Current structure
XX2, an indirect controlled foreign affiliate of a Canadian public corporation, is the sole limited partner of a German KG, and its indirect wholly-owned German subsidiary (FA2), is the sole general partner of KG with a 0% partnership interest. KG, FA2, and two direct wholly-owned German subsidiary of FA2 (FA3 and FA4), constitute all the shares (being of a single class) of a German corporation carrying on an active business (FA5).
Current PTAs
Each of the Transferring Entities below has entered into a profit and loss transfer agreement (“PTA”) with the Dominating Entity below for the Transferring Entity to transfer its statutory profit to the Dominating Entity and for the Dominating Entity to cover any statutory losses of the Transferring Entity:
| PTA label | Transferring Entity | Dominating Entity |
| PTA1 | FA5 | FA3 |
| PTA2 | FA3 | FA2 |
| PTA3 | FA4 | FA2 |
Background on PTAs
17. …[F]or German tax purposes, in order for tax consolidation to be possible, the parties to a PTA must be a parent and a subsidiary (direct or indirect) to meet the requirement of financial integration.
18. PTAs are generally concluded in order to implement an Organschaft for German tax purposes. Once an Organschaft is implemented, the taxable income/loss (after adjustment for matters such as book to tax differences and non-deductible items, etc.) of the subsidiary is transferred to the parent.
19. The [German Stock Corporation Act] requires a PTA to provide for adequate compensation of outside shareholders with annual payments established in proportion with their shares in the share capital of the Transferring Entity. The annual amount to be provided as compensation payment must not be less than the amount which could be expected to be distributed as the average dividend for each share based on the past profitability of the corporation and on its prospective profits.
Proposed transactions
- FA4 will be merged into FA3 with FA3 (“New FA3") as the survivor. Consequently, PTA3 will be extinguished.
- FA2 will transfer all of its shares of FA5 to New FA3 in consideration for shares of New FA3.
- The (ordinary) shares held by KG in FA5 will be converted into voting cumulative preferred shares.
Rulings
The payments made by FA5 to New FA3 and KG under PTA1 and by New FA3 to FA2 under PTA2 will be deemed by s. 90(3) to be dividends including for various surplus calculation purposes. Each payment made by New FA3 to FA5 under PTA1 and by FA2 to New FA3 will be treated as a contribution of capital for purposes of s. 53(1)(c) and will not be treated as earnings or loss under Reg. 5907(1).