Justin Davis explains the rules for tax treaty relief on US investments, under the US/Australia tax treaty.
Whilst you may be an Australian tax resident and you may satisfy the limitations of benefit (LoB) in Article 16 of the United States/Australia Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the US/Australia tax treaty), you may not be entitled to treaty relief.
If you are investing into a fund that has US investments and the fund (or a lower tier fund vehicle) is a Cayman Limited Partnership (CLP), you will not be the beneficial owner for US tax treaty purposes and thus, cannot lodge a valid W-8BEN-E with the fund (as withholding agent) claiming withholding tax treaty relief. In these circumstances, the rate of US withholding tax on dividends and interest will be 30 percent, being the US default rate. It will not be reduced under the US/Australia tax treaty to 15 percent for dividends and 10 percent for interest.
Under the US tax code, the default classification of a CLP is as a transparent entity, though a check-the-box election is often made to treat the CLP as a corporation for US Federal Income tax purposes. Notwithstanding the treatment of the CLP as a corporation for US tax purposes, the US rules will recognise a foreign limited partner as the beneficial owner of the underlying income and thus, entitled to US tax treaty relief provided the CLP is treated as transparent under the tax laws of the relevant foreign treaty jurisdiction. In these circumstances, the foreign limited partner may be eligible for reduced dividend and interest withholding tax rates under an applicable treaty even if the CLP has elected to be treated as a corporation for US tax purposes.
Unlike the rest of the world (Japan used to be the other exception, but no longer), the Australian income tax law treats a limited partnership as a corporation. Whilst Division 830 of the Income Tax Assessment Act 1997 (ITAA 1997) allows an Australian portfolio investor to elect to treat certain foreign limited partnerships as partnerships for Australian income tax purposes, the Australian Taxation Office (ATO) view (as espoused in Taxation Determination TD 2009/2) is that such an election cannot be made for limited partnerships resident in tax haven jurisdictions. As such, as the Cayman Islands does not impose taxes on income, such an election cannot be made in respect of a CLP.
Completion of a W-8BEN-E form requires consideration of ‘beneficial ownership’ under US tax law. It is not merely a certification as to Australian residency and satisfaction of the LoB article under the US/Australian tax treaty.
If you are investing in a fund that holds US investments and the fund vehicle is a limited partnership, even if a Delaware limited partnership, you need to consider whether an election can be made under Division 830 of the ITAA 1997 and if so, you will need to make that election before you can complete a W-8BEN-E certifying yourself as the beneficial owner and thus, treaty eligible. If such an election cannot be made, then you are not entitled to treaty relief!