2008 Ruling 2007-0231581R3 - Luxembourg fonds commun de placement

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 fonds commun de placement ("FCP") organized in Luxembourg is a co-ownership arrangement rather than a trust, corporation or partnership to the new investors?

Position: Yes.

Reasons: The attributes of an FCP more closely resemble those of a co-ownership arrangement than those of a trust, corporation or partnership. These attributes are very similar to those of an Irish CCF that was previously determined to be a co-ownership arrangement.

XXXXXXXXXX 							2007-023158

Attention: XXXXXXXXXX

XXXXXXXXXX , 2008

Dear Sirs or Madams:

Re: XXXXXXXXXX
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. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX ) and email correspondences (XXXXXXXXXX ).

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 tax 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.

The rulings given herein are based solely on the facts, proposed transactions and purposes of the proposed transactions described below. Facts and proposed transactions in the documents submitted with your request not described below do not form part of the facts and proposed transactions on which this ruling is based and any reference to these documents is 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) “CSD” means central securities depository. A CSD is commonly used in an investment context to provide custodial services whereby securities are deposited with the CSD for safekeeping in physical certificate or electronic form.

(c) “CSSF” means the Grand-Duchy of Luxembourg’s Commission de surveillance du secteur financier (Commission for the Supervision of the Financial Sector). The CSSF is a regulatory body responsible for the prudential supervision of undertakings for collective investment (“UCIs”), credit institutions, other professionals of the financial sector, pension funds, SICARs, securitisation vehicles issuing securities to the public on a continuous basis, stock exchanges, payment and securities settlement systems, operators of payment or securities settlement systems. It also supervises the securities markets. Accordingly, the CSSF has supervisory authority over compliance with the Law of 2002.

(d) “Custodian” means XXXXXXXXXX (Luxembourg Branch), the Luxembourg branch of XXXXXXXXXX , an indirect subsidiary of the Manager with a registered office in the XXXXXXXXXX , acting as custodian on appointment by the Manager with respect to the assets comprising the Fund;

(e) “Custody Agreement” means the Re-Stated Custodian and Paying Agent Agreement entered into between the Manager and Custodian on
XXXXXXXXXX with respect to the appointment and duties of the Custodian in relation to the Fund;

(f) “Fonds commun de placement” (“FCP”) means, pursuant to Article 5 of the Law of 20 December 2002 of Luxembourg relating to undertakings for collective investment (“UCIs”) (the “Law of 2002”), for the purpose of the application of Part I of the Law of 2002, an undivided collection of transferable securities and other liquid assets enumerated in Article 41 of the Law of 2002, made up and managed according to the principle of risk-spreading on behalf of joint owners whose rights are represented by units intended for placement with the public by means of a public or private offer;

(g) “Fund” means the XXXXXXXXXX undertaking for collective investment, constituted as an FCP and established by the Manager under the terms of the Management Regulations pursuant to Part I the Law of 2002;

(h) “Law of 2002” means the Law of 20 December 2002 of Luxembourg relating to UCIs;

(i) “Luxembourg Tax Authority” means the Ministère des finances (Ministry of Finance) in the government of the Grand-Duchy of Luxembourg, and in particular, the “Administration des contributions directes”, the ministerial department responsible for administering the Luxembourg Income Tax Act;

(j) “Manager” means XXXXXXXXXX ., a corporation incorporated on XXXXXXXXXX and organized as a public limited company (société anonyme) under the laws of the Grand Duchy of Luxembourg and in particular under Chapter 13 of the Law of 2002, acting as manager of the Fund. The Manager has its head office and its registered office in Luxembourg. The Manager is a direct subsidiary of XXXXXXXXXX ;

(k) “Management Regulations” means the contractual agreement, dated
XXXXXXXXXX and drafted in accordance with Chapter 2 of the Law of 2002, among the Manager, the Custodian and the Unitholders;

(l) “New Investor” means a XYZ pension plan which does not hold any Unit in the Fund as of the date of this ruling letter but will subsequently invest in Sub-Funds. Certain Sub-Funds will invest, among other things, in Canadian securities;

(m) “Proposed Transactions” means the transactions described in paragraphs 28 to 33 hereof which appear under the heading “Proposed Transactions”;
(n) “Prospectus” means the prospectus relating to the permanent offering and issue of Units in XXXXXXXXXX , dated XXXXXXXXXX , prepared in accordance with the Law of 2002 and pursuant to which Units of the Sub-Funds are issued;

(o) “Sub-Custodian” means XXXXXXXXXX , a taxable Canadian corporation incorporated in XXXXXXXXXX under the law of the Province of XXXXXXXXXX as XXXXXXXXXX and continued in XXXXXXXXXX as a trust company under the federal Trust and Loans Companies Act.

(p) “Sub-Fund” means a distinct portfolio of assets within the Fund invested in accordance with the particular objectives and policies determined by the Manager and disclosed in the Prospectus and liabilities attributable to the portfolio of assets;

(q) “Tax Treaty” means a tax treaty as defined in subsection 248(1) of the Act;

(r) “UCIs” means, pursuant to the Law of 2002, undertakings for collective investment, including an undertaking for collective investment in transferable securities (“UCITS”);

(s) “UCITS” means undertaking for collective investment in transferable securities governed by European Council Directive 85/611/EEC of 20th December 1985 on the coordination of laws, regulations and administrative provisions relating to UCITS, implemented into Luxembourg law by the Law of 2002. Pursuant to Article 2 of the Law of 2002, such undertakings may be constituted as co-proprietorships (“FCPs”) managed by a management company or under statute as an investment company;"

(t) “Unit” in a particular Sub-Fund means a right of ownership evidenced by the inscription of the Unitholder’s name in the register of Unitholders, representing the holder’s proportionate (i) co-ownership interest in the assets comprising the Sub-Fund and gross income from such assets and (ii) share of the liabilities attributable to such assets;

(u) “Unitholder” of a particular Sub-Fund means any legal or natural person who is the beneficial owner of Units of the particular Sub-Fund and includes a trust that owns Units;

(v) “XYZ Group” means XXXXXXXXXX and their direct and indirect subsidiaries;

(w) “XYZ Canada Pension Plans” means the XXXXXXXXXX ; and

(x) “XYZ pension plan” means a pension plan of the XYZ Group.

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

Facts

Description of the Fund

1. The Fund is a UCITS constituted under the law of contract as an FCP and registered pursuant to Article 2 of the Law of 2002.

2. The Fund does not have a legal personality but instead is an unincorporated co-proprietorship of transferable and other liquid financial assets permitted by Part I of the Law of 2002.

3. The Fund is managed by the Manager under the terms of the Management Regulations in accordance with Chapter 2 of the Law of 2002.

4. The assets comprising the Fund are held in custody by the Custodian, appointed by the Manager to carry out the usual duties of a custodian of a UCI.

5. The Law of 2002 authorizes the establishment of an FCP with multiple portfolios of assets (“umbrella fund”) invested in accordance with different investment objectives and policies applicable to each portfolio of assets. Investors are able to choose between one or more investment objectives by investing in one or more portfolios of assets. The Fund consists of XXXXXXXXXX distinct portfolios of assets and liabilities, each constituting a Sub-Fund. The board of directors of the Manager may also decide at any time to create new Sub-Funds.

6. Investors invest in a particular portfolio of assets by acquiring Units of a particular Sub-Fund issued by the Manager in accordance with the Management Regulations. The Manager may decide to issue one or more Classes of Units for a Sub-Fund, each Class having: (i) a specific sales and redemption charge structure and/or (ii) a specific management or advisory fee structure and/or (iii) different Unitholders servicing or other fees and/or (iv) different types of targeted investors and/or (v) such other features as may be determined by the board of directors of the Manager from time to time.

7. It is the intention of the Manager that only pension plans in which XYZ Group employees participate will invest in the Fund, either directly or indirectly. Currently, a few of the XYZ pension plans have invested in the Fund, the most significant of which are the pension plans in the XXXXXXXXXX . Certain Sub-funds have invested in Canadian securities.

Rights of Unitholders

8. The Management Regulations provide that each Unit of a Sub-Fund represents the proportion of each Unitholder’s rights and obligations as beneficial co-owner of the assets comprising the Sub-Fund and obligations in respect of liabilities attributable to such assets. The Management Regulations further provide that each Unit is indivisible with respect to the rights conferred to it.

9. Pursuant to Article 5 of the Law of 2002, the liabilities of a Unitholder are limited to the Unitholder’s participation in a particular Sub-Fund.

10. The Management Regulations provide that gross income includes interest, dividends, profits, gains and similar amounts derived or generated from the assets comprising a particular Sub-Fund as such income arises.

11. The Management Regulations provide that the gross income from the assets comprising a particular Sub-Fund is beneficially owned by the Unitholders of the Sub-Fund and as such the Manager is required, on the XXXXXXXXXX of each month (and if such a day is not a business day, the next business day), to pay to each Unitholder a sum equal to the Unitholder’s gross income entitlement less any applicable fees, costs, taxes, charges and expenses to the extent such amounts are available.

12. The Management Regulations provide that the transfer of Units requires the unanimous consent of the Manager and of all Unitholders of the Fund, regardless of which Sub-Fund they are invested in. Furthermore, no voting rights are attached to the Units.

13. Unitholders can redeem their Units of a Sub-Fund in the manner set out in the Management Regulations, for an amount based on the net asset value per Unit of a particular Class in a particular Sub-Fund.

Management of the Fund

14. The Manager has the overall responsibility for the management of the assets comprising the Fund in accordance with the Prospectus, Management Regulations, Law of 2002 and any other relevant regulatory requirements.

15. Pursuant to Article 14 of the Law of 2002, the Manager is required to manage the Fund in accordance with the Management Regulations and in the exclusive interest of the Unitholders. Pursuant to Part IV of the Law of 2002, the CSSF must authorize the management of UCITS by a management company. Furthermore, the CSSF may, in the circumstances enumerated in Part IV of the Law of 2002, revoke the authorization of a management company to manage a UCITS.

16. XXXXXXXXXX Both the Manager and the Custodian are non-residents of Canada for purposes of the Act and do not engage in any activities in Canada. The Sub-Custodian is a corporation incorporated and resident in Canada XXXXXXXXXX

17. Under the Law of 2002, the Manager can delegate its functions to third parties for the purpose of a more efficient conduct of its business. Similarly, the Custody Agreement provides that the Custodian is entitled to delegate its functions to third parties.

18. The Custodian shall, in accordance with the Law of 2002, carry out the duties of a custodian of a Luxembourg UCI. In particular, the Custodian shall be entrusted with the custody of the assets comprising the Fund, shall carry out all operations concerning the day-to-day administration of the assets comprising the Fund, shall perform its duties pursuant to the Management Regulations and shall execute transactions at the direction of the Manager pursuant to the Custody Agreement entered into between the Custodian and Manager. The Custodian will have no other material duties in connection with the Fund.

19. Section XXXXXXXXXX of the Custody Agreement provides that the Custodian will, for safe and efficient handling of the assets of the Sub-Funds, from time to time appoint a sub-custodian as an agent of the Custodian in each jurisdiction to execute and perform such powers and obligations of the Custodian under the Custody Agreement as the Custodian may from time to time determine. The Custodian or any sub-custodian may lodge or deposit securities or certificates of title to the Sub-Funds’ assets with a CSD.

20. Section XXXXXXXXXX of the Custody Agreement further provides that the delegation by the Custodian of certain of its duties to sub-custodians and CSDs shall not affect, reduce or increase the Custodian’s duty of supervision in accordance with the Law of 2002.

21. The Custodian has delegated some of its functions in Canada to the Sub-Custodian.

Pass-Through Treatment of the Fund

22. The Fund is a co-proprietorship without legal personality. Article 159 of the Luxembourg Income Tax Act enumerates the categories of entities which are considered resident taxpayers. The FCP does not fall within these categories. It is from a Luxembourg tax perspective a transparent vehicle whereby it itself is not subject to tax, but rather its unitholders are subject to tax. As the Fund is viewed as transparent from a Luxembourg tax perspective, investors who are resident in Luxembourg are, technically, treated for Luxembourg income tax purposes as having earned their share of the income and gains that arise or accrue in respect of a Sub-Fund and are subject to Luxembourg tax thereon. From a purely administrative perspective, however, Luxembourg residents are generally only required to report income and gains at the time of a distribution from the Fund or a disposition of the Units.

23. The Manager is subject to the payment of Luxembourg capital duty limited to EUR 1,250, which may be charged to the Fund.

24. As a pension fund pooling vehicle created on the initiative of XYZ Group, the Fund is exempt from the annual subscription tax described in Article 129(3)(c) of the Law of 2002.

25. The Luxembourg Tax Authority does not treat the Fund as a resident of Luxembourg for purposes of any income tax treaty.

26. XXXXXXXXXX

27. XXXXXXXXXX

Proposed Transactions

28. The Sub-Funds intend to issue to any New Investor, including any or all of the XYZ pension plans listed in Appendix A of this letter, Units of Sub-Funds. Certain Sub-Funds will invest in Canadian securities in addition to those that are already held and in assets located in various foreign jurisdictions as permitted under the Prospectus.

29. New Investors will invest pursuant to the Prospectus, except for those Canadian investors purchasing under an exemption from Canadian prospectus requirements. By purchasing Units of a Sub-Fund, a New Investor will fully approve and accept the terms of the Management Regulations.

30. The Fund will invest only in those investments permitted by the Management Regulations, the Prospectus, the Law of 2002 and any other relevant regulatory requirements.

31. The Fund will operate as an open-ended umbrella fund, which means that there will be multiple portfolios of assets in which a New Investor may invest.

32. New Investors will be treated for Luxembourg tax purposes as having earned the income and gains that arise or accrue in respect of the Sub-Funds in which they invest subject to the administrative treatment described in paragraph 22 above.

33. With respect to the Fund’s Canadian investments, the Sub-Custodian will withhold and remit amounts on behalf of the New Investors in respect of their Part XIII tax liabilities under the Act. Specifically, the Sub-Custodian will determine the amount of Part XIII tax to withhold on amounts paid or credited by a payer resident in Canada on a particular day in the following manner:

(a) The Sub-Custodian will first determine, for each Sub-Fund, the percentage of Units held by each Unitholder. The Sub-Custodian will then apply those respective percentages to the aggregate amount of the Sub-Fund’s Canadian source receipts that are taxable under Part XIII of the Act to determine the amount received by any or all of the Unitholders. To the extent the receipts are allocated to Canadian residents, there will be no Part XIII tax withheld. The Sub-Custodian will apply any relevant Tax Treaty provisions, as the case may be, to determine the amount of tax to withhold in respect of the amounts received by the New Investors and other Unitholders that are not resident in Canada.

(b) At the end of each month, the Sub-Custodian will compute the total amount to withhold on behalf of the New Investors and other Unitholders that are not resident in Canada for that month as determined above and remit that amount to the Canada Revenue Agency (the “CRA”) by the XXXXXXXXXX day of the following month. Within XXXXXXXXXX months after the end of each year, the Sub-Custodian will produce the NR4 Supplementary forms for the non-resident New Investors and other non-resident Unitholders, reporting the total amount of Part XIII tax withheld and remitted to the CRA on behalf of the non-resident New Investors and other non-resident Unitholders and will forward to the CRA a copy of the NRA Supplementary forms issued by the Fund as well as an NR4 Summary for the year.

(c) A similar process to that described in (a) and (b) above will be followed with respect to any Part XIII.2 tax that may be applicable.

Purpose of the Proposed Transactions

34. The purpose of the Proposed Transactions is to provide the New Investors with the opportunity to access an array of pooled investment options (including investing in Canadian securities) offered by the Fund. Future investments would be made through the Fund to continue to create returns for the pension pool.

35. The pooling of the pension plan assets will provide the opportunity to lower overall risks, leverage the strengths of XYZ Group and its national-based pension funds, and enable a number of cost savings to be achieved through economies of scale. These savings would include a reduction in management fees, administration costs, and custodian fees. Equally important, a pooled arrangement would allow smaller country funds to diversify their risk by using a larger number of investment managers than would be possible if they operated on a stand-alone basis. In short, the Fund is expected to reduce costs, reduce risks and increase the net return potential of local pension plans while at the same time improving the governance and efficiency of its worldwide pension plans.

Additional Information

36. A number of the XYZ pension plans around the world are considering making an investment in the Fund. These investors will investigate whether the pooling structure offered by the Fund is suitable for their particular organization and will ultimately decide whether they will invest in the Fund. It is the Manager’s understanding that the pension plans listed in Appendix A are likely to invest in the Fund.

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 rulings are as follows:

A. For the purposes of the Act, each New Investor of a particular Sub-Fund will be treated as owning a direct proportionate and undivided interest in each property of that Sub-Fund.

B. For the purposes of Part I of the Act, each New Investor of a particular Sub-Fund will be treated as directly earning or realizing, as the case may be, its proportionate share of income, losses, capital gains and capital losses from the property comprising the particular Sub-Fund whether or not distributed.

C. For the purposes of Part I of the Act, the character, source and timing of income, losses, capital gains, and capital losses earned by each New Investor from the property of the Sub-Funds in which such investor has invested will not be affected by the fact that the Fund or Sub-Funds have been used as a mechanism by which each New Investor owns its proportionate share of such property.

D. A distribution from a Sub-Fund to a New Investor, as described in paragraph 11 above, will not be a taxable event for purposes of Part I of the Act.

E. Provided that a New Investor who is not resident in Canada is not considered to be carrying on business in Canada with respect to their ownership of the Units of the Sub-Funds, for the purposes of Part XIII and Part XIII.2 of the Act, any amount paid or credited by a payer resident in Canada to the Sub-Custodian in respect of the property of a particular Sub-Fund will be treated as being an amount paid or credited to the New Investor of that Sub-Fund in proportion to such investor’s ownership of the property of that Sub-Fund.

F. Provided that a New Investor who is not resident in Canada is not considered to be carrying on business in Canada with respect to their ownership of the Units of the Sub-Funds, for the purposes of applying Part XIII and Part XIII.2 of the Act, the character, source and timing of any amount paid or credited by a payer resident in Canada in respect of the New Investor’s interest in the assets of the Sub-Funds will not be affected by the fact that the Sub-Funds have been used as a mechanism by which the New Investor owns its proportionate share of those assets.

G. If a New Investor redeems Units of a particular Sub-Fund as described in paragraph 13 above, the New Investor will, for the purposes of the Act, have disposed of a proportionate interest in the property of that Sub-Fund for the purposes of calculating any capital gains or losses on such disposition.

H. Provided that a New Investor who is not resident in Canada is not considered to be carrying on business in Canada with respect to their ownership of the Units of the Sub-Funds, for the purposes of applying Parts XIII and XIII.2 of the Act, the New Investor that is resident for the purposes of any applicable Tax Treaty in a particular jurisdiction, shall be entitled to the benefits of that Tax Treaty in respect of such investor’s proportionate interest in the assets of the relevant Sub-Fund, as applicable, to the extent such income qualifies for relief under the provisions of the relevant Tax Treaty.

I. Provided that a New Investor who is not resident in Canada is not considered to be carrying on business in Canada with respect to their ownership of the Units of the Sub-Funds, if the Sub-Custodian calculates and remits Part XIII or XIII.2 tax on behalf of the New Investor in the manner set out in paragraph 33 above, the amounts paid by the Sub-Custodian in respect of the New Investor’s Part XIII or XIII.2 tax will be treated as being paid on behalf of the New Investor in respect of its Part XIII or XIII.2 tax liability and both the New Investor and the Sub-Custodian will be considered to have complied with the provisions of Parts XIII and XIII.2 of the Act in respect of income earned through the Sub-Funds by the New Investors.

J. Neither the Fund nor any Sub-Fund will be considered to be a trust for purposes of the Act.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the CRA provided that new investments made by the Fund, including investments in Canadian securities, have commenced before XXXXXXXXXX .

These rulings are based on the Act in the present form and do not take into account amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

Opinions

(i) Provided that proposed subsection 94(3) is enacted in substantially the same manner as that described in former Bill C-33 that was reintroduced as Bill C-10 in the House of Common on October 29, 2007 in the 2nd session of the 39th Parliament, it is our opinion that proposed subsection 94(3) of the Act will not apply to the Fund or any Sub-Fund; and

(ii) Without commenting on the applicability of section 115.2 to the proposed transactions, for purposes of interpreting subsection 115.2(2), the CRA will look through the Fund and Sub-Funds and will apply that subsection at the level of the New Investors.

Other Comments

Nothing in this ruling should be construed as implying that the CRA has considered, examined, agreed to or ruled on whether any New Investor is a resident of any country with which Canada has entered into a Tax Treaty, whether income referred to herein is taxable under Part I or Part XIII, or the manner in which any article of a Tax Treaty applies to any New Investor. Additionally, nothing in this letter 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, the CRA has not examined and therefore takes no position on whether the Unitholders and the New Investors would be considered to be carrying on business in Canada because of the provision of services to them by the Sub-Custodian in reference to their investments in Canadian securities.

Yours truly,

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

XXXXXXXXXX