Edited version of private advice

Authorisation Number: 1051614654113

Date of advice: 18 December 2019

Ruling

Subject: International issues - Foreign income tax offset

Question

When the US LLC receives a US-sourced dividend in respect of which dividend withholding tax has been paid in the US, is the US LLC entitled to the foreign income tax offset under Division 770 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 202X

Year ending 30 June 202X

Year ending 30 June 202X

Year ending 30 June 202X

Year ending 30 June 202X

Year ending 30 June 202X

The scheme commences on:

XX October 20XX

Relevant facts and circumstances

Facts

1.     This description of facts is based on the following documents. The documents form part of and are to be read with this description. The relevant documents are:

(a)   The private ruling application dated XX Month 20XX; and,

(b)   The emails to the ATO from the Tax Agent for Company A.

2.     On XX Month 20XX, Company A was incorporated as an Australian proprietary company limited by shares in Australia.

3.     Company A is an Australian resident.

4.     Individual A and Individual B are the directors of Company A.

5.     Individual A is an Australian resident.

6.     Company A intends to incorporate a single-member limited liability corporation (the US LLC) in the United States of America (the US) under US law.

7.     Company A will be the sole shareholder of the US LLC.

8.     Individual A and at least one US resident will be the directors of the US LLC.

9.     Under US taxation law, the US LLC will be a 'disregarded entity' and is not considered to be a separate legal entity to its shareholder.

10.  The US LLC will acquire shares in various US corporations. Generally, these US corporations will be US public corporations.

11.  The US corporations, in which the US LLC holds an interest, may pay dividends to the US LLC from time to time (the US dividends).

12.  The US corporations will be required to remit an amount of withholding tax on the US dividends to the Internal Revenue Service (IRS).

13.  When a US dividend is paid to the US LLC:

(a)   The sole shareholder of the US LLC is treated as having received the US dividend. This is because the US LLC is treated as a 'disregarded entity' for US taxation purposes.

(b)   The US corporation is required under US taxation law to remit an amount of withholding tax to the IRS in relation to the US dividend proposed to be paid to the US LLC as the sole shareholder (who is treated as receiving the US dividend) is a foreign resident for US taxation purposes.

(c)   The US LLC can claim concessional tax treaty benefits, including a reduced rate of withholding tax where the US LLC submits a valid IRS Form W-8. This reduces the withholding tax rate from 30% to 15% for US taxation purposes.

(d)   The US dividends will be paid into the US bank account of the US LLC and may be used to invest in other US corporations.

Assumptions

Throughout the period to which the ruling applies:

1. Company A will be an Australian resident for Australian taxation purposes.
2. The US LLC will be an Australian resident for Australian taxation purposes.
3. The US LLC will continue to be a 'disregarded entity' for the purposes of US taxation law.
4. The sole shareholder of the US LLC will not elect to be treated as a corporation under US taxation law.
5. The US LLC, Company A or Individual A will not create a permanent establishment in the US.
6. The US LLC will not acquire shareholdings that carry more than 10% of the total voting power of any one company.
7. The US LLC will declare the grossed up amount of any dividend received on their Australian income tax return.
8. The US LLC or its shareholder will not become entitled to a refund of the foreign income tax or any other benefit worked out by reference to the amount of the foreign income tax (other than a reduction in the amount of the foreign income tax).

Relevant legislative provisions

Income Tax Assessment Act 1936, subsection 6(1)

Income Tax Assessment Act 1936, subsection 44(1)

Income Tax Assessment Act 1997, section 6-1

Income Tax Assessment Act 1997, subsection 6-5(1)

Income Tax Assessment Act 1997, subsection 6-5(2)

Income Tax Assessment Act 1997, subsection 6-10(1)

Income Tax Assessment Act 1997, subsection 6-10(2)

Income Tax Assessment Act 1997, subsection 6-10(4)

Income Tax Assessment Act 1997, section 10-5

Income Tax Assessment Act 1997, Division 770

Income Tax Assessment Act 1997, subsection 770-5(1)

Income Tax Assessment Act 1997, subsection 770-5(3)

Income Tax Assessment Act 1997, section 770-15

Income Tax Assessment Act 1997, section 770-130

Income Tax Assessment Act 1997, subsection 995-1(1)

International Tax Agreements Act 1953, section 5

Reasons for decision

Overview

1.           Division 770 of the ITAA 1997 outlines when an entity may be entitled to a non-refundable tax offset for foreign income tax paid on their assessable income.

2.           As highlighted in subsection 770-5(1) of the ITAA 1997, the object of this Division is to relieve the potential for double taxation where an entity has paid foreign income tax on amounts included in their assessable income and, apart from the operation of Division 770 of the ITAA 1997, would pay Australian income tax on the same amount.

3.           Specifically, subsection 770-10(1) of the ITAA 1997 provides that:

You are entitled to a tax offset for an income year for foreign income tax. An amount of foreign income tax counts towards the tax offset for the year if you paid it in respect of an amount that is all or part of an amount included in your assessable income for the year.

4.           Therefore, it must be determined whether:

(a)   The US withholding tax is a 'foreign income tax';

(b)   The US dividend income is included in the US LLC's assessable income for Australian taxation purposes; and,

(c)   For the purpose of Division 770 of the ITAA 1997, the US LLC is treated as having paid that US withholding tax in relation to each US dividend it receives.

Foreign income tax

5.           'Foreign income tax' is defined in section 770-15 of the ITAA 1997:

Foreign income tax means tax that:

(a)   is imposed by a law other than an Australian law; and

(b)   is:

(i)     tax on income; or

(ii)    tax on profits or gains, whether of an income or capital nature; or

(iii)  any other tax, being a tax that is subject to an agreement having the force of law under the International Tax Agreements Act 1953.

Note: Foreign income tax includes only that which has been correctly imposed in accordance with the relevant foreign law or, where the foreign jurisdiction has a tax treaty with Australia (having the force of law under the International Tax Agreements Act 1953), has been correctly imposed in accordance with that tax treaty.

6.           Section 5 of the International Tax Agreements Act 1953 (ITAA 1953) provides that the Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income [1983] ATS 16 (the DTA) has the force of law under the ITAA 1953.

7.           Article 10 of the DTA deals with taxes on the payment of dividends by a resident of one 'Contracting State' to different resident of another 'Contracting State'. The tax on these dividends (the withholding tax) shall not exceed 15 percent of the gross amount of the dividend: pursuant to Article 10(2) of the DTA.

8.           As a result, the withholding tax under Article 10 of the DTA is a tax that is subject to an agreement having the force of law under the ITAA 1953. Therefore, the withholding tax is a 'foreign income tax' for the purposes of Division 770 of the ITAA 1997.

Amounts included in your assessable income

9.           For the purpose of subsection 770-10(1) of the ITAA 1997, it must be determined whether the foreign income tax paid was paid 'in respect of an amount that is all or part of an amount included in your assessable income for the year'.

10.        The reference to 'assessable income' here refers to the assessable income for Australian taxation purposes.

11.        Relevantly here, subsections 6-5(1) and (2) of the ITAA 1997 state:

(1)   Your assessable income includes income according to ordinary concepts, which is called ordinary income.

Note: Some of the provisions about assessable income listed in section 10-5 may affect the treatment of ordinary income.

(2)   If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

12.        Further, subsections 6-10(1), (2) and (4) of the ITAA 1997 also state:

(1)   Your assessable income also includes some amounts that are not ordinary income.

Note: These are included by provisions about assessable income. For a summary list of these provisions, see section 10-5.

(2)   Amounts that are not ordinary income, but are included in your assessable income by provisions about assessable income, are called statutory income.

(4) If you are an Australian resident, your assessable income includes your statutory income from all sources, whether in or out of Australia.

13.        Section 10-5 of the ITAA 1997 states that particular kinds of assessable income include general dividend income under subsection 44(1) of the ITAA 1936.

14.        As the US LLC is an Australian resident for Australian taxation purposes, its assessable income includes ordinary income and statutory income from all sources, whether in or out of Australia: pursuant to subsections 6-5(2) and 6-10(4) of the ITAA 1997.

15.        US dividend income received by the US LLC (whether in or out of Australia) will form part of their assessable income pursuant to subsection 6-5(2) of the ITAA 1997 (as ordinary income) or subsection 6-10(4) of the ITAA 1997 (as statutory income under subsection 44(1) of the ITAA 1936).

Foreign income tax paid by someone else

16.        Subsections 770-130(1) and (2) of the ITAA 1997 provides:

(1)   This Act applies to you if you had paid an amount of foreign income tax in respect of an amount (a taxed amount) that is all or part of an amount included in your ordinary income or statutory income if you are covered by subsection (2) or (3) for an amount of foreign income tax paid in respect of the taxed amount.

(2)   You are covered by this subsection for an amount of foreign income tax paid in respect of a taxed amount if that foreign income tax has been paid in respect of the taxed amount by another entity under an arrangement with you or under the law relating to the foreign income tax.

17.        Relevantly here, it must be determined whether the US LLC will be treated as having paid an amount of foreign income tax in respect of a 'taxed amount' where the foreign income tax was paid in respect of the 'taxed amount' by another entity under the law relating to the foreign income tax.

18.        For the reasons highlighted above, the US dividend income will form part of the US LLC's assessable income (whether as ordinary income or statutory income) and will be the 'taxed amount' for the purposes of section 770-130 of the ITAA 1997.

19.        When a US dividend is paid to the US LLC:

(a)   The sole shareholder of the US LLC is treated as having received the US dividend. This is because the US LLC is treated as a 'disregarded entity' for US taxation purposes.

(b)   The US corporation is required under US taxation law to remit an amount of withholding tax to the IRS in relation to the US dividend proposed to be paid to the US LLC as the sole shareholder (who is treated as receiving the US dividend) is a foreign resident for US taxation purposes.

(c)   The US LLC can claim concessional tax treaty benefits, including a reduced rate of withholding tax where the US LLC submits a valid IRS Form W-8. This reduces the withholding tax rate from 30% to 15% for US taxation purposes.

20.        As a result, the US corporation pays foreign income tax in respect of the taxed amount, and the foreign income tax is paid under the law relating to that foreign income tax.

21.        Therefore, the US LLC will be treated as having paid the foreign income tax paid by the US corporation on the US dividends distributed to the US LLC.

Conclusion

22.        The US LLC is entitled to the foreign income tax offset for an income year under Division 770 of the ITAA 1997 because:

(a)   The US withholding tax paid on the US dividend income is a foreign income tax.

(b)   The US dividend income, on which the US withholding tax is paid, will be included in the US LLC's assessable income in Australia.

(c)   For the purposes of Division 770 of the ITAA 1997, the US LLC is treated as having paid the US withholding tax in relation to the US dividend income it receives and includes in its assessable income for Australian taxation purposes even though the US corporations remit these amounts to the IRS for US taxation law purposes.