Current structure
Forco 1 is held through three stacked Canadian partnerships by two taxable Canadian corporations (Canco 1D and Canco 1A) which, in turn, are indirect wholly-owned subsidiaries of a non-resident parent (“Parent”). Forco 1, which is an unlimited liability company resident in Foreign Country 3, wholly owns Forco 2, which is resident in Country 3 and wholly-owns Forco 3, which is a limited liability company resident in Foreign Country 2. Parent wholly owns Forco 4, which is a limited liability company resident in Country 2. Forco 5 is a private limited liability company resident in the Netherlands whose shares are held directly by Forco 2, Forco 3 and Forco 4.
Proposed transactions
- Forco 2, Forco 3 and Forco 4 will create DC, a Dutch cooperative under the Dutch Civil Code, without making a capital contribution. Upon the registration of the notarial deed with the commercial register, DC will be regarded as a legal entity that exists separately from its members under the Dutch Civil Code and the Netherlands domestic income tax law.
- The Articles will provide that each member must make capital contributions to DC as unanimously agreed upon by all members, the number of votes that a member may cast at a general meeting of members will generally be proportionate to its percentage of ownership in DC, a distribution of retained profits will only be made with the unanimous agreement of all members and such distributions will be proportional to the respective ownership percentages, and the members 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.
- Each of Forco 2, 3 and 4 will transfer all of its Forco 5 Shares to DC solely in consideration for a credit to its membership account in DC in the amount of the fair market value of the transferred shares.
- Each of Forco 3, 2 and 4 will be liquidated and dissolved in succession.
Additional Information
The Dutch Civil Code provides that “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.” “DC will generally not be required to withhold any tax in Foreign Country 1 on any dividends paid to Forco 1.”
Rulings
- DC will be treated as a corporation for the purposes of the Act, and as a non-resident corporation without share capital for purposes of s. 93.2.
- Membership interests in DC will be deemed to be shares of a single class by s. 93.2(2).
- Provided the transfers of Forco 5 Shares to DC described in 3 increase the fair market value of the deemed class of Shares of the capital stock of DC and no election is made under s. 93.2(3)(b), s. 95(2)(c) will apply.
- S. 95(6)(b) will not apply to the transfers by Forco 2 and Forco 3, in 3.