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 Polish sp z o.o. (which is translated as a limited liability company) is a corporation for the purposes of the Income Tax Act?
Position: Yes
Reasons: It has a separate legal personality apart from the shareholders and more closely resembles a corporation than a partnership.
XXXXXXXXXX 2004-008749
S. Leung, C.A.
June 13, 2007
Dear XXXXXXXXXX:
Re: Status of a Polish spólka z ograniczona odpowiedzialnoscia ("sp. z o.o.")
We are writing in reply to your letter of July 20, 2004 in which you requested a technical interpretation regarding the characterization of a sp. z o.o. for Canadian tax purposes. We apologize for the delay in replying. You provided us with the English translation of part of the Code of Commercial Partnerships and Companies of Poland (the "Code") including Title I (General Provisions), Title II (Partnerships) and Section I of Title III (Limited Liability Company).
You indicated that the English translation of the Polish term "sp. z o.o." is limited liability company ("LLC"). As such, it is specifically governed by Section I (Common Provisions) and Section III (Companies) of Title I (General Provisions) and Section I (Limited Liability Company) of Title III (Companies) of the Code. In addition, Article 2 of Section I of Title I of the Code provides that the Civil Code in Poland will apply (i) to any matter specified in Article 1(1) of that Section of the Code not regulated in the Code (i.e., matters other than those that involve the formation, structure, operation, dissolution, merging, division and transformation of commercial partnerships and companies) and (ii) where the specificity (nature) of the legal relationship of a commercial company so requires. Our following comments are based on the assumption that the above provisions of the Code have not been changed since the date of your letter.
The references to the titles, sections, chapters, divisions and articles stated below, unless otherwise specified, are references to the titles, sections, chapters, divisions and articles of the Code.
We have reviewed the English translation of the portion of the Code that you provided and we noted the following:
- A LLC may be formed only for commercial purposes by one or more persons (Articles 1(1) and 1(2) of Section I of Title I and Article 151(1) of Chapter 1of Section I of Title III); however, it may not be formed by another sole-shareholder LLC as the single promoter (Article 151(2) of that Chapter);
- A LLC has to be registered and is subject to the provisions on the National Court Register. (Article 5(1) of Section I of Title I and Article 166(1) of Chapter 1 of Section I of Title III);
- The following is required for a LLC to come into existence (Article 163 of Chapter I of Section I of Title III):
- The company deed to be performed;
- Shareholders to make contributions to pay up the initial capital in full;
- Management board to be appointed;
- Supervisory board of audit commission to be appointed where the Code or the company deed so stipulated; and
- Company to be entered in the register;
- The shareholders are not liable for the LLC's obligations (Article 151(4) of Chapter 1 of Section I of Title III);
- A LLC in organization (see the following bullet for how a LLC in organization would become a LLC) may in its own name acquire rights, including ownership of immovable property and other rights, incur obligations, sue and be sued (Article 11(1) of Section III of Title I);
- Upon entry into the register, a LLC in organization shall become a LLC and gain legal personality. Thereby, it shall become the subject of rights and duties of the company in organization (Article 12 of Section III of Title I);
- A shareholder of a company in organization shall be liable jointly and severally with the company and the persons that acted on its behalf for the company's obligations up to the amount of his "unmade" contribution to pay up the shares he took up (Article 13(2) Section III of Title I);
- Shareholders of a company shall be treated equally in the same circumstances (Article 20 of Section III of Title I);
- Shareholders shall be liable to make only such performances as are laid down in the company deed (Article 151(3) of Chapter 1 of Section I of Title III);
- The initial capital of a LLC shall be divided into shares of equal or unequal nominal value (Article 152 of Chapter 1 of Section I of Title III) and shall be no less than 50,000 zlotys (Article 154(1) of that Chapter);
- The deed of a LLC shall determine (Article 157(1) of Chapter 1 of Section I of Title III):
- The business name and seat of the company;
- The object of the company's activity;
- The amount of the initial capital;
- Whether a shareholder may have more than one share;
- The number and nominal value of shares taken up by each shareholder;
- The lifetime of the company, if defined;
- The shareholder shall be entitled to participate in such profit shown in financial statements as may allotted under a resolution of a meeting of shareholders to distribution among shareholders (Article 191(1) of Chapter 2 of Section I of Title III);
- Upon liquidation of the LLC, the shareholders are entitled to distribution of the assets remaining after the creditors have been satisfied or secured (Article 286(1) of Chapter 6 of Section I of Title III);
- Shares can be transferred if the transfer was executed in writing with the signatures notarially certified (Article 180 of Chapter 2 of Section I of Title III);
- The management board shall manage the affairs of the LLC and represent the LLC; appointment to the management board may be made from among the shareholders or from among outsiders (Articles 201(1) and 201(3) of Chapter 3 of Section I of Title III);
- The company deed may appoint the supervisory board or audit commission, or both (Article 213(1) of Division 2 of Chapter 3 of Section I of Title III);
- The supervisory board shall exercise day-to-day supervision over the performance of the company in all areas of the company's activities, but may not give any binding instructions to the management board as to the running of the company's business (Articles 219(1) and 219(2) of Division 2 of Chapter 3 of Section I of Title III).
In view of the above, we note that a sp z o.o., which is translated in English as a LLC, has a separate legal personality and existence separate and distinct from the personality and existence of those who caused its creation or those who own it (see Article 12 of Section III of Title I) and 151(4) of Chapter 1 of Section I of Title III). It possesses its own capacity to acquire rights and to assume liabilities, and any rights acquired or liabilities assumed by it are not the right or liabilities of those who control or own it (see Article 11(1) and 12 of Section III of Title I). The shareholders of a LLC are only liable to the amount of their contributions to the capital of the LLC (see Article 13(2) of Section III of Title I). As to the perpetuity aspect of a company, it appears that the LLC does not have a limited life unless its life is restricted under the company deed (i.e., its lifetime is defined thereunder). There are other characteristics of a sp z o.o. which resemble those of a corporation, such as (i) the ownership of shares by the shareholders; (ii) the transferability of shares; (iii) the entitlements to the distributions of profits only when a resolution is passed to make such distributions; (iv) the entitlements to the distributions of the assets of the company upon liquidation; and (v) the creation and operations of the management board and the supervisory board.
Conclusion
As the attributes of the Polish sp z o.o. more closely resemble those of a corporation under Canadian commercial law, we are of the view that a sp z o.o. created and governed under the Code is a corporation for the purposes of the Income Tax Act.
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, the opinion expressed in this letter is not a ruling and is consequently not binding on the Canada Revenue Agency.
Yours truly,
Olli Laurikainen, C.A.
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
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