2003 Ruling 2003-0024583 - XXXXXXXXXX

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 CCRA.

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

Principal Issues: (i) Whether the foreign affiliate of the taxpayer is a resident of France for the purposes of Article 4 of the Canada-France Income Tax Convention; (ii) Whether XXXXXXXXXX ; and (iii) Whether paragraph 5906(1)(a) and subparagraph (d)(i) of the definition of "exempt earnings" in subsection 5907 (1) of the Income Tax Regulations apply to the active business income earned XXXXXXXXXX by a branch of the foreign affiliate situated therein.

Position: (i) Yes; (ii) Yes; and (iii) yes.

Reasons: (i) The foreign affiliate of the taxpayer is liable to tax on as comprehensive a basis as it is imposed by France; (ii) XXXXXXXXXX has no policy concern with respect to the XXXXXXXXXX ; and (iii) This is a meaningful interpretation of XXXXXXXXXX .

XXXXXXXXXX 2003-002458

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling

We are writing in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-referenced taxpayer. We also acknowledge the additional information you provided in your letter of XXXXXXXXXX, and during our various telephone conversations (XXXXXXXXXX).

XXXXXXXXXX tax affairs are administered by the XXXXXXXXXX Tax Services Office and it files its tax returns at the XXXXXXXXXX Taxation Centre.

To the best of your knowledge and that of the taxpayer involved, none of the issues involved with this request:

(i) is involved in an earlier return of the taxpayer or a related person;

(ii) is being considered by a tax services office or a taxation centre in connection with a tax return already filed by the taxpayer or a related person;

(iii) is under objection; or

(iv) is before the courts or, if a judgement has been issued, the time limit for appeal has not expired.

Definitions

In this letter the following terms have the meanings specified:

(a) "Act" means the Income Tax Act R.S.C. 1985 c.1 (5th Supp.), as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph, subparagraph or clause is a reference to the relevant provisions of the Act;

(b) "active business" has the meaning assigned by subsection 95(1) of the Act;

(c) "Aco" means XXXXXXXXXX;

(d) "Aco 2001 Ruling" means the advance income tax ruling issued by the CCRA to Aco on XXXXXXXXXX, 2001 (reference #2001-008991), as amended by a further letter from the CCRA to Aco dated XXXXXXXXXX, 2001 (reference #2001-010443);

(e) "Bco" means XXXXXXXXXX;

(f) "Canada-France Treaty" means the Canada-France Income and Capital Tax Convention, 1975, as amended to the date hereof;

(g) "CBCA" means the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended to the date hereof;

(h) "the CCRA" means the Canada Customs and Revenue Agency;

(i) "Cco" means XXXXXXXXXX;

(j) "Cco Branch" means the XXXXXXXXXX branch of Cco;

(k) "controlled foreign affiliate" has the meaning assigned by subsection 95(1);

(l) "Eco" means XXXXXXXXXX, a wholly-owned subsidiary of Bco;

(m) "exempt earnings" has the meaning assigned by subsection 5907(1) of the Regulations;

(n) "FAPI" means foreign accrual property income within the meaning assigned by subsection 95(1);

(o) "Gco" means XXXXXXXXXX, successor to Cco following a merger of Cco and Old Gco;

(p) "Gco Branch" means the XXXXXXXXXX branch of Gco;

(q) "Gco Project" means the XXXXXXXXXX project XXXXXXXXXX in which Gco has an interest;

(r) "Sco" means XXXXXXXXXX;

(s) "Old Gco" means XXXXXXXXXX, a XXXXXXXXXX corporation which has been merged into Cco in XXXXXXXXXX;

(t) "public corporation" has the meaning assigned by section 89; and

(u) "Regulations" means the Income Tax Regulations.

Facts

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

Aco

1. Aco was incorporated in XXXXXXXXXX under the law of Canada, XXXXXXXXXX. In XXXXXXXXXX. Aco's executive offices are located at XXXXXXXXXX. Aco is a public corporation with its shares listed on the XXXXXXXXXX Stock Exchange.

2. XXXXXXXXXX.

3. XXXXXXXXXX.

Sco

4. Sco was incorporated on XXXXXXXXXX as a Société Anonyme under the law of France and is registered in France. Sco has its head office in France, which, under the Code de Commerce, subjects it to French law.

5. Sco is a wholly-owned subsidiary of Aco. Sco is therefore a controlled foreign affiliate of Aco for purposes of the Act.

Gco / Cco

6. Gco is a Société Anonyme registered in France. Gco was incorporated as a Société Anonyme in XXXXXXXXXX under the law of France, under the name Cco. XXXXXXXXXX, Cco absorbed Old Gco by way of merger, at which time the name of Cco was changed to Gco. Gco has its head office in France, which, under the Code de Commerce, subjects it to French law.

7. Sco holds XXXXXXXXXX% of the issued and outstanding shares of Gco. Gco is therefore a controlled foreign affiliate of Aco. The remaining XXXXXXXXXX% interest in Gco is held by Bco, a XXXXXXXXXX, through Eco.

8. Gco, through Gco Branch, holds the XXXXXXXXXX.

9. Pursuant to the XXXXXXXXXX merger between Cco and Old Gco, Gco Branch also acquired all of the XXXXXXXXXX assets owned by Old Gco.

Old Gco

10. Old Gco was incorporated as a Société Anonyme in XXXXXXXXXX under the law of XXXXXXXXXX. Prior to its merger with Cco, Old Gco was a wholly-owned subsidiary of Cco. As a result, Old Gco was also a controlled foreign affiliate of Aco.

11. Prior to XXXXXXXXXX, Old Gco owned a XXXXXXXXXX. These assets were transferred to Gco Branch upon the merger of Cco and Old Gco.

The Gco Project

12. XXXXXXXXXX

13. XXXXXXXXXX

XXXXXXXXXX

14. XXXXXXXXXX

15. XXXXXXXXXX

XXXXXXXXXX

16. XXXXXXXXXX

17. XXXXXXXXXX :

18. XXXXXXXXXX

French Tax Regime

19. Article 206 of the French Code Général des Impôts subjects a Société Anonyme to French corporation tax. Business income is taxed in France by applying a territoriality principle set out in Article 209 of the French Code Général des Impôts. Therefore, business income derived outside of France is generally not subject to French corporation tax. Conversely, passive income, such as interest, of a French Société Anonyme, whether sourced in France or outside France, is subject to corporation tax in France (subject to certain exemption regimes, such as the EU parent-subsidiary regime).

20. France's controlled foreign corporation ("CFC") provisions, set out in Article 209B of the French Code Général des Impôts, provide an exception to the application of the territoriality principle in respect of certain business income derived outside of France. A French Société Anonyme, with an interest in a foreign business (e.g., a branch) or in a subsidiary established in a foreign jurisdiction, which benefits from a XXXXXXXXXX tax holiday, may be taxed in France on those profits made by the foreign business or subsidiary under France's CFC provisions. However, these CFC provisions provide a safe harbour rule where the foreign business or subsidiary principally carries on an industrial or a commercial undertaking and it carries out its business primarily in the local market. XXXXXXXXXX the Gco Project will qualify for this safe harbour rule. Therefore, Gco should not be subject to French corporation tax on the profits of the Gco Project notwithstanding the XXXXXXXXXX tax holiday.

Aco 2001 Ruling

21. In XXXXXXXXXX, Aco, through its counsel XXXXXXXXXX, requested an advance income tax ruling with respect to the proposed XXXXXXXXXX Gco Project in connection with the proposed transfer of certain assets from Old Gco to Cco. In particular, Aco sought the following rulings:

(a) XXXXXXXXXX.

(b) That Cco would be considered a resident of France for the purposes of paragraph 1 of Article 4 of the Canada-France Treaty.

(c) XXXXXXXXXX.

(d) That the provisions of subsection 245(2) of the Act would not be applied as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

22. Pursuant to the Aco 2001 Ruling, the CCRA provided Aco with a favourable ruling on each of the issues outlined in paragraph 21 above.

23. There have not been any changes to the French XXXXXXXXXX law described in the Aco 2001 Ruling (and in particular, as described in paragraphs 3, 9, 11, 12, 14 and 15 under the title "Facts" in Aco 2001 Ruling) between the date of the Aco 2001 Ruling and the present date.

Proposed Transactions

24. Sco will be merged into Gco. Pursuant to the merger, Sco will contribute its XXXXXXXXXX assets to Gco Branch. Following the merger, Sco will cease to exist and Aco will hold directly approximately XXXXXXXXXX % of the issued and outstanding shares of Gco. It is anticipated that the merger documents will be executed on or about XXXXXXXXXX.

25. Gco Branch carries on an active business XXXXXXXXXX.

26. Gco will maintain its head office in XXXXXXXXXX . Employees of Gco will be located at this office, who will carry on some or all of the following activities:

? Preparation for directors' meetings, including:

o preparation and circulation of directors' materials; and

o arrangement of directors' accommodation etc.

? Preparation of minutes of directors' meetings.

? Preparation of quarterly management accounts and annual accounts, and related liaison with auditors.

? Management of capital structure (either directly or, where a matter requires shareholder action, by way of recommendation to the parent company), including share issues, capital contributions, capital reductions and dividends.

? Preparation of reports for its shareholders.

? Accounting, corporate governance, record keeping and other related administration of head office.

? Dealing with French tax and other authorities.

? Dealing with premises (lease etc.).

? Dealing with banks for all banking matters related to activities of head office.

? Staffing:

o one officer responsible for head office activities and accounting; and

o one part-time secretary/office administrator.

27. Meetings of the board of directors and of the shareholders of Gco will normally be held in France. On occasion, such meetings may be held outside of France XXXXXXXXXX. However, notwithstanding the above, a majority of such meetings will be held in France. All strategic decisions relating to the operations of Gco will be made at board meetings held in France.

28. It is expected that profits of the Gco Branch will be repatriated to Gco - Head Office (XXXXXXXXXX) any time surplus cash arises. Gco will distribute these profits to its shareholders in various forms including dividends, return of contributed surplus and return of shareholder equity.

Purpose of the Proposed Transactions

29. The purpose of the proposed transactions is to simplify the structure of the Aco group by combining the business operations of Sco and Gco, and to permit Gco to continue to carry out the Gco Project XXXXXXXXXX through the Gco Branch.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. XXXXXXXXXX.

B. Gco is considered to be a resident of France for the purposes of paragraph 1 of Article 4 of the Canada-France Treaty.

C. XXXXXXXXXX.

D. The provisions of subsection 245(2) will not be applied as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the CCRA provided that the proposed transactions are completed by XXXXXXXXXX.

These rulings are based on the Act in the present form and do not take into account amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

Other Comments

Nothing in this ruling should be construed as implying that the CCRA has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. In particular, nothing in this ruling should be construed as implying that the CCRA has agreed to or reviewed any tax consequences relating to

(i) the merger between Cco and Old Gco described in paragraph 9 above;

(ii) the transfer of assets described in paragraphs 11 and 24 above;

(iii) XXXXXXXXXX;

(iv) the distribution of profits described in paragraph 28 above; and

(v) whether any of the entities described herein are corporations, trusts or partnerships, as the case may be, for Canadian tax purposes.

Yours truly,

XXXXXXXXXX
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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