Withholding Tax

While interest paid to a non-resident investor is generally subject to interest withholding tax ("IWT") at the rate of 10 per cent, interest on certain publicly offered company debentures or debt interests can be excluded from the IWT regime under the provisions of section 128F. A failure to fall within section 128F, or other withholding tax exemptions, may have a material adverse tax cost on the project.

An unfranked dividend paid to a resident investor in the early years of a PPP arrangement may not be efficient as it will generate taxable income in the hands of the investor. Furthermore, an unfranked dividend paid to a non-resident investor will be subject to the statutory rate of dividend withholding tax ("DWT") of 30 per cent, unless the rate is reduced by an international tax treaty (which generally reduces the DWT rate to 15 per cent or less).  As no DWT is payable by an entity on a fully-franked dividend repatriated to non-resident investors, the availability of franked profits and the timing of the payment of a fully-franked dividend to foreign investors is important. Should an entity have insufficient profits to pay a fully-franked dividend to non-resident investors, this may have an adverse tax cost on a PPP project.