Methanex Prevails in Privy Council Dispute in Trinidad and Tobago

The decision in Methanex Trinidad (Titan) Unlimited v The Board of Inland Revenue, [2025] UKPC 20, released earlier this year by the UK Privy Council, deals with sequential dividends paid by an operating company through a chain of holding companies to the ultimate parent in Canada. At issue in Methanex was the applicability of a Trinidad and Tobago domestic anti-avoidance rule that mirrors similar rules in the domestic tax regimes of other Caribbean nations, and of broader application, the proper interpretation of the Caribbean Community (CARICOM) Tax Treaty. The Privy Council’s conclusions raise the broader perennial question of the extent to which references to well understood corporate law concepts (such as what constitutes a dividend) are to be respected in interpreting tax statutes and tax treaties.

The Trinidad Board of Inland Revenue (BIR) recharacterized the dividends paid by the operating subsidiary in Trinidad as being paid “in substance” directly from the operating subsidiary to the ultimate parent in Canada, and it applied withholding tax accordingly. The BIR invoked a domestic anti-avoidance rule and raised several treaty interpretation arguments to support its position. In a unanimous decision written by Lord Richards, the Privy Council allowed the taxpayer’s appeal, overturning lower tier court decisions in favor of the BIR.

I. Background

Methanex is the world’s largest producer of methanol, a chemical used in a wide range of products from fuel to pharmaceuticals. The Methanex group’s ultimate parent is Methanex Canada. Methanex Trinidad is an indirect subsidiary of Methanex Canada. Methanex Trinidad owns and operates a methanol plant in Trinidad and Tobago.

In 2007, a dividend of USD $85.4M was paid by Methanex Trinidad to its parent, Methanex Barbados. Methanex Barbados then paid dividends of the same amount to its parent, Methanex Cayman. Methanex Cayman commingled the USD $85.4M with dividends from other subsidiaries and used the monies to pay expenses, repay loans, invest in subsidiaries, and pay dividends to Methanex Canada.

No tax was withheld on the dividend from Methanex Trinidad because the taxpayer relied on Article 11 of the CARICOM Tax Treaty. Article 11 provides that if a resident of one Member State pays dividends to a resident of another Member State, then those dividends are taxed at 0%. Trinidad and Barbados are both Member States of CARICOM.

The lower courts had determined as a fact that Methanex Barbados was a company formed for legitimate corporate purposes (including the limitation of liability). This conclusion was not challenged by the BIR before the Privy Council. However, the BIR did challenge whether Methanex Barbados was resident in Barbados for the purposes of the CARICOM Tax Treaty notwithstanding that Barbados had issued a certificate confirming that Methanex Barbados was resident in Barbados.

The dividends paid by Methanex Trinidad, Methanex Barbados, and Methanex Cayman in each case respected the relevant corporate law. The respective dividend resolutions were duly drafted and in each case the directors of the applicable company confirmed that the company had sufficient retained earnings to pay a dividend. Although Methanex Barbados and Methanex Cayman each maintained a bank account in a Canadian bank and in respect of which Methanex Canada’s treasury department had signing authority, each account belonged to the applicable company.

II. The Reassessments and Decisions

The BIR assessed Methanex Trinidad to impose 5% withholding tax as if its dividends were paid directly to Methanex Canada and the Canada-Trinidad Tax Treaty applied. In support of this assessment, it advanced two main arguments. It first argued that the dividends should be disregarded because they were “artificial and fictitious” under §67 of Trinidad and Tobago’s domestic tax legislation. It also raised interpretive arguments as a basis for denying relief under the CARICOM Tax Treaty. The Privy Council’s response to each of these arguments is set out below.

A. Artificial
The main issue in Methanex was whether the dividends were “artificial”. This legal concept was previously interpreted by the Privy Council in two cases dealing with an identical provision in Jamaica’s income tax legislation: Seramco Ltd Superannuation Fund Trustees v Income Tax Commissioners, [1977] AC 287 and Commissioner of Taxpayer Audit and Assessment v Cigarette Company of Jamaica Ltd, [2012] UKPC 9. Seramco involved a surplus stripping scheme with a tax-exempt superannuation fund. Jamaica Cigarette dealt with outstanding interest-free loans from a subsidiary to its parent. The transactions in Seramco were held to be artificial, but those in Jamaica Cigarette were not.

Jamaica Cigarette described the test as one of commerciality that asks whether a well-informed bystander would say, ‘[t]his simply would not happen in the real world.’ In that case, the Privy Council concluded that interest-free, unsecured loans between subsidiaries and parents are not artificial when examined in their inter-group commercial context. The test from Jamaica Cigarette was considered at each level of court in Methanex. Only the Privy Council concluded that the dividends at issue were not “artificial” based on the application of the Jamaica Cigarette test, and the decision is instructive, beyond the facts of the Methanex case, on the proper application of that test.

At first instance, the Tax Appeal Board (TAB) had concluded that the dividends were “artificial” for several reasons. It started with a discussion about beneficial ownership, which it described as “an issue of global concern” that “has an intrinsic linkage with anti-avoidance considerations” and the genesis of which is found “in the doctrine of substance over form.” The TAB concluded that Methanex Canada was the beneficial owner of the dividends and found the dividends to Methanex Barbados to be artificial (as well as fictitious, as discussed below) at least partly on that basis.

The Court of Appeal also considered Methanex Canada to be the beneficial owner of the dividends paid to Methanex Barbados.However, the Court of Appeal’s analysis focused on the “overall effect” of the series of transactions to determine whether “in substance” the payments were “actual dividend payments” to Methanex Barbados. The Court of Appeal concluded that the payments were artificial because of Methanex Canada’s instructions and control over the bank accounts, as well as the rapidity of the sequential dividends and the lack of independent discretion by the directors of Methanex Barbados.

The Privy Council disagreed with the lower courts that the dividends were artificial for two main reasons:

• First, it noted that the only legal means available for the dividends to be paid to Methanex Canada was by declaring dividends at each company in the chain. It was impossible under corporate law for Methanex Trinidad to pay a dividend to anyone other than Methanex Barbados. “It cannot be ‘artificial’”, the Privy Council noted, “to execute a legitimate commercial decision by the only available legal means.” The Privy Council pointed to the Court of Appeal’s conclusion that the interposition of Methanex Barbados in the chain of companies was not itself artificial. As an extension, therefore, the dividends paid to and by it cannot be artificial.
• Second, the Privy Council also disagreed with the lower courts’ conclusions that the dividends had “abnormal features”. The Privy Council made clear that “the payment of dividends up a corporate chain at the request of the ultimate holding company is a commercial commonplace in national and international groups, not least because it is the only lawful means by which distributable profits can be brought up from subsidiaries”.

B. Fictitious
Another issue in Methanex was whether the dividends were “fictitious”. Prior decisions concluded that this legal concept is synonymous with the doctrine of sham as it was set out in Snook v London and West Riding Investments Ltd, [1967] 2 QB 786. Snook described a sham transaction as one intended by the parties “to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create.”

Both lower courts in Methanex concluded the dividends were fictitious, largely for the same reasons they found them to be artificial. Their analysis focused on the instructions from Methanex Canada’s treasury department, the rapidity of the dividends, and the central control over the bank accounts. The Court of Appeal found the intermediary dividends to be fictitious because they were not as they purported to be because the “intended and actual beneficiary” was Methanex Canada. When “examined as to their substance”, the Court of Appeal said, the transactions were simply payments to Methanex Canada.

The Privy Council firmly rejected the conclusions of the lower courts, holding that “the fact that a payment is made by A to B with the intention that it should be paid by B to C does not itself render fictitious the payment from A to B.” The Privy Council pointed out that such a conclusion was particularly apparent in the context of back-to-back dividends paid up a chain in a corporate group. The Privy Council held that the payment of such dividends was valid “in law and in substance” and that there was nothing unusual about an ultimate parent requiring its subsidiaries to pay dividends through the corporate chain. It also concluded that the features of these dividends were not sufficient to conclude that Methanex Canada became their beneficial owner.

C. CARICOM Interpretive Arguments
The BIR argued two separate bases to deny withholding tax relief for the dividends under the CARICOM Tax Treaty. The first basis asserted by the BIR was that Methanex Barbados was not a resident of Barbados as required to qualify for treaty relief under the CARICOM Tax Treaty. The second basis was that the particular dividends at issue did not qualify for treaty relief under the terms of the CARICOM Tax Treaty dividend article.

The BIR argued that Methanex Barbados was not a “resident” of Barbados for the purposes of the treaty because its worldwide income was not liable to tax at the full rate by Barbados. This argument largely relied on Methanex Barbados’s status as an International Business Company (IBC). Under the International Business Companies Act, a Barbados resident corporation can apply for an IBC license, which affords different advantages including a lower tax rate. Although the lower courts had held that the CARICOM Tax Treaty did apply to an IBC company, the BIR appealed this conclusion.

In discussing the principles applicable to treaty interpretation, the Privy Council affirmed the Supreme Court of Canada’s conclusion in Canada v Alta Energy Luxembourg S.A.R.L., 2021 SCC 49, that treaties need to be interpreted contextually “with a view to implementing the true intentions of the parties.” It also cited to the Supreme Court of Canada’s decision in Crown Forest Industries Ltd v Canada, [1995] 2 SCR 802, which interpreted the notion of being “liable to tax” for the purpose of determining a corporation’s residence as asking whether the jurisdiction asserts the right to impose tax on its worldwide income.

The Privy Council rejected the BIR’s assertion that Methanex Barbados’ status as an IBC meant that it was not liable to tax in Barbados. Methanex Barbados was “liable to tax” in Barbados even though its IBC status meant it was subject to a reduced rate: regardless of the rate charged, Barbados had undeniably asserted jurisdiction to tax it on all its worldwide income.

The BIR’s final argument was that the language of “paid…to a resident of another Member State” in the CARICOM Tax Treaty should be read to include a requirement that the dividends must be received “in substance” and enjoyed by the resident recipient. However, the CARICOM Tax Treaty does not include a beneficial ownership requirement. This argument was quickly dismissed, with the Privy Council noting that the dividends at issue were “paid to” and “received by” Methanex Barbados within the “ordinary sense” of the words.

III. Conclusion and Takeaways

At each court level, the decisions in Methanex recognized that tax-driven structuring was not itself an issue. The issue instead was whether the specific dividends paid through this chain of companies could be recharacterized into dividends paid from Methanex Trinidad directly to its ultimate parent, Methanex Canada, for purposes of determining if withholding tax applied. Departing from both lower courts on this question, the Privy Council held they could not be so recharacterized and that the well-established corporate law principles as to what constitutes a valid dividend must be respected, both in the interpretation of the domestic anti-avoidance rule and for tax treaty purposes.

Methanex is an important reminder that purposive interpretation cannot be used to read terms or restrictions into a treaty that the treaty signatories did not themselves choose to include. This is especially true when there is no evidence to suggest the parties intended otherwise.

Methanex is also an important reminder that legal substance matters. Here, the dividends paid through the corporate chain of companies consistent with the request of the central treasury group were neither artificial nor fictitious. Legally effective dividends are a normal commercial practice in corporate groups. As long as dividends are legally effective, they cannot be set aside in favor of a substance-based approach. Although beneficial ownership formed a greater part of the analysis at the lower courts, the Privy Council was clear that the “rapid” payment of dividends through a chain of companies at the request of the ultimate recipient did not mean that the legal recipient of each dividend was not its beneficial owner.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

David Wilson is a partner, and Sebastien Duckett and Joshua Lasry are associates at Osler, Hoskin & Harcourt LLP in Montréal.

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