Private ruling: CFC rules – treatment of investments in an open ended variable capital investment company established under foreign law
Date of advice: 26 June 2018
Published: September 2018
Ruling period: Year ended 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Will Foreign Co be regarded as a ‘body corporate’ for the purposes of paragraph (a) of the definition of ‘company’ in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Will a compartment within Foreign Co be regarded as a separate Controlled Foreign Company (CFC) for the purposes of section 340 of the Income Tax Assessment Act 1936 (ITAA 1936)? | A2: No

Relevant facts and circumstances: 1. Foreign Co is a public limited company ( societe anomyme ) established under the laws of a certain foreign country as an open-ended variable capital investment. 2. Foreign Co has been authorised as an undertaking for collective investment in transferable securities (UCITS) pursuant to the provisions of certain foreign law and is regulated pursuant to such law. 3. The articles of association governing Foreign Co (the Foreign Co’s Articles) have been deposited with the relevant Register. 4. Articles 1 and 2 of the Foreign Co’s Articles state that Foreign Co is a corporation established for an indefinite period of time. 5. Foreign Co is an umbrella structure comprising separate compartments with segregated liability. Each compartment has segregated liability from the other compartments and Foreign Co shall not be liable as a whole to third parties for the liabilities of each compartment. Each compartment shall be made up of a separate portfolio of investments maintained and invested in accordance with the investment objectives applicable to such compartment. 6. Article 3 of the Foreign Co’s Articles provides that the exclusive object of Foreign Co is to place the funds available to it in transferable securities of all types and all other permitted assets under the applicable foreign law with the purpose of spreading investment risks and affording its shareholders the results of the management of its portfolio. 7. Article 5 of the Foreign Co’s Articles provides that the capital of the company shall be represented by shares, and the board of directors has certain powers to issue the shares. Such shares may, as the board of directors shall determine, be of different portfolios of assets (hereinafter referred to as ‘compartments’), and the proceeds of the issue shall be invested as the directors determine in respect each compartment 8. Other relevant Articles of the Foreign Co’s Articles are as follow: ● Article 9 provides that meetings of shareholders shall represent the entire body of shareholders of Foreign Co regardless of the class held by them. ● Article 13 provides that Foreign Co is to be managed by a board of directors composed of at least three persons. ● Article 16 provides that the directors are vested with all powers to perform all acts of administration and disposition in Foreign Co’s interest. In particular, they have the power to determine and implement the investment policy for the investments relating to each compartment. 9. The foreign law that governs a public limited company in this case provides that: ● the law recognises the public company limited by shares ( societe anonyme ) as commercial companies with legal personality. ● companies shall act through their managers, directors or members of the management board, as the case may be, the powers of which shall be determined by law or by the constitutive instrument and by instruments adopted subsequently in accordance with the constitutive instrument…. 10. The relevant provisions of the foreign law applicable to a UCITS in this case provide that: ● where a UCITS comprises more than one investment compartment, each compartment shall be regarded as a separate UCITS for the purposes of this Chapter. ● UCIs may be comprised of multiple compartments, each compartment corresponding to a distinct part of the assets and liabilities of the UCI. ● The rights of unit-holders and of creditors concerning a compartment or which have arisen in connection with the creation, operation or liquidation of a compartment are limited to the assets of that compartment, unless a clause included in the management regulations or instruments of incorporation provides otherwise. The assets of a compartment are exclusively available to satisfy the rights of investors in relation to that compartment and the rights of those creditors whose claims have arisen in connection with the creation, the operation or the liquidation of that compartment, unless a clause included in the management regulations or instruments of incorporation provides otherwise. For the purpose of the relations between unit-holders, each compartment will be deemed to be a separate entity, unless a clause included in the management regulations or instruments of incorporation provides otherwise. 11. Legal advice on the interpretation of the foreign law that applies to UCITS provides that the relevant Chapter only contains provisions related to the investment policy of a UCITS. The aim of the provisions is to clarify that compartments of a UCITS may have distinct investment policies, and that there is not a common investment policy for all compartments. 12. The legal advice further explains that the relevant provisions of the foreign law concerning UCITS: ● provide for the segregation of assets and liabilities among the compartments. This provision is complemented by another provision which provides that “the rights of unit-holders and of creditors concerning a compartment…are limited to the assets of that compartment, unless a clause included in the management regulations or instruments of incorporation provides otherwise. ● only recognise compartments of UCIs as separate entities for the purposes of relations between unit holders. As a consequence, these provisions, as a matter of the law of the relevant foreign country, are limited to a compartment’s investment policy and assets and liabilities respectively and may not be interpreted in a sense that compartments of a UCITS shall be regarded as separate legal entities. 13. There are no constitutive documents at the level of each compartment and no management and control functions (board and conducting officers) are carried out at the level of the compartments.

Relevant legislative provisions: Income Tax Assessment Act 1936 s 6(1) | Income Tax Assessment Act 1936 s 340 | Income Tax Assessment Act 1997 s 995-1

Reasons for decision: Summary: Foreign Co is a ‘body corporate’ for the purposes of paragraph (a) of the definition of ‘company’ in subsection 995-1(1) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: 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. The term ‘company’ is defined in subsection 6(1) of the ITAA 1936 by reference to subsection 995-1(1) of the ITAA 1997 as follows: (a) a body corporate; or (b) any other unincorporated association or body of persons; but does not include a partnership or a non-entity joint venture Paragraph (a) of the above definition is relevant for present purposes. The term ‘body corporate’ is not defined in the ITAA 1936 or the ITAA 1997 and therefore, takes its ordinary meaning. The ordinary meaning of ‘body corporate’ is considered in paragraph 30 of 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) as follows: ‘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 contracts, sue and be sued in its own name, just as a natural person can. The characteristics or attributes essential for the existence of a ‘body corporate’ is that such entity is able to continue in existence indefinitely and to keep its identity regardless of changes to its membership, and it must be able to own property, acquire rights and become subject to duties owed to other persons. Based on the Foreign Co’s Articles and the applicable foreign laws, Foreign Co has the characteristics or attributes of a ‘body corporate’: ● Foreign Co is a corporation in the form of a ‘ societe anonyme ’ (Article 1 of the Foreign Co’s Articles), which is recognised under the relevant foreign law as a company with legal personality; in other words, a legal person separate from its members ● In the case of the death or the dissolution of the sole shareholder, this would not result in the dissolution of Foreign Co (Article 23(1) of the applicable foreign law) ● Foreign Co has been established for an indefinite period (Article 2 of the Foreign Co’s Articles) ● Foreign Co is a commercial company with an object to conduct commercial activities, which presumably means that it is able to acquire rights, and be subject to the obligations, arising from agreements entered into with other persons (Article 1 of the applicable foreign law), and ● Foreign Co is able to hold property in the form of, among others, various investment assets (Article 5 of the Foreign Co’s Articles and Article 181 of the relevant foreign law). It follows that Foreign Co is a ‘body corporate’ for the purposes of paragraph (a) of the definition of ‘company’ in subsection 995-1(1) of the ITAA 1997 and therefore, is a ‘company’ for the purposes of section 340 of the ITAA 1936. | Detailed Reasoning - Question 2: Will a compartment within Foreign Co be regarded as a separate CFC for the purposes of section 340 of the ITAA 1936? | Summary: A compartment within Foreign Co does not have the characteristics, identified in paragraph 30 of MT 2006/1, of an artificial entity having separate legal existence. As a result, a compartment within Foreign Co is not a ‘body corporate’ for the purposes of paragraph (a) of the definition of ‘company’ in subsection 995-1(1) of the ITAA 1997, and therefore cannot be a separate CFC for the purposes of section 340 of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: In determining whether an individual compartment in Foreign Co is a ‘company’ within the definition provided in subsection 995-1(1) of the ITAA 1997, separate from Foreign Co of which it forms a part, the compartment must have the characteristics and attributes of a ‘body corporate’, discussed at paragraph 30 of MT 2006/1. Essentially, the compartment must be able to continue in existence indefinitely and to keep its identity regardless of changes to its membership, and it must be able to own property, acquire rights and become subject to duties owed to other persons. Based on the Foreign Co’s Articles and the applicable foreign laws, the relevant characteristics and attributes of a compartment within Foreign Co do not amount to that of a ‘body corporate’: ● While Foreign Co is comprised of multiple compartments with each compartment corresponding to a distinct part of the assets and liabilities of Foreign Co, as against third parties, only Foreign Co is seen to be the legal owner of that property or be subjected to those legal obligations (Article 40 and Article 181 of the applicable foreign law) ● Article 181(5) of the applicable foreign law limits the rights of creditors (and unit-holders) concerning a compartment to the assets of that compartment; but the agreement giving rise to such rights would presumably have been entered into with Foreign Co itself, and not the relevant compartment, which has no legal identity (save for the purpose of the relations between unit-holders), and ● Foreign Co has a board of directors who are vested with the powers to perform all acts of administration and disposition in Foreign Co’s interest, including determining and implementing the investment policy for the investments relating to any of the compartments (Articles 13 and 16 of the Foreign Co’s Articles). The ATO considers that an individual compartment of Foreign Co does not have the characteristics, identified in paragraph 30 of MT 2006/1, of an artificial entity having separate legal existence. As a result, a compartment within Foreign Co is not a ‘body corporate’ for the purposes of paragraph (a) of the definition of ‘company’ in subsection 995-1(1) of the ITAA 1997, and therefore cannot be a separate CFC for the purposes of section 340 of the ITAA 1936.

Question 1: Will Foreign Co be regarded as a ‘body corporate’ for the purposes of paragraph (a) of the definition of ‘company’ in subsection 995-1(1) of the ITAA 1997?