2002 Ruling 2001-0107023 - Part XIII

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: (i) Whether interest paid on a loan from an Austrian corporation to a related Canadian is exempt from the application of paragraph 212(1)(b) of the Income Tax Act (the "Act") by subparagraph 7(c) of Article XI of the Canada-Austria Income Tax Treaty (the "Treaty")? (ii) Whether guarantee fee payable by the Canadian corporation to the related Austrian corporation of an amount representing the fees charged by Osterreichische KoNtrollbank A.G. ("KONTROLLBANK") to the Austrian corporation is deemed interest under paragraph 214(15)(a) of the Act and therefore exempt from paragraph 212(1)(b) of the Act by virtue of subparagraph 7(c) of Article XI of the Treaty? (iii) Whether payments such as legal, accounting and related expenses paid by the Canadian corporation in respect of the credit facility granted to the Canadian corporation and on related agreements, is exempt from withholding tax by virtue of paragraph 212(4)(b) of the Act?

Position: (i) Yes; (ii) Yes; (iii) Yes under certain conditions

Reasons: (i) and (ii) Based on the terms of the Treaty and consistent with our position in previous rulings involving similar transactions; (iii) Only to extent expenses are reasonable and are reimbursement of expenses by company to bank on related loans.

XXXXXXXXXX 2001-010702

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX ("ACO")

This is in reply to your letters of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge information provided over the telephone (XXXXXXXXXX).

Our understanding of the facts and proposed transactions and purpose of the proposed transactions is as follows:

Definitions

In this ruling application, unless otherwise specified:

? "Act" means the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended;

? "Regulations" means the Income Tax Regulations, C.R.C. 1977, c. 945, as amended; all statutory references herein are to provisions of the Act unless otherwise specified;

? the words and expressions which are defined for purposes of the Act and Regulations (in particular, subdivision i of Division B of Part I of the Act and Part LIX of the Regulations) shall have the same meanings for the purposes hereof;

? "Treaty" means the Canada - Austria Tax Convention, including protocols enacted to the date hereof;

? "Proposed Transactions" means the transactions described in the paragraphs hereof which appear under the heading "Proposed Transactions";

? "ACO" means XXXXXXXXXX;

? "Joint Venture" means XXXXXXXXXX;

? "BCO" means XXXXXXXXXX;

? "CCO" means XXXXXXXXXX;

? "BANK" means XXXXXXXXXX;

? "KONTROLLBANK" means Osterreichische Kontrollbank AG as referred to in the Treaty.

Facts

1. ACO was incorporated on XXXXXXXXXX and files its tax returns with the XXXXXXXXXX District Taxation Office. ACO is a private corporation and a taxable Canadian corporation within the meaning of subsection 89(1).

2. ACO owns a XXXXXXXXXX% undivided interest in the Joint Venture which carries on business in Canada with XXXXXXXXXX owners. XXXXXXXXXX

3. All of the issued and outstanding shares of ACO are owned by CCO.

4. CCO was incorporated under the laws of Austria and is a resident of Austria for purposes of the Treaty with its head office located in Austria. CCO is not a resident of Canada nor does it carry on business in Canada under the Act. CCO does not have a permanent establishment in Canada for purposes of the Treaty.

5. The majority of shares in CCO are controlled by entities that do not carry on business in Canada, are not resident in Canada for the purposes of the Act and have no permanent establishment in Canada within the meaning of the Treaty. Other shareholders of CCO are individuals not resident of Canada within the meaning of the Act.

6. BANK is the main banking partner of the CCO group. BANK is located in Austria and is not a resident of Canada within the meaning of the Act and does not have a permanent establishment in Canada within the meaning of the Treaty.

7. BCO is a private corporation and a taxable Canadian corporation within the meaning of subsection 89(1) and is mandated to manage, as agent, the operations of XXXXXXXXXX operated by the Joint Venture. The XXXXXXXXXX owners of the Joint Venture hold all of the issued and outstanding share capital of BCO in the same proportions as described in paragraph 2 above.

Proposed Transactions

8. Under a proposed agreement between CCO and ACO (the "Agreement"), CCO offers to ACO a revolving credit facility of up to a maximum amount of US $XXXXXXXXXX under which ACO will not grant specific guarantees to CCO.

9. BANK will grant a credit line to CCO to be used by it exclusively to finance the revolving credit facility from CCO to ACO up to an amount of US $XXXXXXXXXX for which CCO will hand over a bill of exchange (promissory note) to BANK as collateral security. This credit granted to CCO by BANK will be guaranteed by KONTROLLBANK, acting on behalf of the Ministry of Finance, Austria.

10. The credit facility from BANK to CCO and from CCO to ACO shall be used solely to finance costs associated with the Joint Venture incurred by ACO within a period commencing on the date of acceptance by ACO and ending XXXXXXXXXX.

11. Interest is payable by ACO to CCO quarterly at a rate equal to LIBOR plus XXXXXXXXXX% margin.

12. ACO will also be required to pay CCO a guarantee fee of XXXXXXXXXX% per annum, representing a fee charged by KONTROLLBANK to CCO for guaranteeing the cash credit to CCO from BANK.

13. All costs and expenses (e.g., legal, accounting and related expenses) paid in respect of the arranging of the Agreement shall be borne exclusively by ACO. Accordingly, the portion of these expenses that are incurred by CCO will be reimbursed by ACO.

Purpose of Proposed Transactions

The overall purpose of the arrangement is to obtain financing for ACO. The line of credit from BANK is granted to CCO on condition that the funds are used exclusively to fund ACO. The guarantee from KONTROLLBANK is made in order to facilitate the credit to CCO by BANK and is given on condition that funds are used by CCO exclusively to finance ACO.

Additional Information

To the best of your knowledge and the knowledge ACO or CCO, none of the issues involved in this request for an advance income tax ruling:

(a) is in an earlier return of ACO or CCO or of a person related to them;

(b) is being considered by a tax services office or tax center in connection with a previously-filed return of ACO or of a person related to ACO;

(c) is under objection by ACO or CCO or by a person related to them; or

(d) is before the courts.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are carried out as described above, we rule as follows:

A. The interest payable by ACO to CCO under the Agreement is exempt from tax under subsection 212(1) by virtue of subparagraph 7(c) of Article XI of the Treaty.

B. The guarantee fees payable by ACO to CCO representing the fee charged by KONTROLLBANK to CCO will be considered interest on the loan by virtue of paragraph 214(15)(a) and will be exempt from tax under subsection 212(1) by virtue of subparagraph 7(c) of Article XI of the Treaty.

C. Provided all expenses described in paragraph 13 above are paid as reimbursements for specific expenses incurred for the performance of services that were for the benefit of ACO in connection with financing granted to ACO, such fees, to the extent reasonable in the circumstances, will be exempt from tax under Part XIII by virtue of paragraph 212(4)(b).

The above rulings, which are based on the Act in its present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.

Yours truly,

for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch