4 October 1996 Income Tax Severed Letter 9522655 - Residency — Article IV Canada–Switzerland treaty

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

PRINCIPAL ISSUES:

Whether a corporation incorporated in Switzerland is a resident of Switzerland for purposes of the Canada- Switzerland Income Tax Convention (the "Convention")

POSITION:

No definitive opinion provided. If the Swiss company is, by virtue of negotiation with the Swiss tax authorities or otherwise, not taxed in Switzerland on its world-wide income, it should be considered to be a resident of Switzerland for purposes of the Convention. In any case, if unintended benefit is obtained by means of treaty shopping, GAAR may be invoked.

REASONS:

No opinion offered because of lack of information. Caution taxpayer of abusive transactions.

952265 XXXXXXXXXX S. Leung

Attention: XXXXXXXXXX

October 4, 1996

Dear Sirs:

Re: Article IV of the Canada - Switzerland Income Tax Convention (the "Convention")

We are writing in reply to your letter of August 15, 1995 in which you requested our view as to whether the benefits of the Convention is available to the corporation described in the following hypothetical situation.

Hypothetical Facts

I.. A corporation incorporated in Switzerland ("Swissco") carries on virtually all of its business activities through a branch in Bermuda, but has a head office in Switzerland.

II.. Under the Swiss federal tax law, Swiss incorporated companies are subject to tax on their worldwide income but are able to negotiate a reduction in the amount subject to Swiss federal tax if a significant portion of the operations are conducted outside Switzerland.

III.. Swissco files a Swiss tax return and is subject to Swiss federal tax of at least 5% of its worldwide income.

IV.. On the other hand Swissco may be able to negotiate with Swiss authorities that no Swiss tax is payable.

V.. It is your understanding that the Swiss tax authorities are of the view that the benefits of the Convention would be available to Swissco.

Our Comments

It is a question of fact whether a company incorporated in Switzerland is, under the domestic law of Switzerland, liable to taxation in Switzerland by reason of its domicile, residence, place of management or any other criterion of a similar nature. Since we do not have all the facts of a particular situation and since the subject matter relates to the domestic law of Switzerland, we are not in a position to provide any opinion as to whether Swissco in the situation described above would be considered to be resident of Switzerland for purposes of the Convention.

However, if Swissco is, by virtue of negotiation with the Swiss tax authorities, not liable to taxation in Switzerland on its world-wide income, it would appear that Swissco should not be considered a resident of Switzerland for the purpose of the Convention.

Even if such a corporation were considered resident in Switzerland for purposes of the Convention, the Department may consider applying the general anti-avoidance provisions to deny the benefits of the Convention to the corporation if evidence shows that there is an improper use of the Convention. In this regard you may refer to the comments on Article 18 in the Technical Explanation of the Third Protocol to the Canada-United States Income Tax Convention where it indicates that Canada prefers to rely on general anti-avoidance rules to counter arrangements involving treaty-shopping.

Yours truly,

for Director Reorganizations and International Division Income Tax Rulings and Interpretations Directorate Policy and Legislation Branch