The ATO clarified on 13 July 2026 that R&D entities claiming the incentive for work done on behalf of an associated foreign corporation must meet conditions under subsection 355-210(1) of the ITAA 1997, including a double tax agreement, Australian-only activity, and a written agreement setting out ownership, control, and financial risk.
The Australian Taxation Office (ATO) updated its guidance on 13 July 2026 regarding the eligibility requirements for research and development (R&D) activities undertaken by an R&D entity on behalf of an associated foreign corporation when claiming the R&D tax incentive.
Under the incentive, eligible companies with an aggregated annual turnover of less than AUD 20 million can claim a refundable tax offset equal to their corporate tax rate plus an additional 18.5% premium.
Conducting R&D activities for an associated foreign corporation
To be eligible to claim the R&D tax incentive for R&D activities conducted for one or more associated foreign corporations, the following conditions must apply:
- Each foreign corporation must be a resident of a foreign country that has a double tax agreement with Australia.a
- The R&D activity must be conducted solely in Australia or an external territory of Australia.
- If the R&D activity is a supporting activity, each corresponding core activity must be
- conducted solely within Australia or an external territory
- an activity for which the entity has 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 the R&D entity
- an affiliate of the R&D entity, or the R&D entity must be an affiliate of each foreign resident.
- The R&D activity must be conducted in accordance with an appropriate written agreement, binding only on the R&D entity and each foreign resident. The agreement must specify that the R&D activities are to be conducted either:
- directly by the R&D entity
- indirectly by another entity under an agreement binding on the R&D entity (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).
An R&D entity can’t claim a notional deduction for R&D activities conducted for a foreign entity that is not a foreign corporation, or if the R&D entity and a foreign corporation are not associates.
Working out who an R&D activity is conducted for
When working out whether the R&D activity is conducted for one or more foreign corporations, the R&D entity must also consider the extent to which the activity is conducted for the benefit of any other type of entity who isn’t eligible under subsection 355-210(1) of the Income Tax Assessment Act 1997 (ITAA 1997). If the activity is also conducted to a significant extent for that other entity, the entity can’t claim the R&D tax incentive (refer to subsection 355-210(2)).
The extent to which the R&D activity is conducted for the benefit of a foreign corporation can be assessed by considering whether the foreign corporation has:
- effective ownership of the results
- an appropriate degree of control
- borne the financial risk.
To understand how these principles apply to Australian subsidiaries see R&D claims by Australian subsidiaries.
Expenses incurred on overseas R&D activities
If the R&D entity is a subsidiary, it can only claim expenses incurred on overseas R&D activities if they were conducted for it — not for a foreign resident corporation.
Australian supporting R&D activities can’t be claimed if the corresponding core activity was conducted overseas for a foreign resident corporation. If an entity incurs these kinds of R&D expenses, it is essential to correctly identify whether the R&D is conducted for the entity, its foreign parent or for another related entity.
Reviewing R&D claims by Australian subsidiaries
The ATO has concerns about Australian subsidiaries incorrectly assessing that activities are conducted for themselves and claiming on this basis. These are addressed in Taxpayer Alert TA 2023/5 Research and development activities conducted overseas for foreign related entities. It is important that entities correctly determine which entity is the major beneficiary of the R&D. The ATO regularly reviews claims, even after entities receive their offset.
The ATO looks at the claims of Australian subsidiaries closely, particularly those with:
- no physical presence in Australia
- no substantial business activity
- directors under the direction or wishes of the foreign parent
- no qualified employees to conduct or supervise the R&D activities
- incorporation near the end of the income year.
The ATO is also concerned about claims involving arrangements designed to present the subsidiary as the major beneficiary of the R&D where this is not in fact the case. For example, a licencing agreement may give the subsidiary a formal right to most income from the commercialisation of the R&D but comes with conditions preventing them from accessing that entitlement. These claims aren’t eligible, based on the general anti-avoidance rules. For more information, see Part IVA of the Income Tax Assessment Act 1936.
To work out who R&D activities are conducted for, entities should use the 3 principles (effective ownership of results, appropriate control over activities and bearing financial risk) to weigh up and conclude which entity is the major beneficiary.
Effective ownership of the results
The R&D entity is likely to have effective ownership of the R&D results if:
- it will be paid in full and at arm’s length for any products, goods or services arising from the successful results which it later provides to the foreign entity
- the foreign entity’s procurement of products, goods or services from the R&D entity arising from the successful results, is at a price comparable to another third-party service provider
- the entity is able to genuinely benefit from or commercialise the results, separately to its arrangements with the foreign entity.
The foreign entity is likely to have effective ownership of the R&D results if:
- this is explicitly captured in an agreement they have with the R&D entity
- only they can benefit from or commercialise the results, formally or in practice
- it has the primary right, from the start, to exploit and manage intellectual property developed by the subsidiary.
Control over the R&D activities
The R&D entity is likely to have appropriate control over the R&D activities if the entity (or its employees, contractors or third-party advisers) is not under the direction, control or influence of the foreign entity in relation to the specific R&D activities. Ordinary parent company governance and oversight does not count as effective control.
The foreign entity is likely to have control over the R&D activities if they have direct control or decision-making authority over them. This will need to be over and above the control ordinarily exercised by an arm’s length customer. The control or authority doesn’t need to be captured in a formal agreement between the R&D entity and the foreign entity to count — control exercised in practice still constitutes this.
If the R&D entity is contracting with or acting like a research service provider for a foreign associate to carry out the R&D, it’s likely they have effective control of it.
Bearing the financial risk of the R&D activities
The R&D entity is likely to carry the financial risk of the R&D if both the following occur:
- The entity has paid for the R&D with money that belongs to it — for example, from business revenues or a third-party loan.
- Any financial support (debt or equity) the entity has received from a foreign associate
- is on an arm’s length basis
- is provided as working capital, not for conducting the R&D
- has repayment obligations that aren’t conditional on the R&D being successful (both in the written agreement and in practice).
The foreign entity likely carries the risk if they:
- are covering the R&D entity’s costs for conducting the R&D (including any cost overruns)
- pay a non-arm’s length value for any products, goods or services the R&D entity later provides them out of the successful R&D results, with the value calculated to cover the costs of the R&D activities.
Requirements for written agreements
As a subsidiary, the entity must be delivering on an appropriate written agreement with the foreign entity in order to claim R&D activities conducted for them. This agreement must be binding only on the subsidiary and each foreign entity.
The agreement must specify that the R&D activities are to be conducted either:
- directly by the subsidiary
- indirectly by another entity under an agreement binding on the subsidiary (such as 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.
The written agreement may be a contract for the services to be provided. Other types of written agreements, such as agreements for delivery of goods and services or intellectual property (IP) agreements, may also be suitable if they’re clearly linked to the R&D activities being conducted. For example, a written IP agreement could satisfy this requirement. The rights dealt with under an IP agreement would need to be stated in a way that clearly connects the IP with the R&D activities that are undertaken.
Example: R&D conducted for a foreign corporation
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 a written agreement between the 2 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, which is 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 incentive are also satisfied.
Aggregated turnover
If an R&D entity has foreign residents that are connected or affiliated with it, their income must be taken into account when calculating aggregated turnover to determine if the entity can claim the refundable or non-refundable tax offset. For more information, see Step 3 – Calculate your aggregated turnover.
Example: R&D conducted for a foreign corporation
Company O is a large company incorporated in the UK with an annual turnover that exceeds AUD 50 million. Company O establishes an Australian subsidiary on 1 July 2024. The subsidiary, Company A, is an Australian company wholly owned by Company O and qualifies as an R&D entity. Most directors of Company A are also directors of Company O.
Under a written agreement between the 2 parties:
- Company A agrees to undertake R&D activities for Company O
- Company O funds the activities
- Company O legally owns all intellectual property arising from the activities and benefits from the use and exploitation of the results
- key decisions regarding the conduct of the activities are to be made by Company O.
Core R&D activities 1 and 2 and supporting R&D activity 3 are undertaken in Australia and other activities are undertaken overseas.
Expenditure incurred on the R&D activities by Company A in the 2025 income year are as follows:
- Australian core R&D activities – AUD 2,500,000
- Australian supporting R&D activity – AUD 20,000
- Overseas activities – AUD 800,000.
Company O is incorporated and a resident of the UK, with which Australia has a double tax agreement. Company O is also connected with Company A, as Company O controls Company A.
The R&D activities are being conducted solely for the benefit of foreign Company O because Company O has effective ownership of the results, controls the conduct of the activities and bears the financial risk of the activities.
Company A can claim the R&D tax incentive for core R&D activities 1 and 2 undertaken in Australia provided all other requirements for claiming the incentive are satisfied.
As the R&D activities are conducted for a foreign company:
- Company A can’t claim the R&D tax incentive for expenditure incurred on overseas activities
- the expenditure incurred on the Australian supporting activity can only be claimed if
- it corresponds to the Australian core R&D activities
- other requirements for claiming the R&D tax incentive are met.
When working out Company A’s aggregated turnover to determine if it can claim the refundable or non-refundable R&D tax offset, Company A must include:
- Company A’s annual turnover
- Company O’s annual turnover – as it is a connected entity
- the annual turnover of any other connected or affiliated entities.
This results in Company A’s aggregated turnover being greater than AUD 20 million. Therefore, it can’t claim the refundable R&D tax offset. Instead, Company A can claim the non-refundable R&D tax offset for expenditure on eligible R&D activities.
