International tax: CFC tax rules explained

If you have interests in offshore companies you should be aware of the taxation rules relating to Controlled Foreign Companies (CFC) or Controlled Foreign Trusts Rules (CFT).

1.If an offshore entity is a CFC or CFT has an an Australian resident “controller”, the tainted income of the CFC or CFT will be included in the assessable of income of the controller.

Taxation of CFCs and CFTs

2.  The following tests apply:

(a)        Is there a CFC or a CFT?

(b)        Is the taxpayer an attributable taxpayer?

(c)        If the answer to (a) and (b) is yes, what is the CFC or CFT’s attributable income?

CONTROLLED FOREIGN COMPANY (CFC)

  1. 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 the company is “controlled” by an Australian entity:

Residency – Listed and Unlisted Countries

  1. A listed country is a country that is declared by the regulations to be a listed country for the purposes of the CFE regime. A listed country is essentially a country with a tax system similar to the Australian tax system
  1. The following countries are listed countries:
  • Canada;
  • France;
  • Germany;
  • Japan;
  • New Zealand;
  • United Kingdom of Great Britain and Northern Ireland; and
  • United States of America.
  1. An unlisted country is essentially a foreign country that is not a listed country. For example:
  • Greece;
  • Ireland;
  • Italy;
  • Singapore; and

Control Tests

  1. There are three control tests:

group of 5 or fewer Australian entities control more than 50% of the entity; or

a single Australian entity has more than 40% control and the company is controlled by a group related to the controllera group of 5 or fewer Australian entities effectively control the foreign company. For instance, where an Australian entity can control the appointment of a foreign company’s directors.

CONTROLLED FOREIGN TRUST (CFT) 

  1. Different rules apply to CFTs.
  1. A trust is a CFT at a particular time if, at that time, the trust is not an Australian trust and either of the control tests apply.

 Residency

  1. The first limb of the CFT test requires that the relevant trust is not an Australian trust.
  1. Essentially a trust is an Australian trust if any trustee is, broadly, an Australian resident, or central management and control is in Australia.

Control Tests

12.  There are two alternative tests to determine control:

  • there is a group of 5 or fewer Australian 1% entities the aggregate of whose associate-inclusive control interests in the trust is not less than 50%.
  • there is an eligible transferor in respect of the trust. Very broadly an eligible transferor trust is one where:
  • the transferor entity transferred property or services to the trust and this was not in the course of business
  • the transferor entity essentially controlled the trust.

Comment

The CFC regime is a very complex tax regime.  If you think you may be involved in a CFC you should seek legal advice.  Waterhouse Lawyers have the necessary CFC expertise to assist you.

Category: Tax