1051822600529 | Legal database

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Edited version of private advice

Authorisation Number: 1051822600529

Date of advice: 30 March 2021

Ruling

Subject: Foreign super fund - double tax agreement

Question

Does subparagraph 4d) of Article 10 of the Convention between Australia and the Swiss Confederation for the Avoidance of Double Taxation with respect to Taxes and Income, with Protocol [2014] ATS 33 (Swiss Convention) apply to the dividend income derived by The Fund from its Australian investments held through FCP and its Sub-Fund A, such that the dividends shall not be taxed in Australia?

Answer

Yes.

Question

Does subparagraph 3d) of Article 11 of the Swiss Convention apply to the interest income derived by The Fund from its Australian debt investments held through FCP and its Sub-Fund B and Sub-Fund C, such that the interest shall not be taxed in Australia?

Answer

Yes.

This ruling applies for the following periods:

Year ended 31 January 20XX

The scheme commences on:

1 February 20XX

Relevant facts and circumstances

The Fund

The Fund is a foundation, created by notarial act in accordance with Article 80 ff. of the Swiss Civil Code (ZGB/CC), Article 331 of the Swiss Code of Obligations (OR/CO) and Article 48, paragraph 2 of the Swiss Federal Act of 25 June 1982 on Occupational Old Age, Survivors' and Invalidity Pension Provision (OPA/BVG/LPP).

The Fund's objective is to insure XX personnel against the economic consequences of retirement, disability and death by providing its members with occupational pension insurance in accordance with the requirements set out in OPA/BVG/LPP and additionally in the context of supplementary coverage through benefits in excess of the minimum level required by law.

The Fund is entered in the Register for Occupational Pension Schemes of the Canton of XX and is supervised by the Federal Social Insurance Office (FSIO/BSV), the BVG and the supervising authority of the Canton of XX.

The Fund is a foundation with a pension plan open to new members.

The Fund holds investment interests in various countries.

The Fund was established in and is domiciled in the Canton of XX, Switzerland.

The Fund's sole Governing Body is the Foundation Board.

The Foundation Board represents The Fund in dealings with third parties; it designates those persons whose signature legally binds The Fund. Only joint signature with another person is allowed.

The Foundation Board administers the Foundation in accordance with the relevant legislation and its applicable ordinances, with the provisions of its Statutes and the Plan Rules, and with the instructions of the supervisory authority.

The Foundation Board enacts plan rules (the Plan Rules) covering the benefits, the financing, the auditing and organisation of the Foundation, the rights and obligations of the Foundation's beneficiaries, and the use and management of the Foundation's assets.

All of The Fund's management and investment decisions are undertaken in Switzerland by the Foundation Board.

The assets of The Fund may not, under any circumstance, devolve to the founder, its affiliated companies or to their legal successors; nor can they be used for any other means than the provision of pension benefits.

The members of the Foundation Board are all non-residents of Australia. Additionally, the executive managers of The Fund are all non-residents of Australia.

The Fund does not carry on a business through a permanent establishment situated in Australia and does not perform independent personal services from a fixed base in Australia.

The Fund, being the beneficial owner of the interest, does not and will not participate in the management, control or decision-making of any of the issuers of the debt instruments upon which it derives interest income.

The Australian debt instruments in which The Fund has invested in are such, that the payer has no special relationship with The Fund.

The Fund is treated as a company for Swiss tax purposes.

The official website for FSIO/BSV (https://www.bsv.admin.ch/bsv/en/home/social-insurance/bv/grundlagen-und-gesetze/grundlagen/organisation-und-finanzierung.html, accessed 5 February 2021) outlines that Switzerland contributes only indirectly to the financing of occupational pension funds in Switzerland, by granting a tax exemption on the contributions and 2nd pillar assets of the occupational pension funds.

The Certificate of Residence from the Tax Authorities of the Canton of XX dated XX (Certificate of Residence), states that The Fund is a resident of Switzerland for tax purposes.

The Fund is exempt from tax in Switzerland.

FCP and its sub-funds

The Fund holds investment interests in numerous countries, including Australia, through FCP and its sub-funds: Sub-Fund A, Sub-Fund B and Sub-Fund C.

FCP is governed by Swiss law, in particular the Federal Act on Collective Investment Schemes (CISA) of 23 June 2006, Ordinance on Collective Investment Schemes (CISO) of 22 November 2006 and Ordinance of the Swiss Financial Market Supervisory Authority on Collective Investment Schemes (CISO-FINMA) of 27 August 2014.

FCP is an open-ended collective investment scheme in the form of a contractual fund where The Fund as the sole investor has either a direct or indirect legal entitlement, at the expense of collective assets, to redeem their units at the net asset value.

The Fund Contract for FCP (Fund Contract) embodies FCP and the rights and duties of the Fund Management Company (FMC), the custodian bank and the sole investor, The Fund, by way of contractual arrangement.

The FMC drafted the Fund Contract and, with the consent of the custodian bank, had it approved by the Swiss Financial Market Supervisory Authority (FINMA).

The FMC's investment objective is to achieve an appropriate return of each particular sub-fund by investing in the various instruments listed in the Fund Contract.

Under CISA and the Fund Contract, the FMC's role is to issue investors with the number and type of units in the investment fund and manage the fund's assets [Articles 8 and 25 of CISA].

The FMC holds legal title to the assets.

For each of the sub-funds, within the scope of each sub-fund's specific investment policy and as specified in section XX of the Fund Contract, the FMC manages the investment of assets, at its own discretion and in its own name, for the account of The Fund. In particular, it decides the issue of units, the investments and their valuation. It calculates the net asset values of the sub-funds, sets the issue and redemption prices and also determines the distribution of income. The FMC exercises all rights associated with FCP and the sub-funds.

As contractual arrangements, FCP and its sub-funds do not have separate legal personalities, are fiscally transparent and are not subject to tax in Switzerland. The incomes of FCP and the sub-funds are considered to be the income of The Fund as the sole investor in FCP.

The rationale for the investments through FCP and its sub-funds is primarily for organisational reasons. Firstly, the specific expertise of an external fund manager is more considerable. Secondly, investments being held via FCP and sub-fund structure allow greater flexibility and independence in the definition of the investment strategy, ensuring enduring quality and efficiency, and reducing the coordination effort of The Fund. Thirdly, investing through FCP and its sub-funds provides increased oversight of the funds of The Fund.

Auditors examine whether the FMC and the custodian bank have acted in accordance with the Fund Contract, CISA and other rules.

The FMC and its agents are subject to the duties of loyalty, care and information, or, in other words, they do not hold the assets for their own benefit. They act independently and safeguard only The Fund's interests.

The custodian bank safeguards the assets of the sub-funds, deals with the issue and redemption of fund units and the payment transactions for the sub-funds. The custodian bank and its agents are subject to the duties of loyalty, care and information.

The Fund can terminate the Fund Contract at any time by requiring payment of its share in the sub-funds in cash. The Fund Contract does not otherwise interfere with this right. The fund manager can consent to a transfer of part of the portfolio at market value.

The Fund holds the units of the sub-funds for its members (beneficiaries) and represents their interests.

The Fund is beneficially entitled to the assets and income only of the sub-funds, in which it holds an interest. Only the relevant sub-funds are liable for the obligations relating to individual sub-funds.

The Fund's Australian investments via the FCP and its sub-funds

FCP holds corporate and government bonds, units and common stock investments in various Australian entities.

FCP's investments are held under sub-funds with their own respective asset managers to whom the investment decisions have been delegated.

Sub-Fund A holds shares in Australian resident Australian Securities Exchange (ASX) listed companies which pay dividends in relation to those investments.

Sub-Fund A holds no more than 10% of the voting power in the Australian resident companies paying dividends from the investments.

Sub-Fund B holds Australian government bonds, which pay interest in relation to those investments.

Sub-Fund C holds Australian corporate bonds, which pay interest in relation to those investments.

Assumptions

The Australian resident companies that pay dividends from the investments held through FCP and its sub-funds are not dual residents of both Australia and Switzerland, pursuant to paragraph 1 of Article 4 of the Swiss Convention.

Relevant legislative provisions

Convention between Australia and the Swiss Confederation for the Avoidance of Double Taxation with respect to Taxes and Income, with Protocol [2014] ATS 33 Article 10

Convention between Australia and the Swiss Confederation for the Avoidance of Double Taxation with respect to Taxes and Income, with Protocol [2014] ATS 33 Article 11

Reasons for decision

Question 1

Does subparagraph 4d) of Article 10 of the Swiss Convention apply to the dividend income derived by The Fund from its Australian investments held through FCP and its Sub-Fund A, such that the dividends shall not be taxed in Australia?

Summary

The Fund is considered to be a person who is a resident of a Contracting State and is therefore subject to the Swiss Convention.

Dividends paid from investments in Australian resident companies held through FCP and its Sub-Fund A, meet the requirements of subparagraph 4d) of Article 10 of the Swiss Convention and as such, shall not be taxed in Australia.

Detailed reasoning

Subsection 128B(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that, subject to certain exclusions, section 128B of the ITAA 1936 will apply to income derived by a non-resident that consists of a dividend paid by an Australian resident company (franked dividends are specifically excluded from the operation of section 128B by paragraph 128B(3)(ga) of the ITAA 1936).

Subsection 128B(4) of the ITAA 1936 provides that a person who derives dividend income to which section 128B of the ITAA 1936 applies, is liable to pay withholding tax on that dividend income. The withholding tax rate applicable is generally 30% of the dividend amount (section 7 of the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974).

Unfranked dividends derived by a non-resident from Australian resident companies are therefore subject to withholding tax unless otherwise excluded.

However, in determining liability to Australian tax on Australian source income derived by a non-resident, it is necessary to consider not only the income tax laws but also any applicable Convention or Double Taxation Agreement contained in the International Tax Agreements Act 1953 (Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and the Income Tax Assessment Act 1997 (ITAA 1997) so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

Withholding tax payable in respect of dividends paid to non-residents, is considered to be an Australian income tax that is covered by the Swiss Convention. As such, Consideration of the Swiss Convention is outlined below.

Swiss Convention - application to The Fund

In order for the Swiss Convention to apply, Article 1 of the Swiss Convention states:

This Convention shall apply to persons who are residents of one or both of the Contracting States.

The Fund must therefore be considered both a 'person' and a 'resident of a Contracting State' for the Swiss Convention to apply.

Person

Subparagraph 1c) of Article 3 of the Swiss Convention defines 'person' to include:

...an individual, a company, a trust and any other body of persons.

Subparagraph 1d) of Article 3 of the Swiss Convention defines a 'company' to mean:

...any body corporate or any entity which is treated as a company or body corporate for tax purposes.

The Fund is a foundation undertaken in Switzerland and is treated as a company for tax purposes in Switzerland. Therefore, The Fund satisfies the definition of a 'company' pursuant to subparagraph 1d) of Article 3 of the Swiss Convention. It is, therefore, considered to be a 'person' in accordance with Subparagraph 1c) of Article 3 of the Swiss Convention for the purposes of applying the Swiss Convention.

Resident of a Contracting State

Paragraph 1 of Article 4 of the Swiss Convention provides the following:

For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the laws of that State, is liable to tax as a resident of that State, and also includes the Government of that State and any political subdivision or local authority thereof. This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State.

In addition, sub-subparagraph 3a)(i) of the Protocol to the Swiss Convention states that, in relation to paragraph 1 of Article 4 of the Swiss Convention, it is understood that the term 'resident of a Contracting State' includes, in particular, a person that is a pension scheme established in that State.

Accordingly, The Fund must be a pension scheme established in Switzerland to satisfy the definition of a 'resident of a Contracting State' for the purposes of the Swiss Convention.

Subparagraph 1i) of Article 3 of the Swiss Convention provides the following in respect of the term 'pension scheme':

...the term "pension scheme" means any plan, scheme, fund, foundation, trust or other arrangement established in a Contracting State or, in the case of Australia, that is an Australian superannuation fund for the purposes of Australian tax, which is:

(i) regulated by that State; and

(ii) operated principally to administer or provide pension or retirement benefits or to earn income for the benefit of one or more such schemes.

Subparagraph 2b) of the Protocol to the Swiss Convention provides the following in respect of Article 3 of the Swiss Convention:

It is understood that the term "pension scheme" in subparagraph i) of paragraph 1 includes the following and any identical or substantially similar schemes which are established pursuant to legislation introduced after the date of signature of this Convention:

a) in Switzerland, any pension schemes covered by:

(i) the Federal Act on old age and survivors' insurance, of 20 December 1946;

(ii) the Federal Act on disabled persons' insurance of 19 June 1959;

(iii) the Federal Act on supplementary pensions in respect of old age, survivors' and disabled persons' insurance of 6 October 2006;

(iv) the Federal Act on old age, survivors' and disabled persons' insurance payable in respect of employment or self-employment of 25 June 1982, including the non-registered pension schemes which offer occupational pension plans and the forms of individual recognised pension schemes comparable with the occupational pension plans.

Paragraph 1.35 of the Explanatory Memorandum to the International Tax Agreements Amendment Bill of 2014 (Cth) (EM to the ITAAB 2014) states the following in respect of sub-subparagraphs 1i)(i) and 1i)(ii) of Article 3 of the Swiss Convention:

In Switzerland, a pension scheme includes any plan, scheme, fund, foundation or trust that is established and regulated in Switzerland and is operated principally to administer or provide pension or retirement benefits or to earn income for the benefit of one or more such schemes.

Furthermore, paragraph 1.36 of the EM to the ITAAB 2014 provides the following, in relation to subparagraph 2b) of the Protocol to the Swiss Convention:

More specifically, the Swiss Convention is also intended to cover any Swiss pension scheme covered by:

• the Federal Act on old age and survivors' insurance, of 20 December 1946;

• the Federal Act on disabled persons' insurance, of 19 June 1959;

• the Federal Act on supplementary pensions in respect of old age, survivors' and disabled persons' insurance, of 6 October 2006;

• the Federal Act on old age, survivors' and disabled persons' insurance payable in respect of employment or self-employment of 25 June 1982, including the non-registered pension schemes which offer occupational pension plans and the forms of individual recognised pension schemes comparable with the occupational pension plans; and

• and any identical or substantially similar schemes that are established under legislation introduced after signature of the Swiss Convention.

The Fund is a foundation, created by notarial act, in accordance with Article 80 ff. of the ZGB/CC, Article 331 of the OR/CO and Article 48, paragraph 2 of the OPA/BVG/LPP. The Fund was established in and is domiciled in the Canton of XX, Switzerland.

The Fund is entered in the Register for Occupational Pension Schemes of the Canton of XX and is supervised by the FSIO/BSV, the BVG and XX.

In respect of paragraphs 1.35 and 1.36 of the EM to the ITAAB 2014, given The Fund is a foundation representing pension funds established in Switzerland pursuant to the deed of foundation and OPA/BVG/LPP and operates principally to provide pension related benefits, The Fund satisfies the definition of a 'pension scheme' under the Swiss Convention.

This view is supported by the Certificate of Residence and The Fund's inclusion in the Register for Occupational Pension Schemes of the Canton of XX.

According to FSIO/BSV, Switzerland contributes only indirectly to the financing of occupational pension funds in Switzerland, by granting tax exemption on the contributions and 2nd pillar assets of the occupational pension funds. As The Fund is entered in the Register for Occupational Pension Schemes of the Canton of XX, it is considered to be a compliant occupational pension fund.

For completeness, The Fund is exempt from tax in Switzerland. As a result, due to it being not liable to pay tax in Switzerland, prima facie, The Fund does not satisfy paragraph 1 of Article 4 of the Swiss Convention to be defined as a 'resident of a Contracting State'.

However, as determined above, The Fund is deemed to be a person and a pension scheme established in Switzerland. As such, pursuant to sub-subparagraph 3a)(i) of the Protocol to the Swiss Convention, The Fund is a resident of a Contracting State.

Conclusion on the application of the Swiss Convention

The Fund meets the requirements of Article 1 of the Swiss Convention and is therefore subject to its application.

Swiss Convention - application to taxes

Paragraphs 1 and 2 of Article 2 of the Swiss Convention, in respect to taxes covered, provides the following:

1. This Convention shall apply to taxes on income imposed on behalf of a Contracting State and, in the case of Switzerland, on behalf of its political subdivisions or local authorities, irrespective of the manner in which they are levied.

2. There shall be regarded as taxes on income all taxes imposed on total income or on elements of income, including taxes on gains from the alienation of movable or immovable property, taxes on the total amounts of wages or salaries paid by enterprises, as well as taxes on capital appreciation.

In addition, subparagraph 3a) of Article 2 of the Swiss Convention provides the following:

The existing taxes to which this Convention shall apply are in particular:

a) in Australia:

the income tax, the fringe benefits tax and resource rent taxes imposed under the federal law of Australia;

(hereinafter referred to as "Australian tax");

Based upon the above, the Swiss Convention applies to all taxes imposed on income and in particular applies to Australian income tax.

Section 128B of the ITAA 1936imposes liability to withholding tax on dividend, interest and royalty income derived by non-residents. As such, withholding tax payable in respect to dividends to non-residents is considered to be an Australian income tax and is covered by the Swiss Convention.

Dividend income

Article 10 of the Swiss Convention is the relevant provision in relation to dividend income. The provision states relevantly:

Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.
However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed:

a) 5 per cent of the gross amount of the dividends if the beneficial owner is a company which, in the case of Australia, holds directly at least 10 per cent of the voting power in the company paying the dividends, or in the case of Switzerland, holds directly at least 10 per cent of the capital in the company paying the dividends;

b) 15 per cent of the gross amount of the dividends in all other cases.

....
Notwithstanding the provisions of subparagraph 2b), dividends shall not be taxed in the Contracting State of which the company paying the dividends is a resident if the beneficial owner of the dividends holds, in the case of Australia, directly no more than 10 per cent of the voting power in the company paying the dividends, or in the case of Switzerland, directly no more than 10 per cent of the capital of the company paying the dividends, and the beneficial owner is:

a) A Contracting State, or political subdivision or a local authority thereof (including a government investment fund);

b) a central bank of a Contracting State;

c) in the case of Australia, a resident of Australia deriving such dividends from the carrying on of complying superannuation activities; or

d) in the case of Switzerland, a pension scheme whose investment income is exempt from Swiss tax.

Paragraphs 2, 3 and 4 shall not affect the taxation of the company in respect of the profits out of which the dividends are paid.
....
The provisions of paragraphs 1, 2, 3 and 4 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply.
....
Notwithstanding paragraph 8, dividends paid by a company that is deemed to be a resident only of one Contracting State pursuant to paragraph 3 of Article 4 may be taxed in the other Contracting State, but only to the extent that the dividends are paid out of profits arising in that State. Where such dividends are beneficially owned by a resident of the first-mentioned State, paragraph 2 of this Article shall apply as if the company paying the dividends were a resident only of the other State.

For subparagraph 4d) of Article 10 of the Swiss Convention to apply to the Fund, to the effect that the dividend income shall not be taxed in Australia, it must satisfy each of the following:

• There are dividends that are paid by companies that are residents of Australia.

• The Fund derives and is the beneficial owner of the dividends.

• The Fund holds directly no more than 10 per cent of the voting power in the companies paying the dividends.

• The Fund is a pension scheme and its investment income is exempt from Swiss tax.

There are dividends that are paid by companies that are residents of Australia

FCP's Sub-Fund A holds shares in Australian resident companies which pay dividends in relation to those investments.

Therefore, there are dividends that are paid by companies that are residents of Australia from the investments held by The Fund through FCP and Sub-Fund A.

The beneficial owner of the dividends

The term 'beneficial owner' is not defined under the Swiss Convention.

Paragraph 2 of Article 3 of the Swiss Convention provides the following:

As regards the application of the Convention at any time by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the law of that State for the purposes of the taxes to which the Convention applies, any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State.

As such, the definition of the term 'beneficial owner' in relation to dividends derived from an Australian source shall be guided by the context of its use in the Swiss Convention or, without such context, by the laws of Australia for the purposes of taxation.

Additionally, paragraphs 1.41, 1.42 and 1.43 of the EM to the ITAAB 2014 provide the following, in respect of paragraph 2 of Article 3 of the Swiss Convention:

1.41. Unless the context requires otherwise, a term not specifically defined in the Swiss Convention will have the same meaning that it has under the law of the country applying the Convention at the time of its application. In that case, the meaning of the term under the taxation law of that country will have precedence over the meaning it may have under other domestic laws.

1.42. The same term may have a differing meaning and a varied scope within different Acts relating to specific taxation measures. For example, GST definitions are sometimes broader than income tax definitions. The definition more specific to the type of tax should be applied in such cases. For example, where the matter subject to interpretation is an income tax matter, but definitions exist in either the ITAA 1936 or the ITAA 1997 and the A New Tax System (Goods and Services Tax) Act 1999, the income tax definition would be the relevant definition to be applied.

1.43. If a term is not defined in the Convention, but has an internationally understood meaning in tax treaties and a meaning under the domestic law, the context would normally require that the international meaning be applied.

ATO Interpretive Decision ATO ID 2011/13 Income Tax Interest withholding tax: interest arising in Australia paid to a New Zealand Limited Partnership - 'beneficially owned' (ATO ID 2011/13)provides guidance in relation to the use of relevant context for interpreting Australian tax treaties and is therefore instructive in considering the application of paragraph 2 of Article 3 of the Swiss Convention. It further provides guidance in relation to the definition of 'beneficial owner'.

ATO ID 2011/13 states the following:

Relevant context for the purposes of interpreting an Australian tax treaty includes the Commentaries on the OECD Model Tax Convention on Income and on Capital (the OECD Commentary). Paragraph 104 of Taxation Ruling TR 2001 / 13 states that the OECD Commentary provides important guidance on interpretation and application of the OECD Model Tax Convention and will often need to be considered as a matter of practice, in interpreting tax treaties, at least where the wording is ambiguous.

Paragraph 9 of the 2010 OECD Commentary on Article 11 of the Model Tax Convention states:

... The term 'beneficial owner' is not used in a narrow technical sense, rather, it should be understood in its context and in light of the object and purposes of the Convention, including avoiding double taxation and the prevention of fiscal evasion and avoidance.

Therefore, the term 'beneficial owner' should be used in a purposive sense in light of the operation of the Swiss Convention.

In terms of Australian tax, ATO Interpretive Decision ATO ID 2008/61 Income Tax: Withholding Tax Exemption: interest and dividends paid by an Australian resident and received by a Dutch Stichting as unitholder in an Irish Common Contractual Fund (ATO ID 2008/61) is relevant. ATO ID 2008/61 provides that, in respect of the particular arrangement in that decision, the relationship between the manager, custodian and the unitholder constitute a trust relationship.

ATO ID 2008/61 refers to French J in Harmer & Ors v. FC of T 89 ATC 5180; (1989) 20 ATR 1461 who stated that a trust 'is notably a definition of a relationship by reference to obligations'.

Further, ATO ID 2008/61 provides the following:

His Honour went on to state that the four essential elements of a trust are:

1. the trustee who holds a legal or equitable interest in the trust property

2. the trust property which must be property capable of being held on trust and which includes a chose in action

3. one or more beneficiaries other than the trustee, and

4. a personal obligation on the trustee to deal with the trust property for the benefit of the beneficiaries, which obligation is also annexed to the property.

ATO ID 2008/61 states the following:

All four elements of a trust are present in the relationship between the manager, custodian and the unitholder of the CCF. The manager of the CCF, and in some cases the custodian, holds legal title to the assets of the CCF. The assets are not held by the manager and the custodian for their own benefit, but rather the deed obliges the manager and custodian to deal with the assets of the CCF on behalf of and in the best interests of the unitholder in the CCF. Accordingly, both the manager and the custodian are acting in a trustee capacity with respect to the assets of the CCF, being the trust property which initially arose from the unitholder's contributions to the CCF. A unitholder is beneficially entitled to a proportion of the underlying assets of the CCF in accordance with their unit holding and receives income from the investment of the CCF assets by the manager and/or custodian as it arises.

ATO ID 2008/61 concludes that where a trust relationship exists and the income accrues to the unitholder as it arises, the unitholder has a present legal entitlement to the income received by the fund.

Accordingly, the unitholder is considered to have derived the income at the time when it became presently entitled to the income.

In applying these principles to The Fund, FCP and its sub-funds,

• The FMC as manager holds legal title to the assets

• The custodian bank acts to safeguard the assets.

• The assets are not held by the FMC or custodian bank for their own benefit, but they act for the interests of The Fund, which is the only unitholder of FCP and its sub-funds.

• The Fund is beneficially entitled to the income of FCP and its sub-funds and can at any time require payment of its interest in FCP and its sub-funds.

• There are no other provisions of the Fund Contract that affect the operation of XX of the Fund Contract.

Based upon the above rights and obligations, a trust relationship exists between The Fund, FCP, FMC and the custodian bank. Due to The Fund's sole beneficial interest in the assets of FCP and its sub-funds, where it can require payment of its interest at any time, The Fund accrues income from the investments as it arises.

Accordingly, The Fund is presently entitled to the income of FCP and its sub-funds. As such, The Fund is considered to derive the dividends through FCP and Sub-Fund A.

The Swiss tax treatment of The Fund and the income arising through FCP and its sub-funds, is also instructive.

FCP and its sub-funds are not subject to Swiss income tax and are fiscally transparent. The income of the relevant sub-funds is considered to be the income of The Fund as the sole investor in FCP.

As outlined above, due to the purposive meaning to be given to 'beneficial owner' made apparent by the OECD Model Tax Convention, as cited by ATO ID 2011/13, and the determination that The Fund is viewed to derive the income under both Swiss tax and Australian tax, it follows that The Fund is the beneficial owner of the dividends for the purposes of the Swiss Convention.

The Fund holds directly no more than 10 per cent of the voting power in the companies paying the dividends

The Fundholds directly no more than 10 per cent of the voting power in the Australian resident companies paying dividends from the investments held through FCP and Sub-Fund A.

Based upon the above, this condition is satisfied.

Pension scheme and investment income is exempt from Swiss tax

As established above, The Fundis a pension scheme, pursuant to the Swiss Convention, and is exempt from tax in Switzerland.

Other provisions of Article 10 of the Swiss Convention

Paragraphs 7 and 9 of Article 10 of the Swiss Convention operate to limit the application of subparagraph 4) of Article 10 of the Swiss Convention in certain circumstances.

These paragraphs do not apply for the following reasons:

• The Fund does not carry on a business through a permanent establishment situated in Australia and does not perform independent personal services from a fixed base in Australia.

• The Australian resident companies that pay dividends from the investments held through FCP and Sub-Fund A, are not dual residents of both Australia and Switzerland, pursuant to paragraph 1 of Article 4 of the Swiss Convention. The Fund also, as determined above, is a resident of Switzerland.

Conclusion

The Fundis a Swiss pension scheme whose investment income is exempt from Swiss tax. In addition, The Fund is the beneficial owner of dividends paid by Australian resident companies held through FCP and Sub-Fund A. Furthermore, The Fund holds directly no more than 10 per cent of the voting power in the Australian resident companies paying dividends.

Therefore, subparagraph 4d) of Article 10 of the Swiss Convention will apply to the dividends paid to The Fund by Australian resident companies from the investments held through FCP and Sub-Fund A, such that the dividends shall not be taxed in Australia.

Question 2

Summary

The Fund is considered to be a person who is a resident of a Contracting State and is therefore subject to the Swiss Convention.

Interest paid in relation to the Australian debt investments held through FCP and its Sub-Fund B and Sub-Fund C, meets the requirements of subparagraph 3d) of Article 11 of the Swiss Convention and as such, shall not be taxed in Australia.

Detailed reasoning

A non-resident is liable to pay withholding tax under subsection 128B(5) of the ITAA 1936 if the 'non-resident' derives income that consists of interest and the requirements of subsection 128B(2) of the ITAA 1936 are satisfied in relation to that income. Subsection 128B(2) of the ITAA 1936 provides that:

Subject to subsection (3), this section... applies to income that:

(a) is derived... by a non-resident; and

(b) consists of interest that:

(i) is paid to the non-resident....

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and the ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

Withholding tax payable in respect of interest paid to non-residents, is considered to be an Australian income tax that is covered by the Swiss Convention. As such, consideration of the Swiss Convention is outlined below.

Swiss Convention - application to The Fund

As determined above, The Fund is deemed to be a person and a pension scheme established in Switzerland. As such, pursuant to sub-subparagraph 3a)(i) of the Protocol to the Swiss Convention, The Fund is a resident of a Contracting State.

Furthermore, The Fund meets the requirements of Article 1 of the Swiss Convention and is therefore subject to its application.

Swiss Convention - application to taxes

Paragraphs 1 and 2 of Article 2 of the Swiss Convention, in respect to taxes covered, provides the following:

In addition, subparagraph 3a) of Article 2 of the Swiss Convention provides the following:

The existing taxes to which this Convention shall apply are in particular:

a) in Australia:

the income tax, the fringe benefits tax and resource rent taxes imposed under the federal law of Australia;

(hereinafter referred to as "Australian tax");

Based upon the above, the Swiss Convention applies to all taxes imposed on income and in particular, applies to Australian income tax.

Section 128B of the ITAA 1936imposes liability to withholding tax on dividend, interest and royalty income derived by non-residents. As such, withholding tax payable in respect to interest to non-residents is considered to be an Australian income tax and is covered by the Swiss Convention.

Interest income

Article 11 of the Swiss Convention is the relevant provision in relation to interest income. The provision states the following:

Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
However, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the interest.
Notwithstanding paragraph 2, interest arising in a Contracting State and beneficially owned by a resident of the other Contracting State shall not be taxed in the first-mentioned State if the interest is derived by:

...

(d) in the case of Switzerland, a pension scheme whose investment income is exempt from Swiss tax.

For subparagraph 3d) of Article 11 of the Swiss Convention to apply to The Fund, such that the dividend income shall not be taxed in Australia, it must satisfy each of the following:

• There is interest that arises in Australia.

• The Fund is the beneficial owner of the interest.

• The Fund is a resident of Switzerland.

• The Fund is a pension scheme and its investment income is exempt from Swiss tax.

Interest that arises in Australia

Interest income arises from the Australian investments held by The Fund through FCP and its Sub-Fund B and Sub-Fund C.

Additionally, all interest income arising from the Australian investments is paid by Australian residents for the purposes of Australian tax, and all such income is not connected to a permanent establishment or a fixed base situated outside Australia. Accordingly, pursuant to paragraph 7 of Article 11 of the Swiss Convention, interest income arises in Australia.

Therefore, interest arises in Australia from the Australian investments held by The Fund through FCP and its Sub-Fund B and Sub-Fund C, in accordance with subparagraph 3d) of Article 11 of the Swiss Convention.

The beneficial owner of the interest and derives the interest

For the purposes of the Swiss Convention, The Fund is the beneficial owner of the income that it derives via FCP and its Sub-Fund B and Sub-Fund C, which are not entities for the purposes of Swiss law or the Swiss Convention, but contractual relationships which are fiscally transparent. The income of FCP and its Sub-Fund B and Sub-Fund C, are considered to be the income of The Fund as the sole investor in FCP and its Sub-Fund B and Sub-Fund C. As such, the Fund will be the beneficial owner of the interest and will be considered to derive the interest.

Resident of Switzerland

As determined above, The Fund is a resident of Switzerland as it satisfies the definition of a 'resident of a Contracting State' and was established in Switzerland.

Pension scheme and investment income is exempt from Swiss tax

As determined above, The Fund is a pension scheme, pursuant to the Swiss Convention, and is exempt from tax in Switzerland.

Other provisions of Article 11 of the Swiss Convention

Paragraphs 4, 6, 7 and 8 of Article 11 of the Swiss Convention operate to limit the application of subparagraph 3d) of Article 11 of the Swiss Convention in certain circumstances. These include where:

a) the member of a contracting state is operating through a permanent establishment whether or not that permanent establishment is situated in that other contracting state (paragraphs 6 and 7 of Article 11 of the Swiss Convention). The Fund does not operate through or have any permanent establishments, within the meaning of Article 5 of the Swiss Convention, in Australia through which its investments are made or managed.

b) the beneficial owner of the interest participates in the management, control or decision-making of the issuer of the debt-claim (paragraph 4 of Article 11 of the Swiss Convention). The Fund, being the beneficial owner of the interest, does not and will not participate in the management, control or decision-making of any of the issuers of the debt instruments upon which it derives interest income.

c) there exists a special relationship between the payer and the person beneficially entitled to the interest which results in the amount being paid exceeding the amount that would otherwise have been expected to have been paid had such a special relationship not been in existence (paragraph 8 of Article 11 of the Swiss Convention). In the present circumstances, the Australian debt instruments in which The Fund has invested in are such that the payer has no special relationship with The Fund.

Consequently, the restrictions discussed above, will not be applicable in respect of the interest income derived by The Fund on its Australian debt instrument investments.

Conclusion

The Fund is a Swiss pension scheme whose investment income is exempt from Swiss tax. In addition, it derives interest income from Australian debt investments held via FCP and its Sub-Fund B and Sub-Fund C.

As none of the restrictions prescribed in paragraphs 4, 6, 7 or 8 of Article 11 of the Swiss Convention apply to The Fund, subparagraph 3d) of Article 11 of the Swiss Convention will apply to the interest paid to The Fund from the Australian debt investments via FCP and its Sub-Fund B and Sub-Fund C, such that the interest shall not be taxed in Australia.

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