Issue
Are dividends paid from an Australian resident company to a United States resident company subject to withholding tax under subsection 128B(1) of the Income Tax Assessment Act 1936 (ITAA 1936), where the United States company owns shares representing 80% or more of the voting power of the Australian company?
Decision
No. Withholding tax does not apply to the dividends under Article 10 of the United States Convention contained in Schedules 2 and 2A of the International Tax Agreements Act 1953 (Agreements Act).
Facts
A US resident company acquired 100% of the issued shares in an Australian resident company on 1 September 2003.
The US resident company's principal class of shares are listed on the New York Stock Exchange (NYSE) and are regularly traded.
The Australian resident company intends to pay a dividend after 1 September 2004.
It is expected that the principal class of shares in the company receiving the dividends will be regularly traded.
Reasons for Decision
Pursuant to subsection 128B(1) of the ITAA 1936, a liability to withholding tax will apply to income that is derived by a non-resident that consists of a dividend 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 double tax agreement contained in the Agreements Act.
The taxpayer is a resident of the United States, a country with which Australia has entered into a double tax agreement. Therefore, the double tax agreement between Australia and the United States and the protocols to that agreement contained in Schedule 2A of the Agreements Act must be considered in determining whether the dividends received by the taxpayer are taxable in Australia.
Article 10(2) of the US Convention provides that dividends paid by a company resident in Australia being dividends to which a resident of the US is beneficially entitled, may be taxed in Australia.
However, Article 10(3) provides that dividends shall not be taxed in Australia if the person who is beneficially entitled to the dividends is a company that is a resident of the US that has owned shares representing 80 percent or more of the voting power of the company paying the dividends for a 12-month period ending on the date the dividend is declared and: (a) the company that is resident in the US is a qualified person by reason of sub-paragraph (c) of paragraph (2) of Article 16 (Limitation on Benefits); or (b) the company that is resident of the US is entitled to benefits with respect to the dividends under paragraph (5) of that Article.
A person is a 'qualified person' for a taxable year pursuant to sub-paragraph (c)(i) of paragraph (2) of Article 16 if it is a company and the principal class of its shares is listed on a recognised stock exchange specified in sub-paragraph (a) or (b) of paragraph (6) of this Article and is regularly traded on one or more recognised stock exchanges.
Under sub-paragraph (a) of paragraph (6) of Article 16 a 'recognised stock exchange' includes 'any stock exchange registered with the U.S. Securities and Exchange Commission as a national securities exchange under the U.S. Securities Exchange Act of 1934 '.
The US resident company's principal class of shares is listed on the NYSE, which is registered with the U.S. Securities and Exchange Commission, and the shares are currently regularly traded (and it is expected they will be regularly traded in future) on that exchange. Therefore sub-paragraph (a) of paragraph (3) of Article 10 is satisfied.
At the time the dividend is declared, the US company owns 100% of the shares representing 80% or more of the voting power of the Australian company for the 12-month period ending on the date the dividend is declared.
Therefore, Article 10(3) applies, and Australia has no taxing right in respect of the dividend under the US double tax agreement.
As a result, the dividend is not subject to withholding tax under section 128B.