2007 Ruling 2007-0229541R3 - Article 10(2)(a) of Luxembourg 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.

Principal Issues: Whether the reduced rate of tax on dividends under subparagraph (2)(a) of Article 10 of the Luxembourg Treaty would apply to a situation where dividends are paid to a XXXXXXXXXX partnership of which the majority partner is a resident of Luxembourg and the only other partner is a wholly-owned subsidiary of the Luxembourg resident?

Position: Yes to the partner resident in Luxembourg.

Reasons: In this case, we look through the XXXXXXXXXX partnership to the partners as to who the beneficial owner is. The partnership agreement and the relationship between the partners determined that the Luxembourg partner controls at least 10% of the voting power of the payer corporation.

XXXXXXXXXX  							2007-022954

Attention: XXXXXXXXXX

XXXXXXXXXX , 2007

Dear XXXXXXXXXX:

Re: XXXXXXXXXX ("Holdco")
XXXXXXXXXX ("Canco")
Business Number XXXXXXXXXX
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.

Canco's tax affairs are administered by the XXXXXXXXXX Tax Services Office and it files its tax returns at the XXXXXXXXXX Taxation Centre under the above-noted business number.

To the best of your knowledge and that of the taxpayer 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 taxpayers 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.

This document is based solely on the facts and proposed transactions described below. The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.

Definitions

In this letter the following terms have the meanings specified:

(a) "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;

(b) "Canada-Luxembourg Treaty" means the Convention Between the Government of Canada and The Government of the Grand Duchy of Luxembourg for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income and on Capital, signed on September 10, 1999;

(c) "Canada-US Treaty" means the Convention Between Canada and The United States of America With Respect to Taxes on Income and on Capital, signed on September 26, 1980, as amended by the Protocols signed on June 14, 1983,

March 28, 1984, March 17, 1995 and July 29, 1997;

(d) "Code" means the Internal Revenue Code of the United States of America;

(e) XXXXXXXXXX;

(f) "Foreign Parent" means XXXXXXXXXX;

(g) "Foreign Sub1" means XXXXXXXXXX;

(h) "Foreign Sub2" means XXXXXXXXXX;

(i) "Group" means, collectively, Foreign Parent and each of its direct and indirect subsidiaries;

(j) "Holdco" means XXXXXXXXXX a company organized as a Luxembourg Public Limited Liability Company (Société Anonyme);

(k) "ITAR" means the Income Tax Application Rules, R.S.C. 1985 c. 2 (5th Supp.) as amended to the date hereof;

(l) "Partnership" is the proposed general partnership of which the partners will be US LLC and Holdco;

(m) "Partnership Agreement" means the General Partnership Agreement between Holdco and US LLC to form the Partnership;

(n) XXXXXXXXXX;

(o) "US" means the United States of America;

(p) "US LLC" is the proposed, newly formed US limited liability corporation which will be formed in the State of XXXXXXXXXX as a wholly-owned subsidiary of Holdco; and

(q) "US Parent" means XXXXXXXXXX a company incorporated under the laws of XXXXXXXXXX and a wholly-owned subsidiary of Holdco.

Facts

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

1. The Group is a XXXXXXXXXX.

2. Foreign Parent is the ultimate parent of the Group, and is resident of XXXXXXXXXX.

3. Approximately XXXXXXXXXX percent of the outstanding and issued shares of Foreign Parent are owned by XXXXXXXXXX.

4. Foreign Sub1 and Foreign Sub2 are indirect subsidiaries of Foreign Parent through a chain of wholly-owned private companies organized under the laws of XXXXXXXXXX.

5. Holdco is a holding company XXXXXXXXXX, and is a resident of Luxembourg.

6. Foreign Sub1 owns common shares of Holdco comprising XXXXXXXXXX percent of the total outstanding voting rights. The remaining XXXXXXXXXX percent of the voting rights of Holdco attributes to voting preferred shares that are publicly traded on the XXXXXXXXXX Stock Exchange. In addition, Holdco has issued non-voting preferred shares to ForeignSub1 and ForeignSub2.

7. Holdco is a body corporate for Luxembourg tax purposes and is a resident of Luxembourg for the purposes of the Canada-Luxembourg Treaty; as such it is subject to taxation in Luxembourg as comprehensive as any resident of Luxembourg.

8. Holdco is not a resident of Canada, does not carry on business in Canada and does not maintain a permanent establishment in Canada.

9. Holdco owns all of the outstanding share capital of Canco, a corporation incorporated under the laws of the Province of XXXXXXXXXX and registered under the laws of the Province of XXXXXXXXXX.

10. Canco is the Canadian parent of the Group's Canadian operations. Canco, along with its direct and indirect Canadian subsidiaries, is involved in XXXXXXXXXX.

11. The Group has historically held its US subsidiaries through a chain of indirect Canadian subsidiaries of Canco. Each of these Canadian subsidiaries is organized under the laws of Canada or a province therein, and is resident of Canada for Canadian income tax purposes.

12. In XXXXXXXXXX, Holdco established US Parent as a holding company and the ultimate parent of a new chain of US subsidiaries.

13. US Parent and its direct and indirect subsidiaries are residents of the US for tax purposes and are involved in XXXXXXXXXX Neither US Parent nor any of its direct or indirect subsidiaries own property in Canada, nor carry on any business in Canada.

Proposed Transactions

14. Holdco will organize US LLC under the laws of the State of XXXXXXXXXX. Holdco will be the sole member of the US LLC.

15. US LLC will be regarded as being fiscally transparent for purposes of the Code.

16. Holdco will appoint the manager(s) of the US LLC, none of whom will be residents of Canada.

17. Holdco and US LLC (collectively, the "Partners") will form the Partnership under the laws of the State of XXXXXXXXXX pursuant to a partnership agreement under and pursuant to XXXXXXXXXX ("Partnership Agreement"). The Partnership Agreement will provide that:

(i) The purpose of the Partnership will be to hold the shares of Canco and US Parent;

(ii) Profits and losses of the Partnership will be allocated to the partners in accordance with their respective percentage interests therein;

(iii) The Partnership will have a registered office in XXXXXXXXXX, and will not hold any other office or fixed location in any other location;

(iv) A Partnership Board will be established for the purpose of administering the Partnership's investments;

(v) The Partnership Board will be consisted of XXXXXXXXXX members: XXXXXXXXXX will be resident in the US, XXXXXXXXXX in Canada and XXXXXXXXXX in Luxembourg; and

(vi) The Partnership Agreement will provide that the initial Partnership Board members will be appointed by the Partners pursuant to and as part of the terms of the Partnership Agreement and the Board members may be removed by unanimous vote of the Partners. Any vacancies occurring among the Board members will be filled by a Majority in Interest partner (i.e., that who owns more than 50% of all the Partnership interests).

18. Under XXXXXXXXXX law, a general partnership governed by XXXXXXXXXX owns its own assets. The partners are liable jointly and severally for all obligations of the Partnership.

19. The Partnership will be fiscally transparent for the purposes of the Code and will not be considered a resident of the US for the purposes of Article IV of the Canada-US Treaty.

20. The Partnership will be fiscally transparent and will not be treated as a body corporate for Luxembourg tax purposes.

21. Holdco will transfer all of its shares in Canco and US Parent, respectively, to the Partnership at their fair market value in consideration for additional partnership units. Holdco will comply with the provisions of section 116 of the Act in connection with the transfer of the shares of Canco to the Partnership.

22. Following the transfer of shares to the Partnership referred to in paragraph 21 above, Holdco will hold approximately XXXXXXXXXX% interest in the Partnership and US LLC will hold approximately XXXXXXXXXX% interest in the Partnership.

23. The Partnership Board will act in the capacity as shareholder of US Parent and Canco and will assume general oversight activities directly related to the administration and stewardship of investments held by the Partnership. Specific activities carried on by the Partnership Board will include:

(i) Management and supervision of the affairs of the Partnership, including participation in the oversight of the Group's North American operations, as those operations directly relate to the Partnership's investments in its subsidiaries;

(ii) Oversight of business plans and strategic direction of the Group's North American operations;

(iii) Management of risk and evaluation of performance of the Group's North American operations;

(iv) Delegation to management and Boards of the Partnership's direct and indirect subsidiaries;

(v) Attendance at periodic shareholder meetings and approval of shareholder resolutions as required;

(vi) Casting of votes in respect of the shares of Canco; and

(vii) Approval of actions taken by subsidiary boards.

24. The Partnership Board will meet on a rotational basis XXXXXXXXXX in various locations in Canada and the US. The meetings will be held in rented conference facilities, and the Partnership will not maintain an office in any of these locations (except for the registered office referred to in subparagraph 17(iii) above).

25. Dividends will be paid from time to time by Canco to the Partnership, which will immediately distribute such dividends to Holdco and US LLC in proportion to their interests in the Partnership.

Purpose of the Proposed Transactions

26. The Group's North American entities are currently held under Canco and US Parent. The purpose of the proposed transactions of organizing the Partnership and transferring the shares of Canco and US Parent by Holdco to the Partnership is to provide a vehicle to facilitate the corporate governance of the Group's North American entities. For financial reporting purposes, the insertion of the Partnership will effectively enable the Group's North American operations to be consolidated under the Partnership.

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 Holdco was the beneficial owner, within the meaning of paragraph 2 of Article X of the Canada-Luxembourg Treaty, of any dividends paid by Canco before the commencement of the proposed transactions described in paragraphs 14 to 25 above, Holdco's proportionate share of the dividends paid by Canco to the Partnership after the completion of the proposed transactions will be subject to withholding tax under Part XIII of the Act at the rate of 5% pursuant to Article 10(2)(a) of the Canada-Luxembourg Treaty and subsection 10(6) of the ITAR.

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 ("CRA") provided that the proposed transactions (other than those described in paragraph 25 above) are completed by XXXXXXXXXX.

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

In the future, in the event that the shares of Canco are disposed of by the Partnership, provided that subsection 245(2) of the Act does not apply and provided further that at the time of such disposition, Holdco continues to be resident in Luxembourg for the purposes of the Canada-Luxembourg Treaty and the value of the shares of Canco held by the Partnership is not derived principally from immovable property situated in Canada, the gain derived by Holdco from the disposition of such shares of Canco by the Partnership will be exempt from tax in Canada pursuant to paragraph 5 of Article 13 of the Canada-Luxembourg Treaty.

Other Comments

Nothing in this ruling should be construed as implying that the CRA 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 CRA has agreed to or reviewed:

(i) the classification of Holdco as a corporation, a partnership or something else;

(ii) the residential status of Holdco for the purposes of the Canada-Luxembourg Treaty; and

(iii) the tax consequences of the transfer of the shares of Canco and US Parent by Holdco to the Partnership referred to in paragraph 21 above.

Yours truly,

XXXXXXXXXX
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch