Three control tests
A CFC is a non-resident company that satisfies one of three control tests. Whether a company is a resident of a foreign country is determined according to the Australian tax law as modified by double taxation agreements with other countries.
The three control tests are the:
- strict control test
- assumed controller test, and
- de facto control test.
Strict control test
A foreign company will be treated as a CFC under the strict control test if a group of five or fewer Australian '1 per cent entities', together with their associates, own or are entitled to acquire a control interest of at least 50% in the foreign company.
An Australian 1 per cent entity is an Australian entity that, together with its associates, holds an interest of at least 1% in the foreign company.
An Australian entity is an Australian partnership, an Australian trust, or an entity - other than a partnership or trust - that is a Part X Australian resident. A Part X Australian resident is a resident of Australia who is not treated solely as a resident of another country under a double taxation agreement between Australia and that country.
The associate-inclusive control interest of an entity is the sum of interests held by the entity and its associates in the foreign company. Interests that the entity and its associates are entitled to acquire are also taken into account.
Example 1: Strict control test
This test will be satisfied if three Australian residents each hold interests of 30%, 10% and 10% respectively in a foreign company.
End of exampleAssumed controller test
A foreign company will normally be treated as a CFC under the assumed controller test if a single Australian entity owns, or is entitled to acquire, an associate-inclusive control interest of at least 40% in the foreign company. An entity's associate-inclusive control interest in a foreign company is the sum of the interests held in the company by the entity and the associates of the entity. A foreign company will not be treated as a CFC under the assumed controller test, however, if the company is controlled by a party or parties unrelated to the single resident or its associates.
Example 2: Assumed controller test
If an Australian entity holds 45% of the interests in a foreign company and the remaining 55% is held by several non-residents, it would be assumed under this test that the Australian controls the foreign company.
End of exampleDe facto control test
A foreign company will be treated as a CFC under the de facto control test if a group of five or fewer Australian entities, either alone or with associates, effectively control the foreign company.
Example 3: De facto control test
If an Australian entity can control the appointment of the directors of a foreign company, the Australian entity will generally be taken to have de facto control of that foreign company.
End of example