Edited version of private advice

Authorisation Number: 1052233879897

Date of advice: 2 April 2024

Ruling

Subject: Foreign income - non-assessable

Question 1

Is XXXX a foreign hybrid limited partnership in relation to the 20YY to 20YY income years pursuant to subsections 830-10(2) and (3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Will Company A's share of foreign income derived as a limited partner in XXXX be non-assessable non-exempt income under subsection 23AH(2) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 3

Is any of Company A's share of foreign income derived as a limited partner in XXXX branch hybrid mismatch income (BHMI) for the purposes of subsection 23AH(4A) of the ITAA 1936?

Answer

No.

This ruling applies for the following periods:

Income year ended 30 June 20YY

Income year ending 30 June 20YY

Income year ending 30 June 20YY

Income year ending 30 June 20YY

Relevant facts and circumstances

Company A was incorporated in Australia.

Company A, acting in its own right and not as the trustee of a trust, invested in XXXX as a limited partner.

Company A is not a passive investor. It is an active investor, having recently commenced its activities of acquiring interests in foreign funds. Company A carries on a business and as part of that business it has to date made 2 direct investments into foreign limited partnerships.

Company A is seriously considering making the election under paragraph 830-10(2)(b) of the ITAA 1997 in relation to its interest in XXXX to treat XXXX as a foreign hybrid limited partnership (FHLP) for any income year during which the election is in force.

XXXX

XXXX is a limited partnership that was formed in the XXXX under the laws of XXXX - Chapters 15 (XXXX Revised Uniform Partnership Act (DRUPA)) and 17 (Limited Partnerships) of the Uniform Commercial Code (UCC) upon the execution of a certificate of limited partnership.

XXXX is an unrelated entity with a wide range of investors. The investors are primarily not from Australia and are limited to investors that are sophisticated and experienced investors. The purpose of the partnership is to invest in a wide range of financial instruments and to achieve capital appreciation.

Under the Partnership Agreement (PA) unless earlier dissolved and terminated pursuant to the PA, the partnership shall continue perpetually.

XXXX is not subject to taxation in the XXX at the level of the partnership in respect of the income or profits of the partnership.

XXXX is not and does not intend on being a resident for the purposes of the tax law of any foreign country.

XXXX is not an Australian resident and does not, nor will it:

(a)  carry on business in Australia;

(b)  be centrally managed and controlled in Australia; or

(c)  re-form in Australia.

All the income generated by XXXX is sourced in the XXXX. There is no proposal to generate any income from sources outside of the XXXX.

GP

The General Partner (GP) of XXXX is the sole general partner of XXXX. The GP has the sole and exclusive right to conduct, control and manage the business of XXXX, including entering of contracts on behalf of XXXX, but is able to delegate such powers to other persons.

The principal office of the partnership is the XXX office, or other places selected by the GP. The GP carries on all its activities, as the GP, in the XXX.

Investment Manager

The GP has delegated exclusive discretionary investment advisory authority to another entity as the investment manager (IM) pursuant to an executed Management Agreement.

The IM has full discretion and authority, without obtaining the prior approval of the GP, to enter contracts on behalf of the GP and is responsible for all investment decisions made with respect to XXXX.

In consideration of its investment advisory services, the IM will be entitled to receive management fees as set out in the PA. The IM is not liable to XXXX or any of its investors for any losses in connection with the performance of its duties under the Management Agreement or acting as investment manager.

Controlled foreign company, corporate limited partnership, foreign investment fund and eligible designated concession income

As at 30 June 20YY, XXXX is not a controlled foreign company (CFC) under section 340 of the ITAA 1936.

XXXX is a corporate limited partnership (CLP) under section 94D of the ITAA 1936 (disregarding subsection 94D(6) of the ITAA 1936).

XXXX is not a venture capital limited partnership (VCLP), an early stage venture capital limited partnership (ESVCLP), an Australian venture capital fund of funds (AFOF) or a venture capital management partnership (VCMP) for Australian tax law purposes.

XXXX is a foreign investment fund (FIF) under former subsection 481(1) of the ITAA 1936.

XXXX does not expect there to be any eligible designated concession income (EDCI) as defined in section 317 of the ITAA 1936. XXXX is not a 'regulated investment company' under the tax law of the XXX for the purposes of table item 14 in section 17 of the Income Tax Assessment (1936 Act) Regulation 2015 (ITAR (1936 Act) 2015). XXXX does not intend on investing in any tax-exempt governmental bonds.

Neither Company A nor XXXX is claiming a tax deduction in any jurisdiction for the payment of the partnership distribution.

In relation to Company A and XXXX:

(a)  the 2 entities are not members of a group of entities that are consolidated for accounting purposes;

(b)  neither entity holds a participation interest of 50% or more in the other; and

(c)  no third entity holds a 50% or more participation interest in each of the entities.

Assumptions

Company A will make an election under paragraph 830-10(2)(b) of the ITAA 1997 on or before the day on which it lodges its income tax return for the 20YY income year.

XXXX will not elect to be taxed in the XXX as a corporation and will continue to be characterised as a partnership for the ruling period (income years 20YY to 20YY).

XXXX will not generate any EDCI during the ruling period on the basis that it will continue its status as an entity that is not a regulated investment company under XXX tax law and will not invest in tax-exempt governmental bonds.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 830-10(1)

Income Tax Assessment Act 1997 paragraph 830-10(1)(a)

Income Tax Assessment Act 1997 paragraph 830-10(1)(b)

Income Tax Assessment Act 1997 paragraph 830-10(1)(c)

Income Tax Assessment Act 1997 paragraph 830-10(1)(d)

Income Tax Assessment Act 1997 paragraph 830-10(1)(e)

Income Tax Assessment Act 1997 subsection 830-10(2)

Income Tax Assessment Act 1997 paragraph 830-10(2)(b)

Income Tax Assessment Act 1997 subsection 830-10(3)

Income Tax Assessment Act 1997 subsection 830-10(4)

Income Tax Assessment Act 1997 paragraph 830-10(4)(a)

Income Tax Assessment Act 1997 subparagraph 830-10(4)(a)(i)

Income Tax Assessment Act 1997 subparagraph 830-10(4)(a)(ii)

Income Tax Assessment Act 1997 subsection 830-10(5)

Income Tax Assessment Act 1997 subsection 830-10(6)

Income Tax Assessment Act 1997 Division 832

Income Tax Assessment Act 1997 section 832-105

Income Tax Assessment Act 1997 section 832-210

Income Tax Assessment Act 1997 subsection 832-470(1)

Income Tax Assessment Act 1997 subsection 832-470(3)

Income Tax Assessment Act 1997 subsection 832-470(4)

Income Tax Assessment Act 1997 section 832-475

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1936 section 6

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 paragraph 6(1)(b)

Income Tax Assessment Act 1936 subsection 6AB(1)

Income Tax Assessment Act 1936 section 23AH

Income Tax Assessment Act 1936 paragraph 23AH(1)(c)

Income Tax Assessment Act 1936 subsection 23AH(2)

Income Tax Assessment Act 1936 subsection 23AH(4A)

Income Tax Assessment Act 1936 subsection 23AH(5)

Income Tax Assessment Act 1936 subsection 23AH(10)

Income Tax Assessment Act 1936 subsection 23AH(14C)

Income Tax Assessment Act 1936 subsection 23AH(15)

Income Tax Assessment Act 1936 section 92

Income Tax Assessment Act 1936 section 94D

Income Tax Assessment Act 1936 subsection 94D(5)

Income Tax Assessment Act 1936 subsection 94D(6)

Income Tax Assessment Act 1936 section 94J

Income Tax Assessment Act 1936 section 94P

Income Tax Assessment Act 1936 subsection 94T(1)

Income Tax Assessment Act 1936 paragraph 94T(1)(b)

Income Tax Assessment Act 1936 paragraph 94T(1)(e)

Income Tax Assessment Act 1936 paragraph 94T(1)(f)

Income Tax Assessment Act 1936 Part X

Income Tax Assessment Act 1936 section 317

Income Tax Assessment Act 1936 section 320

Income Tax Assessment Act 1936 section 340

Income Tax Assessment Act 1936 former Part XI

Income Tax Assessment Act 1936 former section 470

Income Tax Assessment Act 1936 former subsection 481(1)

Income Tax Assessment Act 1936 former subsection 481(2)

Income Tax Assessment Act 1936 former subsection 483(1)

Income Tax Assessment (1936 Act) Regulation 2015 section 17

Income Tax Assessment (1936 Act) Regulation 2015 section 19

XXXX - the Convention between the Government of Australia and the Government of the XXX of XXX for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, done at Sydney on 6 August 19YY.

XXX (No.1) - the protocol, done at Canberra on 27 September 20YY, amending the XXX convention.

Reasons for decision

Question 1

Summary

XXXX will be a FHLP in relation to the 20YY to 20YY income years on the basis that the conditions in subsection 830-10(4) to make the election under paragraph 830-10(2)(b) are satisfied and Company A will make such an election on or before the day on which it lodges its income tax return for the 20YY income year.

Detailed reasoning

Foreign hybrid limited partnership - subsection 830-10(1)

Subsection 830-10(1) states that a limited partnership is a FHLP, in relation to an income year, subject to subsection 830-10(2), if:

(a)  it was formed in a foreign country; and

(b)  foreign income 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...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.

Limited partnership

For XXXX be a FHLP, it must first meet the definition of a 'limited partnership' which is defined in section 995-1 to mean:

(a)  an association of persons (other than a company) carrying on business as partners or in receipt of ordinary income or statutory income jointly, where the liability of at least one of those persons is limited; or

(b)  an association of persons (other than the one referred to in paragraph (a)) with legal personality separate from those persons that was formed solely for the purpose of becoming a VCLP, an ESVCLP, an AFOF or a VCMP and to carry on activities that are carried on by a body of that kind.

XXXX is a Delaware limited partnership. Limited partnerships in Delaware are governed by Chapter 15 (DRUPA) and Chapter 17 (Limited Partnerships) of the UCC.

As discussed in ATO ID 2008/80 Income tax: Foreign Hybrid Limited Partnership: Delaware Limited Partnership, a limited partnership formed under the DRUPA has features both commonly associated with a business caried on by partners as partners and with a company. In particular, while a Delaware limited partnership has separate legal entity status which is more commonly associated with a company, this feature of itself does not necessarily lead to characterisation of the entity as a company. Rather, the question remains as to whether the business is being carried on by the relevant persons as partners (as opposed to by the separate legal entity on its own behalf).

XXXX is a limited partnership

In this particular case, there are a number of features which favour characterisation of XXXX as a partnership, including:

•         the relationship is formalised through, and governed by, a partnership agreement (as opposed to memorandum of association);

•         the business is managed by a general partner on behalf of the partners;

•         the inclusion of additional partners and assignment of partnership interests requires the consent of a general partner; and

•         at the end of each accounting period, the profits of the limited partnership are allocated to each partner for distribution, indicating that the profits belong to the partners as they arise.

Therefore, the business is organised and conducted more in line with how a partnership operates than a company, indicating that it is the partners that carry on the business and not the separate legal entity. Therefore, despite the fact that XXXX has separate legal status, it is a partnership that is also a limited partnership within the meaning of section 995-1.

As a result, XXXX is eligible to be a FHLP in the 20YY income year within the meaning of subsection 830-10(1) provided the other conditions in that subsection are satisfied.

The conditions in paragraph (a) to (d) of subsection 830-10(1) are satisfied for the 20YY income year for the following reasons:

(a)  As concluded above, XXXX, is a limited partnership and was formed under the DRUPA in the XXX.

(b)  As a partnership, XXXX is not subject to taxation in the XXX at the level of the partnership and the partners will instead be taxed.

(c)  XXXX is not a resident of any other country.

(d)  Disregarding subsection 94D(5) of the ITAA 1936, at no time during the 20YY income year is XXXX an Australian resident since it would be a CLP that is not a resident of Australia under subsection 94T(1) of the ITAA 1936.

Paragraph 830-10(1)(e) is not satisfied because XXXX is not a CFC as at 30 June 20YY and Company A is not an attributable taxpayer in relation to XXXX.

Therefore, XXXX is not a FHLP under subsection 830-10(1).

Election to be a FHLP in relation to a partner - subsection 830-10(2)

A limited partnership, may however, be a FHLP in relation to a partner's interest in the limited partnership in relation to an income year, if a partner is not an attributable taxpayer in relation to the limited partnership and makes an election under paragraph 830-10(2)(b) in relation to the partner's interest in the partnership.

Company A is a partner in XXXX that is not an attributable taxpayer in relation to XXXX. Company A is therefore eligible to make the election under paragraph 830-10(2)(b) for the 2023 income year, provided it satisfies the conditions to make an election set out in subsection 830-10(4).

Subsection 830-10(4) - conditions to make an election

Subsection 830-10(4) states that the election can only be made under paragraph 830-10(2)(b) if:

(a)  disregarding subsection 94D(6) of the Income Tax Assessment Act 1936:

(i)   at the end of the income year in which the election is made, the partner has an interest in a FIF (within the meaning of former Part XI of that Act) that is a corporate limited partnership; and

(ii)   the interest consists of a share in the FIF; and

(b)  the limited partnership satisfies paragraphs (1)(a) to (d) in relation to the income year in which the election is made.

Subsection 94D(6) of the ITAA 1936 provides that if a limited partnership is a FHLP in relation to a year of income because of subsection 830-10(2), the partnership is not treated as a CLP in relation to a partner's interest in relation to that year of income for the purposes of applying the ITAA 1936 and ITAA 1997 in relation to the partner's interest in the limited partnership.

Paragraph 830-10(4)(a) requires subsection 94D(6) of the ITAA 1936 to be disregarded when determining if the conditions in paragraph 830-10(4)(a) are satisfied - i.e. it allows a partner's interest in a limited partnership to be treated as an interest in a CLP in relation to the partner's interest.

It is assumed that Company A will make the election under subsection 830-10(2)(b) for the 2023 income year.

Company A is able to make the election for the 20YY income year under subsection 830-10(2)(b) if, disregarding subsection 94D(6) of the ITAA 1936:

•         at the end of the 20YY income year, XXXX is a FIF under former Part XI of the ITAA 1936 that is also a CLP;

•         Company A has an interest in XXXX at the end of the 20YY income year and that interest consists of a share in XXXX; and

•         XXXX satisfies paragraphs (1)(a) to (d) in relation to the 20YY income year.

XXXX is a FIF at the end of the 20YY income year

XXXX is a CLP under section 94D of the ITAA 1936 in relation to the 20YY income year. By virtue of section 94J of the ITAA 1936, a reference in the income tax law (subject to some exclusions) to a 'company' includes a reference to a CLP. Therefore, on the basis XXXX is a CLP, it is also a company for the purposes of the definition of a 'FIF'.

Former subsection 481(1) of the ITAA 1936 defined an entity as a 'FIF' at a particular time if the entity is a 'foreign company' or a 'foreign trust'. Former subsection 481(2) of the ITAA 1936 provided that a company is a foreign company at a particular time if at that time the company is not a 'Part XI Australian resident'. On the basis that XXXX is a CLP which is considered to be a company, it is also a FIF if it is not a 'Part XI Australian resident'.

Part XI Australian resident

Former section 470 of the ITAA 1936 provides that 'Part XI Australian resident' means a resident within the meaning of section 6 of the ITAA 1936 but excluding an entity that is a dual resident under a DTA and is deemed to be a resident solely of the foreign country.

Under paragraph 94T(1)(b) of the ITAA 1936, a CLP that is a partnership is a resident within the meaning of section 6 of the ITAA 1936 if it satisfies the conditions in paragraphs 94T(1)(e) and (f) of the ITAA 1936. XXXX is not a resident under subsection 94T(1) of the ITAA 1936 and consequently also not a resident under section 6 of the ITAA 1936.

XXXX is therefore not a Part XI Australian resident and is a FIF.

Interest in a FIF

As a limited partner of XXXX, Company A therefore has an interest in a FIF that is a CLP as at 30 June 20YY. Therefore, subparagraph 830-10(4)(a)(i) is satisfied.

Share in a FIF

Former subsection 483(1) of the ITAA 1936 defined an interest in a FIF that is foreign company to include a share in the company. Under section 94P of the ITAA 1936, a reference in the income tax law to a 'share' includes a reference to an interest in a CLP. On the basis that Company A's interest in XXXX is an interest in a CLP, that interest is also deemed to be a share in a FIF.

Therefore, the requirements in subparagraph 830-10(4)(a)(ii) and paragraph 830-10(4)(a) are satisfied.

As discussed, XXXX satisfies the requirements in paragraphs 830-10(1)(a) to (d) in relation to the 20YY income year. Therefore, Company A satisfies all the conditions in subsection 830-10(4) required to make an election under paragraph 830-10(2)(b) for the 2023 income year in relation to its interest in XXXX.

The election under paragraph 830-10(2)(b) must be made on or before the day on which Company A lodges its income tax return for the 20YY income year or within a further time allowed by the Commissioner (subsection 830-10(5)).

On the assumption that Company A will make an election on or before the day on which it lodges its 20YY income tax return, XXXX will be a FHLP in relation to the 20YY income year and subsequent income years. This is on the basis the election remains in force for all later income years and is irrevocable under subsection 830-10(6).

Question 2

Summary

Yes. By virtue of subsection 23AH(10) of the ITAA 1936, the partnership distributions received by Company A as a limited partner in XXXX will constitute foreign income derived by Company A from carrying on a business at or through a permanent establishment (PE) in the XXX and be non-assessable non-exempt income under subsection 23AH(2) of the ITAA 1936.

Detailed reasoning

Subsection 23AH(2) of ITAA 1936

Under subsection 23AH(2) of the ITAA 1936, foreign income derived by a company, at a time when the company is a resident, in carrying on a business at or through a PE of the company in a listed country or unlisted country is not assessable income, and is not exempt income, of the company.

Subsection 23AH(2) therefore contains the following basic conditions in relation to a company:

•         the company must be a resident and derive foreign income;

•         the company must carry on a business at or through a PE in a listed or unlisted country; and

•         the foreign income must be derived by the company in carrying on that business at or through that PE.

Resident company

Under subsection 23AH(15) of the ITAA 1936, a company does not include a company in the capacity of a trustee. In relation to the investment in XXXX, Company A is acting in its own right and not as the trustee of a trust. Company A is a company that is incorporated in Australia and is therefore a resident of Australia in accordance with the definition of that term under paragraph 6(1)(b) of the ITAA 1936.

Foreign income

The term 'foreign income' is defined in subsection 6AB(1) of the ITAA 1936 as follows:

A reference in this Act to foreign income is a reference to income (including superannuation lump sums and employment termination payments) derived from sources in a foreign country or foreign countries, and includes a reference to an amount included in assessable income under section 102AAZD, 456, 457 or 459A of this Act, or section 305-70 of the Income Tax Assessment Act 1997.

Emphasis added

Foreign income is also defined in subsection 23AH(15) of the ITAA 1936 to include an amount that:

(a)          apart from this section, would be included in assessable income under a provision of this Act other than Part 3-1 or 3-3 of the Income Tax Assessment Act 1997 (CGT); and

(b)          is derived from sources in a listed country or unlisted country.

As a result of the election under subsection 830-10(2), Company A's interest in XXXX will be an interest in a FHLP for the purposes of section 23AH of the ITAA 1936. Company A will derive income in the form of a partnership distribution from XXXX which is a partnership that carries on its activities in the XXX and generates income that is attributable to sources in the XXX. The income derived by Company A as a partner in XXXX will be included in its assessable income under section 92 of the ITAA 1936 and will be foreign income for the purposes of subsection 23AH(2) of the ITAA 1936.

Carry on business at or through a PE in a listed or unlisted country

Listed country

Under subsection 23AH(15) of the ITAA 1936, listed country and unlisted country has the same meaning as in Part X of the ITAA 1936. Under section 320 of Part X of the ITAA 1936, a listed country means a foreign country that is declared by the regulations to be a listed country. The XXX is a listed country under section 19 of the ITAR (1936 Act) 2015.

Meaning of PE

Under subsection 23AH(15) of the ITAA 1936, if there is a double tax agreement (DTA) in place, PE has the meaning in that treaty. If there is no DTA in place, PE has the meaning given by subsection 6(1) of the ITAA 1936.

The current agreements between Australia and the XXX are:

•         theXXX convention, meaning the Convention between the Government of Australia and the Government of the XXXX for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, done at Sydney on 6 August 1982; and

•         the XXX protocol (No.1), meaning the protocol, done at Canberra on 27 September 2001, amending the XXX convention.

Therefore, the relevant DTA here is the XXX convention (as amended by the XXX protocol (No.1)) and the meaning of PE for the purposes of section 23AH is the meaning in the XXX convention.

Article 5 of the XXX convention deals with PEs.

•         Under Article 5(1), the term 'PE' means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

•         Under Article 5(2), a PE specifically includes a place of management, a branch and an office.

•         Under Article 5(4), a PE is deemed to exist if an enterprise carries on business in another State through a person, other than an agent of independent status to whom Article 5(5) applies, who has authority to conclude contracts on behalf of that enterprise and habitually exercises that authority in that other State, unless the activities of such person are limited to those mentioned in Article 5(3).

•         Under Article 5(5), a PE shall not be deemed to exist merely because the enterprise carries on business through a broker, general commission agent, or any other agent of independent status, where such broker or agent is acting in the ordinary course of his business as a broker, general commission agent or other agent of independent status.

Does Company A carry on business at or through a PE?

While it is acknowledged that Company A carries on a business that includes investing in foreign limited partnerships, those business activities really take place in Australia rather than at or through a PE in the XXX. Company A itself therefore does not carry on a business at or through a PE and must instead rely on other provisions (examined below) to satisfy subsection 23AH(2) of the ITAA 1936.

Interposed partnerships

As a result of the election under subsection 830-10(2), Company A's interest in XXXX will be an interest in a FHLP for the purposes of section 23AH of the ITAA 1936, rather than a share in a CLP.

Subsection 23AH(10) of the ITAA 1936 is therefore relevant and provides:

This section applies to any indirect interest (through one or more partnerships or trust estates) of a company in foreign income derived by a partnership or trustee through a PE of the partnership or trustee in a listed country or unlisted country as if that indirect interest were foreign income derived by the company through a PE of the company in that country.

Emphasis added

Where subsection 23AH(10) of the ITAA 1936 applies, the company's indirect interest in foreign income derived by the relevant partnership is deemed to be foreign income derived by the company through a PE. As a partner in XXXX, Company A has an indirect interest in any foreign income derived by the partnership. Therefore, subsection 23AH(2) of the ITAA 1936 would, by virtue of subsection 23AH(10) of the ITAA 1936, apply as if Company A's indirect interest itself was foreign income derived at or through a PE of Company A's in the XXX.

Although subsection 23AH(10) of the ITAA 1936 deems the taxpayer to derive income at or through a PE of the taxpayer, it does not explicitly deem the taxpayer to carry on business through that PE. However, paragraph 23AH(1)(c) of the ITAA 1936 confirms that the object of subsection 23AH(10) of the ITAA 1936 is, where partnerships are interposed between a resident company and a foreign branch, to get the same outcomes for the company as if they were not interposed (i.e. the PE was held directly by the resident company). Accordingly, where the partnership has derived foreign income in carrying on a business at or through a PE, subsection 23AH(10) of the ITAA 1936 has the effect that subsection 23AH(2) of the ITAA 1936 applies as though the resident company was placed in the shoes of the partnership and carries on the business of that partnership at or through that PE.

Does XXXX have a PE?

XXXX could be considered to have a PE under Article 5(4) of the XXX convention, on the basis XXXX carries on a business through the GP who is a person who has authority to conclude contracts on behalf of the partnership and who habitually exercises that authority in the XXX, where such activities are not limited to those mentioned in Article 5(3) and where the GP is not an agent of independent status to whom Article 5(5) applies. According to the OECD's Commentary on Article 5 of the Model Tax Convention, a partner acting on behalf of a partnership would not be acting as an agent of independent status.

Does XXXX carry on business at or through its principal office or through the GP?

It is acknowledged that:

•         the primary purpose of XXXX and its main business is investing in securities;

•         the partnership has granted the GP the sole right to manage, conduct and control the business and the affairs of the partnership;

•         the GP has a right to delegate these managerial rights and has delegated all investment advisory authority to the appointed IM pursuant to an executed Management Agreement;

•         the IM is responsible for all investment decisions of the partnership; and

•         under this delegated authority, the IM may, without obtaining the prior approval of the GP, trade and invest the partnership's assets in accordance with the terms of the Management Agreement.

Here, the facts point to the GP, a dependent agent, habitually exercising its power to conclude contracts on behalf of the partnership. All the contracts are executed in the name of the GP, even though it has delegated that function to the IM. The IM acts purely as an agent for the GP and is not liable for any losses made in connection with the services provided. The GP and indirectly XXXX (and each partner of XXXX) bears the consequences of the success or failure of the IM. It is also noted that the activities of the GP are not limited to those mentioned in Article 5(3). XXXX therefore carries on business through the GP which is a PE under Article 5(4) of the XXX convention.

Conclusion

On the basis that XXXX carries on a business through its GP, which is based in the XXX, and is deemed to have a PE under Article 5(4) of the XXX convention, Company A, as a partner that has an indirect interest in the partnership will also be considered, as a result of subsection 23AH(10) of the ITAA 1936, to also be carrying on a business at or through a PE in the XXX for the purposes of subsection 23AH(2) of the ITAA 1936. The income derived by Company A as a partner in XXXX will qualify for the exemption under subsection 23AH(2) of the ITAA 1936 as non-assessable and non-exempt foreign income.

The exception to subsection 23AH(2) of the ITAA 1936 under subsection 23AH(5) of the ITAA 1936 will not apply since it is assumed that the foreign income will not be EDCI in relation to the XXX for the ruling period.

Question 3

Summary

No. No part of Company A's share of foreign income derived as a limited partner in XXXX constitutes BHMI for the purposes of subsection 23AH(4A) of the ITAA 1936.

Detailed reasoning

Subsection 23AH(4A) of the ITAA 1936 provides that subsection 23AH(2) of the ITAA 1936 does not apply to foreign income derived by the company if the foreign income is 'BHMI'.

BHMI

Subsection 23AH(14C) of the ITAA 1936 provides that BHMI is so much of foreign income derived by the company that does not exceed the amount of the 'branch hybrid mismatch' (BHM), if for the purposes of Division 832, the foreign income is a payment:

(a)          received by the company; and

(b)          that, apart from subsection (4A) of this section, would give rise to a branch hybrid mismatch.

In broad terms, the hybrid mismatch rules are contained in Division 832. A hybrid mismatch will arise if an entity enters into a scheme that gives rise to a payment and the payment gives rise to a deduction/non-inclusion mismatch or a deduction/deduction mismatch. The mismatch must fall within one of 6 types of mismatches. The BHM is one of the mismatches. If the mismatch arises, it is neutralised by disallowing the deduction or including an amount in assessable income.

BHM

Under subsection 832-470(1), a payment gives rise a BHM if:

(a)          the payment gives rise a hybrid mismatch under section 832-475; and

(b)          subsection (3) or (4) applies.

Subsection 832-470(3) applies if the entity that made the payment and the 'branch hybrid' are in the same 'Division 832 control group'. Company A and XXXX are not part of the same Division 832 control group and subsection 832-470(3) does not apply.

Subsection 832-470(4) applies if the payment is made under a 'structured arrangement'. Under section 832-210, a payment that gives rise to a hybrid mismatch is made under a structured arrangement if:

(a)          the hybrid mismatch is priced into the terms of a scheme under which the payment is made; or

(b)          it is reasonable to conclude that the hybrid mismatch is a design feature of a scheme under which the payment is made.

There is no hybrid mismatch (see below) and no structured arrangement. Company A is simply investing in an unrelated XXX limited partnership on an arm's length basis and subsection 832-470(4) does not apply.

Therefore, there is no BHM and no BHMI under subsection 23AH(14C) of the ITAA 1936. No part of Company A's share of foreign income from its partnership distributions from XXXX will be BHMI for the purposes of subsection 23AH(4A) of the ITAA 1936.

Hybrid mismatch

Under section 832-475, a payment gives rise to a hybrid mismatch if:

(a)          the payment gives rise to a deduction/non-inclusion mismatch; and

(b)          the mismatch, or a part of the mismatch, meets the hybrid requirement in section 832-480.

Deduction-non-inclusion (D/NI) mismatch

Section 832-105 explains when a payment gives rise to a D/NI mismatch. There is no D/NI mismatch since no party is claiming a deduction in any jurisdiction. Neither Company A nor XXXX is claiming a deduction for the payment of a partnership distribution. Therefore there is no hybrid mismatch.

In summary, no part of the foreign income received by Company A will be BHMI for the purposes of subsection 23AH(4A) of the ITAA 1936.