15 May 2024 IFA Roundtable
Email this ContentThis provides the text of written questions that were posed, and summaries of the CRA oral responses, at the CRA Roundtable held on May 15, 2024 at the International Fiscal Association (Canadian Chapter) conference in Montreal. The presenters from the Income Tax Rulings Directorate were:
Ina Eroff, Acting Manager, International Division
Yves Moreno, Director, International Division
The questions were orally presented by Derek Chiasson (Norton Rose Fulbright) and Melissa Dorsaint (CAE). We have employed our own titles.
Q.1 – PPT and Treaty threshold for 5% withholding
- In CRA Document 2019-0792651I7 (June 16, 2020), the CRA concluded that paragraph (8) of Article 10 (“Article 10(8)”) of the UK-Canada Income Tax Convention (the “UK-Canada Treaty”) should deny a UK resident corporation the benefit of any reduction in the 25% withholding rate applicable to a dividend paid by a Canadian corporation, where the UK corporation owned less than 10% of the voting shares of the Canadian corporation, but acquired additional shares the day before the dividend was paid such that the UK corporation held 10% at the time the dividend was paid.
- The CRA provided detailed analysis which included its analysis of the history and context of Article 10(8) of the UK-Canada Treaty.
- In the CRA’s view, how would the PPT in Article 7(1) of the MLI apply if the dividend were paid in 2024? What if the UK-Canada Treaty did not have Article 10(8)?
Preliminary Response
Moreno: The written response to these questions will be shared in a few weeks and the written version is the official CRA view.
Article 10(8) of the Canada-UK treaty has developed over time. At one time, it included a specific caveat on acquisitions or accretions of shareholdings occurring for bona fide commercial purposes. That caveat was removed at some point, and it was inapplicable to 2019-0792651I7. In that memorandum, the premise was that the shares were acquired to obtain the benefit of the reduced treaty rate, so that the conclusion followed logically.
The latest development on that front in the Canada-UK treaty was the parties agreeing to Article 7(1) of the Multilateral Instrument (MLI) applying for purposes of that treaty – effectively, the principal purpose test in Art. 7(1) of the MLI supplants Art. 10(8). Let us consider the examples for Article 29, which is the forum in which the principal purpose test (PPT) was introduced back in the 2017 version of the OECD Model Convention. Some examples were provided back then, and one example is particularly relevant here, which is in paragraph 182 of the Commentary on Art. 29. Example E describes a situation similar to this one, where a shareholder is slightly below the threshold to have access to the lower rate on dividends, and acquires shares for the purpose of taking advantage of the reduced rate. The view in the Commentary is that that transaction would be in accordance with the object and the purpose of Article 10(2), which provides the reduced rate.
The Commentary does not seem to suggest that the fact that the initial holding was just below the threshold had much bearing on the conclusion, but it does indicate which factors to consider. It states that the answer would be conditional on the acquisition of the taxpayer "genuinely increas[ing]" its participation in the company.
CRA therefore understands “genuinely increasing” to suggest that there be no manipulation of the shareholding in the form of transitory acquisitions. For example, if a person, holding 8% of the shares, bought just enough shares to exceed the threshold for accessing the 5% reduced rate and, right after the dividend, returned to its initial holding of 8%, that would not be consistent with the object and purpose of the treaty.
Official Response
Q.2 – Entity classification of Lux. SCS and SCSp
- The common limited partnership (société en commandite simple (SCS)) and the special limited partnership (société en commandite spéciale (SCSp)) are common type of entities used for investment funds in Luxembourg.
- A SCS has a separate legal personality distinct from that of its partners, whereas a SCSp does not.
- Both the SCS and the SCSp are generally treated as fiscally transparent for Luxembourg tax purposes.
- However, Luxembourg has recently enacted “reverse hybrid” rules which can apply to such Luxembourg limited partnerships if, among other things, it has investors that are located in a jurisdiction that treats the entity as opaque for income tax purposes.
- Has the CRA considered the entity classification for Luxembourg limited partnerships or special limited partnerships?
- What is CRA’s view about whether such limited partnerships would be classified as partnerships for Canadian income tax purposes or corporations?
Preliminary Response
Eroff: Generally, to determine the status of an entity or arrangement, CRA applies a two-step approach. The first step is to determine the characteristics of the foreign entity or arrangement under applicable foreign law and relevant documentation; the second step is comparing those characteristics to those of recognized types of entities and arrangements under Canadian law. As previously stated at the 2022 IFA Conference (2022-0926431C6), the CRA will consider the classification of a specific foreign entity arrangement in the context of an advanced income ruling request, in light of all relevant documentation and legislation, or as part of an audit. On that basis, no definite conclusion can be provided in this forum on the classification of a société en commandite spéciale or simple formed in Luxembourg, and only general comments will be provided.
First, the fact that a société en commandite simple has separate legal personality under the commercial law of Luxembourg is not determinative in itself. Second, the classification of a foreign entity for foreign taxation purposes, and the taxation of the entity in the foreign jurisdiction, will not generally impact the classification of that entity for Canadian tax purposes.
We previously commented on the status of a société en commandite simple resident in France, and we indicated that the CRA views it as a partnership, irrespective of whether it made an irrevocable election to be taxed as a corporation in France [cf. 2018-0749481C6]. Similarly, in this context, the existence and potential application of the reverse-hybrid rules in Luxembourg will not be determinative of the classification of these Luxembourg entities for Canadian tax purposes.
Although no rulings have been issued on the classification of the société en commandite simple or société en commandite spéciale formed in Luxembourg, it is worth noting that an opinion was provided to CRA Audit recently (and will be published very shortly) on the classification of sociétés en commandite simple formed in Ivory Coast and Gabon. In the context of that interpretation, we determined that based on all the relevant facts and legislation, and notwithstanding those entities having separate legal personalities under the commercial laws of their respective jurisdictions, the unlimited liability of the general partners, as well as other characteristics, most closely resembled a partnership under Canadian law.
The interpretation points out that the legal system governing the foreign entity (e.g. civil law vs. common law) will be relevant in identifying similar Canadian entities. Because Gabon and Ivory Coast are civil law jurisdictions and Quebec has a civil law system, it was considered appropriate to compare the characteristics of those foreign entities to the characteristic of partnerships formed under the Civil Code of Quebec.
Official Response
15 May 2024 IFA Roundtable Q. 2, 2024-1007541C6 - Foreign Entity Classification
Q.3 – Cash pooling arrangements and notifiable transactions
- Subsection 237.4(4) requires an information return to be filed in respect of a “notifiable transaction”. Subsection 237.4(1) defines a “notifiable transaction”, at any time, to mean: (a) a transaction that is the same as, or substantially similar to, a transaction that is designated at that time by the Minister under subsection (3); and (b) a transaction in a series of transactions that is the same as, or substantially similar to, a series of transactions that is designated at that time by the Minister under subsection (3).
- Designated transactions effective November 1, 2023 include certain transactions relating to “Back-to-back arrangements” (referred to herein as “the Designated Transactions”), as follows:
Thin capitalization
Non-resident 1 (NR1) is a relevant non-resident in respect of a taxpayer. NR1 enters into an arrangement with an arm’s length non-resident (NR2) to indirectly provide financing to the taxpayer. The taxpayer files, or anticipates filing, its income tax returns on the basis that the debt or other obligation owing by it, and the interest paid thereon, is not subject to the thin capitalization rules.
Part XIII tax
A non-resident person (NR1) enters into an arrangement to indirectly provide financing to a taxpayer through another non-resident person (NR2). If interest had been paid by the taxpayer directly to NR1, it would be subject to Part XIII tax. The taxpayer’s income tax reporting reflects, or is expected to reflect, the assumption that the interest it pays in respect of the arrangement is either not subject to withholding tax at all or is subject to a lower rate of withholding tax than the rate that would apply on interest paid directly by it to NR1.
Alternatively, similar arrangements are entered into in respect of rents, royalties or other payments of a similar nature, or to effect a substitution of the character of the payments.
- Assume a Canadian taxpayer is a participant in a global cash pooling arrangement (“the Cash PA”) involving an arm’s length non-resident intermediary.
- The other participants of the Cash PA are non-resident entities with which the Canadian taxpayer does not deal at arm’s length.
- Under the terms of the Cash PA, total amounts borrowed by participants cannot exceed total amounts deposited by other participants.
Q.3(a)
Assuming that the Canadian taxpayer is a debtor under the Cash PA, is the Cash PA a “notifiable transaction” if at least one non-resident participant of the Cash PA resides in a jurisdiction that is subject to a higher Canadian withholding tax rate on interest than the rate applicable on interest paid by the Canadian taxpayer to the intermediary?
Preliminary Response
Moreno: The quoted passages in this question are from the CRA website: “Notifiable transactions designated by the Minister of National Revenue”.
There are two segments in that description – thin capitalization and Part XIII tax. The transaction would be notifiable if either: it is factually described in a passage under either heading; or it is substantially similar to those transactions. The common element in these two descriptions is the scenario of a taxpayer receiving financing from a non-resident but, instead of receiving it directly from NR1, an NR2 is involved, and the taxpayer takes a filing position that might be different on that basis.
In determining whether cash pooling is similar to or factually described in this description, it is necessary to look at are the definition of “substantially similar” in s. 237.4(2)(a), which encompasses situations that are either factually similar, or informed by the same tax strategy and can be expected to yield similar tax consequences.
S. 237.4(2)(b) also indicates that “substantially similar” should be interpreted broadly, in favour of disclosure.
Cash pooling can either be physical or notional - 2015-0614241C6 looks at a notional cash pooling arrangement and concludes that the amounts created would be considered “intermediary debts” under the back-to-back loan rules, and s. 18(6.1) would therefore probably apply. The CRA relied on the Explanatory Notes on s. 18(6). On this basis, although the designated transaction does not specifically describe a cash pooling arrangement, such an arrangement would be substantially similar to a designated transaction.
Q.3(b)
Would the Cash PA be a “notifiable transaction” if it is not expected, at the time that the Canadian taxpayer first becomes a participant in the Cash PA, that the Canadian taxpayer would eventually be a debtor under the arrangement (i.e., where it is reasonably expected that the Canadian taxpayer would only be a creditor under the arrangement)?
Preliminary Response
Moreno: No, this would not be a notifiable transaction. First, there is no financing to that taxpayer. Moreover, the tax consequences of the cash pooling to that taxpayer would engage different provisions of the Act. The taxpayer maintains a positive cash balance, historically; on that basis, the provisions that might be applicable would be s. 15(2.16) or (2.17).
Q.3(c)
Do the answers to questions (a) and (b) depend on whether the Cash PA is physical or notional?
Preliminary Response
Moreno: The labels “physical” or “notional” can give a sense of the type of arrangement that is being examined. “Physical cash pooling” generally means that there are actual movements of funds if, for example, one of the participants is in overdraft, and another participant with excess cash transfers to the one in overdraft. “Notional cash pooling” occurs where there is no cash flowing around, as such. Instead, a financial institution monitors the balances of the different participants and ensures that the balance is positive in aggregate.
Based on those broad descriptions, the provisions applicable might be slightly different. With a physical arrangement, the transfer of cash would be in the form of loans, which might attract the application of the s. 18(4) or 212(1) withholding provisions. A notional cash pooling arrangement might attract the application of the back-to-back loan rules in s. 18(6) or 212(3.1).
These are general conclusions, but every arrangement needs to be considered on its own merits. For example, there could be some back-to-back element in physical cash pooling. The specific facts will determine whether the arrangement is similar or substantially similar to those described in these transactions.
Q.3(d)
Assuming the Canadian taxpayer is expected to solely be a debtor under the Cash PA, would the Cash PA be considered a “notifiable transaction” if the Canadian taxpayer withholds (and undertakes the relevant compliance) at the rate of withholding tax that would be applicable as a result of the application of the back-to-back loan rules in subsection 212(3.2)? In other words, would a filing requirement exist if no reduction in withholding tax rates is expected to be achieved?
Preliminary Response
Moreno: Again, the exercise in determining whether a transaction is substantially similar involves looking at the facts, looking at the tax consequences, and comparing these factors. The question does not discuss the thin capitalization aspect and (as we pointed out at the beginning) there are really two elements to a pooling transaction: it is necessary to examine both the thin capitalization rules, and Part XIII.
We assume in this scenario that the taxpayer’s filing would take s. 18(4) into account, so that there would not be a notifiable transaction on that basis. As for Part XIII, the circumstances are different here and it also would not be a notifiable transaction on that basis since the taxpayer is already withholding and remitting.
Q.3(e)
Where the Cash PA is a “notifiable transaction”, would a filing requirement exist if the Canadian taxpayer’s participation in the arrangement commenced prior to November 1, 2023?
Preliminary Response
Moreno: This question is really describing a series of transactions, which is to say that it involves multiple transactions and events. The reporting obligation would arise on the first such transaction occurring after November 1, 2023. For example, an interest payment might be the first notifiable transaction after November 1, and would thus trigger an obligation to notify.
Q.3(f)
If the Cash PA is a “notifiable transaction”, please confirm that a single reporting to describe the arrangement is sufficient, and in particular, separate reporting would not be required in respect of each borrowing (potentially on a daily basis) by the Canadian taxpayer under the arrangement.
Preliminary Response
Moreno: Again, cash pooling is really a series of transactions or events. The filing in respect of one element of the series would satisfy the filing requirement in respect of the whole series, provided that the filing describes the nature of the subsequent transactions, and whether they are recurring or not.
Q.3(g)
In respect of a Cash PA that is a “notifiable transaction”, would a professional services firm be required to report the arrangement if the firm is not/was not involved in the set-up of the arrangement and only undertakes compliance services based on debt, interest and withholding figures provided by the taxpayer?
Preliminary Response
Moreno: Advisors must report a notifiable transaction, and the term “advisors” is defined in s. 237.4 for these purposes. Your question seems to zero in on one segment of the definition which talks about “directly or indirectly providing assistance or advice.” Determining whether a professional firm is directly or indirectly providing assistance or advice depends on the nature of the work. Bear in mind, as well, that one element is the reporting position of the taxpayer – is the taxpayer filing in accordance with s. 18(4)? Is the taxpayer withholding and remitting as it would had, for instance, the financing come directly from NR1, as an example.
That has to be born in mind and it is relevant from the perspective of the professional obligation of the advisor as well. Also relevant is whether the advisor has a professional obligation to validate or advise the client on the actual filing position or on the application of the Act to the actual cash pooling arrangement the advisor’s client is part of, and those elements would inform whether there is a notifiable transaction, and whether the person would have to notify as an advisor.
Official Response
15 May 2024 IFA Roundtable Q. 3, 2024-1007631C6 - Cash Pooling and Notifiable Transactions
Q.4 – Procedure for late-filed PLOI election
- In the context of a late-filed pertinent loan or indebtedness (PLOI) election, the CRA commented in Document 2014-0519431E5 that a corporation resident in Canada (CRIC) would not be required to file an amended corporate tax return in addition to filing a valid PLOI election.
- On March 25, 2022, the CRA published revised taxpayer instructions for late-filing a PLOI election (“PLOI Instructions”) wherein CRA indicates that, in order to request a reassessment to report the resulting interest income inclusion on the CRIC’s income tax return, the CRIC should provide an amended Schedule 1, Schedule 125 and any other affected schedules for each relevant taxation year.
- For a late-filed PLOI election involving a partnership or tiered partnerships, the PLOI Instructions direct taxpayers to also provide amended partnership return(s) for each partnership affected by the interest income inclusion (T5013 and applicable schedules, including amended Schedule 1 and Schedule 125) for each relevant fiscal period.
- As such, the PLOI Instructions require that amended partnership information returns and amended schedules be filed for the purposes of processing the election, but do not require a taxpayer to file amended corporate income tax return(s).
- Can the CRA clarify that a CRIC is not required to separately file an amended corporate income tax return in addition to filing a valid PLOI election?
Preliminary Response
Eroff: As background, the PLOI election is relevant in the context of shareholder debt provisions (e.g., s. 15(2)), and foreign affiliate dumping provisions (i.e., s. 212.3). This election allows an amount of indebtedness, that would otherwise be subject to these provisions, to be treated as a PLOI so as to avoid the deemed dividend treatment under these provisions and the resulting Part XIII withholding tax and, instead, have the amount owing be subject to the interest payment imputation provision in s.17.1.
The Act requires this election to be filed in writing jointly by specified entities and it must be filed with the Minister within the prescribed period of time. The Act also allows for a late filing of this election provided it is filed on or before the day that is three years after the date on which it was required to be filed and the late filing penalties are paid by the corporation resident in Canada (the CRIC).
The CRA recently published two new forms this year for PLOI elections: Form T1521 Election (“Election for a Pertinent Loan or Indebtedness (PLOI) under Subsection 15(2.11)”); and Form T2311 (“Election for Pertinent Loan or Indebtedness (PLOI) under Subsection 212.3(11)”).
On late-filing a PLOI election that results in s. 17.1 applying to a CRIC, the CRIC is not required to file an amended income tax return together with the election, provided that the CRIC submits an amended Schedule 1. This remains the case, but now the CRIC can use the new forms to provide the relevant information instead of submitting a revised Schedule 1. If there are any other schedules that are impacted by the interest imputation provision resulting from the late filed PLOI election, those additional schedules should still be submitted along with the form.
With respect to loan indebtedness owing to a qualified Canadian partnership, currently the instructions contained in Part 3 of Form T1521 also indicates that filing an amended partnership information return is not required. These instructions will be revised to clarify that, in order to process the adjustment in respect of the qualified Canadian partnership and corporate partners, the taxpayer should submit an amended partnership information return (or returns, depending on the partnership structure) as well as amended Schedule 1 or any other applicable schedules of corporate partners in order for the elections to be processed effectively.
Taxpayers who may have late-filed Form T1521 without submitting amended partnership information returns are invited to submit amended partnership information returns together with any relevant schedules of the corporate partners together with the previously filed T1521 in order to facilitate the timely processing of the election.
Official Response
15 May 2024 IFA Roundtable Q. 4, 2024-1007571C6 - Late-filed PLOI election
Q.5 – Late-filed PLOI election and statute-barring
- Pursuant to subsection 15(2.12) or 212.3(12), where a PLOI election is made on or before the day that is three years after the day it was due, the election is deemed to have been made on the day on or before which the election was required to be made pursuant to paragraph 15(2.11)(d) or 212.3(11)(c).
- Where a late-filed PLOI election is made prior to the three-year limitation period referred to in subsection 15(2.12) or 212.3(12) but no reassessment is issued to the CRIC to reflect the additional interest income under subsection 17.1(1) prior to the CRIC’s relevant taxation year being statute-barred, will the CRA accept the validity of the election?
Preliminary Response
Eroff: If the election complies with all the requirements of the Act, is filed within the specified period, and late-filing penalties are paid, then yes, the election will be valid notwithstanding that the additional interest was not reassessed, or the determination of income or loss does not include the additional interest income.
Generally, a reassessment can be made within the normal reassessment period as defined in s. 152(2.3) subject to certain exceptions in s. 152(4). S. 152(4)(b)(iii)(A) extends the normal reassessment period by three years where a reassessment period or additional assessment is issued as a consequence of a transaction involving the taxpayer and a non-resident person with whom the taxpayer was not dealing at arm’s length.
A reassessment made as a consequence of a loan or indebtedness in respect of which a PLOI election is made will most certainly be subject to the extended reassessment period under s. 152(4)(b)(iii)(A). The clause refers to a “transaction” as defined in subsection 247(1) which includes “an arrangement or event.” A PLOI election filed jointly by a CRIC and a corporation that controls the CRIC, or each “parent” as defined in 212.3(1)(b), would be an “arrangement or event,” and therefore a transaction, involving a taxpayer and a non-arm's length non-resident person.
Given a situation where the CRIC and each "non-resident parent" are not related, they most certainly will not be dealing at arm’s length as a factual matter, so that the Minister would be able to reassess the relevant taxation years beyond the normal reassessment period to include additional interest income for the CRIC.
Official Response
Q.6 – Blanket PLOI election
- As of March 25, 2022, the CRA has adopted an administrative policy that requires only one PLOI election to be made in respect of each loan or indebtedness governed by the same agreement owing by each non-resident person (“Administrative Relief”).
- Assuming a particular taxpayer (the “Taxpayer”) was eligible for the Administrative Relief, no election would be required in respect of amounts borrowed under the same loan or indebtedness instrument in a subsequent taxation year.
- However, if the Taxpayer does not wish to have a PLOI election apply to amounts borrowed in a subsequent taxation year (i.e. amounts advanced after the initial year for which the single PLOI election is filed and for which the same legal instrument remains in place), is the Taxpayer required to provide notification to the CRA?
Preliminary Response
Eroff: In interpreting “amount” for the purposes of a PLOI election, each increase in the loan indebtedness balance is a separate amount, and 2022-0931121C6 is intended to provide relief in respect of the agreement under which all amounts for the duration of the agreement are intended to be treated as a PLOI.
If the intention is to treat only certain amounts as a PLOI, then 2022-0931121C6 does not apply. A separate election should be filed in respect of each separate amount under the agreement.
Taxpayers who have opted into the application of that administrative relief by jointly making a single election in respect of all amounts made under the same agreement and no longer wish for the election to apply to an amount borrowed in subsequent years should make sure that those amounts are governed under a separate agreement.
Those who make PLOI elections and wish for administrative relief to apply in respect of all amounts of loan indebtedness arising under one agreement should check “yes” in field 100 of T1521. Taxpayers who wish for administrative relief not to apply should file a separate election for each separate amount and check “no” in field 100 in each T1521 form.
Official Response
15 May 2024 IFA Roundtable Q. 6, 2024-1007591C6 - PLOI Election Administrative Relief
Q.7 – PPT and reduced dividend withholding
- At the 2020 Canadian Tax Foundation Annual Tax Conference (2020-0862471C6), the CRA acknowledged that there was general concern in the tax community regarding uncertainty surrounding the application of the “principal purpose test” (PPT) that was implemented into Canada’s “Covered Tax Agreements” through the Multilateral Instrument.
- In response to this concern, the CRA released a list of questions it felt could be relevant in determining whether an arrangement or transaction had as one of its principal purposes the obtaining of a treaty benefit.
- While the list of questions supported that the application of the PPT is highly fact-dependent, the question did little to address the uncertainty regarding the application of the PPT in several relatively common situations.
- It is also noted that the questions addressed the first prong of the PPT (i.e., was obtaining the tax benefit one of the principal purposes of the transaction(s)) and did not address the second prong of the PPT (i.e., the object and purpose test).
- Can the CRA provide their views regarding the application of the PPT in the following situations?
Situation (a): Same Rate
- Canco is owned by a Foreign Entity (FE) and FE is owned by Foreign MNC.
- FE’s only activity is holding shares of Canco and it has no employees.
- FE is resident in a country that has a treaty with Canada (“Treaty 1”). Treaty 1 provides for a 5% withholding tax on dividends paid by Canco to FE where FE has sufficient ownership of Canco shares.
- Foreign MNC is also resident in a country that has a treaty with Canada (“Treaty 2”). Treaty 2 would also provide for a 5% withholding tax on dividends paid by Canco to Foreign MNC if it held shares of Canco directly.
- Treaty 1 is a Covered Tax Agreement.
- In this situation will CRA confirm whether it is reasonable to conclude that the PPT should not apply in respect of a dividend paid by Canco to FE?
Situation (b): Non-Treaty Country in Ownership Chain
- Same facts as above.
- However, there is a holding company (HC) in the ownership structure between Foreign MNC and FE. HC is resident in a jurisdiction that does not have a treaty with Canada.
- Foreign MNC chose to add HC into the structure for non-Canadian tax reasons (before or after the Canco shares were acquired).
- The funding for the acquisition of the shares of Canco came from Foreign MNC and any dividends paid flow back to Foreign MNC.
- In this situation will CRA confirm whether it is reasonable to conclude that the PPT should not apply in respect of a dividend paid by Canco to FE?
Preliminary Response
Situation (a)
Moreno: Consistent with OECD’s guidance, the CRA’s approach to the PPT is to evaluate it on a case-by-case basis. It is not possible to provide complete guidance on this point. As mentioned in prior conferences, we recommend applying for an advance tax ruling.
The PPT consists of two essential elements. The first element is the purpose of the transaction – is it reasonable to conclude that obtaining the benefit was one of the principal purposes of an arrangement or transaction? The second is the purpose of the legislation – would granting the benefit be consistent with the objectives of the provision or not?
Regarding the transaction-purpose element, the OECD Commentary on Art. 29 in paras. 178-79 indicate that this is an objective/subjective determination. In other words, it is not sufficient to look only to the subjective intention of the taxpayer. We also need to look at the surrounding facts, and draw reasonable inferences.
In the present scenario, the relevant factors are:
- FE is a holding corporation with no other activity or employees; and
- both applicable treaties provide for a 5% withholding rate.
On the legislative object and purpose part of the test, para. 174 of the Commentary gives some indications that the treaty is meant to provide benefits in respect of bona fide exchanges of goods and services, and movements of capital and persons, as opposed to arrangements whose principal objective is to obtain favourable tax treatment.
Another element that might inform the object and purpose part of the test is whether FE is a genuine resident of Treaty 1 country. Also, the fact that Treaty 1 and Treaty 2 both provide for a reduction to a 5% rate would be relevant.
Situation (b)
Moreno: The same considerations as above would be relevant.
The initial factors here might be the timing of the transaction (when was HC introduced into the structure), the non-tax reasons for the structure, and what other judicial doctrines, provisions or treaties might be relevant.