Can foreign-owned companies claim the R&D tax incentive?

Yes, but only if the Australian entity meets strict conditions — including conducting the R&D for its own benefit or qualifying under the s355-210(2) carve-out.

Why this matters

If you’re part of a global group conducting R&D in Australia, the ATO is scrutinizing claims where:

  • The Australian entity acts merely as a service provider
  • The foreign parent owns all the intellectual property (IP)
  • The R&D is conducted overseas
  • There’s no real financial risk borne by the Australian entity

It’s no longer sufficient to simply register your activities; you must demonstrate substance in your operations.

What do you need to do?

If you’re a foreign-owned company aiming to access the R&D tax incentive:

  • Assess your structure – Ensure you’re an eligible Australian R&D entity under s355-35.
  • Control and risk – Conduct R&D “for your own benefit” (s355-210(1)) unless you qualify under the carve-out.
  • DTA country – If your parent is in a country with a Double Tax Agreement (DTA) with Australia (e.g., UK, US, Singapore), you may still be eligible under s355-210(2).
  • Demonstrate substance – Employ local staff, conduct genuine R&D, and avoid being a mere service entity.ato.gov.au+5ato.gov.au+5ato.gov.au+5

Learn more about the R&D tax incentive

Ensure your R&D structure meets ATO compliance
Speak with an expert today – call Bulletpoint on 1300 658 508.

 

ATO compliance R&D tax incentive

Background – Where this all comes from

Section 355-210(1) of the Income Tax Assessment Act 1997 stipulates that R&D must be conducted “for the R&D entity”.

This means:

You must control the R&D, bear the financial risk, and benefit from the outcomes.

If you’re merely providing services for a foreign parent under a cost-plus agreement — with no ownership of the IP and no rights to exploit the results — you’re likely ineligible.

The ATO has clarified this in Taxation Determination TD 2019/10, stating that R&D conducted under such arrangements is not eligible, unless the carve-out in s355-210(2) applies.

What is the carve-out?

Section 355-210(2) provides an exception for foreign-owned groups, allowing claims even if the parent owns the IP and benefits, provided:

  • The foreign company is connected or affiliated with the Australian entity (40%+ ownership)
  • The foreign company is a resident of a DTA country
  • The R&D is conducted solely in Australia
  • The arrangement is commercially priced (arm’s length)
  • All other eligibility criteria are met (e.g., hypotheses, technical risk)

If these conditions are satisfied, you can still claim the incentive.

If there’s no DTA?

You’re generally ineligible unless you can prove the R&D is for your own benefit, which entails:

  • Bearing the financial risk (not being reimbursed regardless of outcome)
  • Having technical control (designing, running, and directing the work)
  • Ability to exploit the results (commercial licence, know-how, or product integration)
  • Substantial presence in Australia (staff, facilities, expenses)

If you’re merely executing tasks for a non-DTA foreign parent, the ATO may classify you as a contract research organisation, disqualifying your claim.

❝ Having an advanced finding won’t protect you if you’re just a conduit for offshore R&D.❞

This is emphasized in Taxpayer Alert TA 2023/5, which targets claims by Australian subsidiaries conducting work for foreign parents without substantial operational control or benefit locally.

Avoid ineligible service arrangements
Get clarity before you lodge – message Bulletpoint.

ATO compliance R&D tax incentive

Real-world scenario

Consider a UK parent company establishing an Australian subsidiary to conduct R&D:

  • The Australian entity hires engineers, conducts experiments, and incurs local expenses.
  • The UK parent owns the IP and funds the work.

If:

  • The UK is a DTA country
  • They are connected entities
  • The R&D is conducted solely in Australia
  • Proper agreements are in place

Then:

→ You may claim under the carve-out in s355-210(2).

However, if:

  • The parent is in a non-DTA country (e.g., Brazil)
  • The Australian company has no staff
  • The R&D is conducted offshore

Then:

→ The claim will likely be denied.

What red flags is the ATO looking for?

  • Cost-plus arrangements with guaranteed reimbursement
  • No local IP rights or control over R&D
  • Minimal local staff or infrastructure
  • Back-to-back arrangements lacking commercial substance
  • Service-style contracts instead of genuine risk-bearing R&D

Even with formal agreements, the ATO assesses the economic substance over the legal form.

How to get it right

If you’re foreign-owned and aim to make a legitimate R&D claim in Australia:

  1. Conduct genuine R&D locally – Employ technical staff, lease facilities, and maintain records.
  2. Demonstrate control and risk – Ensure the Australian entity leads the R&D and incurs real costs.
  3. Formalize agreements – Draft intercompany contracts reflecting actual arrangements.
  4. Verify carve-out applicability – Confirm the parent is in a DTA country and conditions under s355-210(2) are met.
  5. Maintain thorough documentation – Include hypotheses, project plans, and approvals.
  6. Avoid thin capitalization – The ATO monitors debt-funded R&D structures closely.

Need help with the R&D tax incentive?

Navigating the R&D tax incentive as a foreign-owned entity can be complex. We’ve assisted over 500 companies in preparing robust, compliant claims. Our experience includes:

  • Handling ATO and AusIndustry audits
  • Structuring intercompany agreements
  • Ensuring eligibility under s355-210(2)

Bulletpoint is Australia’s highest-rated R&D tax consultancy, with over 280 five-star reviews.

Bottom line? If you’re foreign-owned and conducting R&D in Australia, proceed with caution. The ATO is vigilant, but with the right structure and documentation, you can still access the R&D tax incentive.

Let’s ensure your claim is solid.
Talk to us

Scroll to Top