Principal Issues: [TaxInterpretations translation] That the mere presence of a Canco employee in the Particular Country would ensure the establishment of a permanent establishment in that country under Article V of the Convention.
Position: Although it is a question of fact, it appears not.
Reasons: In the Particular Situation, the employee does not have in the Particular Country the powers that the employee usually exercises there to allow the employee to conclude contracts on behalf of Canco.
XXXXXXXXXX 2011-042755
March 7, 2012
Dear Mr. XXXXXXXXXX,
Subject: Permanent establishment in the Dominican Republic
This is in response to your letter of November 9, 2011 in which you asked us for our opinion regarding the existence of a "permanent establishment" in the Dominican Republic (the "Particular Country") within the meaning of Article V of the Convention Between Canada and the Dominican Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital (the "Convention") of your client in the following situation ("Particular Situation"). Also, you are asking for our opinion on your client's right to claim, for a particular taxation year, a foreign tax credit under section 126 in respect of any income tax that would be paid by it to the Particular Country on income from a business that is not earned through a permanent establishment in that country.
Unless otherwise indicated, all statutory references below are to the provisions of the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended, in force on this date.
Particular Situation
The Particular Situation as we understand it is as follows:
1. XXXXXXXXXX ("Canco") is a corporation governed by the Canada Business Corporations Act and a taxable Canadian corporation within the meaning of subsection 89(1).
2. Canco is a corporation resident in Canada pursuant to paragraph 250(4)(a) and a resident of Canada within the meaning of Article IV(1) of the Convention.
3. Canco's effective management has been in Canada continuously since its formation. Canco is not, and has never been, a corporation resident in the Particular Country.
4. XXXXXXXXXX
5. XXXXXXXXXX
6. In order to offer the widest possible range of services to its customers, Canco entered into supplementary service and support agreements with various local corporations. XXXXXXXXXX ("NRco") in the Particular Country (the "Agreement").
7. NRco is a corporation incorporated under the laws of the Particular Country and a resident of the Particular Country for the purposes of the Convention. At no time was NRco a subsidiary of Canco and Canco was never a shareholder of NRco.
8. Under the terms of the Agreement, NRco is committed to providing the following services:
a) NRco undertakes to provide Canco's clients present in the Particular Country XXXXXXXXXX in accordance with certain parameters (the "Canco client services"); and
b) NRco undertakes to provide Canco with certain services on request and certain services to XXXXXXXXXX.
9. Canco’s client services are provided in connection with the following in Canco's taxation year:
a) XXXXXXXXXX
b) XXXXXXXXXX
10. XXXXXXXXXX
11. Canco does not have a fixed place of business in the Particular Country within the meaning of paragraph V(1) of the Convention and does not maintain in the Particular Country any place of management, branch, office or premises used as a point of sale. XXXXXXXXXX.
12. The Canco Employee does not have an authority, habitually exercised, to conclude contracts in the name of Canco.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 of May 17, 2002, it is the practice of the Canada Revenue Agency (the "CRA") not to issue a written opinion regarding proposed transactions otherwise than by advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you.
It appears to us that the commissions paid by NRco to Canco under the terms of the Agreement constitute profits from Canco's XXXXXXXXXX business, i.e. profits that Canco derives from its activity in the Particular Country. Article VII(1) of the Convention provides that the profits of an enterprise of a Contracting State [i.e. Canco] shall be taxable only in that State [i.e. Canada] unless the enterprise carries on business in the other Contracting State [i.e. Particular Country] through a permanent establishment situated therein. If the enterprise carries on or has carried on business on that basis, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.
Article V(1) of the Convention provides that the term "permanent establishment" means a fixed place of business in which the business of the enterprise is wholly or partly carried on and includes an office. In addition, Article V(4) of the Convention provides that a person (other than an independent agent) acting in a Contracting State on behalf of an enterprise of the other Contracting State shall be deemed to be a permanent establishment in the first-mentioned State if the person has, and habitually exercises in that State, an authority to conclude contracts in the name of the enterprise, unless the person’s activities are limited to the purchase of goods or merchandise for the enterprise.
We are of the view that in the Particular Situation the mere presence of the Canco Employee in the Particular Country would not cause there to be a permanent establishment in the Particular Country of Canco under Article V of the Convention. Indeed, the Canco Employee present in the Particular Country who provides XXXXXXXXXX to Canco's clients only XXXXXXXXXX offered by NRco to Canco's clients and does not have a power that is habitually exercised to enter into contracts in the name of Canco.
Finally, it is possible for an amount to be paid (or withheld at source) as a tax on profits derived from Canco's activity in the Particular Country under the domestic law of that country even if such profits are not considered taxable in that country in accordance with the Convention. In such a situation, Canco could potentially take steps with the authorities of the Particular Country to be reimbursed for the amount thus paid. Consequently, we are of the view that that amount would generally be considered a tax "voluntarily paid" to the administration of the Particular Country and that it would not be eligible for the purposes of the foreign tax credit provided for in section 126. For more details on this subject, we invite you to consult paragraph 11 of Interpretation Bulletin IT-270R3 - Foreign Tax Credit.
We hope that these comments will be of assistance.
Best regards,
Guy Goulet, CA, M. Fisc.
for the Director
International Operations Division
Income Tax Rulings Directorate
Legislative Policy
and Regulatory Affairs Branch