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The Canadian government has ratified Tax Information Exchange Agreements (TIEAs) with Bermuda and the Cayman Islands, paving the way for significant tax benefits for Canadian companies that establish subsidiaries in these jurisdictions.
The Canada-Cayman TIEA entered into force on June 1 and the Canada-Bermuda TIEA will enter into force on July 1. Both were signed in June 2010.
The TIEAs will allow actual or deemed active business profits of Canadian subsidiaries based in Bermuda or Cayman to be eligible for tax free dividend repatriation to the Canadian parent as “exempt surplus”.
Active business income earned in the TIEA jurisdiction can be repatriated tax free to the Canadian parent, and passive forms of income, such as interest or royalties paid to a company in a TIEA jurisdiction by a sister company resident and carrying on active business in a third jurisdiction (which is also TIEA or treaty jurisdiction) may be repatriated on a tax free basis to the Canadian parent, provided the amount is deductible in computing active business income of the sister. This allows the Canadian parent to take advantage of the favourable tax regimes (i.e. no income, corporate or similar taxes) in Bermuda and Cayman.
TIEAs are agreements between parties to transfer domestic tax information. They promote international co-operation in tax matters and represent the international standard of effective exchange of information. They were introduced following the OECD’s initiative to address harmful tax practices, which cited the lack of effective exchange of information as one of the key criteria in determining harmful tax practices.
In March 2007, Canada passed laws to provide favourable tax treatment for business income repatriated from TIEA jurisdictions and introduced negative tax consequences for the repatriation of income from any jurisdiction which does not agree a TIEA within 60 months of a request from Canada.
As a result of the recent TIEAs, we expect the financial centres where Conyers has a presence, particularly Bermuda and Cayman, to play a significantly greater role in the international structuring of Canadian companies.
Bermuda and Cayman have both signed over 20 TIEAs, indicating the ongoing commitment of both jurisdictions to enhance their transparency regimes consistent with the internationally agreed standard.
We refer you to Canadian tax counsel for the exact tax consequences under Canadian law of utilising a company incorporated in Bermuda or Cayman. Please contact Conyers Dill & Pearman for advice in connection with incorporating such a company under the laws of our jurisdictions.