International companies should be interested to learn that the Australian Taxation Office (ATO) has recently issued a draft taxation ruling TR 2017/D2 Foreign Incorporated Companies: Central Management and Control test of residency. At the same time, the ATO withdrew its earlier tax ruling TR 2004/15 which covered similar issues.
In light of this, foreign companies with transactions in multiple jurisdictions will need to carefully manage their decision making process in respect of transactions in foreign countries to mitigate unwanted tax implications.
The draft ruling reflects the ATO’s updated view of ‘central management and control’ as part of the definition of Tax Residence, following the release of the Australian High Court’s judgement in Bywater Investments limited & Ors v Commissioner of Taxation  HCA 45.
Under Australia’s tax rules, a company is a resident of Australia if it is incorporated in Australia, or if not incorporated in Australia, carries on business in Australia and has either its central management and control in Australia, or its voting power controlled by shareholders who are resident in Australia. This residency definition originally came from British law and similar definitions feature in many Commonwealth countries tax laws. Further, in many tax treaties, the treaty definition of a resident features the concept of a ‘place of effective management’, which, while not identical contains similar concepts.
The Bywater Investments case was on appeal from the Federal Court and considered whether various overseas registered companies which had company directors who were resident overseas could be considered tax resident of Australia.
In particular, Bywater Investments Ltd was registered in Switzerland and all but one of its directors were resident in Switzerland. The director meetings took place in Switzerland, however, the company had been actively trading shares on the Australian Stock Exchange. The Commissioner of Taxation therefore sought to tax profits on the sale of the shares based on the understanding that the company was a tax resident of Australia.
The ‘business’ of buying and selling shares on behalf of Bywater Investments was conducted by an Australian resident, a Mr Gould without the involvement of the directors of the company. The Primary Court judge held that the directors had abrogated their decision making in favour of Mr Gould and only rubber stamped the decisions made by him in Australia.
The High Court held that residence is a question of fact and degree to be answered according to where the central management and control of the company actually abides. That is to be determined by reference to the course of the company’s business and trading rather than by reference to documents establishing its formal structure. As the decision making was abrogated to Mr Gould and the business and trading occurred in Australia by way of action of Mr Gould and the directors merely accepted his direction, the central management and control was found to be in Australia.
Further, the Company sought to rely on the Australia - Switzerland Double Tax Agreement to argue the tax residence of the company was in Switzerland under the ‘place of effective management’ concept in the Residence article of that treaty. The Court held the place of effective management is not limited to, or answered by identification of the location of the formal organs of each entity. Based on the facts, the place of effective management was held to be with Mr Gould in Australia.
Accordingly, the case law and the ATO’s interpretation of the concept of ‘central management and control’ has evolved. The location of central management and control, or ‘place of effective control’ will be a matter of fact and substance of where the decisions are actually made and not where the decisions are merely recorded or formalised.
Foreign companies with transactions in multiple jurisdictions will need to carefully manage their decision making process in respect of transaction in foreign countries to mitigate unwanted tax implications.
Should you have any queries in relation to how this interpretation of the law may affect your company, please speak with your usual Hanrick Curran adviser or contact Tax Partner Jamie Towers on 07 3218 3900.
Please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice.