New Zealand – Canada Double Tax Agreement update signed
Tax Alert - June 2012
On 3 May 2012, an updated double tax agreement (DTA) between Canada and New Zealand was signed. This replaces the 1980 treaty. Key changes include reduced withholding taxes on interest, dividends and royalties and amendments to the permanent establishment article and definitions of business profits. This article outlines the key issues to be aware of.
When will it apply from?
The new DTA will come into force when both countries have given legal effect to it. The agreement will apply in New Zealand:
- In respect of withholding tax rates on income, profits or gains derived by a non-resident, from the first day of the second month following the date the DTA comes into force.
- In respect of other New Zealand taxes, for an income year beginning on or after 1 April following the date the agreement comes into force.
Withholding tax rates reduced
One of the key features of the updated DTA is reduced withholding tax rates on dividends, interest and royalties. These reductions will help New Zealand businesses compete in Canada and encourage Canadian investment in New Zealand. A summary of these changes are as follows:
The standard withholding tax rate on dividends will stay at 15%; however, it will reduce to 5% for an investing company with at least a 10% shareholding in the company paying the dividend. We understand that the lowest rate of withholding tax on dividends used by Canada in its DTA negotiations is 5%, hence withholding tax on dividends has not been reduced to 0%, as it has in New Zealand’s DTAs with Australia and the United States.
The withholding tax rate on interest will be reduced from 15% to 10%. Consistent with New Zealand’s DTAs with Australia and the United States, the interest article contains an approved issuer levy (AIL) clause which provides that interest arising in New Zealand shall be charged at 10% (as opposed to 0%) if the payer of the interest has not paid AIL.
The general withholding tax rate for royalties will be reduced from 15% to 10%. However a withholding tax rate of 5% will be applied to the following royalties:
- Copyright royalties and other like payments in respect of the production or reproduction of any literary, dramatic, musical or other artistic work (excluding royalties in respect of motion picture films and royalties in respect of works on film, videotape or other means of reproduction for use in connection with television broadcasting); or
- Royalties for the use of, or the right to use, computer software or any patent or for information concerning industrial, commercial or scientific experience (but not including any such royalty provided in connection with a rental or franchise agreement).
Permanent Establishment Article
The new DTA makes the following changes to Article 5 (Permanent Establishment):
- A permanent establishment will only arise if a building site, a construction, installation or assembly project lasts more than 12 months, instead of 6 months under the existing DTA.
- An enterprise is deemed to have a permanent establishment in a Contracting State if for more than 183 days in a twelve month period the enterprise carries on activities in relation to the exploration or exploitation of natural resources, including standing timber; or if it operates substantial equipment in the other state.
- Consistent with other recent DTAs, the inclusion of a new section which provides that, subject to certain exceptions, an enterprise shall be deemed to be carrying on a permanent establishment in the other Contracting State, if it performs services in the other Contracting State:
- Through an individual who is present in the other State for more than 183 days in a twelve month period and more than 50% of the gross revenues attributable to active business activities of the enterprise during this period are derived from the services performed in that other State by the individual; or
- For a period or periods exceeding 183 days in a twelve month period, and the services are performed for the same project or for connected projects through one or more individuals who are present and performing such services in that other State.
This article has been updated under the new DTA to refer to “profits” rather than “industrial or commercial profits”. As such the definition of industrial or commercial profits, which excluded dividends, interest or royalties, has been removed. The article is consequently broader, and may capture some taxpayers that have not historically fallen within it.
If you have investments, operations or transactions concerning Canada, it is time to review your tax position. For more information, please contact your usual Deloitte tax advisor.