A DUTCH FINANCE SUBSIDIARY was denied benefits under the US-Dutch tax treaty
A Canadian parent company borrowed $14 million from the Royal Bank of Canada and then ran the money down a chain of offshore companies as equity contributions. The money passed from Canada to successive subsidiaries in the Cayman Islands, Netherlands Antilles and finally to the finance subsidiary in Holland. The Dutch finance subsidiary then onlent the $14 million to Del Commercial, a real estate company in the United States that was owned by the Canadian parent company.
The United States normally collects a 30% withholding tax on interest payments that are made to offshore lenders. However, the tax is reduced to 15% under the US-Canadian tax treaty, and it is reduced to 0% under the US-Dutch tax treaty.
Del Commercial paid no withholding taxes. The IRS said this was really a Canadian borrowing — so the 15% rate in the US-Canadian treaty should have applied. It assessed back withholding taxes plus penalties that added another third to the total tax bill. The taxpayer argued the case recently in the US Tax Court, but lost. The court said the Dutch shell company was a “mere conduit” for what was essentially a Canadian borrowing.
The case is Del Commercial Properties, Inc. v. Commissioner.