Private ruling: Withholding tax exemption
Date of advice: 13 January 2016
Published: March 2016
Ruling period: 1 July 20xx - 30 June 20xx
Date scheme commenced: 1 July 20xx

Ruling: Q1: Do the relevant dividends and interest articles of the double tax agreement (the DTA) between Australia and a Foreign Country apply to the Australian-sourced dividend and interest income derived by the Entity? | A1: Yes.

Relevant facts and circumstances: Australian sourced dividend and interest was paid to a foreign entity.

Relevant legislative provisions: International Tax Agreements Act 1953

Reasons for decision: Summary: The relevant dividend and interest articles of the DTA apply to exempt from Australian taxation the Australian-sourced dividend and interest income derived by the Entity. | Detailed Reasoning - Detailed reasoning: Subject to certain exceptions, withholding tax is payable under section 128B of the Income Tax Assessment Act 1936 (ITAA 1936) on dividends and interests paid by an Australian resident company and derived by a non-resident. Section 7 of the Income Tax Dividends, Interest and Royalties Withholding Tax) Act 1974 sets the rate of withholding tax on such dividends and interest. Subsection 128B(3) of the ITAA 1936 lists certain types of income to which withholding tax under section 128B of the ITAA 1936 does not apply. In particular, paragraph 128B(3)(jb) of the ITAA 1936 provides an exclusion from withholding tax for certain superannuation funds for foreign residents. (jb) income that: (i) is derived by a non-resident that is a superannuation fund for foreign residents (or a foreign superannuation fund for the period prior to 14 September 2006); and (ii) consists of interest, or consists of dividends or non-share dividends paid by a company that is a resident; and (iii) is exempt from income tax in the country in which the non-resident resides. In the present case: • The income is derived by the Entity; • The income consists of interest and dividends income paid by Australian companies; • However, interest and dividend income is not exempt from income tax in the Foreign Country. Therefore, the Entity is not exempt from withholding tax for its interest and dividends income derived in Australia under paragraph 128B(3)(jb) of the ITAA 1936. As a result, liability to Australian withholding tax is subject to the provisions of the DTA. | Detailed Reasoning - Dividend: The DTA provides for present purposes that dividends paid by an Australian resident company, being dividends beneficially owned by a Foreign Country resident, may be taxed in Australia according to the laws of Australia. However, the beneficial owner does not have to pay tax on the dividends in the country in which it derived them if both of the following apply: • it is a Contracting State, or political subdivision or a local authority thereof (including a government investment fund); • it directly holds no more than 10% of the voting power of the company paying the dividend. | Detailed Reasoning - Interest: The DTA provides that interest arising in one country and which a resident of the other country beneficially owns may be taxed in the country of residence of the recipient. It also allows the source country to tax interest but limits the rate of tax to 10% of the gross amount of interest. The DTA requires each state to exempt interest arising in that state and beneficially owned by a resident of the other state if it is derived by: • a Contracting State or its political subdivision or a local authority (including a government investment fund); or • a bank performing central banking functions. The Commissioner accepts that the Entity is eligible for the purposes of relevant interest and dividend articles of the DTA.