Exemption from withholding tax under Article 10 of the 2003 UK Convention

Is Article 10(3)(b) of the tax treaty between Australia and the United Kingdom (the UK Convention) contained in Schedule 1 to the International Tax Agreement Act 1953 (Agreements Act) satisfied where the United Kingdom (UK) company, which is the beneficial owner of the unfranked dividend paid by an Australian company, is indirectly less than 100% owned by one or more companies whose principal class of shares are listed and regularly traded on a recognised stock exchange?

No. Article 10(3)(b) of the UK Convention is not satisfied where the UK company, which is the beneficial owner of the unfranked dividend, is indirectly less than 100% owned by one or more companies whose principal class of shares are listed and regularly traded on a recognised stock exchange.

An Australian resident company (Aus Co) pays an unfranked dividend to a UK resident company (UK Co), the beneficial owner of the dividend.

UK Co has owned 100% of the voting power in Aus Co for a period of more than 12 months on the date the dividend is declared by Aus Co.

UK Co is wholly owned by a UK Limited Partnership which was formed under the UK Limited Liability Partnerships Act 2000 . The partnership has two partners - UK Partner Co 1 and UK Partner Co 2.

UK Partner Co 1, a UK resident company that owns 70% of the UK Limited Partnership, has its principal and only class of shares listed and regularly traded on the London Stock Exchange.

UK Partner Co 2, a UK resident company that owns 30% of the UK Limited Partnership, is wholly owned by a Japanese resident company whose principal and only class of shares are regularly traded on the Tokyo Stock Exchange.

Article 10 of the UK Convention provides that certain cross-border inter-corporate dividends flowing between Australia and the UK are either: • subject to a maximum of 5% rate of source country tax where the beneficial owner directly holds at least 10% of the voting power in the company paying the dividend; or • exempt from tax because of the application of Article 10(3) of the UK Convention.

UK Co would normally be subject to 5% tax in Australia as its voting power in Aus Co is 100%.

However, Article 10(3) of the UK Convention states that:

Notwithstanding the provisions of paragraph 2 of this Article, dividends shall not be taxed in the Contracting State of which the company paying the dividends is a resident if the beneficial owner of the dividends is a company that is a resident of the other Contracting State that has owned shares representing 80 per cent 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 the company that is the beneficial owner of the dividends: (a) ... (b) is owned directly or indirectly by one or more companies whose principal class of shares is listed on a recognised stock exchange specified in subparagraph (i) or (ii) of subparagraph (o) of paragraph 1 of Article 3 and regularly traded on one or more recognised stock exchanges

Article 3(1)(o) of the UK Convention defines 'recognised stock exchange' to mean: (i) the Australian Stock Exchange and any other Australian stock exchange recognised as such under Australian law (ii) the London Stock Exchange and any other United Kingdom investment exchange recognised under United Kingdom law; or (iii) any other stock exchange agreed upon by the competent authorities.

As UK Partner Co, which owns 70% of the limited partnership, has its principal class of shares listed on the London Stock Exchange, the requirement of 'recognised stock exchange' is satisfied.

The term 'owned' is not defined in Article 10 or Article 3 of the UK Convention. Article 3(3) of the UK Convention provides that where a term is not defined therein, unless the context requires otherwise, it should be given its meaning under the tax law of the country in which the treaty is being applied. Further, any meaning under the applicable tax laws of the country prevails over a meaning given to the term under other laws of that State.

The term 'owned' is not defined in either Income Tax Assessment Act 1936 or Income Tax Assessment Act 1997 . Therefore, a careful scrutiny of both the context and the domestic law is required in interpreting the term (paragraph 74 of Taxation Ruling TR 2001/13).

The term 'owned' has been considered in a number of cases. The general indicia for ownership of an asset were considered by the Full Federal Court in Bellinz Pty Ltd & Others v. Federal Commissioner of Taxation (1998) 84 FCR 154; 98 ATC 4634; (1998) 39 ATR 198. The joint judgment of Hill, Sundberg and Goldberg JJ followed Mason J in Forestry Commissioner of New South Wales v. Stefanetto (1976) 133 CLR 507 at 518, and held the meaning of owned 'must be ascertained in the light of the context in which the word is used'. Their Honours also quoted Halsbury's Laws of England 4th edition Vol 35 at paragraphs 1127 and 1128 which states: Ownership consists of innumerable rights over property, for example the rights of exclusive enjoyment, of destruction, alteration and alienation, and of maintaining and recovering possession of the property from all other persons. Those rights are conceived not as separately existing, but as merged in one general right of ownership ... Ownership is nevertheless divisible to some extent ... prima facie an owner is entitled to possession or to recover possession of his goods against all the world.

The Full Federal Court relied on Union Trustee Co of Australia Ltd v. Federal Commissioner of Land Tax (1915) 20 CLR 526 at 530 for the proposition that the prima facie meaning of the word, subject to context, is the 'entire dominion of the thing said to be owned'.

In considering the context in which the term 'owned' is used in the UK Convention, it is noted that elsewhere in Article 10 of the UK Convention where a percentage of less than 100 is permitted, the exact percentage is specified (for example, 80% in relation to voting power in Article 10(3) of the UK Convention). The fact that no such specific percentage is stated in relation to Article 10(3)(b) of the UK Convention further supports the view that 100% ownership is required.

As UK Limited Partnership is only 70% owned by a company whose principal class of shares is listed and regularly traded on a recognised stock exchange, UK Co does not satisfy Article 10(3)(b) of the UK Convention.