Controlled foreign company
A controlled foreign company is a non-resident company controlled by an Australian entity. Under section 340 of the ITAA 1936 a foreign company is controlled by an Australian entity if one of the three control tests is satisfied:
- strict control test
- assumed controller test
- de facto control test.
Strict control test
A foreign company will be treated as a controlled foreign company under 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.
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.
The associate-inclusive control interest of an entity is the sum of interests held by the entity and its associates in the foreign company. Interests that the entity and its associates are entitled to acquire are also taken into account.
Example of strict control test
Assumed controller test
A foreign company is normally treated as a controlled foreign company 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%. An entity's associate-inclusive control interest in a foreign company is the sum of the interests held in the company by the entity and the associates of the entity. However, a foreign company is not treated as a controlled foreign company under the assumed controller test if the company is controlled by a party or parties unrelated to the single resident or its associates.
Example of assumed control test
De facto control test
A foreign company will be treated as a controlled foreign company under the de facto control test if a group of five or fewer Australian entities, either alone or with associates, effectively control the foreign company.
Example of de facto control test
If an Australian entity can control the appointment of directors to a foreign company, the Australian entity will generally be taken to have de facto control of that company.
When is control measured?
The statutory accounting period of a controlled foreign company is a period of 12 months ending 30 June, unless the company elects to use another period. The control test is applied at the end of a company's statutory accounting period to check whether income of that company is to be attributed.
It may also be necessary to measure control when a controlled foreign company pays a dividend to another controlled foreign company or to a controlled foreign trust, or when a controlled foreign company changes residence.