Edited version of private advice

Authorisation Number: 1052103031014

Date of advice: 5 April 2023

Ruling

Subject:Withholding tax exemptions under double taxation agreements

Question

Is the foreign entity exempt from liability to withholding tax and income tax on interest and dividend income derived from its Australian investments under the Tax Agreement?

Answer

Yes

This ruling applies for the following period:

Income year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

1.    The foreign entity is not a resident of Australia for tax purposes and is a resident of a foreign country.

2.    The foreign entity is covered by the relevant pension legislation in their resident jurisdiction.

3.    The foreign entity is exempt from income taxes in the foreign entity's resident jurisdiction.

4.    The foreign entity will receive interest income along with dividend income from its Australian investments.

5.    The foreign entity does not have any permanent establishments in Australia through which its investments are made or managed.

6.    The foreign entity investments in Australian equities do not, and will not, provide the foreign entity with more than 10% of the voting rights in any Australian entity in which the foreign entity holds an equity interest.

7.    The foreign entity does not, and will not, have any right, contingent or absolute, to participate, directly or indirectly, in the management, control or decision making of the issuer of any debt claims from which the foreign entity derives, or will derive, interest income.

8.    The foreign entity does not have, and will not have, any special relationships with any Australian issuer of debt instruments upon which interest income is being, or will be, derived by the foreign entity.

Relevant legislative provisions

Tax Agreement

Income Tax Assessment Act 1936 section 128B

Income Tax Assessment Act 1997 section 4-1

International Tax Agreements Act 1953 section 3AAA

International Tax Agreements Act 1953 section 3A

Reasons for decision

Question 1

Non-resident taxpayers will generally be liable to pay income tax under section 4-1 of the Income Tax Assessment Act 1997 (ITAA 1997) or withholding tax under section 128B of the ITAA 1936 on Australian-sourced income unless an exemption or exclusion applies.

In determining liability to tax on Australian income derived by a foreign resident, it is necessary to also consider the applicable agreement as defined in section 3AAA or section 3AAB of the International Tax Agreements Act 1953 (Agreements Act).

Subsection 4(1) of the Agreements Act incorporates the ITAA 1936 and the ITAA 1997 so that those Acts are read as one with the Agreements Act.

Subsection 4(2) of the Agreements Act provides that the Agreements Act effectively overrides the ITAA 1936 and the ITAA 1997 where there are inconsistent provisions, except for some limited provisions.

Tax Agreement

Australia and the foreign entity's resident jurisdiction are both parties to the Tax Agreement.

The foreign entity was established in the foreign entity's resident jurisdiction, is exempt from income tax in that jurisdiction, and is covered by the relevant pension legislation in their resident jurisdiction.

Therefore, the foreign entity is a pension fund for the purposes of the Tax Agreement and is a resident of a contracting state, being the foreign entity's resident jurisdiction.

The exemptions will only be available in respect of dividends and interest paid by an Australian resident entity to the foreign entity.

Dividends

The Tax Agreement deals with the taxation of dividends paid by a company which is a resident of a contracting state and provides an exemption for pension funds or schemes whose income is exempt from taxation in the fund or schemes resident jurisdiction where the interest in the Australian company held is less than 10% of the voting power in the entity.

Interest

The Tax Agreement deals with the taxation of interest arising in a contracting state and paid to a resident of the other contracting state and provides an exemption for pension funds or schemes whose income is exempt from taxation in the fund or schemes resident jurisdiction. In respect of its investments into Australia, the foreign entity derives interest and dividend income.

Further, the foreign entity has not, and will not, acquire more than 10% of the voting rights in any Australian entity that pays dividends which the foreign entity will seek to be exempt from income and withholding tax.

The exceptions, prescribed in the Tax Agreement, to the availability of the exemptions from income and withholding tax on dividends and interest income are not applicable in respect of the interest and dividend income derived by the foreign entity on its Australian equity and debt instrument investments.

Conclusion

Therefore, the foreign entity is exempt from income tax and withholding tax on its interest and dividend income under the Tax Agreement.

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