Prior to the payment of dividends by Husky Energy Inc. to its shareholders in 2003, two of its shareholders (companies resident in Barbados) transferred their shares to companies in Luxembourg under securities lending arrangements, and therefore Husky Energy Inc. only withheld dividend tax at a reduced rate of 5% under the Canada-Luxembourg Income Tax Treaty. Judgment of the Court The Court found Husky Energy liable for failing to withhold dividend tax at the non-Convention rate of 25%. As the dividends were not paid to the Barbados companies, the 15% rate under the Canada – Barbados Income Tax Convention was not available. The Canada-Luxembourg Income Tax Convention rate was also not available as the Luxembourg companies were not the beneficial owners of the dividends as they were required to pay compensation to the Barbados companies equal to the dividends received. Excerpts “Under the securities lending arrangements, companies resident in Luxembourg enjoyed nothing more than temporary custodianship of the funds received in payment of the Dividends. The compensation payments were preordained by the terms of the borrowing requests, and this preordination ensured that at all times, the Barbcos retained their rights to the full economic value of the Dividends.” “For the foregoing reasons, HWEI and LF Luxembourg were not the beneficial owners of the Dividends for the purposes of Article 10(2) because they were legally obligated from the outset of the securities lending arrangements to return the full amount of the Dividends to the Barbcos in the form of the compensation payments. This was to occur no later than approximately seven weeks after the commencement of the securities lending arrangements. Consequently, HWEI and LF Luxembourg were not entitled to the benefit of the reduced rates of Part XIII tax provided under Article 10(2) and, for the purposes of subsections 215(1) and (6), the amount of tax under Part XIII that Husky was required to withhold and remit in respect of the Dividends was 25% of the Dividends.” “The fact that the Barbcos transferred their common shares in Husky to the Luxcos under atypical securities lending arrangements really has no bearing on whether the Transactions abuse Article 10(2). The rationale of Article 10(2) is to provide relief from double taxation by allocating the right to tax dividends between Canada and Luxembourg in accordance with the theory of economic allegiance while retaining the protections against the use of conduit‐type arrangements afforded by the beneficial owner requirement and the voting power requirement. Consistent with the theory of economic allegiance described by the majority in Alta Energy, which recognizes that a recipient of passive income need not have any allegiance to the paying country, the focus of the rationale of Article 10(2) is not how the common shares of Husky came to be owned by the Luxcos, but whether the Luxcos satisfy the residence requirement, the beneficial owner requirement and the voting power requirement. Since the hypothetical being considered assumes these requirements have been satisfied, I see no basis on which to find that the securities lending arrangements abused Article 10(2). VII. Conclusion For the foregoing reasons, the appeal of Husky is dismissed with costs to the Respondent, and the appeals of HWLH and LFMI are allowed with costs to HWLH and LFMI and the HWLH Assessment and the LFMI Assessment are vacated. While this is an unusual result, it flows from the fact that the Minister assessed the successors of the Barbcos and did not assess the Luxcos.” Click here for translations ...

Two issues were adressed in this case – transfer pricing and withholding taxes. The transfer pricing issue concerned whether the Danish tax authorities (SKAT) had been entitled to issue an assessment on controlled transactions made between “Soy A/S” and a flow-through company in the group located in a low tax jurisdiction. The withholding tax issue concerned whether the 13 transfers actually constituted taxable dividends under section 31, D of the Danish Corporation Tax Act, which “Soy A/S” was subsequently liable for not having withheld tax at source, cf. section 69(1) of the Danish Withholding Tax Act. Judgement of the High Court In regards of the transfer pricing issue, the High Court found that the company’s TP documentation was subject to a number of deficiencies which meant that the documentation did not provide the tax authorities with a sufficient basis for assessing whether the transactions were made in accordance with the arm’s length principle. The High Court emphasised, among other things, that the documentation did not sufficiently describe how prices and terms had actually been determined. The High Court also emphasised that there had only been a very general description and very sparse information about the sister company’s business activities, contractual terms and financial circumstances, including no information about to whom and at what prices the goods from the sister company were resold. SKAT was therefore entitled to make a discretionary assessment of the company’s taxable income. The High Court found no basis to set aside SKAT’s estimate, as the company had neither demonstrated that the estimate was exercised on an erroneous basis nor led to a manifestly unreasonable result. The High Court emphasised, among other things, the extent and nature of the deficiencies in the information basis and the fact that SKAT had unsuccessfully attempted to obtain additional information for use in the tax assessment. As regards the arm’s length interval used by SKAT, the High Court found, after an overall assessment, that SKAT had been entitled to use the interquartile range and adjusted the price to the third quartile. The High Court stated that the company had a central and value-creating function in the group, and that the comparability analysis was based on “limited risk distributors”, which were not directly comparable with the company. The High Court also found that the foreign sister company had to be considered a pure flow-through company that had no independent business justification in the group. In this connection, the High Court stated that there had been changing information about the sister company’s employees and that there was no documentation that there had been employees to carry out the alleged activities in the company. The analyses prepared after the tax assessment, including the capital adjustment test and the berry ratio analysis, as well as the other factors invoked by the company could not lead to a different assessment. In regards of the withholding tax issue the High Court found that the foreign sister company could only be considered to have acted as a flow-through company that did not bear any risk with the commodity trade. The High Court emphasised, among other things, that no hedging contracts had been presented. In light of the other circumstances of the case, the High Court found that the 13 transfers, which did not take place until 2010, could not be considered to have been made pursuant to the aforementioned agency agreement. The High Court stated that in the situation at hand, the company had a heightened burden of proof that there was no basis for considering the payments as subsidies/dividends with derived liability for withholding tax. The High Court found that the Danish company had not met this burden of proof through the testimony of the company’s former CEO and auditor. Finally, the High Court found that the Danish company was aware of all the circumstances surrounding the transfers to the foreign sister company in Y1 country, and that the transfers were very significant without documentation. On this basis, the High Court found that the Danish company had acted negligently and was therefore liable for the missing withholding tax, cf. section 69(1) of the current Withholding Tax Act, cf. section 65(1). Click here for English translation Click here for other translation ...