Corporate tax residency – who controls your foreign entities?

Foreign companies that may be controlled by an Australian entity should review their decision-making based on the Australian Taxation Office (ATO) Taxation Ruling, TR 2018/5 (TR 2018/5).  It is timely for Australian groups with foreign-incorporated subsidiaries to consider whether they are appropriately managing tax residency risk by re-visiting and/or implementing tax residency protocols and ensuring that they can be applied practically.

The new ruling gives guidance on when the ATO could find a foreign company’s central management and control (CMC) is located in Australia, which can be determinative of whether a company meets the tests in section 6 of the Income Tax Assessment Act 1936.  The test states a company is a tax resident of Australia even if not incorporated in Australia if the Company:

o   carries on business in Australia, and
o   has either:

-       its CMC in Australia, or
-       its voting power controlled by shareholders who are residents of Australia.

The ATO says:

“If a company carries on business and has its central management and control in Australia, it will carry on business in Australia within the meaning of the central management and control test of residency.

It is not necessary for any part of the actual trading or investment operations of the business of the company to take place in Australia. This is because the central management and control of a business is factually part of carrying on that business. A company carrying on business does so both where its trading and investment activities take place, and where the central management and control of those activities occurs”.

It likely follows that if CMC is located in Australia, unless dormant, a company incorporated outside Australia is almost certainly going to satisfy the residency test under section 6.  The key message for taxpayers, is to focus on assessing where CMC will be located rather than a mechanical consideration of where a company may carry on its business.

As “a starting point” the ATO will consider that the directors of a company will exercise CMC. However, where facts suggest otherwise, the ATO will also consider amongst other factors:

• where the governing body of the company meets;
• where the company declares and pays dividends;
• the nature of the company’s business and whether it dictates where CMC decisions are actually made in practice; and
• evidence where minutes or other documents recording where high-level decisions by the company are made.

Importantly, exercise of CMC by the directors of a company looks at real decision making not merely the implementation or rubber stamping of decisions made by others.

For further information please contact:

Rod Payne
Principal
T: 03 5226 8541
E: rpayne@ha.legal

or 

Paul Gray
Principal Lawyer
T  03 5225 5231
E  pgray@ha.legal