Edited version of private advice

Authorisation Number: 1051783150326

Date of advice: 25 November 2020

Ruling

Subject: Withholding tax - interest and dividends - double tax convention

Question 1

Is Entity A exempt from withholding tax on dividends paid by Australian resident companies from the investments held through the FCP and Sub-Fund A under 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)?

Answer

Yes.

Question 1

Is Entity A exempt from withholding tax on interest paid on its Australian debt investments held through the FCP and Sub-Fund B under subparagraph 3d) of Article 11 of the Swiss Convention?

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

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Entity A

Entity A is a pension fund providing compulsory occupational pensions to all individuals and employers who request affiliation.

Entity A was established in Switzerland and is domiciled in Switzerland.

Entity A exists as an investment foundation whose purpose is to deliver occupation pension provisions for its insured persons and their dependents for the financial disadvantages incurred as a result of retirement, disability or death.

The assets of Entity A are invested according to Swiss law and are used solely for the purpose of providing occupational benefits and may not be used for any other purpose.

Entity A is governed by a Board of Trustees, Committees or Commissions appointed by the Board of Trustees, the Administrative Office, and Auditors who have been engaged by the Board of Trustees.

Entity A is managed by the Board of Trustees.

All management and investment decisions of Entity A are undertaken in Switzerland by the Board of Trustees and the Committees of Entity A.

All members of the governing bodies of Entity A are non-residents of Australia.

Entity A 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.

Entity A is treated as a company for Swiss tax purposes.

Entity A is a resident of and exempt from tax in Switzerland due to its status as a regulated pension fund.

Australian investments of Entity A

FCP, Sub-Fund A and Sub-Fund B (the sub-funds)

Entity A invests through FCP which is a Swiss contractual open-ended fonds commun de placement.

FCP is a contractual arrangement for collective investments established in accordance with the Swiss Federal Act on Collective Investment Schemes of 23 June 2006 (CISA) under a contract between Entity A (as the sole investor in FCP), the Fund Management Company and the Custodian Bank (FCP Fund Contract).

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

The investments of FCP are held under sub-funds. The Australian investments include shares held under Sub-Fund A and debt interests held under Sub-Fund B of FCP.

Under the 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 income of FCP and the sub-funds are considered to be the income of Entity A as the sole investor in FCP.

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

Sub-Fund B holds debt interests in Australian government securities, Australian treasury bills, and Australian resident companies at varying interest rates and different currencies.

Entity A does not have a special relationship with those payers who pay the interest on the debt instruments held through the sub-funds 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.

Entity A 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.

Interest income that arises from the Australian debt 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.

Entity A holds directly no more than 10 per cent of the voting power in the Australian resident companies paying dividends or interest from the investments held through the sub-funds.

The FCP Fund Contract

The Fund Manager of FCP acquired legal title to the underlying investments on appointment.

The Fund Manager must be a company limited by shares based in Switzerland under CISA.

The circle of investors in FCP is limited to Entity A as the sole investor, which is a qualified investor under CISA. Entity A holds the units of the sub-funds for its members (beneficiaries) and represents their interests.

The Fund Manager manages the sub-funds on the account of Entity A independently and by its own name. In particular, it decides about the issue of units, the investments and their valuation. It calculates the net asset value and fixes the issue and redemption prices and profit distributions. The Fund Manager exercises all the rights belonging to FCP and to the sub-funds independently and by its own name.

The Fund Manager can, with the consent of the Custodian and the approval of the supervisory authority, establish, merge or dissolve various unit classes at any time.

The Fund Manager, with the consent of the Custodian can merge individual sub-funds with other sub-funds or other investment funds provided the relevant fund contract allows for this and the relevant fund contract is principally identical in terms of provisions regarding the investment policy, fees and commissions, appropriation of net income and capital gains, redemption conditions, and the duration and requirements for dissolution.

The Fund Manager or the Custodian may dissolve the fund or individual sub-funds by terminating the FCP Fund Contract without notice. Individual sub-funds may also be dissolved by order of the supervisory authority.

The Fund Manager may establish new sub-funds with the approval of the supervisory authority.

The Fund Manager delegates all investment decisions and other tasks necessary to ensure the proper management of the sub-funds to nominated asset managers.

The Fund Manager and its agents are subject to the duties of loyalty, due diligence and disclosure. They act independently and only safeguard the interests of Entity A.

The Custodian 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 may delegate the safekeeping of the assets of a sub-fund to third-party custodians and collective securities depositories in Switzerland or abroad, provided it is in the interests of efficient management.

The Custodian and its agents are subject to the duties of loyalty, due diligence and disclosure. They act independently and exclusively in the interests of Entity A.

Entity A can terminate the FCP Fund Contract monthly by requiring payment of its share in the sub-funds in cash. The Fund Manager can consent to a transfer of part of the portfolio at market value.

Entity A is entitled to the assets and income of the sub-funds in which it holds an interest.

Other

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

FCP does not own real estate in Australia.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 128B

International Tax Agreements Act 1953 subsection 3AAA(1)

International Tax Agreements Act 1953 subsection 5(1)

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 1

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 2

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 3

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 4

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

Convention between Australia and the Swiss Confederation for the Avoidance of Double Taxation with respect to Taxes and Income, with Protocol [2014] ATS 33 subparagraph 2b) of the Protocol

Convention between Australia and the Swiss Confederation for the Avoidance of Double Taxation with respect to Taxes and Income, with Protocol [2014] ATS 33 sub-subparagraph 3a)(i) of the Protocol

Reasons for decision

Question 1

Is Entity A exempt from withholding tax on dividends paid by Australian resident companies from the investments held through FCP and Sub-Fund A under subparagraph 4d) of Article 10 of the Swiss Convention?

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 the taxpayer 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 (the 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).

Consideration of the Swiss Convention is outlined below.

Swiss Convention - application to Entity A

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.

Entity A 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.

Entity A is a pension fund providing compulsory occupational pensions to all individuals and employers who request affiliation, provided they meet the Swiss statutory requirements. Entity A is treated as a company for tax purposes in Switzerland. Therefore, Entity A 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 purpose 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, Entity A 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.

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.

Entity A was established in Switzerland and exists as a pension scheme.

In respect of paragraphs 1.35 and 1.36 of the EM to the ITAAB 2014, given Entity A is a pension fund established in Switzerland pursuant to legislation and operates principally to provide pension related benefits, Entity A satisfies the definition of a 'pension scheme' under the Swiss Convention.

This view is supported by the Certificate of Residence.

For completeness, Entity A is exempt from tax in Switzerland. As a result, due to it being not liable to pay tax in Switzerland, prima facie, Entity A 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, Entity A 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, Entity A is a resident of a Contracting State for the purposes of the Swiss Convention.

Conclusion

Entity A 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 of interest 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 Entity A, to provide an exemption from withholding tax on dividends, it must satisfy the following:

•         there are dividends that are paid by companies that are residents of Australia

•         Entity A derives and is the beneficial owner of the dividends

•         Entity A holds directly no more than 10 per cent of the voting power in the companies paying the dividends, and

•         Entity A 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 shares.

Therefore, there are dividends that are paid by companies that are residents of Australia from the investments held by Entity A 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 constitutes 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 Entity A, FCP and the sub-funds:

•         The Fund Manager as manager holds legal title to the assets.

•         The Custodian acts to safeguard the assets.

•         The assets are not held by the Fund Manager or Custodian for their own benefit, but they act for the interests of Entity A, which is the only unitholder of FCP and the sub-funds.

•         Entity A is beneficially entitled to the income of FCP and the sub-funds and can on a monthly basis require payment of its interest in FCP and the sub-funds.

Based upon the above rights and obligations, a trust relationship exists between Entity A, FCP, the Fund Manager and the Custodian. Due to Entity A's sole beneficial interest in the assets of FCP and the sub-funds, where it can require payment of its interest on a monthly basis, Entity A accrues income from the investments as it arises.

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

The Swiss tax treatment of Entity A 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 incomes of the sub-funds are considered to be the income of Entity A 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 Entity A is viewed to derive the income under both Swiss tax and Australian tax, it follows that Entity A is the beneficial owner of the dividends for the purposes of the Swiss Convention.

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

Entity A 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 Sub-Fund A.

Based upon the above, this condition is satisfied.

Pension scheme and investment income is exempt from Swiss tax

As established above, Entity A is 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 affect the exemption to withholding tax on dividends under subparagraph 4d) of Article 10 of the Swiss Convention. These provisions do not apply to Entity A, pursuant to the following:

•         Entity A 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 its sub-funds are not dual residents of both Australia and Switzerland, pursuant to paragraph 1 of Article 4 of the Swiss Convention. Entity A, also, as determined above, is a resident of Switzerland.

Conclusion

Entity A is a Swiss pension scheme whose investment income is exempt from Swiss tax. In addition, Entity A is the beneficial owner of dividends paid by Australian resident companies held through FCP and Sub-Fund A. Furthermore, Entity A 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 operate to exempt Entity A from withholding tax on dividends paid by Australian resident companies from the investments held through FCP and Sub-Fund A.

Question 2

Is Entity A exempt from withholding tax on interest paid on its Australian debt investments held through FCP and Sub-Fund B under subparagraph 3d) of Article 11 of the Swiss Convention?

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.

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).

Consideration of the Swiss Convention is outlined below.

Swiss Convention - application to Entity A

As determined above, Entity A 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, Entity A is a resident of a Contracting State for the purposes of the Swiss Convention.

Furthermore, Entity A 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 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:

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.

For subparagraph 3d) of Article 11 of the Swiss Convention to apply to Entity A, in respect of an exemption from withholding tax on interest income, it must satisfy the following:

•         there is interest that arises in Australia

•         Entity A is the beneficial owner of the interest

•         Entity A is a resident of Switzerland, and

•         Entity A 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 Entity A through FCP and Sub-Fund B.

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 Entity A through FCP and Sub-Fund B 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, Entity A is the beneficial owner of the income which it derives via FCP and its sub-funds, 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 Sub-Fund B is considered to be the income of Entity A as the sole investor in FCP and Sub-Fund B. As such, Entity A will be the beneficial owner of the interest and will be considered to derive the interest.

Resident of Switzerland

As determined above, Entity A 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, Entity A 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

Entity A does not meet any of the restrictions on the availability of the exemptions regarding its investments via FCP and its sub-funds under Article 11, which 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). Entity A 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). Entity A, 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 Entity A has invested in are such that the payer has no special relationship with Entity A.

Consequently, the restrictions, prescribed in the Swiss Convention, to the availability of the exemptions from income and withholding tax on interest income discussed above will not be applicable in respect of the interest income derived by Entity A on its Australian debt instrument investments.

Conclusion

Entity A 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 Sub-Fund B.

As none of the restrictions prescribed in the Swiss Convention regarding the availability of the exemptions from tax on interest income apply, subparagraph 3d) of Article 11 of the Swiss Convention will operate to exempt Entity A from withholding tax on interest paid to Entity A from the Australian debt investments via FCP and Sub-Fund B.