Permanent establishment of a US Limited Liability Company

Is the business income derived through a permanent establishment of a US Limited Liability Company, which is treated as foreign hybrid for Australian income tax purposes, non-assessable non-exempt income under section 23AH of the Income Tax Assessment Act 1936 (ITAA 1936)?

Yes. The business income derived through a permanent establishment of a US Limited Liability Company, which is treated as foreign hybrid for Australian income tax purposes, is non-assessable non-exempt income under section 23AH of the ITAA 1936.

The taxpayer company is a resident for Australian income tax purposes and is not a US resident under the US tax law.

The taxpayer is not a trustee of a trust.

The taxpayer holds 50% in the shareholding and 50% of the voting rights in a US Limited Liability Company (US LLC).

The US LLC is a limited liability company that was formed in the US and has elected to be treated as a partnership for the purposes of US tax law.

The US LLC has a permanent establishment (PE) in the US and passes the active income test under section 432 of the ITAA 1936. Business income derived does not involve any related entities of the taxpayer or the US LLC.

US income tax will be imposed on the taxpayer in respect of its share of the profits of the US LLC. These profits are foreign income for the purposes of subsection 23AH(15) of the ITAA 1936.

The US LLC is a foreign hybrid company under section 830-15 of the Income Tax Assessment Act 1997 (ITAA 1997) and is treated as a partnership under section 830-20 of the ITAA 1997.

By virtue of section 830-25 of the ITAA 1997, the taxpayer is a partner of the partnership (US LLC).

Subsection 23AH(1) of the ITAA 1936 states that one of the objects of section 23AH is to ensure that active foreign branch income derived by an Australian resident company, is not assessable income or exempt income of the company.

Subsection 23AH(2) of the ITAA 1936 provides that: Subject to this section, foreign income derived by a company, at a time when the company is a resident in carrying on a business, at or through a PE of the company in a listed country or unlisted country is not assessable income, and is not exempt income, of the company.

Subsection 23AH(10) of the ITAA 1936 further provides that: This section applies to any indirect interest (through one or more partnerships or trust estates) of a company in foreign income derived by a partnership or trustee through a PE or the partnership or trustee in a listed country or unlisted country as if that indirect interest were for foreign income derived by the company through a PE of the company in that country.

In effect, subsection 23AH(10) of the ITAA 1936 extends the branch profits exemption provided by subsection 23AH(2) of the ITAA 1936 to relevant foreign income derived by an Australian resident company through interposed partnerships and trusts by deeming the taxpayer as a partner carrying on a business through the US LLC's PE.

Subsection 23AH(5) of the ITAA 1936 provides that subsection 23AH(2) of the ITAA 1936 does not apply to foreign income derived by the company if certain conditions are met, including whether the PE does not pass the active income test. In the present case, the US LLC passes the active income test and therefore subsection 23AH(5) of the ITAA 1936 does not apply.

Accordingly, as subsection 23AH(2) of the ITAA 1936 applies, the business income derived through a PE of a US LLC, which is treated as foreign hybrid for Australian income tax purposes, is non-assessable non-exempt income under section 23AH of the ITAA 1936.