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 Hungarian Korlatolt Feleossegu Tarsasag ("Kft") is a corporation for the purposes of the Income Tax Act.
Position: Yes it is.
Reasons: The Kft has legal personality and existence apart from its members.
982987
XXXXXXXXXX Olli Laurikainen
(613) 957-2116
Attention: XXXXXXXXXX
February 10, 1999
Dear Sirs:
Re: Hungarian Korlatolt Feleossegu Tarsasag (“Kft”)
This is in reply to your letter requesting our view whether a Hungarian Kft is a corporation for the purposes of the definition of “foreign affiliate” in subsection 95(1) of the Income Tax Act (the “ITA”). You provided an English translation of the Hungarian legislation governing business associations entitled Act CXLIV 1997 on Business Associations (the “HBA Act”) .
It is our understanding from the material you have submitted that the English translation of the Hungarian term Kft is “limited liability company” and that the Hungarian Kft has the following characteristics:
1. Subsection 121(2) of the HBA Act indicates that the Kft is a company for the purposes of the HBA Act.
2. Subsection 2(2) of the HBA Act states that “Business associations with legal personality are: joint enterprises, limited liability companies (i.e. Kfts) and companies limited by shares.
3. Subsection 121(1) of the HBA Act provides that Kfts are business associations founded with initial capital consisting of capital contributions of a pre-determined amount, in the case of which the obligation of members to the company extends only to the provision of their capital contributions, and to other possible contributions as set forth in the articles of association. With the exceptions set forth in the HBA Act, members shall not be liable for the obligations of the company.
4. Liability of a member of a Kft in excess of its capital contribution will generally arise only in cases where a member has abused his limited liability or committed fraud in the foundation of the Kft; or if the articles of association of the Kft specifically provides for the possibility that members may have to contribute toward covering losses of the Kft.
5. Ownership of a Kft is divided into business shares, and business shares may be transferred freely to existing members of the company. Members may grant each other pre-emption rights in the articles of association. If a member acquires another independent business share, his business share shall increase by the business share acquired. Business shares may also be transferred to non-member parties if the member concerned has paid his capital contribution in full, has given other existing members opportunity to exercise their pre-emptive rights and obtained the consent of the Kft. The conditions for granting or refusing such consent shall be provided for in the articles of association. In the event of a transfer of business shares, the rights and obligations of the transferor attached to his membership shall pass to the party acquiring the business shares.
One business share may have several owners. Such owners shall qualify as one member vis-à-vis the company; their rights, including the conclusion of the articles of association may be exercised only by their joint representative, and they shall bear joint and several liability for the duties owed by such member.
6. Any business association governed by the HBA Act (i.e. including a Kft) under its business name, has legal capacity, may acquire rights and undertake obligations, in particular may acquire property, conclude contracts and may sue and be sued.
7. A Kft has perpetual existence and a resolution of a member’s meeting passed by three-quarters or more of the votes is required to resolve termination of a Kft.
8. Members of a Kft may not lay claim to any portion of the after-tax profits of the Kft except when the profits have been ordered to be distributed as a dividend. On the dissolution of a Kft, members only receive distributions in proportion to their contributed capital and only after creditors have been satisfied.
9. The supreme body of a Kft is the members’ meeting. Members’ meetings must be convened at least once every year. Administration of a Kft’s affairs and representation of the company shall be carried out by one or more managing directors elected from among members or non-members. The articles of association may provide that all members be entitled to management and representation, in which case they shall be considered managing directors.
Based on the above, we are of the view that a Kft formed under the Hungarian HBA Act would be a corporation for the purposes of the ITA. This would be our view whether or not the articles of association of the particular Kft provided that members may be liable for losses of the Kft in excess of their initial capital contributions.
In accordance with Interpretation Bulletin IT-392, the Hungarian Kft is considered to have capital stock consisting of 100 issued shares and each owner of a beneficial interest in the Hungarian Kft is then considered to own a number of shares proportionate to his beneficial interest in the Hungarian Kft. Each amount distributed on account of profits by a Hungarian Kft to its members will be considered dividends for the purposes of the ITA and Regulations made thereunder.
The foregoing comments are given in accordance with the practice referred to in paragraph 22 of information Circular 70-6R3 and are not binding on Revenue Canada.
We trust this is the information you require.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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