Private ruling: Conduit foreign income
Date of advice: 6 August 2015
Published: August 2015
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Question and answer | Can the net profits of the foreign branch of the Australian company be distributed to the foreign shareholders of the company without the deduction of dividend withholding tax? | Yes.

Relevant facts and circumstances: You are an Australian resident company. You have a corporate branch that carries on a business in a foreign country. The profits of the foreign branch are taxable in the foreign country. The profits of the foreign branch are not assessable in Australia. The profits of the foreign branch have been retained in the company for some years. You now intend to distribute the profits of the foreign branch to foreign resident shareholders of the company.

Relevant legislative provisions: Income Tax Assessment Act 1936 section 23AH | Income Tax Assessment Act 1936 section 128B | Income Tax Assessment Act 1997 subsection 802-15(1) | Income Tax Assessment Act 1997 subsection 802-15(2) | Income Tax Assessment Act 1997 section 802-30 | Income Tax Assessment Act 1997 subsection 802-30(1) | Income Tax Assessment Act 1997 subsection 802-30(2) | Income Tax Assessment Act 1997 subsection 802-30(3) | Income Tax Assessment Act 1997 subsection 802-30(4) | Income Tax Assessment Act 1997 subsection 802-30(5)

Reasons for decision: Summary: A distribution that an Australian corporate tax entity makes to a foreign resident is not subject to dividend withholding tax, and is not assessable income, to the extent that the entity declares it to be 'conduit foreign income'. Generally, conduit foreign income is foreign income which is derived by a foreign resident through an Australian entity (the conduit) which would not normally be assessable to that Australian entity. Section 23AH of the ITAA 1936 provides that the foreign income a resident Australian company derives from carrying on a business at or through a permanent establishment in a foreign country is not assessable income and is not exempt income. Subsection 802-15(1) of the ITAA 1997 provides that an unfranked distribution made by an Australian corporate tax entity that is declared in its distribution statement to be conduit foreign income: a) is not assessable income and is not exempt income of a foreign resident; and b) is an amount to which section 128B (liability to withholding tax) of the ITAA 1936 does not apply. The declaration must be made on or before the day on which the distribution is made (subsection 802-15(2) of the ITAA 1997). An Australian corporate tax entity's conduit foreign income at a particular time (the relevant time) is worked out by applying sections 802-30 (foreign source income amounts) and 802-55 (no double benefits) of the ITAA 1997. For an Australian company, the initial calculation involves working out the amount of ordinary and statutory income derived by the company that has been is or will be included in an income statement of the company (or of another entity) and that would not be included in the company's assessable income if the company was a foreign resident at the relevant time (subsection 802-30(1) of the ITAA 1997). The amount obtained is then adjusted by any applicable amounts as specified in subsections 802-30(2) to 802-30 (5) of the ITAA 1997. The result is the amount of the company's conduit foreign income. In your case, the income you derived from the foreign branch of the company is non-assessable non-exempt income in Australia and therefore meets the criteria to be considered conduit foreign income, subject to the calculations mentioned above. Consequently, when distributing the profits of the foreign operation to the foreign resident shareholders of the company, there will be no withholding tax requirement.