Private ruling: Controlled foreign company
Published: September 2013
Ruling period: Year ended 30 June 2012
Date scheme commenced: 1 July 2011

Ruling: Question and answer: | Does the investment facility established in country X, qualify as a controlled foreign company? | Yes.

Relevant facts and circumstances: You were an Australian resident for taxation purposes for the relevant year ended. You had a 100% controlling interest in an investment facility set up in country X, for the relevant year. The facility was originally established by you for the purpose of rolling over a redundancy payment upon termination of a country X based employment contract. The establishment of the facility and contribution of the redundancy payment were effected before you arrived in Australia (i.e. before commencement of residency for taxation purposes). Country X law requires that the facility be appropriately managed to achieve a certain return in order to fund the required periodic (i.e. annuity) payments payable to you at a future point in time. The tax year in country X is a calendar year For 20XX, the facility had no income only costs resulting in a loss. Half of this loss is attributable to the second half of the 20XX Australian financial year. A similar situation occurred for the first half of the relevant Australian financial year. The only activity in the relevant Australian financial year was an outstanding loan. In the loan agreement the interest would be paid at payment of the principal of the loan. This has occurred in the subsequent Australian financial year. All activities are in country X. Country X is listed as a section 404 country. You own all the facility's unlisted shares. Your facility will not derive any income from active business activities. Translation of the documentation provided explains that from a legal point of view a facility such as yours is a normal limited company in country X.

Relevant legislative provisions: Income Tax Assessment Act 1936 Part X | Income Tax Assessment Act 1936 Section 404 | Income Tax Regulations 1936 Regulation 152C

Reasons for decision: Summary: The facility established in country X qualifies as a controlled foreign company. | Detailed Reasoning - Controlled foreign companies: Part X of the Income Tax Assessment Act 1936 (ITAA 1936) contains the guidelines to assist with the determination of whether a foreign company is a controlled foreign company (CFC). The determination of the status of a foreign company as a CFC arises from a consideration of the direct and indirect control interests held by Australian entities in the company. The following is a list of factors to be established in order for a company to be a CFC: 1. Is the entity a company? Translation of the documentation provided explains that from a legal point of view a facility such as yours is a normal limited company in country X. 2. Is the company a resident of either a listed country or an unlisted country? The distinction between listed, unlisted and section 404 countries is important as the tax treatment differs depending upon which category income is sourced in or repatriated from. It can broadly be said that listed countries have tax systems that are considered to be comparable to Australia's, while unlisted countries do not. | Detailed Reasoning - Listed country: A listed country is defined to mean a foreign country, or a part of a foreign country, that is declared by the Regulations to be a listed country for the purposes of Part X. Regulation 152C provides that each foreign country or part of a foreign country specified in Schedule 10 is a listed country. The countries that are listed countries are Canada, France, Germany, Japan, New Zealand, the United Kingdom and the United States of America. | Detailed Reasoning - A section 404 country: A section 404 country is defined to mean a foreign country, or a part of a foreign country, that is declared by the Regulations to be a section 404 country for the purposes of Part X. Regulation 152C provides that each foreign country or a part of a foreign country specified in Schedule 10 is a section 404 country. Country X is listed as a section 404 country. | Detailed Reasoning - Unlisted country: Unlisted countries are those that are not listed countries. This includes section 404 countries for all purposes of the CFC rules except the application of section 404. Section 404 of the ITAA 1936 says that where a CFC is resident in a listed country at the end of the income year, a dividend paid to it by a company also resident in a listed country is also notional exempt income. Country X is an unlisted country and your facility is not affected by the application of section 404 of the ITAA 1936. 3. Is there a group of five or fewer Australian 1% entities, the aggregate of whose associate inclusive control interests in the company, is not less than 50%? You hold 100% ownership of the company. 4. Are both of the following points satisfied: (a) There is a single Australian entity (assumed controller) whose associate-inclusive control interest in the company is not less than 40%? (b) The company is not controlled by a group of entities not being or including the assumed controller or any of its associates. (a) Yes. (b) Yes. 5. The company is controlled by a group of five or fewer Australian entities, either alone or together with associates (whether or not any associate is also an Australian entity). You hold 100% ownership of the company. The facility, established in country X, qualifies as a controlled foreign company.