Understanding Australia’s controlled foreign company regime

Australia’s Controlled Foreign Company (CFC) regime is designed to discourage Australian residents from shifting income to low tax, or no tax jurisdictions.  This has been achieved through the establishment of foreign companies to hold passive investments or to provide services to Australian residents.

In certain circumstances, Australian resident shareholders of a controlled foreign company can be attributed with the assessable income derived by the controlled foreign company, irrespective of whether the income is actually distributed to the shareholder or remitted to Australia.

It is commonly understood that attributable income, referred to as tainted income, includes passive income.  It is important to be aware that attributable income can also include tainted sales and tainted services income.

Tainted services income broadly includes the provision of services (such as administrative, marketing or management services) provided by a foreign subsidiary to the Australian parent company and the provision of services by a foreign subsidiary to Australian resident customers.

What can you do?

Should you hold personal investments in a controlled foreign company or your business has or is planning on operating outside Australia through a foreign subsidiary, we suggest that you talk to your financial or tax adviser to discuss your options.