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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: (i) Whether an entity formed under the Saudi Arabian legislation with respect to Limited Liability Companies is treated as a corporation for Canadian tax purposes; and
(ii) Whether a deduction is allowed under section 113 of the Act with respect to Saudi Arabian income tax paid by the Canadian corporate investor of such entity.
Position: (i) The information provided is not sufficient to make a determination
(ii) Provided that the entity is a corporation for Canadian tax purposes, paragraph 113(1)(c) would probably apply.
Reasons: (i) Not sufficient information
(ii) the foreign tax appears to be an income or profits tax and it is an underlying foreign tax attributable to the dividend received by the Canadian corporate investor.
Memo to File
Date: February 22, 2000
Subject: Saudi Arabian Limited Liability Company
Whether a Saudi Arabian Limited Liability Company ("SALLC") is treated as a corporation for the purposes of the Income Tax Act (the "Act")?
XXXXXXXXXX (the client) provided us the relevant legislation of Saudi Arabia governing the SALLC. After a detailed review of the information provided, it is not clear whether the SALLC is a legal person with a separate identity who is able to acquire and own property and incur liability and to sue and be sued. When we requested additional information from the client such as the Memorandum of Association for the particular SALLC in question, we were told that they do not require our opinion any more in this subject matter.
Provided that the SALLC is treated as a corporation for Canadian tax purposes, whether the Saudi Arabian income tax paid by the Canadian corporate "shareholder" of the SALLC on its share of the income earned by the SALLC is deductible under section 113 of the Act?
The client provided us with the following information. The shareholders of the SALLC who are not Saudi Arabian residents are subject to income tax in Saudi Arabia on their share of the income of a SALLC at corporate tax rates of up to 45%. Tax is withheld and remitted by the SALLC on behalf of these shareholders. On the other hand, instead of paying income taxes, the shareholders of a SALLC who are Saudi Arabian residents are subject to a wealth tax (Zakat) calculated at 2.5% of their share of the net asset value of the SALLC. A SALLC cannot be owned more than 49% by foreigners. A separate capital account is maintained for each shareholder. Saudi Arabian income tax is debited to the foreign investor's current account and Zakat is debited to the Saudi Arabian shareholder's account. Under Saudi corporate law such current account cannot remain in debit position. Consequently, it must be settled either by a cash contribution or a dividend offset to the shareholder's current account.
For a Canadian corporate shareholder of a SALLC, the Saudi Arabian income tax so paid on its share of the income of the SALLC appears to be a non-business income tax for Canadian tax purposes because it is an income or profits tax. Provided that the SALLC is a corporation for purposes of the Act, it can be said that such tax is paid in respect of income from the shares of the SALLC held by the Canadian corporate shareholder, and paragraph 113(1)(c) of the Act would apply to allow as a deduction from income an amount equal to the lesser of (i) the product obtained when the amount of the foreign tax paid by the Canadian corporate shareholder applicable to such portion of the dividend received by the Canadian corporate shareholder is multiplied by the relevant tax factor, and (ii) the amount of such portion of the dividend so received by the Canadian corporate shareholder.
Since a separate capital account is kept by the SALLC for each foreign investor to account for the profits allocated to him and the Saudi Arabian income tax paid on his behalf, the portion of the foreign tax attributable to the portion of the dividend received by the Canadian corporate shareholder of the SALLC can be calculated using the following formula:
A x B
where A is the total amount of the Saudi Arabian income tax paid to-date in respect of the taxable earnings of the SALLC less the amount of such tax used to claim a deduction to-date; B is the amount of the dividend received by the Canadian corporate shareholder in the year; and C is the total amount of the taxable earnings of the SALLC allocated to the Canadian corporate investor to-date before the payments of current dividends less the dividends paid to-date.
For example, assume that the SALLC is owned 40% by a Canadian corporate shareholder and 60% by a Saudi Arabian resident and assume that the taxable earnings of the SALLC for Year 1 and Year 2 and the respective Saudi Arabian income taxes thereon are as follows:
Shareholder's Resident's Total
Share (40%) Share (60%) Amount
Taxable earnings before tax $40,000 $60,000 $100,000
Saudi Arabian income tax- 35%/
dividend offset $14,000 $14,000
Additional dividend distributions $6,000 $30,000 $36,000
Capital Account after dividends $20,000 $30,000 $50,000
Taxable earnings before tax $20,000 $30,000 $50,000
Saudi Arabian income tax - 35%/
dividend offset $7,000 $7,000
Additional distributions in Year 2 $9,000 $24,000 $33,000
Capital Account - beginning of year $20,000 $30,000 $50,000
Capital Account - end of year $24,000 $36,000 $60,000
In year 1, the non-business income tax paid by the Canadian corporate shareholder applicable to the portion of the dividend prescribed to be paid out of the taxable surplus of the SALLC for the purposes of paragraph 113(1)(c) would be
A x B = $14,000 x $20,0001 = $7,000
In year 2, that amount = $14,0002 x $16,0003 = $5,600
1 That is, tax of $14,000 plus additional distributions of $6,000 in year 1
2 That is, total tax paid in year 1 and year 2 of $21,000 less the amount used to claim a deduction in year 1 of $7,000
3 That is, tax of $7,000 plus additional distributions of $9,000 in year 2
4 That is, total taxable earnings for year 1 and year 2 of $60,000 less dividend paid in year 1 to the Canadian investor of $20,000
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