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: 1. Where the non-resident payee holds the copyright, are payments made to the non-resident payee for the right to "distribute" software exempt from withholding tax by virtue of subparagraph 212(1)(d)(vi) of the Act?
2. Would license payments to non-resident related parties for software acquired for the purpose of distribution to end-users, in any of the following forms:
(i) downloaded via electronic, satellite, internet, or other wireless connection, or
(ii) delivered on physical media, or
(iii) embedded or pre-loaded in integrated circuits, read-only memory, or other storage devices on purchased hardware be classified as exempt from the 25% withholding tax under subparagraph 212(1)(d)(vi) with respect of a copyright in respect of a reproduced work?
Position: 1. Yes
2. Yes
Reasons: 1. Payments for distribution rights are considered copyright royalties as the right to distribution is viewed as a component of the right to reproduce or is ancillary to such a right.
2. Payments for software acquired for distribution to end-users, in the various mediums, whether downloaded electronically, delivered on physical media, or embedded or pre-loaded in integrated circuits or ROM, are exempt under subparagraph 212(1)(d)(vi) because the custom software in this case, are in fact a reproduction of the original copyright software and thus, meets the requirements of subparagraph 212(1)(d)(vi).
XXXXXXXXXX 2011-039914
XXXXXXXXXX
XXXXXXXXXX , 2011
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in response to your XXXXXXXXXX request for an advance income tax ruling on behalf of the above-referenced entity.
We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the Ruling request:
(i) is being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of the taxpayer or a related person;
(ii) is under objection by the taxpayer or a related person;
(iii) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
(iv) is the subject of a Ruling previously issued by the Directorate.
The ruling given herein is based solely on the facts, proposed transactions and the purposes 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 letter is based and any reference to these documents is provided solely for the convenience of the reader.
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions are as follows:
Definitions:
"Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date of this advance income tax ruling;
"Brand" means the XXXXXXXXXX brand;
"Corp A" means XXXXXXXXXX ;
"Corp B" means XXXXXXXXXX ;
"Corp C" means XXXXXXXXXX ,
Taxpayer ID: XXXXXXXXXX ;
"Corp D" means XXXXXXXXXX ;
"Corp E" means XXXXXXXXXX ;
"Corp F" means XXXXXXXXXX ;
"Country 1" means XXXXXXXXXX ;
"Country 2" means XXXXXXXXXX ;
"Country 3" means XXXXXXXXXX ;
"Country 4" means XXXXXXXXXX ;
"CRA" means the Canada Revenue Agency;
"MOU" means Memoranda of Understanding or Purchase Agreement;
"Product" means XXXXXXXXXX equipment, comprised of hardware and Software;
"Related Party" has the meaning assigned by subsection 251(2) of the Act; and
"Software" means XXXXXXXXXX equipment software which includes, but is not limited to, software applications, algorithms, operating instructions, interfaces and other machine readable information through activation of hardware.
Facts:
1. Corp A is a XXXXXXXXXX equipment supplier. Corp A is a resident of Country 1 for purposes of the Act, and is the owner of all the Software intellectual property rights including the copyright.
2. Corp B is resident in Country 2 for purposes of the Act. Corp B is XXXXXXXXXX % owned by Corp A and XXXXXXXXXX % owned by Corp F, a non-related company resident in Country 3.
3. Corp C is a wholly-owned subsidiary of Corp B. Corp C was incorporated under the laws of Canada in XXXXXXXXXX and is resident of Canada for purposes of the Act.
4. Corp D is a corporation resident in Country 3 for purposes of the Act. Corp E is a corporation resident in Country 4 for purposes of the Act. Corp A, Corp D, and Corp E are all related persons for the purposes of the Act.
5. Corp A manufactures the copies of Software and hardware, and is also responsible for embedding the Software into the hardware.
6. Corp D and Corp E act as distributors for Corp A. Corp A sells the bundled Products to Corp D and Corp E and charges Corp D and Corp E for the bundled Products.
7. Corp C was formed to market and distribute Product, along with providing associated professional services in Canada to third party XXXXXXXXXX . It also provides research and development services to Corp A.
8. Under a software distribution agreement between Corp A and Corp C, all Software is owned by Corp A and licensed to Corp C. Under the same agreement, Corp A has granted Corp C the right to reproduce and distribute the Software in Canada.
9. Corp C began entering into transactions with Corp A, Corp D and Corp E in XXXXXXXXXX , whereby it acquires Product for distribution to unrelated third party customers in Canada.
10. In XXXXXXXXXX , Corp C entered into separate MOUs with independent third party customers regarding their intent to purchase Product and professional services consistent with certain terms and conditions to be negotiated and agreed to by the parties. Starting in XXXXXXXXXX , Corp C commenced delivery of both Product and services under the MOUs.
11. The Product distributed by Corp C consists of specifically engineered and integrated hardware and Software based on customers' specifications, and purchased in accordance with terms and conditions negotiated under the MOUs, subject to the customers' discretion and timing.
12. XXXXXXXXXX , customer purchase orders may or may not be bundled in a similar manner. XXXXXXXXXX , customers may specifically segment or request Software separate from hardware as part of a purchase order, or as an element of Software maintenance, or in satisfaction of a warranty claim. In all cases, Software is intended to be used as part of and in connection with hardware. In no event can the Brand hardware be used without Brand Software, nor can the Brand Software be used on other vendors' hardware.
13. Prior to XXXXXXXXXX , all Software acquired by Corp C was bundled together and invoiced with hardware, from either Corp D, or as of XXXXXXXXXX , Corp E. Corp D and Corp E charged Corp C for the bundled Product sold and distributed to Corp C. There was no separate charge for the Software that was intrinsically embedded in the hardware. When Corp C sold the bundled Products to the third-party customers, Corp C did not pay any licensing fee to Corp D, Corp E or to Corp A for the embedded software included in the bundled Product as there was no separate charge or price for the Software embedded in the bundled Product.
14. Beginning in XXXXXXXXXX , all Software that is acquired on its own and not embedded into hardware, will be acquired directly from and be invoiced by Corp A. Corp C will also pay a licensing fee to Corp A upon the license of such Software to third-party customers.
15. To the extent Software is pre-loaded or embedded into the hardware circuitry, it will continue to be bundled and invoiced with the hardware with no separate charge, as described in paragraph 13. Corp C will continue to acquire bundled Products from Corp D and Corp E.
16. The customer shall sign a software sub-license agreement with Corp C for the right to use the Software. The terms of the sub-license agreement will also include provisions whereby the customer covenants to not alter, decompile, disassemble or reverse engineer the Software in whole or in part, remove any notice of proprietary rights from the Software, modify the Software, merge it with other Software or documentation or create derivative works based on it.
Proposed Transactions:
17. Based on customer orders, Corp C will continue to engage in the following Software transactions with its non-resident related parties:
i) "bundled" (embedded or pre-loaded) Software within hardware acquired from Corp D;
ii) "bundled" (embedded or pre-loaded) Software within hardware acquired from Corp E;
iii) separate acquisition of Software in digital or CD-ROM media from Corp A.
18. Corp C will pay license fees to Corp A in the manner described in paragraph 14 above.
Purpose of the Proposed Transactions:
19. The purpose of the transactions is to fulfill commercial contracts and render Product operable.
Ruling 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 Ruling is as follows:
We confirm that:
A. Payments for license fees made by Corp C to Corp A for Software and payments made by Corp C to Corp D and Corp E to the extent they are in respect of embedded or pre-loaded Software will be exempt from Part XIII withholding tax under subparagraph 212(1)(d)(vi) of the Act.
This Ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and is binding on the Canada Revenue Agency ("CRA") for license fees paid by Corp C after the date of this letter and before XXXXXXXXXX .
Nothing in this letter should be construed as implying that the Canada Revenue Agency has reviewed, accepted or otherwise agreed to any tax consequences relating to the Facts and Proposed Transactions described herein other than those specifically described in the Ruling given above.
In addition, this Ruling letter does not attest to whether subsection 247(2) of the Act applies to the transactions described in this Ruling letter.
The above noted Ruling is based on the Act in its present form and does not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the Ruling provided herein.
Yours truly,
XXXXXXXXXX
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2011
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2011
Email this Content