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Principal Issues: [TaxInterpretations translation] Is a French Venture Capital Corporation considered a resident of France for the purposes of the Canada-France Income Tax Convention?
Position: Yes.
Reasons: Wording of the Convention and consultation with the Canadian Competent Authority.
XXXXXXXXXX
2009-034411
Yannick Roulier
Attention: XXXXXXXXXX
August 19, 2010
Dear Sir:
Subject: Residence of a Venture Capital Corporation - Canada-France Income Tax Convention
This is in response to your letter of October 13, 2009, in which you requested our opinion regarding the residency status of a French venture capital corporation ("VCC") for the purposes of applying the Convention between Canada and the French Republic (the "Convention") in the following hypothetical situation.
Hypothetical Situation
1. Bank is a public limited company (société anonyme) formed under the laws of France.
2. Corporation A is a simplified public limited company (société anonyme simplifiée) formed under Law No. 2008-776 of August 4, 2008. It is a wholly-owned subsidiary of Bank.
3. For the purposes of French tax legislation, Corporation A is resident in France by virtue of its domicile as well as its effective place of management.
4. Corporation A qualifies as a VCC, as defined in paragraph 9 below, throughout a particular taxation year.
5. The most comprehensive form of taxation in France is generally taxation of business income on a territorial basis and taxation of investment income on a worldwide basis.
6. Article 205 of the French General Tax Code (the "Code") provides that a tax shall be levied on all profits or income earned by companies and other legal entities designated in Article 206, including public limited companies.
7. It is generally provided in 1° of I of Article 209 of the Code that profits liable to corporate income tax are determined by taking into account only profits made in companies operating in France, those mentioned in a, e, e bis, and e ter, of I of Article 164 B as well as those whose taxation is attributed to France by an international convention on double taxation.
8. In particular, Article 164 B of the Code states the following [TaxInterpretations translation]:
"I. The following are considered as income from French sources:
a. Income from real estate located in France or from rights relating to such real estate;
[...]
(e) Profits derived from operations as defined in Article 35, where they relate to business carried on in France and to immovable property situated in France, to real estate rights pertaining thereto or to shares and interests in unlisted companies whose assets consist principally of such property and rights ;
(e bis) The capital gains described in Articles 150 U, 150 UB and 150 UC, in Article 39k 6 ter and in Article 239h 1° f of II, when they are relative to the capital gains described in Articles 150 U, 150 UB and 150 UC, in Article 39k 6 ter and in Article 239h 1° f of II:
1° To real estate located in France or to rights relating to such property;
2° To units of real estate investment funds described in Article 239h or to units or rights in foreign law organizations which have an equivalent object and are of similar form, whose property, at the date of the transfer, consist mainly, directly or indirectly, of the property and rights described in 1°;
3° To the corporate rights of companies or groupings falling within the scope of Articles 8 to 8 ter whose registered office is located in France and whose assets consist mainly, directly or indirectly, of the property and rights referred to in 1°;
(e ter) Capital gains resulting from the transfer:
1° of shares of listed real estate investment companies described in Article 208 C whose assets, on the date of the sale, consist mainly, directly or indirectly, of the property and rights described in 1° of e bis;
2° of shares of real estate investment companies with variable capital described in 3° of Article 208, the assets of which, on the date of sale, consist mainly, directly or indirectly, of the property and rights described in 1° of e bis;
3° of shares, stocks or other rights in bodies, whatever their form, having similar characteristics, or subject to equivalent regulations, to those of the companies described in 1° or 2°, whose registered office is located outside France and whose assets, on the date of sale, consist mainly, directly or indirectly, of the property and rights described in 1° of e bis;
4° of units or shares in companies listed on a French or foreign market, whose assets, at the end of the three financial years preceding the sale, consist mainly, directly or indirectly, of the property and rights described in 1° of e bis. If the company whose units or shares are transferred has not yet completed its third financial year, the composition of the assets is assessed at the end of the financial year(s) or, failing that, at the date of the transfer;
5° of units, shares or other rights in organizations, in any form whatsoever, not listed on a French or foreign market, other than those described in 3° of e bis, whose assets, at the close of the three financial years preceding the sale, consist mainly, directly or indirectly, of the property and rights described in 1° of e bis. If the organization whose shares or rights are being sold has not yet completed its third financial year, the composition of the assets shall be assessed at the close of the financial year(s) just ended or, failing that, at the date of the sale; [...]".
9. Furthermore, Article 208 of the Code states the following in particular:
"The following are also exempt from tax, subject to the provisions of Article 208 A:
[...]
Venture capital companies which operate under the conditions laid down in Article 1-1 of Law No 85-695 of 11 July 1985 referred to above, on income and net capital gains from their portfolio other than those relating to securities remunerating the contribution of their activities which do not fall within the scope of their corporate purpose and, in the case of the venture capital companies described in the second sentence of 1° of Article 1-1 referred to above, on the provision of ancillary services provided by them; [...]".
10. A VCC is defined as follows in Article 1-1 of Law No. 85-695 of July 11, 1985, which contains various economic and financial provisions (the "Act"):
"French limited share companies, known as venture capital companies, are exempt from corporate income tax on the net income and capital gains from their portfolio if their net accounting position is consistently shows 50% or more of units, shares, convertible bonds or equity securities of companies having their registered office in a State of the European Community, whose shares are not admitted to trading on a French or foreign regulated market, which carry on an activity described in Article 34 of the General Tax Code and which are subject to corporation tax under the conditions of the common code at the standard rate or which would be subject to such tax under the same conditions if the activity were carried on in France. For the purpose of calculating the 50% proportion, account shall be taken of units, shares, convertible bonds or equity securities of companies having their registered office in a State of the European Community, the securities of which are not admitted to trading on a French or foreign regulated market, which are subject to corporation tax under the conditions of the common code at the standard rate or which would be subject to it under the same conditions if the activity were carried on in France, and whose exclusive purpose is to hold holdings, either in companies which meet the conditions laid down for their securities to be included in the 50% basket in the event of direct participation by the venture capital company, or in companies having their registered office in a State of the European Community, the securities of which are not admitted to trading on a French or foreign regulated market, which are subject to corporate tax under the conditions of common code at the standard rate or which would be subject to such tax under the same conditions if the activity were carried on in France, and which have the exclusive purpose of holding holdings which meet the conditions laid down for their securities to be included in the 50% basket in the event of direct participation by the venture capital company."
11. A VCC may not acquire securities conferring directly or indirectly, or conferring on one of its direct or indirect shareholders, more than 40% of the voting rights. Furthermore, it may not in principle use more than 25% of its net book value to hold securities issued by the same company.
12. The sole purpose of a VCC must be the management of a securities portfolio. However, its assets may include cash, as well as movable and immovable property necessary for its operations.
13. Under the special tax regime applicable to them, VCCs may opt for exemption from French corporate income tax. VCCs that so elect are thus exempt from corporate income tax on:
- current income and capital gains on the sale of securities included in their portfolio. The exemption applies equally to income from securities that meet the 50% eligible investment level or to other securities or financial rights of the SCR; and
- income from securities received as consideration for the contribution by the VCC to a subsidiary of ancillary services.
On the other hand, gains arising from the disposal of securities which have been received as remuneration for the contribution of ancillary activities are not exempt, nor is income realized in accordance with the objects of the company but not derived from the portfolio, such as profits from the disposal of movable or immovable property, and subsidies.
14. Corporations have two years from the beginning of their first fiscal year of being subject to the VCC tax system to reach the 50% eligible investment level.
15. Corporation A meets the conditions set forth in the Act and the Code and has duly made the election in respect of the given taxation year in order to benefit from the exemption from French tax provided for in Article 208 of the Code.
Question
For the particular year, is Corporation A considered to be a resident of France for the purposes of the application of the Convention?
Comments
It appears that the situation described in your letter may be an actual situation involving taxpayers. As explained in Information Circular 70-6R5 issued on May 17, 2002, it is the practice of the Income Tax Rulings Directorate of the Canada Revenue Agency ("CRA") not to issue written opinions on proposed transactions otherwise than by way of advance income tax rulings. If your situation involves a specific taxpayer and a transaction, you should forward all relevant facts and documents to the appropriate CRA Tax Services Office for its views. However, we would be pleased to provide the following general comments, which we hope you will find helpful. These comments are technical interpretations that are not binding on the CRA and may, in some circumstances, not apply to your particular situation.
It appears to us that a VCC would generally be considered to be a resident of France under Article IV, paragraph 1(a) of the Convention. In particular, it is our understanding that a VCC is liable to tax in France by reason of its domicile, residence, place of management or any other criterion of a similar nature, as provided for in paragraph 1(a) of Article IV of the Convention, notwithstanding the fact that it may have opted for exemption from French corporation tax. It should be noted that a VCC may still be taxed in France on its gains from the disposal of securities which have remunerated it for its contribution of ancillary activities, as well as on income realized in accordance with the company's objects but not coming from the portfolio, such as profits from the disposal of movable or immovable property, and subsidies, all as described in paragraph 13 above.
In addition, we refer to Income Tax Technical News No. 35 issued on February 26, 2007 for a discussion of the CRA's general position on the meaning of the term "liable to tax" for the purposes of interpreting tax treaties. It includes, among other things, the following statement:
It remains CRA's position that, to be considered “liable to tax” for the purposes of the residence article of Canada's tax treaties, a person must generally be subject to the most comprehensive form of taxation as exists in the relevant country. This, however, does not necessarily mean that a person must pay tax to a particular jurisdiction. There may be situations where a person's worldwide income is subject to a contracting state's full taxing jurisdiction but that state's domestic law does not levy tax on a person's taxable income or taxes it at low rates. In these cases, the CRA will generally accept that the person is a resident of the other Contracting State unless the arrangement is abusive (e.g. treaty shopping where the person is in fact only a “resident of convenience”).
We are of the view that this general position must be retained for the purposes of interpreting and applying Article IV, paragraph 1(a) of the Convention in the hypothetical situation presented; paragraph 1(d) is essentially a residual clause. However, the determination of residence for the purposes of the Convention remains a question of fact. Each case must be decided on the basis of its particular facts bearing in mind the intention of the parties to the said Convention and its purpose in order to counter situations of abuse or use of a "resident of convenience".
We hope that the above comments are of assistance.
Best regards,
Alain Godin
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.
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