Edited version of private advice

Authorisation Number: 1052065776025

Date of advice: 9 December 2022

Ruling

Subject: Withholding tax - interest and dividends

Question 1

Does subparagraph 4d) of Article 10 of the Swiss Convention apply to the dividend income paid by Australian resident companies with respect to the Australian investments held by FCP and its Sub-Fund, such that the dividend income 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 paid by Australian resident companies with respect to the Australian investments held by FCP and its Sub-Fund, such that the interest income shall not be taxed in Australia?

Answer

Yes.

This ruling applies for the following period:

1 July 20xx to 30 June 20yy

The scheme commences on:

1 July 20xx

Relevant facts and circumstances

FCP

1. FCP is an umbrella fund of the 'Other funds for traditional investments' category in accordance with Articles 25, 68, and 92 of the Swiss Collective Investment Schemes Act of 23 June 2006 (CISA).
2. FCP is divided into the following sub-fund that is relevant to this ruling, Sub-Fund.
3. FCP and its Sub-Fund are governed by Swiss Law and in particular CISA, the Swiss Collective Investment Schemes Ordinance of 22 November 2006 (CISO) and the Collective Investment Schemes Ordinance of 27 August 2014 issued by the Swiss Financial Market Supervisory Authority FINMA (CISO FINMA).
4. Investment in FCP is restricted to the Investor.
5. Investment in the Sub-Fund is restricted to the following Investors:
   1. investors that are the beneficial owners of the income and are fiscally acknowledged Swiss pension schemes which fulfill the conditions pursuant to Article 10, paragraph 4(d) and Article 11, paragraph 3(d) of the Swiss Convention, and
   2. collective investments schemes and investment foundations under Swiss law where all of the interests are held, and beneficially owned, by fiscally acknowledged Swiss pension schemes which fulfill the conditions pursuant to Article 10, paragraph 4(d) and Article 11, paragraph 3(d) of the Swiss Convention.
6. Custodian is a company incorporated in Switzerland and has its registered office in Switzerland.
7. The legal relationship between the Investor, FMC and Custodian is governed by contractual arrangement (FCP Fund Contract) and the applicable provisions of Swiss legislation concerning collective investment schemes.

FCP Fund Contract

8. Under the FCP Fund Contract, FCP and its Sub-Fund do not have separate legal personalities, are fiscally transparent and are not subject to tax in Switzerland. The incomes of FCP and the Sub-Fund are considered to be the income of the Investor.
9. FMC manages the Sub-Fund at its own discretion and in its own name for the account of the Investor.
10. FCP Fund Contract states FMC makes all decisions relating to the issuing of units, the investments and their valuation. It calculates the net asset values of the sub-funds, sets the issue and redemption prices of units, and determines the distribution of income.
11. FCP Fund Contract allows FMC to transfer investment decisions and specific tasks to third parties for the Sub-Fund, provided it is in the interests of efficient management.
12. FCP Fund Contract lists the Asset Manager of the Sub-Fund.
13. FMC exercises all rights associated with FCP and the Sub-Fund and complies with the law and the FCP Fund Contract at all times.
14. FMC and its agents act independently and exclusively in the interests of the Investor, acting in good faith and subject to the duties of loyalty, due diligence and disclosure.
15. Custodian and its agents act independently and exclusively in the interests of the Investor, acting in good faith and have a duty to exercise due diligence and provide information.
16. Custodian is responsible for the safekeeping of the assets of the Sub-Fund, but may not access the Sub-Fund's assets in its own right.
17. FMC may, subject to the approval of Custodian and the supervisory authority, create different unit classes, or merge or liquidate unit classes, for the Sub-Fund.
18. All unit classes are entitled to a share in the undivided assets of the Sub-Fund, which are not segregated.
19. All unit classes are issued only in the form of registered shares.
20. All unit classes are offered exclusively to qualified investors pursuant to Article 10 of CISA who have signed a written agreement with Asset Manager or one of its authorised partners.
21. Investors can make redemption orders for units on a daily basis.
22. For the Sub-Fund, the issue and redemption price of units is based on the net asset value per unit on the valuation day in conjunction with closing prices of the previous day.
23. FMC may temporarily suspend the redemption of fund units in the interest of all investor by way of exception in certain circumstances.
24. In respect of the investments of the Sub-Fund, FMC may not acquire participations rights that in total represent more than 10% of voting rights or that enable it to exert a significant influence on an issuer's management.
25. For the Sub-Fund, FMC may not acquire more than 10% of the non-voting equity of a single issuer or more than x% of the units of other collective investments.
26. The investment restrictions listed above at fact 28 and fact 29 do not apply if the securities are issued or guaranteed by a state or a public-law institution from the OECD or by international organisations with public-law character to which Switzerland or a member state of the European Union belongs.
27. The net income of the Sub-Fund for each unit class is added annually to the assets of the relevant unit class of the corresponding sub-fund for reinvestment.
28. FMC or Custodian may dissolve the Sub-Fund by terminating FCP Fund Contract without notice. The Sub-Fund may also be dissolved by order of the supervisory authority.

FCP's Australian investments

29. FCP invested in publicly traded shares in companies and Real Estate Investment Trusts (REITs) listed on the Australian Securities Exchange (ASX).
30. The Sub-Fund holds shares in Australian resident companies from which they receive dividend income.
31. Throughout the ruling period the percentage of equity owned in each of the Australian investments held by the Sub-Fund will always remain below 10%.
32. The Sub-Fund holds <10% of the percentage of equity owned and voting power in each of the Australian investments.

Additional Facts

33.  The ultimate beneficial owners of the dividend income received by FCP do not carry on a business through a permanent establishment situated in Australia and do not perform independent personal services from a fixed base in Australia.

Assumption

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

Relevant legislative provisions

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

Question 1

Does subparagraph 4d) of Article 10 of the Swiss Convention apply to the dividend income paid by Australian resident companies with respect to the Australian investments held by FCP and its Sub-Fund, such that the dividend income shall not be taxed in Australia?

Summary

FCP is considered to be a person who is a resident of a Contracting State and is therefore subject to the Swiss Convention.

Dividends paid from investments in Australian resident companies held through FCP and its Sub-Fund 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.

Application of the Swiss Convention

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 relevant entity for the purpose of applying the Swiss Convention 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.

Based on the rights and obligations under the FCP Fund Contract, a trust relationship exists between the Investor, FCP, FMC and Custodian. Therefore, FCP is considered a 'trust' within the meaning of Australian tax law and therefore a 'person' within the definition at subparagraph 1c) of Article 3 of 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, FCP must be a 'person' and a 'pension scheme established in Switzerland' to satisfy the definition of a 'resident of a Contracting State' for the purposes of the Swiss Convention.

As detailed above, it has been established that FCP is a 'person' within the definition at subparagraph 1c) of Article 3 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.

FCP was established in Switzerland and is regulated by Swiss law. FCP is operated principally to earn income for the benefit of the Investors who are Swiss pension schemes and is therefore a 'pension scheme' within the definition of the term 'pension scheme' of the Swiss Convention.

Therefore, FCP is a 'resident' of Switzerland.

Conclusion

As established above, FCP is both a 'person' and a 'resident' of Switzerland in accordance with the definitions within the Swiss Convention. Therefore, FCP meets the requirements of Article 1 of the Swiss Convention and is 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 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 provision in relation to dividend income. The provision states relevantly:

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. ....
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 effect that the dividend income shall not be taxed in Australia, the following must be satisfied:

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

•         The beneficial owners of the dividends are pension schemes whose investment income is exempt from Swiss tax.

•         The beneficial owners of the dividends hold directly no more than 10 per cent of the voting power in the companies paying the dividends.

There are dividends paid by companies that are residents of Australia to residents of Switzerland

The Sub-Fund holds a mixture of units in REITs, from which they may derive various types of income, including dividend income from Australian resident companies. The Sub-Fund also holds shares in ASX-listed Australian resident companies from which they derive dividend income. Therefore, there are dividends paid by Australian resident companies.

In respect of the term 'paid...to', the 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 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.

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 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.

The direct recipients of the dividends paid by Australian resident companies in respect of the Australian investments held by FCP is the Asset Manager who is located in Switzerland. 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.

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 should be assessed in respect of the requirements of paragraph 4 of Article 10 of the Swiss Convention.

The beneficial owners of the dividends are pension schemes whose investment income is exempt from Swiss tax

Sub-paragraph 4(d) of Article 10 requires the beneficial owners of the dividend income to be a 'pension scheme whose investment income is exempt from Swiss tax'.

FCP Fund Contract limits investors to the extent that the ultimate beneficial owners of the income of FCP must be the Investor, which is a Swiss pension scheme under the DTA. The income of FCP includes the dividend income derived from the Australian investments.

As such, the ultimate beneficial owner of the dividend income received in respect of the Australian investments held through FCP and its Sub-Fund is a pension scheme whose investment income is exempt from Swiss tax.

The beneficial owners of the dividends hold directly no more than 10 per cent of the voting power in the companies paying the dividends

FCP Fund Contract limits the investments of the Sub-Fund whereby FMC may not acquire participation rights that in total represent more than 10% of voting rights or that enable it to exert a significant influence on an issuer's management.

The Sub-Fund holds <10% of the voting power in the Australian resident companies paying dividends. Furthermore, the FCP Fund Contract states that the ultimate beneficial owner of the dividends meets the requirements of subparagraph 4d) of Article 10 of the Swiss Convention, which confirms that the ultimate beneficial owner holds directly no more than 10% of the voting power in the companies paying the dividends.

Based upon the above, this condition is satisfied.

Other provisions of Article 10 of the Swiss Convention

Paragraphs 7 and 9 of Article 10 of the Swiss Convention operate to limit the application of subparagraph 4d) of Article 10 of the Swiss Convention in certain circumstances.

These paragraphs do not apply for the following reasons:

•         The ultimate beneficial owner of the income does not carry on a business through a permanent establishment situated in Australia and do 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-Fund are not dual residents of both Australia and Switzerland, pursuant to paragraph 1 of Article 4 of the Swiss Convention.

Conclusion

The ultimate beneficial owner of the dividends paid by Australian resident companies from investments held through FCP and its Sub-Fund is a Swiss pension scheme whose investment income is exempt from Swiss tax. Furthermore, the ultimate beneficial owners of the dividend income hold 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 apply to the dividends paid by Australian resident companies in respect to Australian investments held through FCP and its Sub-Fund such that the dividends shall not be taxed in Australia.

Question 2

Does subparagraph 3d) of Article 11 of the Swiss Convention apply to the interest income paid by Australian resident companies with respect to the Australian investments held by FCP and its Sub-Fund, such that the interest income shall not be taxed in Australia?

Summary

FCP is considered to be a person who is a resident of a Contracting State and is therefore subject to the Swiss Convention.

Interest paid from investments in Australian resident companies held through FCP and its Sub-Fund meet 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.

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).

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 FCP

As determined above, FCP 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, FCP is a resident of a Contracting State.

Furthermore, FCP 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 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 FCP, such that the interest income shall not be taxed in Australia, it must satisfy each of the following:

•         There is interest that arises in Australia.

•         Australian resident companies pay the interest income to FCP via its Sub-Fund.

•         The Investor derives and is the beneficial owner of the interest.

•         The Investor is a resident of Switzerland.

•         The Investor 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 through FCP and its Sub-Fund.

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 through FCP and its Sub-Fund 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, 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, Investor is the beneficial owner of the interest income received by FMC or Custodian under the FCP and its Sub-Fund.

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, FMC, or in some cases the Custodian, is the direct recipient of the interest income paid by Australian residents, and the right to use and enjoy the dividend income is constrained by the contractual obligations of the FCP to hold the payment for the sole benefit of, and distribute it to, Investor as the only unit holder in the Sub-Fund of FCP. This is therefore also sufficient to establish, for the purposes of the Swiss Convention, that Investor has derived the interest income.

Therefore, Investor 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.

Resident of Switzerland

As determined above, FCP 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, FCP 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

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 ultimate beneficial owner, Investor, 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). Investor, 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 FCP's Australian investments have no special relationship with FCP nor the Investor.

Consequently, the restrictions discussed above, will not be applicable in respect of the interest income derived by Investor on its Australian investments held via FCP and its Sub-Fund.

Conclusion

Investor is a Swiss pension scheme whose investment income is exempt from Swiss tax. In addition, it derives interest income from Australian investments held via FCP, another Swiss pension scheme, and its Sub-Fund.

As none of the restrictions prescribed in paragraphs 4, 6, 7 or 8 of Article 11 of the Swiss Convention apply to FCP, subparagraph 3d) of Article 11 of the Swiss Convention will apply to the interest derived by Investor from the Australian investments held via FCP and its Sub-Fund such that the interest shall not be taxed in Australia.