Chapter 3 Taxation of foreign dividends and branch profits

This chapter explains the taxation treatment of foreign dividends and of branch profits derived by Australian companies.

Part 1	Taxation of foreign dividends
Part 2	Taxation of branch profits

Part 1 Taxation of foreign dividends

This part explains how dividends and other distributions paid by a foreign company are taxed in Australia. This can occur in two ways:

• when a resident taxpayer is taxed on a dividend or other distribution received from a non-resident company, or
• when an attributable taxpayer in relation to a controlled foreign company (CFC) or a controlled foreign trust is liable to tax on the taxpayer’s share of a dividend paid by an unlisted country CFC directly or indirectly to another CFC or controlled foreign trust.

Section 1	How do you treat a distribution received from a foreign resident company?
Section 2	What if a CFC receives a dividend from another CFC?
Section 3	When is a CFC deemed to have paid a dividend?

Section 1 How do you treat a distribution received from a foreign resident company?

Subdivision 768-A in the ITAA 1997 determines whether distributions from a foreign company are non-assessable non-exempt income. A foreign equity distribution on participation interests will be non-assessable and non-exempt income for these purposes if:

• the entity receiving the distribution is an Australian resident corporate tax entity (including public trading trusts, corporate unit trusts, and corporate limited partnerships)
• the Australian corporate tax entity receiving the distribution has a 10% or greater participation interest in the foreign company that paid the distribution (this participation test must be satisfied at the time the foreign equity distribution is made; for more information, see TR 2017/3 Income tax: distributions from foreign companies - meaning of 'at the time the distribution is made' when applying the participation test), and
• the entity does not receive the distribution in the capacity of a trustee; or the entity receives the distribution in the capacity of a trustee of a corporate unit trust or public trading trust.

A foreign equity distribution is a distribution or non-share dividend, made by a company that is a foreign resident, in respect of an equity interest in the company. A non-share dividend is a dividend on a non-share equity interest. A non-share equity interest is an equity interest in a company that is not solely a share.

An entity is taken to have a participation interest in relation to another entity if at that time the sum of the following is at least 10%:

• the direct participation interest the entity would have in the other entity if rights on winding-up were disregarded
• the indirect participation interest the entity would have in the other entity if  
  • rights of winding-up were disregarded, and
  • section 960-185 only applied to intermediate entities that are not corporate tax entities.
   

Both direct and indirect participation interests are defined in subdivision 960-GP.

Foreign equity distributions received through interposed trusts and partnerships

A foreign equity distribution received or derived indirectly:

• by an Australian resident corporate tax entity, through  
  • an interposed trust, or
  • partnership, or
  • both
   
• from a company that is a resident of a foreign country

is non-assessable non-exempt income, where the conditions in subsection 768-5(2) are met.

The foreign equity distribution will not be non-assessable non-exempt income where it flows through an interposed trust or partnership that is a corporate tax entity (section 768-5(2)(c)).

Overall, a foreign equity distribution will be non-assessable non-exempt income for an Australian beneficiary or partner where:

• the amount is ultimately received by an Australian corporate beneficiary of a trust, or an Australian corporate partner in a partnership
• the amount would otherwise be included in the trust or partnership’s assessable income under Division 5 or 6 of Part III of the ITAA 1936
• the amount can be attributed, either directly or indirectly through one or more interposed trusts and partnerships that are not corporate tax entities, to a foreign equity distribution
• at the time distribution is made, the trust or partnership satisfies the participation test, and
• the Australian beneficiary or partner does not receive the distribution in the capacity of a trustee (unless it is received in the capacity of a trustee of a corporate unit trust or public trading trust).

Distributions of attributed income: maintaining records to support a claim that an amount is not assessable

Attribution accounts

To be able to work out what distributions out of a CFC’s attributed income are non-assessable non-exempt income, you will need to keep certain records called attribution accounts.

You must maintain an attribution account for:

• each CFC from which income is attributed to you; this account will contain a record of  
  • income attributed to you from the CFC, and
  • income distributed to you by the CFC which is treated as distributed from attributed income
   
• each entity through which the income of that CFC is distributed to you; these entities may be  
  • partnerships
  • trusts, or
  • companies that are not Part X Australian residents
   
• each CFC that has changed residence from an unlisted country to Australia. Distributions paid by a company out of profits which were attributed to you before the company becoming a resident of Australia are non-assessable non-exempt income.

These accounts are used to keep track of profits that have been taxed on an accruals basis so that you determine what amounts are non-assessable non-exempt income when you receive a distribution from those profits.

An attribution account maintained by you for a CFC is specific to you; this means that when you sell shares in a CFC, you cannot transfer the attribution account to the purchaser of the shares.

Tracing the path of distributions of attributed income

There are a number of ways you can receive amounts that were paid from profits that have previously been attributed to you. In general, these amounts will be distributed to you as a dividend. The dividend may be distributed to you directly, or indirectly through a chain of companies, partnerships, or trusts.

When are attribution account payments made?

To work out your exemption, you will need to know the date on which attribution account payments are taken to have been made.

The following table sets out:

• the types of attribution account payments that can occur
• the entities that are treated as making and receiving an attribution account payment
• the date on which the payment is taken to be made.

When are attribution account payments made?

Type of attribution payment	Entity making payment	Entity receiving payment	Date payment made
Dividend	Paying company	Shareholder	On date dividend is paid
Partner’s share in the net income of a partnership	Partnership	Partner	At the end of the income year of the partnership
Share of the net income of a trust estate equal to the beneficiary’s present entitlement	Trust	Beneficiary	At the end of the income year of the trust
Whole or part of the net income of a trust estate is assessable to the trustees. Sections 99 or 99A	Trust	Trustee	At the end of the income year of the trust
Other distribution of accumulated trust income	Trust	Beneficiary	Income year in which the distribution was made

What accounting entries should you make?

As mentioned earlier, attribution accounts link distributions a CFC has made to you (either directly or through other entities) to the income of the CFC that has already been attributed to you. The link is made when you:

• debit the attribution account of the entity that makes the payment, and
• credit the account of the entity that receives the payment.

Continue this process down a chain of entities until you receive a distribution made by the CFC.

Proportionate interests in the CFC and in interposed entities

A resident taxpayer might hold only a proportion (that is, less than 100%) of the interests in a CFC. That interest may be held directly or indirectly through interests in other foreign entities.

If you hold an interest of less than 100% in a CFC, only a proportion of the attributable income of the CFC is included in your assessable income. The proportion you use depends on the interest (called the attribution percentage) you have in the CFC; see chapter 1.

When tracing a distribution made by a CFC through a chain of interposed entities to yourself, note any proportionate interests you have in any of these entities.

Your interest in the CFC, and in each interposed entity, is called your attribution account percentage. This interest may differ from your attribution percentage in an entity. The foreign entities in the chain, along which the attributed income of the CFC is later distributed to you, need not necessarily be controlled foreign entities.

If you have both direct and indirect attribution account interests in an entity, then your attribution account percentage in that entity is the sum of the interests as follows:

Attribution account percentage

=

Direct attribution account interest

+

Indirect account attribution interest

How do you work out your direct attribution account interest in an entity?

Your direct attribution account interest in an entity will depend on the type of entity it is.

If the entity is a foreign company, your direct attribution account interest in the company is the same as your direct attribution interest in that company.

If the entity is a partnership of which you are a partner, your direct attribution account interest is the percentage that you hold (and any percentage you are entitled to acquire) of either:

• the partnership’s profits, or
• the partnership’s property.

If the two percentages differ, use the higher percentage as your direct attribution account interest.

Your interest in a partnership is measured at the end of the accounting period in which the dividend is distributed through the partnership to you. The date of the dividend payment is called the test time. You should assume that you held the same interest in the profits and property of the partnership throughout the accounting period that you held at the test time. When working out your interest in the profits, use the amount of profit for the whole of the period.

If the entity is a trust of which you are a beneficiary, your interest in the trust is the percentage of either the income or property of the trust to which you are presently entitled, and any percentage you are entitled to acquire. If the two percentages differ, use the higher percentage as your attribution account interest.

As in the case of an interest in a partnership, your interest in a trust is measured at the end of the accounting period of the trust in which the dividend is distributed through the trust to you: the date of this payment is called the test time. You should assume that you held the same interest in the income or property of the trust throughout the accounting period as you held at the test time. When working out your interest in the income, use the amount of income earned for the whole period.

How do you work out your indirect attribution account interest in an entity?

Your attribution account percentage in an entity is the sum of your direct and indirect attribution account interests in that entity. To work out your indirect interest in an entity (Entity B) which is held through another entity (Entity A), multiply your direct interest in Entity A by Entity A’s direct interest in Entity B.

If there are more than two entities in a chain, continue the process of multiplication along the chain until you reach the entity in which you are measuring your indirect interest.

 

 

When should you make a credit in an attribution account?

You must make a credit in an attribution account if you include an amount in your assessable income because an amount of the CFC’s income has been attributed to you (section 456). The credit amount will be the amount of the attributed income included in your assessable income under section 456 without any addition for foreign or Australian tax paid by the CFC on that income. You must enter the credit at the end of the CFC’s statutory accounting period. Where a company is a CFC at the beginning of its statutory accounting period but ceases to exist during that period, the statutory accounting period is deemed to end immediately before the company ceases to exist. However, in this circumstance, the credit arises at the beginning of the statutory account period.

An amount is included in your assessable income under section 457 where the CFC has both:

• ceased to be a resident of an unlisted country, and
• become a resident of a listed country or of Australia.

Where section 457 applies, the amount of the credit will be the amount you included in your assessable income under section 457, without any addition for foreign or Australian tax the CFC paid on that amount. You must normally enter the credit at the time the CFC changed residence. However, you have the option to defer the credit to the extent it relates to an amount included in attributable income under section 457 for an unrealised gain on a tainted asset.

The credit may be deferred until immediately before the CFC pays a dividend out of profits arising from the subsequent disposal of the asset.

You must also make a credit in an entity’s attribution account if:

• that entity receives an attribution account payment from another entity, and
• the payment gives rise to an attribution debit for the paying entity.

The credit amount will be the same as the attribution debit. You must enter the credit on the date of the attribution account payment.

How are credits made when the taxpayer is an Australian partnership or Australian trust?

Only the taxpayer who is actually liable to tax on the attributed income of the CFC can obtain an exemption from tax for distributions of that income. While the Australian partnership is the attributable taxpayer and has attributable income included in its net income, it is the partners of the partnership that are liable for tax in respect of this income as their assessable income includes their share of the net income of the partnership.

A similar result applies in relation to presently entitled trust beneficiaries where the net income included in a presently entitled trust beneficiary’s assessable income includes income attributed to the trust under the CFC provisions.

The attribution accounts are intended to ensure that only the relevant partners or trust beneficiaries are entitled to the exemption on distributions of previously attributed income. In these cases, the partners or beneficiaries keep attribution accounts in respect of the relevant CFCs and partnerships or trusts; for attribution account purposes, these entities are known as ‘attribution account entities’.

This means that if the income of a CFC is attributed to an Australian partnership (which may include a foreign hybrid limited partnership or foreign hybrid company) or Australian trust, the credit made in the CFC’s account is for the partner of the partnership or for the trust beneficiary who is presently entitled to the trust income. If there is no such beneficiary, the credit arises for the trustee.

The credit does not normally arise directly for the partnership or trust itself. There is an exception where the trust is a corporate unit trust, a public trading trust, an approved deposit fund, an eligible superannuation fund or a pooled superannuation trust; there is also an exception for Australian corporate limited partnerships, which are treated as Australian companies for tax purposes.

The amount of the credit made for the partner of a partnership is equal to the increase in the amount included under section 92 in the partner’s assessable income, resulting from attributed income being included in the partnership net income. For a trust beneficiary, the credit equals the increase in the amount included under section 97, 98A or 100 in the beneficiary’s assessable income, resulting from attributed income being included in the trust net income; the amount calculated is called the ‘tax detriment’.

When should you make debits in attribution accounts?

You must make an attribution debit in an entity’s attribution account if that entity makes an attribution account payment to either:

• an attributable taxpayer, or
• another attribution account entity.

You must also observe the following two rules:

• You can only make a debit if there is an attribution surplus in the attribution account at the time the attribution account payment is made: that is, the account balance must be more than nil.
• The debit cannot be more than the amount of the surplus in the account at the time.

What is the amount of the attribution debit?

Again, there are two rules to observe:

• If an entity makes an attribution account payment to a resident taxpayer, the debit is the same as the amount of the payment.
• If the entity makes an attribution account payment to another entity, the debit will equal the resident taxpayer’s attribution account percentage of the payment received by the second entity.

How are debits made when the attributable taxpayer is an Australian partnership or Australian trust?

If a CFC makes an attribution account payment to an Australian partnership, an attribution debit will arise for the CFC in relation to a partner in the partnership provided that, immediately before the payment is made, there is an attribution account surplus for the CFC in relation to the partner.

The amount of the attribution debt is the lesser of:

• the attribution surplus for the CFC in relation to the partner, and
• the partner’s attribution account percentage (in the partnership) of the attribution account payment.

Similarly, an attribution account payment made by a CFC to an Australian trust will give rise to an attribution debit for the CFC in relation to a beneficiary of the trust where there is an attribution account surplus for the CFC in relation to the trust: in this case, the attribution debit will be the lesser of:

• the attribution account surplus for the CFC in relation to the beneficiary, and
• the beneficiary’s attribution account percentage (in the trust) of the attribution account payment.

Where such a debit is made for a CFC in relation to a partner in a partnership or beneficiary in a trust, a corresponding attribution credit must also be made for the partnership in relation to the partner or the trust in relation to the beneficiary. This is so that, when calculating the partner’s share of the partnership net income, or the beneficiary’s share of the trust net income, at year end, there is an attribution account surplus against which to debit the attribution account payment arising from that calculation.

Dividends other than non-portfolio dividends

Portfolio dividends are generally taxable unless they are paid from profits taxed previously on an accruals basis. Portfolio dividends are dividends that do not qualify as non-portfolio dividends.

You must maintain an attribution account for each CFC from which income is attributed to you. For an explanation of how these accounts are maintained, see Attribution accounts.

Section 2 What if a CFC receives a dividend from another CFC?

Sub-division 768-A of the ITAA 1997 is also applied in determining the attributable income of a controlled foreign company (CFC) to which a foreign company distribution is made.

Section 3 When is a CFC deemed to have paid a dividend?

It is possible that a resident taxpayer with an interest in an unlisted country CFC may try to minimise Australian tax by arranging for the CFC to distribute benefits in a form other than dividends to its shareholders or their associates.

There are rules to prevent this form of tax avoidance in section 47A. These rules deem certain transfers and payments made by an unlisted country CFC to be dividends; these dividends are then taxed in the normal way.

For section 47A to apply, a CFC must provide a benefit to:

• a resident who is a shareholder or an associate of a shareholder of the CFC, or
• another CFC or controlled foreign trust, directly or through other entities, where the first entity that received the dividend is a shareholder or an associate of a shareholder of the CFC.

When should you deem a dividend to have been paid by a CFC?

Types of benefits that are covered under section 47A

The following seven types of benefits provided by a CFC could be treated as dividends:

1. the waiver by the CFC of a debt owed by another entity
2. the grant by the CFC of a non-arm’s-length loan to another entity
3. the grant by the CFC of a loan (whether at arm’s length or not) to another entity to facilitate, directly or indirectly, the payment by that entity of a dividend that would be non-assessable non-exempt income
4. the transfer by the CFC to another entity of property or services for no consideration, or for inadequate consideration
5. a payment made by the CFC for allotment of    
   • shares in a company
   • rights or options to acquire shares
   • units in a unit trust, or
   • rights or options to acquire units
    
6. a payment made by the CFC in respect of calls on shares in another company
7. the grant by the CFC of a loan (whether at arm’s length or not) to another entity to facilitate a transaction of the type referred to in any of the above points.

Treat the fifth and sixth types of payments as dividends only if:

• a shareholder of the CFC (or shareholder’s associate) holds any direct interest, or later acquires any direct interest, in any of the shares of the company in which the CFC acquired shares or in the unit trust in which the units were acquired, or
• the company (or unit trust) uses the proceeds of the issue to facilitate a transaction providing any of the above types of benefits.

Entities providing and receiving the benefit

For a benefit to be treated as a deemed dividend, the benefit must be provided by the CFC to a shareholder or an associate of a shareholder.

The benefit must be provided by either:

• an unlisted country CFC, or
• another entity under an arrangement with the CFC, where the CFC has transferred property or services in consideration for the benefit to:    
  • the other entity, or
  • any other entity.
   

These transfers of property or services are referred to as arrangement transfers.

The time the benefits are deemed to have been provided

The following table sets out some of the types of benefits provided by a CFC that are subject to section 47A, the time at which they are taken to be provided and the amount of the benefit.

Some types of benefits provided by a CFC

Type of benefit	Time	Amount
Waiver of a debt	Time the debt was waived	Amount of the debt
Non-arm’s-length loan	Time the loan was made	Amount of the loan
Transfer of property for no consideration	Time the property was transferred	Market value at time of transfer
Transfer of property or services for a consideration less than market value	Time the property or services were transferred	Difference between the market value of the property or services and the consideration paid
Payment or transfer of property for the allotment of shares or units	Time the payment or transfer was made	Amount paid or market value of the property transferred
Benefit provided by another entity under an arrangement with the CFC (if there is one ‘arrangement transfer’)	Time the CFC made the arrangement transfer	Amount of the arrangement transfer or market value of arrangement transfer
Benefit provided by another entity under an arrangement with the CFC (if there are several arrangement transfers)	Time the agreement to make the arrangement transfers was entered into	Total amount of the arrangement transfers or the total market value of the arrangement transfers

Working out the amount of the deemed dividend

The amount of a benefit that can be treated as a dividend paid by a CFC cannot be more than the CFC’s profits at the time the benefit was provided.

In this context, ‘profits’ do not mean distributable profits: ‘profits’ in this situation mean ‘commercial profits’ of either an income or capital nature that the company has at the time the benefit is provided. Work out these profits at the time the company provided the benefit.

If the CFC provided a benefit by transferring property or services at less than their market value, work out the CFC’s profits at the time the benefit was provided as if the property or services were transferred for their full market value.

Effect of deeming a benefit to be a dividend

A deemed dividend paid to a resident taxpayer is generally treated the same as other dividend payments; for example, a deemed dividend that is qualified as foreign equity distribution on participation interests under Subdivision 768-A, and paid by an unlisted country CFC to an Australian company is treated as non-assessable non-exempt income.

Disclosure of deemed dividends

You will be denied access to certain tax offsets and concessions in relation to a section 47A deemed dividend if you:

• do not disclose the deemed dividend in your tax return, and
• do not notify us of the deemed dividend within one year of the end of the income year in which the dividend is deemed to have been paid.

The tax offsets and concessions you lose are:

• any tax offsets for foreign taxes you have paid on the dividend, and
• any possibility that a part of the deemed dividend may qualify as non-assessable non-exempt income under section 23AI.

The deemed dividend will also not give rise to an attribution credit.