14 December 1990 Ruling HBW4125N1A F - Canada-Netherlands Income Tax Convention

December 14, 1990

Dear Mr.  19(1)

This is in reply to your letter of August 13, 1990, concerning the application of paragraph 3, of Article 4 of the Canada-Netherlands Income Tax Convention signed by our two countries on May 27, 1986. We apologize for the delay in responding.

Originally, Canada utilized the concept of "the place of effective management", which was followed by the United Kingdom, when determining whether or not a corporation was a resident of Canada for tax purposes. However, we were faced with a growing problem of corporations being incorporated and having their place of effective management in Canada and subsequently "emigrating" at the completion of an activity such as a construction project, simply to avoid Canadian tax on undistributed income of the company (e.g. branch tax and non-resident withholding tax).

To address this abuse, Canada amended its domestic legislation in 1965 to deem a corporation incorporated in Canada to be a resident of Canada for tax purposes. Consequently, in the commentary to the OECD Model Double Taxation Convention of 1977, Canada reserved its right to use the place of incorporation rather than the place of effective management as the criterion in determining the residence of a corporation.

As explained to officials of your department during meetings to negotiate the current tax treaty between our two countries, Canada's position on the dual residency of corporations, as reflected in our model tax convention, is as follows:

-         If the corporation is a resident of both Contracting States, it shall be deemed to be a resident of the Contracting State where it is incorporated.

-         If the corporation has not been incorporated in either Contracting State, it shall be deemed to be a resident of the Contracting State in which its place of effective management is situated.

In situations where the other Contracting State has not agreed to depart from the primacy of the place of effective management concept, Canada has agreed that corporations incorporated in one of the Contracting States and having their place of effective management in the other Contracting State, will not be covered by the treaty unless the competent authorities mutually agree otherwise based on the facts of a particular case, including the absence of tax avoidance.

In our view, the wording of paragraph 3 of Article 4 of the Canada-Netherlands Income Tax Convention has the same effect. While our department will endeavour to reach an agreement with your department as to the residence of a corporation incorporated in Canada but which has transferred its place of effective management to the Netherlands, we will not, in any event, agree that the corporation is a resident of the Netherlands for purposes of the convention unless it can be shown to our satisfaction that Canadian tax is not being avoided. Where agreement cannot be reached, the corporation will not be a resident of either State for most purposes of the Convention.

With respect to the case of 24(1) we would require evidence that the corporation has, in fact, been managed from outside Canada since December 5, 1988, and that the place of effective management is indeed the Netherlands rather than a third State such as  24(1)

The corporation would also have to show to our satisfaction that no Canadian tax otherwise payable is being avoided by emigrating from Canada. In this respect, our records indicate that  24(1)

We trust that our comments will enable you to understand our position in this matter.

Yours sincerely,

Christine SavageActing DirectorProvincial and International Relations Division

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