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Approved Changes (2)


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Canadian Appeals Court Overturns Tax Court's Disallowance of Interest Deductions for Intragroup Loan

Canada's Court of Appeal has overturned a 2015 ruling by the Tax Court that disallowed an interest deduction by a Canadian subsidiary of the Wendy's/Tim Horton group (subsequently split) for an intragroup loan made in 2002.


The case involved a series of transactions between 18 March 2002 and 27 March 2002 as follows:

  • Wendy's International Inc. (Wendy's), the ultimate parent of the group, loaned CAD 234 million to its U.S. subsidiary, Delcan Inc. (Delcan), at an interest rate not to exceed 7 percent.
  • Delcan then loaned the full amount to TDL Group Co. (TDL), the Canadian appellant in the case, at a rate of 7.125%.
  • TDL then used the full amount of the loan from Delcan to purchase additional common shares in its wholly-owned U.S. subsidiary, Tim Donut U.S. Limited, Inc. (Tim's U.S.).
  • Tim's U.S. then made an interest-free loan to Wendy's, evidenced by a promissory note.

Following the above series of transactions, Wendy's decided to have Tim's U.S. incorporate a new U.S. subsidiary, Buzz Co., in May 2002. The promissory note was then assigned to Buzz Co. as payment for Buzz Co.'s shares, and was repaid on 4 November 2002 through the issuance of a new note for CAD 234 million with an interest rate of 4.75%.

Following a review of the series of transactions, Canada's Revenue Agency disallowed TDL's claim for a deduction of the interest paid to Delcan for the period 28 March to 3 November 2002. This was appealed with the Tax Court.

The Tax Court found that there was no reasonable expectation of earning income at the time of the TDL's purchase of additional shares in Tim's U.S., and found that the sole purpose of the borrowed funds was to facilitate an interest free loan to Wendy's while creating an interest deduction for TDL. Since the Tax Court determined that TDL failed to meet the income earning purpose test, the disallowance of the interest expense for the period was upheld.

Court of Appeal Decision

The Court of Appeal found that the Tax Court had incorrectly applied the income earning purpose test. In particular, it questioned how the Tax Court determined that no income earning purpose existed for the transaction before 4 November 2002, but did exist after.

According to the Court of Appeal, the income earning purpose test is to be applied when the borrowed funds are used, which in this case was when TDL used the funds to acquire additional shares in Tim's U.S. It said that in this regard the Tax Court erred in determining that TDL needed a reasonable expectation of earning income in the first seven months of ownership of shares in Tim's U.S.

In addition, the Court of Appeal found that the temporary use of the funds as an interest-free loan to Wendy's did not detract from TDL's income earning purpose, and that the Tax Court erred in determining that the sole purpose of the borrowed funds was to facilitate an interest free loan.

Lastly, the Court of Appeal reviewed whether the amount of interest paid by TDL during the period was reasonable. It found that because National Revenue had accepted the interest rate paid to Delcan after the seven-month period as reasonable, then that same rate paid during the seven-month period is also reasonable.

Based on the above, the Court of Appeal has set aside the judgment of the Tax Court that disallowed the deduction.

United Kingdom

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Wales Passes Bill to Establish Welsh Revenue Authority for Devolved Taxes

On 8 March 2016, the Welsh government announced that the National Assembly for Wales has passed the Tax Collection and Management (Wales) Bill, which provides for the establishment of the Welsh Revenue Authority and the collection and management of devolved taxes. The first devolved UK taxes include the Stamp Duty Land Tax and Landfill Tax, which will be replaced by Land Transaction Tax and Landfill Disposals Tax in Wales from April 2018.

The legislation must receive royal assent before becoming law.

Proposed Changes (2)

European Union

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Proposed ECOFIN Modification to EU Directive for the Exchange of CbC Reports Includes Optional Filing for Non-EU Parents for 2016

As previously reported, the EU's Economic and Financial Affairs Council (ECOFIN) announced on 8 March 2016 that it has reached agreement on the draft EU directive requiring the exchange of Country-by-Country (CbC) reports between EU Member States (previous coverage). As part of the agreement, ECOFIN reportedly included a modification proposed by Germany that MNEs with a non-EU ultimate parent company would have the option to file voluntarily for 2016, with obligatory filing starting from 2017. The modification would not affect MNEs with ultimate EU parents, which will remain required to file from 2016 as originally proposed. The draft directive as modified by ECOFIN will need to be adopted by the European Parliament before being adopted definitively by the Council.

Regardless of whether the draft directive is eventually adopted with or without the modification introduced by ECOFIN, non-EU MNEs may still be required to prepare and file CbC reports starting from 2016 under the national legislations of the various EU Member States that have already implemented or have committed to implement CbC reporting starting from 2016.

The EU Member States that have already adopted CbC reporting nationally from 2016 include the UK, France, Ireland, Poland, Italy, Spain and the Netherlands. Denmark has also adopted CbC reporting requirement from 2016, although for MNEs with a non-resident ultimate parent, the requirement applies from 2017.

EU Member States that have committed to adopt CbC reporting nationally by signing up to the Multilateral Competent Authority Agreement for the automatic exchange of CbC reports (previous coverage) include Belgium, the Czech Republic, Estonia, Finland, Germany, Greece, Luxembourg, Portugal, the Slovak Republic, Slovenia and Sweden.

United States

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U.S. Senator Reintroduces Pay What You Owe Before You Go Act Targeting Corporate Inversions

On 8 March 2016, U.S. Senator Sherrod Brown (D-OH) announced the reintroduction of the so-called Pay What You Owe Before You Go Act. A previous version of the bill was introduced in September 2014, but never passed.

The 2016 version of the bill is meant to address the issue of corporate inversions by requiring companies to pay their full U.S. tax bill on all deferred overseas profits before reincorporating in a new country. It includes a 35% exit tax with credits for foreign taxes paid against the overseas profits of corporations seeking to invert as defined by Section 7874 of the Internal Revenue Code.

Treaty Changes (2)


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Tax Treaty between Argentina and Hungary to be Signed

On 9 March 2016, Hungary published a decree in its Official Gazette that authorizes the signing of an income and capital tax treaty with Argentina. The treaty will be the first of its kind between the two countries, and must be finalized, signed and ratified before entering into force.


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Liechtenstein Approves New Tax Treaty with Switzerland

On 8 March 2016, the Liechtenstein government approved for ratification the pending income and capital tax treaty with Switzerland. The treaty, signed 10 July 2015, will replace the 1995 income and capital tax treaty between the two countries, which is currently in force.

Taxes Covered

The treaty covers Liechtenstein personal income tax, corporate income tax, real estate capital gains tax, and coupon tax. It covers Swiss federal, cantonal and communal taxes on income and capital.

Withholding Tax Rates

  • Dividends - 0% if the beneficial owner is a company that has directly held at least 10% of the paying company's capital for an uninterrupted period of at least one year (if holding period condition met after payment, a refund may be requested); otherwise 15%
  • Interest - 0%
  • Royalties - 0%

Capital Gains

The following capital gains derived by a resident of one Contracting State may be taxed by the other State:

  • Gains from the alienation of immovable property situated in the other State;
  • Gains from alienation of movable property forming part of the business property of a permanent establishment in the other State; and
  • Gains from the alienation of shares deriving more than 50% of their value directly or indirectly from immovable property situated in the other State, with an exemption for:
    • The alienation of shares quoted on a stock exchange established in either Contracting State or other exchanges if agreed to; and
    • The alienation of shares in a company that carries on its business in the immovable property from which the share value is derived

Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.

Double Taxation Relief

Both countries generally apply the exemption with progression method for the elimination of double taxation. However, Liechtenstein applies the credit method in respect of income covered by Articles 10 (Dividends) and 16 (Directors' Fees), and Switzerland may apply the credit method, a lump sum reduction, or a partial exemption in respect of income covered by Article 10 (Dividends).

Limitation on Benefits

A protocol to the treaty, signed the same date, includes that the beneficial provisions of Articles 10 (Dividends), 11 (Interest), 12 (Royalties) and 21 (Other Income) will not apply for income paid under a transaction or derived by an entity if the main purpose, or one of the main purposes, of the transaction or establishment of the entity was to obtain the benefits of those Articles.

Entry into Force and Effect

The treaty will enter into force 30 days after the ratification instruments are exchanged, and will apply from 1 January of the year following its entry into force.

The 1995 tax treaty will terminate on the date the new treaty is in force, and will cease to have effect on the date the new treaty is effective.


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