24 November 1995 External T.I. 9503315 - CHINESE CO-OPERATIVE JOINT VENTURE - WHETHER CORP.

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether a Chinese co-operative joint venture is a corporation for the purposes of the Act.

Position:

Question of fact.

Reasons:

The Chinese co-operative joint venture law appears flexible enough to accomodate the creation of entities that may not be viewed as corporations under the Act.

XXXXXXXXXX 950331

Attention: XXXXXXXXXX

November 24, 1995

Dear Sirs:

Re: Chinese Co-operative Joint Ventures

This is in response to your letter wherein you request the Department's opinion whether a joint venture created under the Law of the People's Republic of China on Sino-foreign Co-operative Enterprises (the "Co-operative JV Law") is a corporation for the purposes of the Income Tax Act (the "Act").

Since your technical interpretation request appears to be in reference to either completed transactions or to transactions that are actually contemplated, we are unable to specifically deal with the facts you have provided. We must ask that you either approach the Tax Services Office in your area or request an advance income tax ruling as described in Information Circular 70-6R2.

However, we provide the following general comments. The Department has accepted that certain joint ventures created under the Co-operative JV Law would be considered corporations for the purposes of the Act. However, it is also our view that the Co-operative JV law may be broad enough to permit the creation of entities that would be viewed as joint ventures under the Act. The following attributes none of which in and by themselves would in our view decide the matter are generally considered to favour the conclusion that the entity created would be viewed as a corporation for the purposes of the Act:

A) The joint venture satisfies the conditions set out in Article 37 of the Civil Law Principles of the People's Republic of China to qualify as a legal person thereunder. It is our understanding that these conditions are as follows:

1) The joint venture is established in accordance with the law.

2) The joint venture possesses the necessary property or funds.

3) The joint venture possesses its own name, organizational structure and premises.

4) The joint venture is capable of independently bearing civil liability.

B) The agreement (the "JV Agreement") provides that:

1) that the liability of each party to the agreement shall be limited to its subscribed registered capital,

2) the joint venture has the legal authority and capacity to enter into contracts in its own name and to acquire and own property,

3) the joint venture company has centralized management and,

4) the joint venturers have the right to transfer their interests whether or not such right is subject to first refusal by the other venturers.

C) The joint venture is a separate taxpayer under the tax laws of the People's Republic of China.

If it is established that joint venture is a corporation for the purposes of the Act but its ownership is not divided into units entitled "shares", Revenue Canada's administrative position as set out in Interpretation Bulletin IT-392 entitled "Meaning of the Term Share" would have application. The Department would view the joint venture as if it had capital stock of 100 issued shares. Each owner of a beneficial interest in the joint venture would be considered to own a number of shares proportionate to his beneficial interest in the joint venture. The Department would generally not accept "shares" in a joint venture as representing different classes of shares on the basis merely that amounts which arguably represent returns of the capital invested or repayments of a loan are distributed to shareholders on a disproportionate basis until one shareholder and then the other has recovered its investment.

We hope that the above will be of assistance to you.

Yours truly,

for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch