On December 1, 2016 the Canadian Department of Finance issued a press release announcing that on November 24, 2016 Canada and the Republic of Madagascar signed a Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Hereafter: the DTA).
Although the DTA has been signed, it has not entered into force yet. For the DTA to enter into force, the respective ratification procedures have to have been finalized in both countries.
Below we will discuss a selection of provisions included in the DTA of which we think they might interest our readers.
Taxes covered
Based on Article 2, Paragraph 3 of the DTA (“Taxes Covered”), the existing taxes to which the Convention shall apply are, in particular,
(a) in the case of Madagascar:
(i) the tax on income;
(ii) the synthetic tax (“impôt synthétique”);
(iii) the direct tax on hydrocarbons (“impôt direct sur les hydrocarbures”);
(iv) the tax on salaries and assimilated income;
(v) the tax on income from movable assets; and
(vi) the tax on gains from immovable;
including any withholding tax, prepayment or advance payment with respect to the aforesaid taxes;
(b) in the case of Canada, the income taxes imposed by the Government of Canada under the Income Tax Act.
Article 2, Paragraph 4 subsequently arranges that the DTA shall apply also to any identical or substantially similar taxes that are imposed after the date of signature of the Convention in addition to, or in place of, the existing taxes.
Residency
Article 4, Paragraph 3 of the DTA (“Resident”) arranges that where by reason of the provisions of paragraph 1 a company is a resident of both Contracting States, then its status shall be determined as follows:
(a) it shall be deemed to be a resident only of the State of which it is a national;
(b) if it is a national of neither of the States, it shall be deemed to be a resident only of the State in which its place of effective management is situated.
Article 4, Paragraph 4 of the DTA subsequently arranges that where by reason of the provisions of Article 4, Paragraph 1 a person other than an individual or a company is a resident of both Contracting States, the competent authorities of the Contracting States shall by mutual agreement endeavour to settle the question and to determine the mode of application of the Convention to such person. In the absence of mutual agreement, that person shall not be entitled to claim any relief or exemption from tax provided by this Convention.
Permanent establishment
Article 5, Paragraph 3 of the DTA (“Permanent Establishment”) arranges that a building site or construction or installation project constitutes a permanent establishment only if it lasts for more than six months.
Article 5, Paragraph 5 arranges that an insurance enterprise of a Contracting State is deemed, except with regard to reinsurance, to have a permanent establishment in the other State if it collects premiums in the territory of that other State or insures risks situated therein through a representative with the authority to commit it.
Immovable property
Article 6, Paragraph 1 of the DTA (“Income from Immovable Property”) arranges that income derived by a resident of a Contracting State from immovable property (including income from agriculture or forestry) situated in the other Contracting State may be taxed in that other State.
With respect to immovable property Article 13, Paragraph 1 of the DTA (“Capital Gains”) arranges that gains derived by a resident of a Contracting State from the alienation of immovable property situated in the other Contracting State may be taxed in that other State.
Article 13, Paragraph 4 of the DTA subsequently arranges that gains derived by a resident of a Contracting State from the alienation of :
(a) shares, the value of which is derived principally from immovable property situated in the other State;
(b) an interest in a partnership or trust, the value of which is derived principally from immovable property situated in that other State;
may be taxed in that other State.
Associated enterprises
Article 9, Paragraph 2 of the DTA (“Associated Enterprises”) contains a so-called appropriate adjustment clause.
Article 9, Paragraph 3 of the DTA contains a so-called statute of limitations clause which reads as follows:
“A Contracting State shall not change the profits of an enterprise in the circumstances referred to in paragraph 1 after the expiry of the time limits provided in its domestic laws and, in any case, after eight years from the end of the year in which the profits that would be subject to such change would, but for the conditions referred to in paragraph 1, have been attributed to that enterprise.”
Article 9, Paragraph 4 of the DTA subsequently arranges that the provisions of Article 9, Paragraphs 2 and 3 shall not apply in the case of fraud, wilful default or neglect.
Dividends
If the beneficial owner of the dividends is a resident of the other Contracting State, Article 10, Paragraph 2 of the DTA (“Dividends”) maximizes the withholding tax a Source State is allowed to withhold over dividends to:
(a) 5 per cent of the gross amount of the dividends if the beneficial owner is a company that controls directly or indirectly at least 25 per cent of the voting power in the company paying the dividends; and
(b) 15 per cent of the gross amount of the dividends, in all other cases.
Article 10, Paragraph 6 of the DTA reads as follows:
“Nothing in this Convention shall be construed as preventing a Contracting State from imposing on the earnings of a company attributable to a permanent establishment in that State, or the earnings attributable to the alienation of immovable property situated in that State by a company carrying on a trade in immovable property, a tax in addition to the tax that would be chargeable on the earnings of a company that is a national of that State, except that any additional tax so imposed shall not exceed 5 per cent of the amount of such earnings that have not been subjected to such additional tax in previous taxation years.”
Interest
If the beneficial owner of the interest is a resident of the other Contracting State, Article 11, Paragraph 2 of the DTA (“Interest”) maximizes the withholding tax a Source State is allowed to withhold over such interest to 10 per cent of the gross amount of the interest.
Royalties
If the beneficial owner of the royalties is a resident of the other Contracting State, Article 12, Paragraph 1 of the DTA (“Royalties”) maximizes the withholding tax a Source State is allowed to withhold over such royalties to 10 per cent of the gross amount of the royalties.
Article 12, Paragraph 3 subsequently arranges that notwithstanding the provisions of Article 12, Paragraph 2, the tax so charged shall not exceed 5 per cent of the gross amount of the royalties in the case of:
(a) copyright royalties and other like payments in respect of the production or reproduction of any literary, dramatic, musical or other artistic work (but not including royalties in respect of motion picture films nor royalties in respect of works on film or videotape or other means of reproduction for use in connection with television broadcasting); and
(b) royalties for the use of, or the right to use, computer software or any patent or for information concerning industrial, commercial or scientific experience (but not including any such royalty provided in connection with a rental or franchise agreement),
arising in a Contracting State and paid to a resident of the other Contracting State who is the beneficial owner of the royalties.
Anti-abuse clause
Article 27 of the DTA (“Miscellaneous Provisions”) contains several anti-abuse clauses.
Other
Furthermore the DTA contains a.o. provisions regarding a Mutual Agreement Procedure (Article 24) and regarding the Exchange of Information (Article 25).
Click here to be forwarded to the text of the DTA as available on the website of the Canadian Department of Finance.
Are you looking for other DTAs? Then check our section DTAs & TIEAs, a very efficient way to locate numerous DTAs.
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