Supreme Court of Canada pronounces on application of Luxembourg/Canada Treaty
On 26 November 2021, the Supreme Court of Canada ruled on the Canadian government’s appeal in the Alta Energy Luxembourg SARL (Alta Lux) case in which the government argued that Alta Lux should not be entitled to benefit from a Canadian tax exemption based on the Canada Luxembourg double tax treaty (Treaty). The case had gone through the Canadian lower courts, with Alta Lux prevailing at each stage.
In 2011, an American oil and gas company had formed a Canadian subsidiary, Alta Energy Canada, to acquire and develop oil and natural gas properties. In 2012, a Luxembourg subsidiary, Alta Lux, had been established and had acquired the shares in Alta Energy Canada. In 2013, Alta Lux had sold the shares in Alta Energy Canada for a handsome profit of more than $380 million. The profit was not taxable in Luxembourg and Alta Lux argued that Canada did not have the right to tax the profit due to the provisions under the Treaty.
The key question was whether the Canadian general anti-avoidance provision should apply to prevent Alta Lux from being able to rely on the Treaty as the inter-positioning of Alter Lux was a misuse or abuse of the Treaty.
It appears to have been accepted by the court that Alter Lux had been set up to take advantage of a particular provision in the Treaty. However, the majority of the judges ruled that Alter Lux was a Luxembourg tax resident and that its role was within the object, spirit and purpose of the particular provisions of the Treaty, namely to foster international investment. They went further to say that there was no need for Alter Lux to have sufficient substantive connections to Luxembourg (which was referred to as having a “well known international tax haven regime”) and accepted that Alter Lux was in effect a conduit. Nevertheless, the majority upheld the application of the Treaty on the basis that the Canadian government, in agreeing to the terms of the Treaty, had been prioritising foreign investment over tax revenue and that they should not be allowed to revisit the bargain they had previously struck.
The minority judgment focussed on the need to consider factors other than the strict wording of the text of the Treaty and that weight should be given to the rationale underlying the Treaty namely that benefits are available to a party because it has a certain economic allegiance to one of the Treaty parties, in this case Luxembourg, something that was not the case on the facts in question.
The point of particular interest arising from this decision is that, if the facts had arisen in 2021 after the principal purpose test (PPT) was introduced into the Treaty by the Multilateral Instrument, it seems that the minority decision would in fact have been the unanimous decision. Under the PPT, a person cannot benefit from a provision under the Treaty where it is reasonable to conclude that obtaining that benefit was one of the principal purposes of the arrangement that resulted directly or indirectly in that benefit.
The Case in Brief can be found here.
The Supreme court Justice case can be found here.