With a global economy and ability to connect easily with individuals and businesses, business activities can easily commence abroad. Carrying on business activities and transacting abroad has different tax implications depending on the business facts or situation. Below is some information and concepts that you should be aware of if you are carrying on business activities outside of Canada.
Your business may be considering expanding and opening an office in another country to grow. Having an office or a division in another country can lead to foreign tax matters. The concept of a permanent establishment is important to understand for a company that does not have a subsidiary incorporated abroad. A permanent establishment is generally a fixed place of business and it can exist if you have an office, factory, or even, in some instances, if there are individuals who can execute contracts to bind the Canadian business in another country.
Foreign Tax Returns/Compliance
A permanent establishment would lead to tax filings in the foreign country for the Canadian company. If there is not a permanent establishment, Canada generally has tax treaties with countries that discuss the concept of permanent establishments and in most cases if no permanent establishment is determined, a treaty based return would need to be prepared in the foreign country; however, won’t lead to any foreign taxes payable.
Foreign Tax Credits
Foreign tax credits provide some relief to Canadian businesses that pay taxes in another country. In Canada, every individual, including businesses, are subject to tax on their worldwide income. This includes income earned in another country. In an attempt to reduce the double taxation in the foreign country and in Canada, you can claim the foreign tax credit when filing your business taxes in Canada.
Movement of Funds & Withholding Taxes
A Canadian corporation that has subsidiaries abroad, it is common that there may be funds moving between the companies. Dividends, royalties, interest and management fees are some transactions between a Canadian corporation with a foreign company. Under most treaties between Canada and other countries, there are withholding tax and reporting requirements for funds transferred from Canada to another foreign company or individuals. The withholding tax rates can vary between countries and can also be lower in some instances.