Assessability of dividends received from shares held in Netherlands companies

Are the dividends received from shares held in Netherlands companies by a resident taxpayer assessable income under subsection 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The dividends received from shares held in Netherlands companies by a resident taxpayer are assessable income under subsection 6-10(4) of the ITAA 1997.

The taxpayer is a resident of Australia for taxation purposes.

The taxpayer owns shares in a number of companies which are resident in the Netherlands.

The taxpayer receives dividends from these shares from which Netherlands withholding tax was deducted.

Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. The assessable income of an Australian resident includes statutory income from all sources, whether in or out of Australia (subsection 6-10(4) of the ITAA 1997).

Section 10-5 of the ITAA 1997 lists those provisions about assessable income. Included in this list is subsection 44(1) of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with dividends. Subsection 44(1) of the ITAA 1936 provides that the assessable income of a resident shareholder of a company (whether the company is a resident or a non resident) shall include dividends paid by the company out of profits derived by it from any source.

In determining liability to Australian tax on foreign source income, it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and ITAA 1997 so that those Acts are read as one.

Schedule 10 to the Agreements Act contains the tax treaty and the protocol between Australia and the Kingdom of the Netherlands (Netherlands Agreement). Schedule 10A to the Agreement Act contains the Second Protocol to the Netherlands Agreement (Second Protocol). The Netherlands Agreement and the Protocols operate to avoid the double taxation of income received by Australian and Netherlands residents.

Article 10(1) of the Netherlands Agreement provides that dividends paid by a Netherlands company to a resident of Australia may be taxed in Australia.

Article 10(2) of the Netherlands Agreement provides that the dividends may also be taxed in the Netherlands but that the rate of tax is not to exceed 15% of the gross amount of the dividends.

Article 23(1) of the Netherlands Agreement provides that, subject to the provisions of the law of Australia, a credit for any tax paid in the Netherlands will be allowed against Australian tax payable on income from Netherlands sources.

Paragraph 5 of the Protocol of the Netherlands Agreement at paragraph (5) states that where income derived by a resident of Australia under Article 10 of the Netherlands Agreement may be taxed in the Netherlands, such income shall be deemed to be income from sources in the Netherlands for the purposes of Article 23(1) of the Netherlands Agreement.

The dividends received by the taxpayer from Netherlands form part of their assessable income under subsection 6-10(4) of the ITAA 1997.

As foreign tax has been paid in relation to this income a foreign tax credit will be allowed. If the Netherlands tax paid on the dividends is less than the Australian tax that will be payable, the taxpayer will be entitled to a full credit for the Netherlands tax paid.