Australia: Offshore Banking Units

An OBU is an entity which intermediates in financial transactions between non-resident borrowers and lenders.

Income derived by an offshore banking unit from certain offshore banking activities is taxed at an effective rate of 10% (at the time of writing). The normal company rate of 30% applies to capital gains and other income. Furthermore, the offshore banking unit is exempt from interest withholding tax in relation to certain offshore borrowings.

An offshore banking activity must satisfy four conditions:

• the activity undertaken by the OBU must be one of the eight defined types of activity;

• the other party to the transaction must generally be an 'offshore person';

• the activity must be undertaken by an entity declared to be an OBU (ie business units of Australian offshore financial intermediaries located in Australia);

• and the OBU must be a resident of Australia or carrying on business in Australia at or through a permanent establishment.

The eight types of offshore banking activity are: borrowing or lending activity; guarantee-type activity; trading activity; eligible contract activity; investment activity; advisory activity; hedging activity; and any other activity declared in regulations (none have been declared to date).

Before the passage of the Taxation Laws Amendment Act (No. 2) 1999, entities eligible to apply to become OBUs were banks, fully owned subsidiary companies of such banks and other financial institutions authorised to deal in foreign exchange.

The range of entities eligible to apply to be OBUs was subsequently extended to funds managers, life insurance companies falling within the Life Insurance Act 1995, and certain other companies operating in the financial sector determined by the Treasurer (including providers of custodial services).

The Act also extended the range of eligible activities to include:

• custodial services;
• trading in Australian dollars where the other party to the transaction is an offshore person;
• trading in gold bullion with offshore persons in any currency;
• trading in gold bullion with any person other than in Australian dollars;
• trading in base metals and palladium with offshore persons in any currency;
• other trading activities (apart from currency trading) in Australian dollars with offshore persons;
• eligible contract activities in Australian dollars with offshore persons;
• and hedging in Australian dollars with related offshore persons.

An 'offshore person' is a non-resident entity excluding its Australian operations, the overseas branch of a resident entity or another OBU.