Exemption for active business



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The active business exemption exempts you from taxation under the FIF measures for interests you have in foreign companies principally engaged in certain active businesses, known as eligible activities. [section 497]

This exemption also applies:

  • when working out the net income of a trust estate where the trust invests directly in a foreign company engaged in an active business, or
  • when working out the FIF income of a CFC or a CFT - because the income of a CFC or CFT is worked out as though they were a resident taxpayer.

This exemption does not apply to an interest in a non-resident trust.

What are eligible activities?

To be eligible for the active business exemption, you must establish that the foreign company was principally engaged in one or more eligible activities. [sections 496 and 497]

All business activities (including the provision of services) that are not named in Schedule 4 of ITAA 1936 are eligible activities (for a complete list, see Appendix 2: Business activities that are not eligible activities). For example, mining, agriculture and the management of funds are eligible activities. However, being named in Schedule 4 does not necessarily make activities ineligible activities - see appendix 2 for more information.

There are two methods for establishing whether a foreign company is principally engaged in eligible activities:

  • the stock exchange listing method, and
  • the balance sheet method.

If both of the methods can be applied, you may choose which one to use. [section 498]

Also see appendix 2 for more information.

The stock exchange listing method

You can use the stock exchange listing method to decide whether a FIF is principally engaged in one or more eligible activities.

Your interest in the FIF must be included in a class of interests quoted on a stock market of an approved stock exchange. See Appendix 1: Approved stock exchanges for more information. [section 499]

Under this method, your interests in the FIF will be exempt if you can establish that the foreign company FIF is included in a class of companies classified or designated as engaged in an eligible activity on either:

The balance sheet method

The balance sheet method tests whether a foreign company was principally engaged in eligible activities by reference to its balance sheet and, if appropriate, the balance sheets of its subsidiaries. [subsection 500(1)]

A company is principally engaged in eligible activities if 50% or more of the gross value of the company's assets were for use in eligible activities - the '50% assets test'. [subsection 500(2)]

This percentage is worked out as follows:

Gross value of the company's
     assets used in eligible activities     

Gross value of all of the company's assets



The gross value of an asset is its value shown in the company's balance sheet prepared for reporting to the shareholders on an annual basis.

The balance sheet test cannot be used if the balance sheet for the company was not prepared in accordance with commercially accepted accounting principles or if it does not give a true and fair view of the financial position of the company. [subsection 500(9)]

Balance sheet method and lower tier companies

An offshore holding company may not satisfy the active business exemption in its own right under the balance sheet test if the company does not have any active business of its own. To prevent this, the active business exemption allows the first tier foreign holding company to look through to the underlying assets of certain subsidiaries.

This look-through rule is available if a holding company owns 50% or more of the paid-up share capital of another company, either directly, indirectly or a combination of these.

Companies that satisfy this requirement are referred to as subsidiaries of the holding company. [subsection 500(3)]

The holding company treats its share of the underlying assets of its subsidiaries as its own in using the balance sheet method to claim the active business exemption. [subsection 500(3)]

There is no limit to the number of tiers of companies a holding company may look through, provided the holding company has an indirect ownership interest of 50% or more in the lowest tier company being tested. [sections 501 and 500]

Whenever the look-through rule applies, any intercompany indebtedness in relation to the holding company and its subsidiaries is not taken into account when working out the percentage of the holding company's assets used in eligible activities. Shares held by the holding company or its subsidiaries in subsidiaries of the holding company are also not taken into account. [subsection 500(5)]

Last modified: 01 Jul 2006QC 18507