FA4 and FA5 Subco were US-resident indirect controlled foreign affiliates (CFAs) of Canco in which Canco had a qualifying interest. FA4 owned a 99% limited partnership interest in a US limited partnership (“LP”). The business of LP, FA4 and FA5 Subco consisted mainly of acquiring, owning and collecting portfolios of debt receivables. FA4 had more than 100 employees who managed and operated the activities of FA4, FA5 Subco and LP, and other US group entities, and with the exception of one employee of FA4, these constituted the only employees in that group.
The Directorate indicated that FA4 appeared to have two separate businesses - a debt portfolio business, and a business of providing services to other foreign affiliates in the group – given inter alia that its services were mostly to other foreign affiliates (in contrast to the arm’s length customers of the debt portfolio business) and thus not principally services rendered to FA4’s own debt portfolio business.