PLEASE NOTE: THIS INFORMATION WAS ORIGINALLY SUBMITTED BY COOPERS & LYBRAND, CANADA
A protocol to amend the existing tax treaty between Canada and The Netherlands was recently signed at The Hague. The amendments must now clear the legislative process in each country before the changes can be effective.
The two most important amendments are provisions that will:
- eliminate withholding tax on patent and "know-how" royalties; and
- address the issue of the treaty partners assisting each other in collecting taxes from certain taxpayers.
The protocol also includes changes of a technical nature regarding:
- the existing 5% withholding tax imposed on "direct dividends" those paid to a parent or other corporation with a substantial
- interest in the payor; and
- gains derived from a controlling interest in a partnership, trust or estate, the value of which is derived principally from immoveable property.
Withholding Tax Reductions
The Netherlands was the first of Canada's tax treaty partners to act on the offer to reduce withholding taxes on "direct dividends" and eliminate withholding taxes on payments for the use of computer software. These were incorporated in the previous protocol which entered into force on July 30, 1994.
The new protocol includes changes that eliminate the 10% withholding tax on payments in respect of rights to use patented information or information concerning industrial, commercial or scientific experience. This follows Canada's commitment to negotiate bilateral withholding tax exemptions for such "know-how" royalties with all its treaty partners. (Withholding on these royalties were eliminated with the United States as part of the 1995 Canada-United States tax treaty protocol.)
Like the Canada-United States tax treaty, the exemption does not extend to payments for "know-how" provided in connection with a rental or franchise agreement. Similarly, the withholding tax on trademark royalties remains at 10%. Thus, taxpayers should have documentation available to substantiate the apportionment of any "mixed contract" or "package fee" royalties that include payments for the right to use a trademark.
Tax Collection Assistance
It has been anticipated that Canada would ask for an "assistance in collection" article in its current round of tax treaty negotiations. The new protocol with The Netherlands provides such an article. Under it, each country agrees, subject to the exercise of its discretion and to certain explicitly-provided conditions, to lend assistance and support to the other in the collection of "revenue claims". Revenue claims are defined to include all taxes covered by the treaty as well as interest, costs, additions to such taxes and civil penalties.
Effective Dates
The new protocol will enter into force on the 30th day after the latter of the dates on which the respective governments have notified each other that the legislative process in their respective countries has been completed. It is anticipated that this could occur by the end of 1997. The elimination of withholding tax on patent and "know-how" royalties will have effect with respect to payments made on or after the date of the latter notification ("the ratification date"). The assistance in collection provisions will have effect for revenue claims finally determined after the date that is 10 years before the date on which the protocol enters into force. This 10-year "look-back" is the same as that contained in the 1995 Canada-United States tax treaty protocol.
The information provided herein is for general guidance on matters of interest only. The application and impact of laws, regulations and administrative practices can vary widely, based on the specific facts involved. In addition, laws, regulations and administrative practices are continually being revised. Accordingly, this information is not intended to constitute legal, accounting, tax, investment or other professional advice or service.
While every effort has been made to ensure the information provided herein is accurate and timely, no decision should be made or action taken on the basis of this information without first consulting a Coopers & Lybrand professional. Should you have any questions concerning the information provided herein or require specific advice, please contact your Coopers & Lybrand advisor, or: David W. Steele, Coopers & Lybrand, 145 King Street West Toronto, Ontario M5H 1V8, Canada, Fax: 1-416-941-8415 OR E-mail: [email protected]
David W. Steele PricewaterhouseCoopers 145 King Street West Toronto, Ontario M5H 1V8 Canada Fax: 1-416-941-8415 E-mail: Click Contact Link
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