Assistant Treasurer David Bradbury today announced that Australia and Switzerland have signed a revised tax treaty, which will replace the existing treaty signed in 1980.
The revised treaty will enhance the already strong economic relationship between Australia and Switzerland by aligning the bilateral tax arrangements more closely with current Australian and international tax treaty policy settings.
The revised treaty will also strengthen administrative assistance between Australian and Swiss revenue authorities, in particular by permitting them to exchange taxpayer information, including information held by banks and other financial institutions, in order to address tax evasion.
This reflects both Governments' commitment to a fair tax system and is consistent with ongoing international efforts, including within the G20, to improve tax system integrity globally.
The revised treaty will enter into force after both countries have completed their respective domestic requirements. Legislation will be introduced into the Australian Parliament as soon as practicable to give the revised treaty the force of law in Australia.
A copy of the text of the revised treaty is available on the Treasury website.
Main Features of the Revised Treaty
The main features of the revised treaty are summarised below.
The taxes covered by the revised treaty will include the fringe benefits tax, the petroleum resource rent tax and the minerals resource rent tax.
A revised definition of 'permanent establishment' will broaden the range of circumstances in which both countries can tax at source business profits derived from construction and mining activities, and the operation of substantial equipment. In addition, integrity provisions will help prevent related parties from circumventing the permanent establishment time thresholds by splitting contracts.
Income from immovable property
A revised definition of 'immovable property' will enhance both countries' ability to tax income derived from the use of immovable property, including mining rights.
Taxing rights over business profits derived through a permanent establishment will apply to profits derived through interposed trusts.
Shipping and air transport
Profits from shipping or air transport activities undertaken between two ports within a country will be taxable in that country.
Where the revenue authority of one country adjusts the taxable income of a resident of the other country, to reflect its assessment of the arm's-length price of goods or services provided to an associated enterprise, the revenue authority of the other country will be required to make a correlative adjustment.
Dividends may be taxed in the source (of the dividend) country up to the following limits:
- Zero - for dividends paid to publicly listed companies, or subsidiaries thereof, or to unlisted companies in certain circumstances, that hold 80 per cent or more of the paying company;
- Zero - for dividends paid to complying Australian superannuation funds and tax exempt Swiss pension schemes;
- 5 per cent - for dividends paid to companies that hold 10 per cent or more of the paying company; and
- 15 per cent - in all other cases.
Interest may be taxed in the source (of the interest) country up to the following limits:
- Zero - for interest paid to bodies exercising governmental functions and to banks performing central banking functions;
- Zero - for interest paid to banks that are unrelated to, and dealing independently with, the payer;
- Zero - for complying Australian superannuation funds and tax exempt Swiss pension schemes; and
- 10 per cent - in all other cases.
Royalties may be taxed in the source (of the royalty) country at up to 5 per cent.
A revised definition of 'royalties', to exclude the right to use industrial, commercial or scientific equipment from the definition, will lower costs for firms that lease such equipment.
Alienation of property
Gains from the disposal of shares or comparable interests in land-rich entities will be taxable in the country where the land is situated.
Australia may tax certain gains derived by individuals who were Australian residents during the relevant income year or during any of the preceding four years.
Fringe benefits tax
Taxing rights over fringe benefits provided to employees will be allocated to the country that has the primary taxing right over the underlying employment income. This will prevent the double taxation of fringe benefits.
Pensions and annuities
Pensions and similar payments will be taxable in the recipient's country of residence, provided the recipient is taxable on those payments in that country. If not, the source (of the pension or similar payment) country may also tax the payments.
Lump sum payments in respect of retirement, invalidity, disability, death or injury may be taxed in the country of source of the payment.
Non-discrimination rules will prevent Australia and Switzerland from treating each other's nationals any less favourably – for tax purposes - than they would treat their own nationals in similar circumstances.
Mutual agreement procedure
Taxpayers will have three years in which to seek the revenue authorities' assistance in the resolution of tax disputes arising from the application of the treaty.
Taxpayers will also be able to refer tax disputes that remain unresolved after three years to independent arbitration.
Exchange of information
The revised treaty will provide a legal basis for the exchange of taxpayer information between tax officials, including for detecting and preventing tax avoidance and evasion. These rules will apply to information held by banks and other financial institutions.
The revised treaty will include rules denying treaty benefits, in certain circumstances, if a person's principle purpose is to take advantage of the treaty.
Temporary residents of Australia
Switzerland will not be required to provide treaty benefits in relation to income derived by Australian temporary residents if Australia exempts that income.
Superannuation funds and pension schemes
New rules will clarify the treaty treatment of superannuation funds and pension schemes, thereby creating greater certainty for those entities.
Australian discretionary trusts
New rules will clarify the treatment of income derived by or through Australian discretionary trusts.