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: Various interpretative issues relating to residency in the United Arab Emirates for the purpose of the Convention
Position: See letter
Reasons: See letter
2007-022640
XXXXXXXXXX D. Zhang
(613) 957-2104
June 3, 2008
Dear XXXXXXXXXX :
Re: Article 4(1)(b)(ii) of the Canada-United Arab Emirates Income Tax Convention
We are writing in response to your letter of March 5, 2007 concerning the application of Article 4(1)(b)(ii) of the Canada-United Arab Emirates Income Tax Convention (the “Treaty”). In your letter, you describe a situation where a company formed under the laws of the United Arab Emirates (the “UAE”) receives payments, such as dividends and interest, from a Canadian resident company. You requested our comments to assist you in determining whether the recipient company would be considered a resident of the UAE under the Treaty such that the payments would qualify for the reduced withholding rates under the Treaty. We apologize for the delay in our reply.
According to Article 4(1)(b)(ii) of the Treaty, a company is a resident of the UAE for the purposes of the Treaty if:
(ii) the company is incorporated in the United Arab Emirates and can establish that:
(A) all of its shares are beneficially owned by residents of the United Arab Emirates; or
(B) all or substantially all of the company’s income is derived by the company from the active conduct of a trade or business, other than an investment business, in the United Arab Emirates and all or substantially all of the value of the company’s property is attributable to property used in that trade or business.
You asked us the following questions with respect to Article 4(1)(b)(ii)(B) of the Treaty:
1. How should the term “investment business” be interpreted?
2. In determining if all or substantially all of the company’s income is derived by the company from the active conduct of a trade or business, does one “look through” the company’s equity investments in its subsidiaries?
3. How should the term “all or substantially all” be interpreted?
4. What is the meaning of “income”?
5. At what time should the “attributable to property” test be applied and for what period of time is income measured to determine if a company is resident in the UAE?
Written confirmation of the tax implications relating to transactions involving specific taxpayers is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, “Advance Income Tax Ruling”, dated May 17, 2002. This Information Circular and other Canada Revenue Agency (“CRA”) publications can be accessed on the Internet at http://www.cra.gc.ca. The determination of the withholding tax applicable to payments, such as those described in your letter can only be resolved after a review all of the relevant documentation and agreements. However, based upon the limited information provided to us, we are prepared to offer the following general comments.
1) Meaning of Investment Business
The term “investment business” is not defined in the Treaty. In determining the meaning of this term for the purpose of the Treaty, we would look to the law of Canada. In this respect, we note that the term is defined in subsection 95(1) of the Income Tax Act (the “Act”) for the purpose of the foreign affiliate rules. Given that this term was defined in the Act at the time the Treaty was signed and that its purpose is consistent with the use of the term in the Treaty (i.e., to ensure that earnings from certain businesses that generate property-type income are not considered active business earnings), we are of the view that the reference to “investment business” in Article 4 of the Treaty should have the same meaning as in subsection 95(1) of the Act.
2) The Income and Property Test
The income and property test is comprised of two components: first, all or substantially all of the company’s income must be derived by the company from the active conduct of a trade or business (other than an investment business) in the UAE; second, all or substantially all of the value of the company’s property must be attributable to property used in that trade or business. In our view, the test, as formulated, suggests that the income must be derived from an active trade or business carried on directly by the company. Accordingly, we would not “look through” the shares of other companies owned by the company to determine if the income and property test had been met.
3) All or Substantially All
The CRA’s position is that the term “all or substantially all” generally means 90% or more. However, in some circumstances, the “all or substantially all” test may be met where the level attained is less than 90%. The determination of whether the “all or substantially all” test has been met where the level attained is less than 90% can only be made on a case-by-case basis after taking into consideration all the facts and circumstances.
4) Meaning of Income
Generally, the term “income” as used in statutes dealing with taxation means “net income” or profit. However, depending on the context in which the term is used, it is also susceptible of meaning “gross income” or revenue. In our view, the income test in Article 4(1)(b)(ii)(B) appears to be inviting a comparison of the relative revenue streams of the company. Therefore, for the purpose of applying Article 4(1)(b)(ii)(B), we would accept that the term “income” means gross income or revenue.
5) Timing Issues
To obtain the benefit of a reduced withholding rate provided in the Treaty, a non-resident recipient of a payment from Canada would have to be resident in the UAE for the purpose of the Treaty at the time of the payment. Accordingly, the income and property test would be applied at the time the payment was made. In applying the property component of the test, we expect that the company would compare the fair market value of the property used by the company in the active conduct of a trade or business in the UAE to the fair market value of all the property of the company. In applying the income component of the test, we expect that the company would establish that the test has been met by reference to a period of time that includes the time of the payment and for which income calculations are normally done. For example, where the company is carrying on an active business in the UAE at the time of the payment and the company has another source of income at the time, we would normally accept that the income test has been met at that time if, during the fiscal period in which the payment was made, all or substantially all of the income of the company was derived by the company from the active conduct of the trade or business.
We trust that these comments are of assistance.
Yours truly,
Daryl Boychuk
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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