Obtaining of treaty benefits under UK Convention

For the purposes of Article 10.3(c) of the tax treaty between Australia and the United Kingdom (the UK Convention) contained in Schedule 1 to the International Tax Agreements Act 1953, did the establishment, acquisition or maintenance of the taxpayer, a United Kingdom (UK) resident company, and the conduct of its operations not have as one of its principal purposes the obtaining of benefits under the UK Convention?

Yes. The establishment, acquisition or maintenance of the taxpayer and the conduct of its operations did not have as one of its principal purposes the obtaining of benefits under the UK Convention.

The taxpayer is a UK resident company. One of the taxpayer's wholly-owned subsidiaries is an Australian resident. The taxpayer has held and continues to hold its investment in its Australian resident subsidiary since 1990.

All the shares in the taxpayer were held by a UK resident company that was listed on the London Stock Exchange since 1993.

In 2000, another UK resident company that was a wholly owned subsidiary of a listed company on the Country A Stock Exchange, acquired all the shares of the UK company listed on the London Stock Exchange.

The taxpayer continued to own all the shares in the Australian resident company.

Article 10.3(c) of the UK Convention provides that a UK resident company that does not meet the conditions in Article 10.3(a) or (b) shall, nevertheless, be granted benefits of the UK Convention if the Australian competent authority determines, in accordance with Australian law, that the establishment, acquisition or maintenance of the UK resident and the conduct of its operations did not have as one of its principal purposes the obtaining of benefits under the UK Convention.

Whether the elements of Article 10.3(c) of the UK Convention are satisfied is to be determined in accordance with the broad principles of treaty interpretation (see Taxation Ruling TR 2001/13: Income Tax: Interpreting Australia's Double Tax Agreements).

The UK Convention does not have any direct references to the interpretation to be given to Article 10.3(c) or any of its elements, nor does the directly relevant extrinsic material provide any insight into its interpretation, both in respect of the provision itself and in the context of the UK Convention as a whole.

The matters upon which a competent authority makes a determination under Article 10.3(c) are the same as those matters as stated in Article 16(5) of the tax treaty between Australia and the United States of America (the US Convention). Notwithstanding the differences in the two Articles of the respective tax treaties, both provisions are similar. Where the conditions for the application of the relevant provision are met, they allow a resident of a relevant tax treaty country to nevertheless obtain certain tax treaty benefits in respect of dividends that might otherwise not be available. For these reasons, the Commissioner considers that, in cases involving dividends, the meaning to be given to the matters upon which a competent authority makes a determination under Article 10.3(c) of the UK Convention is the same as that arising from the matters in Article 16(5) of the US Convention.

Consistent with the approach taken in paragraph 2.112 of the Explanatory Memorandum to the International Tax Agreements Amendment Bill (No 1) 2002, the Commissioner considers that Article 10.3(c) of the UK Convention recognises that there may be cases where significant participation by third country residents in an enterprise resident in one of the treaty countries may be warranted by sound business practice or long-standing business structures and does not necessarily indicate a treaty shopping motive.

The taxpayer company was established prior to the UK Convention coming into force and has held shares in the Australian resident subsidiary company since that time. The subsidiary formed part of the business structure of the group and there is no evidence pointing to treaty shopping as being one of the motives for establishing the taxpayer company

The taxpayer's investment in the Australian resident subsidiary was made to facilitate the conduct in Australia of the business of the taxpayer's group. There is no evidence indicating that the purpose behind maintaining the taxpayer or the conduct of its operations is to obtain benefits under the UK Convention

Accordingly, for the purposes of Article 10.3(c) of the UK Convention, the establishment, acquisition or maintenance of the taxpayer and the conduct of the taxpayer's operations, did not have as one of its principal purposes the obtaining of benefits under the UK Convention.