2003 Ruling 2003-0030923 - Art. 10 (6)(b) German Tax Treaty

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.

Principal Issues: Whether a German corporation which transfers all its income to its parent under a Profit Transfer Agreement and an Organschaft in accordance with German laws is considered a resident of Germany for the purpose of the Canada-Germany Income Tax Agreement?

Position: Yes.

Reasons: It is a person because it is a body corporate and it is liable to tax by reason of its domicile, residence, place of management, and any other criterion of a similar nature.

XXXXXXXXXX 2003-003092

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: XXXXXXXXXX ("Gco")
XXXXXXXXXX ("Newco")
Advance Income Tax Ruling

We are writing in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-referenced taxpayers. We also acknowledge the additional information you provided during our various telephone conversations (XXXXXXXXXX).

Gco's tax affairs will be administered by the International Tax Services Office and it will file its tax returns to that office.

To the best of your knowledge and that of the taxpayers involved, none of the issues involved with this request:

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

(ii) is being considered by a tax services office or a taxation centre in connection with a tax return already filed by the taxpayer or a related person;

(iii) is under objection; or

(iv) is before the courts or, if a judgement has been issued, the time limit for appeal has not expired.

Definitions

In this letter the following terms have the meanings specified:

(a) "A" means XXXXXXXXXX formed under German law;

(b) "Act" means the Income Tax Act R.S.C. 1985 c.1 (5th Supp.), as amended to the date hereof, and unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provisions of the Act;

(c) "AG" means a German public corporation incorporated under the AGA;

(d) "AGA" means the German Public Corporations Act;

(e) "Bco" means XXXXXXXXXX, a corporation incorporated under the GmbHG;

(f) "CCRA" means the Canada Customs and Revenue Agency;

(g) "GCC" means the German Commercial Code;

(h) "German GAAP" means German generally accepted account principles;

(i) "German ITA" means the German Corporate Income Tax Act as amended as of May 16, 2003;

(j) "German TTA" means the German Trade Tax Act as amended as of May 16, 2003;

(k) "Gco" means XXXXXXXXXX, a corporation incorporated under the GmbHG on XXXXXXXXXX under the name of XXXXXXXXXX;

(l) "GmbH" means a private corporation incorporated under the GmbHG;

(m) "GmbHG" means the German Private Limited Liability Corporations Act;

(n) "Holdco" means XXXXXXXXXX, a private corporation incorporated under the GmbHG;

(o) "KG" means XXXXXXXXXX, a German limited partnership formed under the GCC;

(p) "LP" means XXXXXXXXXX, a limited partnership formed under the laws of XXXXXXXXXX;

(q) "Managementco" means XXXXXXXXXX, a corporation incorporated under the GmbHG;

(r) "Newco" means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX (business number: XXXXXXXXXX);

(s) "Principal Partner" means XXXXXXXXXX, an individual resident in Germany;

(t) "Profit Transfer Agreement" means a profit and loss transfer agreement referred to in section 291 of the AGA; and

(u) "Treaty" means the Germany-Canada Income Tax Agreement, S.C. 2001, c. 30, Part 8, ss. 44 to 47, effective as of January 1, 2001.

(v) "X Group" includes KG, Gco, Holdco, Managementco and A;

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

Facts

1. Newco is a corporation incorporated on XXXXXXXXXX under the laws of XXXXXXXXXX . Newco is a wholly-owned subsidiary of Bco, a corporation incorporated in Germany on XXXXXXXXXX under the GmbHG. Bco is a holding company and has no employees. It holds shares and interests in two entities. Bco is owned XXXXXXXXXX % by KG.

2. Newco and Gco are partners of LP. Gco is a limited partner with an interest of XXXXXXXXXX % while Newco is a general partner with an interest of XXXXXXXXXX %.

3. Gco was incorporated in Germany under the GmbHG. Gco's corporate domicile and place of management is in Germany. Gco is a member of the X Group. The X Group operates XXXXXXXXXX

4. Gco is a holding company and has no employees. It holds shares and interests in one German entity and various non-German entities. XXXXXXXXXX . Gco holds the interest in LP as principal and not as agent, nominee or bare trustee for KG or any of KG's partners.

5. Gco is wholly owned by KG. KG is a German limited partnership formed under the GCC.

6. KG also holds interests and shares in various German and foreign investments and carries on an active business (e.g., XXXXXXXXXX .). KG has approximately XXXXXXXXXX employees.

7. The general partners of KG are Principal Partner, Managementco and A. Principal Partner is an individual that resides in Germany both for German tax purposes and for purposes of the Treaty. Managementco is a corporation incorporated under the GmbHG. XXXXXXXXXX . Except for a fixed amount for their role as general partners of KG, the general partners do not share in the profits and losses of KG, nor do they share in the assets (recorded or non-recorded) or the gains or unrealized gains thereof.

8. The only limited partner of KG is Holdco. XXXXXXXXXX . Principal Partner owns XXXXXXXXXX % of the shares of Holdco and Managementco.

9. XXXXXXXXXX

10. A Profit Transfer Agreement exists between KG and Gco. KG and Gco have also entered into a fiscal unity ("Organschaft") pursuant to section 14 of the German ITA and section 2 of the German TTA. Organschaft means, in general terms, that two legally independent entities combine their incomes and losses for tax purposes.

11. Under Organschaft principles, as set forth in sections 14 and 17 of the German ITA, the subsidiary of the Organschaft has to be an AG, a limited partnership with share capital or a GmbH. The parent of the Organschaft can be of almost any legal form (corporation or partnership) or be an individual.

12. For corporate income and trade tax purposes, an Organschaft applies automatically if all the following requirements are met:

(a) Financial integration exists.

Financial integration means that the parent company has more than 50% of the voting rights of the subsidiary.

(b) A Profit Transfer Agreement has been concluded among the parties.

A Profit Transfer Agreement between the two or more parties according to subsection 291(1) in conjunction with section 301 and 302 of the AGA is required for the Organschaft to apply for both corporate income and trade tax purposes. For example, in a parent-subsidiary scenario, pursuant to the Profit Transfer Agreement, all income reported on the financial statements of the subsidiary is transferred on an annual basis to the parent. The parent also compensates the subsidiary for any losses reported on the financial statements of the subsidiary.

As a result, at each year end of the subsidiary, it will record a liability to the parent (or a receivable from the parent) equal to the amount of its profit (or loss) computed under German GAAP, less certain statutory reserves that may be claimed under German corporate law (see sections 301 and 302 of the AGA). This liability (or receivable) will be settled on an annual basis once the amount of the liability (or receivable) has been finally determined by the subsidiary and accepted by the parent.

The Profit Transfer Agreement must be effective for at least five years, cannot be revoked during the time period for which it has been set (except in extraordinary circumstances), has to be entered in the commercial register of the subsidiary which is party to the Organschaft, and, for a GmbH, requires a notarized shareholders resolution of the parent and of the subsidiary (to the extent that the parties involved are corporations).

In the case of a AG, 75% of the shareholders have to vote in favour of the Profit Transfer Agreement, unless the articles provide for a larger majority (subsection 293(1) of the AGA). It is unclear whether this requirement applies for a GmbH, as the GmbHG does not contain any rules concerning Profit Transfer Agreements. As a practical matter, the principles for public corporations are applied to private corporations. However, with regard to the percentage requirement to approve a Profit Transfer Agreement among the shareholders, the prevailing opinion is that in the case of a GmbH 100% of the shareholders have to agree.

(c) The Profit Transfer Agreement is registered with the commercial register.

The Organschaft becomes effective commencing in the fiscal year of the subsidiary in which the Profit Transfer Agreement was registered with the commercial register.

13. If all of the requirements are met, the Organschaft becomes automatically effective for corporate income and trade tax purposes.

14. The Organschaft provides for special rules to calculate the income of the parties to the Organschaft. Initially, the taxable income of each entity is determined on a stand-alone basis (see Corporate Income Tax Regulation No. 57 (1) and Trade Tax Regulation No. 14 (1)). The taxable income or loss of the subsidiary will then be reduced to nil by transferring the income to the parent or having the parent fund the loss, thus arriving at a taxable income of zero in the case of a wholly-owned subsidiary.

15. The taxable income(s) of wholly owned subsidiary(ies) will be added to the taxable income of the parent. Likewise, a loss funded by the parent will reduce the taxable income of the parent. If the parent is, as in this case, a partnership, the partnership allocates the total taxable income to its partners.

16. However, if there are minority shareholders of a subsidiary that is party to an Organschaft, the compensation payments to (i.e. income attributable to) the minority shareholders will be subject to income tax at the level of the subsidiary and the subsidiary will be liable for such tax pursuant to section 16 of the German ITA (see also Corporate Income Tax Regulation No. 63). Compensation payments to minority shareholders are mandatory due to section 304 of the AGA.

17. Since the Profit Transfer Agreement provides for the transfer of the profit (or loss) to the parent equal to the amount of the subsidiary's profit (or loss) computed under German GAAP, there can be differences between the amount transferred for statutory purposes and the amount transferred for corporate income tax and trade tax purposes to the parent. This may arise, for example, if there is a difference between the subsidiary's depreciation under German GAAP and the tax depreciation claimed for corporate income tax purposes. Technically this is resolved as described in Corporate Income Tax Regulation No. 59. The following briefly summarizes the most important rules:

(a) The parent company has to set up a special tax balance sheet item ("StAP") in the amount that equals the parent's proportionate share in the subsidiary's cumulative differences between book and taxable income;
(b) At the level of the subsidiary, the same amount is added or deducted to/from the capital contribution account, which is recorded for tax purposes;
(c) The StAP will be adjusted in subsequent years during which the Organschaft is operative;
(d) At the time the Organschaft ends, the StAP has to carry forward with the then existing amount until the shares in the subsidiary are sold;

(e) At the time of the sale of the shares of the subsidiary, the StAP has to be released for tax purposes, thus increases or decreases the taxable income of the parent in the fiscal year of the sale.

18. Although, under an Organschaft, the income of the fiscal subsidiary is ultimately taxed at the level of the parent, the subsidiary remains, as a legally independent entity, liable for taxes in its own right. The parent owes the tax authority the taxes attributable to the taxable income transferred by the subsidiary. However, if the parent does not pay the taxes attributable to the subsidiary's taxable income, the subsidiary is liable for its portion of the taxes pursuant to section 73 of the German General Fiscal Code.

19. In the present case, XXXXXXXXXX , the total income of the Organschaft will be attributed to XXXXXXXXXX for income tax purposes. XXXXXXXXXX . For trade tax purposes, KG is liable for tax pursuant to section 2 of the Trade Tax Act.

Proposed Transactions

20. LP will carry on the XXXXXXXXXX business in Canada. LP will own and rent XXXXXXXXXX , which will include a significant number of real estate properties (land and buildings), inventory and other business assets. LP will carry on its active business in these real estate properties which may represent more than 50% of the value of Gco at some future time.

21. LP will operate its business through a permanent establishment or establishments in Canada and its partners will be subject to tax under Part I and, with respect to Gco, Part XIV of the Act.

Purpose of the Proposed Transactions

22. The principal purpose of the proposed transactions is to adopt a legal structure to operate the XXXXXXXXXX business in Canada that will provide for limited liability as well as XXXXXXXXXX .

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our ruling is as follows:

Provided that Gco holds its partnership interest in LP as principal and not as agent, nominee or bare trustee for KG, paragraph 6 of Article 10 of the Treaty will apply to Gco such that Gco will be subject to tax under Part XIV of the Act on its earnings (within the meaning assigned by paragraph 6 of that Article) attributable to permanent establishments in Canada at the rate of 5%.

The above ruling is given subject to the general limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001, and is binding on the CCRA after LP starts to carry on the XXXXXXXXXX business in Canada as described in paragraphs 20 and 21 above.

This ruling is based on the Act in the present form and does not take into account amendments to the Act which, if enacted into law, could have an effect on the ruling provided herein.

Opinion

You also requested our opinion as to whether the value of the partnership interest in KG is derived principally from immovable property (within the meaning assigned by paragraph 2 of Article 6 of the Treaty) for purposes of subparagraph 4(b) of Article 13 of the Treaty.

Provided that none of KG, Gco and their subsidiaries as referred to in paragraph 4 above own any immovable property situated in Canada and all the immovable property situated in Canada as described in paragraph 20 above is owned by LP, it is our opinion that the value of the partnership interest in KG would not be considered to be derived principally from immovable property situated in Canada by virtue of the exception described in the post-amble to paragraph 4 of Article 13 of the Treaty. That is, we would generally view XXXXXXXXXX as property in which the business of the company, partnership, trust or estate is carried on as described in that post-amble. Of course, a definitive interpretation can only be made at the time of an actual disposition upon which the asset mix of LP, Gco or KG, as the case may be, may be different.

Other Comments

Nothing in this ruling should be construed as implying that the CCRA has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. In particular, nothing in this ruling should be construed as implying that the CCRA has agreed to or reviewed the following:

(i) whether any of the entities described herein are corporations, trusts or partnerships, as the case may be, for Canadian tax purposes; and more specifically,

(a) whether KG is a partnership for Canadian tax purposes;

(b) XXXXXXXXXX ; and

(c) whether Gco holds its partnership interest in LP as principal; and

(ii) the accuracy and correctness of the German laws and tax regime described in paragraphs 11 to 18 above.

Yours truly,

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

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