ATO ID 2009/149: Consolidation: membership rules - foreign hybrid company
Date of decision: 4 December 2009
Year of income: Year ended 30 June 2010
Business line: Consolidation Centre of Expertise

Issue
Is a United States limited liability company (US LLC) that is a foreign hybrid company in relation to an income year and is a wholly-owned subsidiary of the head company of a consolidated group for a period during the income year, a member of the consolidated group during that period?

Decision
Yes. A US LLC that is a foreign hybrid company in relation to an income year and is a wholly-owned subsidiary of the head company of a consolidated group for a period during the income year, is a member of the consolidated group during that period.

Facts
On 1 September 2009, H Co, the head company of a consolidated group, becomes the beneficial owner of all of the membership interests in a limited liability company, LL Co, formed under the laws of the state of Delaware in the United States of America. H Co remains the beneficial owner of the membership interests at the end of the income year, 30 June 2010. At the end of the income year, LL Co satisfies all of the conditions in subsection 830-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997), and so is a foreign hybrid company in relation to the income year.

Reasons for decision
Summary: Where a company is a foreign hybrid company in relation to an income year, section 830-20 of the ITAA 1997 provides that the 'foreign hybrid tax provisions' apply to the company as if the company were a partnership. The definition of the term 'foreign hybrid tax provisions', in subsection 995-1(1) of the ITAA 1997, includes the ITAA 1997 (other than Subdivision 830-A and 830-B). Accordingly, the membership rules for consolidated groups in Division 703 of the ITAA 1997 are foreign hybrid tax provisions. As LL Co is a foreign hybrid company in relation to the income year, Division 703 of the ITAA 1997 applies to LL Co as if it were a partnership. Paragraph 703-15(1)(b) of the ITAA 1997 provides that an entity is a member of a consolidated group while the entity is a subsidiary member of the group. An entity is a subsidiary member of a consolidated group if the conditions in columns 2, 3 and 4 of item 2 of the table in subsection 703-15(2) of the ITAA 1997 are satisfied. The condition in column 2 of item 2 of the table in subsection 703-15(2) of the ITAA 1997 is satisfied if the entity is a company, trust or partnership, subject to certain conditions and exceptions regarding its income tax treatment that are not applicable for present purposes. The condition in column 3 of that item is satisfied if the entity is a company or trust satisfying certain Australian residence requirements, or is a partnership. To satisfy the condition in column 4 of that item, the entity must be a 'wholly-owned subsidiary' of the head company, according to the definition of that term in section 703-30 of the ITAA 1997. LL Co satisfies the conditions in columns 2 and 3 of item 2 of the table in subsection 703-15(2) of the ITAA 1997 because it is treated as a partnership. This is irrespective of LL Co being, in fact, a company and, in that circumstance, not satisfying the residence requirements in column 3(a) of that item. During the period that all of the membership interests in LL Co are beneficially owned by H Co, LL Co is a wholly-owned subsidiary of H Co as defined in section 703-30 of the ITAA 1997, so satisfies the condition in column 4 of item 2 of the table in subsection 703-15(2) of the ITAA 1997 during that period. LL Co is therefore a member of the consolidated group while it is a wholly-owned subsidiary of H Co, from 1 September 2009 to 30 June 2010.

Legislative references: Income Tax Assessment Act 1997 Part 3-90 Division 703 paragraph 703-15(1)(b) subsection 703-15(2) section 703-30 Subdivision 830-A Subdivision 830-B subsection 830-15(1) section 830-20 subsection 995-1(1)
Subject references: Consolidation Consolidation - membership Foreign hybrid company Foreign hybrids Head company International tax Subsidiary member of a consolidated group