Under an “Organschaft,” a German corporation (“Parentco”) and another corporation resident in Germany (“Subco”) enter into a Profit Transfer Agreement (“PTA”) under which Subco agrees to annually transfer its entire profit determined in accordance with German (statutory) GAAP to Parentco, and Parentco agrees to compensate Subco for any loss incurred under German GAAP.
A profit transfer payment made by Subco to Parentco could be re-characterized as income from an active business of Parentco under s. 95(2)(a) to the extent that Subco had earnings from an active business before taking into account the profit transfer payment (see, e.g., 2001-0093903). However, where the statutory accounting profits of Subco included income such as dividends from underlying affiliates or capital gains from dispositions of excluded property, all or a portion of a profit transfer payment could be included in the computation of the foreign accrual property income of Parentco notwithstanding that Subco had no FAPI prior to the payment.
Would CRA consider a profit transfer payment made by Subco to Parentco under a PTA to be a dividend under that s. 90(2)?
CRA agreed that the payment from Subco to Parentco under the PTA could be a deemed dividend under s. 90(2). In the base case scenario, there is one class of shares wholly-owned by the parent. Any profit transfer payment made after August 19th , 2011 under the base case scenario (where there is one class of shares wholly-owned by Parentco would be a dividend under s. 90(2) - whose effect on the surplus accounts of Subco and Parentco would be in accordance with the rules of Part LIX of the Regulations.
As most taxpayers would be able to rely on CRA’s new view, CRA proposes to restrict the ability of taxpayers to treat these payments in accordance with the previous CRA view, to profit transfer payments made before 2017.