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:
1)Whether a guarantee by the Osterreichische Kontrollbank A.G. on a loan with an Austrian Bank results in the interest paid on the loan being not subject to the application of 212(1)(b) by virtue of paragraph 7(c) of Article XI of the Canada-Austria Income Tax Treaty.
2) Whether the commitment fees and guarantee fees are deemed to be interest and therefore not subject to withholding taxes under Part XIII of the Act by virtue of paragraph 7(c) of Article XI of the Canada-Austria Treaty.
Position:
1)Yes
2) YES
Reasons:
Based on the terms of the Treaty and consistent with our position on similar transactions
XXXXXXXXXX 971155
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1997
Re: XXXXXXXXXX
This is reply to your letter of XXXXXXXXXX and facsimile of XXXXXXXXXX and various phone calls requesting an advance income tax ruling for XXXXXXXXXX.
To the best of your knowledge and that of the above noted company, none of the issues or matters involved in this advance income tax ruling request have been or are being considered by a District Tax Services Office and/or Taxation Centre in connection with a tax return already filed or is under objection and/or appeal.
Facts
1.XXXXXXXXXX was incorporated on XXXXXXXXXX and owns XXXXXXXXXX. The ownership of this XXXXXXXXXX is the corporation's sole business asset.
2.The company's offices are located at XXXXXXXXXX. The company files its tax returns with the XXXXXXXXXX Tax Services Office (account number XXXXXXXXXX).
3.The company is a private corporation and a taxable Canadian corporation within the meaning of subsection 89(1 ) of the Income Tax Act (the "Act").
4.All of the issued and outstanding shares of XXXXXXXXXX are owned by XXXXXXXXXX, a company resident of XXXXXXXXXX with its head office located in XXXXXXXXXX.
5.XXXXXXXXXX is XXXXXXXXXX controlled by XXXXXXXXXX, which are all non-residents of Canada.
6.XXXXXXXXXX has decided to restructure its financial obligations and those of all other corporations it currently directly or indirectly holds, in whole or in part ( the "XXXXXXXXXX group").
7.The XXXXXXXXXX controlling shareholders have designated XXXXXXXXXX as the main banking partner of the XXXXXXXXXX group. XXXXXXXXXX is located in XXXXXXXXXX, is not a resident of Canada, and does not have a permanent establishment in Canada.
Proposed Transaction
8.XXXXXXXXXX proposes to enter into an agreement (the "Agreement") for a non-revolving credit facility of up to a maximum amount of US$XXXXXXXXXX ("Credit Facility I") and a revolving credit facility of up to a maximum amount of US$XXXXXXXXXX ("Credit Facility II") arranged by XXXXXXXXXX.
9.Credit Facility I shall be used exclusively to finance the partial prepayment of a financial obligation outstanding by XXXXXXXXXX to XXXXXXXXXX on a loan agreement (the original loan was in the amount of US$XXXXXXXXXX) concluded between the parties in XXXXXXXXXX, and is part of XXXXXXXXXX decision to restructure the financial obligations of the members of the XXXXXXXXXX group. Credit Facility II shall be used to finance costs associated with the XXXXXXXXXX project. As part of Credit Facility II, XXXXXXXXXX undertakes to terminate a loan agreement (the original loan was in the amount of US$XXXXXXXXXX) concluded with XXXXXXXXXX.
10.Both Credit Facility I and Credit Facility II will be guaranteed by XXXXXXXXXX in the form of an irrevocable and unconditional letter of guarantee in favour of XXXXXXXXXX that will be valid until XXXXXXXXXX.
11.Both Credit Facility I and Credit Facility II will also be guaranteed by the Osterreichische Kontrollbank A.G.. This guarantee will be a declaration by the Osterreichische Kontrollbank A.G., acting on behalf of the Republic of Austria represented by the Austrian Ministry of Finance, that they will assume the guarantee, as noted in paragraph 10 above, by aval on bills of exchange according to the Austrian Export Promotion Scheme.
The Osterreichische Kontrollbank A.G. will charge a guarantee fee, which is fixed at a quarterly rate of 0.125% of the principal balance. This guarantee fee will be paid by XXXXXXXXXX to XXXXXXXXXX who will then pay the fee to the Osterreichische Kontrollbank A.G..
12.As part of the Agreement, XXXXXXXXXX undertakes to use the amount prepaid by XXXXXXXXXX to fully prepay a loan in the amount of XXXXXXXXXX and partially prepay an amount of XXXXXXXXXX on a loan presently outstanding with XXXXXXXXXX. XXXXXXXXXX also undertakes to prepay the remaining loan balance with XXXXXXXXXX with funds from other sources.
13.Credit Facility I can be utilized by XXXXXXXXXX on the earliest of a receipt of a favourable advance income tax ruling or XXXXXXXXXX, and must be in the full amount of the credit facility.
14.Credit Facility Il can be utilized by XXXXXXXXXX within a period commencing on the earliest of a receipt of a favourable advance income tax ruling and XXXXXXXXXX and ending on XXXXXXXXXX. The drawdowns on Credit Facility II must be made in minimum amounts of US$XXXXXXXXXX.
15.The Agreement sets out the terms and conditions upon and subject to which XXXXXXXXXX agrees to make available to XXXXXXXXXX the credit facilities.
16. The more important terms and conditions of the agreement in relation to the ruling request are as follows:
A)Interest
The annual interest rate under the Agreement shall be equal to XXXXXXXXXX% payable semi-annually for Credit Facility I, to XXXXXXXXXX% for drawdowns under Credit Facility II in minimum amounts of US$XXXXXXXXXX, and to XXXXXXXXXX% for drawdowns under Credit Facility II in minimum amounts of US$XXXXXXXXXX.
B)Commitment and accounting fees
XXXXXXXXXX shall pay to XXXXXXXXXX a commitment fee of XXXXXXXXXX% per annum on the total amount under Credit Facility II not utilized.
XXXXXXXXXX
C)Repayment
The principal repayments of Credit Facility I shall be as follows
XXXXXXXXXX
The principal repayments of Credit Facility II shall be that on each repayment date as noted in Credit Facility I, except the last date, the maximum amount outstanding or available shall be reduced by US$XXXXXXXXXX
D)Collateral
The agreement provides for collateral undertakings by XXXXXXXXXX mainly relating to the sale of shares of XXXXXXXXXX or of members of the XXXXXXXXXX Group, and assignments to XXXXXXXXXX of rights and claims arising on such sales.
Purpose of the Proposed Transaction
17.The purpose of the proposed transaction is to meet part of XXXXXXXXXX decision to restructure all of its and the XXXXXXXXXX group's financial obligations.
Rulings Given
Provided that the preceding statements constitute complete and accurate disclosure of all the relevant facts and proposed transactions, we rule as follows:
A.The interest paid or credited by XXXXXXXXXX to XXXXXXXXXX, under Credit Facility I and Credit Facility II, will not be subject to the application of paragraph 212(1)(b) of the Act by virtue of paragraph 7(c) of Article XI of the Canada-Austria Income Tax Treaty ( the "Treaty").
B.The commitment fee paid or credited by XXXXXXXXXX to XXXXXXXXXX, as noted in paragraph 16 above, will be deemed to be interest paid or credited on Credit Facility II, by virtue of paragraph 214(15)(b) of the Act, and will not be subject to withholding taxes under Part XIII of the Act by virtue of paragraph 7(c) of Article XI of the Treaty.
C.The guarantee fees paid or credited by XXXXXXXXXX to the Osterreichische Kontrollbank A.G. as noted in paragraph 11 above, will be deemed to be interest paid or credited on Credit Facility I and Credit Facility II by virtue of paragraph 214(15)(a) of the Act, and will not be subject to withholding taxes under Part XIII of the Act by virtue of paragraph 7(c) of Article XI of the Treaty.
Except as expressly stated, our rulings do not imply acceptance, approval or confirmation of any tax implications of the facts and proposed transactions.
These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 issued by Revenue Canada, Taxation on December 30, 1996 and are binding provided that the proposed transactions are completed by XXXXXXXXXX and provided the guarantee by the Osterreichische Kontrollbank A.G. is still in effect. This ruling is based on the Act as it currently reads and does not take into account any proposed amendments.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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