Edited version of private advice

Authorisation Number: 1052221326909

Date of advice: 20 February 2024

Ruling

Subject: Withholding tax - interest and dividends

Question 1

Are you exempt from withholding tax on dividends paid by Australian resident companies from your investments held through the FCP and its sub-funds under paragraph 4d) of Article 10 of the Convention between Australia and the Swiss Confederation for Avoidance of Double Taxation with respect to Taxes and Income, with Protocol [2014] ATS 33 (Swiss Convention)?

Answer

Yes.

Question 2

Are you exempt from withholding tax on interest paid on your Australian debt investments held through the FCP and its sub-funds under subparagraph 3d) of Article 11 of the Swiss Convention?

Answer

Yes.

This ruling applies for the following periods:

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Pension Fund

1.     You are a pension fund in Switzerland.

2.     Your object is to provide occupational pensions and to pay out benefits.

3.     Your assets are invested according to Swiss law and solely for the purpose of providing occupational benefits to members.

4.     The members of your key management bodies are all non-residents of Australia. Additionally, your executive managers are all non-residents of Australia.

5.     All your management and investment decisions are undertaken in Switzerland by these bodies.

6.     You 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.

7.     You are treated as a company for Swiss tax purposes.

8.     You are exempt from tax in Switzerland.

9.     The tax authority of Switzerland states that you are exempt from tax on the basis that you are a regulated pension fund in Switzerland.

Your Australian Investments

FCP and its Sub-Funds

10.  You make investments through the FCP which is a Swiss contractual open-ended fonds commun de placement.

11.  The FCP is a contractual arrangement for collective investments established in accordance with Swiss law under a contract between you (as the sole investor in the FCP), the Fund Management Company and the Custodian Bank (the FCP Fund Contract).

12.  The FCP is an open-ended collective investment scheme in the form of a contractual fund where you are the sole investor and have either a direct or indirect legal entitlement, at the expense of collective assets, to redeem your units at the net asset value.

13.  The FCP investments are held under sub-funds. Your Australian investments include shares which are held under the FCP's sub-fund.

14.  As contractual arrangements, the FCP and its sub-funds do not have separate legal personalities, are fiscally transparent and are not subject to tax in Switzerland. The incomes of the FCP and the sub-funds are considered to be your income as the sole investor in the FCP.

15.  The sub-fund holds shares in Australian resident companies which pay dividends in relation to those shares. This sub-fund also holds debt interests in Australian resident companies in varying interest rates and currencies.

16.  You do not have a special relationship with those payers who pay the interest on the debt instruments held through the sub-fund 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. Furthermore, you do not and will not participate in the management, control or decision-making of any of the issuers of the debt instruments upon which you derive interest income.

17.  Interest income arising 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.

18.  You hold 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-fund.

The FCP Fund Contract

19.  The fund manager acquired legal title to the underlying investments on appointment.

20.  The fund manager manages the sub-funds on your account independently and by its own name. It decides in particular about the issue of units, the investments and their valuation. It calculates the net asset value and fixes the issue and redemption prices and profits distributions. The fund manager exercises all the rights belonging to the FCP and to the sub-funds independently and in its own name. The fund manager can, with the agreement of the custodian bank and the approval of the supervisory authority create, cancel or merge various unit classes at any time.

21.  The fund manager and its agents are subject to the duties of loyalty, care and information. They act independently and safeguard only your interests.

22.  The custodian bank 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 bank and its agents are subject to the duties of loyalty, care and information.

23.  The circle of investors in the sub-fund is limited to you as the sole investor. You hold the units of the sub-funds for its members (beneficiaries) and represent their interests.

24.  You can terminate the Fund Contract at any time by requiring payment of your share in the sub-funds in cash. The fund manager can consent to a transfer of part of the portfolio at market value.

25.  You are entitled to the assets and income of the sub-funds in which you hold an interest.

Other

26.  The Australian resident companies that pay dividends from the investments held through the 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.

27.  The FCP does not own real estate in Australia.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 128B

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

Reasons for decision

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).

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.

Swiss Convention - application to your circumstances

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.

You 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.

You are a pension fund that provides occupational benefits to its members. You are treated as a company for tax purposes in Switzerland. Therefore, you satisfy the definition of a 'company' pursuant to subparagraph 1d) of Article 3 of the Swiss Convention. You are, therefore, considered to be a 'person' in accordance with Subparagraph 1c) of Article 3 of the Swiss Convention for the purposes 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, you 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.

You were established in Switzerland and exist as a pension scheme.

In respect of paragraphs 1.35 and 1.36 of the EM to the ITAAB 2014, given you are a pension fund established in Switzerland and operates principally to provide pension related benefits, you satisfy the definition of a 'pension scheme' under the Swiss Convention.

This view is supported by the Certificate of Residence.

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

Conclusion on the application of the Swiss Convention

You meet the requirements of Article 1 of the Swiss Convention and are 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.

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 you, to provide an exemption from withholding tax on dividends, you must satisfy the following:

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

•         you derive and are the beneficial owner of the dividends,

•         you hold directly no more than 10 per cent of the voting power in the companies paying the dividends, and

•         you are a pension scheme and your investment income is exempt from Swiss tax.

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

The FCP's sub-funds hold 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 you through the FCP and its sub-funds.

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 interest 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 12.1 of the 2017 OECD Commentary on Article 10 of the Model Tax Convention (OECD Commentaries) states:

... The term 'beneficial owner' is therefore not used in a narrow technical sense (such as the meaning it has under the trust law of many common law countries), rather, it should be understood in its context, in particular in relation to the words "paid ... to a resident", 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.

Paragraph 12.4 of the OECD Commentaries informs that the 'beneficial owner' can be found identifying the entity which has the unconstrained right to use and enjoy the dividend income:

... Where the recipient of a dividend does have the right to use and enjoy the dividend unconstrained by a contractual or legal obligation to pass on the payment received to another person, the recipient is the "beneficial owner" of that dividend. It should also be noted that Article 10 refers to the beneficial owner of a dividend as opposed to the owner of the shares, which may be different in some cases.

Further, the OECD Commentaries at paragraphs 12.2 to 12.3 provides examples of situations where agent, 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.

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 you, the FCP and its sub-funds:

•         The fund manager as manager holds legal title to the assets.

•         The custodian bank also acts to safeguard the assets.

•         The assets are not held by the fund manager or custodian bank for their own benefit, but they act for your interests, where you are the only unitholder of the FCP and its sub-funds.

•         You are beneficially entitled to the income of the FCP and its sub-funds and can at any time require payment of your interest in the FCP and its sub-funds.

Based upon the above rights and obligations, a trust relationship exists between you, FCP, the fund manager and the custodian bank. Due to your sole beneficial interest in the assets of FCP and its sub-funds, where you can require payment of your interest at any time, you accrue income from the investments as it arises.

Accordingly, you are presently entitled to the income of the FCP and its sub-funds. As such, you are considered to derive the dividends through the FCP and its sub-funds.

The Swiss tax treatment of you and the income arising through the FCP and its sub-funds is also instructive.

The 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 your income as the sole investor in the 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 you are viewed to derive the income under both Swiss tax and Australian tax, it follows that you are the beneficial owner of the dividends for the purposes of the Swiss Convention.

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

You hold 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 its sub-funds.

Based upon the above, this condition is satisfied.

Pension scheme and investment income is exempt from Swiss tax

As established above, you are a pension scheme, pursuant to the Swiss Convention, and are 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 you, pursuant to the following:

•         You 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.

•         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. You, also, as determined above, are a resident of Switzerland.

Conclusion

You are a Swiss pension scheme whose investment income is exempt from Swiss tax. In addition, you are the beneficial owner of dividends paid by Australian resident companies held through the FCP and its sub-funds. Furthermore, you 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 operate to exempt you from withholding tax on dividends paid by Australian resident companies from the investments held through FCP and its sub-funds.

Question 2

Are you exempt from withholding tax on interest paid on your Australian debt investments held through the FCP and its sub-funds under subparagraph 3d) of Article 11 of the Swiss Convention?

Summary

Interest paid by Australian resident companies held through the FCP and its sub-funds meet the requirements of subparagraph 3d) of Article 11 of the Swiss Convention and as such are exempt from withholding tax under 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 your circumstances

As determined above, you are 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, you are a resident of a Contracting State for the purposes of the Swiss Convention.

Furthermore, you meet the requirements of Article 1 of the Swiss Convention and are 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 you, in respect of an exemption from withholding tax on interest income, it must satisfy the following:

•         there is interest that arises in Australia

•         you are the beneficial owner of the interest

•         you are a resident of Switzerland, and

•         you are 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 you through the FCP and its sub-funds.

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 you through the FCP and its sub-funds 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, you are the beneficial owner of the income which you derive via the 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 the FCP and its sub-funds are considered to be your income as the sole investor in the FCP and its sub-funds. As such, you will be the beneficial owner of the interest and will be considered to derive the interest.

Resident of Switzerland

As determined above, you are a resident of Switzerland as you satisfy the definition of a 'resident of a Contracting State' and were established in Switzerland.

Pension scheme and investment income is exempt from Swiss tax

As determined above, you are a pension scheme, pursuant to the Swiss Convention, and are exempt from tax in Switzerland.

Other provisions of Article 11 of the Swiss Convention

You do not meet any of the restrictions on the availability of the exemptions regarding its investments via the 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). You do 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). You, being the beneficial owner of the interest, do not and will not participate in the management, control or decision-making of any of the issuers of the debt instruments upon which you derive 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 you have invested in are such that the payer has no special relationship with you.

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 you on your Australian debt instrument investments.

Conclusion

You are a Swiss pension scheme whose investment income is exempt from Swiss tax. In addition, you derive interest income from Australian debt investments held via the FCP and its sub-funds.

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 you from withholding tax on interest paid to you from the Australian debt investments via the FCP and its sub-funds.