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  • Straddle holding period rule

    Under particular tax treaties, including some of those modified by Article 8 of the Multilateral Instrument, non-portfolio intercorporate dividends may become eligible for reduced withholding tax rates if the beneficial owner of the dividend satisfies the straddle holding period rule and any other conditions set out in the particular tax treaty. Australia's tax treaties that may be impacted by this rule are set out in the table below.

    The straddle holding period includes the day of payment of the dividend. Therefore in the first year a beneficial interest in the shares is held, the holding period may straddle the dividend payment date. This is because the holding period rule will look both backwards and forwards in determining whether the relevant holding period is satisfied.

    If the holding period has not been satisfied when a dividend is paid then the withholding tax rate, as specified in the particular tax treaty before any reduction, will apply to any unfranked part of the dividend.

    If the holding period is subsequently satisfied after the dividend payment date and any other conditions set out in the particular tax treaty are met, the reduced withholding tax rate will apply to the dividend. This means the dividend withholding tax withheld at the dividend payment date may have been over-withheld. In such a case the beneficial owner of the dividend, or a representative of the beneficial owner, may apply to the ATO for a refund of the over-withheld withholding tax.

    Example: Dividend paid before the straddle holding period rule is satisfied

    On 1 December 2019, Foreignco, a New Zealand resident company, acquired 20% of the shares or ownership interests in Ausco, an Australian resident company.

    On 17 June 2020, 200 days after Foreignco acquired the shares in Ausco, Ausco pays an unfranked dividend to Foreignco.

    As Foreignco has only owned the shares in Ausco for 200 days when the dividend is paid the 365-day straddle holding period requirement under the Australia New Zealand tax treaty as modified by the Multilateral Instrument (the New Zealand treaty) has not been satisfied. Accordingly the reduced withholding tax rate of 5% potentially available to Foreignco under Article 10(2)(a) of the New Zealand treaty will not apply at the date of payment of the dividend.

    When Ausco pays the dividend on 17 June 2020, Foreignco is subject under Article 10(2)(b) of the New Zealand treaty to dividend withholding tax at 15% of the gross amount of the dividend.

    Foreignco continues to hold the shares in Ausco throughout a 365-day period that includes the day of payment of the dividend. Once Foreignco has held the shares in Ausco for a continuous 365-day period, the reduced dividend withholding tax rate of 5% under Article 10(2)(a) of the New Zealand treaty will from that time apply to any dividends paid by Ausco to Foreignco from 1 December 2019 being the date of acquisition of the shares.

    From the date at which the straddle holding period is satisfied Foreignco can apply to the ATO for a refund of the dividend withholding tax which was over-withheld from the dividend paid on 17 June 2020.

    End of example

    Tax treaties impacted by a straddle holding period

    The following table summarises the intercorporate dividend concessional provisions in Australia’s tax treaties that may be impacted by the straddle holding period rule in the first year the beneficial interest in the shares is held.

    Provisions that may be impacted by the straddle holding period rule

    Jurisdiction

    Date of effect of the relevant treaty article
    (see Note 1)

    DTA article
    (modified by Article 8 of the MLI where applicable)

    Non-portfolio dividend rate if holding period and other criteria are satisfied

    Argentina

    10(2)(a)(i)

    10%

    Canada

    01/01/2020

    10(2)(a)(i)

    5%

    France

    01/01/2019

    10(2)(a)

    10(2)(b)

    0%

    5%

    Germany
    (see Note 2)

    01/01/2017

    10(2)(a)

    5%

    Israel
    (see Note 2)

    01/01/2020

    10(2)(a)

    5%

    Mexico

    10(2)(a)

    0%

    New Zealand

    01/01/2019

    10(2)(a)

    10(3)

    5%

    0%

    Norway

    01/01/2020

    10(2)(a)

    5%

    Romania

    10(2)(a)

    5%

    Russia

    10(2)(a)

    5%

    South Africa

    10(2)(a)

    5%

    Table notes:

    • Note 1: Where date of effect is left blank, the treaty partner has yet to action its ratification, acceptance or approval of the MLI and notify the OECD.
    • Note 2: The tax treaties with Germany and with Israel are not modified by the MLI.

    See also:

      Last modified: 23 Dec 2019QC 60960