Canada vs VELCRO CANADA INC., February 2012, Tax Court, Case No 2012 TCC 57

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The Dutch company, Velcro Holdings BV (“VHBV”), licensed IP from an affiliated company in the Dutch Antilles, Velcro Industries BV (“VIBV”), and sublicensed this IP to a Canadian company, Velcro Canada Inc. (VCI). VHBV was obliged to pay 90% of the royalties received from VCI. within 30 days after receipt to VIBV.

At issue was whether VHBV qualified as Beneficial Owner of the royalty payments from VCI and consequently would be entitled to a reduced withholding tax – from 25% (the Canadian domestic rate) to 10% (the rate under article 12 of the treaty between Canada and the Netherlands).

The tax authorities considered that VHBV did not qualify as Beneficial Owner and denied application of the reduced withholding tax rate.

Judgement of the Tax Court

The court set aside the decision of the tax authorities and decided in favor of VCI.

“VHBV obviously has some discretion based on the facts as noted above regarding the use and application of the royalty funds. It is quite obvious that though there might be limited discretion, VHBV does have discretion. According to Prévost, there must be “absolutely no discretion” – that is not the case on the facts before the Court. It is only when there is “absolutely no discretion” that the Court take the draconian step of piercing the corporate veil.”

“The person who is the beneficial owner is the person who enjoys and assumes all the attributes of ownership. Only if the interest in the item in question gives that party the right to control the item without question (e.g. they are not accountable to anyone for how he or she deals with the item) will it meet the threshold set in Prévost. In Matchwood, the Court found that the taxpayer did not have such rights until the deed was registered; likewise, VIBV is not a party to the license agreements (having fully assigned it, along with its rights and obligations, to VHBV). It no longer has such rights and thus does not have an interest that amounts to beneficial ownership.”

“For the reasons given above I believe that the beneficial ownership of the royalties rests in VHBV and not in VIBV and as such, the appeal is allowed and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment on that basis and further, the 1995 assessment dated October 25, 1996 is referred back to the Minister for reconsideration and recalculation on the basis that VIBV was a resident of the Netherlands in 1995 and therefore entitled to the benefit of that treaty.”

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