Private ruling: Withholding tax and double tax agreement
Published: February 2014
Ruling period: Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018
Date scheme commenced: 1 July 2013

Ruling: Q1: Is the overseas Company subject to withholding tax withheld at a rate of 15% under Article 10 of the Double Tax Agreement between Australia and the overseas Company for unfranked dividends from Australian equities held by the Foreign Branch of the overseas Company? | A1: Yes.

Relevant facts and circumstances: The overseas Company is a foreign resident company and not a resident of Australia for tax purposes. The overseas Company is the dividend recipient for dividends received via a foreign branch. The Foreign Branch of the overseas Company is a branch and is not a separate legal entity.

Relevant legislative provisions: Income Tax Assessment Act 1936, Subsection 128B(1) | Income Tax Assessment Act 1936, Subsection 128B(4) | Income Tax Assessment Act 1997, Subsection 6-5(3) | International Tax Agreements Act 1953, Section 17A | Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974, Section 7

Reasons for decision: Summary: Subsection 6-5(3) of the Income Tax Assessment Act 1997 provides that the assessable income of a foreign resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources during an income year. Foreign residents are exempt from tax in Australia on their foreign sourced income. Australian source income derived by a foreign resident is taxed in one of two ways: on an assessment basis or on a withholdings basis. Whether an item of income should be taxed on an assessment basis or a withholding basis is determined by the type of income derived. Where a foreign resident receives a distribution of unfranked dividends, subsection 128B(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that the foreign resident will be liable for withholding tax. 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. Section 7 of the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 requires that a dividend withholding tax (DWT) rate of 30% be deducted from all dividends which are subject to DWT. However, section 17A of the International Tax Agreements Act 1953 ensures that, where a double tax agreement limits the Australian tax payable in respect of a dividend, the DWT is reduced to a maximum limit set by the agreement. In relation to dividends paid to overseas residents, Article 10(2)(b) of the Convention between Australia and the foreign company for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income allows Australia to tax a resident of the foreign country receiving dividend income arising in Australia at a rate not exceeding 15%. The Foreign Branch of the overseas Company is wholly owned by the overseas Company. The Branch is not a separate legal entity. The overseas Company is the dividend recipient for the unfranked dividends received by the Foreign Branch from the Australian prime broker. As a result, the overseas Convention is applicable to the dividends paid by Australia to the Foreign Branch and the DWT is limited to a maximum of 15% of the gross amount of the dividends.