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.
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.
An FGI is defined in the Foreign Acquisitions and Takeovers Act 1975 (Cth) (FATA) as an entity in which:
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.
An FGI must notify and get FIRB approval before:
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%.
Investments by FGIs are not subject to any monetary threshold.
Some limited exemptions to FIRB approval are available for FGIs in certain circumstances, including:
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:
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.
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.
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.
As a condition of granting approval, FIRB will typically impose conditions. These conditions include tax conditions. These can be found here – https://firb.gov.au/sites/firb.gov.au/files/guidance-notes/GN47-tax-conditions.pdf.
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:
Conditions we are aware of FIRB requesting (and in some cases imposing) include:
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.
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.
 Foreign Acquisitions and Takeovers Regulation 2015 (Cth) s 17.