2002 Ruling 2002-0132163 - Characterization of Foreign Entity

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 CCRA.

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

PRINCIPLE ISSUES:

1-Whether a Société par actions simplifiée (S.A.S.) is a corporation.

2-Whether the conversion of a Société anonyme (S.A.) into a S.A.S. will result in a disposition of its shares held by a Canadian company.

3-Whether the conversion of a S.A. into a S.A.S. will result in a disposition of the assets of the S.A.

4- Whether the conversion of the S.A. into a S.A.S will affect the exempt surplus, exempt deficit, taxable surplus, taxable deficit and underlying foreign tax account balances of the foreign affiliate.

Position:

1- yes
2- no
3- no
4- no

Reasons:

The characteristics of a S.A.S. are akin to a Canadian corporation.

There is no disposition because the entity remains the same. The same reason applies for the accounts.

XXXXXXXXXX 2002-013216

Attention: XXXXXXXXXX

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX in which you request an Advance Income Tax Ruling on behalf of the above named taxpayer. We also acknowledge the information you provided in your facsimiles of XXXXXXXXXX.

XXXXXXXXXX tax affairs are administered by the XXXXXXXXXX Tax Services Office and it files its tax returns at the XXXXXXXXXX Taxation Center.

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the Ruling request:

(i) is in an earlier return of the taxpayer or a related person;

(ii) is being considered by a Tax Services Office or Taxation Center in connection with a previously filed tax return of the taxpayer or a related person;

(iii) is under objection by the taxpayer or a related person;

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

(v) is the subject of a Ruling previously issued by the Directorate.

DEFINITIONS

In this letter:

"Act" means Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended;

"Canco" means XXXXXXXXXX;

"Frco" means XXXXXXXXXX;

"French Act" means either the French legislation entitled Loi du 24 juillet 1966 sur les sociétés commerciales or Code de Commerce;

"XYZco " means XXXXXXXXXX;

"Société anonyme" or S.A. is a company established under and governed by the French Act and its articles of incorporation;

"Société par actions simplifiée" or S.A.S. is an entity created under French law;

"Subs" means entities in which XXXXXXXXXX directly or indirectly owns interests. These entities are XXXXXXXXXX.

Our understanding of the facts, proposed transaction and the purpose of the proposed transaction is as follows:

FACTS

1. Canco a company incorporated under the laws of Canada owns XXXXXXXXXX% of the shares of Frco.

2. XYZco is a publicly traded company resident in XXXXXXXXXX and the ultimate parent company of Canco. XYZco owns XXXXXXXXXX% of the shares of Frco.

3. Frco is a Société anonyme ("S.A."), incorporated under the French Act, carrying on XXXXXXXXXX businesses within France. Frco has interests in Subs.

4. The provisions of the French Act that govern a S.A. also govern a Société par actions simplifiée ("S.A.S.") with the exception of articles L225-17 to L225-126 and L225-243 of the French Act (article L227-1).

5. In addition, articles L227-1 to L227-20 of the French Act only apply to a S.A.S. These articles were first introduced in January 1994.

6. With regards to a S.A.S., the French Act provides for the following:

a. A S.A.S. is treated as a separate legal entity (article L220-6);

b. A S.A.S. can be incorporated by one or more persons (article L227-1);

c. It has share capital, divided into issued shares with a right to vote (articles L225-1 to L225-16). It must have a minimum share capital amounting to € 37,500 (article L224-2);

d. The liability of the shareholders is limited to their contribution (articles L225-1 and L227-1);

e. The S.A.S.'s organization and operating methods are primarily set down in the articles of incorporation (article L227-5);

f. The president or board of directors (the "directors") has all the powers necessary to act, in all circumstances, on behalf of the S.A.S., within the limits imposed by the articles of incorporations, including the power to purchase assets and incur liabilities (article L227-6);

g. The acts of the directors bind the S.A.S. with regards to third parties regardless if the directors were acting within their authority, unless it can be proven that the third party knew that the directors were acting outside their authority (article L227-6);

h. The articles of incorporation may provide for special limitations of the directors' powers, or any other specific provision the shareholders may wish to include (article L227-9);

i. The following decisions must be made through a shareholders' resolution (article L227-9):

i. Annual accounts and allocation of profits,

ii. Appointment of the statutory auditor(s),

iii. Depreciation, increase and reduction of share capital,

iv. Operations involving mergers, spin-offs and dissolution.

Moreover, amendments to the articles of incorporation affecting shareholders' individual rights, for example approval or exclusion, must be decided upon unanimously;

j. Agreements concluded in the normal course of business and under normal conditions do not require the prior authorization of the shareholders (article L227-11);

k. The shares of a S.A.S. are freely negotiable. However, the articles of incorporation can provide for the non-transferability of shares for a period not exceeding ten years and can restrict the freedom of a shareholder to assign shares by providing for an approval procedure for assignments to third parties (article L231-6);

l. The S.A.S. can be represented in court by its directors (article L231-7);

m. Subject to certain conditions set out in the French Act, a distribution of profits can only be made by a shareholders' resolution after the annual accounts have been approved (articles L232-10 to L232-20);

n. A S.A. can be transformed into a S.A.S., but the S.A. must have existed for at least 2 years and its accounts for the first 2 years must have been approved (article L225-243);

o. The unanimity of the shareholders is required for an entity to be converted into a S.A.S (article L227-3);

p. Where an entity is converted from one corporate form to another, a report must prepared for the shareholders' approval and the transformation will be null and void unless approved by the shareholders (articles L224-3 and L225-243 to L225-245);

q. The conversion from one commercial form to another does not create a new entity. As such, the rights and obligations of a S.A. with respect to third parties will continue after its conversion to the legal form of the S.A.S. (article L220-6);

r. The provisions of the French Act that apply to mergers, liquidations and dissolutions do not apply to the conversion of an entity from one corporate form to another.

PROPOSED TRANSACTION

7. The shareholders of Frco will resolve to have the legal form of the S.A. to be converted into a S.A.S.

8. The conversion will be qualified as a "transformation régulière" according to section L210-6 of the French Act.

9. The rights of Canco as a shareholder will not change as a result of the conversion of Frco into a S.A.S. More specifically, the shares held by Canco will continue to have the same dividend, voting, and liquidation rights and the nature of the shares that will be owned by Canco will continue to be ordinary shares.

10. Immediately after the conversion, the S.A.S. will carry on the same business as Frco.

11. The articles of the S.A.S. will be identical to the existing articles of Frco in all material respects. Specifically, under the proposed articles of incorporation:

a. The S.A.S. will have an identical share capital structure as the existing S.A. (i.e., share capital of XXXXXXXXXX euros divided into XXXXXXXXXX issued shares);

b. Shares will be represented by a share certificate, which includes the name and domicile of its holder and the number of shares owned by the holder;

c. A special committee established by the shareholders must approve a transfer of shares other than a transfer to a spouse, a descendant, or another shareholder. If the committee refuses to approve the transfer, procedures are in place to have the shares acquired by other shareholders of the S.A.S.;

d. The S.A.S. will be managed by a board of directors with all powers necessary to, in all circumstances, act on behalf of the S.A.S.;

e. The actions of the board of directors of the S.A.S. will be monitored by a supervisory board composed of at least XXXXXXXXXX but not more than XXXXXXXXXX shareholders;

f. An annual shareholders meeting must take place within six months after year-end. Extraordinary shareholders meetings can also be called;

g. The existence of the S.A.S. will be limited to 99 years, as provided by the French Act. The 99-year period will be the same as the current period applicable to Frco (i.e., it commenced on XXXXXXXXXX);

h. The shareholders' heirs and creditors will not have recourse against the S.A.S. assets; and

i. Other than the right to vote, each share grants a shareholder a right to the distributed profits of the S.A.S.

PURPOSE OF THE PROPOSED TRANSACTION

12. The Proposed Transaction will be undertaken to take advantage of the increased flexibility regarding management personnel provided by the legal form of the S.A.S. The policy of the corporate group is to have the same executives at the head of each major local subsidiary. This policy was acceptable until French corporate law was changed (so called "Loi NRE" dated 15 May 2001, n° 2001-420). According to this new law, there will be additional restrictions with respect to the plurality of functions. In other words, the same person will no longer be allowed to be director/CEO/manager of several French companies. This new regulation does not apply to a S.A.S.

RULINGS GIVEN

13. Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transaction, and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, our Rulings are as follows:

a. We confirm that the S.A.S. will be considered to be a corporation for purposes of the definition of "corporation" in subsection 248(1) of the Act;

b. We confirm that the conversion of Frco into a S.A.S. will not constitute a "disposition" of the shares of Frco by Canco within the meaning of that term in subsection 248(1) of the Act if such conversion is "régulière" according to section L. 210-6 of the French Act.

c. We confirm that the conversion of Frco into a S.A.S. will not constitute a disposition of the assets of Frco within the meaning of that term in subsection 248(1) of the Act if such conversion is "régulière" according to section L. 210-6 of the French Act; and

d. We confirm that the exempt surplus, exempt deficit, taxable surplus, taxable deficit and underlying foreign tax account balances of Frco

(and all other foreign affiliates identified as Subs) in respect of Canco will not be changed as a result of the conversion of Frco into a S.A.S. and will continue to be the respective balances of Frco (and of the foreign affiliates identified as Subs) once the S.A.S. conversion is completed.

Nothing in this Advance Income Tax Ruling should be construed as implying that we are ruling on the characterization of the Subs as "corporation" for the purposes of subsection 248(1) of the Act.

The Rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.

XXXXXXXXXX
Section Manager
for Division Director
International and Trust Division
Income Tax Rulings Directorate
Policy and Legislation Branch