ATO ID 2007/177: Obtaining of treaty benefits under US Convention
Date of decision: 30 August 2007
Year of income: Year ended 30 June 2007
Business line: Public Groups and International

Issue
For the purposes of Article 16(5) of the tax treaty between Australia and the United States of America (the US Convention) contained in Schedules 2 and 2A to the International Tax Agreements Act 1953 , did the establishment, acquisition or maintenance of the taxpayer, a United States (US) resident company, and the conduct of its operations not have as one of its principal purposes the obtaining of benefits under the US Convention?

Decision
Yes. The establishment, acquisition or maintenance of the taxpayer and the conduct of its operations did not have as one of its principal purposes the obtaining of benefits under the US Convention.

Facts
The taxpayer is a US resident company that is a holding company of a company group. One of the taxpayer's subsidiaries is an Australian resident company. The taxpayer is not a qualified person for the purposes of the Limitation of Benefits Article (Article 16) of the US Convention. The taxpayer was incorporated in the US several years before the US Convention entered into force and has been maintained as a holding company since its incorporation. The taxpayer's investment in the Australian resident subsidiary was made to facilitate the conduct in Australia of the business of the taxpayer's group. The conduct of the taxpayer's operations includes its on-going investment in its Australian subsidiary. The taxpayer's group provided certain business services. For a number of years, the taxpayer has held its investment in its Australian subsidiary which provided those business services to Australian customers and still continues to do so.

Reasons for decision
Summary: Article 16(5) of the US Convention provides that a US resident that is not a qualified person under Article 16(2) of the US Convention shall, nevertheless, be granted benefits of the US Convention if the Australian competent authority determines, in accordance with Australian law, that the establishment, acquisition or maintenance of the US resident and the conduct of its operations did not have as one of its principal purposes the obtaining of benefits under the US Convention. Paragraph 2.112 of the Explanatory Memorandum to the International Tax Agreements Amendment Bill (No 1) 2002 states that the discretion in Article 16(5) of the US Convention recognises that there may be cases where significant participation by third country residents in an enterprise resident in one of the treaty countries may be warranted by sound business practice or long-standing business structures and does not necessarily indicate a treaty shopping motive. Similarly, there may also be cases where significant participation by a resident of one Contracting State in an enterprise resident in the other State may be warranted by the same things as stated above and not necessarily indicate a treaty shopping motive. The taxpayer company was established prior to the US Convention coming into force and has held shares in the Australian resident subsidiary company since that time. The subsidiary formed part of the business structure of the group and there is no evidence pointing to treaty shopping as being one of the motives for establishing the taxpayer company. The taxpayer's investment in the Australian resident subsidiary was made to facilitate the conduct in Australia of the business of the taxpayer's group. There is no evidence indicating that the purpose behind maintaining the taxpayer or the conduct of its operations is to obtain benefits under the US Convention. Accordingly, for the purposes of Article 16(5) of the US Convention, the establishment, acquisition or maintenance of the taxpayer and the conduct of the taxpayer's operations, did not have as one of its principal purposes the obtaining of benefits under the US Convention.

Legislative references: International Tax Agreements Act 1953 Schedule 2 Schedule 2A Schedule 2, Article 16(2) Schedule 2, Article 16(5)
Subject references: Double tax agreements International law Non resident dividend withholding tax Unfranked dividends United States