24 March 2004 External T.I. 2003-0032781E5 - Treaty benefits for Irish Investment Undertakings

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Are Irish Investment Undertakings eligible for the benefits of the Canada-Ireland Tax Treaty?

Position: No.

Reasons: They do not appear to be "liable to tax" in Ireland.

XXXXXXXXXX 2003-003278
T. Cook
March 24, 2004

Dear XXXXXXXXXX:

Re: Investment Undertakings

We are writing in reply to your email of July 30, 2003, in which you requested our opinion as to whether a particular type of unit trust established under Irish law would be eligible for the benefits of the Canada-Ireland Income Tax Agreement¹ (the "Irish Treaty"). We apologize for the delay in responding.

Facts

From your correspondence and our own research we gather that the following are the salient facts.

? Certain unit trusts (and other entities) authorized under Irish law are eligible for a special tax regime established by the Finance Act 2000 (Ireland), which amended the Taxes Consolidation Act, 1997 (Ireland) (the "Irish Act"). Entities governed by this regime, whether unit trust or other, are generally known as "Investment Undertakings".

? An Investment Undertaking is an investment vehicle for its unitholders. We have no information to suggest that the use of Investment Undertakings is limited to particular purposes.

? An Investment Undertaking is not taxed in Ireland on its income or capital gains as earned.

? Unitholders of an Investment Undertaking are not taxed in Ireland on the income or capital gains of the Investment Undertaking as they are earned.

? An exit tax is paid when amounts are distributed out of an Investment Undertaking to its unitholders. (Other events, such as unit cancellations, redemptions and sales, are also taxed; but they are not discussed herein since they do not change the analysis set out below.)

? The Irish Act terms a distribution to be a "chargeable event". When a chargeable event occurs, there is "arising to the Investment Undertaking a gain in the amount of" the distribution.

? There is no chargeable event if a distribution is made to certain entities, such as a pension or charity, or to a non-resident (whether natural person or other).

? A chargeable event is taxed at a rate of either 20% or 23% of the amount of the distribution giving rise to the chargeable event.

? With respect to who bears the burden of the tax, the Irish Act provides that "an Investment Undertaking shall account for the appropriate tax in connection with a chargeable event in relation to a unitholder ..."; however, the Irish Act also gives statutory authority to the Investment Undertaking to deduct the amount of tax owing from the underlying distribution made to the unitholder.

? The Irish Revenue document, Investment Undertakings: General Guidelines for Calculating Tax Due and for Completing Declaration Forms (the "General Guidelines"), states that:

"The general thrust of the new regime is that there is no annual tax on income and gains arising to a fund but the fund deducts tax from payments to be made to certain unit holders in the fund. This tax deducted by the fund represents a final liability to Irish tax for unit holders who are individuals. In the case of Irish resident corporates who have suffered tax on payments, other than on redemption, from a fund, the amount that they receive is treated as a net annual payment, grossed up accordingly and taxed, with credit given for the tax withheld by the fund."

? If the exit tax is not paid, a unitholder resident in Ireland must include the amount of the distribution to him or her in income for Irish tax purposes.

Issue

Your general query about treaty benefits can be illustrated as follows. A resident of Canada makes an interest payment subject to Canadian withholding tax under the Income Tax Act (the "Act") to an Investment Undertaking - would the correct withholding tax rate for the payer be the 25% set out in Part XIII of the Act, or the 15% rate provided in paragraph 1 of Article VI of the Irish Treaty (10% under paragraph 2 of Article 11 of the New Irish Treaty)?

Our Comments

As explained in Information Circular 70-6R5, it is not the Directorate's practice to comment on the tax consequences applicable to a specific taxpayer in particular circumstances, except in the context of an advance income tax ruling. However, we are prepared to offer the following general comments, which we hope will assist you.

A Canadian payer may withhold at the lower treaty rate only if the Investment Undertaking is a resident of Ireland under the Irish Treaty (or the New Irish Treaty). Paragraph 1(c) of Article II of the Irish Treaty provides that "resident of Ireland" means "any person who is resident in Ireland for the purposes of Irish tax and is not resident in Canada for the purposes of Canadian tax". Paragraph 1 of Article 4 of the New Irish Treaty provides that the term "resident of a Contracting State" means "any person who, under the laws of that State, is liable to tax therein by reason of ...". The Supreme Court of Canada examined the meaning of the term "liable to tax" in Crown Forest Industries Ltd. v. The Queen, 95 DTC 5389 (S.C.C.). In that decision, at page 5395, the Supreme Court held that the term "liable to tax" in the Canada-U.S. Income Tax Convention (1980) generally requires that a person be subject to as comprehensive a tax liability as is imposed by a state before that person will be considered to be a resident of that state for purposes of a tax treaty. It is our view that the test enunciated by the Supreme Court would apply equally to both the Irish Treaty and the New Irish Treaty. As a result, an Investment Undertaking would only be eligible for treaty benefits if it were subject to comprehensive taxation in Ireland and therefore was a resident of Ireland for treaty purposes.

The Irish Act provides that upon a chargeable event, a gain accrues to the Investment Undertaking and it is liable for tax based on the amount of that gain, but the Investment Undertaking is authorized to deduct that tax from the underlying distribution made to the unitholder. Once tax has been deducted, the unitholder does not have to include the distribution in his or her income for Irish tax purposes. In this regard, the Irish tax levied resembles a withholding tax on the unitholder more than a comprehensive tax on the Investment Undertaking. This view is consistent with the explanation provided in the General Guidelines, which states "tax deducted by the fund represents a final liability to Irish tax for unit holders". Therefore, our inclination is that an Investment Undertaking is not itself subject to comprehensive taxation in Ireland and so would not be a resident of Ireland for purposes of either the Irish Treaty or the New Irish Treaty.

As well, we note that no Irish tax is payable by an Investment Undertaking or its unitholders when distributions are made to unitholders who are not resident in Ireland. Where non-residents of Ireland wholly own an Investment Undertaking, no Irish tax would be paid. This further supports the view that an Investment Undertaking is not subject to comprehensive taxation in Ireland. Even if an Investment Undertaking could be found to be a resident of Ireland, paragraph 4 of Article 28 might still prevent the New Irish Treaty from applying in certain circumstances:

The Convention [i.e., the New Irish Treaty] shall not apply to any company, trust or partnership that is a resident of a Contracting State and is beneficially owned or controlled directly or indirectly by one or more persons who are not residents of that State, if the amount of the tax imposed on the income or capital of the company, trust or partnership by that State is substantially lower than the amount that would be imposed by that State if all of the shares of the capital stock of the company or all of the interests in the trust or partnership, as the case may be, were beneficially owned by one or more individuals who were residents of that State.

The information we have been able to obtain does not suggest that it would be appropriate to look through an Investment Undertaking for the purpose of granting treaty benefits to its unitholders. Various legal forms can be used to establish an Investment Undertaking, so it is not clear to us that Investment Undertakings are flow-through entities as a general matter of private law. And from an Irish tax perspective at least, income and capital gains earned by an Investment Undertaking accumulate within the Investment Undertaking rather than accruing directly to the unitholders. Unitholders only receive income when a distribution is made.

In summary, our initial view is that an Investment Undertaking would not be a resident of Ireland for purposes of either the Irish Treaty or the New Irish Treaty, it would not be entitled to treaty benefits, and that any withholding on payments to an Investment Undertaking should be made at Part XIII rates, rather than treaty rates. However, we note that yours is the first enquiry we have had regarding the treaty status of Investment Undertakings. You may wish to consider submitting a request for an advance income tax ruling. This would allow us to review the applicable law in the context of an actual transaction and all the supporting commercial documentation. We trust that these comments will assist you.

Yours truly,

Jim Wilson
Section Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
ENDNOTES

¹ Signed November 23, 1966, in force December 6, 1967. A new treaty (the "New Irish Treaty") between the two countries was signed on October 8, 2003, but is not yet in force.