2004 Ruling 2004-0070171R3 - China Equity Joint Venture

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.

Principal Issues: Whether a Chinese Equity Joint Venture is a foreign affiliate?

Position: Yes

Reasons: The Joint Venture is treated as a foreign affiliate per Article 21 of the Canada-China treaty.

XXXXXXXXXX 2004-007017

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you ask for an advance income tax ruling on behalf of the Taxpayer.

Definitions

In this letter, the following terms have the meanings specified:

(a) "Exempt Surplus" of the Joint Venture in respect of the Taxpayer has the meaning assigned by subsection 5907(1) of the Income Tax Regulations of the Income Tax Act.

(b) "Joint Venture" means a joint venture entitled XXXXXXXXXX established on XXXXXXXXXX by the Taxpayer and the co-venturer, XXXXXXXXXX, a resident of China.

(c) "Taxpayer" means XXXXXXXXXX, a corporation incorporated under the Canada Business Corporations Act on XXXXXXXXXX and resident in Canada for purposes of the Treaty. The Taxpayer's address is:

XXXXXXXXXX.

(d) "Treaty" means the "Canada-China Income Tax Agreement, 1986".

Facts

1) The Taxpayer is served by the XXXXXXXXXX Tax Services Office and files its returns at the XXXXXXXXXX Tax Centre.

2) The Taxpayer has invested XXXXXXXXXX% of the registered capital of the Joint Venture. The remaining XXXXXXXXXX% was invested by the co-venturer.

3) The Joint Venture carries on an active business in China.

4) The Joint Venture is a limited liability company established under the Law of the People's Republic of China on Chinese-Foreign Equity Joint Ventures, (adopted on July 1, 1979, revised on April 4, 1990 and March 15, 2001). The parties to the Joint Venture share in the profits, risks and losses of the Joint Venture in proportion their respective contributions to the registered capital of the Joint Venture.

Proposed Transaction

5) The Joint Venture proposes to make a distribution of profit to the Taxpayer.

Purpose of the Proposed Transaction

The Joint Venture wishes to distribute profit to the Taxpayer.

Other Information

To the best of your knowledge, and that of the Taxpayer, none of the issues involved in this advance income tax ruling is:

a) in an earlier return of the Taxpayer or a person related to the Taxpayer;

b) being considered or under assessment by a tax services office or tax centre in connection with a previously filed tax return of the Taxpayer or a person related to the Taxpayer;

c) under objection by the Taxpayer or a person related to the Taxpayer; or

d) before the courts, and no judgment has been issued which may be under appeal.

Ruling Given

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

Pursuant to paragraph 1b) of Article 21 of the Treaty for the purpose of computing the Exempt Surplus of the Joint Venture in respect of the Taxpayer, the Taxpayer is treated as having a foreign affiliate in respect of its interest in the Joint Venture and a distribution of profit paid to the Taxpayer by the Joint Venture may be deducted in computing the Taxpayer's taxable income to the extent that the distribution is paid from the Exempt Surplus of the Joint Venture in respect of the Taxpayer.

The above ruling is given subject to the general limitations and qualifications set out in Information Circular 70-6R5, dated May 17, 2002 and is binding on the Canada Revenue Agency provided that the proposed transaction is completed by XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
Manager
for Director
International & Trusts Division
Income Tax Rulings Directorate