Principal Issues: [TaxInterpretations translation]
Can the management fees received by Xco be considered to be covered by Article 21 of the Canada-Romania Convention?
If the management fee is not covered by Article 21 of the Convention, can a foreign tax credit be claimed by Xco under Article 126 of the Act on tax withheld by the Romanian corporation?
Position:
No.
Not if Xco obtains a refund of the deductions from the Romanian tax authorities.
Reasons:
In most agreements where management fees/charges are not specifically treated, the business profit provisions are considered to include reasonable management fees.
If Xco does not obtain a refund from the Romanian tax authorities for the withholding tax paid on the management fee, Xco may under Article 25 of the Convention apply to the competent authorities to obtain a foreign tax credit.
XXXXXXXXXX Danielle Bouffard
2006-019585
September 11, 2007
Dear Madam,
Subject: Request for technical interpretation:
Foreign tax credit
This is in response to your letter of July 6, 2006, requesting our opinion on the above subject. We apologize for the delay in responding to your request.
Facts
1. Xco is a Canadian corporation that owns more than 50% of the shares of S.A.co, a Romanian corporation.
2. Xco provides management services to S.A.co and charges a reasonable fee for such services. A contract has been signed between the two corporations regarding those management fees. Xco does not have a permanent establishment in Romania.
3. S.A.co withholds 15% withholding tax on the management fees paid to Xco.
4. According to Articles 115 and 116 of Section V of the Tax Code of Romania, management fees paid to a non-resident of Romania are taxable in Romania and are subject to a withholding tax of 15%. This tax is final, so in principle no tax return is to be filed in Romania to claim overpaid tax or to pay any additional tax.
5. The Canada-Romania Income Tax Convention (the "Convention") does not provide for any tax relief in respect of management fees, nor does it specifically address this type of income.
6. Article 21 of the Convention provides as follows:
Other Income
1. Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable in that State.
2. However, if such income is derived by a resident of a Contracting State from sources in the other Contracting State, such income may also be taxed in the State in which it arises and according to the law of that State.
Questions
1. Can management fees be considered to come within Article 21 of the Convention?
2. If the management fees do not come within Article 21 of the Convention, can a foreign tax credit be claimed under section 126 of the Income Tax Act ("the Act") for the 15% withholding tax?
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency (the "CRA") not to issue written opinions on proposed transactions otherwise than through 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. These comments may, however, under certain circumstances, not apply to your particular situation.
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 since Xco should be entitled to claim a tax refund from the Romanian authorities and it must claim it and challenge any refusal of refund before the Romanian administrative authorities. As stated in paragraph 11 of Interpretation Bulletin IT-270R3, any portion of a taxpayer's foreign tax which is paid but which subsequently is, or will be, refunded to the taxpayer is not considered to be tax "paid for the year".
If the request for a refund from the Romanian tax authorities is denied and the assessment is upheld, Xco may follow the procedures outlined in Article 25 of the Convention and make a written request to the CRA's Legislative Policy Directorate for a foreign tax credit.
These comments are not advance income tax rulings and do not bind the CRA with respect to any particular factual situation.
Best regards,
Alain Godin
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch