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Updated ATO guidance on R&D activities conducted for an associated foreign corporation

The ATO has updated guidance on 13 July 2026 around the provisions for R&D activities conducted 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.
• 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 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 yours or you 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 you and each foreign resident. The agreement must specify 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).

The guidance includes some specific examples and clarifications and notes that the ATO has concerns about Australian subsidiaries incorrectly assessing that activities are conducted for themselves and claiming on this basis. The ATO guidance also notes:

• The ATO are 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;
• To work out who R&D activities are conducted for, companies 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.

This additional guidance on the R&D activities conducted for an associated foreign corporation provisions is welcomed by Swanson Reed. We have observed these complex provisions may not be well understood by many companies and advisors, and this presents risks of companies incorrectly assessing R&D Tax Offset eligilbity.

Misapplication can occur in instances where a subsidiary of a foreign parent entity is established in Australia to conduct a limited trial activity that is in substance for an overseas parent entity (eg establishing a company to conduct a single Australian trial to test the performance of a technology developed by an overseas parent, where the IP and results of the trial are owned by the parent entity). Issues with such scenarios possibly contributed to the ATO’s release of TA 2023/5 (Research and development activities conducted overseas for foreign related entities) in December 2023.

Application of these provisions can determine:

• The net cash impact of the R&D Tax Offset in a claim year. Some entities may be lodging claims on the basis of them receiving a $0.435 cash impact when they may possibly be entitled only to a $0.185 net cash impact if the provisions around R&D activities conducted for an associated foreign corporation were correctly applied; or
• Whether a company is eligible for any R&D Tax offset at all. If R&D activities are conducted for a foreign parent, and if the specific and additional requirements around R&D activities conducted for an associated foreign corporation are not met, then an Australian entity may not be eligble for any R&D Tax Offset.

Australian subsidiary entities of global parent entities that are seeking to register R&D Activities must be aware of these rules and carefully review the ATO guidance.

Please get in touch with our office if you require assistance, would like to speak to someone about a potential claim, or check out our website for more information.