House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. John Howard, M.P.)

General Outline

The main purpose of this Bill is to give the force of law in Australia to a comprehensive double taxation agreement between Australia and Denmark which was signed in Canberra on 1 April 1981.

The Bill also specifies that interest and royalties derived from Denmark by residents of Australia, and in respect of which, under the agreement, Danish tax is limited to 10 per cent, will not, by reason of the payment of that limited tax, be exempt from Australian tax. Australia will instead allow credit for the limited Danish tax against the Australian tax on this income.

The agreement sets out the basis on which, and the extent to which, income derived in one country by residents of the other is to be taxed in each country and the basis on which relief from double taxation is to be effected where income may be taxed by both countries. The main features of the arrangements with Denmark are as follows :

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Business profits, if they are derived by a resident of one country from a branch or other "permanent establishment" in the other country, may be taxed in the latter country; otherwise they are to be taxed only in the country of residence.

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Dividends, interest and royalties may be subjected to tax in the country of source, but there is a general limit on the tax that that country may charge on such income flowing to residents of the other country. This limit is 15 per cent for dividends and 10 per cent for interest and royalties.

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Income from real property is taxable in full in the country in which the property is situated.

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Profits from international operations of ships and aircraft will be taxed only in the country of residence of the operator.

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Income from independent personal services will be taxed only in the country of residence of the recipient unless the income is attributable to a fixed base of the recipient in the other country.

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Income from dependent personal services, i.e., employees' remuneration, will generally be taxable in the country where the services are performed. However, where the services are performed during a short visit to one country by a resident of the other country, and the remuneration is not an expense of a resident of, or a permanent establishment in, the country visited the income will be exempt in the country visited provided it is subject to tax in the country of residence of the recipient.

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Government officials are to be taxed by their home country.

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Directors' fees will generally be taxed in the country of residence of the paying company.

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Income derived by public entertainers from their activities as such are to be taxed by the country in which the activities take place.

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Pensions and annuities will generally be taxed only in the country of residence of the recipient.

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A student resident in one country who is temporarily present in the other country solely for the purpose of receiving an education will be exempt from tax in the country visited in respect of payments made from abroad for the purposes of his or her maintenance or education.

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Dual residents of both countries are, according to specified criteria, to be treated for the purposes of the agreement as being residents of only one country.

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Associated enterprises may be taxed on the basis of dealings at arm's length.

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Exchange of information and consultation between the taxation authorities of each country is authorised.

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Double taxation relief to be allowed by the country of residence in respect of income taxed in the other country will be :

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in Australia, by allowance of credit against Australian tax for Danish tax on interest and royalties (if imposed in future), where that tax is subject to the 10 per cent limit expressed in the agreement, and for Danish tax on dividends received by individuals - dividends received by Australian companies from Denmark and all other categories of taxed income received by Australian residents from Denmark being freed from Australian tax by Australian tax law;

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in Denmark, generally, by allowance of credit against Danish tax for the Australian tax on dividends, interest and royalties and, while taking other income into account in determining the rate of Danish tax on taxable income, by exempting that other income from Danish tax.

Notes on the clauses of the Bill are given below and these are followed by explanations of the articles of the agreement.