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 the amount of a foreign affiliate's surplus balances in respect of a corporation resident in Canada will be determined on the basis that dividends received by the affiliate from its Labuan subsidiary, also a foreign affiliate of the corporation, would be prescribed by paragraph 5900(1)(a) to have been paid out of the subsidiary's exempt surplus in respect of the corporation.
Position: Yes.
Reasons: At the time each dividend was paid from the Labuan subsidiary to its parent, the total of the Labuan subsidiary's net earnings, as defined in 5907(1), were equal to or in excess of the amount of the respective dividend, and for the purposes of 5907(11.2), the Labuan subsidiary was considered to be resident in Malaysia under the Canada-Malaysia Tax Treaty.
XXXXXXXXXX
2013-047787
XXXXXXXXXX, 2013
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX in which you request an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge the information provided in your emails of XXXXXXXXXX and in our various telephone conversations (XXXXXXXXXX) in connection with your request.
To the best of your knowledge and that of the taxpayer, none of the issues involved in this request for an advance income tax ruling is:
(i) dealt with in an earlier tax return of the taxpayer, or a related person;
(ii) 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;
(iii) under objection by the taxpayer or a related person;
(iv) before the courts, and no judgment has been issued which may be under appeal; or
(v) the subject of an Advance Income Tax Ruling previously issued by this Directorate.
This document is based solely on the facts and the proposed transactions described below. The documentation submitted with your request does not form part of the facts and the proposed transactions except as expressly referred to herein, and any references thereto are otherwise provided solely for the convenience of the reader.
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definitions unless otherwise indicated.
Definitions
In this letter, the following terms have the meanings specified below:
"active business" has the meaning assigned by subsection 95(1);
XXXXXXXXXX;
"corporation" has the meaning assigned by subsection 248(1);
"Canada-Malaysia tax treaty" means the Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income entered into by Canada and Malaysia on 15 October 1976;
"CRA" means the Canada Revenue Agency;
"exempt surplus" has the meaning assigned by subsection 5907(1) of the Regulations;
"foreign affiliate" has, by virtue of subsection 248(1), the meaning assigned by subsection 95(1);
"ForeignHoldco" means XXXXXXXXXX, a corporation incorporated in XXXXXXXXXX pursuant to the XXXXXXXXXX and, since its incorporation, a subsidiary wholly-owned corporation of Parent;
"hybrid surplus" has the meaning assigned by subsection 5907(1) of the Regulations;
XXXXXXXXXX;
"Labuan" means the Malaysian Territory of Labuan, as described in the Federal Constitution of Malaysia 1957;
"LabuanOpco" means XXXXXXXXXX, a corporation incorporated in Malaysia in XXXXXXXXXX under the OCA by ForeignHoldco and, at all times during its existence, a subsidiary wholly-owned corporation of ForeignHoldco;
"Loan" means the non-interest bearing loan made by ForeignHoldco to Parent, as described in paragraph 11;
"Malaysia" means the Federation of Malaysia, and includes any area adjacent to the territorial waters of Malaysia which in accordance with international law has been or may hereafter be designated, under the laws of Malaysia concerning the Continental Shelf, as an area within which the rights of Malaysia with respect to the sea-bed and sub-soil and their natural resources may be exercised;
"MITA" means the act passed under the laws of Malaysia entitled the Malaysian Income Tax Act 1967;
"MYR" means Malaysian Ringgit;
"net earnings" has the meaning assigned by subsection 5907(1) of the Regulations;
"net loss" has the meaning assigned by subsection 5907(1) of the Regulations;
"LOBATA" means the act passed under the laws of Malaysia entitled the Labuan Offshore Business Activity Tax Act 1990;
"OCA" means the act passed under the laws of Malaysia entitled the Offshore Companies Act 1990;
"Parent" means XXXXXXXXXX, a taxable Canadian corporation;
"Regulations" means the Income Tax Regulations, C.R.C., chapter 945;
"share" has the meaning assigned by subsection 248(1);
"subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1);
"taxable Canadian corporation" has, by virtue of subsection 248(1), the meaning assigned by subsection 89(1);
"taxable surplus" has the meaning assigned by subsection 5907(1) of the Regulations; and
"US$" means United States of America dollars.
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
Facts
1. Parent carries on a business in Canada XXXXXXXXXX. Parent has various directly and indirectly owned subsidiaries and affiliates which carry on the same business outside of Canada. Parent deals with the XXXXXXXXXX Tax Services Office and files its tax returns at the XXXXXXXXXX Taxation Centre.
2. For purposes of the Act, at all times of its existence, ForeignHoldco has not been resident in Canada, has been resident in XXXXXXXXXX, and has been a corporation and a foreign affiliate of Parent.
3. For purposes of the Act, at all times of its existence, LabuanOpco was not resident in Canada, was resident in Malaysia, and was a corporation and a foreign affiliate of Parent.
4. For purposes of taxation under the MITA, at all times of its existence, LabuanOpco was a company resident in Malaysia, pursuant to section 8 of that act.
5. LabuanOpco operated an active business XXXXXXXXXX. LabuanOpco became inactive in XXXXXXXXXX and was subsequently liquidated and dissolved in XXXXXXXXXX. Subsection 5905(7) of the Regulations applied to the liquidation and dissolution of LabuanOpco.
6. The only income earned by LabuanOpco in any year of its existence was income from an active business that was, for the purposes of paragraph 5906(1)(a) of the Regulations, carried on only in Malaysia.
7. LabuanOpco was subject to the provisions of the LOBATA (which are more fully described in paragraphs 15 to 19, below) from XXXXXXXXXX to XXXXXXXXXX and paid income tax in Malaysia on its net income at a rate of 3%, except in its XXXXXXXXXX taxation year where it elected the option to pay a flat tax of MYR 20,000.
8. All of the retained earnings of LabuanOpco were distributed to ForeignHoldco as follows:
a. On XXXXXXXXXX, it paid a dividend of US$XXXXXXXXXX;
b. On XXXXXXXXXX, it paid a dividend of US$XXXXXXXXXX; and
c. On XXXXXXXXXX, it paid a dividend of liquidation of US$XXXXXXXXXX.
9. LabuanOpco did not have a net loss for any of the years of its existence, and at no time in its existence, including the time of its liquidation, did LabuanOpco realize any capital gains or capital losses on the disposition of capital property.
10. Immediately prior to each dividend described in paragraph 8, above, the total of all of the net earnings of LabuanOpco for its preceding years from the active business carried on by it in Malaysia, net of any prior dividends, was equal to or exceeded the amount of that dividend.
11. In XXXXXXXXXX, ForeignHoldco advanced the Loan in the amount of US$XXXXXXXXXX to Parent. Minor repayments on the Loan had since been made leaving an outstanding balance of approximately US$XXXXXXXXXX.
Imposition of Income Tax in Malaysia
12. Pursuant to the charging provisions of Section 3 of the MITA, income accruing in or derived from Malaysia, or received in Malaysia from outside Malaysia, by any person, is subject to tax in Malaysia.
13. Pursuant to Section 2 of the MITA, a person includes a company, a body of persons and a corporation sole.
14. Effective from the year 1998, through Income Tax (Exemption) (No. 48) Order 1997, the Malaysian government exempted foreign sourced income from Malaysian income tax even if such income was remitted into Malaysia (with an exception for a resident company carrying on the business of banking, insurance, sea or air transport). This order was revoked in 2004, but the exemption was then included directly in the MITA, via an amendment to Paragraph 28 of Schedule 6 of the MITA. Paragraph 28(1) of Schedule 6 in the MITA states that the following is exempt from tax:
"Income of any person, other than a resident company carrying on the business of banking, insurance, sea or air transport, for the basis year for a year of assessment derived from sources outside Malaysia and received in Malaysia
"
Income Tax Treatment of a Company Subject to the LOBATA
15. In 1990, the Malaysian government enacted the LOBATA, which created a business and financial centre on the island of Labuan with a separate and distinct tax regime and regulatory regime. The Inland Revenue Board of Malaysia is the agency responsible for the administration of direct taxes under both the MITA and the LOBATA.
16. Section 3B of the MITA states that notwithstanding Section 3 (referred to in paragraph 12 above), tax shall not be charged under the MITA on income of an offshore business activity carried on by an offshore company.
17. Under the LOBATA, the Labuan tax regime applied to an "offshore company" carrying on an "offshore business activity". "Offshore company" and "offshore business activity" were defined in both the LOBATA and the MITA as follows:
"Offshore company: an offshore company incorporated under the Offshore Companies Act 1990, and includes a foreign offshore company registered under that Act, a licensed Malaysian offshore bank, an offshore limited partnership and offshore trust."
"Offshore business activity: an offshore trading or an offshore non-trading activity carried on in, or from Labuan in a currency other than the Malaysian currency by an offshore company with non-residents or with another offshore company, but does not include shipping operations..."
18. Any income of a Labuan offshore company which does not arise from a Labuan offshore business activity would be subject to tax under the MITA and not under the LOBATA.
19. The LOBATA subjects Labuan entities to tax at the rate of 3% of their chargeable profits derived from their Labuan offshore business activities. As an alternative to paying this tax, the LOBATA also permitted Labuan companies to elect to pay a flat rate of MYR 20,000.
Proposed Transactions
20. ForeignHoldco will declare a dividend equal to the amount outstanding on the Loan at that time, to be paid by the issuance of a non-interest bearing promissory note payable on demand.
21. The promissory note will be transferred by Parent to ForeignHoldco in payment of the outstanding amount of the Loan.
Purpose of the Proposed Transactions
The purpose of the proposed transactions is for ForeignHoldco to make a distribution in order to allow Parent to settle the Loan.
Ruling
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant definitions, facts, proposed transactions and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, our ruling is as follows:
In determining the proportion of the proposed dividend to Parent that will be deemed by subsection 5901(1) of the Regulations to have been paid out of ForeignHoldco's exempt surplus, taxable surplus or hybrid surplus in respect of Parent, the amount of ForeignHoldco's exempt surplus or deficit, taxable surplus or deficit and hybrid surplus or deficit in respect of Parent will be determined on the basis that each of the dividends received by ForeignHoldco from LabuanOpco were prescribed by paragraph 5900(1)(a) of the Regulations to have been paid out of LabuanOpco's exempt surplus in respect of Parent.
This ruling is given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002 and is binding on the CRA provided that the proposed dividend is paid to Parent before XXXXXXXXXX.
Caveats
Except as expressly stated, this advance income tax ruling does not imply acceptance, approval or confirmation of any other income tax implications of the facts or proposed transactions described herein. For greater certainty, the CRA has not considered, confirmed or made any determination in respect of:
(a) the residence status under the Act of ForeignHoldco or LabuanOpco, as described in paragraphs 2 and 3;
(b) the residence status of LabuanOpco for purposes of the MITA, as described in paragraph 4;
(c) whether the liquidation and dissolution of LabuanOpco, as described in paragraph 5, was subject to subsection 5905(7) of the Regulations;
(d) whether LabuanOpco carried on a business in Malaysia and whether the income from that business was from an active business, as described in paragraph 6;
(e) the amount of net earnings or net loss of LabuanOpco at any time, as described in paragraph 9; and
(f) whether LabuanOpco realized any capital gains or capital losses, as described in paragraph 10.
In addition, nothing in this letter should be construed as implying that the CRA has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those described in the ruling given above.
The above advance income tax ruling, which is based on the Act, the Regulations, and the Canada-Malaysia tax treaty as historically enacted as of the date of this letter and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and are binding on the CRA provided that the proposed transactions are completed by XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
For Director
International Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch
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