Download PDF - Wipfli

More documents

Recommendations

Info

Canada Update continued A ULC is generally treated as a fiscally transparent entity for US tax purposes but is taxed as a corporation under Canadian rules. ULCs have been very popular with US investors seeking a flow-through entity for their tax structure. New Article IV(7)(b), however, will generally eliminate the treaty benefit to a US resident member of a ULC on a cross-border payment from the ULC to the member by deeming the member not to be a US resident for treaty purposes (and thereby eliminating treaty benefits) where the treatment of the amount under US law is not the same as its treatment would be if the ULC were not treated as fiscally transparent under US law. On a dividend to the US member, the loss of the treaty benefit could be as much as a 25% versus 5% Canadian withholding tax rate. Solutions may include: ■ Inserting an intervening foreign entity (such as a Dutch Co-op or a Luxembourg SARL between Canada and the US member). ■ Using a strategy to increase the paid-up capital for Canadian tax purposes that will result in a deemed dividend for Canadian tax purposes followed by a return of capital distribution to the US member. This will generally result in the availability of the applicable treaty-reduced rate, 5% in the case of qualifying corporations. We recently came across a situation with a structure proposed by another advisor, which was to have a US LLC be the member of the Canadian ULC. Article IV(6) is a favourable rule which gives US members of a fiscally transparent entity such as a US LLC or US partnership. As a result of the strict wording in Article IV(6), there is a problem in obtaining the treaty-reduced rate in a PUC increase strategy where the ULC member is an LLC. The US does not recognise the PUC increase amount as a taxable amount. As it is a disregarded amount, the CRA does not consider the US member to have derived the PUC increase amount through the LLC for US tax purposes and Canada will apply a 25% withholding tax rate to the deemed dividend on the PUC increase. In contrast to an LLC needing the help of Article IV(6) to get treaty benefits for its members, the CRA will generally look through a partnership to give treaty benefits to its members. A member of a US partnership will still be able to obtain the treaty-based rate on the PUC increase strategy. Where partnerships do not work for commercial reasons, the Dutch or Luxembourg planning may be appropriate. The CRA also considers a Subchapter S Corporation to be able to get treaty benefits in its own right without the need to use Article IV(6). Outbound investment into Canada On 19 August 2011, Canada’s Finance Minister introduced a long-awaited package of proposed amendments to Canada’s foreign affiliate rules, Canada’s tax regime for foreign subsidiaries and significant investees of Canadian multinational corporations, referred to as the foreign affiliate rules. The 200-page package replaces a number of controversial amendments proposed in 2004 but never enacted. The period for comments from interested parties on the current foreign affiliate rules package closes on 19 October 2011. Given the Government’s majority in the House of Commons, it is expected that this package may be passed into law within the next few months. Some of the changes will have retroactive effect. The proposed rules offer some simplifications over the 2004 proposals but apply back to 2004 or earlier with some modifications to the rules as they will apply going forward. The coming-into-force rules are complicated as a result of the transitional rules and the ability to make elections to have the rules apply to 2004 and prior years. The 2011 package includes revisions to the foreign affiliate reorganisation and distribution rules originally proposed on 27 February 2004. It also includes new proposals in place of the proposals that suspended certain gains from the sale of shares and other assets of foreign affiliates for the purpose of the surplus accounting rules. In its December 2008 report to the Minister of Finance, the Advisory Panel on Canada’s System of International Taxation recommended fundamental changes to Canada’s system of international taxation, particularly in respect of its exemption system for foreign source business income earned by foreign affiliates. In its covering Release, Finance Canada indicated that, at this time, the priority is to encourage countries to enter into Tax Information Exchange Agreements with Canada and to provide exempt surplus treatment as an incentive to those which choose to do so. The 19 August 2011 proposals contain the following components: ■ Hybrid surplus – a new surplus account to capture gains from the sale of foreign affiliate shares ■ Upstream loans – a rule to protect the integrity of the hybrid and taxable surplus regimes by discouraging transactions designed to avoid taxation of taxable 11 // PKF International Tax Alert All Regions Issue 8 November 2011
Canada Update continued ■ ■ ■ ■ ■ ■ dividends through the use of loans from foreign affiliates to their Canadian shareholders Reorganisations – rules to: ■ Allow more generous foreign accrual property income (FAPI) rollover treatment of asset dispositions by a foreign affiliate in the context of mergers and liquidations by, for example, allowing all types of property, not just capital property, to qualify for rollover treatment; and ■ Prevent the duplication of losses on certain share-forshare transactions Return of capital – rules to allow more generous and simplified treatment of distributions from the capital of a foreign affiliate by allowing taxpayers to elect to have the full amount of their cost of the shares be returned before any distributions become taxable Surplus reclassification – a rule to reclassify certain gains from business asset sales from exempt to taxable surplus in situations where a taxpayer forces the disposition of such an asset for the primary purpose of creating exempt surplus Stop-loss rules – amendments to: ■ Provide relief from loss denial rules that apply on the disposition of shares of a foreign affiliate by allowing a portion of such a loss to the extent the taxpayer realises a foreign exchange gain on a related financial instrument ■ Ensure that certain loss denial rules do not apply in the computation of foreign affiliate surplus balances and apply properly in the context of foreign accrual property losses FAPI capital losses – new rules to align the FAPI system with domestic rules by providing that capital losses can only be deducted against capital gains Various other technical changes. The Agreement between Canada and the Republic of Turkey for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital entered into force on 4 May 2011. The Agreement was signed on 14 July 2009. In accordance with Article 28 of the Agreement, its provisions have effect in Canada: in respect of withholding taxes, on amounts paid or credited to non-residents on or after 1 January 2012; and in respect of other taxes, for taxation years beginning on or after 1 January 2012. Tax Information Exchange Agreements with the following countries have either been signed or entered into force in 2011: St Vincent and the Grenadines; Costa Rica; Bermuda, Cayman Islands; Antigua and Barbuda; Grenada; Montserrat; Uruguay; Guernsey; Isle of Man; Jersey; Netherlands in respect of the Netherlands Antilles. For more information please contact: Bill Macaulay Tax Partner Smythe Ratcliffe LLP, Chartered Accountants Vancouver, BC, Canada T: +1 604 694 7536 E: bmacaulay@smytheratcliffe.com Treaty developments Negotiations to update the income tax treaty between Canada and the United Kingdom commenced the week of 3 October 2011. Negotiations for an income tax treaty between the Government of Canada and the Government of the Hong Kong Special Administrative Region of the People's Republic of China commenced the week of 27 June 2011. 12 // PKF International Tax Alert All Regions Issue 8 November 2011
Page 1 and 2: International Tax Alert Issue eight
Page 3 and 4: Malaysia 26 Lee Yiing Ting summaris
Page 5 and 6: Austria Update Publication of finan
Page 7 and 8: Australia Update continued the exis
Page 9 and 10: Australia Update continued Under th
Page 11: Canada Update New Canadian treaty-b
Page 15 and 16: Cyprus Update Tax treaty update Cyp
Page 17 and 18: Ghana Update Highlights of the tax
Page 19 and 20: India Update An introduction to Tra
Page 21 and 22: Ireland Update Domestic Tax Changes
Page 23 and 24: Kenya Update continued at 0%. This
Page 25 and 26: Lebanon Update continued free zones
Page 27 and 28: Malaysia Update Below is a summary
Page 29 and 30: The Netherlands Update This article
Page 31 and 32: The Netherlands Update continued 8
Page 33 and 34: Pakistan Update continued Federal E
Page 35 and 36: Romania Update There have been some
Page 37 and 38: Slovak Update Impact on income tax
Page 39 and 40: Slovenia Update Tax changes in 2011
Page 41 and 42: South Africa Update continued ■ a
Page 43 and 44: Spain Update There have been severa
Page 45 and 46: Uganda Update Introduction of Trans
Page 47 and 48: United Kingdom Update Changes propo
Page 49 and 50: USA Update Update on Reporting of S
Page 51 and 52: USA Update continued of any asset,
Page 53 and 54: USA Update continued LLC to be tran
Page 55: IMPORTANT DISCLAIMER: This publicat

Download PDF - Wipfli

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?