Withholding Tax: dividend paid from a dual resident company to its UK parent company

Are unfranked dividends paid by a company that is a dual resident of Australia and the United Kingdom (UK), to a UK resident company (the taxpayer) subject to withholding tax under subsection 128B(1) of the Income Tax Assessment Act 1936 (ITAA 1936), where the taxpayer owns shares representing more than 80% of the voting power of the dual resident company?

No. Unfranked dividends paid by a company that is a dual resident of Australia and the UK, to the taxpayer is not subject to withholding tax under subsection 128B(1) of the ITAA 1936, where the taxpayer owns shares representing more than 80% of the voting power of the dual resident company.

The taxpayer is a listed company resident of the UK and a non-resident of Australia for income tax purposes.

The taxpayer owns 100% of the issued shares in a company that is both a resident of Australia and resident of the UK (the dual resident company).

The dual resident company is incorporated in Australia but has its place of effective management in the UK.

The taxpayer receives unfranked dividends from the dual resident company.

Pursuant to section 128B of the ITAA 1936, a liability to withholding tax will apply to income that is derived by a non-resident that consists of unfranked dividends paid by a company that is a resident.

In determining liability to Australian tax on Australian sourced income received by a non-resident, it is necessary to consider not only the income tax laws but also any applicable tax convention contained in the International Tax Agreements Act 1953 (Agreements Act).

The taxpayer is a resident of the UK, a country with which Australia has entered into a tax convention. Therefore, the Tax Convention between Australia and the United Kingdom of Great Britain and Northern Ireland and 2003 United Kingdom Notes (the 2003 UK Convention), contained in Schedule 1 of the Agreements Act, must be considered in determining whether the dividend income derived by the taxpayer is taxable in Australia.

Subsection 4(1) of the Agreements Act provides that the ITAA 1936 must be read as one with the Agreements Act. By virtue of subsection 4(2) of the Agreements Act, the Agreements Act effectively overrides the ITAA 1936 where there are inconsistent provisions.

Article 4(4) of the 2003 UK Convention stipulates that for the purposes of the 2003 UK Convention a company that is resident of both Australia and the UK will be deemed to be a resident in the country where its place of effective management is situated. As the dual resident company paying the dividends has its place of effective management in the UK, it is deemed to be a UK resident for the purposes of the 2003 UK Convention.

Article 10(1) of the 2003 UK Convention provides that dividends derived by the taxpayer from an Australian resident company for the purpose of its tax, may be taxed in the UK.

Article 10(2) of the 2003 UK Convention further provides that Australia may also tax the relevant dividends but this rate shall not exceed 5% if the taxpayer owns more than 10% in the company paying the dividends. In all other cases the rate of tax shall not exceed 15%.

Notwithstanding Article 10(2), Article 10(3) of the 2003 UK Convention specifies that where a listed company receiving the dividends owns 80% of the company paying the dividends, for a 12 month period, the dividends shall not be taxed in the Contracting State of which the company paying the dividends is a resident.

The phrase, 'for the purposes of its tax' is contained in Article 10(1) and 10(2) of the 2003 UK Convention and ensures that where dividends are paid by a dual resident company, that is deemed a resident of the UK under the 2003 UK Convention, Australia still has a taxing right on these payments. Article 10(3) of the 2003 UK Convention does not contain the phrase 'for the purposes of its tax' after the reference to 'the Contracting State of which the company paying the dividend is a resident'.

Article 10(3) of the 2003 UK Convention, however, is still inextricably linked to Article 10(2) of the 2003 UK Convention in that it focuses on the limitation of Australia's source country taxing rights. As Article 10(3) restricts Australia's source country taxation rights based on the attributes of the taxpayer, not on the company paying the dividend, it is consistent with the context of the Article for the words, 'for the purposes of its tax,' to be implied when reading the reference to 'the company paying the dividends is a resident.'

This conforms with the Explanatory Memorandum to the International Tax Agreements Bill 2003 that states that: No tax will be payable in the source country on dividends where a company that is the beneficial owner and is resident in the other country: • holds 80% or more of the voting power of the company paying the dividends; and • satisfies a 12 month holding requirement at the time the dividend in relation to the shares on which the dividend is payable. (Paragraph 1.109)

Furthermore, if the phrase was not implied, a payment made by a dual resident company, that had its effective management in the UK, would be treated as being a payment from one UK resident to another UK resident and therefore Article 10(3) of the 2003 UK Convention would not apply. As a consequence, the payment would instead be subject to tax at a rate of 5% under Article 10(2)(a) of the 2003 UK Convention.

As there is an inconsistency between the exemption provided for under Article 10(3) of the 2003 UK Convention, contained in Schedule 1 of the Agreements Act and subsection 128B(1) of the ITAA 1936 which prima facie subjects dividends derived by a non-resident to withholding tax, the Agreements Act prevails.

Accordingly, the unfranked dividends paid to the taxpayer are not subject to dividend withholding tax under subsection 128B(1) of the ITAA 1936.