31 May 1990 Income Tax Severed Letter ACC9108 - Canada-Netherlands Income Tax Convention

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.

19(1)                                      HBW 4125-N1
                                           HBW 6591-N1
                                           David Senécal
                                           (613) 957-2074

May 31, 1990 Dear 19(1)

Pursuant to paragraph 4 of Article 25 of the Canada-Netherlands Income Tax Convention signed by our two counties on May 27, 1986, we would like to clarify the application of the said Convention to the following situation:

A corporation, which is a resident of Canada for the purposes of the Convention, borrows Canadian dollars form a lender in the Netherlands. The loan is incurred in connection with the operation of the Canadian company's permanent establishment in the netherlands and the interest is borne by the permanent establishment. In these circumstances, paragraph 7 of Article XI deems the interest to arise in the Netherlands. However, the Canadian Income Tax Act provides for a tax of 25% on certain amounts paid to a non-resident of Canada by a person resident in Canada regardless of where the income arises.

Consequently, as paragraphs 1 and 2 of Article XI of the Convention only apply top reduce the tax of 15% if the interest arises in one State and is paid to a resident in the other State and the Convention does not contain an "Other Income" article deeming the interest to be taxable only in the Netherlands where it arises, a technical interpretation of the Convention would result in the interest being subject to a 25% tax in Canada even though the interest is paid by the permanent establishment in the Netherlands.

We have discussed this matter with our Department of Finance and it is their position that taxation by Canada of interest arising in the Netherlands and paid to a resident of the Netherlands would not be in accordance with the intention of the Convention. Therefore notwithstanding the absence of an "Other Income" provision in the Convention, we are prepared to publicly adopt the position that, under a liberal interpretation of the Convention, such interest will be exempt form tax in Canada provided you advise us that the Netherlands will adopt the some position with respect to similar transactions involving a Canadian lender and a permanent establishment of a Dutch company situated in Canada.

If you are prepared to accept the foregoing proposal, this letter and your reply confirming our position will be regarded as constituting an official agreement between competent authorities on this matter.

Yours sincerely,

Christine Savage Acting Director Provincial and International Relations Division

c.c. Jacques Sasseville Department of Finance

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