A UK corporation (“GP Co”) is the general partner (with a 1% interest) of a UK limited partnership which is fiscally transparent for UK purposes and a partnership for ITA purposes (“UK LP” – all of whose partners are non-residents), and the Limited Partners include LP1 and LP3, which provide benefits under a “recognized pension plan” (as defined in Art. 10, para. 4 of the Canada-UK Treaty) and own 7% and 11% partnership interests, and LP2, a UK corporation owning a 19% partnership interest. In addition to being unrelated, the partners factually deal with every other at arm’s length. UK LP wholly owns Holdco, which wholly owns Canco, also a taxable Canadian corporation. UK LP used the subscription proceeds from the issuance of its partnership interests to make a loan to Canco (the “UK LP Loan”), the interest on which is not a “participating debt interest.”
Issue 1
Would LP2 and LP3 be considered to have “indirect control” over the voting power of Holdco, the shares of which are held by UK LP, for purposes of Art. 10, subpara. 2(a)?
Issue 2
Would LP1 and LP3 be considered to own indirectly shares of Holdco for purposes of Art. 10, para. 3?
CRA responded:
Issue 1…
The 5% withholding rate under subparagraph (2)(a) of Article 10 of the Treaty applies if the beneficial owner of the dividend “is a company which controls, directly or indirectly, at least 10 per cent of the voting power in the company paying the dividends.” …
[O]nly GP Co would be considered to control directly or indirectly at least 10% of the voting power in Holdco unless the partnership agreement specifically provided the limited partners with the ability to vote on the shares of Holdco. Therefore, LP2 and LP3 would not qualify for the 5% withholding rate under subparagraph 2(a) of Article 10. In addition, it is unclear…that LP3 would meet the definition of a “company” in Article 3….
Issue 2...
Paragraph 3 of Article 10… provides an exemption from withholding tax on dividends beneficially owned by a “recognized pension plan” if, among other conditions, such an organisation “does not own directly or indirectly” more than 10% of the capital or 10% of the voting power of the company paying the dividends.
…LP1 and LP3 will be considered to own indirectly the shares of Holdco and accordingly Holdco’s capital in proportion to their partnership interests in UK LP. While…fractional ownership under the partnership law would generally prevent partners from owning a particular percentage of the partnership’s property…the words “directly or indirectly” enable to attribute a particular percentage of ownership of partnership property to a partner….
Consequently, the requirements of subparagraph 3(b) would be satisfied in respect of LP1 but not in respect of LP3.