Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Would the 5% reduced rate of withholding tax under Article X(2)(a) of the Canada-France Income Tax Convention (the "Canada-France Treaty") apply to dividends paid by a Canadian-resident corporation ("Canco") to a French SNC which owns all the shares of Canco, where the SNC has elected to be subject to corporate income tax under the domestic income tax laws of France?

Position: An SNC that has elected to be subject to corporation income tax under French tax law, that has its place of effective management in France for French tax purposes and is liable to tax as a corporation considered resident in France for French tax purposes is entitled to claim the benefit of the 5% reduced withholding tax rate under Article X(2)(a) of the Canada-France Treaty in respect of dividends received from Canco, where the SNC owns all the issued and outstanding shares of the Canco.

Reasons: Such an SNC is a resident of France for purposes of the Canada-France Treaty because it is a person who, under the laws of France is liable to tax in France by reason of its domicile, residence, place of management or any other criteria of a similar nature. Such an SNC is also the beneficial owner of the dividends received from Canco and a company liable to corporation tax which controls at least 10% of the voting power in Canco.

XXXXXXXXXX 2001-010871
S. Wong
August 13, 2002

Dear XXXXXXXXXX:

Re: Withholding Tax Rate on Dividend Payments to French Société en nom Collectif ("SNC") that Elects to be Taxed as a Corporation for French Tax Purposes

We are writing in reply to your letter of November 1, 2001 requesting clarification with respect to the technical interpretation 2000-0048855 dated September 13, 2001 regarding the appropriate Canadian withholding tax rate on dividends payable by a Canadian-resident corporation ("Canco") to a French société en nom collectif ("SNC") in light of the Canada-France Income Tax Convention where the SNC has elected to be subject to corporate income tax under the domestic income tax laws in France and where the SNC owns all the issued and outstanding shares of Canco. We apologize for the delay in replying to your letter.

In this letter, unless otherwise expressly stated, "Canada-France Treaty" means the Canada-France Income Tax Convention, as amended by the protocols signed in 1987 and 1995; "Canada-U.S. Treaty" means the Canada-United States Income Tax Convention, 1980, as amended; "Act" means the Canadian Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended and "Election" means the election pursuant to Articles 206(3) and 239 of the French Code Général des Impots available to certain entities, including an SNC, to be subject to French corporation tax.

It is your opinion that where an SNC has made the irrevocable election to be subject to corporate tax under the domestic income tax laws in France, the SNC meets the definition of "company" for purposes of the Canada-France Treaty. It is also your view that such an SNC therefore meets the definition of "person" for purposes of the Canada-France Treaty, and is a resident of France pursuant to Article IV(1)(a) of the Canada-France Treaty

as such an SNC is subject to the same comprehensive form of taxation in France as a corporation that is resident in France for French tax purposes. Thus, where such an SNC is the sole shareholder of Canco, it is your view that any dividends paid by Canco to SNC should be subject to the 5% reduced withholding tax rate pursuant to Article X(2)(a) of the Canada-France Treaty. In support of this position, you referred by analogy to technical interpretation 9728445 where it is stated that a U.S. LLC that has elected to be treated as a corporation for U.S. tax purposes would be considered as a resident of the U.S. for purposes of the Canada-U.S. Treaty.

BACKGROUND INFORMATION

Our comments below are based on the following background information on the French corporate tax system, the characteristics of SNCs, the French tax treatment of SNCs and the effect of the Election, which are generally based on information you have provided to us in your letters dated January 18, 2002 and July 3, 2002 and our understanding of the French tax system:

1. Under French tax law, certain corporate entities (principally, Société anonyme ("SA"), Société à responsabilité limiteé ("SARL") and Société en commandite par actions ("SCA")) are subject by law to corporation tax. Other entities, including SNCs, normally have no income tax liability at the entity level, but if the Election as described below is made, will be subject to corporation tax.

2. Under French law, a corporation is generally deemed to be resident in France if its "place of effective management" is in France. We understand that the "place of effective management" of a corporation is defined for French tax purposes as the place where the bodies of direction, management and control of the corporation are located. We understand that this generally corresponds to the concept of "place of effective management" or "place of management" used in many tax treaties concluded by France and in the OECD Model Tax Convention.

3. Under domestic French tax law, corporations are taxable on a territorial basis with respect to business income. Thus, both corporations that are considered resident in France under French law (i.e., its place of effective management is located in France) and foreign corporations are subject to French corporation tax on business income derived from France but, subject to certain exceptions,¹ are not subject to French corporation tax on business income derived outside of France. However, the territorial principle applies only to business income. Passive income, such as interest, of a corporation that is considered resident in France under French law,

whether sourced in France or outside France, is subject to French corporation tax (subject to certain exemption regimes, such as the EU parent-subsidiary regime). In contrast, a corporation that is not considered resident in France under French law is not subject to French corporation tax on passive income sourced outside France.

4. In general terms, the characteristics of SNCs are as follows:

(a) an SNC is formed by the filing of a written document (as opposed to any actions by the parties);

(b) an SNC is a separate legal person from the time it is registered in the commercial registry;

(c) the name of the SNC must include the name of one of the members;

(d) the SNC, not the members, owns the assets of the SNC;

(e) debts are debts of the SNC, not of the members, but if the debts are not paid, the liability of the members for those debts is unlimited;

(f) contracts entered into by an SNC bind its members;

(g) until the annual inventory is approved by the members, no member has any right to the profits of the SNC;

(h) members are not agents of each other in carrying out the business of the SNC;

(i) the death or bankruptcy of a member will dissolve the SNC unless the partnership agreement provides otherwise;

(j) interests in an SNC are not transferable unless the partnership agreement specifically provides for assignability; and

(k) a retiring member will generally be liable only for debts incurred by the SNC before the date of his retirement.

5. Unless the Election to be taxed as a corporation described below is made, an SNC is not itself subject to French corporation tax, rather, members/partners of the SNC are subject to income tax based on their shares of the SNC's profits.

6. Articles 206(3) and 239 of the French Code Général des Impots provides that certain entities may elect to be taxed as a corporation in France. The entities eligible for the Election are: SNCs, civil partnerships (sociétés civiles), undeclared partnerships (société en participation or SPs), limited partnerships with respect to share of profits accruing to general partners (société en commandite simple or SCSs) and economic interest grouping (GIE). It appears that all the entities that are eligible for the Election are entities that are formed in France, under and governed by the laws of France. The Election is made by filing a written notice with the local tax office. The Election, once made, is irrevocable.

7. An SNC that has made the Election is subject to the same French corporation tax regime as that applying to limited companies, that is,

(a) Assuming the SNC's place of effective management is in France for French tax purposes, the SNC itself is liable to French corporation tax on business income sourced in France and on worldwide passive income (subject to certain exceptions as discussed above), just like any French corporation considered resident in France under French law.

(b) Following the Election, the partners are not taxed personally on the profits of the SNC unless that income is distributed to the partners. Distributions from such an SNC are taxed as dividends from a corporation subject to French corporate income tax. That is, distributions are subject to tax in the hands of the partners as dividends which result in the granting of dividend tax credits (avoir fiscal) and equalization tax (précompte mobilier) for certain dividends.

Making the Election does not change the legal status or characteristics of the SNC. Thus, the partners have unlimited liability with respect to the debts of the SNC, whether or not the SNC makes the election, although the primary liability is with the SNC.

8. It is not clear whether an SNC formed and registered in France but does not have its place of effective management in France can make the Election. We understand that it is possible that the French tax authorities could refuse to accept the Election on the basis that such an SNC is not resident in France for French tax purposes. Even if such an Election is accepted by the French tax authorities, it is not clear what are the French tax consequences. Therefore, as agreed with you (XXXXXXXXXX/S. Wong, July 4, 2002), our comments below are restricted to an SNC that has its place of effective management in France for French tax purposes.

Our Comments

As explained in Information Circular 70-6R5 dated May 17, 2002, written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject of an Advance Income Tax Ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following general comments.

Pursuant to Article X(2) of the Canada-France Treaty, dividends paid by a company which is a resident of Canada to a resident of France may be taxed in Canada, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed:

"(a) 5 per cent of the gross amount of the dividends if the beneficial owner is a company liable to corporation tax which: (i) controls directly or indirectly at least 10% of the voting power in the company paying the dividends where that company is a resident of Canada;...

(b) 15 per cent of the gross amount of the dividends in all other cases."

Thus, in order for the 5% reduced withholding tax rate to apply to dividends paid by Canco to a French SNC that elects to be subject to French corporate tax, all of the following conditions must be satisfied:

1. The SNC must be "a resident of France" for purposes of the Canada-France Treaty. Article IV(1) of the Canada-France Treaty defines "resident of a Contracting State" to mean, inter alia,

"(a) any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature but the term does not include any person who is liable to tax in that State in respect only of income from sources in that State;...

(c) in the case of France, partnerships or other bodies of persons which have their place of effective management in France, and whose partners, shareholders or other members are personally liable to tax therein in respect of their share of the profits under domestic French law; but, with respect to the benefits granted by Canada under the Treaty, such partnerships and bodies of persons shall not be treated as resident of France except insofar as their partners, shareholders or other members are liable to French tax on income in respect of which these benefits are granted;..." [Emphasis Added]

2. The SNC must be the beneficial owner of the dividends;

3. The SNC must be "a company liable to corporation tax"; and

4. The SNC must control directly or indirectly at least 10% of the voting power in Canco.

Each of these conditions are discussed below.

Is an SNC that has made the Election "a resident of France" for purposes of the Canada-France Treaty?

As a preliminary matter, it should be noted that Article IV(1)(c) of the Canada-France Treaty would not apply to deem an SNC that has elected to be taxed as a corporation in France to be a resident of France for purposes of the Canada-France Treaty. This is because under domestic French law the partners of such an SNC would not be personally liable to tax for their share of the SNC profits, including dividends from Canco, until such profits are distributed. Rather it is the SNC itself which is liable to French corporation tax on its profits.

Since Article IV(1)(c) of the Canada-France Treaty does not apply to an SNC that has elected to be taxed as a corporation in France, in order to be a resident of France for purposes of the Canada-France Treaty, such an SNC must meet the requirements in Article IV(1)(a) of the Canada-France Treaty, specifically, it must be a person who, under the laws of France, is liable to tax therein by reason of its domicile, residence, place of management or any criterion of a similar nature.

A "person" is defined in Article III(1)(b) of the Canada-France Treaty to include an individual, a company or any other body of persons, and in the case of Canada, a partnership, an estate and a trust. There are good arguments that "body of persons" is broad enough to include a partnership such as an SNC. Even if a partnership or SNC in general is not a body of person, it is clear that an SNC that elects to be taxed as a corporation in France is a "company" as defined in Article III(1)(c) of the Canada-France Treaty, that is, "any other entity which is treated as a body corporate for tax purposes". Since a "person" as defined in Article III(1)(b) includes a "company", it is clear that an SNC that has made the Election is a "person" and a "company" for purposes of the Canada-France Treaty.

The issue is then whether an SNC that has made the Election is under the laws of France "liable to tax in France by reason of its domicile, residence, place of management, or any other criterion of a similar nature" within the meaning of Article IV(1)(a) of the Canada-France Treaty. In technical interpretation 2000-0048855 dated September 13, 2001, we stated that an SNC that has made the Election would not be considered a resident of France for purposes of the Canada-France Treaty as it is not liable to tax in France by reason of its domicile, residence, place of management or any other criterion of similar nature.

That initial opinion was based on insufficient information on the French corporate tax system and on the Election. We have now reconsidered this issue in light of addition information on the French corporate tax system and the Election; our analysis and conclusion in this regard are set out below.

As we have stated in the past (see Ruling 2001-0089913 and technical interpretation 9822230), we are of the view the principles set out in the Supreme Court of Canada decision in The Queen v. Crown Forest Industries Limited, 95 DTC 5389 (SCC) can be applied, albeit with some caution, to determine residency in a treaty country that have adopted a territorial system of taxation such as France. In order to qualify as a resident of a contracting state which has a territorial tax system, a taxpayer will generally have to be subject to as comprehensive a tax liability as is imposed by the particular state.

Thus, applying the principles in Crown Forest to the present case, it is first necessary to determine the criteria on which France determines who is liable to the most comprehensive form of taxation under its domestic law and to determine whether this criteria is one of the enumerated grounds for residency in France under Article IV(1)(a) of the Canada-France Treaty. It is then necessary to determine whether an SNC that has made the Election meets that criteria and is thereby liable to as comprehensive a tax liability as is imposed by the state. In making this latter determination, the enumerated criteria must form the "true and immediate basis for tax liability".

We understand that the most comprehensive form of tax liability under domestic French law for corporations considered to be resident in France under French law is tax on business income sourced in France (with certain exceptions) and on worldwide passive income (subject to certain exemption regimes). We also understand that the basis for corporate residency in France is the place of effective management which we understand corresponds to the concept of "place of management", one of the enumerated criteria for residency in Article IV(1)(a) of the Canada-France Treaty.

We understand that an SNC that elects to be subject to French corporation tax and that has its place of effective management in France for French tax purposes will generally be subject to a similar residency test as a French limited company, i.e., it is considered resident in France for French tax purposes because its place of effective management is located in France. Thus, while it could be argued that French corporate tax liability attaches to an SNC that has made the Election not by reason of any enumerated criterion or similar criterion, but because of a simple election, this argument ignores what is, in the words of the Supreme Court of Canada in Crown Forest, the "true and immediate basis for tax liability". That is, based on the information provided, the reason an SNC that has its place of effective management in France and that has made the Election is taxed as a domestic French corporation is because its place of management is in France, one of the enumerated criteria for residency in Article IV(1)(a) of the Canada-France Treaty.

Accordingly, we are of the view that an SNC that has its place of effective management in France for French tax purposes, that has made the Election and that is taxed as a corporation resident in France under French tax law is a person who, under the laws of France, is liable to tax therein by reason of its domicile, residence, place of management or any criterion of a similar nature and a resident of France for purposes of the Canada-France Treaty.

This conclusion is consistent with:

1. paragraph 5 of the commentary on Article 1 of the OECD Model Tax Convention which states:

"Where a partnership is treated as a company or taxed in the same way, it is a resident of the Contracting State that taxes the partnership on the grounds mentioned in paragraph 1 of Article 4 and, therefore, it is entitled to the benefits of the Convention."

2. the intention of the parties to the Canada-France Treaty as evidenced in Article IV(1)(c) of the Treaty which clearly intends partnerships to be entitled to treaty benefits provided certain conditions are satisfied, specifically in relation to benefits granted by Canada, the partners must be liable to French tax on income in respect of which the benefits are granted; and

3. our position in technical interpretation 9728445 that a U.S. LLC that has elected to be treated as a corporation for U.S. tax purposes and is taxable in the U.S. on its worldwide income would be a resident of the U.S. for purposes of the Canada-U.S. Treaty.

Is the SNC the beneficial owner of the dividends paid by Canco?

We understand that, unlike a partnership formed in Canada and most common law jurisdictions, under French law, an SNC is a separate legal person and the SNC, not the members/partners, owns the assets of the SNC. On that basis, we are of the view that the SNC should be considered the beneficial owner of the dividends from Canco for purposes of Article X(2) of the Canada-France Treaty.

Is the SNC "a company liable to corporation tax" which controls directly or indirectly at least 10% of the voting power in Canco?

As discussed above, since an SNC that has made the Election is taxed as a corporation for French tax purposes, it is a "company" as defined in Article III(1)(c) of the Canada-France Treaty, that is, "any other entity which is treated as a body corporate for tax purposes". Such an SNC is also liable to corporation tax in France. Where such an SNC owns all the issued and outstanding shares of Canco, it controls all the voting power in Canco.

Based on all of the foregoing, we are of the view that an SNC that has elected to be subject to corporation income tax under French tax law, that has its place of effective management in France for French tax purposes and is liable to tax as a corporation considered resident in France for French tax purposes should be entitled to claim the benefit of the 5% reduced Canadian withholding tax rate under Article X(2)(a) of the Canada-France Treaty in respect of dividends received from Canco where the SNC owns all the issued and outstanding shares of Canco.

We trust that our comments will be of assistance to you.

Yours truly,

Jim Wilson
Section Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

ENDNOTES

¹ One of these exceptions is the France's controlled foreign corporation regime. Another exception is the ability of a French corporation to elect, with the agreement of the French Ministry of Economy, to be taxed on worldwide income, although we understand very few companies have made such an election.