Knowing your ‘associates’ for Section 128F interest withholding tax exemption

Understanding an ‘associate’ for Section 128F

Minh Dao and Denis Larkin, highlight the importance of an ‘associate’ regarding Section 128F interest withholding tax exemption.


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In the current market of large infrastructure and property transactions, it is more important than ever to know who your ‘associates’ are for the purpose of Section 128F interest withholding tax exemption.

For example, have you previously considered whether a state owned entity of Country A is an ‘associate’ of a state owned financial institution of Country A solely on the basis that both entities are government owned?

Consistent with market practice for large scale infrastructure and property transactions, it is common that the project financing vehicle (i.e. the Finance Company) will make an invitation to prospective financiers under a syndicated loan facility in accordance with the ‘public offer test’ so that interest paid to foreign resident financiers is not subject to Australian withholding tax.

In addition to satisfying the basic ‘public offer test’, an invitation under a syndicated loan facility will be taken to have never satisfied the ‘public offer test’ if, at the time the invitation is made, the Finance Company knew, or had reasonable grounds to suspect, that an ‘associate’ (or ‘offshore associate’) of the Finance Company is or would become a lender under the facility.

An exception exists if the associate would become a lender under the facility in carrying on a business in Australia at or through an Australian permanent establishment). That is, even if the public offer test is otherwise satisfied, the presence of one offshore ‘associate’ in the lender group will cause the public offer test to have been failed for all lenders, and thus expose all lenders to interest withholding tax.

Navigating through the ‘associate’ test (which considers both economic ownership interests and the degree of influence one entity has over another), together with the various double negatives in the Section 128F can be complicated. To mitigate the risk of Section 128F not being complied with, we recommend obtaining a list of potential senior lenders prior to making the ‘public offer test’ and undertaking sufficient due diligence to consider whether the potential lenders are ‘associates’ of the project vehicles under section 318 of the Tax Act.

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