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Canada-Madagascar

1 July 2020

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Tax Treaty between Canada and Madagascar has Entered into Force

The income tax treaty between Canada and Madagascar entered into force on 3 June 2020. The treaty, signed 24 November 2016, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Canadian income taxes imposed by the Government of Canada under the Income Tax Act. It covers Malagasy tax on income, synthetic tax, direct tax on hydrocarbons, tax on salaries and assimilated income, tax on income from movable assets, and tax on gains from immovable property.

Residence

If a company is considered resident in both Contracting States, the competent authorities will determine the company's residence for the purpose of the treaty through mutual agreement. If no agreement is reached, the company will not be entitled to claim any relief or exemption from tax provided by the treaty.

Withholding Tax Rates

  • Dividends - 5% if the beneficial owner is a company that directly or indirectly controls at least 25% of the voting power in the paying company; otherwise, 15%
  • Interest - 10%, with an exemption for:
    • interest paid to a beneficial owner in a Contracting State in respect of a loan made, guaranteed, or insured by a public agency of that State or to the Central bank of that state; and
    • interest paid to a resident of a Contracting State that is operated exclusively to administer or provide benefits under one or more pension, retirement, or employee benefits plans, provided that (i) the resident is the beneficial owner of the interest and is generally exempt from tax in the other State, and (ii) the interest is not derived from carrying on a trade or a business or from a related person.
  • Royalties -
    • 5% for copyright royalties and other like payments in respect of the production or reproduction of any literary, dramatic, musical or other artistic work (but not including royalties in respect of motion picture films nor royalties in respect of works on film or videotape or other means of reproduction for use in connection with television broadcasting);
    • 5% for 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);
    • Otherwise, 10%

Capital Gains

The following capital gains derived by a resident of one Contracting State may be taxed by the other State:

  • Gains from the alienation of immovable property situated in the other State;
  • Gains from the alienation of movable property forming part of the business property of a permanent establishment in the other State; and
  • Gains from the alienation of shares or an interest in a partnership or trust, the value of which is derived principally from immovable property situated in the other State.

Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.

Double Taxation Relief

Both countries apply the credit method for the elimination of double taxation.

Arbitration

Article 24 (Mutual Agreement Procedure) contains a general arbitration provision, which provides that if any difficulty or doubt arising as to the interpretation or application of the treaty cannot be resolved by the competent authorities pursuant to the other paragraphs of Article 24, the case may be submitted for arbitration if both competent authorities and the taxpayer agree and the taxpayer agrees in writing to be bound by the decision of the arbitration board. The decision of the arbitration board in a particular case shall be binding on both States with respect to that case. The procedure shall be established in an exchange of notes between the Contracting States.

Limitation on Benefits

Article 27 (Miscellaneous Rules) includes the provision that the treaty will not apply to any company, trust, or other entity that is resident of a Contracting State if:

  • The company, trust, or other entity is beneficially owned or controlled, directly or indirectly, by one or more persons who are not residents of that State; and
  • The amount of the tax imposed on the income or capital of the company, trust, or other entity by that State is substantially lower than the amount that would be imposed by that State if all the shares or interests were beneficially owned by residents of that State.

Article 27 also includes the provision that the treaty will not apply to a company or other entity that is entitled to income tax benefits pursuant to any legislation in either Contracting State relating to the promotion of increased economic activity (including legislation providing for tax-free zones), unless:

  • The company or other entity is a resident of the Contracting State providing the income tax benefits and is wholly-owned directly by individuals who are residents of that State or indirectly by such individuals through one or more entities provided that all such entities are resident of that State; or
  • 90% or more of the income eligible for such benefits are derived exclusively from the active conduct of a trade or business carried on by the company or other entity other than an investment business.

Effective Date

The treaty applies from 1 January 2021.

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