4 October 2006 Internal T.I. 2006-0204341I7 - Cyprus Limited Liability Company

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: Whether a Cyprus Limited Liability Company is entitled to the treaty benefits under the Canada-Cyprus Tax Convention (the "Treaty").

Position: Question of fact.

Reasons: Where a Cyprus Limited Liability Company is subject to tax in Cyprus, under Cyprus tax law as a resident of Cyprus, such a company will be entitled to the benefits under the Treaty.

							October 4, 2006

Shafik Kanji					HEADQUARTERS
Team Leader	A. Seidel, CMA
International Audit Section 			(613) 957-2058
Calgary Tax Services Office
Encor Building (8048)

Attention: Lauri Robinson			2006-020434

Cyprus Limited Liability Company

We are writing in response to your September 5, 2006 memorandum in which you requested our comments concerning a Cyprus limited liability company's ("Cyprus LLC") entitlement to the benefits contained in the Canada-Cyprus Tax Convention (the "Treaty").

Background

You have provided us with a copy of a certificate of incorporation that would be issued by the Registrar of Companies to a Cyprus LLC under the Republic of Cyprus's "The Companies Law, Cap. 113" (the "Legislation"). You query whether such a Cyprus LLC would be considered to be a resident of Cyprus such that the Cyprus LLC would be entitled to the benefits provided under the Treaty.

Our Comments

Article 4 of the Treaty provides that a Cyprus LLC will be considered to be a "resident of Cyprus" if, under the laws of Cyprus, it is liable to tax in Cyprus by reason of its "domicile, residence, place of management or any other criterion of a similar nature".

Paragraph 3 of Article 29 of the Treaty provides that the Treaty does not apply to companies that are entitled to any special tax benefit under paragraph (w) of Section 8 and Section 28A of the Income Tax Laws 1961 to 1977 and also does not apply to companies entitled to any special tax benefit under any substantially similar law subsequently enacted by Cyprus in addition to, or in place of, the laws mentioned above.

Prior to December 31, 2002, a Cyprus LLC was subject to tax under Cyprus tax law based on the source of the income earned by the company. However, as part of the harmonization of Cyprus's tax laws with the other European Union countries and to make Cyprus a more attractive international tax jurisdiction, Cyprus enacted a series of tax reforms ("Tax Reform") that became effective January 1, 2003. The key changes in the Cyprus tax system for Cyprus LLC's was a shift from taxation based on source of income to taxation based upon "residency" and the elimination of different tax rates for companies incorporated in Cyprus and companies incorporated outside of Cyprus.

The information you have provided indicates that the company under review was incorporated in 2004. Accordingly, our comments are restricted to the determination of whether a Cyprus LLC is a resident of Cyprus, for purposes of the Treaty, under the new tax regime in Cyprus.

The Legislation provides that there are two main types of limited liability companies in Cyprus, public and private. After Tax Reform, all "resident" limited liability companies are taxed in the same manner, such that this distinction will not be relevant to the residency issue for purposes of the Treaty.

Pursuant to Tax Reform, and subject to a carve out for income earned by certain permanent establishments ("PE's") situated outside of Cyprus, any company that is a resident of Cyprus under Cyprus tax law is subject to a uniform 10% corporate tax on any income accrued or arising from sources within or outside of Cyprus, i.e. worldwide income. Tax Reform provides that a company will be a "resident" of Cyprus if "management and control" of the company is exercised in Cyprus. Tax Reform does not include a definition of management and control.

Conclusion

Where it is determined that a Cyprus LLC is a "resident" of Cyprus under Cyprus tax law, i.e. management and control of the company is exercised in Cyprus, such that the Cyprus LLC is liable to the comprehensive 10% corporate tax imposed by Cyprus on its worldwide income, other than the income earned by certain PE's, it is our view that the Cyprus LLC will be considered to be a resident of Cyprus for purposes of Article 4 the Treaty. Accordingly, all of the benefits provided under the Treaty will generally be available to such a Cyprus LLC. However, there may be facts and circumstances present in any particular case which amount to treaty abuse. In such a case, treaty benefits may be challenged in various ways, including the application of the general anti-avoidance rules in section 245 of the Income Tax Act.

It is our understanding that, as a result of Tax Reform, all companies resident in Cyprus under Cyprus tax law, including the Cyprus LLC and companies incorporated outside of Cyprus and carrying on business in Cyprus, are now taxed in the same manner under Cyprus law. If this is in fact the case, paragraph 3 of Article 29 of the Treaty is redundant for the period beginning January 1, 2003.

We hope that our comments are of assistance. If you wish to discuss any of the above, please contact the writer.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Olli Laurikainen, CA
for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch