Many clients have controlled foreign company in overseas, will they need to report in the income tax return? This article is for clients or friends who want to know more about controlled foreign company. 

Section 1: Is there a CFC?

A CFC is a non-resident company that satisfies one of three control tests. Whether a company is a resident of a foreign country is determined according to Australian tax law as modified by double-taxation agreements with other countries.

The three control tests are the:

·       strict control test: If a group of five or fewer Australian ‘1% entities’, together with their associates, owns or is entitled to acquire a control interest of at least 50% in the foreign company.

·       assumed controller test: A foreign company will normally be treated as a CFC under the assumed controller test if a single Australian entity owns, or is entitled to acquire, an associate-inclusive control interest of at least 40% in the foreign company.  

·       de facto control test: A foreign company will be treated as a CFC under the de facto control test if a group of five or fewer Australian entities, either alone or with associates, effectively controls the foreign company.

An Australian 1% entity is an Australian entity that, together with its associates, holds an interest of at least 1% in the foreign company.

An Australian entity is an Australian partnership, an Australian trust, or an entity (other than a partnership or trust) that is a Part X Australian resident. A Part X Australian resident is a resident of Australia who is not treated solely as a resident of another country under a double-taxation agreement between Australia and that country.

When is control measured?

A statutory accounting period of a CFC is a period of 12 months ending 30 June, unless the CFC makes an election to use another period. The control test is applied at the end of a CFC's statutory accounting period to check whether income of the CFC is to be attributed.

It may also be necessary to measure control at the time a CFC pays a dividend to another CFC or to a controlled foreign trust or at the time a CFC changes residence.

Substance requirements

Yes, active income test (less than 5% of income is from passive income, tainted sales, tainted services). Generally, if the CFC satisfies the ‘active income test’ then there is no need to attribute income from that CFC to its Australian controllers.

Section 2: Are you an attributable taxpayer?

If you have an interest in a CFC, you must determine if you are an attributable taxpayer. You are only required to include an amount of attributable income from a CFC in your assessable income if you are an attributable taxpayer in relation to the CFC.

You will be an attributable taxpayer if:

1.     you have an associate-inclusive control interest of 10% or more in a CFC, or

2.     all of the following rules apply     

-        the CFC is a CFC because of the application of the de facto control test

-        you are an Australian 1% entity, and

-        you are part of a group of five or fewer Australian entities who, alone or with associates (regardless of whether the associates are Australian entities) controls the CFC.

Section 3 Description of significant CFC exemption and exclusion requirements

Certain exemptions provided for non-portfolio dividends (10% or more); 

1) sale of a CFC interest. Further, where CFCs are located in a listed country (US, UK, Canada, France, Germany, NZ, Japan) only particular types of income (referred to as Eligible Designated Concession Income) is attributable to the Australian controller.

2) There is also an Australian Financial Institutions (“AFI”) subsidiary exemption which enables interest and certain asset and currency transactions to be exempt for CFCs that are subsidiaries of a registered Australian AFI (may be broader than Australian banks).

Section 4 What types of attribution can apply?

Sections 1 and 2 asked the following questions:

-        Is there a CFC?

-        Are you an attributable taxpayer?

If the answer to both of these questions is yes, the next step is to determine whether you must include an amount in your assessable income.

Attribution on change of residence

If you were an attributable taxpayer of a CFC resident in an unlisted country and the CFC changed its residence to a listed country or to Australia while you were an attributable taxpayer, you may be subject to attribution on your share of the accumulated profits of the CFC.

Attribution of current year profits

If you are an attributable taxpayer of a CFC at the end of the CFC's statutory accounting period, you may need to include the whole or a part of the profits of that period in your assessable income.

The attribution of current year profits of a CFC may be reduced if you have been subject to:

-        dividend attribution, or

-        attribution on change of residence by the CFC.

Chang Accounting Advisory Pty Ltd, we are CPA practice and tax agent. If you or your families or friends need our services, please feel free to contact our team for any assistance. 

This article is for informational purposes only and does not form part of our advice. This article is based on guidance from Australian Taxation Office. Please contact our team if you need any assistance.

Claire Chang, 0497 131 419, claire.chang@changadvisory.com.au, wechat: clairechang26

Michelle Cui, 0433 539 870, michelle.cui@changadvisory.com.au, wechat: michellejc