Classification of a Korean Hapja Hoesa for Australian income tax purposes

Is the Korean Hapja Hoesa a company pursuant to the definition within section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The Korean Hapja Hoesa is a company within the meaning of section 995-1 of the ITAA 1997.

The Hapja Hoesa is a legal form of corporation, which may be established under the Korean Commercial Act (Commercial Act). The Hapja Hoesa is also a private equity fund which is regulated by the Korean Indirect Investment Asset Management Business Act (IIAMBA).

In essence, the Hapja Hoesa is an unlimited investment specialty vehicle that is established for the purpose of investing the assets of the entity into the shares or equity of other entities - with the purpose of increasing the value of such entities through participation in the management of the entities or improving the business structure or control structure of the entities. The Hapja Hoesa may be used only for private equity investment purposes.

Currently under Korean legislation, a Hapja Hoesa has the following features: • a Hapja Hoesa is incorporated, and is formed by registering its incorporation (Article 144-5(2) of the IIAMBA; Article 172 of the Commercial Act); • a Hapja Hoesa has a legal personality that is separate from the members (Article 171(1) of the Commercial Act); • a Hapja Hoesa does not have partners, it has members (Article 268 of the Commercial Act); • a Hapja Hoesa has members with limited liability and members with unlimited liability (Article 144-3 of the IIAMBA; Article 268 of the Commercial Act); • a Hapja Hoesa has articles of incorporation (Article 144-5 of the IIAMBA; Article 178 of the Commercial Act); • a Hapja Hoesa exists for a specific term, which must be specified in the articles of incorporation, but after the term expires, the Hapja Hoesa may continue with consent of all or some members (Article 144-5(1) of the IIAMBA; Article 229 of the Commercial Act); • a member's interest in a Hapja Hoesa is referred to as a share (Article 197 of the Commercial Act); • in order to transfer their share in the Hapja Hoesa, a member needs the consent of other members (Article 197 of the Commercial Act); • members can transact with the Hapja Hoesa (Articles 199 and 275 of the Commercial Act); • subject to limitations for Limited Liability Members, members are jointly and severally liable if assets of the company are insufficient to satisfy its obligations (Articles 212 and 279(1) of the Commercial Act); • distributions by the Hapja Hoesa are referred to as 'dividends' (Article 279(1) of the Commercial Act).

The articles of incorporation of this particular Hapja Hoesa include the following terms: • a Limited Liability Member may not transfer any part of their interest in the Hapja Hoesa without the consent of all Unlimited Liability Members; • an Unlimited Liability Member may not transfer any part of their interest without the consent of all members; • a Limited Liability member may not withdraw from the Hapja Hoesa without transferring their interest, and the transfer of an interest requires the consent of all Unlimited Liability Members; • a member does not have a right to a distribution of distributable cash. Instead, a resolution of members is required before any profits can be distributed; • meetings of the Hapja Hoesa will be convened by the Manager or on request of members; • a member has one vote per unit of their interest in the Hapja Hoesa; • members may pass resolutions on dissolution of the Hapja Hoesa; extension or reduction in the term of the Hapja Hoesa; approval of distributions; • business cannot be transacted at a meeting of the Hapja Hoesa unless a quorum is present; • the Hapja Hoesa will be dissolved on expiration of its term; with a resolution of the Members; on bankruptcy or insolvency; on an order of the court; or if the Korean Financial Supervisory Commission denies or cancels registration.

'Company' is defined in section 995-1 of the ITAA 1997 as: (a) a body corporate; or (b) any other unincorporated association or body of persons;

but does not include a partnership or a non-entity joint venture.

As the term 'body corporate' is not defined in Australia's income tax legislation, the ordinary meaning of the term applies. The Butterworths Concise Australian Legal Dictionary Second edition defines a body corporate as 'an artificial legal entity having separate legal personality'.

Being an entity that was created by registration, and that has separate legal personality, the Hapja Hoesa is a 'body corporate'. Consequently, it will be a company under paragraph (a) of the definition of 'company' in section 995-1 of the ITAA 1997, providing that it is not also a partnership.

Section 995-1 of the ITAA 1997 defines 'partnership' as: (a) a body of persons (other than a company or limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly; or (b) a limited partnership.

The Hapja Hoesa has some features commonly associated with a partnership, and some features associated with a company.

The following features favour characterisation of this particular Hapja Hoesa as a company. • a resolution of members is required before profits can be distributed. This indicates that profits belong to the Hapja Hoesa, and that the members are not in receipt of income jointly; • distributions are referred to in the Commercial Act as 'dividends' rather than as a share of profits; • the Hapja Hoesa was formed by registration of its incorporation, whereas a partnership is generally formed by a partnership agreement between the partners; • the Hapja Hoesa has members rather than partners; • the Hapja Hoesa has articles of incorporation, and not a partnership agreement; • the Hapja Hoesa has a form of perpetual succession. It will not terminate on the withdrawal of a member, as is the case with a partnership. Instead, it will continue until the occurrence of one of the events specified in its articles of incorporation.

The features which favour characterisation of this Hapja Hoesa as a partnership include: • to withdraw from the Hapja Hoesa a Limited Liability Member in effect needs the consent of all Unlimited Liability Members; • members' interests are not freely transferable; in order to transfer their share in the Hapja Hoesa, a member needs the consent of other members.

The predominance of characteristics favours classification as a company rather than a partnership. Further, as the Hapja Hoesa does not have partners who carry on its business or who receive income jointly, it is not a partnership for the purpose of the definition of 'partnership' or 'company' in section 995-1 of the ITAA 1997.

As the Hapja Hoesa is a body corporate and not a partnership, it follows that it is a company within the meaning of section 995-1 of the ITAA 1997.