ATO Interpretative Decision
ATO ID 2002/1088
International tax
Application of Australia/Germany DTA to a German Investment FundFOI status: may be released
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This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade. The ATO ID is current in relation to the re-enacted or remade provisions.
Australia's tax treaties and other agreements except for the Taipei Agreement are set out in the Australian Treaty Series. The citation for each is in a note to the applicable defined term in sections 3AAA or 3AAB of the International Tax Agreements Act 1953.
Status of this decision: Decision Current
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Can an investment fund created under the German Investment Company Act claim benefits, under the Australia/Germany double taxation agreement (German tax treaty) as a resident of Germany if Australia treats the fund as a non-resident company and Germany taxes the members of the fund on the income of the fund, rather than the fund itself?
Decision
Yes, the investment fund can claim benefits under the German tax treaty to the extent the fund's members are taxable in Germany on income derived through the fund and would be entitled to claim benefits under the German tax treaty if they had derived the income directly.
Facts
The investment fund is created under German law and proposes to acquire a number of income producing commercial buildings and expects to derive rental income as well as some interest income in Australia. The income producing buildings will be acquired as a long term investment. The investment fund will not be a resident of Australia.
The investment fund is exempt from income tax in Germany (ie, it is treated as a transparent entity) and as a company (ie. a separate taxable entity) for the purposes of Australia's domestic law.
Reasons for Decision
The investment fund would not be entitled to claim the benefits of the German tax treaty based on a literal interpretation of the treaty. In this regard, only residents of Germany as defined in Article 4 of the German tax treaty can claim treaty benefits in Australia. In particular, Article 4(1)(b) provides that a person must be subject to an unlimited tax liability in Germany to be treated as a resident of Germany for the purposes of the treaty. The investment fund, however, does not satisfy this "unlimited tax liability" requirement because the members of the fund, rather than the fund itself, are taxable in Germany.
Paragraphs 2 to 6.7 of the OECD Commentary on Article 1 of the OECD Model Tax Convention, based on outcomes from the OECD's partnership report, indicate that the above literal interpretation of the residence definition in a tax treaty would provide a result inconsistent with the intent of the treaty. Guidance is also provided in the paragraphs on how treaties should be interpreted to resolve this conflict. In particular, paragraph 6.3 of the OECD Commentary on Article 1 states the general principle that:
"...the State of source should take into account, as part of the factual context in which the Convention is to be applied, the way in which an item of income, arising in its jurisdiction, is treated in the jurisdiction of the person claiming the benefits of the Convention as a resident."
While the above guidance is for partnerships, we consider the underlying reasoning to be applicable in other cases where an entity is regarded as a separate taxable entity in the country of source and as transparent for taxation purposes in the country of residence. Accordingly, taking into account the factual context referred to by the OECD, Australia should provide treaty benefits for income derived by the investment fund to the extent that Germany has allocated the income to fund members who would have been entitled to treaty benefits if they had derived the income directly. The above general principle would not apply, however, if the investment fund were treated as a resident of Australia (paragraph 6.3 of the OECD Commentary on Article 1).
The need to interpret tax treaties according to their intent and the importance of taking into account guidance provided in the OECD Commentary is discussed in Taxation Ruling TR2001/13. Based on this interpretative approach, it is considered that the investment fund can claim benefits under the German tax treaty, to the extent the fund's members are taxable in Germany on income derived through the fund and would be entitled to claim benefits under the German tax treaty if they had derived the income directly.
Date of decision: 19 October 2002Year of income: Year ending 30 June 2003 Year ending 30 June 2004 Year ending 30 June 2005
Legislative References:
International Tax Agreements Act 1953
section 11
Related Public Rulings (including Determinations)
Taxation Ruling TR 2001/13
Other References:
OECD Model Tax Convention on Income and Capital
Keywords
Germany
Double tax agreements
ISSN: 1445-2782