Australian Government CrestInternational Comparison of Taxes

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10.4 Treatment of income of non-residents

Non-residents are generally only taxed on their domestic source income. This usually includes payments of dividends, interest and royalties from residents and income earned through a permanent establishment (PE), partnership or trust in the country.

Table 10.5 shows for the OECD-10 the way in which these different types of income of non-residents are treated for tax purposes.

Table 10.5: Treatment of income of non-resident taxpayers(a)

Country

Withholding tax on dividends paid to non-residents

Withholding tax on interest and royalties paid to non-residents

Withholding tax on other income paid to non-residents

Australia

Franked dividends attract no withholding tax.

Withholding tax on unfranked dividends is 30 per cent. This reduces generally to 15 per cent in the case of double tax agreements (United States and United Kingdom resident companies may receive a rate of zero or 5 per cent on unfranked dividends received in some cases).

The Conduit Foreign Income regime allows foreign source income to pass through to non-resident shareholders without any withholding tax.

The rate of withholding tax on interest is 10 per cent with a broad range of exemptions (including interest paid to United States and United Kingdom resident financial institutions under the United States and United Kingdom treaties).

Royalties are subject to withholding tax at 30 per cent. Under most treaties, the rate is reduced to 10 per cent, however other rates may apply, for example, 5 per cent under the United States and United Kingdom treaties.

Withholding tax applies at rates provided in previous columns to dividends, interest and royalties received through partnerships and trusts.

Whilst not legally a ‘withholding tax’, Australian source income derived by a non-resident through a trust (other than the types above) is subject to tax in the hands of the trustee (at the rate applicable to the beneficiary) with credit provided to the beneficiary for the trustee tax paid.

Rental income is not otherwise subject to withholding tax (but is likely to be subject to tax by assessment as a PE).

Unless otherwise provided in a tax treaty certain shipping activities of non-residents within Australia are subject to Australian tax on a deemed taxable income of 5 per cent of relevant freight income.

Australia also collects withholding tax on amounts paid to non-residents in respect of certain insurance, gambling, entertainment and construction activities. However, the amounts withheld are fully claimable against the non-residents final tax assessment.

Canada

The primary dividend withholding tax rate is 25 per cent, but may be reduced to 5 per cent, 10 per cent or 15 per cent subject to various double tax treaties.

The basic rate for interest and royalty withholding taxes is 25 per cent. However, this may be lower subject to tax treaties.

For interest withholding tax, it may be 10 per cent to 15 per cent depending on the treaty.

Royalty withholding tax is generally levied at a rate of between zero and 25 per cent depending on the treaty.

Interest on government debt and arm’s length debt is exempt provided that the taxpayer is not obliged to repay more than 25 per cent of the principal within five years.

If a non-resident performs services in Canada, a 15 per cent withholding tax applies. (A waiver may be obtained but only if certain conditions are satisfied.) The tax withheld may be refunded to the non-resident, pursuant to a tax treaty.

Management fees, estate or trust income, immovable property, alimony, films, periodic pension and annuity payments, and lump sum pension, annuity or similar type payments taxed at 25 per cent, reduced under treaties.

Ireland

Withholding tax of 20 per cent in general.

Irish legislation provides an exemption from dividend withholding tax if certain conditions are satisfied. To qualify for the exemption the Irish company’s parent must:

  • be entitled to the benefit of the EU Parent/Subsidiary Directive; or
  • be a company resident in an EU/treaty country and not be under the control of Irish residents; or
  • be a company ultimately controlled by residents of EU/treaty countries; or
  • be a company whose principal class of shares is traded on a stock exchange in an EU/treaty country, or be a 75 per cent subsidiary of such a company; or
  • be a company wholly owned, directly or indirectly, by two or more companies which are listed on a stock exchange in an EU/treaty country.

In practice this results in most dividend payments to non-residents being exempt from withholding tax.

The basic rate is 20 per cent.

In relation to royalties, withholding tax only applies to patent royalties or royalties on an asset which is a passively held asset owned by the non-resident. Further, the EU interest and royalty directive eliminates royalty withholding tax on royalties to certain related EU countries. Many treaties reduce the withholding to 0, 5, or 10 per cent.

In relation to interest, Irish legislation provides an exemption for interest withholding tax on interest paid to a company resident in the EU or a treaty country.

Rental payments for Irish-located property payable to non-residents are subject to 20 per cent withholding tax.

A retention tax, at the standard rate of tax, must be deducted at source by deposit takers (for example, banks, building societies, Post Office Savings Bank, etc) from interest paid or credited on deposits of Irish residents.

The retention tax does not apply to interest on deposits beneficially owned by non- residents.

Japan

The basic rate is 20 per cent but may be reduced by tax treaties to zero per cent (for example, United Kingdom, United States and French treaties), 5, 10 or 15 per cent depending on the treaty. Qualification for reduced rates generally requires shareholding of at least 25 per cent and in the case of United States and United Kingdom shareholders, satisfaction of limitation of benefit tests.

7 per cent (national) final withholding tax at source on dividends paid by a publicly traded company to a non-resident through 31 March 2008.

The basic rate is 20 per cent for interest and royalties (for certain categories of interest, the basic rate is 15 per cent or zero per cent).

Reduced treaty rates: zero, 10 or 15 per cent depending on treaty.

20 per cent withholding tax also applicable to certain technical services performed in Japan subject to the business profits article in the applicable tax treaty.

Unless otherwise provided in a treaty, 20 per cent withholding tax on partnership distributions to non-resident partners (one exemption provided).

Rental income paid to non-residents for use of real property or industrial or commercial equipment also subject to 20 per cent withholding tax.

Netherlands

Dividend payments to non-residents are taxed at 25 per cent, exempted or reduced to 15, 5, or 0 per cent under treaties. Dividends payable to qualifying EU residents are tax free.

Withholding tax is not collected on interest or royalty payments to non-residents.

Management service fees received in relation to management of a Dutch resident company are subject to corporate income tax in the Netherlands.

New Zealand

Withholding tax on unfranked dividends is 30 per cent. This reduces generally to 15 per cent in the case of double tax agreements. The foreign investor tax credit regime effectively reduces company tax by an amount equal to the dividend non-resident withholding tax (NRWT) paid by the New Zealand company to the extent that the dividends paid to the non-resident are fully franked and the company has paid a supplementary dividend to the non-resident equal to the amount of the NRWT.

15 per cent interest and royalty withholding tax is applicable subject to treaty conditions.

Interest payable to arm’s length lenders eligible for approved issuer levy, under which interest is exempt from withholding tax but subject to 2 per cent duty.

Under New Zealand domestic law, in some cases the NRWT becomes a minimum tax and the interest and royalties may be subject to tax at full rates unless the liability is protected by a treaty.

Where a non-resident provides services in New Zealand, a 15 per cent non resident contractor withholding tax (NRCWT) will apply. This tax is fully creditable against any final tax liability for the non-resident (30 per cent in cases where relevant paper work has not been completed). Excess amounts are refundable. Exemptions may apply if the non resident contractor applies for an exemption certificate from the New Zealand revenue authority.

Although not technically a withholding tax, amounts of New Zealand tax are withheld from premiums paid to non-resident insurers.

Spain

Domestic withholding tax on dividends is 15 per cent. This is generally reduced to 10 or 5 per cent in a number of treaties.

Dividends paid to non-residents by special regime holding companies out of qualifying income are not subject to taxation in Spain.

Under the Parent-Subsidiary Directive, dividends distributed by a Spanish company to a qualifying EU parent are exempt from Spanish withholding tax.

There is also draft law for the increase of the dividend withholding tax rate from 15 to 18 per cent with effect from 1 January 2007.

The domestic withholding tax rate on interest and royalties is 15 and 25 per cent respectively. This is generally reduced under treaties.

Interest received by an EU resident is generally exempt from Spanish withholding tax.

Royalties received by qualifying EU companies are taxed at the 10 per cent rate.

Note that Spain taxes royalties paid to non-residents in consideration for the right to use computer software, with few exceptions.

Domestic law establishes a residual 25 per cent withholding tax rate. This applies to payments for services rendered from jurisdictions without a double tax agreement, rental income insofar as it does not qualify as royalties, and employment income.

Capital gains obtained by non-residents are taxed at the 35 per cent rate, though a draft Bill put forth by the Government would reduce this to 18 per cent.

Switzerland

Withholding tax is 35 per cent. Individual non-residents benefiting from a treaty may be entitled to a reduction of up to 20 per cent, resulting in residual withholding tax of 15 per cent.

Corporations with a substantial investment (usually 20 or 25 per cent) benefit from a reduction resulting in only 5 or zero per cent withholding tax. This holds in particular for parent companies within the EU due to bilateral agreements between Switzerland and the EU.

No withholding tax on royalties.

Withholding tax on interest is limited to interest that is paid by a bank or to interest where the underlying financial instrument is a bond. The applicable rate is 35 per cent. Treaty relief is common (usually 10 per cent residual withholding tax).

There is some wage withholding tax (progressive rates) levied on salary earned in Switzerland and on old age pensions from Swiss pension funds.

United Kingdom

Withholding tax is not applied on dividend payments to non-residents.

The withholding tax rate on interest payments (‘annual interest’) to non-residents is 20 per cent for non-treaty countries and 22 per cent for royalties. The rates are reduced to zero per cent under most treaties, including with the United States and most European countries.

Rental income is subject to 22 per cent withholding tax.

Payments made to non-resident entertainers and sportsmen are also subject to 22 per cent withholding tax.

United States

Basic 30 per cent rate may be reduced or eliminated by treaties.

United Kingdom, Australia, Mexico and Sweden are examples of treaties which include zero per cent dividend withholding tax.

With the other treaties, mostly 5 per cent for corporates with a required percentage ownership, and 15 per cent otherwise.

Basic 30 per cent rate may be reduced or eliminated by tax treaties.

Treaties vary greatly in their treatment of interest. A number of treaties exempt interest payments.

Royalties generally attract a rate of 0, 5 or 10 per cent.

A branch profits tax which is a dividend equivalent tax applies for branches.

Passive income through a partnership treated the same.

Not generally covered by treaties, 30 per cent withholding tax on:

  • gross rent, but can elect to be taxed at the normal United States marginal rates on the net rent;
  • annuities;
  • alimonies;
  • premiums.
  1. The table does not deal with income which is taxed on a net basis such as where it is attributable to a PE.

Source: Various, see Chapter 1 (1.4.1).

The income of non-residents is treated in a variety of ways across the OECD-10, and Australia does not appear to be unique in its framework or treatment. Most of these countries levy all three of the main non-resident withholding taxes (dividends, interest and royalties) through their domestic law. Some OECD-10 countries do not levy one or more of these (for example, United Kingdom and dividend withholding tax), while others have exemptions or significantly reduced rates under treaties, including Australia. The Netherlands levies no interest or royalty withholding taxes and, by virtue of its extensive treaty network, very little dividend withholding tax too.

Australia’s dividend withholding tax base is relatively narrow due to a number of significant exemptions (for example, franked dividends and conduit foreign income). It was further narrowed through recent treaties with the United States and United Kingdom. This is also broadly the case for Australia’s interest withholding tax base. Where income of non-residents is taxed, Australia’s extensive treaty network reduces applicable rates, particularly on dividends and royalties.

10.4.1 Treatment of conduit income

Conduit income typically arises where a non-resident owns an interest in a resident company which pays dividends out of foreign source income. A country can levy tax on conduit income when the resident company earns the foreign income (if the income is not exempt) and when the income is paid by dividend to the non-resident shareholder (for example, dividend withholding tax). Conduit taxation can also arise where the dividend is distributed along a chain of resident companies interposed between the first resident company and the non-resident.

Conduit regimes can help attract multinational operations and regional headquarter activity. A pure conduit regime imposes no domestic tax on foreign income that is eventually paid to non-residents. The more attractive regimes relieve tax at some or all possible conduit taxation points, either unilaterally or through (an extensive network of) treaties. Very few countries (if any) provide full conduit taxation relief in all circumstances.

No Australian tax is levied on dividends paid directly or indirectly (through interposed resident companies) to non-residents out of the foreign income of a resident company. This includes company tax exemptions for any further interposed Australian companies and no dividend withholding tax. When added to the already extensive company tax exemptions for foreign source income derived by resident companies (see Table 10.3), this gives a complete tax exemption for active business profits earned offshore and repatriated through one or more Australian companies to non-residents. Any passive income or gains sourced offshore by an Australian company remains subject to Australian tax but it may be distributed to non-resident shareholders free of any further Australian tax.

Other conduit examples

Similar conduit taxation issues can arise where investment activity is conducted through a domestic funds manager. Broadly, Australia’s tax treatment of such arrangements provides a tax exemption for foreign income earned by the Australian funds manager and distributed to non-resident investors.

As an alternative to receiving distributions of foreign profits from interposed Australian companies or fund managers, non-resident investors can access those profits by disposing of their investments. Where that investment is through an Australian funds manager which holds foreign assets almost exclusively, the non-resident investor is now exempt from capital gains tax on the disposal of the investment.7


7 The Government also announced in the 2005-06 Budget that a similar exemption from CGT would be provided where a non-resident investor disposes of its investment in an Australian company, provided the company’s principal asset is not Australian land. When implemented, this change will align Australia’s law more closely with OECD practice on capital gains through narrowing the range of assets on which a non-resident is subject to Australian CGT to land and business assets used in Australia. These changes will significantly improve the way in which Australia treats the conduit foreign and other income of its non-residents.

 

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