Private ruling: Withholding tax exemptions under double taxation agreements
Date of advice: 14 December 2017
Published: May 2018
Ruling period: Income years ended 30 June 20XX | 30 June 20XX | 30 June 20XX | 30 June 20XX | 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is the foreign entity exempt from liability to withholding tax and income tax on interest and dividend income derived from its Australian investments the Tax Agreement. | A1: Yes

Relevant facts and circumstances: The foreign entity 1. The Regulations of the foreign entity forms part of the Scheme to which this Ruling relates. 2. The foreign entity is covered by the relevant pension legislation in their resident jurisdiction. 3. The foreign entity is recorded in a published document of registered pension funds or schemes. 4. The tax administration of the foreign entity’s resident jurisdiction has provided a Certificate confirming that the foreign entity is a resident of the foreign entity’s resident jurisdiction, the foreign entity has the statutory purpose of administering and providing pensions in accordance with the relevant pension legislation in the foreign entity’s resident jurisdiction, and that the foreign resident is exempt from income taxes in the foreign entity’s resident jurisdiction. Other 5. The foreign entity will receive interest income along with dividend income from its Australian investments. 6. The foreign entity is not a resident of Australia for tax purposes. 7. The foreign entity does not have any permanent establishments in Australia through which its investments are made or managed. 8. The foreign entity investments in Australian equities do not, and will not, provide the foreign entity with more than 10% of the voting rights in any Australian entity in which the foreign entity holds an equity interest. 9. The foreign entity does not, and will not, have any right, contingent or absolute, to participate, directly or indirectly, in the management, control or decision making of the issuer of any debt claims from which the foreign entity derives, or will derive, interest income. 10. The foreign entity does not have, and will not have, any special relationships with any Australian issuer of debt instruments upon which interest income is being, or will be, derived by the foreign entity.

Relevant legislative provisions: Tax Agreement | Income Tax Assessment Act 1936 section 128B | Income Tax Assessment Act 1997 section 4-1 | International Tax Agreements Act 1953 section 3AAA | International Tax Agreements Act 1953 section 3AAB

Reasons for decision: Summary: Non-resident taxpayers will generally be liable to pay income tax under section 4-1 of the Income Tax Assessment Act 1997 ( ITAA 1997 ) or withholding tax under section 128B of the Income Tax Assessment Act 1936 ( ITAA 1936 ) on Australian-sourced income, unless an exemption or exclusion applies. In determining liability to tax on Australian income derived by a foreign resident, it is necessary to also consider the applicable agreement as defined in section 3AAA or section 3AAB of the International Tax Agreements Act 1953 ( Agreements Act ). Subsection 4(1) of the Agreements Act incorporates the ITAA 1936 and the ITAA 1997 so that those Acts are read as one with the Agreements Act. Subsection 4(2) of the Agreements Act, provides that the Agreements Act effectively overrides the ITAA 1936 and the ITAA 1997 where there are inconsistent provisions, except for some limited provisions. | Detailed Reasoning - Tax Agreement: Australia and the foreign entity’s resident jurisdiction are both parties the Tax Agreement. | Detailed Reasoning - Investments: Dividends The Tax Agreement deals with the taxation of dividends paid by a company which is a resident of a contracting state and provides an exemption for pension funds or schemes whose income is exempt from taxation in the fund or schemes resident jurisdiction where the interest in the Australia company held is less than 10% of the voting power in the entity. Interest The Tax Agreement deals with the taxation of interest arising in a contracting state and paid to a resident of the other contracting state and provides an exemption for pension funds or schemes whose income is exempt from taxation in the fund or schemes resident jurisdiction. In respect of its investments into Australia, the foreign entity derives interest and dividend income. Further, the foreign entity has not, and will not, acquire more than 10% of the voting rights in any Australian entity that pays dividends which the foreign entity will seek to be exempt from income and withholding tax. | Detailed Reasoning - Resident of a contracting state: The Tax Agreement sets out definitions of residents of contracting states and definitions in relation to what will constitute a pension fund or scheme, being one that is established and maintained in accordance with the relevant legislative provisions of that relevant jurisdiction. The foreign entity is covered by the relevant pension legislation in their resident. The foreign entity was established in the foreign entity’s resident jurisdiction. Consequently, the foreign entity is a pension fund or scheme for the purposes of the Tax Agreement and is a resident of a contracting state, being the foreign entity’s resident jurisdiction. The exemptions will only be available in respect of dividends and interest paid by an Australian resident entity to the foreign entity. | Detailed Reasoning - Is the foreign entity a pension fund or scheme whose investment income is exempt from tax in their resident jurisdiction?: As set out above, the foreign entity is a pension fund or scheme for the purposes of the Tax Agreement. Further, the certificate sets out that the foreign entity is exempt from tax in its resident jurisdiction and has been exempt since it was established. Consequently, in accordance the Tax Agreement, the foreign entity will prima facie be exempt from income and withholding tax on the dividend and interest income derived from its Australian instruments. | Detailed Reasoning - Limitations: The Tax Agreement also prescribes further restrictions on the availability of the abovementioned exemptions. In respect of both interest and dividends, the applicability of the exemption is restricted and may not be available where the member of the contracting state operates through a permanent establishment whether or not that permanent establishment is situated in the other contracting state. The foreign entity does not have any permanent establishments in Australia through which its investments are made or managed. In respect of interest, the exemption will not be available where the beneficial owner of the interest participates in the management, control or decision making of the issuer of the debt claim. The foreign entity does not, and will not participate in the management, control or decision making of any of the issuers of the debt instruments upon which the foreign entity derives interest income. Further, in respect of interest, of the Tax Agreement precludes the availability of the exemption in circumstances where a special relationship exists 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. In the present circumstances the Australian debt instruments in which the foreign entity has invested in, or will invest in, are such that the payer has no special relationship with the foreign entity. Consequently, the exceptions, prescribed in the Tax Agreement, to the availability of the exemptions from income and withholding tax on dividends and interest income discussed above will not be applicable in respect of the interest and dividend income derived by the foreign entity on its Australian equity and debt instrument investments. | Detailed Reasoning - Conclusion: The foreign entity is exempt from income tax and withholding tax on its interest and dividend income under the Tax Agreement.