Flowing through Australia:  How conduit foreign income really helps

These rules enable foreign profits to pass through Australian companies to foreign resident shareholders without incurring Australian tax, provided certain requirements are satisfied. 

If an Australian company holds at least 10% participation interest in a foreign company, the dividends received from the foreign subsidiary are not taxable – it qualifies as non-assessable non-exempt (NANE) income. The downside of an Australian company receiving NANE income is that where the dividend has been subject to withholding tax, the Australian recipient company will not be eligible for a foreign income tax offset (FITO), nor would the Australian company earn any franking credits as the income is not taxed in Australia. 

To the extent that the dividend received from the foreign subsidiary is then passed through to the Australian entity’s foreign shareholders as an unfranked dividend, the Australian company is required to withhold 30% as a dividend withholding tax (unless a reduced rate applies by virtue of a double tax treaty). Australia has an extensive treaty network that can reduce the withhold tax, often to 15%, but in some treaties the rate is reduced to 5%. However, if the unfranked dividend qualifies as CFI, it will not be subject to Australian withholding tax. 

The CFI regime works hand-in-hand with Australia’s participation exemption (which exempts foreign active business income and certain capital gains from Australian tax). Applying these rules together results in active business profits earned in foreign jurisdictions being exempt in Australia, and then the distributions to the non-resident shareholders flowing without further tax as CFI income. This creates a clean repatriation pathway through Australia for regional investments. Further, the CFI benefits can pass through Australian intermediaries, subject to certain requirements being met. Inbound investors therefore have some flexibility to structure their investments to preserve the CFI benefit.

The CFI regime has improved Australia’s standing as a stable, rule-of-law jurisdiction that provides access to Asia’s emerging markets, while offering foreign investors tax neutrality and tax certainty on the treatment of the business’s foreign income flows. This combination has encouraged foreign multinationals and fund managers to base their Asia-Pacific operations in Australia, using the CFI regime to efficiently route investments into Asia.

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Tony Nunes has over 25 years’ experience in providing tax advice to clients, especially on issues affecting cross-border transactions, acquisitions and restructures, and on all aspects of structuring the ownership and financing of corporations and their operations. 

Charm Jayatileka is a qualified lawyer. She specialised in corporate law in Sri Lanka, a fellow Commonwealth country, prior to commencing her career in tax in Australia. Charm works with SMEs and high-net-worth individuals from diverse industries. Her areas of tax expertise include tax residency, cross-border transactions, and capital gains tax.