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8 Mar 17
Who is a 'foreign person'?

WHO SHOULD READ THIS

  • Individuals and entities looking to invest in Australia who are foreign or who have foreign ties.

THINGS YOU NEED TO KNOW

  • The definition of ‘foreign person’ for Foreign Investment Review Board purposes is complex and may apply to individuals and entities in ways that are not always immediately apparent.

WHAT YOU NEED TO DO

  • When investing in Australia, seek legal advice in relation to the FIRB requirements where the investor is foreign or has ties with foreign entities.

Foreign investment in Australia is regulated by the Australian Federal Government through the Foreign Investment Review Board (FIRB).  As a general rule, the Australian Government, through FIRB, must be notified of all proposed foreign investment activity unless the value of the proposed investment is below the prescribed notification threshold applicable to that specific type of investment, or if a specific exemption applies.

The first step in determining if these rules apply in relation to a particular transaction is to determine if the proposed investor is a ‘foreign person’.

The Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) contains a detailed and somewhat complex method of determining who falls within the definition of a ‘foreign person’.  Whether a person or entity falls into this definition is important for determining whether or not FIRB approval is required for a particular transaction.  It is important to be aware of who, and what entities, fall within the definition of ‘foreign person’ at the commencement of any transaction to ensure compliance with a regulatory regime which is increasingly in the public eye.

Definition of ‘foreign person’
A ‘foreign person’ includes:

  • an individual not ordinarily resident in Australia – note that to be ‘ordinarily resident’, the individual must be either an Australian citizen or permanent resident and must have been in Australia for at least 200 days in the 12 months preceding the acquisition
  • a corporation in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest – note that a ‘substantial interest’ is an interest of 20% or more, when aggregated with interests held by related persons
  • a corporation in which two or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, holds an aggregate substantial interest – note that an ‘aggregate substantial interest’ is an interest of 40% or more
  • a trustee of a trust in which an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds a substantial interest
  • the trustee of a trust in which two or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government, holds an aggregate substantial interest
  • a foreign government (or foreign government investor), or
  • any other person that meets the conditions prescribed by the regulations.

Section 18 Foreign Acquisitions and Takeovers Regulations 2015 (Cth) (FATR) extends the definition of foreign person to include a person who is a general partner of a limited partnership, where either:

  • an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds an interest of at least 20% in the limited partnership, or
  • two or more persons, each of whom is an individual not ordinarily resident in Australia, a foreign corporation or a foreign government holds an aggregate interest of at least 40% in the limited partnership.

Indirect interests
It is not always readily apparent whether an entity is a ‘foreign person’ or not.  It is important to note that companies or trusts incorporated or established in Australia and with no direct ownership by foreign individuals, corporations or trusts may still be classified as ‘foreign persons’ under the FATA.

An interest in an Australian company or trust held indirectly by a foreign entity through its subsidiaries (including, for example, subsidiaries incorporated or established in Australia) will be taken to be interests held by the foreign parent entity for the purposes of determining if the Australian company or trust is a ‘foreign person’.

In addition, the FATA has a broad definition of ‘interest’ which changes depending on the entity and extends beyond direct legal ownership to include the ability to control voting power, potential voting power or the ability to exercise a right (for example, under an option) which would deliver similar types of control.  This broad definition serves to prevent parties structuring around the need to obtain FIRB approval.  

Trusts
For FIRB purposes a person is regarded as holding an interest in a trust if the person either holds or acquires a beneficial interest in the income or property of the trust, or the person holds or acquires an interest in the units of a unit trust.

For discretionary trusts, each beneficiary is deemed to hold an interest equal to the maximum percentage that the beneficiary could receive if the trustee exercised its discretion in that beneficiary’s favour.  Generally this will mean that each person or entity that falls within any class of beneficiaries of a discretionary trust will be deemed to hold a 100% interest (i.e. a substantial interest) in the trust.  This can create some obvious issues where the classes of beneficiaries are drafted broadly (which is common).  For example, a discretionary family trust that has only ever distributed to (and only ever intends to distribute to) Australian citizens may still be a ‘foreign person’ if a member of one of the classes of beneficiaries is a foreign person.  In these circumstances it may be prudent to amend the trust deed to exclude foreign beneficiaries before the trust makes any acquisitions that could trigger the FIRB approval requirements, so as to avoid any unnecessary compliance issues.

Individuals
Although a person will only be considered to be ‘ordinarily resident’ if:

  • they are either an Australian citizen or permanent resident (i.e. there are no legal restrictions as to the time the individual can and could stay in Australia), and
  • they have been in Australia for at least 200 days in the 12 months preceding the acquisition,

the regulations do provide for certain additional exemptions from the FIRB approval requirements for Australian citizens who are technically ‘foreign persons’ because they are not ordinarily resident in Australia.  These exemptions generally also apply to entities that are technically classified as ‘foreign persons’ only because of interests held by Australian citizens that are not ordinarily resident in Australia.

Foreign governments and foreign government investors
A foreign government investor is a ‘foreign person’ by section 18 FATR.  ‘Foreign government investor’ is defined as a foreign government, separate government entity (such as agencies or departments), company, trust or the general partner of a limited partnership in which:

  • a foreign government or separate government entity (either alone or with its associates) holds substantial interest, or
  • foreign governments or separate government entities of more than one foreign country together with their associates hold an aggregate substantial interest.

The tracing rules for subsidiaries also apply to foreign government investors.

Associates
Section 6 FATA provides an extensive list of who amounts to an ‘associate’ for the purposes of determining whether a foreign person (together with its associates) holds a substantial interest in an entity.  An associate includes:

  • any relative of the person
  • any person with whom the person is acting, or proposes to act, in concert with in relation to an action to which FATA applies to
  • any person with whom the person carries on a business in partnership with
  • any holding entity of the relevant entity
  • any corporation in which the individual holds a substantial interest
  • if the relevant person is a corporation, a person who holds a substantial interest in the corporation
  • the trustee of a trust in which the person holds a substantial interest, and
  • if the relevant person is a trust – a person who holds a substantial interest in the trust.

This broad definition of associates will mean that some entities that do not initially appear to be ‘foreign persons’ because only minority interests are held by foreign investors may be foreign persons if associates of those foreign investors (including Australian associates) also hold interests in the entity (either directly or indirectly).

Conclusion
The definition of ‘foreign person’ under FATA is very wide and has the potential to apply to a broad range of individuals and entities in a way that is not always immediately obvious. The penalties for failing to obtain FIRB approval when required are severe (including significant fines, forced divestiture orders and, at worst a maximum three year prison sentence) and over the last few years, the compliance and audit activity conducted through FIRB and the Australian Taxation Office has increased significantly.  It is therefore more important than ever to ensure that a proper analysis of the status of a potential investor is undertaken before investing in Australian assets.

 

Focus covers legal and technical issues in a general way.  It is not designed to express opinions on specific cases.  Focus is intended for information purposes only and should not be regarded as legal advice.  Further advice should be obtained before taking action on any issue dealt with in this publication.

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