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: Would subsection 56(2) apply to the situation where XXXXXXXXXX % of the income of a third-tier foreign affiliate of a taxpayer resident in Canada is transferred to a second-tier foreign affiliate of the taxpayer under a profit transfer agreement in a German Organschaft even though other related parties (including the taxpayer) also own directly or indirectly shares of the third-tier foreign affiliate?
Position: No.
Reasons: As a result of the other profit transfer agreements all the income of the second-tier or third-tier foreign affiliates would end up in the first-tier foreign affiliate of the taxpayer. In the case of the taxpayer's entitlement, the benefit conferred is immaterial.
XXXXXXXXXX 2008-029009
Attention: XXXXXXXXXX
XXXXXXXXXX , 2008
Dear Sirs or Madams:
Re: XXXXXXXXXX
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 taxpayer. We acknowledge the additional information you provided through emails and during our telephone conversations (XXXXXXXXXX).
XXXXXXXXXX 's tax affairs are administered by the XXXXXXXXXX Tax Services Office and it files its tax returns at the XXXXXXXXXX Taxation Centre.
To the best of your knowledge and that of the taxpayer involved, none of the issues involved with this advance income tax ruling:
(i) is involved in an earlier return of the taxpayer 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.
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.
Unless otherwise stated, all references to a statute are references to the provisions of the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.) as amended to the date hereof (the "Act"), and every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provisions of the Act.
Definitions
In this letter the following terms have the meanings specified:
(a) "CFA1" means XXXXXXXXXX ;
(b) "CFA2" means XXXXXXXXXX ;
(c) "CFA3" means XXXXXXXXXX ;
(d) "CFA4" means XXXXXXXXXX ;
(e) "CFA5" means XXXXXXXXXX ;
(f) "excluded property" has the meaning assigned by subsection 95(1);
(g) "exempt earnings" has the meaning assigned by subsection (1) of Regulation 5907;
(h) "FAPI" means "foreign accrual property income" as that expression is defined in subsection 95(1);
(i) "GCITA" means the German Corporate Income Tax Act;
(j) "German Group" means CFA1, CFA2, CFA3, CFA4 and CFA5;
(k) "GTTA" means the German Trade Tax Act;
(l) "GSCA" means the German Stock Corporation Act;
(m) "KG" means XXXXXXXXXX , a limited partnership formed under the German Commercial Code;
(n) "Parentco" means XXXXXXXXXX ;
(o) "public corporation" has the meaning assigned by subsection 89(1) of the Act;
(p) "Regulations" means the Income Tax Regulations, C.R.C. 1977, c. 945, as amended to the date hereof; and
(q) "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act.
Facts
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
1. Parentco is a public corporation and a taxable Canadian corporation. Parentco carries on an active business in Canada and outside Canada through directly and indirectly owned entities, including foreign affiliates. The business of Parentco is comprised of XXXXXXXXXX .
2. CFA1, CFA2, CFA3 and CFA5 are all corporations incorporated in Germany and resident in that country and not resident in Canada for the purposes of the Canada-Germany Income Tax Convention.
3. CFA4 is a corporation incorporated in XXXXXXXXXX and resident in that country.
4. CFA1, CFA2, CFA3, CFA4 and CFA5 are each indirect wholly-owned subsidiaries of Parentco.
5. CFA1, CFA2, CFA3, CFA4 and CFA5 are all foreign affiliates and controlled foreign affiliates of Parentco for purposes of the Act.
6. CFA1 has incurred net operating losses for German income tax purposes of approximately €XXXXXXXXXX . These losses arose while CFA1 carried on XXXXXXXXXX activities in Germany. These activities were transferred to CFA3 so that all of the XXXXXXXXXX activities could be carried out through one entity (i.e., there was a combination of the CFA1 and CFA3 activities).
7. CFA3 is the corporation that carries on most of the XXXXXXXXXX activities in Germany. CFA3 is estimated to have net income of approximately €XXXXXXXXXX for its 2008 taxation year and a budgeted net income of approximately €XXXXXXXXXX for the 2009 taxation year.
8. The estimated net income of CFA5 for the 2008 taxation year is approximately €XXXXXXXXXX .
9. CFA1 and CFA2 are holding corporations.
10. CFA4 owns XXXXXXXXXX % of CFA1.
11. CFA1 owns XXXXXXXXXX % of CFA2, XXXXXXXXXX % of CFA3, and XXXXXXXXXX % of CFA5.
12. CFA 2 owns XXXXXXXXXX % of CFA3.
13. CFA5 owns XXXXXXXXXX % of CFA3.
14. KG is a limited partnership formed under the German Commercial Code. KG owns XXXXXXXXXX % of CFA3.
15. Parentco owns XXXXXXXXXX % of the general partnership interest in KG representing a XXXXXXXXXX % interest in the income of KG. Hence, Parentco's share of the estimated 2008 net income of CFA3 through KG is approximately €XXXXXXXXXX before the implementation of the profit transfer agreement described in paragraph 20 below.
16. CFA2 owns XXXXXXXXXX % of the limited partnership interest in KG representing a XXXXXXXXXX % interest in the income of the KG.
17. CFA3 carries on an "active business" for purposes of subsection 95(1) and is a holding company for certain European subsidiaries of Parentco. As such, CFA3 could, from time to time, derive property income such as dividends. Nevertheless, such property income is anticipated to be immaterial.
18. The shares of CFA1, CFA2, CFA3 and CFA5 are excluded property. The fiscal year-end of CFA1, CFA2, CFA3 and CFA5 is XXXXXXXXXX .
Proposed Transactions
19. In order to meet certain German tax and financial objectives, certain companies of the German Group will enter into fiscal unities ("Organschaft", referred to as "fiscal unity" hereinafter).
20. Pursuant to the German corporate law, CFA3 and CFA2 will enter into a profit transfer agreement ("PTA1") for a minimum of XXXXXXXXXX years pursuant to which it will be agreed that all income from the operations of CFA3 is transferred to CFA2 on an annual basis. PTA1 cannot be revoked (except for unusual circumstances) and will be registered in the commercial register following a notarized shareholders' resolution.
21. At the same time, CFA2 and CFA1 will enter into a profit transfer agreement ("PTA2") for a minimum of XXXXXXXXXX years pursuant to which it will be agreed that all income from the operations of CFA2 (including the income transferred from CFA3 by reason of PTA1) will be transferred to CFA1. PTA2 cannot be revoked (except for unusual circumstances) and will be registered in the commercial register following a notarized shareholders' resolution.
22. Also at the same time, CFA5 and CFA1 will enter into a profit transfer agreement ("PTA3") for a minimum of XXXXXXXXXX years pursuant to which it will be agreed that all income from the operations of CFA5 will be transferred to CFA1. PTA3 cannot be revoked (except for unusual circumstances) and will be registered in the commercial register following a notarized shareholders' resolution.
23. Each of CFA3 and CFA2, CFA2 and CFA1, and CFA5 and CFA1 will enter into a fiscal unity pursuant to section 14 of the GCITA and section 2 of the GTTA.
24. The result of a fiscal unity is to transfer the income of the subsidiary to its parent; the subsidiary nonetheless remains, as a legally separate entity, liable for taxes in its own right. Although the parent owes the tax authority on the taxable income that has been transferred to it by its subsidiary, that subsidiary is liable for the taxes on its income in the event that these taxes have not been paid by the parent.
25. Hence, CFA3, which carries on an active business, will compute its taxable income (or loss) under the GCITA and the GTTA and will reduce that income (or loss) to nil pursuant to the fiscal unity that will exist between CFA3 and CFA2. As mentioned in paragraph 17 above, CFA3 might derive property income, which is not anticipated to be material.
26. CFA2 will compute its income under the GCITA and the GTTA to which it will add (deduct) the taxable income (loss) of CFA3. By reason of the fiscal unity that will exist between CFA2 and CFA1, CFA2 will reduce the income (or loss) to nil.
27. CFA5, which carries on an active business, will compute its taxable income
(or loss) under the GCITA and the GTTA and will reduce that income (or loss) to nil pursuant to the fiscal unity that will exist between CFA5 and CFA1.
28. CFA1 will compute its income under the GCITA and the GTTA to which it will add (deduct) the taxable income (loss) of CFA2 (which will include the taxable income (or loss) of CFA3 by reason of PTA1) and the taxable income (or loss) of CFA5 by reason of PTA3.
29. For the reason described in paragraphs 32 to 33 below, prior to the fiscal unity agreements above, CFA 2 and CFA5 will enter into a control agreement ("Beherrschungsvertrag") with CFA2 being the controlling company and CFA5 being the controlled company.
30. CFA1 and CFA2 will enter into agreement whereby CFA1 is primarily responsible for the compensation of the losses of CFA5 that may be required under both PTA3 described in paragraph 22 above and the control agreement between CFA2 and CFA5 described in paragraph 29 above.
31. To claim an Organschaft for corporate tax purposes, the profit transfer agreement must be concluded and registered before the end of the subsidiary's financial year for which the Organschaft is to become effective. The profit transfer agreement will be terminated when one corporation does not own the shares of the other as a result of the disposition of the shares of the other by the first-mentioned corporation.
32. In the context of a fiscal unity, shareholders of a controlled company of an Organschaft have a right to a minimum dividend amount if they qualify as "outside shareholders" ("außenstehender Gesellschafter"). Under proposed changes to the German tax legislation, such a dividend would be fully taxable in the hands of the recipient and would not benefit from the partial participation exemption for dividends.
33. Under German corporate law, CFA5 could qualify as an outside shareholder of CFA3. However, if a control agreement is in effect, CFA5 would not qualify as an outside shareholder. As a consequence, it is desirable for CFA2 and CFA5 to enter into a control agreement to ensure that CFA5 has no right to a minimum dividend unless declared.
34. A control agreement is defined by §291 of the GSCA. Such an agreement is entered into by two companies where one of the companies (controlled company) agrees to be subject to the control of the other company (controlling company), the practical effect of which is that the board of the controlling company can issue binding instructions to the board of directors of the controlled company (§308 of the GSCA).
35. In addition to the delegation of control, a control agreement must provide that the controlling company must compensate for losses incurred by the controlled company during the term of the control agreement under §302 of the GSCA.
36. For German accounting purposes, the payment made for the loss compensation by CFA2 to CFA5, if any, qualifies as a deductible expense. However, since the payment would be made within one group, it would be re-characterized for tax purposes as a constructive dividend from CFA2 to CFA1 followed by an equity contribution from CFA1 to CFA5. Such a potential constructive dividend would be treated as an advanced payment under PTA2.
Purpose of the Proposed Transactions
The purpose of the proposed transactions is to ensure the efficient tax consolidation in Germany, particularly of the group consolidation of CFA3, CFA2, CFA5 and CFA1.
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. During the subsistence of PTA1 and PTA2 described in paragraphs 20 to 21 above, no amount will be included in computing the FAPI of a foreign affiliate of Parentco solely as a consequence of a payment that was made in accordance with PTA1 and PTA2 by CFA3 to CFA2 and by CFA2 to CFA1, as a consequence of the relevant fiscal unity as the case may be, to the extent the amount paid or payable to CFA1 by CFA2 does not exceed the amount payable to CFA2 by CFA3 for a particular taxation year and the amount payable by CFA3 is deductible in the year or a subsequent year in computing the amount prescribed to be its exempt earnings from an active business other than an active business carried on in Canada. For these purposes, the amount that is paid or payable under PTA1 by CFA3 will be considered to be deductible for that year in computing the amount prescribed to be the exempt earnings from an active business of CFA3, other than an active business carried on in Canada, to the extent that, before taking into account any such payment, CFA3 would otherwise have an amount of exempt earnings for that year from an active business, other than an active business carried on in Canada, which equals or exceeds the amount of any such payment.
B. During the subsistence of PTA3 described in paragraph 22 above, no amount will be included in computing the FAPI of a foreign affiliate of Parentco solely as a consequence of a payment that was made in accordance with PTA3 by CFA5 to CFA1, as a consequence of the fiscal unity, to the extent the amount paid or payable to CFA1 by CFA5 is deductible in the year or a subsequent year in computing the amount prescribed to be the exempt earnings from an active business of CFA5 other than an active business carried on in Canada. For these purposes, the amount that is paid or payable under PTA3 by CFA5 will be considered to be deductible for that year in computing the amount prescribed to be the exempt earnings from an active business of CFA5, other than an active business carried on in Canada, to the extent that, before taking into account any such payment, CFA5 would otherwise have an amount of exempt earnings for that year from an active business, other than an active business carried on in Canada, which equals or exceeds the amount of any such payment.
C. Any amount payable to CFA3 by CFA2, and to CFA5 by CFA1, under PTA1 and PTA3 respectively, which pertains to a loss from an active business carried on by CFA3 or CFA5 will not be included in the computation of income of the recipient for purposes of Part I of the Act.
D. Subject to any adjustment under subsections (2), (2.1), (2.2) or (2.9) of Regulation 5907 while PTA1, PTA2 and PTA3 are in force as described in paragraphs 20 to 22 above, CFA3 and CFA5 will have no "earnings" or "loss" as those terms are defined in subsection (1) of Regulation 5907 from an active business carried on by them in a country other than Canada in any taxation year. Subsection (1.1) and (1.2) of Regulation 5907 will not apply in computing the surpluses of CFA1, CFA2, CFA3 and CFA5.
E. Subsection 15(1), 56(2) or 246(1) will not apply solely as a result of the proposed transactions described in paragraphs 19 to 30 above.
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 Canada Revenue Agency ("CRA") provided that the proposed transactions are completed by 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.
Nothing in this ruling shall be construed as implying that the CRA has accepted or otherwise agreed to:
(i) any surplus balances of foreign affiliates referred to herein;
(ii) the validity of any agreements or terms and conditions therein;
(iii) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above; or
(iv) any other tax consequences relating to any facts or proposed transactions referred to herein as a result of the any legislative proposals introduced by the Department of Finance which are not yet entered into force.
Yours truly,
XXXXXXXXXX
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2008
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2008