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: Is a Liechtenstein Trust Enterprise a trust or a corporation for the purposes of the Act?
Position: In the present instance, a trust.
Reasons: Two-step approach applied to the facts submitted considering the applicable foreign law.
July 15, 2010
Jaime S. Cabrera HEADQUARTERS
Auditor Income Tax Rulings
Toronto North TSO Trusts Section Directorate
5001 Yonge St, Ste 1000 Yannick Roulier
Toronto ON M2N 6R9 (613) 957-2134
Classification of a foreign entity - Trust enterprise (Liechtenstein)
This is in reply to a memorandum faxed on January 11, 2010, in which you asked for our views with respect to the tax status of a particular Liechtenstein Trust Enterprise for the application of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended to the date of the present ("Act").
We understand the facts of the situation submitted to be as follows:
1. XXXXXXXXXX (the "Entity") has been created on XXXXXXXXXX , as mentioned in an English translation of an extract from the trade register of the Chambers of Commerce (XXXXXXXXXX ) dated XXXXXXXXXX (the "Extract").
2. On XXXXXXXXXX , the Entity's date of establishment in XXXXXXXXXX , the Entity was registered to the XXXXXXXXXX Chambers of Commerce as a Foreign EC company with undertaking in XXXXXXXXXX , as mentioned in the Extract.
3. In XXXXXXXXXX , the Entity was registered with the Dutch tax authorities, as confirmed in a letter from XXXXXXXXXX addressed to XXXXXXXXXX and dated XXXXXXXXXX (the "Letter").
4. In accordance with article XXXXXXXXXX of the XXXXXXXXXX dated XXXXXXXXXX (the "Articles"), the Entity is explicitly funded as a Trust Enterprise with legal personality as per article 932a §§1-170 of the Liechtensteinishes Personen und Gesellschatftsrecht ("Liechtenstein Law on Persons and Companies", "PGR") and is registered in the Liechtenstein Public Register.
5. The Articles are signed by XXXXXXXXXX (chairman) and XXXXXXXXXX (secretary).
6. The object of the Entity is the investment and administration of its own assets; excluded from its objects specifically are activities of any commercial nature, as provided in article XXXXXXXXXX of the Articles.
7. The Articles of the Entity provide, among other things, the following:
a. The Entity is formed for an undetermined period.
b. The Entity's fund amounts to XXXXXXXXXX , contributed by means of cash and divided into XXXXXXXXXX bearer coupons of XXXXXXXXXX each ("Coupon").
c. The Entity's fund may, at any time, be increased by the issuance of new Coupons or contribution of additional assets of any nature and may be decreased by virtue of any loss incurred as well as by any payment in favour of the Coupon holders.
d. Each Coupon carries one vote.
e. A board of trustees consisting of XXXXXXXXXX members, whose duties it is to manage and to represent the Entity without limitation towards third parties, is established. The board of trustees has the competence, among other things, in respect of day-to-day management, to appoint the auditing agency and to issue dispositions complementary to the Articles by means of supplementary articles.
f. One trustee has to be a professional and licensed Liechtenstein's trustee, two trustees have to be XXXXXXXXXX residents, and the meeting of the board shall be held in XXXXXXXXXX .
g. Annual assemblies of the Coupon holders are called by the board of trustees. Resolutions and elections are generally decided by an absolute majority of the represented Coupon votes and a casting vote is provided to the chairman.
h. The annual assembly has exclusive competence to elect the members of the board of trustees, determine which member may legally bind the Entity with his signature, amend the Articles, liquidate the Entity, transform the Entity into a different legal entity, resolve distribution of the Entity's fund, discharge the board of trustees and the auditor, and designate the beneficiaries as well as the extent of their entitlement.
i. The Coupons may be freely disposed and transferred by virtue of a written agreement and the registration in the participation book held by the Board of trustees.
j. The Coupon holders of the Entity will not be liable for any debts or losses incurred by the Entity that are in excess of the initial contributions to the capitalization of it. Also, further liability or liability to further call of the potential beneficiaries does not exist.
8. On XXXXXXXXXX , the following persons are part of the Entity's board of trustees, as per the Extract and a letter from the XXXXXXXXXX dated
9. On XXXXXXXXXX , an inspector of XXXXXXXXXX Tax Administration issued an English translation of a Declaration of residence ("XXXXXXXXXX ", "Declaration") to the effect that the Entity is a resident of XXXXXXXXXX within the meaning of article XXXXXXXXXX of the Convention for avoidance of double taxation between XXXXXXXXXX and Canada.
10. No modification or amendment of the Entity's Articles has been made since its signature.
Those facts are based on your opinion request, including the Extract, the Letter, the Articles and the Declaration, a copy of which documents were attached to your request. The following information or documentations were not provided with the request:
- the original constitutive documentation of Entity,
- any subsequent amendment, modifications or supplementary articles except as mentioned in paragraph 2 of the present,
- the information concerning the Entity's settlor,
- any information in respect of contributors to the Entity's fund, identity of Coupon holders at any moment and information in respect of any disposition or transfer of Coupons,
- the form and the amount of any subscription or contribution made to the Entity along its existence, subject to the information present in subparagraph 7(b) of the present,
- the representations of the Entity's representatives.
Note that all the facts pertaining to this particular situation are not fully repeated herein and one should refer to these documents for additional details, where necessary. Also, although we haven't made an exhaustive analysis of the PGR's provisions and its related Liechtenstein legal authorities, one should keep in mind that the provisions of the PGR have been considered in reaching our position.
From XXXXXXXXXX , is the Entity a trust or a corporation for the purposes of the Act?
We are of the view that the dominant characteristics of the Entity support the conclusion that it should be classified as a trust from XXXXXXXXXX , for the purposes of the Act. We reach this conclusion based on the two-step approach described in the Income Tax Technical News no 38, published on September 22, 2008, considering our understanding of the facts described above and a combined interpretation of the Articles and the PGR, as discussed hereunder.
Liechtenstein is a civil law jurisdiction which recognizes corporate entities. It also has introduced and hence regulated the concept of the Anglo-Saxon trust and the American business trust under a variety of types of entities. As such, the Trust Enterprise in general and the Entity in particular, have some of the characteristics of a Canadian corporation and some of the characteristics of a Canadian trust. For Canadian tax purposes, it appears to us that a Trust Enterprise could be treated as either a trust or a corporation depending on the specific facts of a particular situation.
In the present instance, the Entity presents some of the characteristics of a corporation. It provides, among other things, for centralized control, continuity of management and existence of the Entity, issuance of transferable Coupons which might be assimilated to shares, and limitation of personal liability of the Coupon holders as is the case for the stockholders of a corporation. Furthermore, the Entity in the instant case has a legal personality and owns its own assets; beneficiaries or Coupon holders have generally no right to individual assets. Concerning this latter characteristic, since a separate legal entity status is no longer considered a distinctive feature of corporations alone by the Canada Revenue Agency ("CRA"), we are of the view that this attribute is only one among many others which has to be considered in order to classify the entity.
In other respects, the issuance of transferable Coupons is not without reminding us of the issuance of units by Canadian income trusts. Furthermore, we identify the following dominant characteristics of the Entity in support of its classification as a trust for the purposes of the Act:
- The limited extent of the Entity's objects mentioned in paragraph 6 above.
- The Coupon holders of the Entity are entitled to designate the beneficiaries as well as the extent of their entitlement (e.g. proportional capital or income interest). Such appointment results from rights exercised by Coupon holders without any transfer of Coupons.
- The beneficiaries or potential beneficiaries may derive a present or future advantage from the assets of the Entity.
- The beneficiaries of the Entity do not pay for their interests and are not entitled to vote.
- The Coupon holders are entitled on a discretionary basis to resolve the drawing up of the Entity's balance sheet and the appropriation of its annual yield in favour of the beneficiaries, subject to mandatory legal limitations and authoritative rules adopted.
- We understand from the PGR that the Entity has a legal personality with incomplete limited liability, as a claim may be made against beneficiaries who enrich themselves or have derived benefit without valuable consideration.
- Rules of equity apply in respect of the expenses allocated between the Trust Enterprise's assets account and its yield account.
- The possibility for a Trust Enterprise to be created inter-vivos or by will.
- The PGR establishes preservation obligations in respect of the Trust Enterprise's assets and multiple safeguards and protection measures judicially enforceable by participants, i.e. generally the settlors, trustees, beneficiaries and reversioners.
- The PGR allows rules preventing withdrawal of a beneficiary's interest in case of insolvency or bankruptcy in certain circumstances.
- The PGR allows a trust to convert into a Trust Enterprise, and vice-versa.
- The nature of the rights and duties of any participant generally imposed by the Liechtenstein law.
Finally, it is appropriate to note that the qualification of the Entity under the tax laws of XXXXXXXXXX or of Liechtenstein is of limited assistance for Canadian tax purposes considering the differences between those tax regimes and the Canadian one. However, we are of the view that the legal characterisation of the Entity under Liechtenstein civil law might be of some assistance, keeping in mind the system of law adopted by this foreign jurisdiction, the other types of entities recognized by its law and their historic origins. For instance, the fact that article 932a §§1-170 of the PGR refers consistently to trusts is an indicative element. On the other hand, article 932a §§1-170 of the PGR refers several times to the regulations concerning legal entities, and a few times to other parts of the PGR regulations, such as those concerning companies. These cross-references do not affect our main conclusion in the present instance.
On the whole, we are of the view that the Entity might generally be assimilated to a trust. Accordingly, you may wish to consider the application of subsection 75(2) in the present instance, and more specifically the application of subparagraph 75(2)(a)(ii) in respect of the power of appointment given to the Coupon Holders.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the CRA's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Celine Charbonneau (613) 957-2137. A copy will be sent to you for delivery to the client.
We trust that these comments will be of assistance.
Alain Godin, Manager
for Director International and trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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