ATO ID 2008/23: A cell in a protected cell company formed in Guernsey and the controlled foreign company measures
Date of decision: 16 January 2008
Year of income: Year ended 30 June 2008 Year ended 30 June 2009 Year ended 30 June 2010
Business line: Public Groups and International

Issue
Will an individual 'cell' in a protected cell company incorporated under Guernsey law, in respect of which a taxpayer subscribes for redeemable preference shares (RPS), be a controlled foreign company (CFC) for the purposes of section 340 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision
No. An individual cell in a Guernsey protected cell company, in respect of which a taxpayer subscribes for RPS, will not be a CFC for the purposes of section 340 of the ITAA 1936.

Facts
An Australian resident taxpayer subscribes for redeemable preference shares (RPS) in respect of a relevant individual cell in a Guernsey protected cell company (protected cell company). The protected cell company is a limited liability company incorporated under Guernsey's Protected Cell Companies Ordinance 1997 (as amended by Ordinance No.V of 1997; by No. XV of 1998; by No. XXI of 2005) (the PCC Ordinance) and registered under the provisions of The Companies (Guernsey) Law 1994 (as amended). The protected cell company may form one or more cells.

Reasons for decision
Summary: Section 340 of the ITAA 1936 provides that a company is a CFC at a particular time if, at that time, the company is a resident of a listed country or of an unlisted country and satisfies one of the three control tests contained therein. Whether a cell in a protected cell company is a CFC for the purposes of section 340 of the ITAA 1936 requires the determination of whether a cell in a protected cell company constitutes a company. The term 'company' is defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to mean: The term 'body corporate' is not defined in the ITAA 1936 or the ITAA 1997. The Commissioner has considered the meaning of the term 'body corporate' in Miscellaneous Taxation MT 2006/1 - The New Tax System: the meaning of entity carrying on an enterprise for the purposes of entitlement to an Australian business number (ABN). Paragraph 30 of MT 2006/1 states that the term 'body corporate' has the following meaning: 'Body Corporate' is not a defined term. The term takes its meaning from the general law. 'Body corporate' is a general term to describe an artificial entity having separate legal existence. A body corporate has the ability to continue in existence indefinitely and to keep its identity regardless of changes to its membership. It also has the power to act, hold property, enter into legal contract, sue and be sued in its own name, just as a natural person can. The protected cell company is incorporated under the PCC Ordinance and registered under the provisions of the Companies (Guernsey) Law 1994 (as amended). By virtue of section 1(2) of the PCC Ordinance, the protected cell company itself is a legal person and is therefore a 'body corporate' for the purposes of paragraph (a) of the definition of 'company' in subsection 995-1(1) of the ITAA 1997. The taxpayer will become a shareholder in the protected cell company by subscribing for RPS in respect of a particular cell in the protected cell company, and therefore becomes a member of a 'body corporate'. The taxpayer will not become a member of any other 'company', as that term is defined in subsection 995-1(1) of the ITAA 1997, within the protected cell company through the subscription of RPS in the protected cell company. Accordingly, the protected cell company itself is a 'company' as that term is defined in subsection 995-1(1) of the ITAA 1997. Each individual cell in the protected cell company is not a company under subsection 995-1(1) of the ITAA 1997 and therefore cannot be a CFC for the purposes of section 340 of the ITAA 1936.

Legislative references: Income Tax Assessment Act 1997 subsection 995-1(1)
Related public rulings and determinations: Miscellaneous Taxation Ruling MT 2006/1
Other references: Protected Cell Companies (Guernsey) Ordinance 1997 subsection 1(2) The Companies (Guernsey) Law 1994
Subject references: Controlled foreign companies Guernsey International tax