• Indirect control interest in a company

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    A taxpayer may hold a direct control interest in an entity - entity A - which holds a direct control interest in another entity - entity B. In this case, the taxpayer has an indirect control interest in entity B.

    A taxpayer's indirect control interest in entity B is obtained by multiplying the direct control interest of the taxpayer in entity A by the entity's direct control interest in entity B.

    This process of multiplication is continued where there are further entities in the chain.

    Indirect control interest may only be traced through a controlled foreign entity

    An indirect control interest in a foreign entity can be traced only through controlled foreign entities (CFEs). These are CFCs, controlled foreign partnerships (CFPs) and controlled foreign trusts (CFTs).

    A CFP is a partnership which does not have a resident partner and has at least one CFC or a CFT as a partner. A CFT is a trust, other than a resident trust:

    • that has an eligible transferor - see appendix 2, or
    • where five or fewer residents and their associates hold, or are entitled to acquire, 50% or more of the income or capital of the trust.

    Deeming rules for tracing an indirect control interest

    For determining the indirect control interest in an entity - but not for working out the amount of the income to be attributed to a taxpayer - a resident or an interposed CFC is deemed, in the following specified circumstances, to own a 100% interest in a lower tier entity.

    The control tracing interest of an entity will be treated as 100% if, together with associates, the entity:

    • has an interest of at least 50% in a foreign company
    • satisfies the assumed controller test in relation to a foreign company
    • actually controls the foreign company - is a partner in a partnership that is not an Australian partnership
    • is an eligible transferor in relation to a trust, or
    • has an interest of at least 50% in a trust that is not an Australian trust.

    Example 7

    Indirect control interest

    A resident company holds a 60% interest in a foreign company, FC1, which holds a 35% interest in another foreign company, FC2. FC2 holds a 60% interest in foreign company FC3. Another resident holds a 20% interest in FC2.

    The indirect control interest of the resident company in FC3 is:

    Resident company

    Direct control interest

    %

    Control tracing interest

    %

    FC1

    60

    100

    FC2

    35

    35

    FC3

    60

    100

    The indirect control interest of the resident company in FC3 is worked out as follows:

    100% X 35% X 100% = 35%

    It is possible to trace interests through FC2 because it is a CFC. FC3 is also a CFC because the resident company has an indirect control interest of 35% in FC3 and another resident has an indirect control interest of 20% in FC3 - that is, 20% in FC2 x 100% interest for tracing control of FC2 in FC3.

    Last modified: 05 Dec 2006QC 18000