David Rotfleisch on the Methanex Case, Trinidad & Tobago Courts Reinforcing International Tax Rules, Examining "Treaty Shopping" & Lessons Learnt for Canadian Multinationals

Methanex Case Facts

On April 22, 2025, the Judicial Committee of the U.K. Privy Council delivered its decision in Methanex Trinidad v. Board of Inland Revenue ([2025] UKPC 20). The judgment set aside prior rulings of Trinidad and Tobago’s Tax Appeal Board and Court of Appeal, both of which had upheld withholding tax assessments on dividends issued by Methanex Trinidad. In doing so, the Privy Council reaffirmed important international tax principles, particularly those addressing corporate residence and beneficial ownership, which have long been recognized in Canadian jurisprudence.

For Canadian multinationals, the case underscores that while treaty-shopping structures face close scrutiny, courts are cautious about disregarding legitimate corporate arrangements that align with tax treaty provisions. The decision echoes established Canadian case law on treaty interpretation and anti-avoidance rules, offering valuable lessons for cross-border tax planning.

Withholding Tax Cut from 5% to Zero Under the Tax Structure

Methanex Trinidad was organized in a way that minimized withholding tax on dividend payments. It was fully owned by Methanex Barbados, a company incorporated in Barbados. Methanex Barbados was, in turn, owned by Methanex Cayman, a Cayman Islands entity, which was ultimately controlled by Methanex Canada, a Canadian-resident corporation.

Under this structure, dividends moved from Trinidad to Barbados and then to Cayman before reaching Canada. By relying on the CARICOM double taxation agreement, Methanex reduced withholding tax from 5% under the Canada–Trinidad treaty to 0%. Because Barbados did not impose a withholding tax and Cayman law fully exempted dividends, the arrangement allowed funds to flow back to Canada with minimal tax cost.

In 2007, Methanex Trinidad distributed more than US$85 million in dividends. Although Trinidad’s tax authority challenged the structure, the Privy Council ultimately set aside the assessments.

Methanex Significant Legal Issues

Dividends in Question: Fictitious or Real?

The Court of Appeal of Trinidad had concluded that the dividends in question were “fictitious,” reasoning that they were effectively intended for Methanex Canada rather than Methanex Barbados. Supporting this view, the court pointed to the quick transfer of funds and the fact that the dividends were managed through Canadian bank accounts.

The Privy Council rejected this reasoning, holding that dividends properly declared and paid to Methanex Barbados could not be dismissed as fictitious simply because they ultimately reached Methanex Canada. It emphasized that routing dividends through holding companies is a legitimate and widely accepted corporate practice.

This finding aligns with Canadian jurisprudence, including Prévost Car Inc. v. The Queen (2009 FCA 57) and Velcro Canada Inc. v. The Queen (2012 TCC 57), both of which clarified the boundaries of beneficial ownership arguments in cross-border tax cases.

Residence Status of Methanex Barbados

The Privy Council also considered whether Methanex Barbados qualified as a resident under the Caribbean Treaty. Trinidad’s tax authority contended that Barbados International Business Companies (IBCs) could not be treated as genuine residents, arguing that they operated under a preferential tax regime and were not subject to taxation on worldwide income.

The court rejected this argument, finding that Methanex Barbados was indeed liable to tax in Barbados on its worldwide income, and that the existence of preferential rates did not negate its residence status. In reaching this conclusion, the court drew upon the Supreme Court of Canada’s ruling in Crown Forest Industries Ltd. v. Canada ([1995] 2 SCR 802), later reinforced by Alta Energy Luxembourg S.A.R.L. v. Canada (2021 SCC 49). Both decisions confirmed that “full liability” for tax purposes means exposure to taxation on worldwide income, not the imposition of the highest possible rate.

How “Paid” Is Interpreted Under the Tax Treaty

The Trinidad tax authority also contended that dividends were not genuinely “paid” to Methanex Barbados, since it did not exercise effective control over the funds. The Privy Council rejected this view, concluding that receipt by Methanex Barbados was sufficient to satisfy the treaty requirements.

This approach mirrors the Tax Court of Canada’s decision in Husky Energy Inc. v. The King (2024 TCC 73), which confirmed that withholding tax applies to the legal recipient of dividends, rather than the ultimate beneficial owner.

Key Takeaways for Canadian Multinationals

The Methanex ruling offers important guidance for Canadians involved in international tax planning. It reinforces that courts remain hesitant to disregard legitimate corporate structures, even when those structures are designed to achieve tax efficiencies.

The decision also confirms that beneficial ownership cannot be stretched beyond the wording of a treaty and that residence is determined by liability to tax on worldwide income, regardless of whether preferential tax regimes are in place.

For Canadian multinationals, the case highlights both the potential and the limits of treaty-based planning. It also points toward future disputes likely arising under newer anti-avoidance measures, such as the principal purpose test (PPT) introduced through the OECD Multilateral Instrument.

Tax Pro Tips from Top Canadian Tax Lawyers

Before setting up holding company structures, it is critical to carefully review applicable tax treaties. Courts will generally respect the wording of a treaty, but are unwilling to uphold arrangements that appear artificial. To reduce the risk of a challenge under the General Anti-Avoidance Rule (GAAR), businesses should also maintain clear documentation demonstrating the genuine commercial rationale behind their holding structures.

In addition, taxpayers must consider the principal purpose test (PPT) in treaties modified by the OECD Multilateral Instrument. Even if a structure is consistent with the literal treaty language, treaty relief may still be denied if its primary purpose is determined to be tax avoidance. Given these complexities, engaging knowledgeable Canadian tax lawyers is essential to evaluate both domestic and cross-border risks when planning international investments.

Frequently Asked Questions (FAQs)

Is this decision binding on Canadian taxpayers?

No. The case originated in Trinidad and Tobago, but its reasoning closely mirrors Canadian jurisprudence and offers important guidance for Canadian multinationals engaged in international tax planning.

What guidance does the decision provide on beneficial ownership?

It affirms that properly declared dividend payments cannot be set aside merely because they flow to an indirect parent company. This aligns with earlier Canadian cases that restrict how far beneficial ownership arguments can be extended.

Will the principal purpose test affect future outcomes?

Yes. With the PPT now included in many treaties, tax authorities have a broader anti-avoidance mechanism. Structures primarily designed to secure tax benefits may be denied treaty relief, even if they comply with the treaty’s wording.

What’s the best course of action for Canadian corporations?

Canadian corporations should continue to rely on legitimate corporate structures but support them with thorough documentation, careful treaty analysis, and guidance from experienced Canadian tax lawyers.

Disclaimer: The information in this article is provided for general guidance only and should not be considered legal or tax advice. Laws and policies change, and individual circumstances vary. Canadian taxpayers are strongly encouraged to seek advice from an experienced Canadian tax lawyer before taking any action based on any of the information provided.

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