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  • R&D activities conducted for an associated foreign entity

    R&D activities can be conducted for an associated foreign corporation if certain conditions are met.

    If you are an R&D entity conducting R&D activities for one or more foreign corporations, each being a resident of a foreign country that has a double tax agreement with Australia, you must first consider whether you meet the following further conditions:

    • The R&D activity must be conducted solely in Australia or an external Territory.
    • If the R&D activity is a supporting activity, each corresponding core activity must be conducted solely within Australia or an external Territory and be an activity for which you have registered or could register for the R&D tax incentive for the income year.
    • When the R&D activity is conducted, each foreign resident must be either  
      • connected with you
      • an affiliate of you or you must be an affiliate of each foreign resident.
       
    • The R&D activity must be conducted in accordance with a written agreement binding only on you and each foreign resident, specifying that the R&D activities are to be conducted either  
      • directly by you
      • indirectly by another entity under an agreement binding on you (for example conducting the R&D activity under a subcontract).
       

    Any R&D entities conducting these activities as a subcontractor under a contract with a related R&D entity are ineligible for the R&D tax incentive.

    These conditions are in addition to other requirements that must ordinarily be satisfied in order to claim the R&D tax incentive (for example, those about notional deductions for expenditure, registration and having eligible R&D activities).

    When working out whether the R&D activity is conducted for one or more foreign corporations, you must also consider the extent to which the R&D activity is conducted for the benefit of any other entity to whom the conditions in subsection 355-210(1) do not apply. If the R&D activity is also conducted to a significant extent for such another entity, then it is ineligible for the purposes of the R&D tax incentive (refer to subsection 355-210(2)).

    You can assess the extent to which the R&D activity is conducted for the benefit of the foreign corporation by considering the extent to which the foreign corporation:

    • has effective ownership of the results from the R&D activities
    • has a degree of control over the R&D activities
    • bears the financial burden or risk arising from the R&D activities.

    See also:

    • who R&D activities can be conducted for, refer to section 355-210 of the ITAA 1997
    • conditions that must be satisfied for R&D activities to be conducted for one or more foreign entities, refer to section 355-220 of the ITAA 1997.

    For the definition of:

    CRC program

    If you are claiming the R&D tax incentive for a monetary contribution you have made under the CRC program, it is not necessary to work out who R&D activities are conducted for in order to work out eligibility for the R&D tax incentive for that expenditure.

    See also:

    • Section 355-580 of the ITAA 1997 – for more information on notional deductions for CRC contributions.

    Example: R&D activity for a foreign company

    Company J is a company incorporated in the UK. Company J establishes an Australian subsidiary. The subsidiary, Company K, is an Australian company wholly owned by Company J and qualifies as an R&D entity.

    Under an agreement between the two parties, Company K agrees to undertake R&D activities in its Perth office solely for the benefit of Company J. The consideration is at arm's length and will be paid even if the R&D is not successful. Company J is legally entitled to all intellectual property arising from the R&D activities.

    Company J is a foreign resident incorporated under foreign law and a resident of the UK, being a country Australia has a double tax agreement with. Company J is also connected with Company K, as Company J controls Company K.

    The R&D activities are being conducted solely for Company J. Therefore Company K may be able to claim the R&D tax incentive provided all other requirements for claiming the R&D tax incentive are also satisfied.

    End of example
      Last modified: 28 Feb 2017QC 26121