FocusOn - Foreign and Foreign Controlled Companies

Companies regulated under the Corporations Act 2001 in which foreign individuals and companies have interests may comprise foreign companies or foreign controlled companies.

Foreign Companies

A foreign company is defined by the Corporations Act 2001 as:

a body corporate incorporated in an external territory or outside Australia and the external territories, not being:

a corporation sole

an exempt public authority

an unincorporated body that:

	is formed in an external territory or outside Australia and the external territories; and
	under the law of its place of formation, may sue or be sued, or may hold property in the name of its secretary or of an officer of the body duly appointed for that purpose; and
	does not have its head office or principal place of business in Australia.

Such companies are regulated primarily under Division 2 of Part 5B.2 of the Corporations Act 2001.  In particular, section 601CK outlines the financial reporting requirements of such companies.

Foreign Controlled Companies

Australian public companies, and large and small proprietary companies can be controlled by foreign companies and individuals. These public companies and large and small proprietary companies are still regulated by the Corporations Act 2001 and its financial reporting requirements.

A small proprietary company controlled for all or part of the year by a foreign company is only required to prepare a financial report and directors’ report if it is not consolidated in the financial statements lodged with ASIC by:

	a registered foreign company; or
	a company, registered scheme or disclosing entity

Financial Reporting

To determine the financial reporting requirements of foreign and foreign controlled companies, preparers should refer to a number of sources including:

	ASIC Class Orders
	Corporations Act 2001
	Accounting Standards
	Australian Accounting Interpretations

ASIC Class Order and other relevant releases

The requirement to prepare a financial report and have it audited has been addressed by a number of ASIC Class Orders.

The following provides a brief commentary on the application of these Class Orders.

ASIC Class Order 98/96

This Class Order allows an entity to synchronise its financial year with that of its foreign parent entity in certain circumstances including where the parent is required by the law in its own jurisdiction to change the financial year.

ASIC Class Order 98/98

This Class Order provides relief to small proprietary companies which are controlled by a foreign company from the requirement to prepare and lodge an audited financial report provided they are not part of a large group.

For the purpose of the Class Order a ‘group’ comprises:

	the company in question
	entities which control the company in question and which are incorporated or formed in Australia or carry on business in Australia
	any other entities controlled by any foreign company which controls the company in question, which are incorporated or formed in Australia or carry on business in Australia
	any entities which are controlled by the company in question or the other entities

The controlled entities of the company and the other entities need not carry on business in Australia, or be formed or incorporated in Australia, to be included in the group.

A group is a ‘large group’ when, on a combined basis, the group satisfies at least two of the following criteria:

	the combined revenue of the group for the financial year is $25 million or more
	the combined value of gross assets of the group at the end of the financial year is $12.5 million or more
	the group has 50 or more employees (part-time employees being counted as an appropriate fraction of a full-time equivalent) at the end of the financial year

A ‘combined basis’ means that financial statements for the group must be prepared in accordance with all accounting standards to determine whether the group is a ‘large group’.

To obtain relief under this order, the directors of the company must have resolved to apply this order no earlier than three months before commencement of the year the relief is to be applied to.  In addition, ASIC form 384 must be lodged with ASIC no earlier than three months before commencement of the relevant financial year unless the company applied the relief available under this Class Order in respect of the financial year immediately preceding the relevant financial year.

If the relevant financial year is the company’s first financial year, this must be within three months of the date of registration of the company.

If the company became controlled by a foreign company during the relevant financial year, this must be within three months from the date it became controlled.

Where relief under this Class Order is not applied in respect of the financial year (the first non-reliance year) immediately following a financial year in which the relief was applied,  then unless the Company lodges an annual financial report for the first non-reliance year the Company must give notice to ASIC that it has ceased to apply the relief using form 394.  This must be done:

	within four months after the end of the first non-reliance year; or
	such other time as is approved in writing by an ASIC Officer to whom ASIC’s powers and functions under section 340 have been delegated

ASIC Class Order 05/638

This Class Order replaced Class Order 98/99.

This Class Order provides relief to large proprietary companies which have foreign company shareholders (but are not controlled by the foreign company shareholders) to be treated as though they were ‘grandfathered’ large proprietary companies under section 319 of the former Corporations Law. Such companies do not need to lodge a financial report with ASIC provided the report is audited.

The relief from this order is available where the company:

	was an exempt proprietary company on 30 June 1994 (i.e. no member of the company was a public company)
	has met the definition of exempt proprietary company at all times from 30 June 1994 until the deadline for reporting to members for the relevant financial years
	was a large proprietary company at the end of its financial year after 9 December 1995

had its financial reports and financial statements audited before the deadline for reporting to members for the year for the relevant financial year ended 1993 and each year since, except for:

ASIC Class Order 98/1417

This Class Order provides relief from the audit obligations of the Corporations Act 2001 to large proprietary companies and small proprietary companies which are controlled by foreign companies.

ASIC Class Order 98/1418

This Class Order provides relief to wholly-owned entities whose holding entity is a company or a registered foreign company, from preparing and lodging a financial report, directors’ report and auditor’s report.

ASIC Class Order 02/1432

This Class Order replaced Class Order 01/1594.

The Class Order provides a small registered foreign company with relief from the requirement to lodge financial statements. The relief is available for calendar years commencing on or after 1 January 2002.

The relief from this order is available where the foreign company:

	is registered, or required to be registered, under Division 2 of Part 5B.2 of the Corporations Act 2001
	it is subject to similar restrictions that are at least as strict as those imposed on an Australian proprietary company under section 113 of the Corporations Act 2001
	is not required by the law in its place of origin to prepare any one or more of the following in respect of the company’s last financial year

a balance sheet

	a profit and loss statement
	a cash flow statement

	has not been a disclosing entity, borrowing corporation or guarantor of a borrowing corporation at any time during the calendar year
	is not large in relation to its last financial year
	either:

	is not part of a group which is a large group in relation to its most recent financial year
	was incorporated in consolidated financial statements covering the whole of the financial year (and the statements were lodged with ASIC) by a company, registered foreign company, registered scheme or disclosing entity which controlled the company for the whole of the financial year

ASIC Regulatory Guide 58

In addition, ASIC Regulatory Guide 58: Reporting Requirements — Registered Foreign Companies and Australian Companies with Foreign Company Shareholders outlines ASIC guidance relating to the circumstances where:

	it exercises its discretionary powers under section 601CK(7) of the Corporations Act 2001 relating to specified registered foreign companies;
	it gives relief to large proprietary companies that have foreign company shareholders from the requirement to lodge its financial report;
	it provides relief to small proprietary companies that are controlled by foreign companies; and
	it provides relief in order to synchronise the financial year of a company with the financial year of its foreign parent.

This Regulatory Guide should be considered when applying the relief available under the Class Orders listed above.

Published : July 2009