2008 Ruling 2008-0280131R3 - Interest exempt from tax

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 interest and guarantee fees are exempt from Part XIII tax in Canada in this specific situation by virtue of the Canada-Austria Income Tax Convention (the "Treaty")?

Position: Yes.

Reasons: Interpretation of the Income Tax Act and the Treaty.

XXXXXXXXXX 2008-028013

Attention: XXXXXXXXXX

XXXXXXXXXX , 2008

Dear Sirs or Madams:

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

We are writing in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-referenced taxpayer.

Aco's tax affairs are administered by the XXXXXXXXXX Tax Services Office and it files its tax returns at the XXXXXXXXXX Taxation Centre under Account Number XXXXXXXXXX .

To the best of your knowledge and that of the taxpayers involved, none of the issues involved with this request:

(i) is involved in an earlier return of the taxpayer or a related person;
(ii) is being considered by a tax services office or a taxation centre in connection with a tax return already filed by the taxpayer or a related person;
(iii) is under objection; or
(iv) is before the courts or, if a judgement has been issued, the time limit for appeal has not expired.

The rulings given herein are based solely on the facts, proposed transactions and purpose of the proposed transactions described below. Facts and proposed transactions in the documents submitted with your request not described below do not form part of the facts and proposed transactions on which this ruling is based and any reference to these documents is provided solely for the convenience of the reader.

Definitions

In this letter the following terms have the meanings specified:

(a) "Act" means the Income Tax Act R.S.C. 1985 c.1 (5th Supp.), as amended to the date hereof, and unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provisions of the Act;

(b) "Aco" means XXXXXXXXXX ;

(c) "Eco" means Osterreichische Kontrollbank AG as referred to in subparagraph 7(c) of Article XI of the Treaty;

(d) "Finco" means XXXXXXXXXX , a financial institution in Austria and the main banking partner of the Parentco Group;

(e) "Parentco" means XXXXXXXXXX , a company incorporated under the laws of Austria and resident in Austria with its head office located in XXXXXXXXXX , Austria;

(f) "Parentco Group" consists of Parentco and any other persons whose accounts are consolidated with those of Parentco;

(g) "Project" means the XXXXXXXXXX ;

(h) "Proposed Transactions" means the transactions described in the paragraphs hereof which appear under the heading "Proposed Transactions"; and

(i) "Treaty" means the Canada-Austria Income Tax Convention, signed on December 9, 1976 and amended by a Protocol signed on June 15, 1999.

Facts

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

1. Aco is a "private corporation" and a "taxable Canadian corporation" within the meanings assigned by subsection 89(1).

2. Aco owns a XXXXXXXXXX % undivided interest in the Project. This undivided interest is its sole business asset.

3. The Project is a joint venture having XXXXXXXXXX owners XXXXXXXXXX

4. All the issued and outstanding shares in the capital stock of Aco are owned by Parentco.

5. Parentco is not resident in Canada for the purposes of the Act, does not carry on a business in Canada, does not have a permanent establishment in Canada and is resident in Austria for the purposes of the Treaty.

6. None of the shareholders of Parentco is resident in Canada for the purposes of the Act.

7. Finco is a resident of Austria for the purposes of the Treaty, is not a resident of Canada for the purposes of the Act, and does not have a permanent establishment in Canada for the purposes of the Treaty.

8. Aco and Finco deal, and will continue to deal, with each other at arm's length.

Proposed Transactions

9. Under a credit facility agreement (the "Credit Facility") between Parentco and Aco, Parentco has offered to Aco a revolving credit facility of up to a maximum amount of US$XXXXXXXXXX . The Credit Facility will be used by Aco solely to finance operating costs and investment associated with the Project. The Credit Facility can be utilized by Aco within a period commencing on the date of acceptance of the offer and ending on XXXXXXXXXX . The first drawdown date is expected to be XXXXXXXXXX . Interest will be charged at a rate equal to LIBOR plus a margin of XXXXXXXXXX % per annum payable quarterly on XXXXXXXXXX of each year.

10. Finco has granted a credit line to Parentco (the "Loan Arrangement") to be used by Parentco exclusively to finance the Credit Facility from Parentco to Aco up to an amount of US$XXXXXXXXXX .

11. With respect to the Loan Arrangement, Parentco has signed as a drawee on the bills of exchange (i.e., promissory notes) posted to Finco as collateral security for the Loan Arrangement.

12. With respect to the Loan Arrangement, Eco, acting on behalf of the Ministry of Finance of Austria, will guarantee Parentco as the drawee on the bills of exchange referred to in paragraph 11 above. Any amount drawn on the bills of exchange by Parentco with respect to the Loan Arrangement and not repaid is hereby referred to as the Loan.

13. Aco will be required to pay Parentco a guarantee fee of XXXXXXXXXX % per annum, calculated on the basis of a year of XXXXXXXXXX days and the actual number of days elapsed on the amount used under the Credit Facility, representing a charge by Eco to Parentco for guaranteeing the Loan between Parentco and Finco.

14. Some of the terms and conditions of the Loan Arrangement are as follows:

(a) Interest. The annual interest rate under the Loan Arrangement shall be equal to LIBOR plus XXXXXXXXXX Margin payable quarterly;

(b) Repayment of the Loan. The Loan is required to be repaid by Parentco to Finco by XXXXXXXXXX at the latest;

(c) Other expenses. All costs and expenses paid in connection with the implementation and running of the Loan Arrangement, any security agreement and/or any other agreements pertaining thereto, shall be borne exclusively by Aco. Accordingly, the portion of these expenses that are incurred by Parentco will be reimbursed by Aco.

Purpose of the Proposed Transactions

The purpose of the Proposed Transactions is to obtain financing for Aco which will be used to finance costs associated with the Project.

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 completed in the manner described above, our rulings are as follows:

A. The interest paid or credited by Aco to Parentco under the Credit Facility will be exempt from tax under paragraph 212(1)(b) by virtue of subparagraph 7(c) of Article XI of the Treaty.

B. The guarantee fees paid or credited by Aco to Parentco representing the fee charged by Eco to Parentco described in paragraph 13 above will be deemed to be interest on money borrowed under the Credit Facility by virtue of paragraph 214(15)(a) and will be exempt from tax under paragraph 212(1)(b) by virtue of subparagraph 7(c) of Article XI of the Treaty.

C. Provided that all expenses described in subparagraph 14(c) above are paid as reimbursements for specific expenses incurred for the performance of services that are for the benefit of Aco in connection with the financing granted to Aco under the Credit Facility, such fees that are paid by Aco to Parentco, to the extent reasonable in the circumstances, will be exempt from tax under Part XIII by virtue of subparagraph 212(4)(b).

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the Canada Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX .

These rulings are based on the Act in the present form and do not take into account amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

Yours truly,

XXXXXXXXXX
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch