Canada: “Prévost Car”: Dutch Intermediary Is “Beneficial Owner” Under Treaty

In The Queen v. Prévost Car Inc., the Federal Court of Appeal dismissed the Minister of National Revenue's appeal from the Tax Court's decision that the Canadian corporate taxpayer's parent, a Dutch holding company, was the "beneficial owner" of dividends which entitled it to a reduction in the 25% rate of Canadian non-resident withholding tax to 5% under Article 10(2) of the Canada- Netherlands Income Tax Convention (the "Treaty").

The term "beneficial owner" is not defined in any of Canada's tax treaties. In its decision, the Federal Court of Appeal emphasized the value of the Commentaries on the OECD Model Convention as a "widely-accepted guide to the interpretation and application of the provisions of existing bilateral conventions". It also endorsed reliance on later Commentaries, to the extent that they are not in conflict with Commentaries existing at the time the specific tax treaty was entered into and have not been objected to by either treaty partner.

The trial judge's decision had been based in part on his interpretation of "beneficial owner" in Article 10(2) of the Treaty as "the person who receives the dividends for his or her own use and enjoyment and assumes the risk and control of the dividend[s] he or she received". The Federal Court of Appeal rejected the Minister's argument that the trial judge had misinterpreted the term "beneficial owner", concluding that:

"[t]he Judge's formulation captures the essence of the concepts of "beneficial owner", "bénéficiaire effectif" as it emerges from the review of the general, technical and legal meanings of the terms. Most importantly, perhaps, the formulation accords with what is stated in the OECD Commentaries and in the [OECD] Conduit Companies Report."

In contrast, the Court concluded that the Minister's formulation of the term "beneficial owner"— the person who can, in fact, ultimately benefit from the dividend — would "jeopardize the relative degree of certainty and stability that a tax treaty seeks to achieve" and lacked support in either Canadian domestic law or the international community.

The trial judge had also based his decision on significant findings of fact, which included his findings that the Dutch parent was not a conduit for, or an agent or nominee of, its shareholders, that it enjoyed all the attributes of ownership over the dividends it received, and that it was not legally obligated to pay out such dividends to its shareholders either under Dutch law, its Deed of Incorporation or the dividend policy provided in the Shareholders' Agreement between its shareholders. Furthermore, in analyzing beneficial ownership in a corporate context, the trial judge had concluded that the corporate veil can only be pierced where the corporate intermediary is a conduit for another person and either it has no discretion with respect to the use or application of funds put through it as conduit, or it has agreed to act on another person's behalf pursuant to that person's instructions without any right of independent action.

Reviewing the trial judge's findings of fact, the Court concluded that the Minister had failed to show that the trial judge had committed any error of law in his interpretation of the parties' contractual relationships, or any palpable or overriding error in his findings of fact, which the Court found were supported by the evidence. Accordingly, the Minister's appeal was dismissed.

The Federal Court of Appeal's decision provides some welcome certainty to multinationals with foreign holding companies which receive dividends from Canadian subsidiaries in circumstances similar to Prévost Car. However, the decision leaves open the question of what contractual obligations a holding company may assume without crossing the line to become a mere conduit, agent or nominee acting for the account of a beneficial owner for treaty purposes.

The full text of the Federal Court of Appeal's decision is available from the Court's website at: http://decisions.fca-caf.gc.ca/en/index.html

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