Edited version of your written advice

Authorisation Number: 1013091329340

Date of advice: 18 October 2016

Ruling

Subject: Tax residency status for companies

Question 1

Is A an Australian tax resident for the financial years 20XX, 20XX, 20XX, 20XX, 20XX and 20XX?

Answer

Yes.

This ruling applies for the following periods:

1 July 20XX - 30 June 20XX

1 July 20XX - 30 June 20XX

1 July 20XX - 30 June 20XX

1 July 20XX - 30 June 20XX

1 July 20XX - 30 June 20XX

1 July 20XX - 30 June 20XX

The scheme commences on:

June 20XX

Relevant facts and circumstances

● Company A was incorporated in an overseas country XYZ. At the time, there were two shareholders X and Y. X was elected as the Manager. X is an Australian tax resident. Y was originally resident in Australia but just over a year after incorporation of A, he/she moved overseas.

● Company A is involved in the development of products. Users can download the products for free and get basic features at no cost, but also can purchase additional features.

● All stages involved in developing the products are performed in Australia. In addition, the products are released through various platforms, and marketing, distribution, and analysis of performance are all performed and managed by X in Australia.

● The security access required to release products on a particular platform are held and controlled in Australia and only X has the ability to submit new products or updates.

● Under a relevant agreement, all control of the Company rested with X during the time that Y was located overseas. Y has no plans to return to Australia.

● Last year, an Australian company C acquired 40% of the capital in A, and the relevant agreement was updated to reflected the new ownership structure (the restructure).

● The new agreement appoints two managers being X and Z who is a representative of C. Z resides in Australia.

● As per the relevant agreement the managers have exclusive and complete discretion in the management and control of the affairs of A.

● To date A has been lodging tax returns in the overseas country XYZ as a non-resident taxpayer, and it has been treated as a partnership for XYZ tax purposes.

● In relation to the finance and accounting functions of C, X enters most data (from Australia) to a cloud based system, other accounting data is entered by a book-keeper in Australia.

● All bank account log-in details are also controlled by X.

● Since the restructure, annual meetings have taken place in C's offices in Australia. At these meetings the strategic direction of the business was set and the allocation of resources was determined.

● Prior to C joining the group, annual meetings had taken place in city W in Australia.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1).

Convention between the Government of Australia and the Government of the XYZ for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income Article 4

Reasons for decision

Article 4 of the Convention between the Government of Australia and the Government of the XYZ for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (the DTA) provides the residency rules with respect to the taxing rights between Australia and the XYZ.

The domestic definition of “resident” or “resident of Australia” is provided in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

In the event the domestic rules are in conflict with those of the DTA, the provisions in the DTA would prevail.

Clause 1 of Article 4 of the Convention provides:

(a) A person is a resident of Australia if the person is:

(i) An Australian corporation; ……

(b) A person is a resident of the United States if the person is:

(i) A XYZ Corporation; …..

Is A an “XYZ corporation” under the DTA?

“XYZ corporation” is defined in Article 3 of the DTA as follows:

1(g)(i) the term “XYZ corporation” means a corporation which, under XYZ law relating to XYZ tax, is a domestic corporation or an unincorporated entity treated as a domestic corporation, and which is not, under the law of Australia relating to Australian tax, a resident of Australia.

Company A was incorporated in an overseas country XYZ. It has been lodging tax returns in XYZ as a non-resident taxpayer and treated as a partnership for XYZ tax purposes. As it is not treated as a domestic corporation in XYZ, A does not satisfy the definition of a 'XYZ corporation”. Thus, it is not a resident of XYZ under Article 4 of the DTA.

Is A an “Australian corporation” under the DTA?

The definition of “Australian corporation” is provided in Article 3 of the DTA as follows:

1(g)(ii) the term “Australian corporation” means a company, as defined under the

law of Australia relating to Australian tax, which, under the law, is a resident

of Australia, and which is not under XYZ law relating to XYZ tax, a domestic corporation or an unincorporated entity treated as a domestic corporation.

To satisfy the definition of “Australian corporation”, A has to satisfy the definitions of “company” under section 995-1 of the Tax Assessment Act 1997 (ITAA 1997) and “resident of Australia” under subsection 6(1) of the ITAA 1936 respectively.

Section 995-1 of the ITAA 1997 defines “company” as:

(a) A body corporate; or

(b) Any other unincorporated association or body of persons.

but does not include a partnership or a non-entity joint venture.

Note 1: Division 830 treats foreign hybrid companies as partnerships.

A is not a company if it is a foreign hybrid company under Division 830 of ITAA 1997 because foreign hybrids are being treated as partnerships for Australia tax purposes.

Subsection 830-15(1) of ITAA 1997 sets out the definition of a “foreign hybrid company” (in relation to an income year) as:

(a) at all times during the income year when the company is in existence, the partnership treatment requirements for the income year in subsection (2) and (3) are satisfied; and

(b) at no time during the income year is the company, for the purposes of a law of any foreign country that imposes foreign income tax (except credit absorption tax or unitary tax) on entities because they are residents of the foreign country, a resident of that country; and

(c) at no time during the income year is the company an Australian resident; and

(d) disregarding this Division, in relation to the same income year of another taxpayer:

(i) the company is a CFC at the end of a statutory accounting period that ends

in the income year; and

(ii) at the end of the statutory accounting period, the taxpayer is an attributable taxpayer in relation to the CFC with an attribution percentage greater than nil.

According to paragraph 830-15(1)(c) of the ITAA 1997, if A satisfies the definition of “Resident of Australia”, it is not a “foreign hybrid company”.

“Resident of Australia” is defined under subsection 6(1) of the ITAA 1936 as:

(b) A company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia.

Taxation Ruling, Income Tax: residence of companies not incorporated in Australia - carrying on business in Australia and central management and control (TR 2004/15) states at paragraph 5 that two conditions are required to be satisfied in order to satisfy the definition of 'resident of Australia”:

the first is that the company must carry on business in Australia, and the second is that the company's central management and control (CM&C) must be located in Australia.

Furthermore, the taxation ruling states (at paragraph 6) that if no business is carried on in Australia, then there is no need to determine the location of the company's CM&C as the company is not a resident of Australia. But, if the company carries on business in Australia, it also has to have its CM&C in Australia.

Does A carry on business in Australia?

The question of where business is carried on is one of fact. It requires a consideration of where the activities of the company are carried on and is dependent on the facts and circumstances of a case. However, the Commissioner's approach to this factual determination is to draw a distinction between a company with operational activities and a company which is more passive in its dealings. (Paragraph 9 of TR 2004/15).

For the purposes of the second statutory test, a company that has major operational activities relative to the whole of its business carries on business wherever those activities take place and not necessarily where its CM&C is likely to be located. (Paragraph 10 of TR 2004/15)

On the other hand, a company whose income earning outcomes are largely dependent on the investment decisions made in respect of its assets, carries on its business where these decisions are made. This is often where its CM&C is located. (Paragraph 11 of TR 2004/15)

The business of A is to develop and hold intellectual property. The developed digital products are sold through major online platforms. In performing its business, A has to carry out a number of business functions, and each of the functions is controlled by X and undertaken from Australia. The security accesses required to release products on a particular platform are held and controlled in Australia and only X has the ability to submit new products or update. All bank account log-in details are also controlled by X.

Under the relevant agreement the power over the above decision making has been devolved to the 'Manager' and for the years from incorporation until the restructure this power rested solely with X. From the restructure till now, this power has rested with X and Z, a representative of C, who also resides in Australia.

From the discussions above, we conclude that A carries on its business in Australia as its main functions of the business are performed in Australia. Thus, it satisfied the first condition of the definition 'resident of Australia'.

Does A have its CM&C in Australia?

TR 2004/15 defines CM&C as “level of management and control that involves the high level decision making processes, including activities involving high level company matters such as general policies and strategic directions, major agreements and significant financial matters. It also includes activities such as the monitoring of the company's overall corporate performance and the review of strategic recommendations made in the light of the company's performance.” (Paragraph 13 of TR 2004/15)

The location of the company's CM&C is a question of fact to be determined in light of all the relevant facts and circumstances. In order to reduce uncertainty the Commissioner will accept, for those companies whose CM&C is exercised by a board of directors at board meetings, that the CM&C is in Australia if the majority of the board meetings are held in Australia. (Paragraph 15 of TR 2004/15)

From the time of its incorporation until the restructure, A was a sole director company- there were no formal minuted board meetings, and all strategic business decisions were made by X who spent the majority of his/her time in Australia.

Since last year, there have been two directors managing A jointly. The two directors are X and Z (a representative of C), and both are Australian tax residents. Since the restructure, regular board meetings have been held in the offices of C in W, Australia. At these meetings the strategic direction of the business was set and the allocation of resources was determined.

From the above discussions, we can conclude that the CM&C of A is located in Australia and the second condition of a “resident of Australia” under subsection 6(1) of the ITAA 1936 is also satisfied.

Therefore, A is an 'Australian corporation' and 'a resident of Australia' under Article 4 of the DTA.

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