Foreign incorporated companies relocating central management and control

Practical Compliance Guide (PCG) 2018/9 provides a transition period for foreign incorporated companies to change their governance arrangements so that they do not become Australian residents solely because their central management and control (CM&C) are located in Australia.

The transitional period ends on 30 June 2019.

To be eligible for the transitional compliance approach a foreign incorporated company must meet the following conditions:

• immediately prior to the withdrawal of TR 2004/15, it must have:
  • relied on this ruling and, on this basis, was not a resident of Australia;
  • had not undertaken or entered any artificial or contrived arrangements that affected the location of its CM&C, or any tax avoidance scheme whose outcome depends, in whole or part, on it being a non-resident; and
• it must be an ordinary company and not a foreign hybrid; and
• it would become an Australian resident under the Australian Tax Office (ATO)’s revised view in TR 2018/5, solely because its CM&C is located in Australia.

The ATO will not apply resources to review or seek to disturb a foreign incorporated company’s status as a non-resident, provided during the transitional period it:

• changes its governance arrangements, to ensure its CM&C is exercised outside Australia by the transitional period;
• does not commence carrying on business in Australia, other than around its CM&C; and
• does not undertake or enter any artificial or contrived arrangements that affect the location of its CM&C, or any tax avoidance scheme whose outcome depends, in whole or part, on it being a non-resident.

Impact of becoming an Australian resident

If a foreign incorporated company becomes an Australian resident, the potential Australian income tax consequences include:

• if the foreign incorporated company is a 100% subsidiary of the head company of an income tax consolidated group and not a prescribed dual resident, it may become a subsidiary member of the group. This could generate tax cost setting in accordance with the ACA method, capital gains under CGT event L3 or L5, and denial of deductions;
• the foreign incorporated company becoming subject to Australian income tax, though concessions may apply, such as active foreign branch exemption in section 23AH;
• the non-portfolio dividend exemption in Subdivision 768-A no longer being available in relation dividends or non-share equity distributions paid by the foreign incorporated company; and
• the active foreign business asset exemption in Subdivision 768-G no longer being available to reduce a capital gain made on the sale of shares in the foreign incorporated company.