When your business receives foreign funds, it is crucial to characterise them correctly. This is especially important for wealthy, privately owned groups to comply with Australian tax laws. Mischaracterisation can lead to serious tax implications.

Mischaracterisation of Inbound Foreign Funds

The ATO scrutinises cross-border arrangements that mischaracterise inbound foreign funds. For instance, disguising foreign-sourced income as a loan, gift, or other capital investment can attract the ATO's attention. Such arrangements may appear contrived and overly complex. They may aim to reduce or hide the income tax or withholding tax payable.

Loans and Gifts

Particular attention is given to funds received from offshore family and related parties in the form of loans or gifts. If you lack proper evidence, the ATO may investigate whether the funds are undeclared foreign income. To avoid this, maintain detailed documentation that clearly outlines the nature and terms of any foreign loans or gifts.

Related Party Financing Arrangements

Financing arrangements with related foreign parties must follow arm's length principles. This ensures the terms and conditions are commercially reasonable.

Non-Commercial Financing Arrangements

The ATO monitors financing arrangements with international parties that are not on commercial terms.
These can cause excessive interest deductions or income not being recognised in Australia. Even if unrelated parties are not concerned, the ATO may investigate if there is a transfer pricing benefit.

Arm's Length Terms

To comply with transfer pricing rules, ensure that any related party financing arrangements are conducted on arm's length terms. This means that the terms and conditions should mirror those that would be agreed upon between independent parties under similar circumstances. Non-arm's-length terms can result in higher interest rates and excessive debt deductions, which the ATO closely monitors.

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Low-Level Inbound and Outbound Loans

The ATO provides guidance on simplified transfer pricing record-keeping options for low-level inbound and outbound loans, allowing eligible businesses to opt for reduced record-keeping and compliance costs.

Inbound loans involve funds lent by foreign entities to Australian businesses, while outbound loans occur when Australian businesses lend funds to related foreign entities. Both are subject to transfer pricing rules, particularly with regard to interest rates and loan terms.

Loans would be required to meet a certain set of criteria to be considered as low-level inbound and outbound loans.The criteria include:

• a combined cross-border loan balance of $50 million or less for your Australian economic group at all times throughout the financial year; and
• for each of your loans:
  • if it is inbound, the interest rate is no more than the specific interest rate prescribed by the ATO for that particular income year (5.61% for the 2024-25 income year);
  • if it is outbound, the interest rate is no less than the specific interest rate prescribed by the ATO for that particular income year (5.61% for the 2024-25 income year);
  • the funds are in Australian dollars and reflected in the loan agreements; or
  • associated expenses are paid in Australian dollars.
• you have not made sustained losses;
• you have not undergone a restructure within the year; and
• you have assessed your compliance with the transfer pricing rules.

Properly structured loans within these parameters are less likely to attract ATO review, reducing compliance risks and administrative burdens. Maintaining comprehensive documentation that substantiates the arm's length nature of the loan and the satisfaction of the criteria set out above is critical to defending its classification as low risk.

Compliance Best Practices

Adhering to best practices as advised by tax professionals in documenting and managing your cross-border financing arrangements can significantly reduce compliance risks.

Documentation

Maintain comprehensive documentation for all related party financing arrangements. This includes formal agreements detailing the terms and conditions, evidence supporting the commerciality of the arrangement, and records of any payments made. Proper documentation demonstrates that the arrangement is conducted on arm's length terms and supports your position in the event of an ATO review.

Regular Reviews

Engaging tax professionals in periodically reviewing your financing arrangements to ensure they remain compliant with current laws and guidelines. Changes in business operations, financial markets, or tax regulations can impact the appropriateness of existing arrangements. Regular reviews allow you to make necessary adjustments proactively.

Professional Advice

Engage with tax professionals who specialise in international tax law to navigate the complexities of cross-border financing. Their expertise can help you structure arrangements that comply with legal requirements and align with your business objectives.

Key Takeaway

Securing funding for a cross-border entity requires navigating complex tax rules and ensuring all arrangements are commercially sound. Proper documentation is essential to support compliance and reduce the risk of tax issues. Simplified transfer pricing options are available to help eligible entities reduce record-keeping and compliance costs. Consult a tax professional to choose the best funding structure for your cross-border entity.

If you are uncertain about your legal obligations related to international tax law, our experienced taxation lawyers can assist you as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on1800 532 904 or visit our membership page.

Frequently Asked Questions

What are the risks of mischaracterising inbound foreign funds?

Mischaracterising foreign funds, such as labelling income as a loan or gift, can trigger scrutiny from the ATO. If deemed undeclared income, this may lead to additional tax liabilities and penalties.

What is meant by 'arm's length terms' in related party loans?

Arm's length terms mean the loan conditions must reflect what independent, unrelated parties would agree upon in similar circumstances. This ensures fair interest rates and prevents excessive deductions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.