CRA finds that a cross-border restrictive covenant payment was not eligible for Treaty-reduced withholding

After CanCo had sold shares of a partly-owned subsidiary (SubCo), it made a payment to the other share vendor (LuxCo) pursuant to what was assumed to be a "restrictive covenant" in a related agreement, and withheld and remitted 25% of the payment. Luxco was unsuccessful in a refund claim based on Art. 7 (business profits with no PE) or 21 (other income) of the Canada-Luxembourg Treaty: the restrictive covenant payment did not qualify as business profits given that LuxCo was stated as having held the shares of SubCo as a capital investment; and the payment was not subject to reduced withholding under Art. 21 as it was considered to be derived from Canada (Canadian payer; subject shares were Canadian shares; and Canadian governing law).

Neal Armstrong.  Summaries of 20 November 2014 Memo 2014-0539631I7 under Treaties - Art. 22, and s. 56.4(1) - restrictive covenant.