2017-0682291E5 Swedish/Finnish Profit Transfer Agreements

Principal Issues: Whether a payment made by a subsidiary foreign affiliate to its grand-parent foreign affiliate under a "profit transfer agreement" in accordance with Finnish or Swedish tax law can potentially be recharacterized as income from an active business under subparagraph 95(2)(a)(ii) of the Act?

Position: Provided the payment is “income from property” to the recipient, and to the extent only of the portion of that amount paid that is deductible by the subsidiary affiliate in computing its “earnings from an active business”, the payment should generally be eligible for recharacterization under that subparagraph, provided its other conditions are met.

Reasons: This approach will continue to apply except where the payment is deemed under subsection 90(2) to be a dividend.

Author: Roulier, Yannick
Section: 90(2), 95(2)(a)(ii)

XXXXXXXXXX                                                                                                                        Yannick Roulier
                                                                                                                                                2017-068229
March 2, 2017

Dear XXXXXXXXXX:

Profit transfer agreements

We are writing in response to your letter dated January 10, 2017, and your previous correspondence, in which you request clarification regarding the position announced by the Canada Revenue Agency (“CRA”) at the May 2016 International Fiscal Association (Canadian Branch) Conference in respect of payments made under a “profit transfer agreement” (“PTA”) governed by the laws of Germany (the “IFA Position”).

Unless otherwise noted, all statutory references herein are references to the provisions of the Income Tax Act (Canada) (the “Act”).

Background

You have represented to us that many foreign jurisdictions, such as Germany, Sweden and Finland, have PTA mechanisms that allow for full or partial combination of the tax results of entities under common control. In this respect, you mention that the CRA has in the past taken the view that a payment under such a PTA could, in certain circumstances, be considered “income from property” to the foreign affiliate recipient, but would be eligible for recharacterization to “income from an active business” to the extent of the portion of such amounts in respect of which the conditions of subparagraph 95(2)(a)(ii) are met (the “General Approach”).

You are concerned that the IFA Position may suggest that the CRA no longer follows the General Approach, and you are seeking clarification in this regard. Your concern lies mainly in the concluding statements in the IFA Position where the CRA proposes that taxpayers only be able to rely on the General Approach in respect of PTA payments made before 2017. You illustrate your concern by reference to a hypothetical scenario involving a profitable operating subsidiary in Finland or Sweden (“FA-Sub”) that makes PTA payments to a “grand-parent” corporation, i.e. a corporation that does not own any shares of FA-Sub directly (“FA-GP”) but that indirectly owns all of its shares.

Our comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC70-6R7, Advance Income Tax Rulings and Technical Interpretations.

The IFA Position involves a situation where a German-resident subsidiary has only one class of shares issued and outstanding and its German-resident parent directly owns all of these shares. The CRA concluded that a payment made under a PTA by the subsidiary to the parent in these circumstances would be considered to be a pro rata distribution in respect of all the shares of that class and, as such, would be deemed to be a dividend under subsection 90(2).

We understand your concern and are hereby confirming that the proposal to limit the application of the General Approach to PTA payments made before 2017 was only meant to apply to situations where the PTA payment is deemed under subsection 90(2) to be a dividend. For any other PTA situations, such as the one you illustrate above concerning FA-Sub and FA-GP, the CRA will continue to apply the General Approach.

We trust that our comments will be of assistance, and thank you for your enquiry.

Yours truly,

Dave Beaulne, CPA, CA
Section Manager
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2017

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2017