The Australian Taxation Office (ATO) has published guidance on the application of the straddle holding period rule for dividend withholding tax under Australia's tax treaties.
Straddle holding period rule
Under particular tax treaties, including some of those modified by Article 8 of the Multilateral Instrument, non-portfolio intercorporate dividends may become eligible for reduced withholding tax rates if the beneficial owner of the dividend satisfies the straddle holding period rule and any other conditions set out in the particular tax treaty. Australia's tax treaties that may be impacted by this rule are set out in the table below.
The straddle holding period includes the day of payment of the dividend. Therefore in the first year a beneficial interest in the shares is held, the holding period may straddle the dividend payment date. This is because the holding period rule will look both backwards and forwards in determining whether the relevant holding period is satisfied.
If the holding period has not been satisfied when a dividend is paid then the withholding tax rate, as specified in the particular tax treaty before any reduction, will apply to any unfranked part of the dividend.
If the holding period is subsequently satisfied after the dividend payment date and any other conditions set out in the particular tax treaty are met, the reduced withholding tax rate will apply to the dividend. This means the dividend withholding tax withheld at the dividend payment date may have been over-withheld. In such a case the beneficial owner of the dividend, or a representative of the beneficial owner, may apply to the ATO for a refund of the over-withheld withholding tax.