Xco, a Canadian corporation without a permanent establishment in Romania and owning more than 50% of the shares of S.A.co, a Romanian corporation, charges reasonable fees to S.A.co for its management services. According to the Tax Code of Romania, management fees paid to a non-resident of Romania are subject to withholding tax of 15%, which is described as final and not subject to adjustment. The Other Income Article (Art. 21) of the Convention provides that items of income not dealt with in the foregoing Articles that is derived by a resident of Canada from sources in Romania may be taxed in Romania.
Do the management fees come within Art. 21? CRA responded:
In most treaties where management fees or charges are not specifically dealt with, the business profits provisions are considered to include reasonable management fees. Taking into account that on the facts Xco does not have a permanent establishment in Romania to which the management fees are attributable, the CRA would treat the net income attributable to the fees earned by Xco as "business profits", exempt from tax in Romania under Article 7 of the Convention. In our view, Article 21 of the Convention is therefore not applicable to the management fees. Given that such fees constitute business profits, the CRA would not grant a foreign tax credit for the 15% withholding tax on them … .