Private ruling: Foreign hybrid partnership
Date of advice: 14 December 2016
Published: May 2017
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Is A a limited partnership that is automatically a foreign hybrid limited partnership under section 830-10 of the Income Tax Assessment Act 199 7 (ITAA 1997)? | A1: Yes. | Q2: If the answer to question 1 is yes, is A a partnership in relation to B? | A2: Yes.

Relevant facts and circumstances: B intends investing in A. B is an Australian incorporated and registered company. Its directors are Australian residents for tax purposes. B is managed and controlled in Australia. B is a resident of Australia pursuant to the definition of resident in section of the Income Tax Assessment Act 1936 (ITAA 1936). B holds an interest in the paid up capital in A of more than 50%. There are 5 or fewer Australian residents that control A. B is treated as a partnership for foreign country income tax purposes. The dividends and interest are subject to the withholding rates pursuant to a foreign country/Australia Double Taxation Agreement.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 95(2) | Income Tax Assessment Act 1936 subsection 333(1) | Income Tax Assessment Act 1936 paragraph 333(1)(b) | Income Tax Assessment Act 1936 section 340 | Income Tax Assessment Act 1936 subsection 350(1) | Income Tax Assessment Act 1936 subsection 361(1) | Income Tax Assessment Act 1997 Division 830 | Income Tax Assessment Act 1997 section 830-10 | Income Tax Assessment Act 1997 section 995

Reasons for decision: Summary: A limited partnership is defined in section 995-1 of the ITAA 1997 to mean, generally: An association of persons (other than a company) carrying on business as partners or in receipt of ordinary income or statutory income jointly, where the liability of at least one of those persons is limited. Subsection 830-10(1) of the ITAA 1997 states that; subject to subsection (2), a limited partnership is a foreign hybrid limited partnership in relation to an income year if: (a) it was formed in a foreign country; and (b) foreign income tax (except credit absorption tax or unitary tax) is imposed under the law of the foreign country on the partners, not the limited partnership, in respect of the income or profits of the partnership for the income year; and (c) at no time during the income year is the limited partnership, for the purposes of a law of any foreign country that imposes foreign income tax (except credit absorption tax or unitary tax) on entities because they are residents of the foreign country, a resident of that country; and (d) disregarding subsection 94D(5) of the Income Tax Assessment Act 1936 , at no time during the income year is it an Australian resident; and (e) disregarding that subsection, in relation to the same income year of another taxpayer: (i) the limited partnership is a CFC at the end of a statutory accounting period that ends in the income year; and (ii) at the end of the statutory accounting period, the taxpayer is an attributable taxpayer in relation to the CFC with an attribution percentage greater than nil. | Detailed Reasoning - Foreign income tax: Taxation Determination TD 2009/2 considers when foreign income tax is imposed on the partners rather than the partnership for the purposes of determining whether a foreign limited partnership is a foreign hybrid partnership under Division 830 of the ITAA 1997. In determining whether foreign income tax is imposed on the partnership or the partners, consideration must be given to the characteristics specific to the limited partnership in question where they affect its status, and/or the status of the partners, as taxpayers.TD 2009/2 provides the following examples: | Detailed Reasoning - Example 1: partnership treatment: 8 . XY is a limited partnership formed in the Foreign country (X). X income tax is imposed on the partners of a limited partnership in respect of its income or profits, and no income tax is imposed on the limited partnership itself. 9 . Therefore foreign income tax is imposed on the partners of X and not on X itself, and the requirements in paragraph 830-10(1)(b) are satisfied. Assuming that the other requirements of subsection 830-10(1) are satisfied, X is a foreign hybrid. | Detailed Reasoning - Example 1A: partnership treatment - no tax paid: 10 . In a loss year for X, the partners will not have a tax liability in respect of the income or profits of X. Were there income or profits (instead of a loss), the partners would be subject to income tax on those profits. Therefore, for the purposes of paragraph 830-10(1)(b), foreign income tax is imposed on the partners. 11 . Likewise, income tax is imposed on the partners for the purposes of paragraph 830-10(1)(b) in an income year in which X derived only exempt income and as a result the partners did not pay tax on partnership income or profits. 12 . For example, if X derived only foreign source income, and all the partners were non-residents of the X, the partners would not be taxed on the partnership income or profits. However, the requirement that the X law imposes tax on the partners (rather than the partnership) will be satisfied because, if there were taxable income or profits (that is, X sourced income or profits), the partners would have been taxed. 13 . Further, in a year in which the partners had unrelated deductions which offset the taxable income from X (for example interest expenses on an investment property), the partners would not pay tax on the partnership income or profits. However, the income of X is assessable income of the partners that would have been taxable in the foreign jurisdiction. Therefore, for the purposes of paragraph 830-10(1)(b), foreign income tax is imposed on the partners. 14 . In each of these cases, assuming that the other requirements of subsection 830-10(1) are satisfied, X is a foreign hybrid. | Detailed Reasoning - Control tests: Section 340 of the ITAA 1936 states that a company is a controlled foreign company (CFC) at a particular time if, at that time, the company is a resident of a listed country or of an unlisted country and any of the following paragraphs applies: (a) at that time, there is a group of 5 or fewer Australian 1% entities the aggregate of whose associate-inclusive control interests in the company is not less than 50%; (b) both of the following subparagraphs apply: (i) at that time, there is a single Australian entity (in this paragraph called the assumed controller ) whose associate-inclusive control interest in the company is not less than 40%; (ii) at that time, the company is not controlled by a group of entities not being or including the assumed controller or any of its associates; (c) at that time, the company is controlled by a group of 5 or fewer Australian entities, either alone or together with associates (whether or not any associate is also an Australian entity). Section 361 of the ITAA 1936 outlines the attributable taxpayer in relation to a CFC. Where the test entity is an Australia entity whose associate-inclusive control interest in the CFC is at least 10% - that entity will be an attributable taxpayer in relation to the CFC. Taxation Determination TD 2004/31 determined that a X Limited Partnership is, pursuant to paragraph 333(1)(b) of the ITAA 1936, a tax resident of an unlisted country for the purposes of the CFC rules. | Detailed Reasoning - Application to your circumstances: We accept that the conditions set out in section 830-10 of the ITAA 1997 have been met. Therefore the partnership is a foreign hybrid limited partnership. It follows that A is a partnership in relation to B.