Edited version of your written advice

Authorisation Number: 1051360420196

Date of advice: 11 April 2018

Ruling

Subject: Foreign hybrid and foreign income tax offset

Question 1

Is the entity a “foreign hybrid” for the purposes of section 830-5 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997)?

Answer

No

Question 2

If the taxpayer ceases being a temporary resident and remains an Australian tax resident, in an income year in which they receive a dividend, will they be entitled to a foreign income tax offset under 770-10 of the ITAA 1997 for any tax paid on the income of the entity in the overseas country?

Answer

Yes

This ruling applies for the following periods:

Period ending 30 June 20XX

Period ending 30 June 20XX

Period ending 30 June 20XX

Period ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are a citizen of overseas country A

You are a resident of overseas country A for tax purposes

You hold a temporary visa in Australia

You are not an Australian resident within the meaning of the Social Security Act 1991 (Cth)

You are a temporary resident within the meaning of section 995-1 of the ITAA 1997

You are a shareholder of an entity incorporated in overseas country A

The entity has elected to pass income, losses, deductions, and credits through to its shareholder(s) for tax purposes in overseas country A

You are taxed on the entity’s profits in overseas country A

From time to time you are paid dividends from the entity

You do not declare the dividend income in your Australian income tax return

You are considering becoming a permanent resident of Australia by applying for a permanent residency visa.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 768-960

Income Tax Assessment Act 1997 section 770-10

Income Tax Assessment Act 1997 section 770-15

Income Tax Assessment Act 1997 section 830-5

Income Tax Assessment Act 1997 section 830-10

Income Tax Assessment Act 1997 section 830-15

Income Tax Assessment Act 1997 section 830-20.

Reasons for decision

Question 1

The definition of ‘foreign hybrid’ is given by section 830-5 as either a foreign hybrid limited partnership or a foreign hybrid company.

‘Foreign hybrid limited partnership’ is defined within subsection 830-10(1) as:

Subject to subsection (2), a *limited partnership is a foreign hybrid limited partnership in relation to an income year if:

a) it was formed in a foreign country; and

b) *foreign income tax (except *credit absorption tax or *unitary tax) is imposed under the law of the foreign country on the partners, not the limited partnership, in respect of the income or profits of the partnership for the income year; and

c) at no time during the income year is the limited partnership, 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

d) disregarding subsection 94D(5) of the Income Tax Assessment Act 1936, at no time during the income year is it an Australian resident; and

e) disregarding that subsection, in relation to the same income year of another taxpayer:

i) the limited partnership 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.

Subsection 830-10(2) provides conditions by which a limited partnership with a non-attributable taxpayer is a foreign hybrid where certain elections are made.

On the basis that the entity is an incorporated entity formed in overseas country A, it is not a limited partnership and as such subsections 830-10(1) and 830-10(2) will not apply. Further, the entity is not a limited partnership formed in overseas country A.

Subsection 830-15(1) provides the definition of foreign hybrid company as:

Subject to subsection (5), a company is a foreign hybrid company in relation to an income year if:

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) or (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.

Subsection 830-15(5) provides a similar election condition to that in subsection 830-10(2). Read in context, for subsection 830-15(5) to be engaged, the company in question must be capable of satisfying paragraph 830-15(1)(a).

Paragraph 830-15(1)(a) prescribes the first of a number of conditions for a company to be a foreign hybrid company, which is that the partnership treatment requirements in subsections 830-15(2) or 830-15(3) must be satisfied.

Subsection 830-15(2) provides:

For the purposes of paragraph (1)(a), the partnership treatment requirements are satisfied if:

a) the company was formed in the United States of America; and

b) for the purposes of the law of that country relating to *foreign income tax (except *credit absorption tax or *unitary tax) imposed by that country, the company is a limited liability company that:

i) is treated as a partnership; or

ii) is an eligible entity that is disregarded as an entity separate from its owner.

Subsection 830-15(3) provides:

For the purposes of paragraph (1)(a), the partnership treatment requirements are also satisfied if:

a) the company was formed in a foreign country (which may be the United States of America); and

b) for the purposes of the law of that country relating to *foreign income tax (except *credit absorption tax or *unitary tax) imposed by that country, the company is treated as a partnership; and

c) regulations are in force setting out requirements to be satisfied by a company in relation to the income year for the purposes of this paragraph, and the company satisfies those requirements.

The entity will not meet the requirements of subsection 830-15(2).

In considering subsection 830-15(3), the entity:

a) is an entity formed in overseas country A

b) is treated as an entity for overseas country A tax purposes and is not treated for the purposes of the overseas country A income tax law as a partnership (see paragraph 26(c) above), and

c) does not satisfy the requirements set out in the regulations that are made and in force for the purpose of paragraph 830-15(3)(c).

As such, the entity will not meet the requirements of subsection 830-15(3).

Thus the requirements of paragraph 830-15(1)(a) will not be met. Given that subsection 830-15(1) is written so that all of its cumulative requirements must be met to be applicable, the entity will not be a foreign hybrid. Neither will subsection 830-15(5) be engaged.

Based on the information provided, the entity will not be a ‘foreign hybrid’ under section 830-5.

Question 2

Whilst the entity is not a foreign hybrid there are views on the issue of FITO, fiscally transparent entities and foreign hybrids which provide some context for the application of FITO in your circumstances.

Under Australian tax law the entity will be treated as a company and as the taxpayer (then a resident of Australia under Australian income tax law) is the shareholder any income received from the entity will ordinarily be assessable as dividend income of the taxpayer, under Australian domestic law.

Paragraph 5 of Taxation Ruling 2009/6 Income tax: entitlement to foreign income tax offsets under section 770-10 of the Income Tax Assessment Act 1997 where income is derived from investing in fiscally transparent foreign entities (TR 2009/6) provides the following in relation to fiscally transparent foreign entities:

A foreign entity is fiscally transparent if no foreign income tax is imposed on its income, either by effect of application of the laws of a foreign country or because of an election, but rather tax is imposed on such income at the level of the partner or member.

To the extent the entity, having elected to pass income, losses, deductions, and credits through to its shareholder(s) for tax purposes in overseas country A, the entity is fiscally transparent.

These circumstances are similar to the situation described in paragraphs 24 and 25 of TR 2009/6:

24. A difference in treatment of income as between the State of source and Australia may arise because of differences between the countries' respective domestic tax laws. For example, the foreign entity may be treated as fiscally transparent under the law of the other State but as a company taxed in its own right under Australian tax law (that is, if it is not a foreign hybrid under Division 830).

25. In these cases, provided that the other State has taxed such income in accordance with the tax treaty, as interpreted and applied by it as the State of source, such tax is foreign income tax for the purposes of section 770-15. A foreign income tax offset may therefore be available under section 770-10.

It is also important to consider the applicable Double Tax Agreement (DTA) concerning the availability of FITO.

Article X of the DTA with overseas country A provides a general principle that where overseas country A tax has been paid in respect of overseas country A source income, under the law of the overseas country A and in accordance with the DTA, a credit against Australian tax payable on that income will be allowed subject to the provisions and limitations of the law of Australia in force at the relevant time.

This is further supported by the commentary at paragraphs 32.1 to 32.3 of the 2005 OECD Commentary on Articles 23A and 23B of the OECD Model Tax Convention. The Commissioner's view expressed at paragraph 104 of Taxation Ruling TR 2001/13 Income tax: Interpreting Australia’s Double Tax Agreements is that the OECD Model Tax Convention and Commentary may be considered in interpreting double tax agreements.

Therefore, to the extent the taxpayer (a resident of Australia under Australian income tax law) is properly subject to tax under Australian income tax law (and having regard to the DTA) on distributions or dividends received from the entity, the taxpayer will be entitled to receive a FITO under section 770-10 for any overseas country A income tax that is correctly imposed under the overseas country A income tax law and in accordance with the DTA in relation to non-Australian sourced income out of which the distribution or dividend is made.