ICLGThe International Comparative Legal Guide to: Corporate 2018 14th Edition A practical cross-border insight into work

Published by Global Legal Group, with contributions from:

Arqués Ribert Junyer Advocats Maples and Calder Avanzia Taxand Limited Mayer Brown International LLP Baker Tilly Klitou and Partners MIM Law Business Services EOOD Nagashima Ohno & Tsunematsu Blackwood & Stone LP P+P Pöllath + Partners Blake, Cassels & Graydon LLP SBH Law Office Boga & Associates Schindler Attorneys Cases & Lacambra Sele Frommelt & Partners Attorneys at Law Ltd. Čipčić-Bragadin and Associates Slaughter and May in cooperation with Tax Advisory TUK Ltd. SMPS Legal Concern Dialog law firm SSH Advisors Dobrinescu Dobrev SCA Stavropoulos & Partners Law Office Domański Zakrzewski Palinka T. P. Ostwal & Associates LLP, Chartered Accountants Greenwoods & Herbert Smith Freehills Tirard, Naudin K&D Law Firm Totalserve Management Limited Lenz & Staehelin VdA Vieira de Almeida LEX Law Offices Wachtell, Lipton, Rosen & Katz Ludovici Piccone & Partners Waselius & Wist The International Comparative Legal Guide to: Corporate Tax 2018

General Chapters:

1 Fiscal State Aid: the Kraken Wakes? – William Watson, Slaughter and May 1

2 The Implications for UK Taxpayers of BEPS Actions 2 (on Hybrid Mismatches), 4 (on Interest Deductibility) and 6 (on Treaty Access) – Sandy Bhogal & Kitty Swanson, Mayer Brown International LLP 6

Contributing Editor Country Question and Answer Chapters: William Watson, Slaughter and May 3 Albania Boga & Associates: Alketa Uruçi & Andi Pacani 12

Sales Director 4 Andorra Arqués Ribert Junyer Advocats: Daniel Arqués i Tomàs & Florjan Osmani Mireia Ribó i Bregolat 17

Account Director 5 Angola VdA Vieira de Almeida: Samuel Almeida & Joana Lobato Heitor 24 Oliver Smith 6 Armenia Concern Dialog law firm: Rustam Badasyan 30 Sales Support Manager Toni Hayward 7 Australia Greenwoods & Herbert Smith Freehills: Adrian O’Shannessy & Tony Frost 35 Editor 8 Austria Schindler Attorneys: Clemens Philipp Schindler & Martina Gatterer 44 Nicholas Catlin Senior Editors 9 Belarus SBH Law Office: Anastasiya Malakhova & Evgeniya Starosotnikova 52 Suzie Levy 10 Bulgaria Baker Tilly Klitou and Partners Business Services EOOD: Svetla Marinova Caroline Collingwood & Svetlana Dermendjieva 59 Chief Operating Officer 11 Blake, Cassels & Graydon LLP: Zvi Halpern-Shavim & Shavone Bazarkewich 65 Dror Levy Group Consulting Editor 12 Croatia Čipčić-Bragadin and Associates in cooperation with Tax Advisory TUK Ltd.: Alan Falach Silvije Čipčić-Bragadin & Edo Tuk 71 Publisher 13 Cyprus Totalserve Management Limited: Petros Rialas & Marios Yenagrites 75 Rory Smith 14 Finland Waselius & Wist: Niklas Thibblin & Mona Numminen 81 Published by Global Legal Group Ltd. 15 France Tirard, Naudin: Maryse Naudin & Jean-Marc Tirard 87 59 Tanner Street 16 Germany P+P Pöllath + Partners: Michael Best & Nico Fischer 95 London SE1 3PL, UK Tel: +44 20 7367 0720 17 Greece Stavropoulos & Partners Law Office: Ioannis Stavropoulos & Fax: +44 20 7407 5255 Vasiliki Koukoulioti 103 Email: [email protected] URL: www.glgroup.co.uk 18 Iceland LEX Law Offices: Garðar Víðir Gunnarsson & Guðrún Lilja Sigurðardóttir 110

GLG Cover Design 19 India T. P. Ostwal & Associates LLP, Chartered Accountants: T. P. Ostwal & F&F Studio Design Siddharth Banwat 116

GLG Cover Image Source 20 Ireland Maples and Calder: Andrew Quinn & David Burke 123 iStockphoto 21 Italy Ludovici Piccone & Partners: Paolo Ludovici & Stefano Tellarini 129 Printed by Ashford Colour Press Ltd 22 Japan Nagashima Ohno & Tsunematsu: Shigeki Minami 136 November 2017 23 Kazakhstan SSH Advisors: Safkhan Shahmammadli & Jahangir Juraev 144 Copyright © 2017 Global Legal Group Ltd. 24 Kosovo Boga & Associates: Andi Pacani & Fitore Mekaj 151 All rights reserved No photocopying 25 Liechtenstein Sele Frommelt & Partners Attorneys at Law Ltd.: Heinz Frommelt 156

ISBN 978-1-911367-83-3 26 Malta Avanzia Taxand Limited: Walter Cutajar & Mary Anne Inguanez 162 ISSN 1743-3371 27 Mexico SMPS Legal: Ana Paula Pardo Lelo de Larrea & Alexis Michel 170 Strategic Partners 28 Mozambique VdA Vieira de Almeida: Samuel Almeida & Ana Raquel Costa 177

29 Nigeria Blackwood & Stone LP: Kelechi Ugbeva 183

30 Poland Domański Zakrzewski Palinka: Joanna Wierzejska & Tomasz Leszczewski 188

31 Portugal VdA Vieira de Almeida: Samuel Almeida & Bárbara Miragaia 195

32 Romania Dobrinescu Dobrev SCA: Luisiana Dobrinescu 201

33 Serbia MIM Law: Tanja Ungura 207

Continued Overleaf

Further copies of this book and others in the series can be ordered from the publisher. Please call +44 20 7367 0720

Disclaimer This publication is for general information purposes only. It does not purport to provide comprehensive full legal or other advice. Global Legal Group Ltd. and the contributors accept no responsibility for losses that may arise from reliance upon information contained in this publication. This publication is intended to give an indication of legal issues upon which you may need advice. Full legal advice should be taken from a qualified professional when dealing with specific situations.

WWW.ICLG.COM The International Comparative Legal Guide to: Corporate Tax 2018

Country Question and Answer Chapters:

34 Spain Cases & Lacambra: Ernesto Lacambra & Marc Montserrat 212

35 Switzerland Lenz & Staehelin: Pascal Hinny & Jean-Blaise Eckert 218

36 Turkey K&D Law Firm: Murat Bal & Ezgi Kumas 228

37 United Kingdom Slaughter and May: Zoe Andrews & William Watson 235

38 USA Wachtell, Lipton, Rosen & Katz: Jodi J. Schwartz & Swift S.O. Edgar 244 Chapter 11

Canada Zvi Halpern-Shavim

Blake, Cassels & Graydon LLP Shavone Bazarkewich

1 Tax Treaties and Residence 1.5 Are treaties overridden by any rules of domestic law (whether existing when the treaty takes effect or introduced subsequently)? 1.1 How many treaties are currently in force in your jurisdiction? While domestic legislation generally does not override treaties, treaties are subject to the provisions of the Income Tax Conventions Canada currently has 93 treaties that are in force, four treaties that Interpretation Act (Canada) which, among other things, provides are signed but not yet in force, and seven treaties that are either that the general anti-avoidance rule in the Income Tax Act can apply under negotiation or re-negotiation. In addition, Canada currently to eliminate treaty benefits if it is determined that a has has 22 tax information exchange agreements that are in force, two been abused. Canada’s tax treaties are generally also subject to a that are signed but not yet in force, and six under negotiation. general tax benefit rule (expressly included in many of Canada’s tax treaties) whereby a tax treaty will not be applied to deprive a 1.2 Do they generally follow the OECD Model Convention taxpayer of a benefit otherwise available under domestic . or another model? Similarly, and as mentioned above, the principal purpose test that Canada will adopt for treaties covered by the MLI may operate Canada’s tax treaties generally follow the OECD model. to deny treaty benefits in certain circumstances. The MLI also contains a number of other provisions which would modify such 1.3 Do treaties have to be incorporated into domestic law treaties in order to implement other tax treaty measures contained before they take effect? in the BEPS Project.

Treaties take effect once Parliament enacts legislation incorporating 1.6 What is the test in domestic law for determining the them into domestic law. residence of a company?

1.4 Do they generally incorporate anti-treaty shopping A corporation will be resident in Canada if it is incorporated under rules (or “limitation on benefits” articles)? the laws of Canada or a province, or if central management and control of the corporation is exercised in Canada, subject to the Canada’s tax treaty with the U.S. has a specific limitation on benefits application of certain deeming and tie-breaker rules contained in rule that is derived from the limitation of benefits rule in the U.S. Canada’s treaties and domestic law. model treaty. Additionally, some of Canada’s treaties have narrow limitation on benefits provisions, e.g., benefits are not available to 2 Transaction certain types of entities. On June 7, 2017, Canada signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion 2.1 Are there any documentary taxes in your jurisdiction? and Profit Shifting (MLI) which contains certain measures intended to address “treaty shopping”. Through the MLI, Canada’s tax There are no documentary taxes in Canada. treaties which are covered by the MLI will be amended, among other things, to incorporate (a) a stated intention for tax treaties to 2.2 Do you have Value Added Tax (or a similar tax)? If so, eliminate without creating opportunities for non- at what rate or rates? taxation or reduced taxation through or avoidance (including through treaty-shopping arrangements), and (b) a Federal goods and services tax (GST) is a VAT that applies at a rate principal purpose test, which will operate to deny treaty benefits in of 5%. Some provinces have harmonised their provincial certain circumstances where a principal purpose of an arrangement base with the federal GST, resulting in a harmonised sales tax (HST) or transaction was to obtain a treaty benefit. with rates varying by province between 13%–15%. The province of Canada has also indicated that, where appropriate, it may seek Quebec imposes its own provincial VAT in addition to the 5% GST to negotiate on a bilateral basis a detailed limitation on benefits at a rate of 9.975%. provision with its treaty partners.

ICLG TO: CORPORATE TAX 2018 WWW.ICLG.COM 65 © Published and reproduced with kind permission by Global Legal Group Ltd, London Blake, Cassels & Graydon LLP Canada

2.3 Is VAT (or any similar tax) charged on all transactions 3.2 Would there be any withholding tax on royalties paid or are there any relevant exclusions? by a local company to a non-resident?

VAT applies to nearly all supplies of property and services, but there Canada levies a 25% withholding tax on royalties paid by Canadian are exceptions. Financial services are exempt from VAT, as are residents to non-residents. There are a number of domestic healthcare services, certain educational services, and most supplies exemptions, the most significant of which is for royalties or similar by registered charities. payments in respect of copyright in respect of the production or reproduction of dramatic, musical and artistic works. Additionally, Canada’s treaties generally reduce the withholding tax on royalties 2.4 Is it always fully recoverable by all businesses? If not, Canada what are the relevant restrictions? to 10% where such royalties are paid to beneficial owners who are entitled to benefits under the relevant treaty, and in some cases eliminate withholding tax entirely for royalties paid for the use of VAT is fully recoverable by a business to the extent that it is itself computer software. engaged in a commercial activity (i.e., generally, an activity that leads to making VAT taxable supplies). To the extent that the Domestic tax law includes certain anti-avoidance rules which business is engaged in exempt activities, such as making supplies of may impose additional withholding obligations in respect of financial services, its recovery of VAT on its input costs is restricted. certain “back-to-back” or “character substitution” arrangements, that reduce or eliminate the withholding tax that would otherwise apply to a royalty either by interposing an intermediary between a 2.5 Does your jurisdiction permit “establishment only” Canadian resident payor and the ultimate non-resident recipient, or VAT grouping, such as that applied by Sweden in the by substituting for the royalty an economically similar payment that Skandia case? attracts less withholding tax. No, Canada does not permit “establishment only” VAT grouping. 3.3 Would there be any withholding tax on interest paid by a local company to a non-resident? 2.6 Are there any other transaction taxes payable by companies? Canada levies a 25% withholding tax on interest paid or credited by a Canadian resident to a non-resident. However, interest payments Yes. The provinces of British Columbia, Saskatchewan and made by a Canadian resident to an arm’s length non-resident are Manitoba impose provincial sales and use taxes, primarily on sales generally exempt from withholding tax unless the interest is and leases of tangible property to end users but also on certain computed by reference to commodity price, cash flow, or certain services. similar amounts (i.e., the interest is “participating interest”). In addition, a non-arm’s length payment of interest (that is not 2.7 Are there any other indirect taxes of which we should participating interest) is exempt from withholding tax under the be aware? Canada-U.S. tax treaty, and Canada’s other tax treaties typically reduce the withholding on interest to 10%, in each case Insurance premiums are financial instruments and exempt from where such dividends are paid to beneficial owners who are entitled VAT; however, it is useful to be aware of the and provincial to benefits under the relevant treaty. taxes applicable to them. Certain provinces also impose taxes and/ As with royalty payments, domestic tax law includes certain or penalties on insured persons who contract with insurers that are anti-avoidance rules which may impose additional withholding not licensed in the jurisdiction. Other taxes can apply to specific obligations in respect of certain “back-to-back” or “character goods. For example, there are excise taxes on alcohol and tobacco, substitution” debt arrangements. provincial fuel and gasoline taxes, and more recently, carbon taxes.

3.4 Would relief for interest so paid be restricted by 3 Cross-border Payments reference to “thin capitalisation” rules?

Canada permits the deduction of interest if the amount borrowed 3.1 Is any withholding tax imposed on dividends paid by is used for the purpose of producing income or constitutes the a locally resident company to a non-resident? unpaid purchase price of property used for the purpose of producing income. There are a number of limitations on interest deductibility, Canada levies a 25% withholding tax on the gross amount of including thin capitalisation rules which may limit the deduction of dividends paid by a Canadian-resident corporation to a non- interest paid to specified non-residents (including, in broad terms, resident shareholder. The 25% withholding tax may be reduced by non-residents that hold 25% or more, by votes or by fair market treaty. Canada’s treaties typically reduce the withholding tax rate value, of all of the issued and outstanding stock of the Canadian- on dividends to 15% where such dividends are paid to beneficial resident corporate borrower), and treat the excess interest as a owners who are entitled to benefits under the relevant treaty, and to dividend subject to withholding tax. 5% in the case of corporate shareholders that own or control more than 10% of the voting shares of the Canadian-resident corporation where such shareholder is the beneficial owner and is entitled to 3.5 If so, is there a “safe harbour” by reference to which benefits under the relevant treaty. tax relief is assured?

The thin capitalisation rules limit interest deductibility on interest payments made to specified non-residents if the debtor’s debt-to- equity ratio exceeds 1.5 to one. Any interest denied by the rule

66 WWW.ICLG.COM ICLG TO: CORPORATE TAX 2018 © Published and reproduced with kind permission by Global Legal Group Ltd, London Blake, Cassels & Graydon LLP Canada

cannot be carried forward or otherwise applied, and as noted above, will be treated as a dividend subject to withholding tax. 4 Tax on Business Operations: General The equity side of the debt-to-equity ratio in respect of Canadian resident corporations is comprised of: (a) the company’s 4.1 What is the headline rate of tax on corporate profits? retained earnings at the beginning of the year, determined on an unconsolidated basis; (b) the average of the company’s contributed The net federal corporate tax rate is generally 15% for income earned surplus at the beginning of each calendar month that ends in the in any province of Canada. In addition to the federal corporate tax year, counting only amounts that were contributed by specified non- rate, each province levies a similar corporate tax at rates that range residents; and (c) the average of the company’s paid-up capital at the from 11% to 16%. beginning of each calendar month that ends in the year, excluding Canada the paid-up capital of shares that are not owned by specified non- 4.2 Is the tax base accounting profit subject to resident shareholders. adjustments, or something else? The debt side of the formula is the average of all amounts, each of which is, in respect of a calendar month that ends in the year, the The tax base upon which the corporate tax is levied is determined greatest total amount at any time in the month of the company’s in accordance with specific statutory rules. The starting point outstanding debts to specified non-residents (certain debts are for the calculation is the company’s profit, as determined under excluded for this purpose). general commercial principles. After profit is determined, specific adjustment rules in the Income Tax Act for both income inclusions 3.6 Would any such rules extend to debt advanced by a and expense deductions apply to determine income for tax purposes. third party but guaranteed by a parent company? 4.3 If the tax base is accounting profit subject to Withholding tax on interest payments and the thin capitalisation adjustments, what are the main adjustments? rules will apply to certain debt advanced by a third party that is advanced as part of a “back-to-back” loan arrangement (which for A corporation’s tax profit will often differ significantly from its this purpose includes certain “back-to-back” loans and loans secured financial statement income. For example, no “reserve” amounts are by property where the third party has a right to use that property). permitted unless specifically authorised in the Income Tax Act, and there are very few reserves so provided. Additionally, depreciation 3.7 Are there any other restrictions on tax relief for and depletion rates for assets and mineral, timber and oil and gas interest payments by a local company to a non- properties differ significantly from financial statement depreciation resident? and amortisation. These are only a few of the examples of the differences between commercial accounts and tax accounts. There are no additional rules that specifically target the deduction of interest payable by a Canadian-resident company to a non- 4.4 Are there any tax grouping rules? Do these allow resident. However, there are a number of other rules applicable to for relief in your jurisdiction for losses of overseas certain taxpayers that may limit interest deductions. For example, subsidiaries? interest expense relating to the construction of a building may not be deductible and instead may be required to be capitalised as part Under current law, there is no consolidation or tax grouping of the cost of the building. regime. Instead, in-group tax relief is effected by way of “loss consolidation” transactions, using interest expense or un-deducted 3.8 Is there any withholding tax on property rental depreciation expenses. These transactions are well understood and payments made to non-residents? are not generally considered abusive by the tax authorities.

There is a withholding tax of 25% on the gross amount of rental 4.5 Do tax losses survive a change of ownership? payments made by residents of Canada to non-residents for the use of any property (including real property) in Canada. In some The Income Tax Act contains rules aimed at limiting loss trading. circumstances, taxpayers can elect to report rental income on real Generally, losses incurred before a change of control cannot property in Canada on a separate Canadian tax return and have the be deducted from income in years after the change of control. income taxed on a net basis under regular Canadian income tax Similarly, losses incurred after the change of control cannot be rules. deducted from income in years before the change of control. However, provided certain conditions are met, non-capital losses 3.9 Does your jurisdiction have rules? arising from a particular business prior to a change of control can be carried forward to offset of the same business in the Canada has transfer pricing rules that include contemporaneous years after the change of control. documentation rules, and penalties that apply if an adjustment exceeds a de minimis threshold, and/or when contemporaneous 4.6 Is tax imposed at a different rate upon distributed, as documentation requirements have not been met. The transfer opposed to retained, profits? pricing rules adopt the arm’s length standard, and the OECD transfer pricing guidelines are considered relevant, but not determinative, in A corporation’s tax rate is the same regardless of whether profits assessing arm’s length price, terms and conditions. are distributed or retained. Note that certain corporations pay an additional tax on portfolio and investment income, which currently is refundable when dividends are paid. These rules are not relevant to most non-resident investors.

ICLG TO: CORPORATE TAX 2018 WWW.ICLG.COM 67 © Published and reproduced with kind permission by Global Legal Group Ltd, London Blake, Cassels & Graydon LLP Canada

4.7 Are companies subject to any significant taxes not 6.2 Is there a difference between the taxation of a local covered elsewhere in this chapter – e.g. tax on the subsidiary and a local branch of a non-resident occupation of property? company (for example, a branch profits tax)?

Companies are no longer subject to federal capital tax in Canada, Subsidiaries incorporated in Canada are generally deemed to be other than companies that are financial institutions. resident in Canada and as such subject to on their worldwide income. Dividends paid by a Canadian subsidiary to a non-resident shareholder would generally be subject to Canadian 5 Capital Gains withholding tax as discussed above. Canada On the other hand, a non-resident company which carries on 5.1 Is there a special set of rules for taxing capital gains business in Canada is generally subject to income tax in Canada only and losses? on the income from the business carried on in Canada, or on gains realised on the disposition of certain “taxable Canadian property”. Canada provides a base preference for capital gains. That is, one- Somewhat like profits of a Canadian subsidiary that are distributed half of a is included in income and is taxed at ordinary as dividends, profits of a branch that are considered withdrawn from rates. Capital losses may only be used to offset capital gains, and Canada may be subject to a “branch tax” of 25% of such profits. may be carried back three years and forward indefinitely. Amounts reinvested in Canada as determined by detailed statutory and regulatory rules may reduce the amount of branch profits that are considered withdrawn from Canada. 5.2 Is there a participation exemption for capital gains?

Canada does not have a participation exemption for capital gains. 6.3 How would the taxable profits of a local branch be determined in its jurisdiction?

5.3 Is there any special relief for reinvestment? The taxable profits of a local branch of a foreign company are generally determined in the same manner as a Canadian-resident The Income Tax Act provides a rollover for certain voluntary and company. involuntary dispositions of capital property where “replacement property” (within the meaning of the Income Tax Act) is acquired within a prescribed period following the time the property is deemed 6.4 Would a branch benefit from double tax relief in its to have been disposed of. The rollover provisions for voluntary jurisdiction? dispositions are more limited than the provisions governing involuntary dispositions. Among other things, a “voluntary” rollover Under the federal Income Tax Act, the branch tax rate is generally is only available for property that was used for the purpose of gaining reduced where the corporation is a resident of a country that has or producing income (other than rental property) and is real or a tax treaty with Canada which reduces withholding tax rates immovable property. on dividends. The applicable rate is that which applies where a non-resident corporation owns all of the shares of a Canadian- resident company (this will often be 5%). In addition, under 5.4 Does your jurisdiction impose withholding tax on the proceeds of selling a direct or indirect interest in local some of Canada’s tax treaties, the first $500,000 of a non-resident assets/shares? corporation’s Canadian-source income may be exempt from the branch tax base, and/or the non-resident corporation may not be (and reporting and withholding obligations) arise subject to the branch tax unless it has a where a non-resident person disposes of “taxable Canadian property”. in Canada, in each case provided such corporation qualifies for This includes, for example, shares of a private company (Canadian benefits under the relevant treaty. or not, but not mutual fund corporations, as defined for Canadian tax purposes) and interests in trusts (but not mutual fund trusts, as defined 6.5 Would any withholding tax or other similar tax be for Canadian tax purposes) and partnerships that in the previous 60 imposed as the result of a remittance of profits by the months have derived more than 50% of their value from real property branch? and/or certain types of resource and timber properties situated in Canada. Shares of companies listed on certain stock exchanges, There is no other tax that would be imposed as a consequence of mutual fund corporations and mutual fund trusts that so derive their remitting profits by the branch to the head office. value will constitute taxable Canadian property only if the taxpayer and persons not dealing at arm’s length with the taxpayer owned 25% or more of the entity in the previous 60 months. Certain asset 7 Overseas Profits dispositions will also be subject to withholding tax on disposition by a non-resident, such as dispositions of real property in Canada. 7.1 Does your jurisdiction tax profits earned in overseas branches? 6 Local Branch or Subsidiary? Canadian residents are liable to Canadian tax on their worldwide income. Consequently, a Canadian-resident company will be 6.1 What taxes (e.g. capital ) would be imposed upon subject to Canadian tax on profits earned from overseas branches. the formation of a subsidiary? The Income Tax Act allows a foreign for foreign taxes paid. This credit is limited to the Canadian tax otherwise payable No stamp, capital or wealth duties are imposed on the formation of in respect of foreign source income and is computed on a country- a subsidiary.

68 WWW.ICLG.COM ICLG TO: CORPORATE TAX 2018 © Published and reproduced with kind permission by Global Legal Group Ltd, London Blake, Cassels & Graydon LLP Canada

by-country basis, so that credits for foreign tax paid to one country disposed of constitutes “taxable Canadian property”. This includes cannot be used to reduce Canadian tax on foreign-source income shares of a private company (Canadian or not, but not mutual fund from another country. In addition, foreign tax credits are computed corporations) and interests in trusts (but not mutual fund trusts) and separately in respect of business income and non-business income. partnerships that in the previous 60 months have derived more than 50% of their value from real property and/or certain types of resource and timber properties situated in Canada. Shares of companies listed 7.2 Is tax imposed on the receipt of dividends by a local company from a non-resident company? on certain stock exchanges, mutual fund corporations and mutual fund trusts that so derive their value will generally constitute taxable Canadian property only if the taxpayer and persons not dealing at Dividends received from non-resident companies are included arm’s length with the taxpayer owned 25% or more of the entity in in a Canadian resident’s income for Canadian tax purposes. That Canada the previous 60 months. said, the Income Tax Act effectively exempts dividends received by a Canadian-resident corporation from “foreign affiliates” if the dividends are derived from active business profits earned by a 8.3 Does your jurisdiction have a special tax regime foreign affiliate that is resident in a country with which Canada has for Real Estate Investment Trusts (REITs) or their a tax treaty or a tax information and exchange agreement, and the equivalent? profits are earned by the affiliate through a permanent establishment in such a country. The foreign affiliate rules are complex, and are Yes. In general terms, REITs are treated as pass-through entities linked with Canada’s controlled foreign corporation rules (discussed provided they are structured to comply with certain “specified below). investment flow-through” trust rules.

7.3 Does your jurisdiction have “controlled foreign 9 Anti-avoidance and Compliance company” rules and, if so, when do these apply?

Canadian-resident taxpayers that own shares of a “controlled 9.1 Does your jurisdiction have a general anti-avoidance foreign affiliate” at the end of a taxation year of the affiliate ending or anti-abuse rule? in a taxation year of the taxpayer, are required to include certain types of passive income and certain capital gains (“foreign accrual Canada has had a statutory general anti-avoidance rule since 1988. property income”) in computing the taxpayer’s income for the year. There is now a substantial amount of jurisprudence considering Where the taxpayer is a Canadian-resident corporate taxpayer, the the application of the rule. Note that Canada also has a number of foreign accrual property income rules work in concert with the targeted anti-avoidance rules. foreign affiliate rules mentioned above. It should be noted that investments made in a “foreign affiliate” by 9.2 Is there a requirement to make special disclosure of a Canadian company that is controlled by a non-resident company avoidance schemes? will generally be subject to the so-called “foreign affiliate dumping rules”. These rules are complex. Among other things, in certain The federal Income Tax Act and the Quebec income tax act require situations, the amount of any such investment by a Canadian the reporting of certain types of transactions if certain company will be deemed a dividend paid by the Canadian company conditions are met. to its non-resident shareholder and the deemed dividend will be subject to Canadian withholding tax. 9.3 Does your jurisdiction have rules which target not only taxpayers engaging in tax avoidance but also 8 Taxation of Commercial Real Estate anyone who promotes, enables or facilitates the tax avoidance?

8.1 Are non-residents taxed on the disposal of The federal Income Tax Act provides that penalties can be levied commercial real estate in your jurisdiction? on third parties (such as tax preparers, lawyers or accountants, as applicable) who, in general terms, knowingly or in circumstances Yes, non-residents are generally taxed on any gain realised on amounting to culpable conduct make or participate in the making disposition of real property situated in Canada. Whether or not the of false statements or omissions in respect of another person’s tax gain is taxed as a capital gain (one-half of the gain is subject to tax affairs. at ordinary rates) or as income (the entire gain on income account is subject to tax at ordinary rates) depends on the application of principles developed by the courts. 9.4 Does your jurisdiction encourage “co-operative compliance” and, if so, does this provide procedural The purchaser of the property may withhold 25% (or 50% in certain benefits only or result in a reduction of tax? cases) of the purchase price under the federal Income Tax Act (and separate withholding may be effected under the laws of the province The OECD’s cooperative compliance pillars underlie some recent of Quebec where applicable), unless the seller has obtained a clearance compliance initiatives and priorities of the Canadian tax authorities. certificate from the relevant tax authorities on a timely basis. These broadly include: (1) commercial awareness; (2) impartiality; (3) proportionality; (4) openness; and (5) responsiveness. Canadian 8.2 Does your jurisdiction impose tax on the transfer of tax authorities view the final pillar, responsiveness, as a two-way an indirect interest in commercial real estate in your street, involving reciprocal transparency between Canadian tax jurisdiction? authorities and taxpayers. Canada also has a voluntary disclosure programme which promotes Canada will tax an indirect transfer of real property if the interest compliance with tax laws by encouraging taxpayers to voluntarily

ICLG TO: CORPORATE TAX 2018 WWW.ICLG.COM 69 © Published and reproduced with kind permission by Global Legal Group Ltd, London Blake, Cassels & Graydon LLP Canada

correct previous errors or omissions in their tax affairs. Taxpayers border surplus stripping, including rules targeting “back-to-back” are required to pay any additional taxes owing as a result of the loan and royalty arrangements and reorganisations undertaken by correction or an error or omission; however, relief from interest, non-residents of Canadian subsidiaries. In addition, the government prosecution and penalties may be provided under the programme. has recently affirmed Canada’s commitment to combatting offshore tax evasion. 10 BEPS and 10.3 Does your jurisdiction support public Country-by- Country Reporting (CBCR)? 10.1 Has your jurisdiction introduced any legislation in response to the OECD’s project targeting Base

Canada Canada supports country-by-country reporting. Canada has Erosion and Profit Shifting (BEPS)? passed final legislation to impose country-by-country reporting requirements for large MNEs the ultimate parent entity of which Final legislation was passed in Canada on December 15, 2016 to or (in certain cases) a constituent member of which is resident in implement country-by-country reporting requirements for large Canada. This measure will only apply to MNEs with total annual multinational enterprises (MNEs), as noted further below, based on consolidated group revenue of at least €750 million. Canada will the recommendations of the BEPS project. exchange country-by-country reports with other countries that have The 2017 Federal Budget indicated that the government had begun enacted similar legislation and with which Canada has an agreement to implement the OECD’s BEPS recommendation that certain forms to exchange tax information. The new reporting requirement of tax rulings be automatically exchanged between tax authorities. applies to reporting fiscal years of MNE groups that began on or In addition, Canada became a signatory to the MLI on June 7, 2017. after January 1, 2016. The MLI is now subject to domestic approval and may enter into force as early as January 1, 2019 (for withholding taxes) and for 10.4 Does your jurisdiction maintain any preferential tax taxable periods beginning after June 1, 2019 (for all other taxes). regimes such as a patent box?

10.2 Does your jurisdiction intend to adopt any legislation Canada does not have any federal preferential tax regimes such as to tackle BEPS which goes beyond what is a patent box. That said, Canada has a number of incentives built recommended in the OECD’s BEPS reports? into the Income Tax Act designed to encourage investment in certain sectors, such as natural resources and research and development. Canada has not introduced any legislation to tackle BEPS which Patent box regimes have been proposed or enacted in certain specifically goes beyond what is recommended in the OECD’s BEPS provinces (for instance, Saskatchewan) which would provide relief reports. That said, Canada has introduced a number of anti-avoidance in respect of the applicable provincial component of corporate tax. rules aimed at curtailing what it perceives as impermissible cross-

Zvi Halpern-Shavim Shavone Bazarkewich Blake, Cassels & Graydon LLP Blake, Cassels & Graydon LLP 199 Bay Street 199 Bay Street Suite 4000, Commerce Court West Suite 4000, Commerce Court West Toronto ON M5L 1A9 Toronto ON M5L 1A9 Canada Canada

Tel: +1 416 863 2355 Tel: +1 416 863 2994 Email: [email protected] Email: [email protected] URL: www.blakes.com URL: www.blakes.com

Zvi’s practice involves all areas of commodity tax, with a focus on Shavone’s practice focuses on a broad range of Canadian domestic planning and advising clients in connection with the goods and and international income tax law issues. Prior to joining Blakes, services tax, the harmonised sales tax, provincial sales tax, insurance Shavone completed a J.D./M.B.A. at the University of Toronto, where premium tax, valuation, classification, / she focused on the impact of domestic and international to restrictions, and various aspects of the North American Free business strategy and decision-making. Agreement and Canada’s other bilateral trade agreements. Zvi also represents taxpayers at all levels in the tax audit and appeal process. Zvi is recognised as a leading lawyer in International Tax Review’s Leaders 2017 (6th Edition).

Blakes tax lawyers are recognised globally as leaders in all areas of tax. We have one of the leading tax practices in Canada, with offices in Montréal, Toronto, Calgary and Vancouver. Our transactional practice covers all areas of corporate income tax, focusing particularly on cross-border transactions, international reorganisations, investment funds, private equity, energy, corporate finance and structured finance. With a dedicated team of tax controversy & litigation lawyers, we also assist a wide range of public and private clients in resolving tax disputes, whether in the course of the audit process, through administrative appeals or negotiated settlements, or, where necessary, in court. We also have a specialised team of lawyers that advises on commodity tax, customs and trade law, including sales taxes, GST and customs. Whether an issue is local or multi-jurisdictional, practice-area specific or interdisciplinary, Blakes handles transactions of all sizes and levels of complexity.

70 WWW.ICLG.COM ICLG TO: CORPORATE TAX 2018 © Published and reproduced with kind permission by Global Legal Group Ltd, London Current titles in the ICLG series include:

■ Alternative Investment Funds ■ Insurance & Reinsurance ■ Anti-Money Laundering ■ International Arbitration ■ Aviation Law ■ Lending & Secured Finance ■ Business Crime ■ Litigation & Dispute Resolution ■ Cartels & Leniency ■ Merger Control ■ Class & Group Actions ■ Mergers & Acquisitions ■ Competition Litigation ■ Mining Law ■ Construction & Engineering Law ■ Oil & Gas Regulation ■ Copyright ■ Outsourcing ■ Corporate Governance ■ Patents ■ Corporate Immigration ■ Pharmaceutical Advertising ■ Corporate Investigations ■ Private Client ■ Corporate Recovery & Insolvency ■ Private Equity ■ Corporate Tax ■ Product Liability ■ Cybersecurity ■ Project Finance ■ Data Protection ■ Public Investment Funds ■ Employment & Labour Law ■ Public Procurement ■ Enforcement of Foreign Judgments ■ Real Estate ■ Environment & Climate Change Law ■ Securitisation ■ Family Law ■ Shipping Law ■ Fintech ■ Telecoms, Media & Internet ■ Franchise ■ Trade Marks ■ Gambling ■ Vertical Agreements and Dominant Firms

59 Tanner Street, London SE1 3PL, United Kingdom Tel: +44 20 7367 0720 / Fax: +44 20 7407 5255 Email: [email protected]

www.iclg.com