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: 1.Assuming that a Liechtenstein Stiftung or a Liechtenstein Anstalt is classified as a corporation for Canadian Income Tax purposes, would the entities be considered a "Controlled Foreign Affiliate" of the taxpayer as defined in subsection 95(1) of the Act and will the foreign accrual property income ("FAPI") rules in subsection 91(1) apply?
2.In what situations will the taxpayer be considered to have de jure control of the Liechtenstein Stiftung or a Liechtenstein Anstalt?
Position: 1. Our position is that the Liechtenstein Anstalt may be viewed as a corporation for Canadian income tax purposes and would be considered a "Controlled Foreign Affiliate" of the taxpayer as defined in subsection 95(1) of the Act and that the foreign accrual property income ("FAPI") rules in subsection 91(1) would apply.
2. Dejure control rests in the ability to elect the Board of Directors
Reasons: 1. See Analysis 2. Jurisprudence
July 15, 2011
Canada Revenue Agency HEADQUARTERS
Vancouver Tax Services Office Income Tax Rulings
Aggressive Tax Planning Directorate
757 W. Hastings Street M. Gauthier
Vancouver BC V3T 5E1 (613) 948-1143
Attention: Shannon Tani 2010-038862
Foreign Entity Classification of a Liechtenstein Anstalt
We are writing in reply to your two memos dated November 25, 2010 concerning the entity classification of a Liechtenstein Stiftung and Liechtenstein Anstalt and whether the Liechtenstein Stiftung or Liechtenstein Anstalt would be a controlled foreign affiliate for Canadian Income Tax purposes.
In a memo dated March 7, 2011 (File 2010-038861), we indicated that a Liechtenstein Foundation may be regarded as a trust for Canadian Income Tax purposes. In this memo, we respond to your inquiry regarding the entity classification of a Liechtenstein Anstalt and whether this entity classified as a corporation would meet the definition of a controlled foreign affiliate.
Facts:
1) A Canadian individual resident converted a Liechtenstein Stiftung into a Liechtenstein Anstalt on XXXXXXXXXX . We will hereafter refer to the specific Anstalt as the "N Anstalt".
2) The audit has generally been structured in three periods:
a. The first period is XXXXXXXXXX to XXXXXXXXXX which represents the period when the entity was a Liechtenstein Stiftung. The adjustments in this period totalled approximately $XXXXXXXXXX .
b. The second period is XXXXXXXXXX to XXXXXXXXXX , which represents the period when the entity was a Liechtenstein Anstalt until the date of death of the founder. The adjustments in this period totalled approximately $XXXXXXXXXX .
c. The third period is XXXXXXXXXX to XXXXXXXXXX which represents the period after the death of the founder when the entity was a Liechtenstein Anstalt. The adjustments in the third period totalled approximately $XXXXXXXXXX .
3) According to Liechtenstein Company Law (footnote 1) a Liechtenstein Anstalt has, among others, the following characteristics:
a. An Anstalt may be formed and operated by an individual person, a firm, a community or by an association of communes or a legal entity not otherwise entered in the Public Register.
Articles of Association are necessary for the formation of the Anstalt. The Articles must contain certain provisions such as the objective of the Anstalt, the value of the assets, the powers of the supreme body, and certain administrative provisions. The objective of the Anstalt may be commercial or non-commercial.
The Articles shall determine in detail:
i. Who shall benefit from the establishment and its possible net profit (beneficiaries),
ii. The manner in which these benefits shall be determined specifically,
iii. Whether and in what way the beneficiaries shall be entitled to participate in the organization.
An Anstalt is required to be entered in a Liechtenstein public register, unless a law provides otherwise. An Anstalt acquires legal personality only upon entry in the public register. Any property endowed to the Anstalt must be accurately detailed in the Articles or the register. Anstalt shares shall only exist pursuant to the provisions of the Articles. Only the establishment's assets shall be liable for the establishment's debts.
b. The bearer(s) of founder's rights forms the Anstalt's supreme body. The articles may also confer the powers of the supreme body upon the board of directors. The founder may at any time amend the Articles, including the object of the Anstalt and the governing bodies.
Each founder shall only be liable for the endowed assets. The founder's rights may be relinquished or otherwise transferred or inherited but may not be pledged or otherwise charged. As long as no third parties have been appointed as beneficiaries, it shall be assumed that the bearer of the founder's rights is the beneficiary. An heir or creditor of a founder may only contest the Anstalt, if it was formed in favor of third party beneficiaries without valuable consideration. Founders shall have no claim to interest at a determined level on the amount endowed to the Anstalt.
c. The members of the board of directors may or may not be beneficiaries.
d. If no regulations or satisfactory rule is contained in Liechtenstein law, the regulations concerning trust enterprises with legal personality shall be applied, in addition to the general regulations concerning legal entities.
4) According to the Articles of the "N Anstalt", the entity had the following characteristics:
a. The Articles create an "N Anstalt" with independent legal personality with unlimited duration, domiciled in XXXXXXXXXX , Liechtenstein.
b. The objective of the "N Anstalt" shall be to administer and invest movables and properties. The "N Anstalt" is authorized to conclude all transactions to serve the objective. The Anstalt does not engage in commercial activities.
c. The "N Anstalt" capital is CHF XXXXXXXXXX and is not divided into parts or shares. Only the "N Anstalt's" assets shall be liable for the "N Anstalt's" obligations. The founder and any third parties are only liable to the amount endowed to the "N Anstalt".
d. The "N Anstalt's" governing bodies are the bearer(s) of founder's rights as supreme governing body, the board of directors as administrative and representative body, and the audit body, if appointed.
e. The bearer of founder's rights is the supreme governing body of the "N Anstalt". The bearer of founder's rights shall have the power to appoint, remove, and discharge the Board of Directors, as well as determine their signature rights. The bearer of founder's rights shall have the power to amend the Articles or issue by-laws, dissolve the "N Anstalt", appoint beneficiaries, as well as determine the scope of the benefit granted to beneficiaries.
f. The Board of Directors shall administer the "N Anstalt" and represent the "N Anstalt" to third parties. Initially, the Board of Directors is designated by the Formation Deed and subsequently by the bearer of founder's rights. The removal of the Board of Directors or of individual members by beneficiaries of the "N Anstalt" shall be expressly excluded.
g. The beneficiaries are determined by the founder in separate by-laws. The by-laws also indicate the conditions and context for the beneficial interest. A potential or absolute beneficial interest in the "N Anstalt" cannot be disposed of. Any income received without valuable consideration may be withdrawn from beneficiaries by creditors unless the income is for the defrayal of the essential maintenance of the beneficiaries, or beneficiaries' spouse and children not provided for.
5) According to an addendum, dated XXXXXXXXXX , which was attached to an excerpt from the Public Register of Liechtenstein, the following information was established with respect to beneficiaries:
(i) As long as the donor remains alive, there will be no third party beneficiaries
(ii) Upon the donor's death, the sole beneficiary shall be the donor's spouse
(iii) Upon death of the donor and his spouse, the beneficiaries shall be the children.
(iv) In the case of the death of a beneficiary without heirs, their beneficial interest will be transferred to the other surviving beneficiaries.
(v) In the event that no more beneficiaries are named, the beneficial interest will rest with the legal heirs of the final beneficiary based on current family law.
Furthermore, the addendum indicated that the rights of minors shall be pending until they reach an age of XXXXXXXXXX . Also, the addendum indicates that the board of trustees shall be authorized to make additions, changes or delete the addendum at any time, with the approval of the donor while the donor is alive. Upon the death of the donor, the board of trustees would require consent from all beneficiaries.
6) As mentioned in technical interpretation 2008-0300511I7 dated September 28, 2009, an Anstalt generally has the following characteristics:
- Legal personality;
- Ability to own property;
- Could sue and be sued;
- Rights and obligations of its own;
- Ability to conduct various business pursuits;
- Limited Liability for the Members;
- Management centralized in a board of directors elected by the Founder;
- The Founder's Rights Holder has the right to appoint and remove the Directors;
- The Founder's rights are assignable and transferable;
- The Anstalt is incorporated by Articles of Association (like articles of incorporation) and not by a trust deed;
- A contribution of capital is made to the Anstalt and the minimum amount of capital is fixed by the Anstalt legislation;
- The beneficiaries did not pay for their interest in the Anstalt and are not entitled to vote;
- The beneficiaries are named in the Article of Association and are irrevocably entitled to the benefits of the Anstalt;
- The beneficiaries may derive a present or future advantage from the assets of the Anstalt, be it a share in the revenues or a share in the assets of the Anstalt even if they did not pay any consideration for that right.
Questions:
According to the memo dated November 25, 2010, you have the following questions:
1. Assuming that a Liechtenstein Stiftung or a Liechtenstein Anstalt is classified as a corporation for Canadian Income Tax purposes, would the entities be considered a "Controlled Foreign Affiliate" of the taxpayer as defined in subsection 95(1) of the Act and will the foreign accrual property income ("FAPI") rules in subsection 91(1) apply?
2. In what situations will the taxpayer be considered to have de jure control of the Liechtenstein Stiftung or a Liechtenstein Anstalt?
Position of Representative:
In your email dated March 9, 2011, you provided part of a document containing arguments from XXXXXXXXXX . You indicated during a telephone call that the arguments related to a separate audit file. The comments were specific to a Liechtenstein Stiftung (arguments referred to the "Foundation"); however the document contained arguments relating to the tax treatment of an entity that has been classified as a corporation and is therefore relevant to the issues you raised. The representative concludes, XXXXXXXXXX , that it is more likely than not that the Foundation would be characterized as a corporation for the purposes of the Act. It seems reasonable to assume that the representative holds the same position with respect to the Anstalt.
The representative states that for the FAPI rules to apply, the Canadian resident taxpayer must own a share of the capital stock of a corporation for the purposes of determining whether the entity meets the definition of a foreign affiliate in subsection 95(1) and direct equity percentage in subsection 95(4). The representative states that since there is a definition of "share" in subsection 248(1), the FAPI rules do not permit or require an alternative meaning of the term share as found in IT-392 Meaning of the term "share". The representative states that a court may conclude that the taxpayer does hold a share of a foreign entity, but there is doubt as to the validity of the position found in IT-392.
The representative then states that if the entity is considered to have shares, the entity must also meet the definition of controlled foreign affiliate in subsection 95(1) of the Act. The definition of a CFA contains a control test. The representative's view is that control would be determined by the right or power to appoint the governing body.
Furthermore, the representative states that a court may find that foreign entities without typical share capital are more properly dealt with under the proposed foreign investment entity rules, which deal with "a non-resident entity that is not a corporation with share capital".
Position of Tax Services Office:
In an email dated April 14, 2011, you provided us with a position paper detailing your assessing positions. In general, your primary position is that the "N Anstalt" should be considered a corporation for Canadian Income Tax purposes and be considered a controlled foreign affiliate of the taxpayer and subject to FAPI. Your alternative position is that Liechtenstein Anstalt could be subject to section 94.1 of the Act. The support of your primary position is that paragraph 3 of Interpretation Bulletin IT-343R Meaning of the Term Corporation classifies a Liechtenstein Anstalt as a corporation.
Since the foreign entity does not have share capital, the TSO references paragraph 3 of Interpretation Bulletin IT-392 Meaning of the term "share" which states "In those instances in which the ownership of a foreign business entity is not divided into units entitled "shares", and in which the foreign business entity is considered to be a corporation, the Department views the foreign business entity as if it has a capital stock of 100 issued shares. Each owner of a beneficial interest in the foreign business entity is then considered to own a number of shares proportionate to his beneficial interest in the foreign business entity." The TSO believes that since the founder was the sole-beneficiary, he would be considered to own the share(s) in the Anstalt. As such, the entity would meet the definition of foreign affiliate in subsection 95(1) of the Act.
The TSO also indicates that the Anstalt would meet the definition of controlled foreign affiliate in subsection 95(1) of the Act. The basis for that conclusion was that the Articles state that the "Bearer of the founder's rights" had the ability, among other things, to appoint and remove the Board of Directors and change the Articles and by-laws.
The TSO concluded that since the Anstalt would be classified as a corporation, and would be considered to meet the definitions of foreign affiliate and controlled foreign affiliate, subsection 91(1) of the Act would apply to include any FAPI in the hands of the Canadian resident founder as sole beneficiary.
Our Position:
An Anstalt is an entity that has some of the characteristics of a corporation and some of the characteristics of a trust. In determining the classification of a foreign entity for Canadian tax purposes, we follow the two-step approach described in an article by Marc Darmo (footnote 2) . The approach is to first determine the characteristics of the foreign business association under foreign commercial law, and then compare these characteristics with those of recognized categories of business associations under Canadian commercial law in order to classify the foreign business association under one of those categories.
Some of the hallmarks of a corporation include limited liability, separate legal entity status, continuous life, issuance of shares of some sort (though they could have a different name), right for that separate legal person to deal with property, to contract, to sue, to receive grants or privileges in its own name. Aside from not issuing shares, the "N Anstalt" possesses most of the hallmarks of a corporation.
IT-343R Meaning of the Term Corporation, states that an Anstalt should be viewed as a corporation. In technical interpretation 2008-0300511 I7 dated September 28, 2009, we reiterated that an Anstalt may be treated as a corporation for Canadian income tax purposes.
For the FAPI rules to apply, the entity must be a controlled foreign affiliate of a Canadian resident taxpayer. A foreign affiliate of a taxpayer resident in Canada, as defined in subsection 95(1) of the Act, means a non-resident corporation in which the taxpayer's equity percentage is not less than 1%, and the total equity percentages of each person related to the taxpayer is not less than 10%. A controlled foreign affiliate of a taxpayer resident in Canada, defined in subsection 95(1) includes a foreign affiliate of the taxpayer that is, at that time, controlled by the taxpayer.
Interpretation Bulletin IT-392 Meaning of the term "share", dated September 26, 1977 is archived and kept for historical purposes. Paragraph 3 of IT-392 states "In those instances in which the ownership of a foreign business entity is not divided into units entitled "shares", and in which the foreign business entity is considered to be a corporation, the Department views the foreign business entity as if it has a capital stock of 100 issued shares. Each owner of a beneficial interest in the foreign business entity is then considered to own a number of shares proportionate to his beneficial interest in the foreign business entity." Although Interpretation Bulletin IT-392 has been archived, the comments in paragraph 3 are still relevant today as entities created in foreign jurisdictions that are considered to be corporations for Canadian Income tax purposes may not issue shares or other securities as we know them in Canada. The position found in IT-392 is reasonable and appropriate in determining who owns and controls the entity and who may be entitled to a dividend deduction pursuant to subsection 113(1) of the Act.
The aforementioned position in IT-392 meaning of the term "share" was founded primarily on the decision in Ryall (H.M. Inspector of Taxes) v. The Du Bois Company Ltd. Lord Hanworth, in his judgement states "When one turns to consider what is the meaning of the word "share", one is confronted at once with this, that one is dealing with something which, almost of necessity, cannot conform to our English ideas of a share in an English company, for the foreign law, foreign rules and foreign regulations of a foreign company may be divergent from any rules, regulations and laws as we know them and which are applicable to a company in this country." J. Finlay in his judgement states "I think that the words "income from stocks and shares" are wide enough to cover the income which the Respondent Company derives from its holding...The substance of the thing is that what it held was a portion of the capital....It is just the same in that respect as a person who owns shares in an English company."
If the "N Anstalt" is a corporation as we believe it is, then it remains to be determined whether it has shareholders and who they are. Shareholders are normally the persons who invest in a corporation and who are entitled to receive the income and capital of the corporation and to control the corporation. We understand that the Canadian individual resident who created the "N Anstalt" is also the individual who invested CHF XXXXXXXXXX in it and who is entitled to control and receive its income and capital. The "N Anstalt" did not issue shares within the meaning of that term in subsection 248(1) of the Act. However, must we conclude that the "N Anstalt" is a corporation without share capital? A share has been defined as any of the equal interests or rights into which the entire capital stock of a corporation is divided. As noted at paragraph 4(c) above, the "N Anstalt's" capital is CHF XXXXXXXXXX . The Canadian individual resident has an interest in the "N" Anstalt (a right to receive the income and capital from the "N" Anstalt) as a direct result of his investment. As there is only one owner, a division into shares was unnecessary. While this is not without doubt, it seems reasonable to conclude that the Canadian resident's interest in the "N" Anstalt is the equivalent of a share, since this is what entitles him to share in the income of the corporation and to control the corporation. It is not necessary in our view for that interest to be evidenced by a certificate. For Canadian tax purposes, it should suffice that the interest is what accords him the same rights as are normally conveyed by a share.
Since the taxpayer is the sole beneficiary of the "N Anstalt" and the "N Anstalt" is considered a corporation, it is our opinion that the taxpayer would be considered to own the share(s) of the Anstalt and would satisfy the definition of a foreign affiliate of the taxpayer.
A controlled foreign affiliate of a taxpayer resident in Canada is generally defined in subsection 95(1) of the Act as a foreign affiliate that is controlled by the taxpayer. According to (ECC) Buckerfield's Ltd et al v MNR (64 DTC 5301) and (SCC) Duha Printers (Western) Ltd v The Queen (98 DTC 6334), control rests in the ability to elect the Board of Directors. The Articles of the "N Anstalt" state that the bearer of the founder's rights shall have the power to, among other things, appoint, remove, and discharge the board of directors, determine the signature rights of the board of directors, and amend the Articles of Association. As such, in our opinion, the entity would be considered a controlled foreign affiliate of the taxpayer.
We reiterate that while there is uncertainty with respect to whether "N Anstalt" may be viewed as a corporation, it is in our view eminently arguable that this entity would meet the definitions of foreign affiliate and controlled foreign affiliate in the Act, and consequently, subsection 91(1) of the Act would apply such that any FAPI would be included in computing the taxpayer's income.
We understand that you propose invoking, as an alternative position, that section 94.1 applies. While we have not examined the conditions for the application of this provision in any detail or whether one of the reasons of the taxpayer for acquiring, holding or having the interest was to derive a benefit from portfolio investments, we cannot disagree with your proposal to apply this provision as it appears eminently arguable that the conditions for the application of this provision could be met.
The same rationale could also be applied to a Liechtenstein Foundation, if the entity was classified as a corporation for Canadian Income tax purposes.
We hope this information is of assistance to you.
Alain Godin
Section Manager for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Canada Revenue Agency
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 Liechtenstein Company Law, Fifth Title "The Establishments and Foundations", First Section "The Establishments", Articles 534 to 551 (http://www.pgr.li/cd/en/START/index.html)
2 Marc Darmo, International Tax Planning, Characterization of Foreign Business associations, 2005 Canadian Tax Journal, Issue #2
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