| June 19, 1989 | |
| Provincial and International | Specialty Rulings Directorate |
| Relations Division | K.B. Harding |
| Mr. R.G. D'Aurelio, Director | 957-2129 |
Mr. E.E. Campbell
This is in reply to your letter of March 29, 1989 concerning paragraph 2(d)(i) of Article 23 of the Canada-Sweden Income Tax Convention (1983) (the "Convention").
You are concerned with a situation where Swedenco, a resident of Sweden, owns 100% of the capital of Canco, a resident of Canada. Swedenco also owns 100% of the capital of a non-resident owned investment corporation (NRO) as defined in paragraph 133(8)(d) of the Income Tax Act (the "Act"). The NRO has certain loans receivable from Canco bearing interest at market rates. The NRO pays 25% tax on the interest incomes received from Canco. On the payment of a dividend form the NRO to Swedenco, that is equivalent to the interest from Canco, the NRO receives a refund of the full 25% of the tax paid in Canada.
The issue is whether the dividend payment to Sweden from the NRO is exempt from Swedish tax under paragraph 2(d)(i) of Article 23 of the Convention.
It is our view that the profits of the NRO have not been subjected in Canada to a rate of income tax of 25% or more after a dividend has been paid to Swedenco since all tax paid by the NRO in respect of the dividend is refunded by Canada.
A review of the notes on paragraph 2(d)(i) of Article 23 of the Convention indicate that the Swedish negotiators were concerned with NROs since that country permits a flow-through of dividends between companies and they wanted to be ensured that the dividend income from Canada bear a reasonable amount of tax either in Canada or Sweden. Since the tax is refunded to the NRO we are of the view that the dividend did not bear a reasonable rate of tax and that the Swedish government would probably not exempt dividends received from an NRO under the conditions set out above.
Based on our interpretation of the Article and the intention of the Convention, we are of the view that a dividend from the NRO to Swedenco in the situation set out in paragraph 2 above would probably not be exempt, by virtue of paragraph 2(d)(i) of Article 23 of the Convention, from Swedish tax. However, as stated in your memorandum, the Swedish government will make the final decision on this situation subject, of course, to competent authority review of requested by the taxpayer.
We trust these comments are adequate for your purposes.
M.A. Hiltzfor Director GeneralSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch