22 March 1995 External T.I. 9419185 - WITHHOLDING TAX ON ROYALTIES

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.

Principales Questions:

retenues a la source sur redevances

Position Adoptée:

Raisons POUR POSITION ADOPTÉE:

5-941918
XXXXXXXXXX M.D. Gervais
(613) 957-8953

Attention: XXXXXXXXXX

March 22, 1995

Dear XXXXXXXXXX:

Re: Technical Interpretation
Withholding Tax on Royalties

This is in reply to your letter of July 25, 1994, requesting our opinion on the applicability of Canadian withholding tax in the following circumstances.

A Canadian corporation (Canco) owns, in addition to its Canadian business operations, an active business in Italy (Italian Branch). In connection with the Italian business, the Italian Branch has licensed a trademark from a corporation affiliated with Canco incorporated in Germany (Germanco). Royalties paid by the Italian Branch of Canco to Germanco are subject to Italian withholding. You would like our interpretation as to whether Canadian withholding also applies and, if so, whether there is any administrative relief possible. You consider that it is inequitable that both Italy and Canada can tax in these circumstances.

COMMENTS

Since the Department has not been provided with all the contracts, agreements or other relevant documentation, we cannot provide you with a definitive reply with respect to the situation outlined above. Nevertheless, we provide the following general comments.

We are in agreement with your view that Canadian withholding is required in the circumstances described above, by virtue of paragraph 212(1)(d) of the Act and Article 12 of the Canada/Germany Tax Convention (Canada/Germany Treaty). To the extent that Germanco is subjected to tax by Italy on the royalties it receives from the Italian Branch of Canco, (Revenue Canada does not have the competence to comment on foreign legislation), we agree with your conclusion that the German resident will be subject to double taxation. The sourcing rule in the Royalty Article in the Canada/Germany Treaty does not specifically deal with situations where the royalty is borne by a permanent establishment situated in a third country. In such a case the royalty would normally be deemed to arise in the state in which the payer is resident.

Under these circumstances Germanco could seek relief from double taxation pursuant to Article 25 of the Canada/Germany Treaty. Paragraph 1 of this Article provides that where a person considers that he is subject to taxation not in accordance with the provisions of the Agreement, he may submit his case to the competent authority of the Contracting State of which he is a resident. It thus appears that it is Germanco, as opposed to Canco, who must apply for relief, and that the application should be made to the competent authority of Germany and not Canada.

We cannot say whether administrative relief will be available under a competent authority procedure or otherwise. The Tax Treaty between Canada and the Federal Republic of Germany is an agreement for the avoidance of double taxation, as evidenced by the preamble to the Agreement. We understand that the intention was to prevent a resident of a contracting state from being subjected to tax in both contracting states and not to prevent the double taxation of a resident of a contracting state that could result from the tax imposed by a third country not party to the Canada/Germany Treaty. Accordingly, we are not certain that the taxation of Germanco by Canada could be said not to be in accordance with the provisions of the Treaty between Canada and Germany, for the purposes of paragraph 1 of Article 25. Nevertheless, Germany's competent authority could endeavour, if the objection appears to be justified and if it is not itself able to arrive at an appropriate solution, to resolve the case by mutual agreement with the competent authority of Canada. It is the competent authorities that have the competence to decide whether the relief, if any, should be provided by Canada or Italy.

We trust this information will be of assistance to you and apologize for the delay in responding.

Yours truly,

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