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.
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% × 35% × 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 × 100% interest for tracing control of FC2 in FC3.
End of example