Edited version of private advice

Authorisation Number: 1052116736284

Date of advice: 19 May 2023

Ruling

Subject: International issues - double tax agreements

Question 1

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 paid by Australian resident companies to The Fund, with respect to the Australian investments held through FCP and the Sub-Funds, such that the dividends shall not be taxed in Australia?

Answer

Yes.

Question 2

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

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

The Fund

1. The Fund is a pension scheme under Swiss law.
2. The assets of The Fund are to be used exclusively for the purposes of occupational pensions and may not be appropriated for any other purpose.
3. Pursuant to Swiss law, The Fund is treated as a separate entity from its beneficiaries and has an unlimited life.

Funding and assets

4. The Fund is funded by the income produced by its assets and by contributions from its investors (the Investors).
5. Only Swiss pension funds and related tax exempt organizations can invest into the Fund.
6. In the event of a dissolution, The Fund's assets may not be used for any other purpose than that of the Fund. That is, the assets may not be appropriated for any other purpose than the occupational welfare of employees.

Investment structure

7. The Fund invests in Australia through FCP, which is a contractually based umbrella fund. The Fund Contract governs the legal relationships between The Fund (as an investor into FCP), the Fund Management Company the Custodian Bank.
8. FCP has multiple Sub-Funds.
9. FCP and the Sub-Funds are governed by Swiss law.

Flow of funds

10. Drawings and redemptions follow a cascading structure.
11. When the Investors subscribe to or redeem from an investment group in The Fund, The Fund must subscribe to or redeem corresponding fund units in FCP. The units are not securitized, but are held in a book-entry form.
12. The Investors can redeem their units and receive payment calculated based on their Net Asset Value (NAV).
13. FCP, in turn, buys or sells underlying securities through a broker, via the Sub-Funds.
14. The income generated by FCP can either be distributed to The Fund (per The Fund's unit holding and corresponding entitlement), accessed via redemption of fund shares, or reinvested. Income received by The Fund is not as a rule distributed to the Investors, but accrues to the capital and is continuously reinvested until redemption from the investment group of The Fund.

Fund Management Company

15. The Fund Management Company holds the legal ownership of the underlying assets for the benefit of The Fund. Under the terms of the Fund Contract, the Fund Management Company must act in good faith, independently and exclusively in the interests of The Fund.
16. The Fund Management Company manages FCP independently and in its own name for the account of The Fund. The Fund Management Company decides on the issue of units, the investments and their valuation. The Fund Management Company calculates the NAV and sets the issuance and redemption prices as well as decides on the distribution or accumulation of the fund income (depending on the sub-fund's investment policy). The Fund Management Company exercises all rights to which The Fund is entitled.

Custodian Bank

17. The Custodian Bank holds the fund assets on deposit (i.e. safe keeping of fund assets). The Custodian Bank holds FCP's assets in custody and handles the issue and redemption of units as well as payment transactions.
18. The Custodian Bank holds the assets of FCP on behalf of and for the benefit of The Fund. The Custodian and its agents must act in good faith, independently and exclusively in the interests of The Fund.

Investment Restrictions

19. The Fund Contract states that the Fund Management Company shall not acquire any participation rights that in total account for more than 10% of the voting rights or that allow it to exercise a significant influence on the management of an issuer.
20. The Fund Contract states that the Fund Management Company may acquire, for each Sub-Fund, no more than 10% of the non-voting equity securities, debt securities and/or money market instruments of the same issuer and no more than 25% of the units in one and the same collective investment scheme.

Australian Investments

21. The Fund receives dividend income paid by Australian resident companies from the Dividend Yielding Sub-Funds. The Fund received Australian interest income from the Interest Yielding Sub-Funds. This income includes cash dividends, reinvestment of dividends, interest paid on bonds and secure lending compensation payments.
22. The current percentage of equity owned in each of the Australian investments held by the Sub-Funds is below 10%.
23. Throughout the Ruling Period the percentage of equity owned in each of the Australian investments held by the Sub-Funds will always remain below 10%.
24. Collectively, The Fund does not hold more than 10% of the equity in any of the Australian investments, both through its investment in FCP and the Sub-Funds, and through any other means.
25. Throughout the Ruling Period, the percentage of equity that The Fund owns in each of the Australian investments will always remain below 10%.
26. The Fund does not hold any right to appoint a person to a board, committee or similar, either directly or indirectly, to the underlying Australian investee entities. The Fund has not entered into or received any side letters, arrangements or agreements, with the underlying Australian investee entities. The Fund does not hold any veto rights on security holder votes with respect of their investment in the Australian investee entities.
27. The Fund does not and will not participate in the management, control or decision-making of any of the entities from which it derives interest income.

Tax treatment

28. The Fund was established in Switzerland under Swiss law with a separate legal personality, meaning it is treated as a body corporate/company for tax purposes in Switzerland.
29. The Swiss Taxation Authority has issued a statement confirming that:

a.    The Fund is a private law foundation established in Switzerland.

b.    The Fund's statutory purpose is to manage occupational pension money under the Act.

c.     The Fund is a resident of Switzerland.

d.    The Fund has been exempt from income taxes since its establishment.

30. Due to their nature as a contractual fund, FCP and its Sub-Funds do not have separate legal personalities, are fiscally transparent and are not subject to tax in Switzerland. The income of FCP and the Sub-Funds is considered to be the income The Fund.
31. 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.
32. 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

Income Tax Assessment Act 1936 section 128B

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

Issue 1

Taxation of dividend income

Question 1

Does subparagraph 4d) of Article 10 of the Swiss Convention apply to the dividend income paid by Australian resident companies to The Fund, with respect to the Australian investments held through FCP and the Sub-Funds, 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 to The Fund from investments in Australian resident companies held through FCP and its Sub-Funds 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 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 was established in Switzerland under Swiss law with a separate legal personality, meaning it is treated as a body corporate/company for tax purposes in Switzerland.

On this basis, The Fund satisfies the definition of a 'company' pursuant to subparagraph 1d) of Article 3 of the Swiss Convention. Therefore, The Fund is 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:

b)    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.

The Fund is a pension scheme established in Switzerland.

Pursuant to sub-subparagraph 3a)(i) of the Protocol to the Swiss Convention, The Fund is a 'pension scheme' and therefore a resident of a Contracting State (i.e. Switzerland) under paragraph 1 of Article 4 of the Swiss Convention.

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 provides the following in respect of taxes covered by the Swiss Convention:

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 on 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 of 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 article in relation to dividend income, stating:

1. 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.

2. 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.

3. ...

4. 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.

5. 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.

6. The term "dividends" as used in this Article means income from shares...

7. 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.

8. ...

9. 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, each of the following must be satisfied:

1. There are dividends that are paid by companies that are residents of Australia to The Fund (being a resident of Switzerland).
2. The Fund is the beneficial owner of the dividends.
3. The Fund is a pension scheme, and its investment income is exempt from Swiss tax.
4. The Fund holds directly no more than 10 per cent of the voting power in the companies paying the dividends.
5. The Fund does not carry on a business through a permanent establishment in Australia or perform independent personal services from a fixed base in Australia.
6. The Australian resident companies that pay dividends from the investments are not dual residents of both Australia and Switzerland, pursuant to paragraph 1 of Article 4 of the Swiss Convention.

These requirements are considered below.

1.    There are dividends that are paid by companies that are residents of Australia to a resident of Switzerland.

The Dividend Yielding Sub-Funds hold 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 its Sub-Funds.

The term 'paid to' is not defined in 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 'paid to' 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.

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.

In respect of the term 'paid...to', the 2017 Commentaries on the OECD Model Tax Convention on Income and on Capital (OECD Commentaries) provide important guidance on this term and will be instructive in identifying the context within which it is to be interpreted and applied.

Paragraph 4 of the OECD Commentaries on Paragraph 1 of Article 10 explains the meaning of that paragraph and highlights that it does not prescribe the exclusive right to the taxation of dividends to 'the State of the beneficiary's residence or...in the State of which the company paying the dividends is a resident'.

Paragraphs 5 to 7 of the OECD Commentaries on Paragraph 1 of Article 10 go on to state:

5. Taxation of dividends exclusively in the State of source is not acceptable as a general rule...

6. On the other hand, taxation of dividends exclusively in the State of the beneficiary's residence is not feasible as a general rule...

7. For this reason, paragraph 1 states simply that dividends may be taxed in the State of the beneficiary's residence. The term "paid" has a very wide meaning, since the concept of payment means the fulfillment of the obligation to put funds at the disposal of the shareholder in the manner required by contract or by custom.

The OECD Commentaries provide context around the introduction of the requirement of 'beneficial ownership' into paragraph 2 of Article 10 as follows:

12. The requirement of beneficial ownership was introduced in paragraph 2 of Article 10 to clarify the meaning of the words "paid...to a resident" as they are used in paragraph 1 of the Article. It makes plain that the State of source is not obliged to give up taxing rights over dividend income merely because that income was paid direct to a resident of a State with which the State of source had concluded a convention....

12.2 Where an item of income is paid to a resident of a Contracting State acting in the capacity of agent or nominee it would be inconsistent with the object and purpose of the Convention for the State of source to grant relief or exemption merely on account of the status of the direct recipient of the income as a resident of the other contracting State....

12.7 Subject to other conditions imposed by the Article and the other provisions of the Convention, the limitation of tax in the State of source remains available when an intermediary, such as an agent or nominee located in a Contracting State or in a third State, is interposed between the beneficiary and the payer but the beneficial owner is a resident of the other Contracting State...

The direct recipients of the dividends paid by Australian resident companies in respect of the Australian investments held by FCP is the Custodian Bank. However, it is evident from the OECD Commentaries that the main focus of the term 'paid...to' in paragraph 1 of Article 10 of the Swiss Convention requires an enquiry into the status of the 'beneficial owner' of the dividend income and not the status of the intermediary who is the direct recipient of the payment.

In applying paragraph 12.7 of the OECD Commentaries to paragraph 2 of Article 10 of the Swiss Convention and the current circumstances, the limited right to taxation of dividends in Australia remains available in the circumstances where amounts are paid to a custodian or other intermediary (located in Switzerland or otherwise) but the beneficial owner of the dividend income is located in Switzerland, subject to other conditions imposed by Article 10 of the Swiss Convention.

As detailed above, paragraph 4 of Article 10 of the Swiss Convention removes the taxing rights on dividend income sourced from Australia where it can be determined that the 'beneficial owner' of the dividends is a Swiss pension scheme whose investment income is exempt from Swiss tax. Therefore, the 'beneficial ownership' of the dividend income will instead be discussed below in context of the requirements outlined at paragraph 4 of Article 10 of the Swiss Convention.

As such, the dividend income will be taken to be paid to The Fund if it can be shown below that The Fund is the beneficial owner of the dividends.

As it has been determined below that The Fund is the beneficial owner of the dividends, this condition is satisfied.

2.    The Fund is the beneficial owner of the dividends.

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

Paragraph 12.1 of the 2017 OECD Commentaries on Article 10 states:

... The term "beneficial owner" is therefore not used in a narrow technical sense (such as the meaning it has under the trust law of many common law countries), rather, it should be understood in its context, in particular in relation to the words "paid ... to a resident", and in light of the object and purposes of the Convention, including avoiding double taxation and the prevention of fiscal evasion and avoidance.

The OECD Commentaries provide an example of using the term 'beneficial owner' in a narrow technical sense in a footnote to paragraph 12.1 regarding a 'meaning it has under the trust law of many common law countries':

... where the trustees of a discretionary trust do not distribute dividends earned during a given period, these trustees, acting in their capacity as such (or the trust, if recognised as a separate taxpayer), could constitute the beneficial owners of such income for the purposes of Article 10 even if they are not the beneficial owners under the relevant trust law.

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

Paragraph 12.4 of the OECD Commentaries indicates that the 'beneficial owner' can be found through identifying the entity which has the unconstrained right to use and enjoy the dividend income:

... Where the recipient of a dividend does have the right to use and enjoy the dividend unconstrained by a contractual or legal obligation to pass on the payment received to another person, the recipient is the "beneficial owner" of that dividend. It should also be noted that Article 10 refers to the beneficial owner of a dividend as opposed to the owner of the shares, which may be different in some cases.

Further, the OECD Commentaries at paragraphs 12.2 to 12.3 provides examples of situations where agents, nominees, and conduit companies acting as a fiduciary or administrator on account of the interested parties would not be the 'beneficial owner' of the income despite being the direct recipient of the income. In particular, paragraph 12.4 further states:

In these various examples (agent, nominee, conduit company acting as a fiduciary or administrator), the direct recipient of the dividend is not the "beneficial owner" because that recipient's right to use and enjoy the dividend is constrained by a contractual obligation to pass on the payment received to another person.

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 constituted 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 then states:

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. ...

In applying these principles to The Fund, FCP and the Sub-Funds,

• The Fund Management Company holds legal title to the assets of the Sub-Funds for the benefit of The Fund.
• The Fund Management Company manages the Sub-Funds on behalf of and for the benefit for The Fund.
• The Custodian Bank holds the assets to safeguard The Fund's interest.
• The assets are not held or dealt with by the Custodian Bank or the Fund Management Company for their own benefit, but they act for the interests of The Fund.
• The Fund is beneficially entitled to the income of FCP and its Sub-Funds, to the extent the assets within the Sub-Funds are reserved for The Fund.

Based upon the above rights and obligations, a trust relationship exists between The Fund, FCP, the Fund Management Company and the Custodian Bank.

The trust relationship outlined above has the same characteristics as the examples provided in the OECD Commentaries at paragraph 12.4, being that the Custodian Bank is the direct recipient of the dividend income paid by Australian residents, and the right to use and enjoy the dividend income is constrained by the contractual obligations of FCP to hold the payment for the benefit of, and distribute it to, The Fund corresponding to its unit holding in FCP and the Sub-Funds.

This is further supported by the Swiss tax treatment of The Fund and the income arising through FCP and its Sub-Funds, being fiscally transparent entities without their own legal personalities and due to the income of the relevant Sub-Funds being considered to be the income of The Fund.

As such, The Fund is the 'beneficial owner' of the dividend income it receives which is paid to The Fund by the Australian resident companies for the purposes of the Swiss Convention.

Therefore, this condition is satisfied.

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

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

Therefore, this condition is satisfied.

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

The Fund holds 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 the Dividend Yielding Sub-Funds.

Therefore, this condition is satisfied.

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

Paragraph 7 of Article 10 of the Swiss Convention operates to limit the application of subparagraph 4d) of Article 10 of the Swiss Convention in circumstances where 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.

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.

As such, the application of subparagraph 4d) of Article 10 of the Swiss Convention will not be limited by paragraph 7 of Article 10 of the Swiss Convention in these circumstances.

Therefore, this condition is satisfied.

6.    The Australian resident companies that pay dividends from the investments are not dual residents of both Australia and Switzerland, pursuant to paragraph 1 of Article 4 of the Swiss Convention.

Paragraph 9 of Article 10 of the Swiss Convention operates to limit the application of subparagraph 4d) of Article 10 of the Swiss Convention in circumstances where the company paying the dividend is a dual resident under the Swiss Convention.

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.

As such, the application of subparagraph 4d) of Article 10 of the Swiss Convention will not be limited by paragraph 9 of Article 10 of the Swiss Convention in these circumstances.

Therefore, this condition is satisfied.

Conclusion

The Fund is 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 from its investments held through FCP and its Sub-Funds. Furthermore, The Fund holds directly no more than 10 per cent of the voting power in the Australian resident companies paying dividends.

As all of the above requirements have been met, subparagraph 4d) of Article 10 of the Swiss Convention will apply to the dividends paid to The Fund from its Australian investments held through FCP and its Sub-Funds, such that the dividends shall not be taxed in Australia.

Issue 2

Taxation of interest income

Question 2

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

Summary

The Fund is a resident of a Contracting State and is therefore subject to the Swiss Convention. Interest paid in relation to the Australian investments held by The Fund through FCP and the Sub-Funds, 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....

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 Agreements Act.

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 in Question 1, The Fund is a 'pension scheme' and a 'person' and a 'resident of a Contracting State'. The Fund meets the requirements of Article 1 of the Swiss Convention and is therefore subject to its application.

Swiss Convention - application to taxes

As noted 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 of interest to non-residents is an Australian income tax and is covered by the Swiss Convention.

Interest income

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

1.     Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2.     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.

3.     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.

4.     Notwithstanding paragraph 3,

...

b.    interest referred to in subparagraphs a), c) or d) of that paragraph may be taxed in the State in which it arises at a rate not exceeding 10 per cent of the gross amount of the interest if the beneficial owner of the interest participates directly or indirectly in the management, control or capital, or has an existing or contingent right to participate in the financial, operating or policy decisions, of the issuer of the debt-claim.

5.     ...

6.     The provisions of paragraphs 1 and 2, subparagraph b) of paragraph 3 and paragraph 4 of this Article shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the debt-claim in respect of which the interest is 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.

7.     Interest shall be deemed to arise in a Contracting State when the payer is a resident of that State for the purposes of its tax. Where, however, the person paying the interest, whether the person is a resident of a Contracting State or not, has in a Contracting State or outside both Contracting States a permanent establishment or a fixed base in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by such permanent establishment or fixed base, then such interest shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.

8.     Where, by reason of a special relationship between the payer and the beneficial owner of the interest, or between both of them and some other person, the amount of the interest, having regard to the debt-claim for which it is paid, exceeds the amount which might have been expected to have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention.

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

1.    There is interest that arises in Australia and is paid to a resident of Switzerland.

2.    The Fund is the beneficial owner of the interest.

3.    The Fund derives the interest

4.    The Fund is a resident of Switzerland.

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

6.    The operation of subparagraph 3d) of Article 11 of the Swiss Convention is not limited by paragraphs 4, 6, 7 and 8 of Article 11 of the Swiss Convention.

These requirements are considered below.

1.    There is interest that arises in Australia and is paid to a resident of Switzerland

The interest income 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 from the Australian investments held by The Fund through FCP and the Interest Yielding Sub-Funds.

Regarding the term 'paid to', paragraph 5 of the OECD Commentaries on Article 11 states:

Paragraph 1 lays down the principle that interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in the latter. In doing so, it does not stipulate an exclusive right to tax in favour of the State of residence. The term "paid" has a very wide meaning, since the concept of payment means the fulfilment of the obligation to put funds at the disposal of the creditor in the manner required by contract or by custom.

Given the similarities of the above paragraph to those regarding the term 'paid to' in the context of Article 10 (paragraphs 5-7, 12, 12.2 and 12.7), it is reasonable to adopt the same principles regarding the payment of interest being 'paid to' a resident of a contracting state as with the payment of dividends (as outlined above).

The same reasoning as outlined above regarding the dividends being 'paid to' The Fund will also apply to the interest income. As such, interest arises in Australia and is paid to a resident of Switzerland.

Therefore, this condition is satisfied.

2.    The Fund is the beneficial owner of the interest

For the purposes of the Swiss Convention, the OECD Commentaries on the term 'beneficial owner' used in Article 11 at paragraphs 9.1-10.1 largely mimic the commentaries on Article 10. Therefore, for the same reasons as previously outlined, The Fund is the beneficial owner of the interest income received through FCP and the Interest Yielding Sub-Funds.

Therefore, this condition is satisfied.

3.    The Fund derives the interest

The term 'derive' is not defined in the Swiss Convention or the OECD Commentaries. As outlined above, paragraph 2 of Article 3 of the Swiss Convention states that where a term is not defined, interpretation 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.

Under Australian taxation law, where interest income is initially received by a manager and/or custodian prior to it being paid to the beneficial owner, the beneficial owner will be deemed to have derived the income at the time it became presently entitled to the income where a trust relationship exists.

As established above, a trust relationship exists between The Fund, FCP, the Custodian Bank and the Fund Management Company. The income generated by FCP can either be distributed to The Fund or reinvested.

Income received by The Fund is not as a rule distributed to the Investors, but accrues to the capital and is continuously reinvested until redemption from the investment group of The Fund.

However, FCP and the Sub-Funds are fiscally transparent entities without their own legal personalities and the income arising through FCP and its Sub-Funds is therefore considered the income of The Fund.

As such, the point at which the income is paid to the Custodian Bank on behalf of The Fund is the point in which The Fund becomes presently entitled to and has derived the interest income. This is therefore also sufficient to establish, for the purposes of the Swiss Convention, that The Fund has derived the interest income.

As such, The Fund is the beneficial owner of the interest income and will be considered to derive the interest income for the purposes of Article 11 of the Swiss Convention.

Therefore, this condition is satisfied.

4.    The Fund is a 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'.

Therefore, this condition is satisfied.

5.    The Fund is a pension scheme, and its 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.

Therefore, this condition is satisfied.

6.    The operation of subparagraph 3d) of Article 11 of the Swiss Convention is not limited by paragraphs 4, 6, 7 and 8 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 entities from 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 payers with respect to The Fund's Australian investments have 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 investments.

Therefore, this condition is satisfied.

Conclusion

The Fund is a Swiss pension scheme whose investment income is exempt from Swiss tax. In addition, it derives interest income which is paid by Australian residents though its investments held via FCP and the Interest Yielding Sub-Funds.

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 investments via FCP and the Sub-Funds such that the interest shall not be taxed in Australia.

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