The Tax Court has once again considered the meaning of the
phrase "beneficial owner" for purposes of the tax treaty
between Canada and the Netherlands (the "Treaty"). It has
also once again ruled in favour of the taxpayer in determining that
a Dutch holding company was the "beneficial owner" of
amounts received from a related Canadian company.
On February 24, 2012, the Tax Court of Canada released its
eagerly-anticipated decision in Velcro Canada Inc. v. Her
Majesty the Queen, which addresses the applicable Canadian
withholding tax rate in respect of cross-border royalty payments
within a multinational corporate group. The decision comes almost
four years after the Tax Court of Canada released its landmark
decision in Prévost Car Inc. v. The Queen, which
dealt with the identical treaty interpretational issue in the
context of cross-border dividend payments. The decision of the Tax
Court was affirmed by the Federal Court of Appeal.
Both the Prévost Car Inc. and Velcro
decisions are relevant to any multinational enterprise using a
foreign holding company as an investment/financing vehicle and
provide considerable comfort concerning the tax effectiveness of
The issue in Velcro was whether a Dutch holding company
was the "beneficial owner" of royalties paid by a related
Canadian company, and therefore entitled to a reduced rate of
Canadian withholding tax under the Treaty in respect of the
royalties. Pursuant to the "beneficial owner test"
described in Prévost Car Inc., this required that
the Tax Court consider the following issues:
Did the Dutch holding company enjoy possession, use, risk and
control of the amounts it received from the Canadian
Did the Dutch holding company act as a "conduit", an
agent or a nominee in respect of the amounts it received from the
The CRA's position was that Dutchco was not the beneficial
owner of the royalties generally because Dutchco was contractually
required to remit a specific percentage of all amounts received
from the Canadian corporation to its parent company located in the
Netherlands-Antilles (which does not have a comprehensive tax
treaty with Canada). If the Canadian company had paid royalties
directly to the Netherlands-Antilles company the royalty payments
would have been subject to a 25% Canadian withholding tax. In the
CRA's view, Dutchco was merely a collection agent for the
The Court rejected the CRA's arguments and concluded that
Dutcho was indeed the beneficial owner of the royalties. The basis
for the Court's conclusion was that, even though Dutchco may
have been contractually required to pay money onward to the
Netherlands-Antilles company, it retained some discretion
as to the use of the royalties while in its possession. Dutchco
therefore possessed sufficient indicia of beneficial ownership
while it held the royalties and could not be considered a conduit
based on the "beneficial ownership test" outlined in
Prévost Car Inc., which requires a lack of all
It is unclear at this time whether the CRA will appeal the Tax
Court's decision in Velcro to the Federal Court of
Appeal. The tax community will continue to watch the progress of
this case (if any) with great interest.
Please open the attached
PDF for further information about the Velcro case.
Please visit the
FMC website for prior coverage of Prévost Car
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