Principal Issues: Whether a SOPARFI is a resident of Luxembourg for the purposes of the Canada-Luxembourg Tax Convention
Position: A SOPARFI that has a material economic nexus to Luxembourg will be considered to be a resident of Luxembourg for the purposes of the Canada-Luxembourg Tax Convention
Reasons: See letter
XXXXXXXXXX 2007-026344
A. Seidel, CMA
(613) 957-2058
May 19, 2009
Dear XXXXXXXXXX :
Re: Luxembourg SOPARFI
This is in response to your December 7, 2007 letter in which you requested our comments regarding the eligibility of a Société de Participation Financière (referred to herein as a "SOPARFI") formed under Luxembourg laws to the benefits provided in the Canada-Luxembourg Tax Convention (the "Treaty"). We apologize for the delay in our reply.
The situation outlined in your letter appears to relate to a situation involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the CRA website at http://www.cra-arc.gc.ca. Although we cannot comment on your specific situation, we are prepared to provide the following general comments.
Application of the Treaty
Article 1 of the Treaty provides that the Treaty applies to persons who are residents of one or both of the Contracting States. However, Article 28(3) of the Treaty provides that "the Treaty shall not apply to holding companies within the special Luxembourg laws (the Act of July 31, 1929 and the Grand Duchy Order of December 17, 1938) or any other similar law enacted in Luxembourg after the signature of the Treaty, nor to companies subjected to similar fiscal laws in Luxembourg". Therefore, to be entitled to the benefits provided under the Treaty, a SOPARFI must be a resident of Luxembourg within the meaning of Article 4 and must not be a company described in Article 28(3).
The statutes governing the 1929 Holding Companies, the Milliardaire Holding Companies and SOPARFIs are the following:
1. The Act of July 31, 1929 set up the concept of a tax-exempt holding company (a "1929 Holding Company"). The 1929 Holding Company is a company whose sole statutory object is the acquisition and management of participations in other Luxembourg or foreign companies. A 1929 Holding Company may provide services to its subsidiaries, but not for profit, and it must not manage them. Most other activities, including all commercial activities, are prohibited.
2. The Grand Duchy Order of December 17, 1938 created a new type of 1929 Holding Company generally referred to a "Milliardaire Holding Company." This type of holding company may provide financing to any subsidiary in which it holds at least 25% of the issued and outstanding shares.
3. The Grand-Ducal Decree of December 24, 1990 which amended the Luxembourg income tax law to provide an exemption from income tax for dividends and gains on shares of certain subsidiary corporations (referred to herein as "qualifying subsidiaries").
Except for the participation exemption regime allowed under the Grand-Ducal Decree of December 24, 1990, the above holding company regimes will cease to exist after December 31, 2010 in response to a European Commission decision that they contravened EU state aid rules by granting "unjustified tax advantages".
The 1929 Holding Company
A 1929 Holding Company is a company whose sole statutory object is the acquisition and management of participations in other companies. It may provide services to its subsidiaries, but not for profit, and it must not manage them. A 1929 Holding Company cannot render services to anyone and cannot conduct any commercial or industrial activities of its own.
Under Luxembourg domestic law, a 1929 Holding Company is exempt from income taxes (i.e., the corporate income tax, or impôt sur le revenu des collectivités, and the municipal business or trade tax, or impôt commercial communal). A 1929 Holding Company is exempt from the net worth or capital tax (impôt sur la fortune), there is no withholding tax applicable to dividends paid by it and no tax is payable by it upon the liquidation of its assets. A 1929 Holding Company is subject to a low rate (0.2%) of subscription tax (taxe d'abonnement). The subscription tax is an annual tax based on the average value of paid-up shares of the 1929 Holding Company from the previous year. A 1929 Holding Company is also subject to a one-time capital duty (droit d'apport) of 0.5% of the contributions made to it by shareholders.
The 1929 Holding Company regime was amended in 2005 so that it would no longer apply if at least 5% of the total amount of dividends a 1929 Holding Company received during a year were derived from participations in non-resident companies that were not subject to an income tax similar to Luxembourg corporate income tax (with respect to both tax rate and tax base). In December 2006, Luxembourg passed a law abolishing the 1929 Holding Company and Milliardaire Holding Company regimes. This was done in response to a finding by the European Commission that the regimes were state aid incompatible with the common market. The 2006 law also sets out rules for the transitional period of January 1, 2007 to December 31, 2010.
Milliardaire Holding Company
A Milliardaire Holding Company is a type of 1929 Holding Company whose capital (shares and obligations) is not less than 24,000,000 Euros. A Milliardaire Holding Company is exempt from the corporate income tax, the trade tax, the net worth tax and the subscription tax. A Milliardaire Holding Company is subject to the one-time capital duty (0.5% of the contributions) and a special distribution tax on interest paid, dividends distributed and remuneration and fees paid to directors residing less than six months of the year in Luxembourg. The rate of distribution tax varies from 0.1% to 0.3% depending upon the type of distribution made. Where no such amounts are paid out in a fiscal period, this distribution tax becomes a flat "minimum" annual tax (currently 48,000 Euros). Dividends paid by a Milliardaire Holding Company are exempt from withholding tax.
The Evolution of the SOPARFI
Prior to 1967, any company formed in Luxembourg under its Commercial Companies Law of 1915 was not subject to any income tax on dividends received from a subsidiary company resident in Luxembourg and any gains arising upon the disposition of such shares were not subject to tax in Luxembourg (the "participation exemption"). However, all dividends received from foreign subsidiaries were fully taxable in Luxembourg as were the gains realized upon the disposition of the shares. In 1967, Luxembourg introduced legislation that provided for a 50% participation exemption for dividends received from a foreign subsidiary in which the Luxembourg parent held a minimum 25% ownership interest, the Luxembourg parent held the shares for at least 12 months and the income giving rise to the dividend was subject to tax in the country of origin at a tax rate similar to that imposed by Luxembourg. This 50% exemption became a 100% exemption in 1978 and in 1986 the ownership requirement was reduced to 10%. The Grand Ducal Decree of 1990 extended the participation exemption to include gains arising on the disposition of the shares of a foreign subsidiary. After 1990, a Luxembourg company that restricted itself to holding shares in other corporations and was entitled to a participation exemption in respect of the dividends or gains derived or realized in respect of those shares came to be known as a SOPARFI.
Q.1 - Is a SOPARFI resident in Luxembourg within the meaning of Article 4 of the Treaty?
Subject to our comments below regarding residence of convenience, a SOPARFI will be a resident of Luxembourg within the meaning of Article 4 of the Treaty if it is liable to tax in Luxembourg based on one of the criterion described in that Article. In this respect, we would consider a SOPARFI to be liable to tax in Luxembourg within the meaning of Article 4 if it is subject to the most comprehensive form of taxation that exists in Luxembourg (i.e., subject to Luxembourg's full taxing jurisdiction on its worldwide income). However, it does not mean that a SOPARFI cannot benefit from the participation exemption provisions under the Luxembourg tax law.
Subject to the participation exemption, a company incorporated under the Commercial Companies Law of 1915 is subject to income tax on its worldwide income (from 20.8% to 22.08% of taxable income), a municipal business tax (7.5% of operating profit in excess of 17,500 Euros), a capital tax (1% of all capital contributions when made) and a wealth tax (0.5% of a company's net assets).
Based upon our understanding of the taxation of a SOPARFI as set out above, and subject to our comments below, it is our view that a SOPARFI would be liable to tax in Luxembourg within the meaning of Article 4 of the Treaty and is, in our view, a resident of Luxembourg that is entitled, subject to Article 28(3) of the Treaty and the "residence of convenience" restriction discussed below, to any of the benefits available under the Treaty.
In addition to being liable to tax, a SOPARFI must have a material economic nexus to Luxembourg to be a resident of Luxembourg for the purposes of the Treaty. For example, if a SOPARFI is created or used in connection with a treaty shopping arrangement where the SOPARFI is in fact only a "resident of convenience", we would not consider it to be a resident of Luxembourg for the purposes of the Treaty. In this respect, see our comments in Income Tax Technical News Issue No. 35, dated February 26, 2007.
Q.2 - Does Article 28(3) of the Treaty apply to a SOPARFI?
Article 28(3) of the Treaty would deny treaty benefits to a SOPARFI if the SOPARFI is a company that is subjected to similar fiscal laws in Luxembourg as the fiscal laws that apply to a 1929 Holding Company or a Milliardaire Holding Company.
In our view, the Grand Ducal Decree of December 24, 1990 is not similar to the Act of July 31, 1929 or the Grand-Ducal Decree of December 17, 1938 which govern 1929 Holding Companies and Milliardaire Holding Companies. Unlike the Act of July 31, 1929 or the Grand-Ducal Decree of December 17, 1938, the Grand-Ducal Decree of December 24, 1990 does not provide for a comprehensive exemption from normal income taxation. The exemption applicable to a SOPARFI relates to dividends and capital gains on the shares of qualifying subsidiaries and is only available if:
- the company owns at least 10% of the share capital of the subsidiary or the company owns shares of the subsidiary equal to at least 1.2 million Euros (to obtain the exemption for dividends) or 6.0 million Euros (to obtain the exemption for capital gains);
- the company has owned, or agrees to own, such shares for at least 12 months, and
- where the subsidiary is a resident of Luxembourg, it is fully subject to income tax in Luxembourg, or
- where the subsidiary is not a resident of Luxembourg, the subsidiary is located in a country with which Luxembourg has a tax treaty or the subsidiary is fully taxable (i.e., cannot pay less than one half of the Luxembourg corporate income tax rate) on the income from which distributions are made.
Accordingly, we do not consider a SOPARFI to be subject to similar fiscal laws in Luxembourg despite the fact that a SOPARFI may not pay any income tax on dividends from qualifying subsidiaries or on gains from the sale of the shares of qualifying subsidiaries. In our view, the nature and extent of the participation exemption applicable to a SOPARFI is sufficiently different from the broad tax exemptions given to 1929 Holding Companies and Milliardaire Holding Companies that we would not consider them to be subject to similar fiscal laws within the meaning of Article 28(3).
Caveat
Although a SOPARFI would normally be considered to be a resident of Luxembourg for the purposes of the Treaty, the CRA will consider the application of the general anti-avoidance rule in section 245 of the Act to deny a treaty benefit to a SOPARFI where a 1929 Holding Company or a Milliardaire Holding Company converts into a SOPARFI primarily to obtain a tax benefit under the Treaty.
We trust our comments are of some assistance.
Yours truly,
Daryl Boychuk
Manager, International Section I
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
