When is a holding company an Active NFE?


What is a Holding Company Active NFE?

There are 8 types of Active NFEs:

  1. Below de minimis thresholds for both (a) passive income, and (b) assets that potentially or actually produce passive income.
  2. Government entity, international organisation, central bank or subsidiary of foregoing
  3. Regularly traded
  4. At least 80% activities are direct or indirect holding subsidiary stock (or providing finance services) to entities that do business or trade other than a FI
  5. New entity less than 2 years old with intent of operating business other than FI
  6. Liquidating and wasn't a FI within past 5 years
  7. Engages in financing and hedging transactions for related entities that are not FI
  8. Exclusively a public charity

This page will concentrate on type (d) above, the holding company.

1. Definition of terms:

  • Activities: This is undefined by the CRS but presumably refers to either income or valuation of holdings
  • Subsidiaries: At least 50% equity or 50% control of management
  • Entities that do business or trade: activities that do not yield passive income
  • Direct or indirect holdings: A parent company of holding company will have indirect holdings
2.
So is the following company an Active Holding NFE?


holding co structure


Answer:

Number of holdings:
Of the six activities, only two relate to holding subsidiaries, that is the wood plantation and paper mill. The coal mine is an affiliate, not a subsidiary. The property is direct holdings or a minority holdings if the property is held via a company. So based on number of activities, the company does not qualify as 80% activities of holding company NFE .

Income of holdings:
Based on income, the holding company earns only $1 million from subsidiaries (the paper mill) out of a total $6 million income. So based income, the company does not qualify as 80% activities of holding NFE.

Valuation of holdings:
Based on valuation, the holding company holds $190 million valuation of subsidiaries out of a total $235 million assets. Therefore 80% of its activities based on valuation is regarding holding of subsidiary entities that do business or trade. Therefore the company qualifies to be an Active NFE of the holding company type.

Other measurements of activities:
The CRS Commentary example of activities describes where a company has subsidiar holdings of 60% of its activities and 40% acting as distribution center. The CRS does not define what activities are. It could be other measurements such as number of staff dedicated to holdings, or number of man-hours, or square meters of head office space dedicated to holdings, or cost of labour, etc. Until the standard defines what "activities" are, any of these measurements may suffice to determine what a activities are. However to be practical it is recommended that valuation of subsidiaries take priority and the net income.


Note: It does not matter if the holding company earns passive income either from its holdings or investment portfolio. The subsidiaries are categorised as assets that have the potential to produce passive income because dividends distributed to the holding comany is passive income.

3.
Can a holding company qualify for Active NFE if the activities in holding subsidiary entities that do business or trade is less than 80% of the company's total activities?


The CRS commentary page 97 par(130) describes this scenario:

The NFE’s holding activities constitute less than 80% of its activities but the NFE receives also active income (i.e. income that is not Passive income) otherwise, it qualifies for the Active NFE status, provided that the total sum of activities meets the "substantially all test". For purposes of determining whether the activities other than holding and group finance activities of the NFE qualify it as an Active NFE, the test of subparagraph D(9)(a) can be applied to such other activities. For example, if a holding company has holding or finance and service activities to one or more subsidiaries for 60% and also functions for 40% as a distribution centre for the goods produced by the group it belongs to and the income of its distribution centre activities is active according to subparagraph D(9)(a), it is an Active NFE, irrespective of the fact that less than 80% of its activities consist of holding the outstanding stock of, or providing finance and services to, one or more subsidiaries. The term “substantially all” covers also a combination of holding stock of and providing finance and services to one or more subsidiaries. The term “subsidiary” means any entity whose outstanding stock is either directly or indirectly held (in whole or in part) by the NFE.



So is the following company an Active NFE of the holding company type?


holding co structure


Answer:

The activities in holding subsidiaries is below 80% based on valuation test (66% - $150m out of $225m) or income test (0% - Zero out of $15m).

However the property income is active, therefore the activity of holding property counts towards the holding activities. Therefore, the total valuation of assets which count toward holding company categorisation would be $200 m in total which is made up of $150 m plantation plus $50 m property, because the property generates active income. This is 90% of the total assets held by the company. Therefore the company qualifies to be an Active NFE of the holding company type.