30 August 1995 External T.I. 9503045 - CORPORATE STATUS-DUTCH BV WITH UNLIMITED LIABILITY

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.

		950304
XXXXXXXXXX	Jim Wilson
(613) 957-2123

Attention: XXXXXXXXXX

August 30, 1995

Dear Sirs:

Re: Corporate Status of a Netherlands BV

This is in reply to your letters dated February 1, April 13 and July 4, 1995, in which you asked whether the Department would treat a "private company with limited liability" (the "BV") incorporated under, and governed by, the Netherlands Civil Code (the "Civil Code") as a corporation for purposes of the Income Tax Act (the "Act"). In particular, you wish us to confirm that the BV would be a corporation where:

i)the articles specify that the BV will be dissolved without further action upon the bankruptcy of a shareholder or if shares of the BV are transferred to any person other than to a party that is a shareholder of the BV at the time the articles are adopted, or by a resolution of a general meeting, which may be subject to the condition that the shares are transferred to any person other than to a party that is a shareholder at the time the articles are adopted;

ii)the articles provide that shareholders may be required to make additional payments in respect of their common shares upon a liquidation, if the proceeds realized upon liquidation are insufficient to pay all of the BV's creditors;

iii)the articles may, under the Civil Code, be amended at any time;

iv)it is declared irrevocably, and unconditionally in a "Final Statement" which is set out with, but does not form a part of, the BV's articles, that the shareholders have agreed to assume joint, several and unlimited liability for any and all debts and liabilities of the BV; and

v)it is declared irrevocably and unconditionally in a "Final Statement" that the shareholders have resolved to dissolve the BV, which dissolution shall become effective immediately following a transfer of its shares to any person other than to a party that is a shareholder of the BV at the time the articles are adopted, without any further action required.

You state in your April 13th letter that:

"Based on discussions with Netherlands counsel, we understand that the part of the "Final Statement" in which an agreement of shareholders to assume joint, several and unlimited liability for the obligations of the BV is set out evidences a contractual arrangement between the shareholders. The "Final Statement" does not form a part of the articles of association and does not have to be set out with the articles, but could be contained in a separate document. In addition, we understand that such a contractual agreement is enforceable by a third party creditor if (i) the creditor accepts, or has knowledge of and has not rejected, the assumption of liability (the parties to the "Final Statement" presume such acceptance by depositing the agreement with the Trade Register), and (ii) the shareholder has not previously revoked the assumption of liability (Code, Book 6, sections 253 and 254). Alternatively, we understand that the agreement may be treated as an offer to enter into a guarantee agreement, which is accepted by the BV as an unauthorized custodian or caretaker for the present and future creditors of the company (Code, Book 6, sections 198 and 201).

Thus, we are advised that the "Final Statement" is in the nature of a shareholders' agreement. Its effect is to create, by contract, an additional, direct and collateral obligation of the shareholder. This obligation arises from the contractual arrangement, not from enjoying the status of shareholder. In this respect, we understand that the effect of the "Final Statement" is similar to a shareholder's guarantee of corporate obligations."

Our Comments

It appears that the interpretation you seek relates to a proposed transaction to be undertaken by a specific taxpayer and, therefore, we bring to your attention Information Circular 70-6R2 dated September 28, 1990 issued by Revenue Canada, Taxation. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for a particular taxpayer with respect to specific transactions which are contemplated, a written request for an advance income tax ruling can be submitted in accordance with the Information Circular. Nevertheless, we can offer the following general comments.

As stated in paragraph 2 of Interpretation Bulletin IT-343R, "a corporation is an entity created by law having a legal personality and existence separate and distinct from the personality and existence of those who caused its creation or those who own it". Also, paragraph 3 of IT-343R indicates that a BV incorporated under the Civil Code will constitute a corporation for purposes of the Act. The fact that a BV may not have an unlimited life or that the shareholders have agreed to assume liability for its liabilities will not generally affect this determination.

The foregoing comments represent our general views with respect to the subject matter of your letter. As indicated in paragraph 21 of the aforementioned Information Circular this is not an advance income tax ruling and is therefore not binding on Revenue Canada, Taxation.

Yours truly,

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