Entry Into Force Of the Protocol Amending the Australia and United States Double Tax Treaty

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Budget; higher education; CSIRO; economy; Governor-General
May 12, 2003
Budget – Address to the National Press Club
May 14, 2003
Budget; higher education; CSIRO; economy; Governor-General
May 12, 2003
Budget – Address to the National Press Club
May 14, 2003

Entry Into Force Of the Protocol Amending the Australia and United States Double Tax Treaty




Opportunities for increased trade and investment flows between the United

States and Australia will be improved as a result of amendments to the Double

Tax Treaty between the two countries.

I am pleased to announce that on Monday 12 May at 3:30pm Washington Time (5:30am

Tuesday 13 May Australian Eastern Standard Time) Australia and the United States

exchanged instruments of ratification for the Protocol amending the Australia-United

States Double Tax Convention, bringing the Protocol into force. The Protocol,

which was signed in Canberra in September 2001, amends the existing tax treaty

between Australia and the United States, which dates back to 1982.

This Protocol reflects the close economic relations between Australia and

the United States and will significantly assist trade and investment flows between

the two countries.

The Protocol will remove withholding tax on certain dividends, enabling major

Australian public companies to bring profits made by their US subsidiaries back

to Australia without any further tax being payable. This zero per cent withholding

tax on dividends will provide a benefit to the majority of Australian corporate

groups with US operations.

Dividends derived by companies from other direct investment (where the shareholding

is 10 per cent or more) will now be subject to 5 per cent withholding tax (compared

with the current 15 per cent). The new rules will apply to franked and unfranked


Proposed exemptions from withholding tax for interest paid to financial institutions

and governmental bodies will improve Australia’s standing as a financial centre.

The reduction in withholding tax on royalties from 10 to 5 per cent will reduce

business costs for technology and intellectual property. The Protocol will also

explicitly protect Australia’s rights to tax capital gains.

Other changes include an updated list of taxes covered and a new provision

dealing with interposed trusts in relation to permanent establishments. The

Attachment provides further details of the Protocol.

Date of Effect

  • For withholding taxes, the protocol will have effect in relation

    to payments made on or after 1 July 2003.

  • For other taxes covered, the protocol will have effect in respect

    of income, profits or gains of years of income beginning on or after 1 July


Contact: David Alexander

(02) 6277 7340


13 May 2003


The Protocol will amend the existing double tax convention in a number of important


Subject to the exceptions outlined below, dividends, interest and royalties

will generally remain taxable in both countries, but with limits on the tax

that the source country may charge residents of the other country who are beneficially

entitled to the income.


The Protocol provides for a number of broad exceptions to the current limit

of 15 percent on dividends. No tax will be chargeable in the source country

on dividends where a beneficially entitled company resident in the other country

holds 80 per cent or more of the voting power of the company paying the dividends

and satisfies public listing requirements in the Limitation on Benefits Article.

A limit of 5 per cent will apply for other company shareholdings of 10 per

cent or greater.

These limits will apply to both franked and unfranked dividends.

No limit will apply to the tax that can be charged by the United States on

dividends paid on certain substantial holdings of Australian residents in United

States real estate investment trusts (REITs). In practical terms this means

that tax on these dividends will increase from 15 per cent to the current United

States domestic law rate of 30 per cent. The 15 per cent rate will be retained

for REIT investments made by certain listed Australian property trusts subject

to the underlying ownership requirements not exceeding certain levels. Existing

investments in REITs by listed Australian property trusts acquired before 26

March 2001 will be protected from the increased rate.


Source country tax on interest will continue to be limited to 10 per cent.

However, no tax will be chargeable in the source country on interest derived


  • a government body of the other country (including a body exercising governmental

    functions or a bank performing central banking functions); or

  • a financial institution resident in the other country (subject to certain


Rules consistent with United States tax treaty policy and practice will allow:

  • interest calculated by reference to the profits of the payer to be taxed

    at a higher 15 per cent rate (ie, at the same rate that generally applies

    to dividends); and

  • tax to be charged on notional intra-entity interest payments between a

    branch and its head office.


The limit on source country taxation of royalties will be reduced from 10 to

5 per cent.

In addition, amounts derived from equipment leasing (including container leasing)

will be excluded from the royalty definition. Exclusive residence country taxation

will apply to amounts derived from the leasing of containers used for international

transport. Amounts derived from other types of equipment leasing will be treated

as business profits.

A comprehensive Alienation of Property Article consistent with Australia’s

current treaty practice will apply (including a source country sweep-up provision

that allows the source country to tax capital gains not otherwise dealt with).

New rules will remove double taxation of capital gains in the case of departing

residents and ensure that foreign tax credit rules operate effectively for them.

The Protocol will update the existing Convention in various respects in line

with Australia’s current tax law and treaty policies and practice. Among these

are a revised list of taxes covered by the Convention, a clause to provide that

non-resident beneficiaries of a trust will be deemed to have a permanent establishment

in Australia if the trust has a permanent establishment, a revised article on

shipping and air transport and a revised article on other income.