Prevost Car Inc. v. The Queen

Prevost Car Inc. v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2008-04-22
Neutral citation
2008 TCC 231
File numbers
2004-2006(IT)G
Judges and Taxing Officers
Gerald J. Rip
Subjects
Income Tax Act
Decision Content
Dockets: 2004-2006(IT)G
2004-4226(IT)G
BETWEEN:
PRÉVOST CAR INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeals heard on September 4, 5, 6 and 7, 2007 at Toronto, Ontario.
Before: The Honourable Gerald J. Rip, Associate Chief Justice
Appearances:
Counsel for the Appellant:
William I. Innes, Chia-yi Chua,
Matthew Peters
Counsel for the Respondent:
Roger Leclaire, Ifeanyi Nwachukwu,
Daniel Bourgeois
____________________________________________________________________
AMENDED JUDGMENT
The Judgment and Reasons for Judgment are issued in substitution for the Judgment and Reasons for Judgment signed on April 22, 2008.
The appeals from assessments made under Part XIII of the Income Tax Act, notices of which are dated July 13, 2000, August 29, 2001 and April 15, 2004, are allowed with costs and the assessments are vacated. Counsel may be heard concerning questions on costs.
Signed at Ottawa, Canada, this 30th day of April 2008.
"Gerald J. Rip"
Rip A.C.J.
Citation: 2008TCC231
Date: 20080422
Dockets: 2004-2006(IT)G
2004-4226(IT)G
BETWEEN:
PRÉVOST CAR INC.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
AMENDED REASONS FOR JUDGMENT
Rip, A.C.J.
[1] The issue in these appeals by Prévost Car Inc. ("Prévost"), is to determine who was the beneficial owner of dividends paid by Prévost in 1996, 1997, 1998, 1999 and 2001. The term "beneficial owner" is found in Article 10, paragraph 2 of the Canada-Netherlands Tax Treaty ("Tax Treaty").[1] Prévost is a resident Canadian corporation who declared and paid dividends to its shareholder Prévost Holding B.V. ("PHB.V."), a corporation resident in the Netherlands. The Minister of National Revenue ("Minister") issued assessments under Part XIII of the Income Tax Act ("Act") against Prévost, notices which are dated July 13, 2000, August 29, 2001 and April 15, 2004, in respect of the aforementioned dividends.[2] The Minister assessed on the basis that the beneficial owners of the dividends were the corporate shareholders of PHB.V., a resident of the United Kingdom and a resident of Sweden, and not PHB.V. itself. When Prévost paid the dividends it withheld tax by virtue of subsections 212(1) and 215(1) of the Act. According to Article 10 of the Tax Treaty, the rate of withholding tax was five percent.[3]
[2] In her replies to the notices of appeal the respondent stated that pursuant to subsection 215(1) of the Act, the appellant was required to withhold and remit to the Crown 25 percent of the dividends paid to PHB.V. but, she adds, facetiously, I might add, "fortunately for the appellant, the Minister applied the reduced rates of taxation of 15 and 10% from the Canada-Sweden Tax Treaty and Canada‑U.K. Tax Treaty respectively to the dividends paid even though the treaties had no application".
Facts
[3] The appellant was incorporated under the laws of Quebec and is resident of Canada. It manufactures buses and related products in Quebec and has parts and services facilities throughout North America. On or about May 3, 1995 the appellant's erstwhile shareholders agreed to sell their shares of the appellant to Volvo Bus Corporation (also known as Volvo Bussar A.B. and referred to in these reasons as "Volvo"), a resident of Sweden and Henlys Group PLC ("Henlys"), a resident of the United Kingdom. Volvo and Henlys were parties to a Shareholders' and Subscription Agreement ("Shareholders' Agreement") dated May 3, 1995, under which Volvo undertook to incorporate a Netherlands resident company and subsequently transfer to the Dutch Company all of the shares Volvo acquired in Prévost; the shares of the Netherlands company would be owned as to 51 percent by Volvo and 49 percent by Henlys. The transfer of Prévost shares to Henlys would take place after Henlys had secured funding for its share of the purchase.
[4] On or about June 12, 1995, the agreements of May 3, 1995 were carried out: Volvo transferred all of the issued and outstanding shares in Prévost to PHB.V. Shares of PHB.V. were transferred by Volvo to Henlys so that the issued and outstanding shares of PHB.V. were owned by Volvo as to 51 percent (51 Class "A" shares) and Henlys as to 49 percent (49 Class "B" shares).
[5] The relevant corporate structure was:
[6] Volvo and Henlys were both engaged in the manufacture of buses, Volvo manufacturing the chassis and Henlys, the bus body. Prévost was in the same business, building coaches for different types of buses and bus body shells. Mr. Tore Backstrom, Senior Vice-President for North and South America for Volvo Bus Operations, described a body shell as a coach without any seats but may have other facilities, such as expendable side walls and may be convertible into a motor home or coach for entertainers on tour, for example.
[7] In the early 1990s Volvo learned that the erstwhile shareholders of Prévost were prepared to sell their shares. At the time Volvo and Henlys were seeking to expand their markets to North America and decided to acquire Prévost through a holding company.
[8] Mr. Backstrom declared that the reason Volvo and Henlys formed a holding company was that both Henlys and Volvo were involved in two different aspects of bus construction, body and chassis, and "we saw in front of us a clear avenue whereby the corporation should be enlarged further to encompass other operations and to have a holding company . . . where we share our knowledge". He added that where Volvo purchases all the shares of a company, it "very often" does not use a holding company.
[9] The reason for choosing a Dutch holding company was very simple, according to Mr. Backstrom. Tax was a consideration, but not an overriding consideration. He explained that Henlys did not want a Swedish company and Volvo did not want an English company. Both wanted a company resident in Europe where they have "a set-up" for that type of activity that is not too expensive and where business could be conducted in English. The choices were Switzerland, Luxembourg, Belgium and Holland, the latter being "very neutral".
[10] However, the office of Arthur Anderson & Co. in Rotterdam had recommended that in order to avoid tax claims from the United Kingdom or Sweden, and other international tax issues, the effective management and control of PHB.V. be located in the Netherlands.
[11] Mr. Backstrom also testified that PHB.V. was established as a vehicle for Henlys and Volvo to pursue multiple North American projects. The first of these projects was Prévost. The second was to be a Mexican company, Masa. The original intention was for Henlys to participate in the purchase and that PHB.V. would hold the Masa’s shares. However, by this time, Henlys was in financial difficulty. Henlys had the option "for some years" to join Volvo in the Mexican venture but, in the end, did not do so. In fact, said Mr. Backstrom, Henlys is in "liquidation and . . . does not exist anymore".
[12] The Shareholders' Agreement also provided, among other things, that not less than 80 percent of the profits of the appellant and PHB.V. and their subsidiaries, if any, (together called the "Corporate Group") were to be distributed to the shareholders. The distribution of the profits was subject to the Corporate Group having sufficient financial resources to meet its normal and foreseeable working capital requirements at the time of payment unless the shareholders otherwise agreed. Amounts were to be distributed by way of dividend, return of capital or loan. The distribution for a fiscal year was to be declared and paid to shareholders "as soon as practicable" after the end of the fiscal year. The Board of Directors of PHB.V. was to take reasonable steps to "procure" that dividends or other payments are declared by the appellant or other steps are taken to enable PHB.V. to make payments of dividends or return of capital or that any monies loaned by shareholders are repaid.
[13] The directors of Prévost were directors of PHB.V. Directors of Prévost frequently discussed PHB.V.'s affairs as well, including future declarations and payments of dividends.
[14] The amounts of dividends in question were paid by the appellant to PHB.V. and then distributed by PHB.V. to Volvo and Henlys in accordance with the Shareholders' Agreement.
[15] At a meeting on November 27, 1995, the directors of Prévost confirmed that the dividend for 1996 would be at least 80 percent of after tax profit and agreed that a "procedure will be written to determine how this will work". At a meeting on March 23, 1996, the purported shareholders of Prévost agreed to a dividend policy "that following the completion of accounts for each quarter, and subject to adequate working and investment capital being available to the company, a dividend of 80 percent of the net retained profit after tax should be paid by the end of the following quarter". At a meeting following the end of each financial year the directors of Prévost also were to consider whether more than 80 percent of the retained profit for the period be paid out as a dividend. On March 23, 1996 the shareholders met and agreed that a dividend representing 80 percent of the retained earnings for the period June 7, 1995 to December 31, 1995 be paid by April 30, 1996.
[16] There is a reason that I referred to Prévost's "purported shareholders" in the immediately preceding paragraph. The minutes of the meeting of shareholders of Prévost held on March 23, 1996 record that the shareholders attending the meeting are proxies for Volvo and Henlys. At the time, however, Prévost had only one shareholder, PHB.V. An identical error appears in a resolution of shareholders of Prévost dated August 15, 1996, signed by Volvo and Henlys. This is at least sloppy maintenance of corporate records but also could be an indication of something more significant. Minutes of a meeting of shareholders of Prévost held on May 9, 2002 however do state that the shareholder of Prévost is PHB.V.
[17] The English translation of the Deed of Incorporation of PHB.V. is headed "Incorporation of the Private Closed Company with Limited Liability Prévost Holding B.V." and is dated June 12, 1995. Article 24 of the Deed describes how profits are to be allocated and refers to the Shareholders' Agreement:
1. The management board shall be authorized to, with due observance of what has been agreed in the shareholders' agreement, reserve part of the accrued profits.
2. The profits remaining after the reservation referred to in paragraph 1 of this article shall be at the disposal of the general meeting.
3. Dividends may be paid only up to an amount which does not exceed the amount of the distributable part of the net assets.
4. Dividends shall be paid after adoption of the annual accounts from which it appears that payment of dividends is permissible.
5. The management board, may subject to due observance of paragraph 3, resolve to pay an interim dividend.
6. The general meeting may, subject to due observance of paragraph 3, and after approval of the management board resolve to make payments to the charge of any reserve which need not be maintained by virtue of the law.
7. A claim of a shareholder for payment of dividend shall be barred after five years have elapsed.
[18] The Joint Book of Documents contains copies of resolutions of the Board of Managing Directors of PHB.V. declaring dividends to its shareholders, Volvo and Henlys. However, there is only one resolution of the Board of Directors of Prévost in the Joint Book that records the declaration of a dividend; that resolution, dated December 30, 1996, records a dividend of $9,000,000 payable during the first quarter of 1997. There is also evidence that some monies were paid to PHB.V. before dividends were declared by Prévost's directors. However, on examination for discovery Cindy Kalb, an official of the Canada Revenue Agency, acknowledged that the respondent does not dispute that the dividends in question were properly declared by the appellant and paid to PHB.V.
[19] On February 27, 1996 Mr. Brian Chivers, Finance Director of Henlys, wrote to Volvo stressing the importance that Volvo and Henlys agree to a regular dividend stream before the next directors meeting of Prévost. Henlys was always pressing for quick payment of dividends since it required money to service the loan it undertook to finance its purchase of Prévost or, more accurately, its purchase of PHB.V. In one instance $5,684,523 was transferred to Henlys on fax instructions by Mr. Chivers without a resolution of the managing directors of PHB.V. having been signed.
[20] Ms. Lyne Bissonnette, Chief of Treasury at Prévost was (and is) responsible for accounting and financial matters at Prévost. She described how money was usually paid by Prévost to PHB.V. She recalled that Prévost's Chief Financial Officer or its Vice‑President, Finance, would inform her of any dividend declared by Prévost's directors. Usually Mr. Chivers would have been pressing for payment. Ms. Bissonnette would receive a fax instructing her to whom she should make payment. She would verify the amounts and then inform Volvo and Henlys of the amount of money being transferred.
[21] On April 2, 1996, a week after Prévost's purported shareholders adopted its dividend policy at its March 23, 1996 meeting, Mr. Chivers wrote to Prévost setting out the dividend policy and asking for the payment of a dividend for the period June 7 to December 31, 1995. Mr. Chivers advised Prévost of the amount of the dividend, being 80 percent of profit and instructed Prévost to pay the dividend to PHB.V. once he advises Prévost of PHB.V.'s bank account. On April 15th he set out the details of PHB.V.'s Canada dollar bank account. Two days later Ms. Bissonnette sent a memo to Mr. Chivers and a Mr. Hiller at Volvo detailing the amount of the dividend, the amount of the withholding tax at six percent, and that the net dividend "was wired" to the Banque Nationale du Canada.
[22] The Banque Nationale du Canada then transferred the amount of net dividend to Citco Bank Netherlands PHB.V., PHB.V.'s banker in Amsterdam. The actual dividend was declared after Prévost had advanced the amount equal to the proposed dividend, less withholding tax, to PHB.V. It was expected that the recipient would get payment within 24 hours.
[23] There were 11 dividends paid by Prévost that are subject to the assessments under appeal. The payment of the dividends would be processed in a manner similar to that described in the immediately preceding paragraphs, although there were also payments made after an interim dividend was declared.[4]
[24] At all relevant times PHB.V.'s registered office was in the offices of Trent International Management PHB.V. ("TIM"), originally in Rotterdam and later in Amsterdam. TIM was affiliated with PHB.V.'s banker, Citco Bank. In March 1996 the directors of PHB.V. executed a Power of Attorney in favour of TIM to allow it to transact business on a limited scale on behalf of PHB.V. There is no evidence what this "limited" business included. Later, on December 1996, PHB.V. executed another Power of Attorney in favour of TIM to allow it to arrange for the execution of payment orders in respect of interim dividend payments to be made to PHB.V.'s shareholders.
[25] During the years in appeal, PHB.V. had no employees in the Netherlands nor does it appear it had any investments other than the shares in Prévost.
[26] From time to time PHB.V. had to provide "Know Your Client" documentation to its banker. According to this documentation PHB.V. represented that the beneficial owners of the shares of Prévost were by Volvo and Henlys, not PHB.V. itself. The appellant states that the "Know Your Client" policies concerned anti-money laundering and bank regulatory issues and were intended to determine who was ultimately "behind the funds" in an account.
Treaty & OECD Model Conventions
[27] The appellant withheld tax of (six and) five percent on the payment of the dividends to PHB.V., relying on paragraphs 1 and 2 of Article 10 of the Tax Treaty. From July 30, 1994 to January 14, 1999, the relevant portions of Articles 10(1) and (2) of the Tax Treaty read as follows:
1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.
1. Les dividendes payés par une société qui est un résident d'un État contractant à un résident de l'autre État contractant sont imposables dans cet autre État.
2. However, such dividends may also be taxed in the State of which the company paying the dividends is a resident, and according to the laws of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed:
a) 5 per cent of the gross amount of the dividends if the beneficial owner is a company (other than a partnership), that holds directly or indirectly at least 25 per cent of the capital or at least 10 per cent of the voting power of the company paying the dividends;
. . .
c) 15 per cent of the gross amount of the dividends in all other cases.
2. Toutefois, ces dividendes sont aussi imposables dans l'État dont la société qui paie les dividendes est un résident et selon la législation de cet État, mais si la personne qui reçoit les dividendes en est le bénéficiaire effectif, l'impôt ainsi établi ne peut excéder :
a) 5 pour cent du montant brut des dividendes si le bénéficiaire effectif est une société (autre qu'une société de personnes) qui détient directement ou indirectement au moins 25 pour cent du capital ou au moins 10 pour cent des droits de vote de la société qui paie les dividendes;
[…]
c) 15 pour cent du montant brut des dividendes, dans tous les autres cas.
[28] Subparagraph (a) of paragraph 2 of Article 10 of the Tax Treaty was replaced effective January 15, 1999 as follows:
a) 5 per cent of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) that owns at least 25 per cent of the capital of, or that controls directly or indirectly at least 10 per cent of the voting power in, the company paying the dividends;
. . .
a) 5 pour cent du montant brut des dividendes si le bénéficiaire effectif est une société (autre qu'une société de personnes) qui détient au moins 25 pour cent du capital de la société qui paie les dividendes, ou qui contrôle directement ou indirectement au moins 10 pour cent des droits de vote dans cette société;
[…]
[29] The Tax Treaty is based on the Organization for Economic Cooperation and Development ("OECD") Model Tax Convention on Income and on Capital 1977 ("Model Convention"). Paragraph 1 and the opening words of paragraph 2 of Articles 10 of the Model Convention and the Tax Treaty are identical except for the word "Contracting" describing the word "State" in Article 10(2) of the 1977 Model Convention.[5] The subparagraphs of paragraph 2 differ. However, the subparagraphs have no bearing on these reasons.[6]
[30] Paragraphs 2 of Article 10 of the Model Convention and the Tax Treaty require that the recipient of dividends be the "beneficial owner" or, in French, "le bénéficiaire effectif" of the dividends. The words used for "beneficial owner" and "le bénéficiaire effectif" in the Dutch version of the Treaty is uiteindelijk gerechtigde. These words are defined neither in the Model Convention nor in the Tax Treaty. The French version of the Act generally uses the words "propriétaire effectif" or "personne ayant la propriété effective" for "beneficial owner".[7]
[31] The Commentary on Article 10 of the 1977 OECD Model Convention states that:
12. Under paragraph 2, the limitation of tax in the State of source is not available when an intermediary, such as an agent or nominee, is interposed between the beneficiary and the payer, unless the beneficial owner is a resident of the other Contracting State. States which wish to make this more explicit are free to do so during bilateral negotiations.
Canada has not undertaken any negotiations with the Netherlands to make paragraph 2 of Article 10 of the Tax Treaty any more explicit.
[32] In 2003 the OECD Commentaries to Article 10 of the OECD Model Convention were modified. Paragraphs 12, 12.1 and 12.2 of the Commentaries explain that the term "beneficial owner in Article 10(2) of the Model Convention" is not used in a narrow technical sense, rather, it would be understood in its context and in light of the object and purposes of the Convention, including avoiding double taxation and the prevention of fiscal evasion and avoidance. With respect to conduit companies, a report from the Committee on Fiscal Affairs concluded "that a conduit company cannot normally be regarded as the beneficial owner if, though the formal owner, it has, as a practical matter, very narrow powers which render it, in relation to the income concerned, a mere fiduciary or administrator acting on account of the interested parties".
[33] In 1995, Article 10, paragraph 2 of the Model Convention, 1977 was amended by replacing the words "if the recipient is the beneficial owner of the dividends" with "if the beneficial owner of the dividends is a resident of the other Contracting State". (There was no change to this wording in the Tax Treaty.) The Commentary was also amended to explain that the Model Convention was amended to clarify the first sentence of the original commentary, above, "which has been the consistent position of all Member countries". The second sentence of the Commentary was not altered. The key words, as far as these appeals are concerned, in both the 1977 and 1995 versions of the OECD Model Convention and the Tax Treaty are "beneficial owner" and the equivalent words in the French and Dutch languages.
[34] Article 3(2) of the Tax Treaty provides an approach to understanding undefined terms:
2. As regards the application of the Convention by a State any term not defined therein shall, unless the context otherwise requires, have the meaning which it has under the law of that State concerning the taxes to which the Convention applies.
2. Pour l'application de la Convention par un État, toute expression qui n'y est pas définie a le sens que lui attribue le droit de cet État concernant les impôts auxquels s'applique la Convention, à moins que le contexte n'exige une interprétation différente.
In other words, when Canada wishes to impose our income tax, a term not defined in the Tax Treaty will have the meaning it has under the Act, assuming it has a meaning under the Act.
[35] The Income Tax Conventions Interpretation Act,[8] at section 3, directs how the meaning of undefined terms in a tax treaty are to be understood:
3. Notwithstanding the provisions of a convention or the Act giving the convention the force of law in Canada, it is hereby declared that the law of Canada is that, to the extent that a term in the convention is
(a) not defined in the convention,
(b) not fully defined in the convention, or
(c) to be defined by reference to the laws of Canada,
that term has, except to the extent that the context otherwise requires, the meaning it has for the purposes of the Income Tax Act, as amended from time to time, and not the meaning it had for the purposes of the Income Tax Act on the date the convention was entered into or given the force of law in Canada if, after that date, its meaning for the purposes of the Income Tax Act has changed.
1984, c. 48 s. 3.
3. Par dérogation à toute convention ou à la loi lui donnant effet au Canada, le droit au Canada est tel que les expressions appartenant aux catégories ci-dessous s'entendent, sauf indication contraire du contexte, au sens qu'elles ont pour l'application de la Loi de l'impôt sur le revenu compte tenu de ses modifications, et non au sens qu'elles avaient pour cette application à la date de la conclusion de la convention ou de sa prise d'effet au Canada si, depuis lors, leur sens pour la même application a changé. Les catégories en question sont:
a) les expressions non définies dans la convention;
b) les expressions non définies exhaustivement dans la convention;
c) les expressions à définir d'après les lois fédérales.
1984, ch. 48, art. 3.
[36] The Vienna Convention on The Law of Treaties ("VCLT"), at Article 31(1), states that:
A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and are the light of its object and purpose.
[37] Tax treaties are to be given a liberal interpretation with a view of complementing the true intentions of the contracting states.[9] The paramount goal is to find the meaning of the words in question.[10]
[38] Article 3(2) of the OECD Model Convention 1977 is similar to Article 3(2) of the Tax Treaty:
... [A]s regards the application of the Convention by a Contracting State any term not defined therein shall, unless the context otherwise requires, have the meaning which it has under the law of that State concerning the taxes to which the Convention applies.
Pour l'application du présent Accord à un moment donné par un État contractant, tout terme ou expression qui n'y est pas défini a, saut si le contexte exige une interprétation différente, le sens que lui attribue à ce moment le droit de cet État concernant les impôts auxquels s'applique le présent Accord.
[39] In 1999 Article 3(2) of the Model Convention, was amended as follows:
2. As regards the application of the Convention at any time by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the law of that State for the purposes of the taxes to which the Convention applies, any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State.
2. Pour l'application de la Convention à un moment donné par un État contractant, tout terme ou expression qui n'y est pas défini a, sauf si le contexte exige une interprétation différente, le sens que lui attribue, à ce moment, le droit de cet État concernant les impôts auxquels s'applique la Convention, le sens attribué à ce terme ou expression par le droit fiscal de cet État prévalant sur le sens que lui attribuent les autres branches du droit de cet État.
[40] The concept of "beneficial ownership" or "beneficial owner" is not recognized in the civil law of Quebec or other civil law countries who are members of OECD. Paragraph 248(3)(f) of the Act attempts to harmonize civil law and common law for purposes of the Act. Subsection 248(3) states that in applying the Act in Quebec usufruct, right of use in habitation and substitution, are deemed in certain circumstances to be a trust. Paragraph (f) concludes that:
(f) property in relation to which any person has, at any time,
(i) the right of ownership,
(ii) a right as a lessee in an emphyteutic lease, or
(iii) a right as a beneficiary in a trust
shall, notwithstanding that such property is subject to a servitude, be deemed to be beneficially owned by the person at that time.
f) les biens sur lesquels une personne a, à un moment donné, un droit de propriété, un droit de preneur dans un bail emphytéotique ou un droit de bénéficiaire dans une fiducie sont réputés, même s'ils sont grevés d'une servitude, être la propriété effective de la personne à ce moment.
Expert Evidence
[41] The appellant produced several expert witnesses to explain Dutch law and the development of the OECD Model Conventions and the Commentaries on the Model Conventions.
van Weeghel
[42] Professor Dr. S. van Weeghel was an expert witness for the appellant. He is a Professor of Law and practices taxation law in the Netherlands. At time of trial Professor van Weeghel was a partner in the Amsterdam office of the law firm, Linklaters. He had earlier worked at another law firm, Stibbe, in Amsterdam and New York as Head of Tax, among other positions. He was called to the Amsterdam Bar in 1987. He obtained a LL.M. degree in taxation from New York University in 1990 and a doctorate from the University of Amsterdam in 2000. He is a tenured professor of tax law at the University of Amsterdam. Professor van Weeghel has lectured at several universities in Europe. He has published numerous articles on European tax matters and tax treaties. He is an expert in Dutch tax treaties, Dutch tax law and abuse of tax treaties.
[43] Professor van Weeghel concluded that under Dutch law PHB.V. is the beneficial owner of Prévost's shares. He relied, in particular, on an interpretation by the Hoge Raad[11] (Dutch Supreme Court). In his report Professor van Weeghel described the facts and ratio of that case as follows:
. . . The taxpayer, a stockbroker resident in the United Kingdom, had acquired a number of dividend coupons detached from Royal Dutch shares. At the time of the purchase, the dividends had been declared but not yet paid. The stockbroker had paid approximately 80 per cent of the face value of the coupons. The dividend was paid to the stockbroker, subject to 25 per cent dividend withholding tax – the full statutory rate – which was withheld by the paying agent. Subsequently, the stockbroker filed for a refund of 10 per cent of the gross dividend, based upon Article 10, paragraph 2 of the 1980 Netherlands-United Kingdom tax treaty, which – in relevant part – is substantially similar to Article 10, paragraph 2 of the Convention.
The tax inspector denied the refund and asserted that ownership of the shares was a prerequisite for refund of withholding tax. The Gerechtshof – on appeal of the stockbroker – established as a fact that the stockbroker had acquired a number of dividend claims of which the amounts were entirely certain and which would be payable within days from the acquisition. Under those circumstances, the court ruled, the taxpayer did not qualify as the beneficial owner of the dividends.13
The Hoge Raad reversed the decision of the Gerechtshof, deciding as follows . . . [translation by Professor Weeghel]:
The taxpayer became owner of the dividend coupons as a result of purchase thereof. It can further be assumed that subsequent to the purchase the taxpayer could freely avail of those coupons and, subsequent to the cashing thereof, could freely avail of the distribution, and in cashing the coupons the taxpayer did not act as voluntary agent (zaakwaarnemer, SvW) or for the account of the principal (lasthebber, SvW). Under those circumstances the taxpayer is the beneficial owner of the dividend. The treaty does not contain the condition that the beneficial owner of the dividend must also be the owner of the shares and further it is irrelevant that the taxpayer purchased the coupons at the time the dividend had already been announced, because the question who is the beneficial owner must not be answered at the time the dividend is announced, but at the time the dividend is made payable.
Based on the Hoge Raad's interpretation, Professor van Weeghel concluded that:
. . . a clear and simple rule emerges. A person is the beneficial owner of a dividend if i) he is the owner of the dividend coupon, ii) he can freely avail of the coupon, and iii) he can freely avail of the monies distributed. One could read the formulation of this rule by the Court so as to leave open the question whether the freedom to avail of the coupon or of the distribution must exist in law or in fact, or both. The reference to the wording pertaining to the "zaakwaarnemer" and the "lasthebber", however, seems to require a narrow reading of the ruling, i.e., one in which the freedom must exist in law. The addition of these terms cannot be read as a further condition, because a zaarkwaarnemer and a lasthebber by definition cannot freely avail of the dividend. Thus the addition must be seen as a clarification of the conditions of free avail and the zaakwaarnemer and the lasthebber both lack that freedom in law.
_____________________________
13 The taxpayer had argued that the language of Article 10 is clear and that neither the text nor the rationale of this provision justify the condition that the recipient of the dividend must also be the owner of the shares.
[44] Appellant's counsel led evidence that the Canada Revenue Agency, or its predecessor, and the Dutch tax authorities disagreed who was the "beneficial owner" of the dividends received from Prévost. The Dutch are of the view PHB.V. was the "beneficial owner". The appellant requested competent authority assistance relating to the term "beneficial owner" in Article 10(2) of the Tax Treaty. There was some communication between the tax authorities of Canada and the Netherlands, but when the Dutch and Canadian views differed as to whether the beneficial ownership requirement in Article 2 of the 1986 Convention affected situations similar to those in the appeals at bar, the Canadian authorities terminated the competent authority review.
[45] Professor van Weeghel stated that under Dutch law, PHB.V. would be regarded as the beneficial owner of the dividends. However, if PHB.V. were legally obligated to pass on the dividends to its shareholders, Dutch law would consider PHB.V. not to be the beneficial owner of the dividends.
Raas
[46] Professor Rogier Raas is a professor in European banking and securities law at the University of Luden in the Netherlands. Since 2000 he has practiced law with the law firm of Stibbe; he also acts as counsel to corporations and financial institutions on finance related and regulating matters. Professor Raas did not testify. The appellant produced his redacted report and the respondent did not object.
[47] Professor Raas opined that the dividends received by PHB.V. were within the taxing authority of the Dutch government and that, but for the participation exemption granted by the Dutch government to PHB.V., PHB.V. would have been subject to Dutch tax in respect of the dividends.[12] Despite the existence of a Shareholders' Agreement between Volvo and Henlys and the Powers of Attorney granted to TIM, PHB.V. itself was not contractually or otherwise required to pass on the dividends it received from the appellant. In all cases, dividend payments had to be authorized by PHB.V.'s directors in accordance with Dutch law and practice. The Shareholders' Agreement and Powers of Attorney did not have any effect on the ownership of the dividends by PHB.V., Professor Raas stated.
[48] Professor Raas summarizes Dutch corporate law as it relates to the distribution of profits as follows:
(a) The default scenario under the Netherlands Civil Code is that profits are to be distributed up to the shareholders in full with the only proviso being that the equity of the company remains greater than the sum of its paid up capital, called share capital and statutory reserves;
(b) The mandatory distribution of profits can be deviated from in the Articles of Association of a Dutch B.V., with the majority of Dutch B.V.'s opting to have annual profits at the disposal of the general meeting of shareholders. The shareholders then decide the allocation of the profits between annual reserves and the dividends to be distributed to the shareholders; and
(c) The Board of Directors of a Dutch B.V. can pay interim dividends as opposed to year-end dividends if so authorized by the Articles of Association. Interim dividends are of a provisional nature. They only become final when shareholders pass a year-end resolution to declare an annual dividend equal to the sum of the interim dividends or adopt the annual accounts for the relevant financial year confirming the sufficiency of the reserves.
[49] In respect of the impact of the dividend policy in the Shareholders' Agreement on the powers of PHB.V. Professor Raas concluded that:
(a) the dividend policy in the Shareholders' Agreement does not provide for a limitation of the powers of the Board of Directors of PHB.V. that is uncommon in a Netherlands law context. A considerable influence of shareholders on the dividend policy of a Dutch B.V. is very common; and
(b) unlike the default scenario or where annual profits are at the disposal of the general meeting of PHB.V.'s shareholders, the Board of Directors had the discretion under PHB.V.'s Articles of Association and the dividend policy to decide the adequacy of the working capital requirements, before dividends were paid.
[50] The respondent argues that Professor Raas assumed incorrectly that PHB.V. had a dividend policy independent of that of the Corporate Group set out in the Shareholders' Agreement and referred to in PHB.V.'s Articles of Association. Instead, respondent's counsel argued, the discretion of the directors of PHB.V. to determine the adequacy of working capital of PHB.V. was inextricably tied to the same determination being made by the directors of Prévost. The proviso in the Shareholders' Agreement on the payment of not less than 80 percent of the after tax profits of the Corporate Group was limited only by a determination of the Board of Directors of both PHB.V. and Prévost as to the adequacy of normal and foreseeable working capital requirement of the Corporate Group at the time of each dividend payment. The dividend policy of PHB.V., as described in the Raas report, was in fact a resolution of purported shareholders of Prévost, represented as Volvo and Henlys, and adopted by the Board of Directors of Prévost, both occurring on March 23, 1996.
[51] Taken together, the respondent says, the dividend policy in the Shareholders' Agreement, the shareholder and director resolutions of March 23, 1996, coupled with the authorization in PHB.V.'s Articles of Association to pay interim dividends defined the scope of the discretion of the directors of the PHB.V. to determine its working capital requirement. This discretion was purely academic.
Lüthi
[52] Daniel Lüthi, a graduate in law, worked in the Swiss Ministry of Finance and negotiated about 30 tax treaties on behalf of Switzerland. He was also a member of the Swiss delegation to the OECD Fiscal Committee, member of OECD Committee on Fiscal Affairs ("CFA") a member and chairman of the Swiss delegation to the OECD Working Party 1 on Double Taxation as well as a member of the OECD Informal Advisory Group in international tax matters.
[53] Counsel for the Crown objected to the qualification of Mr. Lüthi as an expert and to his potential evidence that is neither relevant nor necessary. I agree with respondent's counsel that several of the questions that were posed to Mr. Lüthi were questions of law, for example, "What is the meaning of the term 'beneficial owner' found in paragraph 2 of Article 10, dividends, in the Model Convention?" I advised the parties that I would hear Mr. Lüthi's evidence and reserve my decision as to admissibility until after the trial. But, at the same time, I informed appellant's counsel that I did not want any questions of law put to Mr. Lüthi and suggested that his report be amended and that all questions of law and his opinion on such questions be redacted from his report. This was done.
[54] I find that the rest of Mr. Lüthi's report is acceptable; it was essentially a fact driven recollection of events that transpired during OECD Model Convention discussions and negotiations. His summary of OECD statements and reports that were in evidence are not legal opinions. I permitted Mr. Lüthi to testify on matters relating to the term "beneficial owner" and to the issues facing draftsmen of the OECD Convention more for background than for anything else.
[55] The term "beneficial owner" was introduced into Article 10(1) of the 1977 OECD Convention, Mr. Lüthi stated, so as to explicitly exclude intermediaries in third States, such as agents