ATO ID 2007/178: Assessability of dividends under Article 10(3) of the US Convention - determination made under Article 16(5) of the US Convention
Date of decision: 30 August 2007
Year of income: Year ended 30 June 2007
Business line: Public Groups and International

Issue
Are unfranked dividends paid by an Australian resident subsidiary to the taxpayer, a United States (US) resident company, not taxed in Australia under Article 10(3) 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 where the Australian competent authority determined under Article 16(5) of the US Convention that the taxpayer shall obtain tax treaty benefits?

Decision
Yes. Unfranked dividends paid by the Australian resident subsidiary to the taxpayer are not taxed in Australia where the Australian competent authority has made a determination under Article 16(5) of the US Convention that the taxpayer shall obtain tax treaty benefits.

Facts
The taxpayer is a US resident company. The taxpayer was incorporated before the US Convention entered into force and has owned all of the shares of an Australian resident company since that time. The taxpayer is beneficially (and legally) entitled to any dividends paid by its Australian resident subsidiary. The Australian resident company paid unfranked dividends to the taxpayer during the income year. The taxpayer is not a qualified person for the purposes of the Limitation of Benefits Article (Article 16) of the US Convention. The Australian competent authority has determined under Article 16(5) of the US Convention that the taxpayer shall obtain the benefits of the US Convention.

Reasons for decision
Summary: Article 10(3) of the US Convention provides that dividends paid by a company that is a resident of Australia shall not be taxed in Australia if the person who is beneficially entitled to the dividends is a company that is a resident of the US that has owned shares representing 80% or more of the voting power of the company paying the dividends for a 12 month period ending on the date the dividend is declared and: Article 16(5) of the US Convention provides that a resident of the US that does not meet the requirements of 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 the law of Australia, that the establishment, acquisition or maintenance of such person and the conduct of its operations did not have as one of its principal purposes the obtaining of benefits under the US Convention. As the Australian competent authority has determined in accordance with Article 16(5) of the US Convention that the taxpayer shall be granted benefits of the US Convention, the conditions for Article 10(3) of the US Convention to apply in the present case have been satisfied. Accordingly, the unfranked dividends paid by the Australian resident subsidiary to the taxpayer will not be subject to tax in Australia.

Legislative references: International Tax Agreements Act 1953 Schedule 2 Schedule 2A Schedule 2, Article 10(3) Schedule 2, Article 16(2)(c) Schedule 2, Article 16(5)
Subject references: Double tax agreements International law International tax Non resident dividend withholding tax Unfranked dividends United States