Funds, FIRB and foreign government investment: the basics

Foreign investment in Australia is heavily regulated. This is particularly the case where the investor includes foreign government funding. This article looks at the circumstances in which a foreign government entity will need to obtain approval to invest in Australia and the requirements to obtain such approval.

  1. Introduction

    The Australian Government actively encourages and welcomes foreign investment into Australia. However, certain types of investments which involve 'foreign government investors' (FGIs) may require the prior approval of the Foreign Investment Review Board (FIRB).

    Private equity funds often include funding from a mix of government sources, including direct government investment, public pension funds and sovereign wealth funds. Although government-sourced investors in most private equity funds are passive limited partners that have little or no participation in the management or control of the fund, private equity funds that exceed certain threshold levels of government investment will be deemed to be an FGI, potentially requiring notification and prior approval from FIRB to invest in Australia.

  2. What is a foreign government investor?

    An FGI is defined in the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) as an entity in which:

    • a foreign government or separate government entity from the same foreign country, alone or together with any one or more associates, holds an interest of at least 20 per cent; or
    • foreign governments or separate government entities from more than one foreign country, alone or together with any one or more associates, hold an aggregate interest of at least 40 per cent.[1]

    A 'separate government entity' means an individual, corporation or corporation sole that is an agency or instrumentality of a foreign country or a part of a foreign country.


    - In practice, the definition of 'separate government entity' is interpreted very broadly by FIRB. It includes public pension funds (e.g. CALPERS, TRS etc.), pension plans, sovereign wealth funds and public university endowment funds.

    - Associates' is also broadly defined. Relevantly, it includes any person with whom the foreign government or separate government entity is acting, or proposes to act, in concert in relation to an action to which FATA may apply. In practice, this means any common funding arrangements or shareholders agreements, may be sufficient for the parties to such arrangements to be considered associates.


  3. What types of transactions require an FGI to obtain FIRB approval?

    An FGI must notify and get FIRB approval before:

    • acquiring a direct interest in an Australian entity or an Australian business (generally at least 10 per cent, or the ability to influence, participate in or control the entity or business);
    • starting a new Australian business;
    • acquiring an interest in Australian land; or
    • acquiring a legal or equitable interest in a mining, production or exploration tenement.
  4. Tracing

    The interests of FGIs in a fund are traced through ownership structures so that an upstream FGI entity will result in each downstream entity in which the upstream entity holds a substantial interest (i.e., an interest of at least 20% in the entity) being deemed to be an FGI (and so on).

    Note: The effect of the tracing provisions is to deem an entity in which an FGI holds a substantial interest to be itself an FGI. This means that if an FGI ("X") holds a 20% interest in Y and Y holds a 20% interest in Z, Z will be an FGI – even if the indirect interest held by X in Z is only (effectively) 4%.


  5. Monetary threshold

    Investments by FGIs are not subject to any monetary threshold.

  6. Are there any exemptions?

    Some limited exemptions to FIRB approval are available for FGIs in certain circumstances, including:

    • moneylending agreements (some restrictions may apply);
    • acquisitions acquired by will or devolution of law;
    • acquisitions of certain interests held by foreign custodian corporations;
    • certain acquisitions including pro-rata rights issues, dividend reinvestment plans, bonus share plans, distribution reinvestment plans and switching facilities;
    • the establishment of a new wholly-owned subsidiary (however, if the subsidiary then takes an action to acquire a direct interest in an Australian entity, that action is notifiable); and
    • ·offshore acquisitions where the assets of Australian entities or businesses are low value and not sensitive businesses (some restrictions may apply).
  7. What information must be submitted?

    An application for FIRB approval must include certain information relating to the foreign investor and the proposed transaction. Failing to provide the required information will significantly delay obtaining FIRB approval. Therefore, it is critical that all relevant information is provided in the initial submission.

    The types of supporting information that FIRB will require include:

    • information relating to the entity taking the action, the parent entity and the target –including business activities and locations, subsidiaries and associated companies, ownership and control, financial statements and any other relevant informati0n;
    • information relating to the proposed transaction – including the commercial rationale behind the transaction, the consideration and calculation base and an explanation of the source or flow of funds to implement the transaction;
    • ·ownership and control details of the entity taking the action – including the identities and country of origin of all investors who hold an interest of greater than 5 per cent and details of any beneficial owners, including identities of all FGIs where the aggregate interest of FGIs from one country is 5 per cent or more (directly or via a fund);
    • details of investors in both the fund manager and the fund – including the level of control of all identified investors, the types of rights that each investor has and the aggregate percentage of any beneficial ownership by FGIs; and
    • structure diagrams of the target and target group – both pre and post-implementation of the proposed transaction.

    FIRB applications are confidential (though see the note box below).


    - FIRB typically requires an analysis be undertaken by the applicant in relation to the tax treatment of the funds used to implement the transaction (generally to address thin-cap concerns). This analysis can be complex and take some time to prepare.

    - As a matter of practice, it is common to include in an application details of the ultimate owner and controller of the general partner of each fund and their nationality.

    - Applications should be as complete as possible. In most cases however, FIRB will accept the submission of additional information.

    As part of its review, FIRB will share the information disclosed in the application to other Australian government agencies – this includes the Australian Taxation Office, the Australian Competition and Consumer Commission and various Australian security services.


  8. When to submit

    An application for FIRB approval must be lodged in advance of any transaction taking place. Failure to obtain approval, if required, is an offence. It is common for transactions to be conditional on FIRB approval being obtained.

  9. How long will it take to obtain FIRB approval?

    FIRB is required to make its decision within 30 days of receiving the notice and notify the applicant within a further 10 day period (or within an additional period of up to 90 days from the registration of an interim order). FGIs must not take the action during this period unless the person is given a no objection notification.

    Note: It is not unusual for FIRB to invite an applicant to ask for one or more extensions of time to permit FIRB to consider an application. Failure to ask for an extension may result in the application being blocked.


  10. Conditions

    As a condition of granting approval, FIRB will typically impose conditions. These conditions include tax conditions. These can be found here –

    In addition, FIRB may also seek to impose transaction or business specific conditions. These are typically imposed to address issues of national interest identified during the approval process. Issues of national interest are defined to include:

    • impacts on national security;
    • impacts on competition;
    • impacts on Australian government policies;
    • impacts on the Australian economy and community;
    • the character of the investor; and
    • in the case of state-owned enterprises, the commercial orientation of the investor.

    Conditions we are aware of FIRB requesting (and in some cases imposing) include:

    • the requirement that certain directors of the target hold security clearance;
    • the requirement that the board of the target consist of a certain number of Australian citizens;
    • the requirement that certain data relating to the target's business be stored only in Australia;
    • that the target invest a certain amount of money in Australia over an agreed period of time;
    • that the acquirer sell down a certain percentage of its shares in the target after a certain date; and
    • reporting on compliance with the FIRB conditions.

    Note: In our experience, FIRB is prepared to negotiate conditions. However, where the conditions are being imposed as a result of consultations between FIRB and another government agency, negotiating conditions may delay the granting of approval.


  11. What are the penalties for non-compliance?

FGIs who fail to comply with foreign investment laws are subject to strict penalties. Penalties will depend on various factors including the nature of the investment and the extent of the breach. Orders can also be made requiring divestiture of the relevant entity or business.

[1] Foreign Acquisitions and Takeovers Regulation 2015 (Cth) s 17.

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