On January 15, 2016, Canada and Taiwan entered into an
"Arrangement for the avoidance of double taxation and the
prevention of fiscal evasion with respect to taxes on income"
(the "Arrangement"). The Arrangement
will apply to amounts paid or taxation years beginning after
January 1 of the year following the year in which Canada and Taiwan
confirm the domestic ratification of the Arrangement.
Broadly speaking, if ratified by both parties, the Arrangement
will encourage cross-border business and investment, allow
businesses and investors to better determine their cross-border tax
exposure and obligations, and provide protection against tax
discrimination and potential double-taxation.
For residents of Taiwan, the benefits of the Arrangement will
A reduced Canadian withholding tax rate of 10% on dividends
paid by a Canadian-resident corporation, if the Taiwanese dividend
recipient is a company that holds, directly or indirectly, at least
20% of the capital of the dividend payer. With respect to dividends
paid by other Canadian-resident corporations, the dividend will
normally be subject to a reduced rate of withholding tax of
A reduced Canadian withholding tax rate on interest payments (a
withholding tax rate of 10% will generally apply in circumstances
where the interest payment does not otherwise qualify for
Canada's 0% statutory withholding tax rate on conventional
interest paid to an arm's length lender).
A reduced Canadian withholding tax rate of 10% on royalty
payments made by a Canadian resident.
Residency tie-breaker rules that may be of assistance to
international business principals who have family or business
connections in both Canada and Taiwan.
The reduced withholding tax rate of 10% on cross-border
dividends is the same as the rate imposed on dividends under
Canada's tax treaty with China; however, the rate reduction is
less favourable than the reduction afforded under recent Canadian
tax treaties, notably Canada's tax treaty with Hong Kong.
While the Arrangement provides that a resident of Taiwan should
only be subject to Canadian tax on business profits attributable to
a permanent establishment of that resident in Canada, it should be
noted that the definition of a "permanent establishment"
under the Arrangement is different (and potentially broader) than
that typically contained in many of Canada's tax treaties. For
example, under the Arrangement, a resident of Taiwan would only be
considered to have a permanent establishment in Canada in respect
of a building site or construction or installation project if it
lasts for more than 6 months (as opposed to the 12 month period
required under many of Canada's tax treaties). Similarly, the
Arrangement includes a so-called "service permanent
establishment" rule in respect of services performed in
Canada, which is unusual in most of Canada's tax treaties (with
the US and China tax treaties being notable exceptions). It
is worth noting that, in these and other respects, the
Arrangement mirrors the provisions of Canada's tax treaty with
In order to access the reduced withholding tax rates provided
under the Arrangement, a Taiwanese company must have a sufficient
nexus to Taiwan. In this regard, consideration must be given to the
potential application of anti-avoidance provisions contained in the
Arrangement that deny the ability to claim the benefits afforded by
the Arrangement where, among other things, steps were taken to
position a particular person to qualify for benefits under the
Arrangement. The special anti-avoidance rules in the Arrangement
are comparable to the anti-avoidance provisions that have been
included in several recent Canadian tax treaties, including the
Canada-Hong Kong treaty.
For Canadian companies, one might expect that one benefit of the
Arrangement would be the ability to potentially repatriate business
profits from Taiwan as "exempt surplus" free from
Canadian tax. However, there is at least a technical concern that
the Arrangement might not be considered to be a qualifying
agreement or convention for the purposes of Canada's
"foreign affiliate" rules (and certain other provisions
of the Income Tax Act (Canada)). Hopefully, the Canada
Revenue Agency will provide clarity on this interpretive point in
the near future.
The foregoing provides only an overview and does not
constitute legal advice. Readers are cautioned against making any
decisions based on this material alone. Rather, specific legal
advice should be obtained.
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