Eligibility for Treaty Benefits Under The Australia-U.S. Income Tax Treaty

Eligibility for Treaty Benefits Under

The Australia-U.S. Income Tax Treaty

by Jason Connery, Douglas Poms, and

Jennifer Blasdel-Marinescu

Reprinted from Tax Notes Int’l, December 12, 2011, p. 843

Volume 64, Number 11 December 12, 2011

Eligibility for Treaty Benefits Under the Australia-U.S.

Income Tax Treaty

by Jason Connery, Douglas Poms, and Jennifer Blasdel-Marinescu

o be entitled to benefits under income tax treaties,

companies must satisfy eligibility requirements.

This article includes flowcharts to help practitioners

navigate the eligibility requirements of the Australia-

U.S. income tax treaty applicable to Australian com-

panies.

Income tax treaties may exempt business income

from source country income taxes and eliminate or

reduce domestic withholding taxes on payments be-

tween residents of countries that are parties to an in-

come tax treaty. To be entitled to benefits under U.S.

income tax treaties, a company must not only be a resi-

dent of the tax treaty partner’s country, but must also

satisfy at least one of the tests in the treaty’s limitation

on benefits provision, if applicable.

The flowcharts in this article focus on the eligibility

of Australian companies claiming benefits on income

that would otherwise be subject to U.S. taxation. This

article does not address the eligibility for treaty benefits

of entities that are partnerships or are otherwise trans-

parent for U.S. or Australian tax purposes. This article

is based on the treaty, the protocol to the treaty signed

on September 27, 2001, and the U.S. Treasury techni-

cal explanation to the protocol.

This article is the 10th in a series

that provides

flowcharts to assist practitioners in determining a com-

pany’s eligibility for tax treaty benefits under the LOB

Convention Between the Government of the United States of

America and the Government of Australia for the Avoidance of

Double Taxation and the Prevention of Fiscal Evasion With Re-

spect to Taxes on Income, August 6, 1982, as amended by a pro-

tocol signed on September 27, 2001.

See Jason Connery, Douglas Poms, and Jennifer Blasdel,

‘‘Eligibility for Treaty Benefits Under the Switzerland-U.S. In-

come Tax Treaty,’’ Tax Notes Int’l, May 9, 2011, p. 505, Doc 2011-

6410,or2011 WTD 89-21; Connery, Poms, and Blasdel, ‘‘Eligibil-

ity for Treaty Benefits Under the Japan-U.S. Income Tax Treaty,’’

Tax Notes Int’l, Sept. 6, 2010, p. 789, Doc 2010-18355,or2010

WTD 172-12; Connery, Poms, and Blasdel, ‘‘Eligibility for Treaty

Benefits Under the 2009 Protocol to the France-U.S. Income Tax

Treaty,’’ Tax Notes Int’l, Apr. 12, 2010, p. 149, Doc 2010-5809,or

2010 WTD 69-14; John Venuti, Connery, Poms, and Blasdel, ‘‘Eli-

gibility for Treaty Benefits Under the Netherlands-U.S. Income

Tax Treaty,’’ Tax Notes Int’l, Nov. 23, 2009, p. 601, Doc 2009-

24084,or2009 WTD 223-11; Venuti, Connery, Poms, and Alexey

Manasuev, ‘‘Eligibility for Treaty Benefits Under the Canada-U.S.

Income Tax Treaty,’’ Tax Notes Int’l, June 15, 2009, p. 967, Doc

2009-11815,or2009 WTD 113-15; Venuti, Ron Dabrowski, Poms,

and Manasuev, ‘‘Eligibility for Treaty Benefits Under U.K.-U.S.

Income Tax Treaty,’’ Tax Notes Int’l, Mar. 23, 2009, p. 1095, Doc

2009-4590,or2009 WTD 56-9; Venuti, Connery, Poms, and Mana-

suev, ‘‘Eligibility for Treaty Benefits Under the Luxembourg-U.S.

Income Tax Treaty,’’ Tax Notes Int’l, July 21, 2008, p. 285, Doc

2008-14359,or2008 WTD 142-8; Venuti, Dabrowski, Poms, and

Manasuev, ‘‘Eligibility for Treaty Benefits Under the France-U.S.

Jason Connery is a principal, Douglas Poms is a principal, and Jennifer Blasdel-Marinescu is a manager

in the International Corporate Services group of KPMG LLP’s Washington National Tax practice.

The information contained herein is of a general nature and based on authorities that are subject to

change. Applicability of the information to specific situations should be determined through consultation

with your tax adviser. This article represents the views of the authors only and does not necessarily rep-

resent the views or professional advice of KPMG LLP.

(Footnote continued on next page.)

TAX NOTES INTERNATIONAL DECEMBER 12, 2011 • 843

provisions of specific U.S. income tax treaties and,

when applicable, in determining eligibility for a 0 per-

cent withholding tax rate on cross-border intercompany

dividend payments to the company.

This article contains eight flowcharts. The first seven

flowcharts analyze the LOB provision of the treaty as

applied to Australian companies. The eighth flowchart

analyzes the requirements that an Australian company

must satisfy to qualify for a 0 percent withholding tax

rate on cross-border intercompany dividend payments

under article 10(3) of the treaty. Although the flow-

charts provide a comprehensive review of applicable

provisions under the treaty, taxpayers and their tax ad-

visers should carefully evaluate each case and deter-

mine whether the requirements of the treaty are met

based on all facts and circumstances. ◆

Income Tax Treaty,’’ Tax Notes Int’l, Feb. 11, 2008, p. 523, Doc

2008-773,or2008 WTD 33-10; and Venuti and Manasuev, ‘‘Eligi-

bility for Zero Withholding on Dividends in the New Germany-

U.S. Protocol,’’ Tax Notes Int’l, Jan. 14, 2008, p. 181, Doc 2007-

27516,or2008 WTD 12-10.

SPECIAL REPORTS

844 • DECEMBER 12, 2011 TAX NOTES INTERNATIONAL

Chart 1. Eligibility for Treaty Benefits Under Article 16 (LOB)

of the Australia-U.S. Tax Treaty

Does the Australian

company satisfy the

publicly traded

company test

(See Chart 2.)

Yes

Does the Australian

company satisfy the

subsidiary of a publicly

traded company

test?

(See Chart 3.)

Does the Australian

company satisfy the

ownership/base erosion

test

(See Chart 4.)

Yes

Does the Australian

company satisfy the

active

trade or business test

(See Chart 6.)

Yes

Has a discretionary

determination been

granted by the U.S.

competent authority?

(See Chart 7.)

Not eligible for

treaty benefits.

Eligible for

treaty

benefits.

Does the Australian company

satisfy the

headquarters

company test

(See Chart 5.)

Yes

Is the company a

resident of Australia?

Eligible for

treaty benefits.

Not eligible

for treaty

benefits.

A person is a “resident” of Australia if the person is:

(i) an Australian corporation; or

(ii) any other person (except a company as defined under the law of

Australia relating to Australian tax) who, under that law, is a resident of

Australia,

provided that, in relation to any income, a person who is:

(iii) subject to Australian tax on income which is from sources in Australia;

(iv) a partnership, an estate of a deceased individual, or a trust (other than

a trust that is a provident, benefit, superannuation, or retirement fund, or

that is established for public charitable purposes or for the purpose of

enabling scientific research to be conducted by or in conjunction with a

public university or public hospital, the income of which is exempt from tax

under the law of Australia relating to Australian tax),

is not treated as a resident of Australia except to the extent that the income is

subject to Australian tax as the income of a resident, either in the hands of

that person or in the hands of a partner or beneficiary, or, if that income is

exempt from Australian tax, is so exempt solely because it is subject to U.S.

tax.

Article 4(1)(a) of the treaty

Pension Funds and Tax-Exempt Organizations

The following are eligible for all benefits of the treaty:

1) An entity organized under the laws of Australia and established and maintained

in Australia for a religious, charitable, educational, scientific, or other similar

purpose, even if the entity is generally exempt from tax in Australia (“Qualifying

Tax Exempt”).

Article 16(2)(e) of the treaty.

There is no requirement that

specified percentages of the beneficiaries of these organizations be residents of

Australia or the United States.

U.S. Treasury technical explanation to the

protocol to the treaty.

2) An entity organized under the laws of Australia and established and maintained

in Australia to provide, under a plan, pensions or other similar benefits to

employed and self-employed persons, even if the entity is generally exempt

from tax in Australia, provided that more than 50 percent of the entity’s

beneficiaries, members, or participants are individuals resident in either

Australia or the United States (“Qualifying Pension Fund”).

Article 16(2)(f) of

the treaty

A person is a “resident” of the United States if the person is:

(i) a U.S. corporation;

(ii) a U.S. citizen, other than a U.S. citizen who is a resident of a state other than

Australia for the purposes of a double tax agreement between that state and

Australia; or

(iii) any other person (except a corporation or unincorporated entity treated as a

corporation for U.S. tax purposes) resident in the U.S. for purposes of its tax,

provided that, in relation to any income derived by a partnership, an estate of a

deceased individual, or a trust, such person is not treated as a resident of the United

States except to the extent that the income is subject to U.S. tax as the income of a

resident, either in its hands or in the hands of a partner or beneficiary, or, if that

income is exempt from U.S. tax, is exempt other than because such person, partner,

or beneficiary is not a U.S. person according to U.S. law related to U.S. tax.

Article 4(1)(b) of the treaty.

SPECIAL REPORTS

TAX NOTES INTERNATIONAL DECEMBER 12, 2011 • 845

Chart 2. Publicly Traded Company Test Under Article 16(2)(c)(I) (LOB)

of the Australia-U.S. Tax Treaty

Does the Australian

company satisfy the

publicly traded

company test?

Is the Australian company’s principal class of

shares listed on a recognized stock exchange

based in Australia or the United States?

Article

16(2)(c)(i) of the treaty.

The term“principal class of shares” is not defined in the

treaty. Generally, the “principal class of shares” means

the common shares of the company representing the

majority of the aggregate voting power and value of the

company. If the company does not have a class of ordinary

or common shares representing the majority of the

aggregate voting power and value of the company, then the

principal class of shares is that class or any combination

of classes of shares that represents, in the aggregate, a

majority of the voting power and value of the company.

U.S.

Treasury technical explanation to the 2001 protocol to

the treaty.

“Recognized stock exchange” means:

(i) the NASDAQ system owned by the

National Association of Securities

Dealers, Inc., and 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;

(ii) the Australian Stock Exchange and

any other Australian stock exchange

recognized as such under Australian

law; and

(iii) any other stock exchange agreed

upon by the competent authorities.

Article 16(6) of the treaty.

The term “regularly traded”is

not defined in the treaty. Terms

not otherwise defined in the

treaty generally are defined by

reference to the law of the source

state (here, the United States).

Article 3(2) of the treaty.

class of shares is considered to

be if tworegularly traded

requirements are met: trades in

the class of shares are made in

more than de minimis quantities

on at least 60 days during the

tax year, and the aggregate

number of shares in the class

traded during the year is at least

10 percent of the average

number of shares outstanding

during the year. Sections 1.884-

5(d)(4)(i)(A), (ii), and (iii) are not

taken into account for purposes

of defining the term “regularly

traded” under the treaty. The

regularly traded requirement

can be met by trading on any

recognized exchange or

exchanges located in either

Australia or the United States.

Trading on one or more

recognized stock exchanges

may be aggregated for purposes

of this requirement. Thus, an

Australian resident company

could satisfy the regularly

traded requirement through

trading, in whole or in part, on a

recognized stock exchange

located in the U.S. or on a stock

exchange in a third country (if

agreed upon by the competent

authorities). Authorized but

unissued shares are not

considered for purposes of this

test.

U.S. Treasury technical

explanation to the 2001

protocol to the treaty.

Yes

Eligible for treaty

benefits.

Yes

Not eligible for

treaty benefits.

(

Go to Chart 3.)

Is the Australian company’s principal class of

shares regularly traded on one or more

recognized stock exchanges?

Article 16(2)(c)(i)

of the treaty.

Does the Australian company have outstanding a

class of shares that is subject to terms or other

arrangements that entitle the holders to a portion of

the income of such company derived from the

United States that is larger than the portion such

holders would receive absent such terms or

arrangements (the “disproportionate part of the

income”)?

Article 16(4)(a) of the treaty.

Do qualified persons own more than 50 percent of

the voting power and value of each class of shares

entitling the holders to the disproportionate part

of the income?

Article 16(4)(b) of the treaty.

Yes

May be partially

eligible for treaty

benefits. Treaty benefits

do not apply to the

disproportionate part

of the income.

A resident of Australia or the United

States is a qualified person for a

tax year if the resident:

(i) is an individual;

(ii) is Australia or the United States,

any political subdivision or local

authority thereof or any agency or

instrumentality of Australia or the

United States;

(iii) satisfies the publicly traded

company test;

(iv) satisfies the subsidiary of a

publicly traded company test

(see Chart 3)

;

(v) is a person (other than an

individual or a company) the

principal class of units of which is

listed or admitted to dealings on a

recognized stock exchange

based in Australia or the United

States and is regularly traded on

one or more of the recognized

stock exchanges

(see article

16(2)(d)(i) of the treaty)

;

(vi) is a person (other than an

individual or company) in which

the direct or indirect owners of at

least 50 percent of the beneficial

interests in such person are

qualified persons by reason of

(iii) or (v), above

(see article

16(2)(d)(ii)

;

(vii) is a Qualifying Tax Exempt

(see

Chart 1 for definition

);

(viii) is a Qualifying Pension Fund

(see Chart 1 for definition)

;

(ix) satisfies the ownership/base

erosion test

(see Chart 4)

;or

(x) satisfies the headquarters

company test

(see Chart 5)

Article 16(2) of the treaty.

The disproportionate part of the

income of an Australian resident

company is the excess portion of such

company’s income from the United

States to which the holders are entitled,

above what they otherwise would be

entitled to receive.

U.S. Treasury

technical explanation to the 2001

protocol to the treaty.

An Australian resident, other than an

individual or a company (e.g., a trust), is

a qualified person if the principal class

of units in that resident is listed or

admitted to dealings on a recognized

stock exchange based in Australia or

the United States and is regularly

traded on one or more of the

recognized stock exchanges.

Article

16(2)(d)(i) of the treaty.

Yes

SPECIAL REPORTS

846 • DECEMBER 12, 2011 TAX NOTES INTERNATIONAL

Chart 3. Subsidiary of a Publicly Traded Company Test Under

Article 16(2)(c)(ii) (LOB) of the Australia-U.S. Tax Treaty

Is at least 50 percent of the aggregate vote and value of

the shares in the Australian company owned directly or

indirectly by five or fewer U.S. or Australian resident

companies, each satisfying the publicly traded

company test

(see Chart 2)

Article 16(2)(c)(ii) of the

treaty.

In the case of indirect ownership, each intermediate

owner must be a resident of either the United States or

Australia.

Article 16(2)(c)(ii) of the treaty.

Eligible for treaty benefits.

Yes

Do qualified persons

(see Chart 2 for definition)

own more than 50 percent of the voting power and

value of each class of shares entitling the holders to

the disproportionate part of the income?

Article

16(4)(b) of the treaty.

Does the Australian company, or a company that

owns at least 50 percent of the aggregate vote or

value of the Australian company, have outstanding a

class of shares that entitles the holders to a

disproportionate part of the income

(see Chart 2

for definition)

Article 16(4)(a) of the treaty.

Yes

Does the Australian company

satisfy the subsidiary of a

publicly traded company

test?

To determine whether the 50

percent ownership test is met,

one must take into account

the aggregate vote and value

of each class of shares issued

by the Australian company.

U.S. Treasury technical

explanation to the 2001

protocol to the treaty.

An Australian resident entity,

other than an individual or

company (e.g., a trust), is a

qualified person

(see Chart

2 for definition)

if the direct

or indirect owners of at least

50 percent of the beneficial

interests in such entity are

entities that satisfy the

publicly traded company

test

(see Chart 2)

, provided

the other requirements

described on this chart are

satisfied.

Article 16(2)(d)(ii)

of the treaty.

Not eligible for treaty

benefits.

(Go to Chart 4.)

May be partially eligible

for treaty benefits. Treaty

benefits do not apply to

the disproportionate part

of the income.

SPECIAL REPORTS

TAX NOTES INTERNATIONAL DECEMBER 12, 2011 • 847

Chart 4. Ownership/Base Erosion Test Under Article 16(2)(g) (LOB)

of the Australia-U.S. Tax Treaty

Does the Australian company

satisfy the ownership/base

erosion test?

Not eligible

for treaty

benefits.

(Go to

Chart 5.)

ForpurposesofD.ofthe

ownership test

the beneficial

interests in a trust will be

considered to be owned by its

beneficiaries in proportion to

each beneficiary’s actuarial

interest in the trust. The interest

of a remainder beneficiary will

be equal to 100 percent less the

aggregate percentages held by

income beneficiaries. A

beneficiary’s interest in a trust

will not be considered to be

owned by a person entitled to

benefits under the other

provisions of paragraph 2 of the

LOB provision if it is not possible

to determine the beneficiary’s

actuarial interest. Consequently,

if it is not possible to determine

the actuarial interest of any

beneficiaries in a trust, the

ownership test cannot be

satisfied, unless all possible

beneficiaries are qualified

persons

(see Chart 2 for

definition). U.S. Treasury

technical explanation to the

2001 protocol to the treaty.

The term “gross income”isnot

defined in the treaty. In the case

of the United States, the term

“gross income”hasthesame

meaning as such term in section

61 of the Internal Revenue Code

of 1986, as amended, and the

regulations thereunder.

To the extent they are

deductible from the taxable

base, trust distributions are

deductible payments. However,

depreciation and amortization

deductions, which do not

represent payments or accruals

to other persons, are

disregarded for this purpose.

U.S. Treasury technical

explanation to the 2001

protocol to the treaty.

Yes

Eligible for treaty benefits.

Yes

Base Erosion Test

Is less than 50 percent of the Australian company’s gross income for the tax year

paid or accrued, directly or indirectly, to persons who are not residents of either

Australia or the U.S. in the form of payments that are deductible for purposes of the

taxes covered by the treaty in Australia (but not including arm’s-length payments in

the ordinary course of business for services or tangible property and payments in

respect of financial obligations to a bank, provided that where such a bank is not a

resident of either the United States or Australia such payment is attributable to a

permanent establishment of that bank located in either the United States or

Australia)?

Article 16(2)(g)(ii) of the treaty.

Ownership Test

On at least half the days of the tax year, do persons of the following type own,

directly or indirectly, at least 50 percent of the aggregate vote and value of the

shares or other beneficial interests in the Australian company?

Article 16(2)(g)(i) of

the treaty.

A. Residents of Australia or the United States that are individuals

(see article

16(2)(a) of the treaty)

;

B. Australia or the United States, political subdivisions or local authorities thereof,

or any agency or instrumentality of such state

(see article 16(2)(b) of the

treaty)

;

C. Residents of Australia or the United States that are companies that satisfy the

publicly traded company test

(see Chart 2) (see article 16(2)(c)(i) of the

treaty)

; and/or

D. Residents of Australia or the United States (other than individuals or

companies) the principal class of units in which are listed or admitted to

dealings on a recognized stock exchange

(see Chart 2 for definition)

based

in Australia or the United States and are regularly traded

(see Chart 2 for

definition)

on one or more of the recognized stock exchanges

(see Chart 2

for definition

) (see Article 16(2)(d)(i) of the treaty)

Does the Australian company, or a company that owns at least 50 percent of the

aggregate vote or value of the Australian company, have outstanding a class of

shares that entitles the holders to a disproportionate part of the income

(see

Chart 2 for definition

Article 16(4)(a) of the treaty.

Do qualified persons

(see Chart 2 for definition)

own more than 50 percent

of the voting power and value of each class of shares entitling the holders to the

disproportionate part of the income?

Article 16(4)(b) of the treaty.

Yes

May be partially

eligible for treaty

benefits. Treaty

benefits do not

apply to the

disproportionate

part of the

income.

Yes

SPECIAL REPORTS

848 • DECEMBER 12, 2011 TAX NOTES INTERNATIONAL

Chart 5. Headquarters Company Test Under Article 16(2)(h) (LOB)

of the Australia-U.S. Tax Treaty

Does the Australian company

satisfy the recognized

headquarters company

test?

Is the Australian company a recognized

headquarters company for a multinational

corporate group?

Article 16(2)(h) of the treaty.

Not eligible

for treaty

benefits.

(Go to

Chart 6.)

Eligible for treaty benefits.

A multinational corporate

group includes all

corporations that the

headquarters company

supervises and excludes

affiliated corporations not

supervised by the

headquarters company.

The headquarters

company does not have to

own shares in the

companies that it

supervises.

U.S. Treasury

technical explanation to

the 2001 protocol to the

treaty.

In determining whether a

“substantial portion” of

the overall supervision and

the administration of the

group is provided by the

headquarters company,

its headquarters-related

activities must be

substantial in relation to the

same activities for the

same group performed by

the other entities.

U.S.

Treasury technical

explanation to the 2001

protocol to the treaty.

The reference to

“generally applicable

rules of taxation” should

be understood to mean that

the Australian company

must be subject to the

income taxation rules to

which a company engaged

in the active conduct of a

trade or business would be

subject. Thus, if Australia

introduced special taxation

legislation that would

impose a lower rate of

income tax on

headquarters companies

than was imposed on

companies engaged in the

active conduct of a trade or

business, or would provide

for an artificially low taxable

base for such companies, a

headquarters company

subject to these rules

would not be entitled to the

benefits of the treaty under

the recognized

headquarters company

test.

U.S. Treasury

technical explanation to

the 2001 protocol to the

treaty.

Does the Australian company, or a company that owns at least 50

percent of the aggregate vote or value of the Australian company, have

outstanding a class of shares that entitles the holders to a

disproportionate part of the income

(see Chart 2 for definition)

Article 16(4)(a) of the treaty.

Do qualified persons

(see Chart 2 for definition)

own more than 50

percent of the voting power and value of each class of shares entitling

the holders to the disproportionate part of the income?

Article

16(4)(b) of the treaty.

May be partially

eligible for treaty

benefits. Treaty

benefits do not

apply to the

disproportionate

part of the income.

No Yes

Yes

An Australian company is considered a recognized headquarters company

if:

1) it provides in Australia a substantial portion of the overall supervision and

administration of a group of companies (which may be part of a larger group

of companies) (e.g., pricing, marketing, internal auditing, internal

communications, and management), which may include, but cannot be

principally, group financing;

2) the group of companies consists of corporations resident in, and engaged in

an active business in, at least five countries (or groupings of countries), and

the business activities carried on in each of the five countries (or groupings

of countries) generate at least 10 percent of the gross income of the group;

3) the business activities carried on in any one country other than in Australia

generate less than 50 percent of the gross income of the group;

4) no more than 25 percent of its gross income is derived from the United

States;

5) it has, and exercises, independent discretionary authority to carry out the

functions referred to in subparagraph 1), above;

6) it is subject to the generally applicable rules of taxation in Australia; and

7) the income derived in the United States either is derivedin connection with

(see Chart 6 for definition)

,orisincidental to

(see Chart 6 for

definition)

, the active business referred to in subparagraph 2), above.

Article 16(2)(h) of the treaty.

If the income requirements for being considered a recognized headquarters

company (subparagraphs 2), 3), or 4) above) are not fulfilled, they will be

deemed to be fulfilled if the required ratios are met when averaging the gross

income of the preceding four years.

Article 16(2)(h) of the treaty.

For purposes of the 10 percent gross income requirement in subparagraph 2),

above, the income from multiple countries may be aggregated, as long as

there are at least five individual countries or groupings that each satisfy the 10

percent requirement.

U.S. Treasury technical explanation to the 2001

protocol to the treaty.

SPECIAL REPORTS

TAX NOTES INTERNATIONAL DECEMBER 12, 2011 • 849

Chart 6. Active Trade or Business Test Under Article 16(3) (LOB)

of the Australia-U.S. Tax Treaty

(Only applies if an item of income is derived in connection with or incidental to an

active trade or business in Australia)

Is the income under consideration derived by the

Australian company in connection with, or is the

income incidental to, such trade or business in

Australia?

Article16(3)(a)ofthetreaty.

Eligible for treaty

benefits.

Yes

Does the Australian company or any of its

associated enterprises carry on a trade or

business activity in the United States that gives

rise to the income under consideration?

Article

16(3)(b) of the treaty.

Yes

Is the Australian company engaged (or deemed to

be engaged) in Australia in the active conduct of a

trade or business (other than the business of

making or managing investments for the

Australian company’s own account, unless these

activities are banking, insurance, or securities

activities carried on by a bank, insurance

company, or a registered, licensed, or authorized

securities dealer

Article 16(3)(a) of the treaty.

Yes

Is the trade or business activity carried on by the

Australian company in Australia substantial in

relation to the trade or business activity in the

United States?

Article 16(3)(b) of the treaty.

Not eligible

for treaty

benefits.

(Go to

Chart 7.)

Yes

Does the Australian company, or a company that

owns at least 50 percent of the aggregate vote or

value of the Australian company, have

outstanding a class of shares that entitles the

holders to a disproportionate part of the

income

(see Chart 2 for definition)

Article

16(4)(a) of the treaty.

Do qualified persons

(see Chart 2 for

definition)

own more than 50 percent of the

voting power and value of each class of shares

entitling the holders to the disproportionate part

of the income?

Article 16(4)(b) of the treaty.

Yes

May be partially

eligible for treaty

benefits. Treaty

benefits do not apply to

the disproportionate

part of the income.

The term “trade or business” is not defined in

the treaty. The U.S. Treasury technical

explanation to the 2001 protocol to the treaty

explains that the U.S. competent authority

(see Chart 7 for definition)

will refer to the

regulations issued under section 367(a) for the

definition of the term “trade or business.” I n

general, therefore, a trade or business will be

considered to be a specific unified group of

activities that constitute or could constitute an

independent economic enterprise carried on for

profit. Furthermore, a corporation generally will

be considered to carry on a trade or business

only if the officers and employees of the

corporation conduct substantial managerial and

operational activities.

Because a headquarters operation is in the

business of managing investments, a company

that functions solely as a headquarters

company

(see Chart 5 for definition)

will not

be considered to be engaged in an active trade

or business for purposes of article 16(3)(a).

U.S. Treasury technical explanation to the

2001 protocol to the treaty.

In determining whether an Australian company

is “engaged in the active conduct of a trade or

business” in Australia, activities conducted by

a partnership in which the Australian company

is a partner and activities conducted by persons

“connected to” the Australian company are

deemed to be conducted by such Australian

company. A person is “connected to” another

(1) if one possesses at least 50 percent of the

beneficial interest in the other (or, in the case of

a company, at least 50 percent of the aggregate

vote and value of the company’s shares or of

the beneficial equity interest in the company) or

(2) if another person possesses, directly or

indirectly, at least 50 percent of the beneficial

interest (or, in the case of a company, at least

50 percent of the aggregate vote and value of

the company’s shares or of the beneficial equity

interest in the company) in each person. In any

case, a person is considered connected to

another if, based on all the relevant facts and

circumstances, one has control of the other or

both are under the control of the same person

or persons.

Article 16(3)(c) of the treaty.

An Australian company is associated with an

enterprise of the United States if: (1) the

Australian company participates directly or

indirectly in the management, control, or capital

of an enterprise of the United States; (2) the

U.S. enterprise participates directly or indirectly

in the management, control, or capital of the

Australian company; or (3) any third person(s)

participates directly or indirectly in the

management, control, or capital of the Australian

company and the U.S. enterprise.

Article

9(1)(a) and (b) of the treaty.

Does the Australian company satisfy

the active trade or business test?

Income is derived in connection with a trade or

business if the income-producing activity in the

state of source (here, the United States) is a line

of business that forms a part of or is

complementary to the trade or business

conducted in the state of residence (here,

Australia) by the income recipient.

U.S. Treasury

technical explanation to the 2001 protocol to

the treaty.

A business activity generally will be considered to

“form a part of” a business activity conducted in

the other state (here, the United States) if the two

activities involve the design, manufacture, or sale

of the same products or type of products, or the

provision of similar services. The line of business

in the state of residence (here, Australia) may be

upstream, downstream, or parallel to the activity

conducted in the state of source (here, the United

States). Thus, the line of business may provide

inputs for a manufacturing process that occurs in

the state of source (here, the United States), may

sell the output of that manufacturing process, or

simply may sell the same sorts of products that

are being sold by the trade or business carried on

in the source state.

U.S. Treasury technical

explanation to the 2001 protocol to the treaty.

For two activities to be considered to be

“complementary,” the activities need not relate to

the same types of products or services, but they

should be part of the same overall industry and

be related in the sense that the success or failure

of one activity will tend to result in the success or

failure for the other. In cases in which more than

one trade or business is conducted in the other

state (here, the United States) and only one of the

trades or businesses forms a part of or is

complementary to a trade or business

conducted in the state of residence (here,

Australia), it is necessary to identify the trade or

business to which an item of income is

attributable. Royalties generally will be

considered to be derived in connection with the

trade or business to which the underlying

intangible property is attributable. Dividends will

be deemed to be derived first out of earnings and

profits of the treaty-benefited trade or business,

and then out of other earnings and profits.

Interest income may be allocated under any

reasonable method consistently applied. A

method that conforms to U.S. principles for

expense allocation will be considered a

reasonable method.

U.S. Treasury technical

explanation to the 2001 protocol to the treaty.

Income derived from the United States will be

“incidental to” the trade or business conducted

in Australia if production of such income facilitates

the conduct of the trade or business in Australia.

An example of incidental income is the temporary

investment of working capital by an Australian

company in securities issued by persons in the

United States.

U.S. Treasury technical

explanation to the 2001 protocol to the treaty.

Whether the Australian company’s trade or

business activity in Australia is substantial in

relation to the trade or business activity in the

United States will be determined based on all the

facts and circumstances.

Article 16(3)(b) of the

treaty.

Factors to be taken into account include:

(1) the comparative sizes of the trades or

businesses in both the United States and

Australia (measured by reference to asset values,

income, and payroll expenses); (2) the nature of

the activities performed in the United States and

Australia; and (3) the relative contributions made

to that trade or business in the United States and

Australia. In making each determination or

comparison, due regard will be given to the

relative sizes of the U.S. and Australian

economies.

U.S. Treasury technical

explanation to the 2001 protocol to the treaty.

SPECIAL REPORTS

850 • DECEMBER 12, 2011 TAX NOTES INTERNATIONAL

Chart 7. Discretionary Determination by U.S. Competent Authority

Under Article 16(5) (LOB) of the Australia-U.S. Tax Treaty

The U.S. competent authority may determine to grant all benefits of

the treaty, or it may determine to grant only certain benefits. For

instance, it may determine to grant benefits only with respect to a

particular item of income in a manner similar to the active trade or

business test

(see Chart 6)

. Further, the U.S. competent authority

may set time limits on the duration of any relief granted.

U.S. Treasury

technical explanation to the 2001 protocol to the treaty.

An Australian company is permitted to present its case to the U.S.

competent authority for an advance determination based on the

facts. In these circumstances, it is also expected that if the U.S.

competent authority determines that benefits are to be allowed, they

will be allowed retroactively to the time of entry into force of the

relevant treaty provision or the establishment of the structure in

question, whichever is later.

U.S. Treasury technical explanation to

the 2001 protocol to the treaty.

Yes

The “U.S. competent authority” is

the secretary of the Treasury or a

delegate.

Article 3(e)(i) of the treaty.

Requesting competent authority

assistance — A taxpayer may request

the assistance of the U.S. competent

authority under Rev. Proc. 2006-54.

The U.S. competent authority may

determine in its own discretion that the

taxpayer qualifies for certain benefits

under the LOB article of the treaty.

There is a US $15,000 user fee for

requesting a discretionary

determination under the LOB

provision. If a request is submitted for

more than one entity, a separate user

fee is charged for each entity.

Section

14.02 of Rev. Proc. 2006-54.

Not eligible for

treaty benefits.

Eligible for treaty benefits.

Has a discretionary determination

been granted by the U.S. competent

authority?

An Australian company that is not a qualified person (

see Chart 2 for

definition)

may be granted benefits of the treaty if the U.S. competent

authority determines, in accordance with U.S. law, that the

establishment, acquisition, or maintenance of the Australian company

and the conduct of its operations did not have as one of its principal

purposes the obtaining of benefits under the treaty.

Article 16(5) of

the treaty.

SPECIAL REPORTS

TAX NOTES INTERNATIONAL DECEMBER 12, 2011 • 851

Chart 8. Eligibility for 0 Percent Withholding Tax Rate on Dividends

Under Article 10(3) of the Australia-U.S. Tax Treaty

Not eligible to

claim 0 percent

withholding tax

rate on

dividends.

“Dividends” means income from shares as well

as other amounts which are subjected to the

same taxation treatment as income from shares

by the law of the state of which the company

making the distribution is a resident for the

purposes of its tax (here, the United States).

Article 10(6) of the treaty.

The term “dividends” is defined broadly and

flexibly. The definition is intended to cover all

arrangements that yield a return on an equity

investment in a corporation as determined under

the tax law of the state of source (here, the

United States), as well as arrangements that

might be developed in the future.

U.S. Treasury

technical explanation to the 2001 protocol to

the treaty.

The term includes income from“dividends”

shares, or other corporate rights that are not

treated as debt under the law of the source state

(here, the United States), that participate in the

profits of the company. The term also includes

income that is subjected to the same tax

treatment as income from shares by the law of

the source state (here, the United States). Thus,

under U.S. tax principles, a constructive dividend

that results from a non-arm’s-length transaction

between a corporation and a related party is a

dividend. Similarly, a payment denominated as

interest that is made by a thinly capitalized

corporation may be treated as a dividend to the

extent that the debt is recharacterized as equity

for U.S. tax purposes.

U.S. Treasury technical

explanation to the 2001 protocol to the treaty.

In the case of the United States, the term

“dividends” includes amounts treated as a

dividend under U.S. law upon the sale or

redemption of shares or upon a transfer of

shares in a reorganization.

See, e.g.,

Rev. Rul.

92-85, 1992-2 C.B. 69 (sale of foreign

subsidiary’s stock to U.S. sister company is a

deemed dividend to extent of subsidiary’s and

sister’s earnings and profits). Further, a

distribution from a U.S. publicly traded

partnership, which is taxed as a corporation

under U.S. law, is a dividend for purposes of

article 10 (dividends). However, a distribution by

a limited liability company is not characterized by

the United States as a dividend and, therefore, is

not a dividend for purposes of article 10,

provided the limited liability company is not

taxable as a corporation under U.S. law.

U.S.

Treasury technical explanation to the 2001

protocol to the treaty.

Eligible to claim 0 percent

withholding tax rate on

dividends.

Yes

Has the Australian company owned

directly shares representing 80 percent

or more of the voting power of the U.S.

company paying the dividend for a

12-month period ending on the date the

dividend is declared?

Article 10(3) of

the treaty; U.S. Treasury technical

explanation to the 2001 protocol to

the treaty.

Is one of the following satisfied:

1) the Australian company satisfies

either the publicly traded company

test

(see Chart 2)

or the subsidiary of

a publicly traded company test

(see

Chart 3)

;or

2) the Australian company obtained a

discretionary determination

(see

Chart 7)

from the U.S. competent

authority

(see Chart 7 for definition)

providing for a 0 percent withholding

tax rate on dividends?

Article 10(3)(a)

and (b) of the treaty.

Is the Australian

company beneficially

entitled to dividends

from U.S. sources?

Does the Australian company carry on

business in the United States through a

permanent establishment situated in

the United States, or perform in the

United States independent personal

services from a fixed base situated in

the United States?

Article 10(5) of the

treaty.

Yes

Is the holding in respect of which the

dividends are paid effectively

connected with such permanent

establishment or fixed base?

Article 10(5) of the treaty.

Yes

Dividends paid by U.S.

regulated investment

companies and U.S. real

estate investment trusts

to an Australian company

do not qualify for a 0

percent U.S. withholding

tax rate.

Article 10(4) of

the treaty.

The term “beneficially entitled” is not defined in

the treaty. A person “beneficially entitled” to a

dividend is the “beneficial owner” of the dividend.

Thus, the resident beneficially entitled to a

dividend is the person to which the dividend

income is attributable for tax purposes under the

laws of the source state (here, the United

States). Accordingly, if a dividend paid by a U.S.

company is received by a nominee or agent that

is a resident of Australia on behalf of a person

that is not a resident of Australia, the dividend is

not entitled to the zero rate of withholding on

dividends. However, a dividend received by a

nominee on behalf of a resident of Australia

would be entitled to benefits if all other

requirements are satisfied.

U.S. Treasury

technical explanation to the 2001 protocol to

the treaty.

SPECIAL REPORTS

852 • DECEMBER 12, 2011 TAX NOTES INTERNATIONAL