Private ruling: CFCs (controlled foreign companies)
Date of advice: 29 July 2025
Published: 27 October 2025
Ruling period: XXXX income year

Ruling: Q1: Was Company X a controlled foreign company (CFC) under section 340 on Date X? | A1: No. | Q2: Were any other members of the XYZ Group CFCs under section 340 on Date X? | A2: Yes. Company D was a CFC on Date X. | Q3: Was Company A an attributable taxpayer of Company D for the XXXX income year? | A3: No.

Relevant facts and circumstances: 1. Company A is a tax resident of Australia, and a company incorporated in Australia. 2. Company A is a shareholder of Company X. 3. Company X is a company incorporated and registered in the British Virgin Islands (BVI), and isn't a tax resident of Australia. 4. Company X is the head company of a group. We refer to Company X and its subsidiaries collectively as the XYZ Group. There are X wholly owned subsidiaries, Y of them owned directly by Company X (which we call 'first level group companies'), and Z of them owned indirectly through first level group companies (we call the indirectly owned companies 'second level group companies'). All subsidiaries are companies. With the exception of Company C, no subsidiaries are tax residents of Australia. We listed the entities in Table 1 and illustrated the group structure in the Diagram. These have been modified for privacy reasons. Table 1 :Group structure Modified for privacy reasons Entity Country of incorporation Ownership First level group companies Company C Australia 100% owned by Company X others Various foreign jurisdictions 100% owned by Company X Second level group companies Company D A foreign jurisdiction 100% owned by Company C Others Various foreign jurisdictions 100% owned by first level group companies Diagram modified for privacy reasons > 5. To draw out one point from Table 1 and the diagram, Company X wholly owns Company C (an Australian resident), and Company C wholly owns Company D (a resident in a foreign jurisdiction). 6. The XYZ Group carries on a business in Australia and several foreign jurisdictions. 7. Paragraph redacted for privacy reasons. 8. Company X's board has 5 directors. 2 directors are Australian tax residents and live in Australia. 3 directors are tax residents in foreign jurisdiction E (not Australian tax residents) and live in foreign jurisdiction E. None of the directors are associates of each other. All current directors have a direct or indirect shareholding interest in Company X. We list the directors in Table 2. Table 2 : Company X's board members Director Tax residency Person F (controller of Company A) Australia Person G (controller of Company B) Australia Person H foreign jurisdiction E Person I foreign jurisdiction E Person J foreign jurisdiction E 9. The board has appointed a management team. The management team assists the XYZ Group manage day-to-day operational matters.partly redacted for privacy reasons. 10. On Date X, the management team comprised the 6 individuals described in Table 3. redacted for privacy reasons. Table 3: Management team at Date X redacted for privacy reasons 11. Paragraph redacted for privacy reasons. 12. On Date X, Company X had issued share capital across several share classes, as described in Table 4. Table 4: Company X's issued share capital redacted for privacy reasons 13. On Date X, Company A had a shareholding interest in Company X described in Table 5. redacted for privacy reasons Table 5: Taxpayer's shareholding in Company X redacted for privacy reasons 14. On Date X, Company A had a shareholding interest in Company X totalling X shares. 15. Paragraph redacted for privacy reasons. 16. Company X's shareholders (at Date X) are described in a share register, which we've briefly summarised in Table 6. Table 3 6: summary of share register Name Percentage of total shares Percentage of total votes Company A Aus resident <25% <25% Company B Aus resident <25% <25% Person K Foreign resident About 20% About 20% Person L Aus resident <2% <2% Person M Aus resident <2% <2% Person N Aus resident <1% <1% Many foreign resident individuals (none of them associates of any Australian resident shareholder) - none holding more than 5% of total shares individually About 30% About 30% A small number of Aus resident individuals (none of them associates of any Australian resident shareholder) - none holding more than 1% of total shares individually Insignificant Insignificant 17. The issue price for Company X's subsequent share issues (after incorporation) has varied depending on Company X's net asset value, and the net asset value has generally increased over time since inception (although not in a straight line). 18. Company X doesn't maintain records of a share capital account, as a) the subscription amount varies according to the net value of the company's assets at the subscription time, b) shareholders don't have a right to a return of the subscription amount, and c) shareholders are paid a redemption amount that varies according to the net value of the company's assets at the redemption time. 19. Company X didn't declare a special dividend in the XXXX income year. 20. On Date X, there were X shareholders of Company X, including Company A, who were tax residents of Australia, with shareholdings summarised in Table 7. Table 7: Australian resident shareholding in Company X Class of shares % in class/% of total Class A about 50% Class B about 50.00% Other classes 0% Non-redeemable ordinary 2/3 Total slightly below 50% 21. The statements in paragraphs 22 to 33, about relationships among Company X's shareholders and directors, applied on Date X. 22. Company X's directors exercised independent judgment and decision-making on board matters. 23. Company A, Company B, Person K, Person L, and Person M weren't associates of each other, and weren't associates of any other shareholders. 24. Company X's Australian shareholders didn't hold options, convertible securities, or other instruments, or have any arrangement that had the effect of being able to exert control or veto decisions of shareholders. 25. Company X's foreign resident directors and shareholders weren't associates of any Australian resident person or entity. 26. Company X's shareholders hadn't entered a separate agreement that governed how they would act in their capacity as Company X's shareholders, or that had the effect of varying any rights or obligations under Company X's Memorandum and Articles of Association. 27. Company X's shareholders weren't subject to any requirement, agreement, expectation, or understanding that affected how they would act in their capacity as shareholders, or had the effect of varying their rights or obligations under Company X's Memorandum and Articles of Association. 28. Company X's subsidiaries (or their board members) weren't required, accustomed, or expected to act in accordance with the wishes or directions of any other person, other than Company X. 29. No Australian resident (or associates of Australian residents) had any special powers or rights over any of Company X's subsidiaries (whether under the relevant constituting documents or a separate agreement). Without meaning to be exhaustive, by 'special powers or rights' we mean to cover things like rights to: • appoint or remove directors • acquire shares • participate directly in decisions (as opposed to participating indirectly by voting on Company X resolutions) • exercise a veto over decisions. 30. Redacted for privacy reasons. 31. Company X (and other XYZ Group companies) didn't own shares in either Company A or Company B. 32. Company A and Company B both acted independently of Company X (and other XYZ Group companies), and there weren't any arrangements that required either of them to follow directions from Company X (or other XYZ Group companies). 33. Company X (and other XYZ Group companies) didn't have majority voting interests in other Australian resident entities not included in this ruling scheme, and there weren't any arrangements that required any such Australian resident entity to follow directions from Company X (or other XYZ Group companies) 34. The applicant gave us copies of Company X's governing rules, being a Memorandum of Association and Articles of Association. (We'll refer to these documents as MoA and AoA for convenience.) 35. The terms of the MoA and AoA are incorporated into the facts and circumstances of this private ruling. We summarise what we see as the clauses significant to this ruling in Tables 8 and 9 , and paragraphs 36 to 38. However, the terms of the documents prevail over our summary to the extent of any discrepancy. Table 8: rules about Company X's shares partly redacted for privacy reasons Topic Summary rights, qualifications of shares All of the share classes have rights set out in this clause, and all shares within each class of shares shall rank equally in respect of each other in each class. See Table 9 Shares Company X may issue shares and grant options to acquire shares, subject to the provisions of these articles and any resolution of members, on terms as Company X determines by resolution of directors. Redemption or auction of shares Members holding redeemable shares may request all or some of the shares to be redeemed. Then the board, at its discretion, shall arrange for the relevant shares to be: - sold to the participants of the share option scheme - redeemed by Company X at a price agreed by the board and the shareholder - sold by auction - sold to third parties. If nobody places a bid in the auction or all bids are below the minimum bid price, the board shall withdraw the auction and redeem the shares. If an event of default occurs, or an auction is withdrawn, Company X will redeem the shares at the aggregate minimum redemption value (if the shares are less than 10%) or at a price determined by the board (if more than 10%). Events of default for members include termination of employment (for employees), being convicted of an indictable offence, becoming bankrupt, breaching obligations as a member, or competing with Company X. The minimum redemption value is the minimum NAV 'for the default or redeemable shares' over a 60-day period from the default or redemption date (where NAV means Company X's net assets) before any dividend is declared. Dividends The directors may authorise dividends if satisfied that Company X's assets exceed its liabilities and Company X will be able to pay its debts as they fall due, and dividends shall be paid out of surplus. The directors may declare an ordinary dividend at their absolute discretion. Ordinary dividends may be declared and paid to shareholders with Class A, B, C, K, P, and non-redeemable ordinary shares, equally between each share, and proportionately to their shareholding. The directors may declare dividends other than ordinary dividends, at their discretion, on classes of shares as they determine. Table 9: Rights and entitlements attaching to Company X's shares Class Voting rights Dividend rights Redemption Other rights Class A One vote per Class A share held Ordinary dividends as declared from time to time. May be redeemed at the board's discretion (in whole or in part) on an event of default. Shareholders may request their Class A shares to be redeemed (in whole or in part) at any time. Class A shares are convertible to permanent shares and Class C shares. Subscription value is the NAV per share as determined from time to time. Class B No voting rights Ordinary dividends as declared from time to time. May be redeemed at the board's sole discretion (in whole or in part), or on an event of default. Shareholders may request their Class B shares to be redeemed (in whole or in part) at any time. - Class C One vote per Class C share held Ordinary dividends as declared from time to time. Redeemed at the board's sole discretion (in whole or in part), or on an event of default. Shareholders may request their Class C shares be redeemed (in whole or in part) at any time. Class C shares are convertible to Class A or Class K shares. Subscription value is the NAV, as determined from time to time, plus a premium. Class K No voting rights Ordinary dividends as declared from time to time. Redeemed at the board's discretion (in whole or in part) on the occurrence of an event of default. Class K shares are convertible into Permanent Shares [1] and Class C shares. Subscription value is the NAV as determined from time to time. Class P One vote per Class P share held Ordinary dividends as declared from time to time. Redeemed on an event of default. Shareholders may request their shares to be redeemed (in whole or in part) at any time. Class P shares are convertible to Class A or Class K shares. Non-redeemable ordinary One vote per share Ordinary dividends as declared from time to time. Non-redeemable. - 36. The following rules in the AoA apply to members meetings. • General meetings can be summoned at the request of members holding 5% or more of Company X's issued shares. • No business can take place at a general meeting unless a quorum of 75% of the members holding issued shares are present. • The chair decides if a motion has carried, but any member may demand a poll be taken. • A general meeting can't resolve or vote on any matter not specified on the agenda, except with the prior consent of each member. • All matters on the agenda for a general meeting shall be decided by poll of the members attending. • A resolution of members means a resolution approved by a simple majority of voters present and entitled to vote. 37. The board consists of five directors, appointed and removed in general meetings with the approval of shareholders representing a simple majority of the votes attaching to the Class A, Class C, and the permanent shares, taken for these purposes as a single class. 38. The duties of the directors include, but aren't limited to: • day to day maintenance and operations of the company • making all decisions about company shares, including any new share offerings, sale processes, and pricing • reviewing any shareholders agreement • approving any pay bonuses that may be issued by management • deciding on corporate strategy • approving any dividend payout • approving any bonus pool and shareholders pool split. 39. The following rules apply to directors and directors meetings. • Company X's business and affairs shall be managed by or under the supervision of the directors. • On a vote at any directors meeting, each director has one vote, with the chair having a casting vote in the event of a tie. • A resolution of directors means a resolution approved by a majority of directors present who vote (and didn't abstain). Assumptions A) The subscription amounts paid for the shares held by Australian residents on Date X represented less than 50% of the total subscription amounts Company X had received (for all shares that remained on issue at that date). B) On Date X, no single Australian resident shareholder held shares that had been issued for subscription amounts representing 40% or more of the total subscription amounts Company X had received (for all shares that remained on issue at that date).

Relevant legislative provisions: Income Tax Assessment Act 1936 (Cth) Section 317 | Section 318 | Section 340 | Section 349 | Section 350 | Section 361 | BVI Business Companies Act 2005 (British Virgin Islands) [2] Section 34 | Section 206

Reasons for decision: Summary: 40. Simplifying somewhat for the purposes of this summary, a company will be a CFC if any of the following tests (in section 340) apply: • a group of 5 or fewer Australian residents hold control interests in the company (either directly, indirectly through interposed entities, or through associates) of at least 50% • a single Australian resident holds a control interest in the company (either directly, indirectly, or through associates) of at least 40% • a group of 5 or fewer Australian residents controls the company. 41. Company X isn't a CFC under any of these tests. • No group of 5 or fewer Australian residents has 50% control interests in Company X. • No single Australian resident has 40% control interests in Company X. • There were no relevant associate relationships that could give an Australian resident extra control interests in Company X, via any associate. • No Australian resident has rights under the relevant constituting documents or under other informal arrangements that would allow it to exercise control (legal or de facto) over Company X's decisions. | Detailed Reasoning - Explanation: A company will be a CFC if it meets any of three tests in section 340. 42. Part X has rules that attribute assessable income of a CFC (or 'controlled foreign company') to a taxpayer. • Division 2 has rules about entity types, including a rule for working out whether a company qualifies as a CFC that partly depends on whether other entities hold 'control interests' in the company. • Division 3 has rules for working out the control interests and attribution percentages that entities have in other entities. • Division 7 is about calculating a CFC's attributable income. • Division 9 includes Company A's attribution percentage of the CFC's attributable income in Company A's assessable income. 43. Section 340 is about whether a company is a CFC. Section 340 says a company is a CFC at a particular time if at that time, the company 1) is a resident of a listed country or of an unlisted country, and 2) any of the 3 conditions set out in paragraphs (a), (b), and (c) apply. Those conditions are that, at the relevant time: • (a) there's a group of 5 or fewer Australian 1% entities with an aggregate of associate-inclusive control interests (in the company) of at least 50% • (b) there's a single Australian entity whose associate-inclusive control interest in the company is at least 40%, andthe company isn't controlled by a group of other entities • (c) the company is controlled by a group of 5 or fewer Australian entities (alone or together with associates). 44. Section 317 says Australian 1% entities are Australian entities [3] with an associate inclusive control interest of at least 1%. 45. Section 349 says a lower entity holds an associate-inclusive control interest in a company or trust that's the aggregate of direct and indirect control interests for both the lower entity and its associates (there are rules to avoid double counting). 46. Section 350 is about direct control interests in another company. • Subsection 350(1) sets the direct control interest at the greatest of the following percentages that you hold, or have rights to acquire: a) paid-up share capital b) rights to vote or participate in decision-making on distributions of capital, profits, constituent documents, or variations of share capital c) rights to distributions of capital or profits on winding-up d) rights to distributions of capital or profits otherwise than on winding-up. • Subsection 350(2) says if the percentage of total rights to vote or participate in decision-making differs between different types of decisions, the highest percentage applies. • Subsection 350(4) says for a distribution (otherwise than on winding-up), the rights to distributions of capital or profits are to be worked out by ascertaining the capital and profits at the end of the period, assuming that rights were the same throughout the period, and ascertaining the percentage at the end of the period. • Subsection 350(6) says if a company is controlled by a group of 5 or fewer Australian entities (alone or together with associates) then each Australian entity in that group of 5 or fewer holds a direct control interest in the company of 100%. 47. ATO ID 2008/5 [4] says an Australian entity that has de facto control over a foreign company will be taken to have a 100% direct control interest in it under subsection 350(6). 48. There are rules in sections 352 and 353 about indirect control interests. Broadly, they're worked out by multiplying your control tracing interest in an interposed entity by the interposed entity's control tracing interest, but with uplifts to 100% for legal, assumed, or de-facto control. However, the interposed entity must itself be a CFE. 49. Section 339 says CFEs (or controlled foreign entities) are CFCs, CFPs (or controlled foreign partnerships), and CFTs (or controlled foreign trusts). Working out associate-inclusive control interests for Company X. 50. There are no interposed entities relevant to interests in Company X, as the only 'entity' shareholders are Australian residents, [5] so associate-inclusive control interests will be determined by direct rather than indirect control interests. 51. Since none of Company X's shareholders are associates of Australian resident shareholders, it follows that associate-inclusive control interests will be equal to the entity or group's direct control interests. (We describe the rules about associates later in these reasons at paragraphs 122 to 127.) While Company A and Company B would each be associates of their owners or controllers, [6] as those controllers don't have direct shareholdings in Company X, no controller could have a greater associate-inclusive control interest in Company X than the entity they control. We can also rule out as a possibility that a single Australian resident has both Company A and Company B as its associates, as none of Company X's shareholders are associates of each other. [7] 52. Under British Virgin Islands corporate law, shares are presumed to carry equal rights to distributions of surplus assets, unless varied by the company's internal rules. Subsection 34(1) of the BVI Business Companies Act 2004 [8] says a share in a company confers the right to one vote at a meeting of members or resolution of members, a right to an equal share in any dividend, and a right to an equal share in the distribution of the company's surplus assets. However, subsection 34(2) says a company may issue more than one class of shares and may issue shares that negate, modify, or add to these rights when expressly authorised by its memorandum. Paragraph 206(1)(d) says a voluntary liquidator may distribute the company's surplus (after discharging debts, liabilities etc.) to members 'in accordance with the memorandum and articles'. 53. Company X's rights work out this way. • All classes of shares currently on issue have equal voting rights, except for Class B shares (given Class B and Class K shares are non-voting, and there are no K shares on issue). • While all classes carry equal rights to ordinary dividends, the board has the discretion to declare special dividends on any share class. • Holders of redeemable shares may request Company X to redeem their shares. Company X may elect for the shares to be sold or auctioned to third parties, or redeemed. If redeemed, the redemption amount will be agreed between Company X and the redeeming shareholder. • The MoA and AoA are silent about rights to paid-up share capital and rights to receive capital distributions on winding-up. Rights to hold paid-up share capital: paragraph 350(1)(a). 54. The direct control test in paragraph 350(1)(a) is the percentage that the entity holds, or is entitled to acquire, at that time, of the total paid-up share capital of the company. 55. 'Paid-up share capital' is a defined term. Subsection 6(1) says the term has the meaning given by section 995-1. Section 995-1 says paid-up share capital of a company means the amount standing to the credit of the company's share capital account, reduced by the amount (if any) that represents amounts unpaid on shares. Share capital account basically means the account a company keeps of its share capital, or any account (whether called a share capital account or not) where the first amount credited to the account was an amount of share capital: see subsection 975-300(1). 56. 'Share capital' isn't defined in tax legislation. 57. The Macquarie Dictionary and the Australian Oxford Dictionary suggest share capital means the capital of a company raised or coming from issuing shares. [9] 58. The Australian Law Dictionary 's entry for share capital says "in a company issued by shares, the issued capital is the total nominal value of the shares actually issued". [10] 59. Applying these concepts, Company X has paid-up share capital. Company X has a share capital account if shareholders have contributed capital through subscribing for shares, even if Company X doesn't use that term, and Company X's share capital would be the total capital contributed by shareholders to subscribe. There are no unpaid amounts because clause X of the AoA says that no shares shall be issued unless they've been fully paid. It follows that Company X's paid-up share capital represents the total capital contributed by subscribers. 60. To apply paragraph 350(1)(a), we need to determine what percentage relevant entities hold of Company X's paid-up share capital. 61. We think shareholders would 'hold' a percentage of Company X's paid-up share capital if they have contributed a portion of that capital by subscribing (and paying) for shares. We don't think it matters that Company X's shareholders don't have a right to a return of the subscription amount under the MoA or AoA: it's enough that they hold fully-paid shares purchased with subscription funds. The percentage of paid-up share capital they 'hold' is calculated as the amount of subscription funds contributed on their shares as a portion of the total subscription funds. 62. We've assumed that: • the subscription amounts paid for the shares held by Australian residents on Date X represented less than 50% of the total subscription amounts Company X had received (for all shares that remained on issue at that date) • no single Australian resident shareholder held shares that had been issued for subscription amounts representing 40% or more of the total subscription amounts Company X had received (for all shares that remained on issue on that date). 63. On those assumptions, no group of 5 Australian 1% entities could have held at least 50%, and no single Australian 1% entity could have held at least 40%, of paid-up share capital. 64. Therefore, paragraph 350(1)(a) won't apply to give any Australian 1% entity a controlling interest that would make Company X a CFC under either paragraph 340(a) or (b). Rights to vote or participate in decision-making on distributions: paragraph 350(1)(b). 65. Paragraph 350(1)(b) is about the percentage of rights to vote or participate in decision-making on distributions of capital, profit, constituent documents, or variations of share capital. 66. While Company X's board appears to be responsible for determining Company X's decisions on these matters, clause X of the AoA says the general meeting may appoint and remove directors by simple majority of the Class A, Class C, and the Class P shares, voting as a single class. 67. While clause X of the MoA says the non-redeemable ordinary shares are voting shares, the effect of clause Y of the AoA is that non-redeemable ordinary shares don't carry rights to vote on appointing or removing directors. 68. Here, we think it's appropriate to treat the percentage of rights to vote or participate in decision-making on the paragraph 350(1)(b) matters as being equal to the rights to vote on appointing or removing directors. • Directors are subject to fiduciary duties requiring them to act in the best interests of the company, including its shareholders. • Voting shareholders have the ability to appoint or remove directors to ensure that directors act in their best interests. • Here, no single shareholder has a majority of votes, so no single shareholder can control board appointments. • Company A and Company B each have between 20-25% of the voting shares, and each have one of their controllers on the board, suggesting that their proportionate voting interest is consistent with their influence over the board. 69. Therefore, we will treat shareholders as having a percentage of rights to vote or participate on decision-making about distributions of capital, profit, constituent documents, or variations of share capital, equal to their percentage of votes on board appointments. 70. Applying that approach: a. no single Australian 1% entity has 40% or more of the relevant voting rights, and b. no group of 5 Australian 1% entities have 50% or more of the relevant voting rights. (See Table 9. ) 71. It follows that paragraph 350(1)(b) won't apply to make Company X a CFC under either paragraph 340(a) or (b). 72. We wouldn't necessarily take the same approach to determining rights to vote or participate under paragraph 350(1)(b) in other circumstances. In the circumstances of this ruling, we think it reasonable to treat shareholders as having indirect rights to vote or participate through their control of directors. But an indirect approach, based on presumed influence over directors, might not be appropriate in other cases (for example, if there were indications shareholders, despite their voting rights, had no practical ability to influence board decisions). Rights to distributions of capital or profits on winding-up: paragraph 350(1)(c). 73. Paragraph 350(1)(c) is about rights to distributions of capital or profits of the company to its shareholders on winding-up. 74. Since the MoA and AoA are silent about distributions on winding-up, distributions will be equal on each share in line with the default rules in section 34 of the BVI Business Companies Act 2004. 75. This means shareholder rights to capital distributions on winding-up will be equal to each shareholder's percentage of total shares. 76. No single Australian shareholder holds more than 40% of Company X's total shares, and no group of 5 Australian shareholders (each shareholder holding at least 1%) holds more than 50% of total shares. (See Table 9. ) 77. It follows that paragraph 350(1)(c) won't apply to make Company X a CFC under either paragraph 340(a) or (b). Rights to distributions of capital or profits otherwise than on winding-up: paragraph 350(1)(d). 78. Paragraph 350(1)(d) is about rights to distributions of capital or profits otherwise than on winding-up. 79. Here, shareholders could only receive a distribution of capital outside winding-up if their shares are redeemed. 80. Under clause X of the AoA, if members holding redeemable shares request their shares to be redeemed, the board, at its discretion, shall arrange for the shares to be either a) sold to participants of the share option scheme, b) redeemed by Company X at a price agreed between the board and shareholder, c) sold by auction, or d) sold to third parties. 81. If an auction is withdrawn (under a voluntary redemption), Company X will redeem the shares at a price based on Company X's net assets. 82. Shares can also be redeemed compulsorily if an event of default occurs (such as termination of employment, becoming bankrupt, etc.), at a price based on Company X's net assets. 83. Percentage rights to distributions of capital outside winding-up can't be quantified here. Any sale would be a private transaction between the seller and buyer, and so wouldn't involve a distribution of Company X's capital to the selling shareholder. Aside from compulsory redemptions on default, Company X's board has a discretion to facilitate a private sale rather than redeem the shares. Further, even if Company X's board decides to redeem, the price may be agreed between the board and shareholder. No shareholder would have a right to a percentage of Company X's capital until a) they defaulted, or the board decided to redeem, and b) Company X had determined the redemption price. 84. Since percentage rights to distributions of capital outside winding-up can't be quantified, we'll treat them as being 0% for all shareholders. 85. Shareholders may have rights to distributions of profits outside winding-up if Company X declares dividends. 86. Clause X of the AoA says that Company X's directors may declare an ordinary dividend at their discretion, and ordinary dividends are paid to all shareholders equally between each share and proportionately to their shareholding. 87. However, X of the AoA says that Company X's directors may declare special dividends at their discretion, on classes of shares as they determine. 88. These special dividend rights complicate calculating percentages for each shareholder. If all dividends were ordinary dividends, each shareholder would have a percentage right to distributions equal to their proportion of total shares. However, that percentage may differ from the proportion of total shares if a) Company X pays a special dividend on some classes to the exclusion of others, or b) Company X pays special dividends to each class at different rates. 89. ATO guidance addresses whether a beneficiary of a discretionary trust has an interest in a CFC for a different purpose. • TD 2017/22 [11] is about whether an Australian company that's a beneficiary of a trust can 'hold' a direct control interest in a foreign company under section 350, for the purpose of Subdivision 768-A, when the trust holds shares in that foreign company. • For the purposes of Subdivision 768-A, a company's participation interest is worked out partly by using direct control interests under section 350: see paragraph 768-5(2)(d) read with sections 768-15, 960-180 and 960-190. • Example 5 of TD 2017/22 addressed whether an Australian company beneficiary of a discretionary trust could hold an interest in the discretionary trust on the date that the foreign company paid the distribution to the discretionary trust (1 April), where the discretionary trust resolved to pay the company beneficiary sometime later (30 June). • Example 5 concluded that on 1 April (the date of the distribution to the discretionary trust), the Australian company didn't have a direct control interest in the discretionary trust, even though a distribution was subsequently made in its favour. • Paragraph 62 of TD 2017/22 says that a beneficiary's direct control interest in a discretionary trust is equal to the percentage share it's entitled to acquire at the test time, and since a trustee usually exercises its discretion at the end of the income year, the discretionary beneficiary wouldn't have the entitlement at an earlier test time, because at that earlier time, it was merely a potential object. 90. Applying this logic to companies, where a company has a discretion to differentiate between share classes, rights to a percentage dividend will depend on the timing of any dividend decision. Shareholders in this situation are in a similar position to a potential beneficiary under a discretionary trust: before the board declares dividends, shareholders have a right to be considered, but no right to any distribution at all. However, when the decision is made, each shareholder has a right to receive a dividend if the board declared a dividend on their shares. 91. Since ordinary dividends are paid equally on each share, and no special dividends were declared in the XXXX income year, this means that each shareholder's entitlement to dividends in the XXXX income year couldn't have exceeded their percentage of total shares. [12] 92. It follows that the percentage of rights to distributions of profits outside winding up, for each shareholder, is equal or less than the percentage of total shares they hold. 93. As mentioned at paragraph 76, no single Australian shareholder held more than 40% of Company X's total shares, and no group of 5 (or fewer) Australian shareholders held more than 50% of total shares. (See Table 9. ) 94. It follows that paragraph 350(1)(d) won't apply to make Company X a CFC under either paragraph 340(a) or (b). Is Company X a CFC? Applying section 340. 95. On these facts, no shareholder was an associate of an Australian resident shareholder on Date X. 96. Given there were no relevant associate relationships, we can ignore the need to include associates when calculating any Australian resident shareholder's 'associate inclusive control interests' for the purposes of section 340. 97. On these facts, indirect control interests are irrelevant when working out if Company X is a CFC. The only non-individual shareholders are Australian residents, removing any need to trace indirect control interests through intervening shareholders. 98. Therefore, each shareholder's associate-inclusive control interests in Company X will be equal to their direct control interests. 99. Table 10 shows the percentage rights to paid-up share capital, rights to vote, and rights to capital distributions for significant entities. | Detailed Reasoning - (whichever is highest of these rights): Company A Unknown, but <40% <25% <25% 0% <25% <25% Company B Unknown, but <40% <25% <25% 0% <25% <25% Person L Unknown, but <40% <2% <2% 0% <2% <2% Person M Unknown, but <40% <2% <2% 0% <2% <2% Person N Unknown, but <40% <1% <1% 0% <1% <1% | Detailed Reasoning - <50%: The paragraph 340(a) test is failed: the group of 5 or fewer Australian 1% entities has total control interests of less than 50%. 100. The first CFC test, in paragraph 340(a), is whether a group of 5 or fewer Australian 1% entities holds aggregate associate-inclusive control interests of at least 50%. 101. Given there were no associate relationships and indirect control interests on these facts, the potential group of 5 or fewer Australian 1% entities was simply the 5 highest shareholdings held by Australian residents. 102. However, since one of those entities has less than 1%, the group of 5 or fewer Australian 1% entities is only 4 entities in this case. The group is made up of Company A (<25%), Company B (<25%), Person L (<2%), and Person M (<2%), and excludes Person N (<1%) 103. The combined control percentage of that group of four Australian 1% entities in Company X would be less than 50%, unless subsection 350(6) applies to deem a de-facto controller to have a 100% direct control interests. (See Table 10 ). 104. We conclude below (at paragraphs 108 to 117) that the de facto control test in paragraph 340(c) is also failed, so no Australian entity had a deemed direct control interest under subsection 350(6). 105. It follows that the test in paragraph 340(a) would be failed: the group of 5 or fewer Australian 1% entities is less than 50%. The paragraph 340(b) test is failed: no single Australian entity has a control interest of 40% or more. 106. The second CFC test, in paragraph 340(b), will be met where a single Australian entity has an associate-inclusive control interest of at least 40%, except where the company is controlled by another group of entities that excludes that Australian entity. 107. This test is failed. There are no associate relationships and indirect control interests on these facts. The highest shareholdings in Company X are Company A with a direct control interest of <25% and Company B with <25%. No Australian resident shareholder has 40%. The paragraph 340(c) test is failed: no group of 5 Australian entities has de facto control of Company X. 108. The third CFC test, in paragraph 340(c), will be met where the company is controlled by a group of 5 or fewer Australian entities, either alone or together with associates. 109. The Explanatory Memorandum to the bill that introduced the CFC rules [13] says that the test for control in paragraph (c) will be satisfied if 'irrespective of the extent of any interests' the group 'nevertheless controls' the company, and that the test is a question of fact to be answered according to the circumstances of each case. 110. PS LA 2007/7 [14] describes paragraph 340(c) as a de facto control test. 111. ATO guidance addresses the phrase 'is controlled by' in a different context. TD 2023/5 [15] is about the Commissioner's discretion, in subsection 328-125(6) to determine that an entity doesn't 'control' another entity for aggregation purposes. TD 2023/5 at paragraph 13 said that 'control' in that context was control over matters typically associated with ownership of a business entity. Those matters would ordinarily include decision-making on the composition and oversight of the management team, amending constituent documents, decisions on capital and entity restructuring, issuing new ownership interests and winding up, or authorising significant changes to the direction of the entity's business operations. At paragraphs 14 and 15, it rejected the view that control could ordinarily be demonstrated by day-to-day operational management. At paragraph 27, it said that in order to form a view that a group of entities controls a test entity, the ATO would expect to see that the group has agreed to operate as a single controlling mind about decisions involving the test entity. 112. To test whether any Australian entities control Company X in the sense of paragraph 340(c), we need to consider both a) formal powers or rights to determine Company X's decisions under its constituent documents and b) the practical ability to determine Company X's decisions informally through exerting influence over the formal decision makers. 113. We'll briefly summarise formal control powers under Company X's constituent documents. • Company X's board is responsible for making decisions about shares, capital, and overseeing the management team, and the board has 5 directors and determines decisions by majority vote. • Company X's shareholders are responsible for appointing and removing directors to or from the board, and they determine member resolutions by majority vote, with each shareholder having one vote for each voting share. 114. Australian entities fall short of both a board majority and shareholder majority. Only 2 out of 5 directors were Australian, so any group of Australian entities is unable to command a majority on board decisions without the support of other board members, or the power to control board appointments. Australian entities fall short of a shareholder majority too. The group of 5 Australian entities holding the most shareholder votes here is Company A (<25%), Company B (<25%), Person L (<2%), Person M (<2%), and Person N (<1%). Together, that comes to only X% of voting shares, short of 50%. 115. It follows that Australian entities lack formal control. The Australian entities would need to rely on the support of other entities to either determine board decisions, or to appoint or replace board members. Therefore, they are unable to determine Company X decisions. 116. Australian entities have no informal or de facto control either. Company X's directors exercise independent judgment. There are no relevant associate relationships among directors or shareholders. There was no informal agreement or arrangement among shareholders that could have given additional power or influence to Australian entities. 117. It follows that the de facto control test in paragraph 340(c) is failed. No group of 5 Australian entities can demonstrate the ability to control Company X's decisions over significant matters. Australian entities lack the legal rights to exert control through board or shareholder meetings, and have no ability exert control through informal arrangements. Without legal or informal control rights, no group of Australian entities controls Company X. Conclusion on Question 1: Company X wasn't a CFC on Date X. 118. Since none of the three tests in section 340 are met, Company X wasn't a CFC on Date X. | Detailed Reasoning - Question 2: Were any other members of the XYZ Group CFCs under section 340 on Date X? | Detailed Reasoning - Answer 2: Yes. Only one member of the XYZ Group was a CFC on Date X: Company D. | Summary: 119. Only one member in the XYZ Group is a CFC. Company D is a CFC under the first test in section 340 because an Australian resident, Company C, has a 100% direct control interest in it. None of the other members in the XYZ Group qualify under any of the three tests in section 340. No Australian residents had direct or indirect control interests or had associates with direct or indirect control interests in any other group entity for the purposes of the first two tests. No Australian residents had rights under the relevant constituting documents or informal arrangements that would give them de facto control of any other company under the third test. | Detailed Reasoning - Explanation: 115. We explained the rules for determining whether an entity is a CFC in our explanation to Question 1 at paragraphs 43 to 49. 116. We'll briefly repeat some of those rules. • A company will be a CFC under section 340 if either a) a group of 5 Australian 1% entities holds 50% of the associate-inclusive control interests, b) an Australian 1% entity holds 40% of the associate-inclusive control interests, or c) a group of 5 Australian entities controls the company. • Associate-inclusive control interests can be direct or indirect. • Indirect control interests are worked out by multiplying an interposed entity's direct control interest by the test entity's direct interest in the interposed entity, but only CFCs can be interposed entities for the purposes of these rules. Company D, as a wholly owned subsidiary of an Australian resident, will be a CFC under paragraph 340(a). 117. Company D was a CFC under the first test. Company D was a second level group company, wholly owned by Company C. As an Australian resident company, Company C (a first level group company) was an Australian 1% entity, and as the sole shareholder in Company D, it held a 100% direct control interest. [16] Therefore, an Australian 1% entity held more than 50% of the control interests in Company D, passing paragraph 340(a). The only other CFC possibilities are associate-inclusive control or de facto control. 118. There were no other Australian resident companies in the XYZ Group, so the remaining companies could only be CFCs through indirect control interests, associate relationships, or de facto control relationships. 119. We can ignore indirect control interests here. • Company X wholly owned the first level group companies in the XYZ Group, so only Company X had direct interests in those companies. • All the second level group companies were wholly owned by first level group companies, so there were no entities outside the group with direct interests in second level group companies. • We have ruled (in Question 1) that Company X wasn't a CFC. • It follows that Company X wasn't an interposed entity for the purposes of working out associate-inclusive control interests. 120. Company X isn't an Australian resident, so it wasn't an Australian entity or Australian 1% entity for the purposes of the CFC tests in section 340. 121. For testing whether any remaining members of the XYZ Group are CFCs, we need to consider two other possibilities. First, is Company X, or any first level group company, an associate of any Australian resident in circumstances that would give the Australian resident an associate-inclusive control interest in any XYZ Group company? Second, do any Australian entities exercise direct control over any entities in the XYZ Group? Was Company X, or any first level group company, an associate of any Australian resident? No. They weren't sufficiently influenced by any entity and no entity held a majority voting interest in them. 122. Section 318 is about associates. 123. A company will be an associate of a natural person under paragraph 318(1)(e) where either: • the company is sufficiently influenced by the natural person (or that person's associates), or • the natural person (or that person's associates) hold a majority voting interest in the company. 124. A company (known as a primary entity) will be an associate of another entity (the controlling entity) under paragraph 318(2)(d) where either: • the primary entity is sufficiently influenced by the controlling entity (or that entity's associates), or • the controlling entity (or that entity's associates) holds a majority voting interest in the primary entity. 125. Similarly, a company (known as a controlled company) will be an associate of a company (the primary entity) under paragraph 318(2)(e) where either: • the controlled company is sufficiently influenced by the primary entity(or that primary entity's associates), or • the primary entity (or that entity's associates) holds a majority voting interest in the controlled company. 126. Paragraph 318(6)(b) says a company is sufficiently influenced by an entity if the company (or its directors) are: • accustomed to act, or • under an obligation (formal or informal) to act, or • might reasonably be expected to act in accordance with the directions, instructions, or wishes of the entity. 127. Paragraph 318(6)(c) says an entity holds a majority voting interest in a company if it's in a position to cast, or control, more than 50% of the maximum number of votes that might be cast at a general meeting. 128. Company X wasn't an associate of any of its own shareholders. • No single shareholder (in Company X) held more than 50% of Company X's votes. • It follows that Company X wasn't an associate of any of its shareholders under the 'majority voting interest' test. • Company X was controlled by its directors, its directors acted independently in their capacity as directors, no single shareholder controlled enough votes to replace or appoint directors, and no single shareholder held special rights over Company X's decision-making processes. • It follows that Company X wasn't an associate of any of its shareholders under the 'sufficiently influenced' test. • Further, Company X wasn't an associate of any of its shareholders under the controlling entity tests in paragraph 318(2)(d). Company X didn't own shares in Company A and Company B, so it didn't have a majority voting interest in either company. Both those companies acted independently of Company X, and there weren't any arrangements in place requiring them to act according to Company X directions, so neither could be sufficiently influenced by Company X. 129. We also need to consider the possibility that any first level group company could be an associate of an Australian resident, in circumstances that would give that Australian resident 'associate inclusive' control interests in any second level group company. [17] 130. The associate tests in paragraph 318(2)(e) won't treat Company X or other XYZ Group companies as controlled companies of an Australian resident. Aside from Company X, all XYZ Group companies are directly owned by either Company X or another entity wholly owned by Company X. This means no XYZ Group company could be an associate of an Australian resident under the 'majority voting interest' test, save for Company D. No Australian resident, or associate of Australian residents, had special powers or rights over any of Company X's subsidiaries, whether under relevant constituting documents, or some separate agreement. None of Company X's subsidiaries, or the board members of those subsidiaries, was required or accustomed to act in accordance with the wishes or directions of other people, other than Company X. This means no subsidiary could have been 'sufficiently influenced' by an Australian resident, save for Company D. 131. XYZ Group companies can't be associates of Company A and Company B under the controlling entity tests in paragraph 318(2)(d) for the same reasons as for Company X in paragraph 128. (XYZ Group companies didn't own shares in Company A and Company B, and both those companies act independently.) 132. Other Australian residents don't have 'controlling entity' associate relationships with Company X or other XYZ Group companies. Company X and other XYZ Group companies don't have majority voting control in any Australian resident entities not included in the ruling scheme, and there aren't any arrangements that would require any such Australian resident entity to follow Company X or XYZ Group directions. Therefore, Company X and XYZ Group companies couldn't be associates of any Australian resident entity outside the group under paragraph 318(2)(d). 133. Therefore, we can discount Australian residents having associate-inclusive control interests in Company X or other XYZ Group companies for the purposes of the tests in paragraphs 340(a) and 340(b). 134. It follows that the tests in paragraphs 340(a) and 340(b) aren't met. Did any Australian residents exercise 'control' over any other members of the XYZ Group in the sense of paragraph 340(c)? No, because Company X's directors acted independently, and other entities didn't have any rights to control Company X's subsidiaries. 135. We discussed the third CFC test, in paragraph 340(c), in our explanation to Question 1 at paragraphs 108 to 110. Briefly, this will be met where the company is controlled (in a de facto sense) by a group of 5 or fewer Australian entities, either alone or together with associates. 136. Aside from Company C, no Australian residents exercised de facto control over other members of the XYZ Group here. Company X is the 100% shareholder in all first level group companies, and the remaining companies are 100% owned by first level group companies. No Australian resident, or associate of Australian residents, had special powers or rights over any of Company X's subsidiaries, whether under relevant constituting documents, or some separate agreement. None of Company X's subsidiaries, or the board members of those subsidiaries, were required or accustomed to act in accordance with the wishes or directions of other people, other than Company X. Therefore, no Australian resident had de facto control over XYZ Group entities in the sense of paragraph 340(c). Conclusion : only one company in the XYZ Group was a CFC. 137. Company D was the only CFC in the XYZ Group. • Company D passes the CFC test in paragraph 340(a) because an Australian resident, Company C, had a 100% direct control interest in it. • Otherwise, there were no direct, indirect, associate, or de facto control relationships in the group that that pass any of the tests in section 340. | Detailed Reasoning - Question 3: Was Company A an attributable taxpayer of Company D for the XXXX income year? | Detailed Reasoning - Answer 3: No. | Summary: 138. To be an attributable taxpayer of a CFC, you must pass either of two tests. One is that you have an associate-inclusive control interest in the CFC of at least 10%. The second test has three conditions, and one of them is that the relevant CFC qualified (only) under the third CFC test about de facto control. 139. Company A isn't an attributable taxpayer as it fails both tests for the only CFC in the XYZ Group. Company D, and Company A has no associate-inclusive control interest in it. It qualified as a CFC under the first CFC test about 50% control interests, rather than the third CFC test about de facto control. | Detailed Reasoning - Explanation: To qualify as an attributable taxpayer of a CFC, you must pass either of two tests in subsection 361(1). 136. Subsection 361(1) says an entity, called a test entity, is an attributable taxpayer in relation to a CFC if it meets either of two tests. The first test in paragraph (a) is that the test entity is an Australian entity with an associate-inclusive control interest in the CFC of at least 10%. The second test in paragraph (c) is that all of the following apply: • the CFC is a CFC at that time only because of paragraph 340(c) • the CFC is controlled by any group of 5 or fewer Australian entities, either alone or together with associates (whether or not any associate is also an Australian entity • the test entity is an Australian 1% entity and is included in that group of 5 or fewer Australian entities. 137. Some of the concepts we mentioned in paragraphs 42 to 49 (such as associate-inclusive control interests) are also relevant for determining whether an entity is an attributable taxpayer of a CFC. 138. As mentioned earlier, PS LA 2007/7 describes paragraph 340(c) as a de facto control test. 139. We have ruled that only one entity in the XYZ Group was a CFC on Date X: Company D, by satisfying the test in paragraph 340(a). 140. Therefore, we only need test whether Company A is an attributable taxpayer for Company D. Company A fails both tests in subsection 361(1): it has no associate inclusive control interests in Company D, and that CFC didn't qualify merely because of the de facto control CFC test. 141. Company A had no associate-inclusive control interests in Company D. • Company A had no direct shareholding in Company D, so it had no direct control interests. • Company D was wholly owned by Company C, itself wholly owned by Company X. • We have ruled that neither Company C nor Company X was a CFC. • Since only CFEs can be interposed entities for the purposes of working out indirect control interests, and Company X and Company C are companies but not CFCs (see paragraphs 48 and 49 of these reasons), Company A had no indirect control interests in Company D. • Save for Company D being an associate of Company C, we have concluded (see paragraphs 128 to 132) that no XYZ Group company was an associate of Australian residents (which include Company A). 142. Neither of the tests in subsection 361(1) applies to Company A. • Company A had no associate-inclusive control interests in Company D. It held no direct or indirect control interests. It had no relevant associate relationships to give it an associate-inclusive control percentage. It fails the 10% associate-inclusive control test in paragraph 361(1)(a). • The test in paragraph 361(1)(b) is also failed. While Company D is a CFC, this is because it passes the test in paragraph 340(a), rather than only because of paragraph 340(c), about de-facto control. It didn't qualify as a CFC only because of paragraph 340(c). 143. Since neither of the tests in subsection 361(1) applies, Company A wasn't an attributable taxpayer for Company D. [1] Permanent Shares means Class P shares. [2] Revised Edition as in force 1 January 2020. Accessed from the BVI Financial Services Commission website (https://www.bvifsc.vg) on 26 March 2025. [3] Section 336 says Australian entity includes Australian partnerships, Australian trusts, and other entities that are Part X Australian residents; section 317 says Part X Australian resident means a section 6 resident but excluding residents where there's a DTA in force that applies so that the foreign resident is solely a resident of the foreign country. [4] ATO Interpretative Decision ATO ID 2008/5 Income Tax Controlled Foreign Companies: attribution of foreign income to Australian entity with de facto control of foreign entity - no direct or indirect attribution interest in that entity. [5] Company A and Company B. [6] See paragraph 318(2)(d). [7] If Company A and Company B had a common owner or controlling entity, both Company A and Company B would be associates of each other under paragraph 318(2)(f). [8] Revised Edition as in force 1 January 2020. Accessed from the BVI Financial Services Commission website (https://www.bvifsc.vg) on 26 March 2025. [9] Macquarie Dictionary Publishers (2025) The Macquarie Dictionary, accessed at https://app.macquariedictionary.com.au on 14 May 2025 (entry for 'share capital'); Oxford University Press (2004) Australian Oxford Dictionary, 2 nd edn, accessed online at https://www.oxfordreference.com on 23 April 2025 (entry for 'share') [10] Mann T ed (2017) Australian Law Dictionary 3 rd edn, accessed at https://oxfordreference.com on 23 April 2025 (entry for 'share capital'). [11] Taxation Determination TD 2017/22 Income tax: where an Australian corporate tax entity is a beneficiary of a trust, can the trust 'hold' a direct contract interest (within the meaning of section 350 of the Income Tax Assessment Act 1936) in a foreign company for the purpose of Subdivision 768-A of the Income Tax Assessment Act 1997? [12] If no ordinary dividend was paid, the percentage profits for the XXXX income year would have been nil. [13] Explanatory Memorandum (House of Representatives) to the Taxation Laws Amendment (Foreign Income) Bill 1990, Notes on Clauses. [14] Practice Statement Law Administration PS LA 2007/7 Making default assessments of taxable income in respect of attributable income. [15] Taxation Determination TD 2023/5 Income tax: aggregated turnover and connected entities - Commissioner's discretion that an entity does not 'control' another entity. [16] It would necessarily hold all of any paid-up share capital, any voting rights, and any rights to distributions of income or capital, giving it a direct control percentage of 100% under section 350. [17] We can ignore Company D for the moment, as it is already a CFC because it's controlled by an Australian resident, Company C).

• unhyphenated provisions (e.g. section 340) are in the Income Tax Assessment Act 1936 | • hyphenated provisions (e.g. section 995-1) are in the Income Tax Assessment Act 1997 | • Part X is in the Income Tax Assessment Act 1936 | • Subdivision 768-A is in the Income Tax Assessment Act 1997 | • 'first level group company' means entities in the XYZ Group that are wholly owned by Company X | • 'second level group company' means entities in the XYZ Group that are wholly owned by a first level group company.