Frequently Asked Questions
You need to check the relevant legislation in your State and Territory, as the rules are different in each jurisdiction.
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How is de facto control established as part of the test for existence of a controlled foreign company (CFC)?
- De facto control will be established if a group of five or fewer Australian entities either alone or with associates effectively control the foreign company.
- For example if the group can control the appointment of directors of the foreign company the group will be considered as having effective control of the foreign company.
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What is direct control interest in a foreign company?
- Direct control interest is the largest of the following percentages:
- paid-up share capital in the foreign company;
- rights to vote; and
- rights to distributions.
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What is accrual taxation?
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What is a CFC?
- CFC stands for a controlled foreign company. A CFC is not considered an Australian resident for tax purposes.
- If a company or individual is resident in Australia they will have an Australian tax liability regardless of the source of their income. Any company incorporated in Australia will also be subject to Australian taxation. Even if a company is established outside Australia it will be taken to have its residence in Australia if:
- it carries on business in Australia; and either
- has its central management and control in Australia; or
- its voting power is controlled by shareholders who are resident in Australia.
- If you need more specific information about how this classification applies in your situation you can use our free and anonymous Ask a Lawyer service.
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What is the test for a CFC?
- A foreign company will be taken to be a CFC if it satisfies any one of the following three control tests:
- five or fewer Australian residents have or are entitled to acquire at least a 50% associate inclusive control interest in the foreign company;
- a single Australian resident has at least 40% control interest in the foreign company. This is rebuttable if there are others having greater control of the foreign company; or
- irrespective of whether there is a group of Australian residents who have the requisite control interest in the foreign company it will considered a CFC if there is actual control by a group of five or fewer Australian residents.
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What is a permanent establishment of a company?
- A permanent establishment is the place of business through which an Australian company carries on its business in another country.
- If the Australian company derives profits through a permanent establishment in another country that country may be able to tax that income.
- Detailed provisions relating to permanent establishments are contained in relevant double tax treaties.
- It is important to check the applicable treaty because the definition of permanent establishment varies between treaties.
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Can a company incorporated outside Australia be resident in Australia for tax purposes?
- Yes. If the company carries on business in Australia and the central control and management of the company can be shown to be in Australia the company may be considered resident in Australia.
- You must also refer to the relevant double tax treaty to be certain that there are no conflicting provisions in the treaty.
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When dealing with thin capitalisation are there rules to help determine whether a financial arrangement between two companies is debt or equity?
- Division 974 of the Income Tax Assessment Act 1997 defines what equity and debt interests are.
- Only in the case of a debt can interest be claimed.
- Even in this situation the thin capitalisation rules may deny or reduce the deductions.
- You can use our LegalPlan™ membership to ask lawyers for tenders or a Fixed Fee Quote in relation to your international taxation needs.
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Are there special rules for e-commerce?
- No. The rules of international taxation will apply.
- There are several publications by the Australian Tax Office (ATO) on the subject. The ATO website can be accessed at https://www.ato.gov.au/.
- The Organisation for Economic Cooperation and Development (OECD) has also published guides. You can find more information on their website at http://www.oecd.org/.
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Do anti-avoidance provisions apply to international taxation issues?
- Apart from specific anti-avoidance measures the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 (Cth) apply to international taxation issues.
- Basically if the dominant purpose of entering into an international taxation transactions was to obtain a tax benefit then Part IVA will apply and the commissioner will be able to reassess the company’s tax liability.
- You can use our Phone a lawyer service for a preliminary legal consultation if you think you may need legal advice.
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