2015-0571441R3 Dutch Cooperative - 93.2 & 95(2)(c)

Principal Issues: (1) Whether a particular Dutch cooperative would be treated as a corporation for the purposes of the Act? (2) If so, would section 93.2 and paragraph 95(2)(c) apply?

Position: (1) Yes. (2) Yes, provided certain conditions are met.

Reasons: (1) The provisions of the foreign legislation and the articles creating the Dutch cooperative support the conclusion that this entity should be treated as a corporation for the purposes of the Act. (2) All of the requirements of section 93.2 and paragraph 95(2)(c) could, under certain conditions, be considered to be met in the circumstances submitted.

Author: XXXXXXXXXX
Section: 93.2, 95(2)(c), 95(6), 248(1) "corporation"

XXXXXXXXXX                                                                                      2015-057144

XXXXXXXXXX, 2016

Dear XXXXXXXXXX:

Advance Income Tax Ruling
XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-noted partnership and its members (“Taxpayers”), as identified below. The rulings requested were subsequently modified and this letter reflects such modified request. We also acknowledge various e-mails and telephone conversations in this respect. In general terms, you are asking us to rule on the status of a Dutch cooperative for the purposes of the Act, and certain consequences thereof. 

You have represented to us that, to the best of your knowledge, none of the issues involved in this ruling request are:

(i)    dealt with in a previously filed information or tax return of any of the Taxpayers or of a related person or partnership;

(ii)    being considered by a tax services office or a tax centre in connection with a previously filed tax return of any of the Taxpayers or of a related person;

(iii)    under objection by any of the Taxpayers or a related person;

(iv)    before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or

(v)    the subject of a ruling previously considered by the Income Tax Rulings Directorate in connection with any of the Taxpayers or a related person.

Unless otherwise stated, all references herein to statutory provisions are to the Act.

Definitions

In this letter, unless otherwise stated, the following terms have the meaning specified below:

a)    “Act” means the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended to the date hereof. Unless otherwise stated, all terms and conditions used herein that are defined in the Act have the meaning given in such definition;

b)    “Adjusted Cost Base” or “ACB” has, by virtue of subsection 248(1), the meaning assigned by section 54;

c)    “Articles” means the articles of association included in DC’s deed of incorporation, a draft copy of which was attached to the ruling request;

d)    “Business Number” or “BN” has the meaning assigned by subsection 248(1);

e)    “Canadian Partnership” has, by virtue of subsection 248(1), the meaning assigned by section 102;

f)    “Canco 1A” means XXXXXXXXXX, having a principal office located at XXXXXXXXXX, as more fully described in Paragraph 2;

g)    “Canco 1B” means XXXXXXXXXX, having a principal office located at XXXXXXXXXX, as more fully described in Paragraph 3;

h)    “Canco 1C” means XXXXXXXXXX, having a principal office located at XXXXXXXXXX, as more fully described in Paragraph 4;

i)    “Canco 1D” means XXXXXXXXXX, having a principal office located at XXXXXXXXXX, as more fully described in Paragraph 5;

j)    “Canco 2” means XXXXXXXXXX, having a principal office located at XXXXXXXXXX, as more fully described in Paragraph 9;

k)    “Canco 3” means XXXXXXXXXX, having a principal office located at XXXXXXXXXX, as more fully described in Paragraph 11;

l)    “CanGP 1” means XXXXXXXXXX, having a principal office located at XXXXXXXXXX, as more fully described in Paragraph 7;

m)    “CanGP 2” means XXXXXXXXXX, having a principal office located at XXXXXXXXXX, as more fully described in Paragraph 10;

n)    “CanGP 3” means XXXXXXXXXX, having a principal office located at XXXXXXXXXX, as more fully described in Paragraph 12;

o)    “CanLP” means XXXXXXXXXX, having a principal office located at XXXXXXXXXX, as more fully described in Paragraph 6;

p)    “Capital Property” has, by virtue of subsection 248(1), the meaning assigned by section 54;

q)    “Controlled Foreign Affiliate” or “CFA” has, by virtue of subsection 248(1), the meaning assigned by subsection 95(1);

r)    “Corporation” has the meaning assigned by subsection 248(1);

s)    “CRA” means the Canada Revenue Agency; 

t)    “DC” means XXXXXXXXXX, a cooperative under Dutch law, to be created as described in Paragraph 18;

u)    “Designated Liquidation and Dissolution” or “DLAD” has the meaning assigned by subsection 95(1);

v)    “Equity Interest” has the meaning assigned by subsection 93.2(1);

w)    “Exchange” means the XXXXXXXXXX;

x)    “Forco 1” means XXXXXXXXXX, as more fully described in Paragraph 13;

y)    “Forco 2” means XXXXXXXXXX, as more fully described in Paragraph 14;

z)    “Forco 3” means XXXXXXXXXX, as more fully described in Paragraph 15;

aa)    “Forco 4” means XXXXXXXXXX, as more fully described in Paragraph 16;

bb)    “Forco 5” means XXXXXXXXXX, as more fully described in Paragraph 17;

cc)    “Foreign Affiliate” or “FA” has, by virtue of subsection 248(1), the meaning assigned by subsection 95(1);

dd)    “Foreign Country” means XXXXXXXXXX;

ee)    “Foreign Country 1” means XXXXXXXXXX;

ff)    “Foreign Country 2” means XXXXXXXXXX;

gg)    “Foreign Country 3” means XXXXXXXXXX;

hh)    “Foreign Legislation” means the Dutch Civil Code Book 2;

ii)    “Non-Resident” has the meaning assigned by subsection 248(1);

jj)    “Non-Resident Corporation Without Share Capital” has the meaning assigned by subsection 93.2(1);

kk)    “Paragraph” refers to a numbered paragraph in this letter;

ll)    “Parent” means XXXXXXXXXX, as more fully described in Paragraph 1;

mm)    “Relevant Cost Base” or “RCB” has the meaning assigned by subsection 95(4);

nn)    “Share” has the meaning assigned by subsection 248(1);

oo)    “Subsidiary Wholly-Owned Corporation” has the meaning assigned by subsection 248(1); and

pp)    “Taxable Canadian Corporation” has, by virtue of subsection 248(1), the meaning assigned by subsection 89(1).

Facts

1.    Parent is a Non-Resident Corporation that is resident in Foreign Country. Shares in the capital stock of Parent are widely-held and traded on the Exchange.

2.    Canco 1A is a Taxable Canadian Corporation for the purposes of the Act and is an indirect wholly-owned subsidiary of Parent.  Canco 1A’s BN is XXXXXXXXXX. Its affairs are administered by the XXXXXXXXXX Tax Services Office of the CRA, and it files its returns with the XXXXXXXXXX Tax Centre. Its most recent taxation year ended on XXXXXXXXXX.

3.    Canco 1B is a Taxable Canadian Corporation for the purposes of the Act. Canco 1B is a Subsidiary Wholly-Owned Corporation of Canco 1A.  Canco 1B’s BN is XXXXXXXXXX. Its affairs are administered by the XXXXXXXXXX Tax Services Office of the CRA, and it files its returns with the XXXXXXXXXX Tax Centre. Its most recent taxation year ended on XXXXXXXXXX.

4.    Canco 1C is a Taxable Canadian Corporation for the purposes of the Act. Canco 1C is a Subsidiary Wholly-Owned Corporation of Canco 1B.  Canco 1C’s BN is XXXXXXXXXX. Its affairs are administered by the XXXXXXXXXX Tax Services Office of the CRA, and it files its returns with the XXXXXXXXXX Tax Centre. Its most recent taxation year ended on XXXXXXXXXX.

5.    Canco 1D is a Taxable Canadian Corporation for the purposes of the Act. Canco 1D is a Subsidiary Wholly-Owned Corporation of Canco 1A.  Canco 1D’s BN is XXXXXXXXXX. Its affairs are administered by the XXXXXXXXXX Tax Services Office of the CRA, and it files its returns with the XXXXXXXXXX Tax Centre. Its most recent taxation year ended on XXXXXXXXXX.

6.    CanLP is a limited partnership formed under the laws of XXXXXXXXXX and is a Canadian Partnership for the purposes of the Act. The partners of CanLP are Canco 1A (XXXXXXXXXX%), and Canco 1D (XXXXXXXXXX%). CanLP’s BN is XXXXXXXXXX. Its affairs are administered by the XXXXXXXXXX Tax Services Office of the CRA. It and its partners file their information and tax returns with the XXXXXXXXXX Tax Centre. CanLP’s most recent taxation year ended on XXXXXXXXXX.

7.    CanGP 1 is a general partnership formed under the laws of XXXXXXXXXX and is a Canadian Partnership for the purposes of the Act. The partners of CanGP 1 are Canco 1A (Class B - XXXXXXXXXX%; Class C - XXXXXXXXXX%), Canco 1B (common - XXXXXXXXXX%), Canco 1C (common - XXXXXXXXXX%), and CanLP (Class C - XXXXXXXXXX%). CanGP 1’s BN is XXXXXXXXXX. Its affairs are administered by the XXXXXXXXXX Tax Services Office of the CRA. It and its partners file their information and tax returns with the XXXXXXXXXX Tax Centre. CanGP 1’s most recent taxation year ended on XXXXXXXXXX.

8.    Each of the interests in CanGP 1 of Canco 1A and Canco 1B is worth at least XXXXXXXXXX% of the fair market value of all members’ interests in CanGP 1.

9.    Canco 2 is a Taxable Canadian Corporation for the purposes of the Act. Canco 2 is a wholly-owned direct subsidiary of CanGP 1. Canco 2’s BN is XXXXXXXXXX. Its affairs are administered by the XXXXXXXXXX Tax Services Office of the CRA, and it files its returns with the XXXXXXXXXX Tax Centre. Its most recent taxation year ended on XXXXXXXXXX.

10.    CanGP 2 is a general partnership formed under the laws of XXXXXXXXXX and is a Canadian Partnership for the purposes of the Act. The partners of CanGP 2 are CanGP 1 (XXXXXXXXXX%) and Canco 2 (XXXXXXXXXX%). CanGP 2’s BN is XXXXXXXXXX. Its affairs are administered by the XXXXXXXXXX Tax Services Office of the CRA. It and its partners file their information and tax returns with the XXXXXXXXXX Tax Centre. CanGP 2’s most recent taxation year ended on XXXXXXXXXX.

11.    Canco 3 is a Taxable Canadian Corporation for the purposes of the Act. Canco 3 is a wholly-owned direct subsidiary of CanGP 2. Canco 3’s BN XXXXXXXXXX. Its affairs are administered by the XXXXXXXXXX Tax Services Office of the CRA, and it files its returns with the XXXXXXXXXX Tax Centre. Its most recent taxation year ended on XXXXXXXXXX.

12.    CanGP 3 is a general partnership formed under the laws of XXXXXXXXXX and is a Canadian Partnership for the purposes of the Act. The partners of CanGP3 are CanGP 2 (XXXXXXXXXX%) and Canco 3 (XXXXXXXXXX%). CanGP 3’s BN is XXXXXXXXXX. Its affairs are administered by the XXXXXXXXXX Tax Services Office of the CRA. It and its partners file their information and tax returns with the XXXXXXXXXX Tax Centre. CanGP 3’s most recent taxation year ended on XXXXXXXXXX.

13.    Forco 1 is a Non-Resident unlimited liability company formed under the laws of Foreign Country 3 and is a Corporation resident thereof for the purposes of the Act. Forco 1 is a wholly-owned direct subsidiary, and a CFA, of CanGP 3. It is also a FA of Canco 1A and Canco 1B by virtue of subsection 93.1(1), for the purposes outlined in subsection 93.1(1.1). CanGP 3 holds its Shares in the capital stock of Forco 1 as Capital Property.

14.    Forco 2 is a Non-Resident company formed under the laws of Foreign Country 3 and is a Corporation resident thereof for the purposes of the Act. Forco 2 is a Subsidiary Wholly-Owned Corporation of Forco 1 and a CFA of CanGP 3. It is also a FA of Canco 1A and Canco 1B by virtue of subsection 93.1(1) for the purposes outlined in subsection 93.1(1.1). Forco 1 holds its Shares in the capital stock of Forco 2 as Capital Property.

15.    Forco 3 is a Non-Resident limited liability company XXXXXXXXXX formed under the laws of Foreign Country 2 and is a Corporation resident thereof for the purposes of the Act. Forco 3 is a Subsidiary Wholly-Owned Corporation of Forco 2 and a CFA of CanGP 3. It is also a FA of Canco 1A and Canco 1B by virtue of subsection 93.1(1) for the purposes outlined in subsection 93.1(1.1). Forco 2 holds its Shares in the capital stock of Forco 3 as Capital Property.

16.    Forco 4 is a Non-Resident limited liability company XXXXXXXXXX formed under the laws of Foreign Country 2 and is a Corporation resident thereof for the purposes of the Act. Forco 4 is a Subsidiary Wholly-Owned Corporation of Parent.

17.    Forco 5 is a Non-Resident private limited liability company formed under the laws of Foreign Country 1 and is a Corporation resident thereof for the purposes of the Act. Forco 5 is directly owned by Forco 2, Forco 3 and Forco 4 and is a CFA of CanGP 3. It is also a FA of Canco 1A and Canco 1B by virtue of subsection 93.1(1) for the purposes outlined in subsection 93.1(1.1). Forco 2, Forco 3 and Forco 4 hold their Shares in the capital stock of Forco 5 (representing ownership interests in Forco 5 of XXXXXXXXXX%, XXXXXXXXXX% and XXXXXXXXXX%, respectively) as Capital Property.

Proposed Transactions

The following transactions will occur in the order in which they are described below:

18.    Forco 2, Forco 3 and Forco 4 will create DC, a Dutch cooperative with limited liability under the Foreign Legislation. There will be no initial capital contribution made to DC at the time of its creation. The Articles of DC will be registered with the appropriate "commercial register" in Foreign Country 1. By virtue of the registration of the notarial deed with the "commercial register", DC will be regarded as a legal entity that exists separate and apart from its members under the Foreign Legislation and Foreign Country 1’s domestic income tax law.

19.    The Articles will provide that:

?    the members of DC may enter into membership agreements with DC;

?    DC will carry on its business in its own name and for its own account and at its own risk;

?    admission of new members requires unanimous consent of all existing members of DC;

?    each member must make capital contributions to DC as unanimously agreed upon by all members;

?    the management of DC has the authority to represent DC;

?    all members, if not suspended, are entitled to attend any general meeting of members and to vote thereat. The number of votes that a member may cast at a general meeting of members will generally be proportionate to the percentage of ownership in DC held by such member. Each member entitled to vote at any general meeting of members will at all times be entitled to at least one vote;

?    the retained profits of DC will be available to DC for its use unless the members vote to distribute all, or a portion of, such retained profits. A distribution of retained profits will only be made with the unanimous agreement of all members of DC. The distribution of any retained profits will be proportional to the ownership percentage of each member of DC at the time of such distribution;

?    the members and former members of DC will not be liable for any debts or losses incurred by DC that are in excess of their required contributions to the capitalization of DC; and

?    all the members of DC may unanimously resolve to amend the Articles. 

20.    DC will enter into a membership agreement with Forco 2 (“Membership Agreement 1”), with Forco 3 (“Membership Agreement 2”) and with Forco 4 (“Membership Agreement 3”).

21.    The following transfers of Forco 5 Shares will occur concurrently:

(a)    In accordance with Membership Agreement 1, Forco 2 will transfer all of its Forco 5 Shares to DC. As sole consideration for the transfer, DC will credit Forco 2’s membership account in DC by an amount that will be equal to the fair market value of the Forco 5 Shares transferred by Forco 2 to DC.

(b)    In accordance with Membership Agreement 2, Forco 3 will transfer all of its Forco 5 Shares to DC. As sole consideration for the transfer, DC will credit Forco 3’s membership account in DC by an amount that will be equal to the fair market value of the Forco 5 Shares transferred by Forco 3 to DC.

(c)    In accordance with Membership Agreement 3, Forco 4 will transfer all of its Forco 5 Shares to DC. As sole consideration for the transfer, DC will credit Forco 4’s membership account in DC by an amount that will be equal to the fair market value of the Forco 5 Shares transferred by Forco 4 to DC.

22.    Forco 3 will be liquidated and dissolved pursuant to the laws of Foreign Country 2. All of the liabilities of Forco 3 will be assumed by Forco 2 and all of the property of Forco 3, including its membership interest in DC and its rights and obligations under Membership Agreement 2, will be distributed to Forco 2 in respect of the Shares of the capital stock of Forco 3 that are disposed of on the liquidation and dissolution.

23.    Forco 2 will be liquidated and dissolved pursuant to the laws of Foreign Country 3. All of the liabilities of Forco 2 will be assumed by Forco 1 and all of the property of Forco 2, including its membership interest in DC and its rights and obligations under Membership Agreement 1, will be distributed to Forco 1 in respect of the Shares of the capital stock of Forco 2 that are disposed of on the liquidation and dissolution.

24.    Forco 4 will be liquidated and dissolved pursuant to the laws of Foreign Country 2. All of the liabilities of Forco 4 will be assumed by Parent and all of the property of Forco 4, including its membership interest in DC and its rights and obligations under Membership Agreement 3, will be distributed to Parent in respect of the Shares of the capital stock of Forco 4 that are disposed of on the liquidation and dissolution.

Additional Information

25.    Pursuant to the Foreign Legislation:

(a)    with respect to the law of property, rights and interests, Dutch cooperatives have separate legal existence, and are considered to be equivalent to natural persons;

(b)    legal persons are formed for an indeterminate period;

(c)    subject to the restrictions under its articles of association, the board of directors of a Dutch cooperative is charged with the management of the cooperative;

(d)    where the articles of association so provide, the board of directors of a Dutch cooperative has the authority to, in general terms, commit or otherwise bind the cooperative to agreements and/or undertakings;

(e)    a Dutch cooperative may, by its articles of association, exclude or limit to a maximum, any liability of its members or former members to contribute to a deficit;

(f)    members of a Dutch cooperative have no right to withdraw or receive distributions, except as provided in the articles of association; and

(g)    Dutch cooperatives may merge with, among other entities, open corporations or closed corporations.

26.    The capital of DC will not be divided into shares and all membership interests in DC will have identical rights and obligations, without regard to proportionate differences.

27.    The ACB to each of Forco 2 and Forco 3 of the Forco 5 shares currently is, and will continue to be, not greater than the fair market value of those shares until the time of the transfers described in Paragraphs 21(a) and (b) of the Proposed Transactions above.

28.    The liquidation and dissolution of Forco 3 and Forco 2, as described above in Paragraphs 22 and 23, respectively, will be DLADs in respect of CanGP 3, Canco 1A and Canco 1B.
 
Purpose of the Proposed Transactions

29.    The purpose of the Proposed Transactions is to create a simplified holding structure for the ownership of Forco 5. The proposed holding structure would require fewer legal entities in fewer jurisdictions such that it would be administratively more efficient, while facilitating a tax-efficient structure for the future repatriation of earnings to CanGP 3, CanGP 2, CanGP 1, CanLP, Canco 1A, Canco 1B, Canco 1C and Canco 1D, as DC will generally not be required to withhold any tax in Foreign Country 1 on any dividends paid to Forco 1.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant Facts, Proposed Transactions, Additional Information and Purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the order described above, we rule as follows, in reliance on such statements:

A.    DC will be treated as a Corporation, for the purposes of the Act, and as a Non-Resident Corporation Without Share Capital, for the purposes of section 93.2.

B.    Membership interests in DC will be considered to be Equity Interests in a Non-Resident Corporation Without Share Capital for the purposes of section 93.2, and will be deemed, for the purposes of the Act, to be Shares of a single class of the capital stock of DC, by virtue of subsection 93.2(2).

C.    Concerning the transfer by Forco 2 of its Forco 5 Shares to DC described in Paragraph 21(a) above, provided this transfer is done in a manner that increases the fair market value of the deemed class of Shares of the capital stock of DC and provided no election is made under paragraph 93.2(3)(b), paragraph 95(2)(c) will apply in respect of CanGP 3, Canco 1A and Canco 1B with the result that the cost of the DC Shares deemed to be owned by Forco 2 immediately before the transfer will be increased by an amount equal to the RCB to Forco 2 of the Forco 5 Shares so transferred.

D.    Concerning the transfer by Forco 3 of its Forco 5 Shares to DC described in Paragraph 21(b) above, provided this transfer is done in a manner that increases the fair market value of the deemed class of Shares of the capital stock of DC and provided no election is made under paragraph 93.2(3)(b), paragraph 95(2)(c) will apply in respect of CanGP 3, Canco 1A and Canco 1B with the result that the cost of the DC Shares deemed to be owned by Forco 3 immediately before the transfer will be increased by an amount equal to the RCB to Forco 3 of the Forco 5 Shares so transferred.

E.    Paragraph 95(6)(b) will not apply to the transfers described in Paragraphs 21(a) and (b).

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R6 dated August 29, 2014, and are binding on the CRA provided that the Proposed Transactions are completed prior to XXXXXXXXXX.

Comments

(a)    Nothing in this ruling letter should be construed as implying that the CRA has agreed to, reviewed, or made any determination in respect of: the fair market value, ACB, RCB, cost or capital cost of any property referred to herein, or whether any such property is Capital Property;

(b)    whether the Facts and Proposed Transactions described herein are, or would be, undertaken for fair market value consideration; 

(c)    any other tax consequences relating to the Facts, Proposed Transactions and Additional Information described herein, other than those specifically described in the rulings given above.

An invoice for our fees in connection with this ruling request will be sent to you under separate cover.

Yours truly,

XXXXXXXXXX
Section Manager
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
 

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