Issue
Can a single member Limited Liability Company (LLC) formed in the United States of America (US) be a foreign hybrid company under Division 830 of the Income Tax Assessment Act 1997 ( ITAA 1997) and therefore be treated as a partnership for income tax purposes?
Decision
Yes. A single member US LLC can be a foreign hybrid company under Division 830 of the ITAA 1997 and is therefore treated as a partnership for income tax purposes.
Facts
Foreign Co is a LLC formed in the US and has a sole member.
Foreign Co is a 'company' as defined in subsection 995-1(1) of the ITAA 1997.
Foreign Co is not a resident of any foreign country for the purposes of paragraph 830-15(1)(b) of the ITAA 1997.
Foreign Co is not an Australian resident for tax purposes at any time during the income year.
Disregarding Division 830 of the ITAA 1997, in relation to the same income year of another taxpayer (the taxpayer), Foreign Co is a CFC (within the meaning of Part X of the Income Tax Assessment Act 1936) at the end of a statutory accounting period (within the meaning of Part X) that ends in the income year.
Disregarding Division 830 of the ITAA 1997, the taxpayer is an attributable taxpayer (within the meaning of Part X) in relation to Foreign Co at the end of the statutory accounting period (within the meaning of Part X) with an attribution percentage greater than nil.
Foreign Co is not treated as a partnership for US income tax purposes.
Foreign Co has not elected to be treated as a corporation for US income tax purposes.
At all times during the income year Foreign Co is an eligible entity that is disregarded as an entity separate from its owner for US income tax purposes.
A reference to 'the Acts' is a reference to those as stated in the definition of 'this Act' in subsection 995-1(1) of the ITAA 1997.
Reasons for Decision
Division 830 of the ITAA 1997 provides for foreign hybrids, that are treated as flow-through entities for the purposes of foreign tax, but treated as companies for Australian income tax purposes, to be treated as partnerships for the purposes of the Acts (section 830-1 of the ITAA 1997).
The expression 'foreign hybrid' is defined in section 830-5 of the ITAA 1997 to mean a foreign hybrid limited partnership or a foreign hybrid company.
Paragraphs 830-15(1)(a) to (d) of the ITAA 1997 set out the requirements for a company to qualify as a foreign hybrid company. It states that: A company is a foreign hybrid company in relation to an income year if: (a) at all times during the income year when the company is in existence, the partnership treatment requirements for the income year in subsection (2) or (3) are satisfied; and (b) at no time during the income year is the company, for the purposes of a law of any foreign country that imposes *foreign income tax (except *credit absorption tax or *unitary tax) on entities because they are residents of the foreign country, a resident of that country; and (c) at no time during the income year is the company an Australian resident; and (d) disregarding this Division, in relation to the same income year of another taxpayer: (i) the company is a *CFC at the end of a *statutory accounting period that ends in the income year; and (ii) at the end of the statutory accounting period, the taxpayer is an *attributable taxpayer in relation to the CFC with an *attribution percentage greater than nil.
According to paragraph 830-15(2)(a) of the ITAA 1997, Foreign Co being a US LLC has to satisfy the 'partnership treatment requirements' in subsection 830-15(2).
Subsection 830-15(2) of the ITAA 1997 states: For the purposes of paragraph (1)(a), the partnership treatment requirements are satisfied if: (a) the company was formed in the United States of America; and (b) for the purposes of the law of that country relating to *foreign income tax (except *credit absorption tax or *unitary tax) imposed by that country, the company is a limited liability company that: i. is treated as a partnership; or ii. is an eligible entity that is disregarded as an entity separate from its owner. (The terms with an asterisk are defined in section 770-15 of the ITAA 1997.)
Foreign Co was formed in the US and having only one member it is not treated as a partnership for US federal tax purposes. However, certain US LLCs (including single member LLCs) can be treated as a disregarded entity separate from their owner(s) for tax purposes in the US. This means that the members are subject to tax on the LLCs income and the LLC itself is disregarded or ignored for US tax purposes. Therefore, it is possible for a single member LLC to satisfy the partnership requirement under subparagraph 830-15(2)(b)(ii) of the ITAA 1997. In this case, Foreign Co has not elected to be treated as a corporation, it is treated as an eligible entity that is disregarded as an entity separate from its owner for US tax purposes. Therefore, Foreign Co has satisfied the partnership treatment requirement in paragraph 830-15(1)(a) of the ITAA 1997.
Paragraph 830-15(1)(b) of the ITAA 1997 is also satisfied as Foreign Co at no time during the income year is a resident of a foreign country for the purposes of a law of that country that imposes foreign income tax (except credit absorption tax or unitary tax) on entities because they are residents of the country.
Paragraph 830-15(1)(c) of the ITAA 1997 is also satisfied as Foreign Co is not an Australian resident at any time during the income year.
Disregarding Division 830 of the ITAA 1997, the requirements of subparagraphs 830-15(d)(i) and (ii) of the ITAA 1997 are also satisfied.
Foreign Co has satisfied all the requirements in subsection 830-15(1) of the ITAA 1997 and is therefore regarded as a foreign hybrid company.
Section 830-20 of the ITAA 1997 provides that if a company is a foreign hybrid company in relation to an income year it is treated as a partnership for the purposes of the income tax law. The partners in the partnership are the shareholders in the company (section 830-25 of the ITAA 1997). According to the Explanatory Memorandum to Taxation Laws Amendment Act (No. 1) 2004 ( the legislation which introduced Division 830 of the ITAA 1997) a shareholder includes a member of a US LLC.
Accordingly, Foreign Co is treated as a partnership for the purposes of the Acts as modified by Subdivisions 830-B to 830-D of the ITAA 1997 and the single member of Foreign Co is treated as a partner in the partnership.