Edited version of private advice

Authorisation Number: 1052215073384

Date of advice: 1 February 2024

Ruling

Subject: Withholding tax

Question

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

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Entity A

1.            Entity A is an umbrella fund category in accordance with Country X law, which is divided into sub-funds.

2.            The sub-fund that is relevant to this ruling is the 'Sub-Fund'.

3.            Entity A and its Sub-Fund are governed by Country X.

4.            The fund management company (Entity B) is a company incorporated in Country X and has its registered office in Country X.

5.            The custodian bank (Custodian) is a company incorporated in Country X and has its registered office in Country X.

6.            The Entity A Fund Contract lists the Asset Manager of the Sub-Fund.

7.            Investment in Entity A is restricted to the 'Investor'. The Investor is a qualified investor pursuant to Country X law.

8.            The legal relationship between the Investor, Entity B and the Custodian, is governed by the present fund contract and the applicable provisions of the legislation on collective investment schemes.

Entity A Fund Contract

9.            Under the Entity A Fund Contract, Entity A and its Sub-Fund do not have separate legal personalities, are fiscally transparent and are not subject to tax in Country X. The income of Entity A and the Sub-Fund are considered to be the income of the Investor.

10.         Entity B manages the Sub-Fund independently and in its own name, but for the account of the Investor. It decides in particular on the issue of units, the investments and their valuation. It calculates the net asset values of the sub-funds and determines the issue and redemption prices of units as well as reinvestments of income. It exercises all rights associated with the umbrella fund and Sub-Fund.

11.         Entity B and its agents are subject to the duties of loyalty, due diligence and disclosure. They act independently and exclusively in the interests of the investor. They implement the organisational measures that are necessary for proper management. They account for the collective investment schemes they manage and provide information on all fees and costs charged directly or indirectly to the investor and on compensation received from third parties, in particular commissions, discounts or other pecuniary advantages.

12.         Entity B may delegate investment decisions and specific tasks to third parties, provided this is in the interests of proper management. It shall only appoint persons who have the necessary skills, knowledge and experience for this activity, as well as the necessary authorisation. It carefully instructs and monitors the third parties brought in. Investment decisions may only be delegated to asset managers who hold the required licence or to the sole investor pursuant to Country X law.

13.         The Custodian is responsible for the safekeeping of the Sub-Fund's assets. It handles the issue and redemption of fund units as well as payment transfers on behalf of the sub-funds. It does not have independent access to their assets.

14.         The Custodian and its agents act independently and exclusively in the interests of the Investor and have a duty to exercise loyalty, due diligence and disclosure.

15.         The Custodian ensures that Entity B complies with the law and the fund contract.

16.         The Sub-Fund is not divided into unit classes. The units are not securitised but are kept in book-entry form and are held exclusively in a custody account at the Custodian.

17.         Subscription and redemption orders for units will be accepted on the order day up to a certain cut-off time.

18.         The issue and redemption price of units is based on the net asset value per unit on the valuation day on the basis of the closing prices from the previous day.

19.         Entity B may suspend the issue of units at any time and may reject applications for the subscription or conversion of units.

20.         Entity B may not acquire equity securities which, in total, represent more than 10% of the voting rights in a company or which would enable it to exert a material influence on the management of an issuing company.

21.         Entity B may acquire for the assets of a sub-fund up to a maximum of 10% of non-voting equity securities, debt instruments and/or money market instruments from the same issuer, as well as up to a maximum of x% of the units in other collective investment schemes.

22.         The investment restrictions listed above at fact 20 and fact 21 do not apply in the case of securities and money market instruments that are issued or guaranteed by a country or a public-law entity from the OECD or by an international public-law organisation to which Country X or a member state of the European Union belongs.

23.         The net income of the Sub-Fund will be added on an annual basis to the Sub-Fund's assets for reinvestment.

24.         Entity B, the Custodian or the Investor may dissolve the Sub-Fund by terminating the fund contract without notice. The Sub-Fund may be dissolved by order of the supervisory authority.

Entity A's Australian Investments

25.         Entity A invested in publicly traded shares in companies listed on the Australian Securities Exchange (ASX).

26.         The Sub-Fund holds shares in Australian resident companies from which they receive dividend income.

27.         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%.

Additional Facts

28.         The ultimate beneficial owners of the dividend income received by Entity A 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

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

Relevant legislative provisions

Convention between Australia and the Country X Confederation for the Avoidance of Double Taxation with respect to Taxes On Income, with Protocol 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-avoidancerule for income tax'.

Reasons for decision

Question 1

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

Summary

Entity A is considered to be a person who is a resident of a Contracting State and is therefore subject to the Country X Convention.

Dividends paid from investments in Australian resident companies held through Entity A and its Sub-Fund meet the requirements of subparagraph 4d) of Article 10 of the Country X Convention and as such, shall not be taxed in Australia.

Detailed reasoning

Subsection 128B(1) of the 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.

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 Country X Convention. As such, consideration of the Country X Convention is outlined below.

Application of the Country X Convention

In order for the Country X Convention to apply, Article 1 of the Country X 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 Country X Convention must therefore be considered both a 'person' and a 'resident of a Contracting State' for the Country X Convention to apply.

Person

Subparagraph 1c) of Article 3 of the Country X 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 Entity A Fund Contract, a trust relationship exists between the Investor, Entity A, Entity B and Custodian. Therefore, Entity A 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 Country X Convention.

Resident of a Contracting State

Paragraph 1 of Article 4 of the Country X 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 Country X Convention states that, in relation to paragraph 1 of Article 4 of the Country X 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 'person' and a 'pension scheme established in Country X' to satisfy the definition of a 'resident of a Contracting State' for the purposes of the Country X Convention.

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

Subparagraph 1i) of Article 3 of the Country X 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.

Entity A was established in Country X and is regulated by Country X law. Entity A is operated principally to earn income for the benefit of the Investor (restricted to Country X pension schemes) and is therefore a 'pension scheme' within the definition of the term 'pension scheme' of the Country X Convention.

Therefore, Entity A is a 'resident' of Country X.

Conclusion

As established above, Entity A is both a 'person' and a 'resident' of Country X in accordance with the definitions within the Country X Convention. Therefore, Entity A meets the requirements of Article 1 of the Country X Convention and is subject to its application.

Country X Convention - application to taxes

Paragraphs 1 and 2 of Article 2 of the Country X 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 Country X, on behalf of its political subdivisions or local authorities, irrespective of the manner in which they are levied.

2.    These 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 Country X 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 Country X Convention applies to all taxes imposed on income and in particular applies to Australian income tax.

Section 128B of the ITAA 1936imposes liability to withholding tax on dividend, interest and royalty income derived by non-residents. As such, withholding tax payable in respect of dividends paid to non-residents is considered to be an Australian income tax and is covered by the Country X Convention.

Dividend income

Article 10 of the Country X 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 Country X, 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 Country X, 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 Country X, a pension scheme whose investment income is exempt from Country X 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 Country X Convention to apply to the Fund, 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 to a resident of Country X.

•   The beneficial owners of the dividends are pension schemes whose investment income is exempt from Country X 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 Country X

The Sub-Fund 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 Entity A is the Asset Manager who is located in Country X. It is evident from the OECD Commentaries that the main focus of the term 'paid...to' in paragraph 1 of Article 10 of the Country X 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 Country X 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 Country X pension scheme whose investment income is exempt from Country X 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 Country X Convention.

The beneficial owners of the dividends are pension schemes whose investment income is exempt from Country X 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 Country X tax'.

The Entity A Fund Contract limits investors to the extent that the ultimate beneficial owners of the income of Entity A must be the Investor, which is a Country X pension scheme under the DTA. The income of Entity A 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 Entity A and its Sub-Fund is a pension scheme whose investment income is exempt from Country X 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

The Entity A Fund Contract limits the investments of the Sub-Funds whereby the 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 less than 10% of the voting power in the Australian resident companies paying dividends.

Based upon the above, this condition is satisfied.

Other provisions of Article 10 of the Country X Convention

Paragraphs 7 and 9 of Article 10 of the Country X Convention operate to limit the application of subparagraph 4d) of Article 10 of the Country X 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 Entity A and its Sub-Fund are not dual residents of both Australia and Country X, pursuant to paragraph 1 of Article 4 of the Country X Convention.

Conclusion

The ultimate beneficial owner of the dividends paid by Australian resident companies from investments held through Entity A and its Sub-Fund is a Country X pension scheme whose investment income is exempt from Country X 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 Country X Convention will apply to the dividends paid by Australian resident companies in respect to Australian investments held through Entity A and its Sub-Fund such that the dividends shall not be taxed in Australia.