Global Daily Tax News, New Australia-Iceland DTA In Force, (Nov 14, 2023)

The Australian Government has announced the entry into force of a new double tax agreement with Iceland.

The Government said this is the first of 12 new tax treaties that the Government is targetting, as part of plans to expand the country's tax treaty network.

Australia is also pursuing tax agreements with Bulgaria, Colombia, Croatia, Cyprus, Estonia, Greece, Latvia, Lithuania, Luxembourg, Portugal, and Slovenia.

The treaty cuts the withholding tax that may be charged at source for cross-border passive income.

For dividends, the treaty provides that withholding tax at source will be capped at 5 percent where the recipient holds at least 10 percent of the voting power of the company paying the dividend throughout a 365-day period that includes the date of payment of the dividend. Otherwise a 15-percent rate will apply.

Except where specifically exempt under the agreement, the treaty caps the maximum rate of withholding tax at source on interest and royalties income at 10 percent.

The agreement also includes provisions to counter tax base erosion and profit shifting. Namely, it will include a preamble that states that the DTA is not intended to create opportunities for non-taxation or reduced taxation through tax evasion or avoidance and states that attempts to abuse it will be counteracted by the treaty's provisions. Further, it includes the BEPS minimum standards on treaty abuse, the avoidance of permanent establishment status, hybrid mismatch arrangements, and improving tax dispute resolution.

The treaty's tax rates will apply from 2024 to withholding rates on the relevant Australian income earned from January 1, fringe benefits provided from April 1, and to any other Australian taxes on income earned from July 1. In Iceland, all aspects of the treaty will take effect from January 1, 2024.