ARTICLE 10

Dividends

This Article limits the rate of tax which may be imposed by a Contracting State on dividends paid by a company which is a resident of that State for purposes of its tax to a resident of the other Contracting State. A dual resident corporation is a resident of each Contracting State “for purposes of its tax,” but is a resident of neither State for purposes of the Convention.

Paragraph 1 states that such dividends may be taxed in the State of residence of the recipient. This provision, which is based on the OECD Model, confirms the provision of paragraph 3 of Article 1 (Personal Scope) that each Contracting State reserves the right to tax its residents. .

Paragraph 2 provides that such dividends may also be taxed in the Contracting State of which the paying company is a resident for the purposes of its tax, but such tax may not exceed

15 percent of the gross amount of the dividends when the beneficial owner is a resident of the other State. This limitation applies to the tax imposed by either State on dividends paid by a dual resident company to a resident of the other Contracting State; but since a dual resident company is not a resident of either State under Article 4 (Residence), it does not apply to dividends received by such a company. In the absence of a Treaty, Australia, like the United States, imposes a tax of 30 percent on gross dividends paid to nonresidents. By Treaty, Australia is willing to reduce that the tax to, but not below, 15 percent. The reciprocal 15 percent limit of taxation at source provided in this paragraph also applied in the 1953 Convention.

Paragraph 3 defines dividends as income from shares and income which under domestic law is assimilated to income from shares.

Paragraph 4 provides that when dividends beneficially owned by a resident of one Contracting State are attributable to a permanent establishment or a fixed base which that resident maintains in the other State, of which the company paying the dividends is a resident, such dividends are not taxable in accordance with this Article, but in accordance with the provisions of Article 7 (Business Profits) or Article 14 (Independent Personal Services).

Paragraph 5 provides that a Contracting State may not impose tax on dividends paid by a company which is a resident of the other State, with three exceptions:

(a) to the extent that the dividends are paid to a resident of the first State; (b) to the extent that the dividends are attributable to a permanent establishment or fixed base of the beneficial owner in the first State; or

(c) to the extent that 50 percent or more of the gross income of the company paying the dividends is attributable to one or more of permanent establishments of that company in the first State and the dividends are paid out of the profits of such permanent establishment.

Subparagraph (c) applies only if the taxing State does not impose branch profits tax of the kind described in paragraph 6. For this purpose, the U.S. accumulated earnings and personal holding company taxes are not taxes of the kind described in paragraph 6. If only subparagraph (c) applies, the tax is limited to 15 percent. The United States may also tax dividends received by U.S. citizens under paragraph 3 of Article 1 (Personal Scope).

Paragraph 6 authorizes the imposition of a branch profits tax in addition to the ordinary corporate tax on profits of a permanent establishment of a resident of the other Contracting State. Australia's ordinary corporate income tax rate is 46 percent, but the rate of tax on permanent establishments of nonresident corporations is 51 percent. Dividends distributed by Australian corporations to a U.S. corporation are subject to a tax of 15 percent. Distributions by an Australian branch of a U.S. company are not subject to a further tax. Thus, the additional 5 percentage points of tax on the branch profits serves as a substitute for a withholding tax on distributed profits. Under paragraph 6, Australia's additional tax may not exceed the amount which would result if the 15 percent dividend withholding tax were to be applied to the profits of the permanent establishment net of the corporate tax at the rate applicable to domestic corporations. For example, if a permanent establishment has taxable income of 100 in Australia

and the ordinary corporate income tax rate is 46 percent, the additional tax on the branch profits may not exceed 15 percent of 54, or 8.1; i.e., the total tax on the branch may not exceed 54.1 percent (46 plus 8.1). The Australian tax of 51 percent is within this limit.

Paragraph 6 also provides that, if a nonresident company is liable to a tax on its undistributed profits, the amount of undistributed profits shall be calculated as if that company had paid the corporate income tax applicable to a domestic corporation and had distributed dividends of an amount such that the 15 percent tax on those dividends imposed in accordance with paragraph 2 of this Article would have equaled the additional tax. For example, with an Australian tax on domestic corporations of 46 percent and on permanent establishments of foreign corporations of 51 percent, a permanent establishment of a U.S. corporation would, for purposes of any Australian tax on undistributed profits, be deemed to have distributed profits of 33.33 and undistributed profits of 20.67 for each 100 of taxable income. (Profit of 100 after basic corporate tax of 46 leaves 54 available for distribution. Additional tax of 5 is equivalent to a 15 percent withholding tax on 33.33; 15% x 331/3 = 5. Therefore, distributed profits are deemed to be 33.33 and the remainder of the after-tax profit of 54, or 20.67 is deemed to be undistributed.)