Edited version of private advice

Authorisation Number: 1052382198069

Date of advice: 30 April 2025

Ruling

Subject: Withholding tax - double tax agreement

Question

Will Article 10 of the double tax agreement between Australia and Country A (the Convention) apply to reduce the withholding tax rate to X% in respect of unfranked dividends paid from Company 1 to the extent that Company A, investing indirectly in Company 1 through Limited Partnership A, holds an indirect interest in Company 1?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20YY

Year ended 30 June 20YY

Year ended 30 June 20YY

Year ended 30 June 20YY

Year ended 30 June 20YY

The scheme commences on:

1 July 20YY

Relevant facts and circumstances

Limited Partnership A

1. Limited Partnership A was formed as a limited partnership under the laws of Country A.

2. The interests in Limited Partnership A are held by multiple Limited Partners, including Company A, and a General Partner. There is one class of Limited Partner units.

3. Limited Partnership A is not a resident of Australia for Australian tax purposes and does not carry on a business through a permanent establishment situated in Australia or perform professional services from a fixed base situated in Australia.

4. The General Partner is a company incorporated in Country A.

5. The Investment Manager for Limited Partnership A is incorporated in Country A and is the ultimate owner of the General Partner.

Limited Partnership A agreement (the LP Agreement)

6. The General Partner has the exclusive authority to manage the operations and affairs of Limited Partnership A and has the power to execute and carry out all agreements and filings on behalf of Limited Partnership A.

7. The assets of Limited Partnership A are partnership property and no partner individually shall own any interest in the assets of Limited Partnership A.

8. Amongst other powers outlined under the LP Agreement, the General Partner is vested with the power to hold the title to all property of Limited Partnership A as nominee and bare trustee for Limited Partnership A, or to form one or more nominees and/or subsidiary entities, to be owned by the General Partner or Limited Partnership A for such purpose.

9. Limited Partnership A is a limited open-ended fund vehicle. The General Partner may admit additional limited partners to Limited Partnership A, provided such person is (among other requirements) not a non-resident of Country A under its tax laws.

10. The decision to pay a distribution from Limited Partnership A vests solely with the General Partner and the General Partner may, at any time, make distributions to the partners of Limited Partnership A.

11. Unless otherwise agreed by the partners:

(a)   The General Partner is entitled to a distribution equal to 0.0X% of any amount available for distribution, up to a maximum amount defined under the LP Agreement per annum, and

(b)   All other distributions shall be made to the Limited Partners pro rata based on their relative interest in Limited Partnership A.

12. For Country A income tax purposes, the income or loss of Limited Partnership A for a year is allocated amongst the partners by the General Partner on a reasonable and consistent basis and taking into account the provisions of the LP Agreement.

13. Limited Partner units may be redeemed in accordance with the LP Agreement.

14. Limited Partnership A shall reimburse the General Partner, on a periodic basis, for all reasonable costs and expenses incurred on Limited Partnership A's behalf by the General Partner in the performance of its duties.

15. Under the LP Agreement, the Limited Partners:

(a)   Have limited liability in relation to Limited Partnership A.

(b)   Shall not participate in the management or control of Limited Partnership A or transact any business for Limited Partnership A.

(c)   Have no right to withdraw any amount or receive any distribution from Limited Partnership A except for redemptions and distributions expressly provided in the LP Agreement and as permitted by applicable law.

(d)   May only transfer units in Limited Partnership A with consent of the General Partner.

(e)   Upon joining the Limited Partnership A, represent and warrant that (among other requirements) they are not, and shall not be, a non-resident of Country A under its tax laws.

16. Upon liquidation of Limited Partnership A:

(a)   The General Partner shall make a final allocation of all income, gain, loss and expenses of Limited Partnership A.

(b)   Limited Partnership A's liabilities and obligations to its creditors shall be paid or adequately provided for prior to any distributions to the Limited Partners.

(c)   Any remaining assets shall be distributed to the Limited Partners (pro rata according to the value of their respective Limited Partner interests) and to the General Partner (subject to the limit under the LP Agreement).

(d)   The General Partner shall not make a distribution to a Limited Partner without the prior written approval of such Limited Partner.

Limited Partnership A investments

17. Limited Partnership A currently holds an indirect X% interest in the shares of Company 1 through a Country A resident trust.

18. Limited Partnership A is proposing to restructure its holding structure to hold directly its X% interest in shares in Company 1.

19. Company 1 is an Australian resident company which carries on a business in Australia.

20. Limited Partnership A expects to receive dividend income from its direct interest in Company 1.

The limited partners

21. The Limited Partners are all companies incorporated in Country A.

22. The Limited Partners are all residents of Country A for Country A tax purposes.

23. The Limited Partners are all wholly owned subsidiaries of entities in Country A.

24. The Limited Partners have no contractual obligation to distribute the income to another entity or to otherwise pass it on.

25. The Limited Partners are all non-residents of Australia for Australian tax purposes and do not carry on a business through a permanent establishment situated in Australia or perform professional services from a fixed base situated in Australia.

Other

26. Limited Partnership A has made partnership distributions to the Limited Partners.

Relevant legislative provisions

Double tax agreement between Australia and Country A Article 10

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

Australian withholding tax for non-residents

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

Subsection 128B(1) of the ITAA 1936 states that (subject to excluding provisions) the operative provisions of the section apply to a dividend paid to a non-resident by an Australian resident company.

Subsection 128B(4) of the ITAA 1936 provides that a person who derives unfranked dividend income to which the section applies is liable to pay income tax upon that income at the rate declared by the Parliament. The franked amount of dividends is not subject to Australian income and withholding taxes.

Section 7 of the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 prescribes that the relevant rate is 30%.

For Australian income tax purposes, where limited partnerships are 'corporate limited partnerships' (CLP), they are treated as a company under Division 5A of the ITAA 1936 and not as a partnership. Accordingly, a non-resident CLP taxed as a company is liable to withholding tax on dividend income received from Australian sources. The dividend income will be paid by Company 1 to Limited Partnership A, which is treated as a non-resident CLP for Australian income tax purposes.

However, Australia has entered into income tax treaties, commonly known as double tax agreements (DTAs), with many countries to avoid the incidence of double taxation and fiscal evasion, including the Convention. Certain DTAs may set a different rate of withholding in circumstances where a resident of a country which has a DTA with Australia is beneficially entitled to a dividend.

The primary legislation governing DTAs in Australia is 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 effectively overrides the ITAA 1936 and the ITAA 1997 where there are inconsistent provisions (with some limited exceptions).

The convention - application

In order for the Convention to apply, Article 1 of the Convention provides that it shall apply to a person who is a resident of one or both contracting states.

Resident

Relevantly, Article 4 of the Convention provides that a person is a resident of a contracting state if that person is a resident of that state for the purposes of its tax.

Limited Partnership A is a limited partnership formed under the laws of Country A. Limited Partnership A is considered flow-through and is not subject to tax in Country A. Limited Partnership A is not a resident of Country A for the purposes of its tax and not a resident of Country A to which the Convention applies under Article 4 of the Convention.

Limited Partnership A's Limited Partners are all companies incorporated in Country A and residents of Country A for tax purposes. The Limited Partners are residents of Country A to which the Convention applies under Article 4 of the Convention.

Dividends

Relevant to these circumstances, Article 10 of the Convention provides that dividends paid by a company that is a resident of one of the contracting states for the purposes of its tax and are dividends to which a resident of the other contracting state is beneficially entitled, may be taxed in that other state. However, those dividends may also be taxed in the contracting state of the company paying the dividends but the tax so charged shall not exceed X%.

Dividends paid by a company which is a resident of Australia

Limited Partnership A expects to receive dividend income from its proposed direct interest in Company 1. Company 1 is an Australian resident company. Limited Partnership A is treated as flow through for the purposes of Country A tax law and the partners are treated as deriving the dividend income. However, under Australian domestic law Limited Partnership A is treated as a CLP and therefore a company for Australian income tax purposes.

In dealing with the inherent difficulties associated with the differing treatment of partnerships in different countries, the OECD Report titled The Application of the OECD Model Tax Convention on Partnerships (OECD Partnership Report) at [53] (which was attached to the OECD Commentaries on the OECD Model Tax Convention on Income and on Capital 2017 [2017 OECD Commentaries]) states the following principle:

6.3... that the State of source should take into account, as part of the factual context in which the treaty is to be applied, the way in which an item of income, arising in its jurisdiction is treated in the jurisdiction of the person claiming the benefits of the Convention as a resident...

6.4 Where, ... income has 'flowed through' a transparent partnership to the partners who are liable to tax on that income in the State of their residence then the income is appropriately viewed as 'paid' to the partners. Hence the partners, in these circumstances, satisfy the condition, imposed in several Articles, that the income concerned is 'paid to a resident of the other Contracting State'. Similarly the requirement, imposed by some other Articles, that income or gains are 'derived by a resident of the other Contracting State' is met in the circumstances described above ...

Therefore, it is accepted that Limited Partnership A's Limited Partners, will be paid the dividend income for the purposes of the Convention.

Treaty benefits under Article 10 of the Convention will only be available to the extent there are Country A residents who are beneficially entitled to the dividends paid by a company which is resident in Australia. That is, the limitation of the dividend withholding tax rate to X% will not be available unless it is established that Limited Partnership A's Limited Partners (as residents of Country A pursuant to Article 4 of the Convention) are beneficially entitled to the dividend income paid by Company 1.

The Commissioner considers that it is reasonable to conclude that in substance, it is the Limited Partners who are beneficially entitled to the income paid by Company 1.

Conclusion

The Limited Partners, including Company A, will be beneficially entitled to the dividend income paid by Company 1 to Limited Partnership A and are residents of Country A for the purposes of the Convention.

Therefore, Article 10 of the Convention will apply such that the gross amount of the dividends are only subject to a X% withholding rate under the Convention.

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