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Controlled Foreign Companies (CFC) Rules reviewed

15 Jan 2010

On 5 January 2010 the Australian Treasury took a further step in the long-running process to reform the anti-tax-deferral regimes that relate to foreign source income by issuing a consultation paper directed at the high-level design of the new controlled foreign company (CFC) rules. Taxand Australia reviews the changes and the impact for foreign companies.

The proposals in the consultation paper are further developed than in the past and so provide further insight into the likely shape of important aspects of the new rules. However, the paper has been released for consultation purposes only so is not definitive and leaves a number of questions unanswered.

Identification of CFCs

Main points:

  • A foreign company will require a single controller (including associates) to be a CFC, except in specific cases of 'joint control'.
  • There is no mention of trusts being treated as CFCs.

Attribution of attributable income

Main points:

  • Each Australian controller of a CFC and each Australian associate of a controller will be an attributable taxpayer if it has a participation interest in the CFC greater than zero.
  • Participation interests will be measured by the investor's right to distributionsof profits on equity interests (using the tax debt/equity rules).
  • Complying superannuation funds will be exempt.
  • The consultation paper raises the possibility of a de minimis exemption.

Identification of attributable income

Main points:

  • Most income from an active trade or business will escape attribution.
  • Most intra-group income will escape attribution.

Taxand's Take

Where to from here? While the process of reforming the anti-deferral rules has already taken over three years, it is clear that there is still much work to be done. Submissions on the current consultation paper are due by 1 March 2010. Considerable further drafting will be required, which will not be an easy task - the CFC rules are incredibly complicated and there is a large amount of detail that the consultation paper does not get into. Moreover, there are also a large number of consequential amendments that will need to be made; eg s 23AH, CGT participation exemption, thin capitalisation.

There also seems to have been little progress in relation to two of the other broad elements of the review: the anti-roll up rule and the amendments to the transferor trust rules. Treasury has said that legislation for those elements will be released before the CFC legislation is finalised.

Treasury has previously said that it was aiming for the new rules to operate for income years beginning 1 July 2010 and later. While that target date seems ambitious Treasury has not said anything that suggests the target has been delayed.

Your Taxand contact for further queries is:
Richard Shaddick
T. +61 3 9288 1412

Read the full review from Greenwoods & Freehills, Taxand Australia, here.

Taxand's Take Author