Kamenitza AD had acquired the Kamenitza trademark from a related party, StarBev Netherlands B.V., in 2014 for €40.1 million.
The tax authorities challenged the pricing of the transaction, arguing that the trademark’s market value was significantly lower. Relying on a 2009 sale price of €12.75 million, the the tax authorities priced the transaction using the CUP method and concluded that Kamenitza AD had overvalued the trademark. This reassessment resulted in additional corporate tax liabilities for the years 2014-2016, along with interest charges.
Kamenitza AD filed an appeal with the administrative court, asserting that the 2014 purchase price was based on an Ernst & Young valuation using the relief-from-royalty method, a widely accepted approach in transfer pricing. The company further argued that the 2009 sale price was not a valid comparable due to changes in economic conditions. It also objected to the tax authorities application of the 2017 OECD Guidelines, specifically the guidance on DEMPE functions for intangibles, which were introduced after the transaction took place. The company maintained that these guidelines should not be retroactively applied to assess a 2014 transaction.
The administrative court upheld the tax authorities’ decision, largely reproducing the reasoning provided by the tax authorities.
Kamenitza AD appealed to the Supreme Administrative Court, arguing that the lower court had failed to conduct its own independent assessment.
Judgment
The Supreme Administrative Court overturned the decision of the administrative court and ruled parcially in favour of Kamenitza AD and remanded the case.
According to the Supreme Administrative Court, the administrative court had not justified its reliance on the 2009 valuation over a 2012 valuation of the same trademark. It also ruled that the administrative court had failed to address the applicability of the 2017 OECD Guidelines and had disregarded expert reports that contradicted the tax authorities conclusions.
Due to these procedural violations, the Supreme Administrative Court annulled the corporate tax reassessment and remanded the case for reconsideration by a different panel of the Administrative Court. However, it upheld the tax authorities’ decision regarding withholding tax liabilities on payments made to foreign service providers, confirming that the company had failed to apply the correct withholding tax rules. The ruling is final and not subject to further appeal.
Excerpts in English
“First of all, it is rightly pointed out by the appellant that the court did not set out its own reasoning, but reproduced in full the reasoning and legal conclusions set out by the Director of the Directorate of the ETRS Sofia in the decision confirming the RA. In the contested judgment there is no ruling on issues of substance, as the administrative court referred to the ruling of the decision-making body on the appellant’s objections, which, however, cannot properly replace the need for the court to set out its own reasons and legal conclusions. The failure to state reasons constitutes an infringement of the procedural rules of the substantive kind, since, in addition to constituting a failure by the judge to fulfil the imperative duty imposed on him to state reasons for his decision, it infringes the rights and the opportunity of the parties to defend themselves, precludes the possibility of cassation review and infringes the principle of the two-instance nature of judicial review.
In addition, the judgment does not rule at all on the objection of Kamenitza AD in relation to the valuation of the trademark used by the revenue administration as a market analogue in 2009 instead of the valuation of the same asset in 2012. Since it has been categorically established in the case that the conclusion of the auditing authorities on the non-market nature of the price of the 2014 transaction was formed after comparison with the valuation of the 2012 transaction, the question why the latter was not used as a comparable uncontrolled transaction in this case, but the 2009 one, is essential for the proper resolution of the dispute. In this regard, the court did not provide any reasoning, i.e. it did not decide whether the 2012 valuation of the intangible asset, prepared by the same valuer as that of the 2014 transaction at issue, should be taken into account in determining the market value under the comparable uncontrolled price method applied by the revenue authorities. As the sole ground for not applying the 2012 valuation, the court referred to the absence of a forensic accounting expert engaged by the appellant, for which, however, no instructions were given to the party in accordance with the requirement of Article 171(5) of the Code of Civil Procedure, read in conjunction with Article 171(5) of the Code of Criminal Procedure. § 2 of the RPC and in violation of the principle of enhanced ex officio principle in the administrative process (Article 9(3) of the APC in conjunction with § 2 of the RPC). In its ruling on the merits, the court was first of all obliged to answer the disputed question referred to above – whether there are grounds for applying the 2012 valuation of the asset in the transaction between independent traders when determining the market value of the asset in the 2014 transaction. Instead, the administrative court only discussed the legality and reasonableness of the market value determined on the basis of the 2009 valuation of the mark, without providing its own reasoning on another of the company’s main complaints – the application of the OECD Guide, as revised in 2017, in assessing the terms of the 2014 transaction at issue. In this respect, the general reasoning of the tax director is reproduced in full, but no definitive conclusion is formed by the court as to whether the depreciation method – the DEMPE functions, which were introduced by the OECD Guide in its 2017 edition – was correctly applied by the auditing authorities in determining the market price of the asset.”
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