2001 Ruling 2001-0089913 - XXXXXXXXXX - EXEMPT EARNING

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:

(i) Whether the foreign affiliate of the taxpayer is a resident of France for the purposes of paragraph 1 of Article 4 of the Canada-France Income Tax Convention;
(ii) Whether XXXXXXXXXX and

(iii) Whether paragraph 5906(1)(a) and paragraph (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.

Position:

(i) Yes;
(ii) Yes; and
(iii) Yes.

Reasons:

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

XXXXXXXXXX 2001-008991

XXXXXXXXXX, 2001

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.

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

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 or subparagraph is a reference to the relevant provisions of the Act;

(b) "Aco" means XXXXXXXXXX;

(c) "Bco" means XXXXXXXXXX;

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

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

(f) "Cco" means XXXXXXXXXX;

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

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

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

(j) "Dco" means XXXXXXXXXX;

(k) "Project" means the XXXXXXXXXX in which Cco has an interest;

(l) "FAPI" means foreign accrual property income which has the meaning assigned by subsection 95(1);

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

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

Facts

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

1. Aco was incorporated in XXXXXXXXXX under the law of Canada, XXXXXXXXXX. Aco is a public corporation with its shares listed on the XXXXXXXXXX Stock Exchange.

2. XXXXXXXXXX.

3. XXXXXXXXXX.

4. Cco was incorporated as a Société Anonyme in XXXXXXXXXX under the law of France and is registered in France. It has its head office in France, which, under the Code de Commerce, subjects it to French law. Aco, through other wholly owned foreign affiliates, holds XXXXXXXXXX% of the issued and outstanding shares of Cco. Cco is, therefore, a controlled foreign affiliate of Aco. The remaining XXXXXXXXXX% interest in Cco is held by Bco, XXXXXXXXXX. As at XXXXXXXXXX , Cco had stated capital in the amount of XXXXXXXXXX. As well, Aco, indirectly through its foreign affiliates, advanced approximately XXXXXXXXXX to Cco during the year ended XXXXXXXXXX. Consistent with past practice, these inter-company advances, along with comparable advances from Bco for its XXXXXXXXXX% share of the funding, will be contributed to the stated capital of Cco in XXXXXXXXXX. Cco holds all the outstanding shares of Dco, a XXXXXXXXXX incorporated company, and has an inter-company advance receivable from Dco for approximately XXXXXXXXXX.

5. Dco was incorporated as a Société Anonyme in XXXXXXXXXX. Dco is also a controlled foreign affiliate of Aco. As at XXXXXXXXXX, Dco had stated capital in the amount of XXXXXXXXXX As noted above, Dco has an inter-company advance payable to Cco for approximately XXXXXXXXXX Consistent with past practice, the inter-company advance payable will be contributed to the stated capital of Dco during XXXXXXXXXX.

6. XXXXXXXXXX.

7. XXXXXXXXXX.

8. XXXXXXXXXX.

9. XXXXXXXXXX.

10. XXXXXXXXXX.

11. XXXXXXXXXX.

12. XXXXXXXXXX.

13. XXXXXXXXXX.

14. 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).

15. 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. The French tax authorities have advised Cco XXXXXXXXXX that the Project will qualify for this safe harbour rule. Therefore, Cco should not be subject to French corporation tax on the profits of the Project, whether earned through Dco or the Cco Branch, notwithstanding the XXXXXXXXXX tax holiday.

Proposed Transactions

16. The Project will be funded through various means, including (i) contributions to the capital of Cco which will be made directly by Aco or indirectly through Aco affiliates, (ii) one or more loans to Cco from an Aco affiliate and/or a third party investor, and (iii) an investment by a third party in Cco, likely by way of contributions to the capital of Cco.

17. Certain assets of Dco, such as the XXXXXXXXXX, may be transferred by Dco to Cco Branch.

18. Cco Branch will carry on an active business in XXXXXXXXXX.

19. Cco will maintain its head office in XXXXXXXXXX. Employees of Cco 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;
o arranging for 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.
• Bookkeeping and 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.

20. All of the meetings of the board of directors and of the shareholders of Cco will be held in France. All strategic decisions relating to the operations of Cco will be made at such meetings.

21. It is expected that profits of the Cco Branch will be repatriated to Cco - Head Office (XXXXXXXXXX) any time surplus cash arises. The Cco Branch profits will be subject to a XXXXXXXXXX branch profits tax at a rate of at least 5%. XXXXXXXXXX Cco will distribute these profits to its shareholders in the form of dividends.

Purpose of the Proposed Transactions

22. The purpose of the proposed transactions is to permit Cco to carry out the Project in XXXXXXXXXX through the Cco 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. Cco 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 70-6R4 dated January 29, 2001, and are binding on the Canada Customs and Revenue Agency ("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 or reviewed any tax consequences relating to

(i) the contributions of the inter-company advances to the stated capital of Cco and Dco described in paragraphs 4 and 5 above;

(ii) any of Cco's shareholders (other than Aco);

(iii) the transfer of assets from Dco to Cco as referred to in paragraph 17 above; and

(iv) XXXXXXXXXX.

Yours truly,

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

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