In 2010, E S.A. transferred the legal ownership of a trademark to subsidiary S and subsequently entered into an agreement with S for the “licensing of the use of the trademarks”. In 2013, the same trademark was transferred back to E. S.A. As a result of these transactions, E. S.A., between 2010 and 2013, recognised the licence fees paid to S as tax costs, and then, as a result of the re-purchase of those trademarks in 2013 – it again made depreciation write-offs on them, recognising them as tax costs. The tax authority found that E S.A. had reported income lower than what would have been reported had the relationships not existed. E S.A. had  overestimated the tax deductible costs by PLN […] for the depreciation of trademarks, which is a consequence of the overestimation for tax purposes of the initial value of the trademarks repurchased from S – 27 December 2013 – by the amount of PLN […]. The function performed by S between 2010 and 2013 was limited to re-registration of the trademarks with the change of legal ownership. In the tax authority’s view, the expenses incurred by E S.A. for the reverse acquisition of the trademarks did not reflect the transactions that unrelated parties would have entered into, as they do not take into account the functions that E S.A. performed in relation to the trademarks. A tax assessment was issued where – for tax purposes – the transaction had instead been treated as a service contract, where S had provided protection and registration services to E S.A. A complaint was filed by E S.A. Judgement of the Court The Court found that there was no legal basis for re-characterisation in Poland for the years in question and that the issue should instead be resolved by applying the Polish anti-avoidance provision. On that basis, the case was referred back for further consideration. Excerpts “In principle, the tax authorities did not present any argumentation showing from which rules of interpretation they came to the conclusion that such an application of the above-mentioned provisions is legally possible and justified in the present case. It should be noted in this regard that Article 11(1) in fine speaks of the determination of income and tax due without – ‘[…] taking into account the conditions arising from the relationship…’, but does not allow for the substitution of one legal act (a licence agreement) for another act (an agreement for the provision of administration services), and deriving from the latter the legal consequences for the determination of the amount of the tax liability. There should be no doubt in this case that, in fact, the authorities made an unjustified reclassification of the legal act performed in the form of the conclusion of a valid licensing contract, when they concluded (referring to the OECD Guidelines – Annex to Chapter VI – Illustrative Examples of Recommendations on Intangible Assets, example 1, point 4) that the transactions carried out by E. and S. in fact constitute, for the purposes of assessing remuneration, a contract for the provision of trademark administration services and the market price in such a case should be determined for administration services. As the applicant rightly argued, such a possibility exists as of 1 January 2019, since Article 11c(4) uses the expression – “[…] without taking into account the controlled transaction, and where justified, determines the income (loss) of the taxpayer from the transaction appropriate to the controlled transaction”. This is what is meant by the so-called recharacterisation, i.e. the reclassification of the transaction, which is what the tax authorities actually did in the present case. At the same time, the Court does not share the view expressed in the jurisprudence of administrative courts, referring to the content of the justification of the draft amending act, according to which, the solutions introduced in 2019 were of a clarifying rather than normative nature (cf. the judgment of the WSA in Rzeszów of 20 October 2022, I SA/Rz 434/22). The applicant rightly argues in this regard that the new regulation is undoubtedly law-making in nature and that the provisions in force until the end of 2018 did not give the tax authorities such powers. It is necessary to agree with the view expressed in the literature that a linguistic interpretation of Article 11(1) of the A.p.d.o.p. and Article 11c of the A.p.d.o.p. proves that Article 11c of that Act is a normative novelty, as the concepts and premises it regulates cannot be derived in any way from the wording of Art. 11(1) u.p.d.o.p. (cf. H. Litwińczuk, Reclassification (non-recognition) of a transaction made between related parties in the light of transfer pricing regulations before and after 1.01.2019, “Tax Review” of 2019, no. 3).” “It follows from the justification of the contested decisions that, in applying Article 11(1) and (4) of the TAX Act to the facts of this case, the tax authorities referred to the OECD Guidelines, inter alia, to the example provided therein (Anex to Chapter VI – Illustrative Examples of Recommendations on Intangible Assets, example 1, point 4), from which, according to the authorities, it follows that the transactions carried out by E. S.A. and S. for the purposes of assessing remuneration constitute, in fact, a contract for the provision of trademark administration services and, in that case, the market price should be determined for such services. In this context, it should be clarified that the OECD Guidelines (as well as other documents of this organisation), in the light of the provisions of Article 87 of the Constitution of the Republic of Poland, do not constitute a source of universally binding law. Neither can they determine in a binding manner the basic structural elements of a tax, since the constitutional legislator in Article 217 of the Basic Law has subjected this sphere exclusively to statutory regulations. Since these guidelines do not constitute a source of law, they can therefore neither lead to an extension of the powers of the tax authorities nor of the

In 2009 the BlackRock Group acquired Barclays Global Investors for a total sum of $13,5bn. The price was paid in part by shares ($6.9bn) and in part by cash ($6.6bn). The cash payment was paid by BlackRock Holdco 5 LLC – a US Delaware Company tax resident in the UK – but funded by the parent company by issuing $4bn loan notes to the LLC. In the years following the acquisition Blackrock Holdco 5 LLC claimed tax deductions in the UK for interest payments on the intra-group loans. Following an audit in the UK the tax authorities disallowed the interest deductions. The tax authorities held that the transaction would not have happened between independent parties. They also found that the loans were entered into for an unallowable tax avoidance purpose. A UK taxpayer can be denied a deduction for interest where a loan has an unallowable purpose i.e, where a tax advantage is the company’s main purpose for entering into the loan relationship (section 441 of the Corporation Tax Act 2009). If there is such an unallowable purpose, the company may not bring into account for that period ….so much of any debit in respect of that relationship as is attributable to the unallowable purpose. An appeal was filed by the BlackRock Group. In November 2020 the First Tier Tribunal found that an independent lender acting at arm’s length would have made loans to LLC5 in the same amount and on the same terms as to interest as were actually made by LLC4 (the “Transfer Pricing Issue”). The FTT further found that the Loans had both a commercial purpose and a tax advantage purpose but that it would be just and reasonable to apportion all the debits to the commercial purpose and so they were fully deductible by LLC5 (the “Unallowable Purpose Issue”). An appeal was then filed with the Upper Tribunal by the tax authorities. Judgement of the Upper Tribunal The Upper Tribunal found that the First Tier Tribunal had erred in law and therefore allowed HMRC’s appeal on both the transfer pricing issue and the unallowable purpose issue. The First Tier Tribunal’s Decision was set aside and the tax authorities amendments to LLC5’s tax returns were confirmed. Transfer Pricing “The actual provision of the loans from LLC4 to LLC5 differed from any arm’s length provision in that the loans would not have been made as between independent enterprises. The actual provision conferred a potential advantage in relation to United Kingdom taxation. The profits and losses of LLC5, including the allowing of debits for the interest and other expenses payable on the Loans, are to be calculated for tax purposes as if the arm’s length provision had been made or imposed instead of the actual provision. In this case, no arm’s length loan for $4 billion would have been made in the form that LLC4 made to LLC5 and hence HMRC’s amendments to the relevant returns should be upheld and confirmed.” Unallowable Purpose “The FTT did not err in finding that LLC5 had both a commercial purpose and an unallowable tax advantage main purpose in entering into the Loans. However, it was wrong to decide that the just and reasonable apportionment was solely to the commercial purpose. But for the tax advantage purpose there would have been no commercial purpose to the Loans and all the relevant facts and circumstances lead inexorably to the conclusion that the loan relationship debits should be wholly attributed to the unallowable tax purpose and so disallowed.” HMRC_v_Blackrock_Holdco_LLC5_UT-2021-000022_-_final_decision_

D. Sp. z oo had deducted interest expenses on intra-group loans and expenses related to intra-group services in its taxable income for FY 2015. The loans and services had been provided by a related party in Delaware, USA. Following a inspection, the tax authority issued an assessment where deductions for these costs had been denied resulting in additional taxable income. In regards to the interest expenses the authority held that the circumstances of the transactions indicated that they were made primarily in order to achieve a tax advantage contrary to the object and purpose of the Tax Act (reduction of the tax base by creating a tax cost in the form of interest on loans to finance the purchase of own assets), and the modus operandi of the participating entities was artificial, since under normal trading conditions economic operators, guided primarily by economic objectives and business risk assessment, do not provide financing (by loans or bonds) for the acquisition of their own assets, especially shares in subsidiaries, if these assets generate revenue for them. In regards to support services (management fee) these had been classified by the group as low value-added services. It appeared from the documentation, that services concerned a very large number of areas and events that occurred in the operations of the foreign company and the entire group of related entities. The US company aggregated these expenses and then, according to a key, allocated the costs to – among others – Sp. z o.o. The Polish subsidiary had no influence on the amount of costs allocated or on the verification of such costs. Hence, according to the authorities, requirements for tax deduction of these costs were not met. An appeal was filed by D. Sp. z oo with the Administrative Court requesting that the tax assessment be annulled in its entirety and that the case be remitted for re-examination or that the proceedings in the case be discontinued. Judgement of the Administrative Court The Court dismissed the complaint of D. Sp. z oo and upheld the assessment issued by the tax authorities. Excerpt in regards of interest on intra-group loans “The authorities substantively, with reference to specific evidence and figures, demonstrated that an independent entity would not have agreed to such interest charges without obtaining significant economic benefits, and that the terms of the economic transactions adopted by the related parties in the case at hand differ from the economic relations that would have been entered into by independent and market-driven entities, rather than the links existing between them. One must agree with the authority that a loan granted to finance its own assets is free from the effects of the borrower’s insolvency, the lender does not bear the risk of loss of capital in relation to the subject matter of the loan agreement, since, in principle, it becomes the beneficiary of the agreement. This in turn demonstrates the non-market nature of the transactions concluded. The lack of market character of the transactions demonstrated by the authorities cannot be justified by the argumentation about leveraged buyout transactions presented in the complaint (page 9). This is because the tax authorities are obliged to apply the provisions of tax law, which in Article 15(1) of the A.l.p. outline the limits within which a given expense constitutes a tax deductible cost. In turn, Article 11 of the A.l.t.d.o.p. specifies premises, the occurrence of which does not allow a given expense to be included in tax deductible costs. This is the situation in the present case. Therefore, questioning the inclusion of the above-mentioned interest as a tax deductible cost, the authorities referred to Article 11(1), (2), (4) and (9) of the A.p.d.o.p. and § 12(1) and (2) of the Ordinance of the Minister of Finance of 10 September 2009 and the findings of the OECD contained in para. 1.65 and 1.66 of the “Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations” (the Guidelines were adopted by the OECD Committee on Fiscal Affairs on […] and approved for publication by the OECD Council on […]). According to these guidelines: 1.65. – However, there are two specific situations where, exceptionally, it may be appropriate and justified for a tax administration to consider ignoring the construction adopted by the taxpayer when entering into a transaction between associated enterprises. The first arises when the economic substance of the transaction differs from its form. In this case, the tax administration may reject the parties’ qualification of the transaction and redefine it in a manner consistent with its substance. An example could be an investment in a related company in the form of interest-bearing debt, and according to the principle of the free market and taking into account the economic situation of the borrowing company, such a form of investment would not be expected. In this case, it might be appropriate to define the investment according to its economic substance – the loan could be treated as a subscription to capital. Another situation arises where the substance and form of the transaction are consistent with each other, but the arrangements made in connection with the transaction, taken as a whole, differ from those that would have been adopted by commercially rational independent companies, and the actual structure of the transaction interferes with the tax administration’s ability to determine the appropriate transfer price; 1.66. – In both of the situations described above, the nature of the transaction may derive from the relationship between the parties rather than be determined by normal commercial terms, or it may be so structured by the taxpayer to avoid or minimise tax. In such cases, the terms of the transaction would be unacceptable if the parties were transacting on a free market basis. Article 9 of the OECD Model Convention, allows the terms and conditions to be adjusted in such a way that the transaction is structured in accordance with the economic and commercial realities of the parties operating under the free market principle. Bearing in mind the aforementioned guidelines, in the

On 30 November 2012, X sold its trademarks to subsidiary C which in turn sold the trademarks to subsidiary D. X and D then entered into a trademark license agreement according to which X would pay license fees to D. These license fees were deducted by X in its 2013 tax return. The tax authorities claimed that X had understated its taxabel income as the license fees paid by X to D for the use of trademarks were not related to obtaining or securing a source of revenue. The decision stated that in the light of the principles of logic and experience, the actions taken by the taxpayer made no sense and were not aimed at achieving the revenue in question, but instead at generating costs artificially – only for tax purposes. An appeal was filed by X. Judgement of the Administrative Court The court set aside the assessment of the tax authorities and decided in favor of X. According to the court taxpayers are not obliged to conduct their business in such a way as to pay the highest possible taxes, and gaining benefits from so-called tax optimization not prohibited by law, was allowed in 2013. The Polish anti-avoidance clause has only been in force since 15 July 2016. Furthermore, although it may have been possible to set aside legal effects of the transactions under the previous provision in Article 24b § 1 of the C.C.P., the Constitutional Tribunal in its verdict of 11 May 2004, declared this provision to be inconsistent with the Constitution of the Republic of Poland. Excerpts “In the Court’s view, the authorities’ findings fail to comply with the provisions applied in the case, including in particular Article 15 of the CIT Act. The legal transactions described in the appealed decision indeed constitute an optimisation mechanism. However, the realised transaction scheme is not potentially devoid of economic as well as tax rationales. The actions performed were undoubtedly also undertaken in order to achieve the intended tax result, i.e. optimisation of taxation. It should be strongly emphasised that none of the actions taken were ostensible. All of the applicant’s actions were as real as possible. Noticing the obvious reality of the above transactions, the tax authorities did not even attempt to apply the institution regulated in Article 199a of the CIT Act. The omission of legal effects of the transactions performed would probably have been possible in the former legal order, under Article 24b § 1 of the C.C.P., but this provision is no longer in force. The Constitutional Tribunal in its verdict of 11 May 2004, ref. no. K 4/03 (Journal of Laws of 2004, no. 122, item 1288) declared this provision to be inconsistent with the Constitution of the Republic of Poland. On the other hand, the anti-avoidance clause introduced by the Act of 13 May 2016 amending the Tax Ordinance Act and certain other acts (Journal of Laws 2016, item 846) has been in force only since 15 July 2016. Pursuant to the amended Article 119a § 1 o.p. – an act performed primarily for the purpose of obtaining a tax benefit, contradictory in given circumstances to the object and purpose of the provision of the tax act, does not result in obtaining a tax benefit if the manner of action was artificial (tax avoidance). Issues related to the application of the provisions of this clause in time are regulated by Article 7 of the Amending Act, according to which the provisions of Articles 119a-119f of the Act amended in Article 1 apply to the tax advantage obtained after the date of entry into force of this Act. Thus, the anti-avoidance clause applies to tax benefits obtained after the date of entry into force of the amending law, i.e. from 15 July 2016, which, moreover, was not in dispute in the present case. Considering the above, it should be pointed out that the tax authorities in the case at hand had no authority to use such argumentation as if the anti-avoidance clause applied. In the legal state in force in 2013. (applicable in the present case) the general anti-avoidance clause was not in force. This state of affairs amounts to a prohibition on the tax authorities disregarding the tax consequences of legal transactions carried out primarily for the purpose of obtaining a tax advantage.” Click here for English translation. Click here for other translation Poland case no I SA_Po 1058_21 - Wyrok WSA w Poznaniu z 2022-03-28

A Spanish subsidiary – SGL Carbon Holding SL – had significant financial expenses derived from an intra-group loan granted by the parent company for the acquisition of shares in companies of the same group. The taxpayer argued that the intra-group acquisition and debt helped to redistribute the funds of the Group and that Spanish subsidiary was less leveraged than the Group as a whole. The Spanish tax authorities found the transactions lacked any business rationale other than tax avoidance and therefor disallowed the interest deductions. The Court of appeal upheld the decision of the tax authorities. The court found that the transaction lacked any business rationale and was “fraud of law” only intended to avoid taxation. The Court also denied the company access to MAP on the grounds that Spanish legislation determines: The decision was appealed by SGL Carbon to the Supreme Court. Judgement of the Supreme Court The Supreme Court dismissed the appeal of SGL CARBON and upheld the judgment. Click here for English translation Click here for other translation Spain STS_3572_2021

In 2009 the BlackRock Group acquired Barclays Global Investors for a total sum of $13,5bn . The price was paid in part by shares ($6.9bn) and in part by cash ($6.6bn). The cash payment was paid by BlackRock Holdco 5 LLC – a US Delaware Company tax resident in the UK – but funded by the parent company by issuing $4bn loan notes to the LLC. In the years following the acquisition Blackrock Holdco 5 LLC claimed tax deductions in the UK for interest payments on the intra-group loans. Following an audit in the UK the tax authorities disallowed the interest deductions. The tax authorities held that the transaction would not have happened between independent parties. They also found that the loans were entered into for an unallowable tax avoidance purpose. A UK taxpayer can be denied a deduction for interest where a loan has an unallowable purpose i.e, where a tax advantage is the company’s main purpose for entering into the loan relationship (section 441 of the Corporation Tax Act 2009). If there is such an unallowable purpose, the company may not bring into account for that period ….so much of any debit in respect of that relationship as is attributable to the unallowable purpose. The Court ruled in favor of BlackRock and allowed tax deduction for the full interest payments. According to the Court it was clear that the transaction would not have taken place in an arm’s length transaction between independent parties. However there was evidence to establish that there could have been a similar transaction in which an independent lender. Hence, the court concluded that BlackRock Holdco 5 LLC could have borrowed $4bn from an independent lender at similar terms and conditions. In regards to the issue of “unallowable purposes” the court found that securing a tax advantage was a consequence of the loan. However,  Blackrock LLC 5 also entered into the transactions with the commercial purpose of acquiring Barclays Global Investors. The Court considered that both reasons were “main purposes” and apportioned all of the debits (interest payments) to the commercial purpose. UK vs Blackrock November 2020 TC07920

Companies carrying on “oil-related activities” are subject to both corporation tax and a “supplementary charge”. “Oil-related activities” are treated as a separate trade and the income from them represents “ring fence profits” on which corporation tax is charged. The “supplementary charge” is levied on “adjusted” ring fence profits, in calculating which financing costs are left out of account. Between 2006 and 2011, the supplementary charge amounted to 20% of adjusted ring fence profits. On 23 March 2011, however, it was announced that the supplementary charge would be increased to 32% from midnight. The change in rate was subsequently carried into effect by section 7 of the Finance Act 2011, which received the royal assent on 19 July 2011. Total E&P, previously Maersk Oil North Sea UK Limited and Maersk Oil UK Limited, carried on “oil-related activities” and so were subject to the supplementary charge. The question raised by the appeal is how much of each company’s adjusted ring fence profits for 2011 are liable to the charge at 20% and how much at 32%. The accounting period which ran from 1 January to 31 December 2011 and so straddled the point at which the supplementary charge was raised. The approach elected by Maersk Oil North Sea UK Limited and Maersk Oil UK Limited – an “actual” basis in place of the time apportionment basis – resulted in all the adjusted ring fence profits for the 2011 accounting period being allocated to the period before 24 March (“the Earlier Period”) rather than that from 24 March (“the Later Period”) and so in escaping the “new” 32% rate of supplementary charge. HMRC did not consider the basis on which Maersk Oil North Sea UK Limited and Maersk Oil UK Limited had approached apportionment of their adjusted ring fence profits to be “just and reasonable”. The Court of Appeal concluded that treating each time period as if they were two separate accounting periods, and allocating income, expenditure and allowances to the periods accordingly was just and reasonable. Capital allowances could be treated similarly for notionally separate periods. UK vs TOTAL E&P 2020

AgraCity Canada had entered into a Services Agreement with a group company, NewAgco Barbados, in connection with the sale by NewAgco Barbados directly to Canadian farmer-users of a glyphosate-based herbicide (“ClearOut”) a generic version of Bayer-Monsanto’s RoundUp. In reassessing the taxable income of AgraCity for 2007 and 2008 the Canada Revenue Agency relied upon the transfer pricing rules in paragraphs 247(2)(a) and (c) of the Income Tax Act (the “Act”) and re-allocated an amount equal to all of NewAgco Barbados’ profits from these sales activities to the income of AgraCity. According to the Canadian Revenue Agency the value created by the parties to the transactions did not align with what was credited to AgraCity and NewAgco Barbados. Hence, 100% of the net sales profits realized from the ClearOut sales by NewAgco Barbados to FNA members – according to the Revenue Agency – should have been AgraCity’s and none of those profits would have been NewAgco’s had they been dealing at arm’s length. “arm’s length commercial parties would never agree to let NewAgco Barbados have any of the profits if it served no function in the transactions given that it had no assets, employees, resources, or other role or value to contribute to the profit making enterprise or to bring thereto.” The Tax Court found that the purchase, sale, and related transactions with NewAgco Barbados were not a sham, nor was any individual transaction in the series of transactions beginning with the incorporation of NewAgco Barbados for the ClearOut sales activity a sham. The transactions that occurred and were documented were the transactions the parties intended, agreed to, and that the parties reported to others including the Canadian Revenue Agency. Any shortcomings in any paperwork was not intended to deceive the CRA or anyone else. Canada-vs-Agracity-Ltd

General Electric (GE) have been routing financial transactions (AUS $ 5 billion) related to GE companies in Australia via the UK in order to gain a tax advantage – by “triple dipping” in regards to interest deductions, thus saving billions of dollars in tax in Australia, the UK and the US. Before entering into these transactions, GE obtained clearance from HMRC that UK tax rules were met, in particular new “Anti-Arbitrage Rules” introduced in the UK in 2005, specifically designed to prevent tax avoidance through the exploitation of the tax treatment of ‘hybrid’ entities in different jurisdictions. The clearance was granted by the tax authorities in 2005 based on the understanding that the funds would be used to invest in businesses operating in Australia. In total, GE’s clearance application concerned 107 cross-border loans amounting to debt financing of approximately £21.2 billion. The Australian Transaction was one part of the application. After digging into the financing structure and receiving documents from the Australian authorities, HMRC now claims that GE fraudulently obtained a tax advantage in the UK worth US$1 billion by failing to disclose information and documents relating to the group’s financing arrangements. According to the HMRC, GE provided UK tax officers with a doctored board minute, and misleading and incomplete documents. The documents from Australia shows that the transactions were not related to investments in Australian businesses, but part of a complex and contrived tax avoidance scheme that would circulate money between the US, Luxembourg, the UK and Australia before being sent back to the US just days later. These transactions had no commercial purpose other than to create a “triple dip” tax advantage in the UK, the US and Australia. HMRC are now seeking to annul the 2005 clearance agreement and then issue a claim for back taxes in the amount of $ 1 billion before interest and penalties. From GE’s 10 K filing “As previously disclosed, the United Kingdom tax authorities disallowed interest deductions claimed by GE Capital for the years 2007-2015 that could result in a potential impact of approximately $1 billion, which includes a possible assessment of tax and reduction of deferred tax assets, not including interest and penalties. We are contesting the disallowance. We comply with all applicable tax laws and judicial doctrines of the United Kingdom and believe that the entire benefit is more likely than not to be sustained on its technical merits. We believe that there are no other jurisdictions in which the outcome of unresolved issues or claims is likely to be material to our results of operations, financial position or cash flows. We further believe that we have made adequate provision for all income tax uncertainties.” The English High Court decision on whether the case has sufficient merit to proceed to trial: “150. For the above reasons, I refuse the application to amend in respect of paragraphs 38(b) and 38(e) of APOC and I will strike out the existing pleading in paragraph 38(e) of APOC. I will otherwise permit the amendments sought by HMRC insofar as they are not already agreed between the parties. Specifically, the permitted amendments include those in which HMRC seeks to introduce allegations of deliberate non-disclosure, fraud in respect of the Full Disclosure Representation, a claim that the Settlement Agreement is a contract of utmost good faith (paragraphs 49B and 53(ca) of APOC) and the claim for breach of an implied term (paragraphs 48 and 49 of APOC). 151. As to paragraph 68(b) of the Reply, I refuse the application to strike it out. To a large extent this follows from my conclusion in relation to the amendments to the APOC to add allegations of deliberate failure to disclose material information. In GE’s skeleton argument, a separate point is taken that paragraph 68(b) of the Reply is a free-standing plea that is lacking in sufficient particulars. I do not accept this: there can be no real doubt as to which parts of the APOC are being referred to by the cross-reference made in paragraph 68(b)(ii). 152. The overall result is that, while I have rejected the attempts to infer many years after the event that specific positive representations could be implied from limited references in the contemporaneous documents, the essential allegation which lay at the heart of Mr Jones QC’s submissions – that GE failed to disclose the complete picture, and that it did so deliberately – will be permitted to go to trial on the various alternative legal bases asserted by HMRC. I stress that, beyond the conclusion that there is a sufficient pleading for this purpose, and that the prospects of success cannot be shown to be fanciful on an interlocutory application such as this, I say nothing about the merits of the claims of deliberate non-disclosure or fraud.” UK-vs-GE-2020

ViciunaiRus LLC was engaged in production and wholesale distribution of its products. During the inspection, the inspection concluded that the chain of contractual relations between the Company and its sole official distributor in the Russian Federation artificially had established intermediates that do not have assets and personnel. At the same time, the price of products increased by more than 20% in the course of movement along the chain of counter parties. During the period from 2012 to 2014, the tax authorities considered the inclusion of intermediaries in the sales structure to be of a artificial nature and aimed at understating the sales revenue. The taxpayer was additionally charged profit tax and VAT, and the additional tax was calculated based on the resale price at which the goods were received by the distributor. In 2012 and 2013 the transactions between the taxpayer and distributor were controlled. In 2014 they were not. The taxpayer objected to the tax authority’s decision; among other things, the taxpayer argued that the tax authority was obliged to apply the methods of determining market prices set forth in Section V.1 of the Tax Code when making additional accruals, but applied a different method (took the last link price). The court of first instance and the court of appeal concluded that the tax authority had exceeded its authority to make transfer pricing adjustments during the tax periods under review for controlled transactions between related parties. With regard to the amount of additional accruals for the period of 2014, the court rejected the taxpayer’s argument that the tax authority was obliged to follow the methods of transfer formation when calculating the tax liability. The applied method of additional accrual – the use of the price of the last link in the chain of intermediates – was recognized by the court as lawful. The Supreme Court cancelled the decision of the lower courts and sent the case back for re-consideration. The conclusion of the lower courts that in the period 2012-2013 the Inspectorate carried out price control for compliance with the market prices was erroneous. The price control was not carried out, but a set of circumstances was established, testifying to the coherence of actions of interdependent persons in order to obtain unjustified tax benefit. Taking into account the proof of the fact that the Company received an unjustified tax benefit, the tax authority correctly calculated the income that the Company should have received when selling goods directly to an interdependent person without using intermediary firms. Click here for translation A21-133-2018_20200414_SC

At issue was the transfer of taxable assets from a shareholder to a 100% owned company, “VSR Inc”. This transfer of resulted in an understatement of profits in a controlled sale of vehicle scrapping rights. Following an audit, the tax authority concluded that the rights had been acquired in the previous quarter from the one transferred and that a sale value below cost could not be justified. According to the tax authorities the arrangement lacked economic or commercial substance. The sole purpose had been to lower the overall taxation. An revised tax assessment – and a substantial fine – was issued by the tax authorities. VSR filed an appeal. Judgement of the Court The court dismissed the appeal and decided in favor of the tax authorities. “Since it is apparent from the above that the above transactions were intended to transfer taxable material from the applicant’s sole proprietorship to the associated company under the name of ” “, TIN and to tax them at a lower average tax rate, all the above transactions are therefore artificial arrangements which are not consistent with normal business behaviour and lead to a significant tax advantage without any assumption of business risk on the part of ” “, TIN Because, for each of the 2005 withdrawal rights, which is identical to a vehicle registration number, the tax authority identified the corresponding purchase document and determined the total acquisition value of these rights at the amount of six hundred and six thousand one hundred and sixty euros (€ 606,160.00), i.e. an average acquisition price per withdrawal right of € 302.32. Consequently, the taxable amount transferred, in the form of an artificial arrangement, from the applicant’s sole proprietorship to the associated company with the name ” “, VAT number , amounts to € 405,580.00 (€ 606,160.00 – € 200,580.00). In the light of the foregoing, the applicant’s claims concerning the tax authority’s unsubstantiated assessment of the existence of artificial arrangements and the absence of the element of intention are rejected as unfounded. Since the public administration is bound by the principle of legality, as laid down in Article 26(1)(b) of the Staff Regulations, the Commission is bound by the principle of proportionality. 2, 43, 50, 50, 82, 83 and 95 & 1 of the Constitution (Council of State 8721/1992, Council of State 2987/1994), which implies that the administration must or may take only those actions provided for and imposed or permitted by the rules laid down by the Constitution, legislative acts, administrative regulatory acts adopted on the basis of legislative authorisation, as well as by any rule of higher or equivalent formal force to them. Since the review of constitutionality is a matter for the courts and does not fall within the competence of the administrative bodies, which are required to apply the existing legislative framework, it is inadmissible and is not being examined in the context of the present action. Consequently, the applicant’s allegation of a breach of the principle of economic freedom in Article 5 of the Constitution, the principle of proportionality in Article 25 para. 1 of the Constitution and the requirements of the Charter of Fundamental Rights of the European Union is rejected as being unfounded. Because the applicant’s claim that the excess amount already paid by ” “, TIN, as income tax (EUR 118 073,21) should be deducted from the income tax assessed on the applicant’s sole proprietorship, TIN, is rejected as unfounded in substance and in law, since there is no relevant provision in the tax legislation providing for such a deduction. With regard to the individual claim that the amount of the income difference found by the audit for his sole proprietorship of € 405,580.00 should be added to the expenses of the I.C.E., this is a matter that should be raised and dealt with by the I.C.E., which is a separate tax entity, and not by the applicant as a natural person, and is therefore irrelevant. “ Click here for English translation Click here for other translation 2631-2019

“SH Loan Ltd” had provided a loan to its shareholder/manager and claimed that it did not expect any profit (interest) from this transaction, since it was not a bank. The tax authorities issued an assessment where additional interest income was added to the income of the company due to a loan granted to its sole shareholder. The additional interest income for the company was determined based on the relevant interest rates from the Bank of Greece’s Financial Situation Statistics. SH Loan Ltd filed an appeal. Judgement of the Court The court dismissed the appeal and upheld the decision of the tax authorities. “Because Mr. , is a person related to the applicant, in accordance with the provisions of Article 2(g) of Law No. 4172/2013, since he is a shareholder (100%), legal representative and member of the Board of Directors. (Chairman and Managing Director), and the granting of the loans in question to the related person was made on economic terms different from those that would apply between unrelated persons, whereas if the loan had been granted to an unrelated person, it would have earned interest income, as calculated in detail on pages 38 to 50 of the relevant audit report, in the total amount of € 22,372.58 for the three years under audit, in accordance with the provisions of Article 50 of Law No. 4172/2013. Because, contrary to the applicant’s claims, in order to find the interest rates, the audit did not act arbitrarily, but referred to the Bank of Greece’s Statistical Bulletins of Economic Trends, issues 160 (January – February 2015), 166 (January – February 2016) and 172 (January – February 2017). Since the findings of the audit, as recorded in the audit report of 13/12/2018 by the auditor of the C.E.M.E.P. on which the contested acts are based, are considered to be valid, acceptable and fully reasoned, the Head of the above audit centre was right to issue the contested acts and the present appeal must be dismissed.” Click here for English translation Click here for other translation 1780-2019

A Spanish subsidiary – SGL Carbon Holding SL – had significant financial expenses derived from an intra-group loan granted by the parent company for the acquisition of shares in companies of the same group. The taxpayer argued that the intra-group acquisition and debt helped to redistribute the funds of the Group and that Spanish subsidiary was less leveraged than the Group as a whole. The Spanish tax authorities found the transactions lacked any business rationale other than tax avoidance and therefor disallowed the interest deductions. The Court held in favor of the authorities. The court found that the transaction lacked any business rationale and was “fraud of law” only intended to avoid taxation. The Court also denied the company access to MAP on the grounds that Spanish legislation determines: Article 8 Reglamento MAP: Mutual agreement procedure may be denied, amongst other, in the following cases: … (d) Where it is known that the taxpayer’s conduct was intended to avoid taxation in one of the jurisdictions involved. (…) Click here for translation Spain vs SGL Carbon Holding April 22 2019 1885

ViciunaiRus LLC was engaged in production and wholesale distribution of its products. During the inspection, the inspection concluded that the chain of contractual relations between the Company and its sole official distributor in the Russian Federation artificially had established intermediates that do not have assets and personnel. At the same time, the price of products increased by more than 20% in the course of movement along the chain of counter parties. During the period from 2012 to 2014, the tax authorities considered the inclusion of intermediaries in the sales structure to be of a artificial nature and aimed at understating the sales revenue. The taxpayer was additionally charged profit tax and VAT, and the additional tax was calculated based on the resale price at which the goods were received by the distributor. In 2012 and 2013 the transactions between the taxpayer and distributor were controlled. In 2014 they were not. The taxpayer objected to the tax authority’s decision; among other things, the taxpayer argued that the tax authority was obliged to apply the methods of determining market prices set forth in Section V.1 of the Tax Code when making additional accruals, but applied a different method (took the last link price). The court of first instance and the court of appeal concluded that the tax authority had exceeded its authority to make transfer pricing adjustments during the tax periods under review for controlled transactions between related parties. With regard to the amount of additional accruals for the period of 2014, the court rejected the taxpayer’s argument that the tax authority was obliged to follow the methods of transfer formation when calculating the tax liability. The applied method of additional accrual – the use of the price of the last link in the chain of intermediates – was recognized by the court as lawful. Click here for translation. A21-133-2018_20181214_Postanovlenie_kassacionnoj_instancii

The South African Supreme Court of Appeal, by a majority of the court, upheld an appeal against the decision of the Tax Court, in which it was held that contracts between companies in the Sasol Group of companies, for the supply of crude oil by a company in the Isle of Man to a group company in London, and the on sale of the same crude oil to Sasol Oil (Pty) Ltd in South Africa, were simulated transactions. As such, the Tax Court found that the transactions should be disregarded by the Commissioner for the South African Revenue Service, and that the Commissioner was entitled to issue additional assessments for the 2005, 2006 and 2007 tax years. On appeal, the Court considered all the circumstances leading to the conclusion of the impugned contracts, the terms of the contracts, the evidence of officials of Sasol Oil, the time when the contracts were concluded (2001), and the period when Sasol Oil may have become liable for the income tax that the Commissioner asserted was payable by Sasol Oil (2005 to 2007). It held that the uncontroverted evidence of the witnesses for Sasol Oil was that in 2001, when the contracts were first concluded, the witnesses had proposed them not in order to avoid tax (residence based tax introduced in mid-2001) but because they had a commercial justification. In any event, the liability for residence based tax would have arisen only when one party to the supply agreement, resident in the Isle of Man, became a foreign controlled company in so far as Sasol Oil was concerned. That had occurred only in 2004. A finding of simulation would have entailed a finding that many individuals and corporate entities, as well as several firms of auditors, were party to a fraud over a lengthy period, for which there was no evidence at all. The Court thus found that the Commissioner was not entitled to issue the additional assessments and that Sasol Oil’s appeal to the Tax Court against the assessments should have been upheld. See the prior dicision of the Tax Court here Case 28/2018 Click here for translation 153

It follows from various Supreme Court judgments in the Netherlands that a loan is commercially irrational if no interest can be determined under which an independent third party would have been willing to grant the same loan. The consequence of a loan beeing deemed commercially irrational is that a loss is not deductible. This case addresses the implications of the Umbrella Judgement, in particular the question of how that judgment relates to case laws on unsecured loans and guarantees. The Advocate General concludes that the Umbrella Judgment is not applicable in this case and that the tax authorities has failed to demonstrate that an independent third party would not have been willing to enter a similar loan agreement. Click here for translation ECLI_NL_GHAMS_2018_2438, Gerechtshof Amsterdam, 17_00407 tm 17_00410N

The issues were whether transactions executed by the company constituted insurance contracts for Federal income tax purposes and therefore, whether Reserve Mechanical Corp was exempt from tax as an “insurance company”. For that purpose the relevant factors for a captive insurance to exist was described by the court. According to the court in determining whether an entity is a bona fide insurance company a number of factors must be considered, including: (1) whether it was created for legitimate nontax reasons; (2) whether there was a circular flow of funds; (3) whether the entity faced actual and insurable risk; (4) whether the policies were arm’s-length contracts; (5) whether the entity charged actuarially determined premiums; (6) whether comparable coverage was more expensive or even available; (7) whether it was subject to regulatory control and met minimum statutory requirements; (8) whether it was adequately capitalized; and (9) whether it paid claims from a separately maintained account. US v Reserve Medical Corp TCMemo_2018-86

In the Hornbach-Baumarkt case, a German parent company guaranteed loans of two related companies for no remuneration. The German tax authorities made an assessment of the amount of income allocated to the parent company as a result of the guarantee, based on the fact that unrelated third parties, under the same or similar circumstances, would have agreed on a remuneration for the guarantees. Hornbach-Baumarkt argued that German legislation was in conflict with the EU freedom of establishment and lead to an unequal treatment of domestic and foreign transactions since, in a case involving german domestic transactions, no corrections to the income would have been made for guarantees granted to subsidiaries. The company further argued that the legislation is disproportionate to achieving the objectives as it provides no opportunity for the company to present commercial justification for the non-arm’s-length transaction. The German Court requested a preliminary ruling from the European Court of Justice on these arguments. In May 2018 The European Court of Justice concluded that German transfer pricing legislation is consistent with EU freedom of establishment. Moreover, the Court ruled, that a parent company’s position as a shareholder of a non-resident company may be taken into account in determining whether there is sufficient commercial justification for a non-arm’s length related-party transaction. The Court further stated that transfer pricing legislation inherently constitutes a restriction to the freedom of establishment. However, this restriction can be justified by the need to preserve a balanced allocation of taxing rights between the Member States. The goal of the transfer pricing legislation is to prevent profit shifting via transactions that are not in accordance with market conditions. German legislation does not go beyond what is necessary to attain the objectives relating to the need to maintain the balanced allocation of the power to tax between the Member States and to prevent tax avoidance, without being subject to undue administrative constraints, to provide evidence of any commercial justification that there may have been for that transaction. The Court concluded that the income adjustment made by the German tax authorities was limited to the portion of the income which exceeded what would have been agreed between unrelated companies. The concept of Commercial justification may include economic reasons resulting from the very existence of a relationship of interdependence between the parent company resident in the Member State concerned and its subsidiaries which are resident in another Member State. A parent company has sufficient commercial reason to provide capital on non-arm’s-length terms to a subsidiary when a subsidiary lacks sufficient equity capital to expand. Therefore, the Court stated that comfort letters containing a guarantee free of any remuneration might be commercially justified because the parent company is a shareholder of the foreign group companies, which would justify the transaction at issue under non-arm’s-length terms. The opinion of the Advocate General was issued December 2017. European Court of Justice Judgment in Hornbach-Baumarkt case, Case No C-382/16 Germany vs HornbachBaumarkt AG 31 May 2018 JUDGMENT OF THE COURT Case No C-382-16

ICL ESPAÑA, S.A., ICL Packaging Coatings, S.A., were members of the Tax Consolidation Group and obtained extraordinary profits in the financial years 2000, 2001 and 2002. (AKZO NOBEL is the successor of ICL ESPAÑA, as well as of the subsidiary ICL PACKAGING.) On 26 June 2002, ICL ESPAÑA, S.A. acquired from ICL Omicron BV (which was the sole shareholder of ICL ESPAÑA, S.A. and of Elotex AG and Claviag AG) 45.40% of the shares in the Swiss company, Elotex AG, and 100% of the shares in the Swiss company of Claviag AG. The acquisition was carried out by means of a sale and purchase transaction, the price of which was 164.90 million euros, of which ICL ESPAÑA, S.A. paid 134.90 million euros with financing granted by ICL Finance, PLC (a company of the multinational ICL group) and the rest, i.e. 30 million euros, with its own funds. On 19 September 2002, ICL Omicron BV contributed 54.6% of the shares of Elotex AG to ICL ESPAÑA, S.A., in a capital increase of ICL ESPAÑA, S.A. with a share premium, so that ICL ESPAÑA, S.A. became the holder of 100% of the share capital of Elotex AG. The loan of 134,922,000 € was obtained from the British entity, ICL FINANCE PLC, also belonging to the worldwide ICL group, to finance the acquisition of the shares of ELOTEX AG. To pay off the loan, the entity subsequently obtained a new loan of €75,000,000. The financial burden derived from this loan was considered by ICL ESPAÑA as an accounting and tax expense in the years audited, in which for this concept it deducted the following amounts from its taxable base – and consequently from that of the Group: FY 2005 2,710,414.29, FY 2006 2,200,935.72, FY 2007 4,261,365.20 and FY 2008 4.489.437,48. During the FY under review, ICL ESPAÑA SA has considered as a deductible expense for corporate tax purposes, the interest corresponding to loans obtained by the entity from other companies of the group not resident in Spain. The financing has been used for the acquisition of shares in non-resident group companies, which were already part of the group prior to the change of ownership. The amounts obtained for the acquisition of shares was recorded in the groups cash pooling accounts, the entity stating that “it should be understood that the payments relating to the repayment of this loan have not been made in accordance with a specific payment schedule but rather that the principal of the operation has been reduced through the income made by Id ESPAÑA SA from the cash available at any given time”. Similarly, as regards the interest accrued on the debit position of ICL ESPAÑA SA, the entity stated that “the interest payments associated with them have not been made according to a specific schedule, but have been paid through the income recorded by ICL ESPAÑA SA in the aforementioned cash pooling account, in the manner of a credit policy contract, according to the cash available at any given time”. The Spanish tax authorities found the above transactions lacked any business rationale other than tax avoidance and therefor disallowed the interest deductions for tax purposes. This decision was appealed to the National Court. Judgement of the National Court The Court partially allowed the appeal. Excerpts “It follows from the above: 1.- The purchase and sale of securities financed with the loan granted by one of the group companies did not involve a restructuring of the group itself. The administration claims that the transfer of 100% ownership of the shares of both Swiss companies is in all respects formal. And it is true that no restructuring of the group can be seen as a consequence of the operation, nor is this alleged by the plaintiff. 2.- There are no relevant legal or economic effects apart from the tax savings in the operation followed, since, as we have pointed out, we are dealing with a merely formal operation, with no substantive effect on the structure and organisation of the Group. 3.- The taxation in the UK of the interest on the loan does not affect the correct application of Spanish tax legislation, since, if there is no right to deduct the interest generated by the loan, this is not altered by the fact that such interest has been taxed in another country. It is clear that the Spanish authorities cannot make a bilateral adjustment in respect of the amounts paid in the United Kingdom for the taxation of the interest received. For this purpose, provision is made for the mutual agreement procedure under Article 24 of the Convention between the Kingdom of Spain and the United Kingdom of Great Britain and Northern Ireland for the avoidance of double taxation and the prevention of fiscal evasion in relation to taxes on income and on capital and its Protocol, done at London on 14 March 2013 (and in the same terms the previous Instrument of Ratification by Spain of the Convention between Spain and the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion in respect of Taxes on Income and on Capital, done at London on 21 October 1975, Article 26 ).” “For these reasons, we share the appellant’s approach and we understand that the non-compliance with the reinvestment takes place in the financial year 2004 (as the start of the calculation of the three-year period is determined by the deed of sale dated 29 June 2001), and that therefore the regularisation on this point should be annulled because it corresponds to a financial year not covered by the inspection.” “Therefore, and in the absence of the appropriate rectification, this tax expense would be double-counted, firstly because it was considered as a tax expense in 1992 and 1999, and secondly because it was included in seventh parts – in 2003 and in the six subsequent years – only for an amount lower than the amount due, taking into account the proven

A Norwegian subsidiary of an international group (Hess Oil), refinanced an intra-group USD loan two years prior to the loans maturity date. The new loan was denominated in Norwegian kroner and had a significantly higher interest rate. The tax authorities reduced the interest payments of the Norwegian subsidiary pursuant to section 13-1 of the Tax Act for fiscal years 2009 – 2011, thereby increasing taxable income for years in question with a total of kroner 262 million. The Court of Appeal found for the most part in favor of the tax administraion. Under the circumstances of the case, neither the claimed refinancing risk nor the currency risk could sufficiently support it being commercially rational for the subsidiary to enter into the new loan agreement two years prior to the maturity date of the original USD loan. When applying the arm’s length principle, the company’s refinancing risk had to be based on the Norwegian company’s actual situation as a subsidiary in the Hess Oil group. Click here for translation Norway vs Hess-Norway-2016-Gulating-lagmannsrett

In 2007, IKEA reorganised its property portfolio in Norway so that the properties were demerged from the Norwegian parent company and placed in new, separate companies. The shares in these companies were placed in a newly established property company, and the shares in this company were in turn sold to the original parent company, which then became an indirect owner of the same properties. The last acquisition was funded through an inter-company loan. Based on the non-statutory anti-avoidance rule in Norwegian Tax Law, the Supreme Court concluded that the parent company could not be allowed to deduct the interest on the inter-company loan, as the main purpose of the reorganisation was considered to be to save tax. The anti-avoidance rule in section 13-1 of the Tax Act did not apply in this circumstance. Click here for translation Norway vs IKEA-Handel-og-Ejendom-HRD-2016-722

Ensco Gerudi provided offshore drilling services to the petroleum industry in Malaysia. The company did not own any drilling rigs, but entered into leasing agreements with a rig owner within the Ensco Group. One of the rig owners in the group incorporated a Labuan company to facilitate easier business dealings for the taxpayer. Ensco Gerudi entered into a leasing agreement with the Labuan company for the rigs. Unlike previous transactions, the leasing payments made to the Labuan company did not attract withholding tax. The tax authorities found the Labuan company had no economic or commercial substance and that the purpose of the transaction had only been to benefit from the tax reduction. The High Court decided in favour of the taxpayer. The Court held that there was nothing artificial about the payments and that the transactions were within the meaning and scope of the arrangements contemplated by the government in openly offering incentives. The High Court ruled that taxpayers have the freedom to structure transactions to their best tax advantage in so far as the arrangement viewed in a commercially and economically realistic way makes use of the specific provision in a manner that was consistent with Parliament’s intention. Malaysia vs Ensco_Gerudi-drilling_high_court

The case involved export transactions carried out by a company domiciled in Brazil, Marcopolo, manufacturing bus bodies (shells) which were sold to subsidiary trading companies domiciled in low tax jurisdictions (Jurisdição com Tributação Favorecida). The trading companies would then resell the bus bodies (shells) to unrelated companies in different countries. The tax authorities argued that the sale of the bus bodies to the intermediary trading companies carried out prior to the sale to the final customers lacked business purpose and economic substance and were therefore a form of abusive tax planning. The Court reached the decision that the transactions had a business purpose and were therefore legally acceptable. Click here for translation Brazil vs M 2014

The case involved a Dutch mutual insurance company, DutchCo, which paid surpluses from the insurance activity back to the participating members in the form of premium restitution. Prior to 2002, DutchCo reinsured the majority of its risks with external reinsurers via an external reinsurance broker. DutchCo kept a small part of the risks for its own account. In 2001, DutchCo established a subsidiary in Switzerland, Captive, to act as a captive reinsurance provider. DutchCo stated that the business rationale to establish Captive goes back to “9/11.” The resulting worldwide turmoil significantly impacted the reinsurance market. In an extremely nervous market, premiums increased and conditions were sharpened. From 2002 onward, all the reinsurance contracts of DutchCo were concluded with Captive (in exchange for payment of premiums), whereby Captive reinsured a vast majority of these risks with external reinsurers and kept a limited part of the risk for itself. As mentioned above, Captive did not employ any personnel, but made use of the services of M GmbH in the person of the owner/director of M GmbH (on average two days a week), an external Swiss reinsurance broker on whose office address Captive was located. In this respect, Captive was charged an amount of about €150,000 annually. The Dutch tax inspector argued that the reinsurance agreements with Captive were not concluded under the same conditions as with third parties. As a result, the tax inspector increased DutchCo’s taxable profit for the 2005-2008 years equal to the premiums paid to Captive by DutchCo after deducting the cost plus remuneration for Captive (i.e. the service fees paid to M GmbH with a mark-up of 10% in 2005 and 11% in the 2006-2008 years). In addition to the tax assessments, the tax inspector levied penalties equal to 50% of the income adjustment (i.e., taxes as a result of adjustments due to profit shifting to Captive). The Court stated that the conditions of the reinsurance agreements between DutchCo and Captive should be evaluated as if it would have been agreed between independent parties. In this respect, reference was made to the arm’s length principle as codified in Article 8b of the Dutch Corporate Income Tax Act 1969 (Article 8b). The Court considered it plausible that the level of the premiums paid by DutchCo to Captive and the policy of Captive regarding whether to reinsure the risks with third parties were determined by DutchCo itself. The Court also held that the tax inspector made it sufficiently plausible that the conditions of the agreement between DutchCo and Captive deviate from the conditions that would have been agreed between independent parties. Reference is made to the considerations of the expert. Next, the profits of DutchCo should be determined as if the deviating conditions would not have been agreed to (based on Article 8b of the Corporate Income Tax Act). Taking into account the limited activities and lack of policy determination by Captive, the Court argued that an annual return on equity (including the accumulated non-arm’s length premiums from the past) of 7.5% for Captive is reasonable in addition to a cost plus mark-up of 10% or 11% as set by the tax inspector. Hence, the Court lowered the adjustment to DutchCo’s taxable income as assessed by the tax inspector. The Court also adjusted the proposed penalties of the tax inspector to an annual penalty of €125,000 for the relevant years (about 25% of the additional corporate income tax). The Court believed that DutchCo intended to withdraw a considerable part of its profits from taxation in The Netherlands by setting up the structure with Captive and the excessive level of premiums paid to Captive. Click here for other translation Nederlands-vs-Corp-January-2014-Lower-Court-AWB11-3717

In 2003 Alesco New Zealand Ltd (Alesco NZ) bought two other New Zealand companies. Its Australian owner, Alesco Corporation (Alesco), funded the acquisitions by advancing the purchase monies of $78 million. In consideration Alesco NZ issued a series of optional convertible notes (OCNs or notes). The notes were non-interest bearing for a fixed term and on maturity the holder was entitled to exercise an option to convert the notes into shares. Between 2003 and 2008 Alesco NZ claimed deductions for amounts treated as interest liabilities on the notes in accordance with relevant accounting standards and a determination issued by the Commissioner against its liability to taxation in New Zealand. In the High Court Heath J upheld1 the Commissioner’s treatment of the OCN funding structure as a tax avoidance arrangement under s BG 1 of the Income Tax Act 1994 and the Income Tax Act 2004 (the ITA). Alesco NZ appeals that finding and two consequential findings. The amount at issue is about $8.6 million. Included within that figure are revised assessable income tax, shortfall penalties and use of money interest. However, Alesco NZ’s appeal has wider fiscal consequences. The Commissioner has treated similar funding structures used by other entities as tax avoidance arrangements. Decisions on those disputed assessments await the result of this litigation. The Commissioner estimates that over $300 million is at issue including core tax and penalties plus accruing use of money interest. Two other features of this appeal require emphasis. First, in contrast to a number of recent cases on tax avoidance, the Commissioner does not impugn the underlying commercial transactions. She accepts that Alesco NZ’s acquisitions were not made for the purpose or effect of avoiding tax and that the company had to raise funds to enable completion. Her challenge is to the permissibility of the OCN funding mechanism actually deployed or what is called an intermediate step in implementing the underlying transactions. Second, the Commissioner accepts that when viewed in isolation from the statutory anti-avoidance provisions the OCN structure complied technically with the relevant financial arrangements rules, the deductibility provisions relating to expenditure and interest then in force, together with the spreading formula provided by the Commissioner’s determination known as G228 (an instrument issued by the Commissioner to provide a method for assessing income and costs on debt instruments under the financial arrangements rules, to which we shall return in more detail). The meaning, purpose and effect of the financial arrangements rules, and the regime they introduced in 1985 for the purpose of assessing the income returns and deductibility of costs on particular debt instruments, are at the heart of this appeal. Relevant facts In January 2003 Alesco agreed to purchase for $46 million the shares in a New Zealand company, Biolab Ltd, a distributor of medical laboratory equipment. This sum was later increased to $55 million by a supplementary payment. Alesco nominated its New Zealand subsidiary, Alesco NZ, as the purchaser. While the purchase monies were to be raised in Australia, Alesco’s board had not then decided on the appropriate funding structure. Judgement from the Court of Appeal: A Alesco NZ’s appeal is dismissed. B Alesco NZ must pay costs to the Commissioner for a complex appeal on a band B basis and usual disbursements. We certify for two counsel. Judgement from the Supreme Court: A Leave to appeal is granted. B The approved grounds of appeal are whether, in light of the principles laid down by this Court in Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue and other cases on tax avoidance: (i) the structure used by the applicants for funding the transactions is a tax avoidance arrangement; (ii) the Commissioner’s application of shortfall penalties was a proper exercise of the relevant statutory powers; (iii) the Commissioner’s reassessments were a proper exercise of the relevant statutory powers. Alesco New Zealand Limited and others v Commissioner of Inland Revenue 2013

In this ruling, the Swiss Federal Supreme Court comments on the application of the arm’s length principel and the burden of proff in Switzerland. “Services, which have their legal basis in the investment relationship, are to be offset against the taxable income of the company to the extent that they would otherwise not be granted to a third party under the same circumstances or not to the same extent and would not constitute a capital repayment. This rule of the so-called third-party comparison (or the principle of “dealing at arm’s length”) therefore requires that even legal transactions with equity holders or between Group companies be conducted on the same terms as would be agreed with external third parties on competitive and market conditions.” “Swiss Law – with the exception of individual provisions – does not have any actual group law and treats each company as a legally independent entity with its own bodies which have to transact the business in the interest of the company and not in that of the group, other companies or the controlling shareholder. Legal transactions between such companies are therefore to be conducted on the same terms as they would be agreed with external third parties. In particular, the Executive Committee (or the controlling shareholder) is not allowed to distribute the profits made by the various companies freely to these companies>… ” “In the area of non-cash benefits, the basic rule is that the tax authority bears the burden of proof of tax-increasing and increasing facts, whereas the taxable company bears the burden of all that the tax abolishes or reduces. In particular, the authority is responsible for proving that the company has rendered a service and that it has no or on reasonable consideration in return. If the authority has demonstrated such a mismatch between performance and consideration, it is for the taxable company to rebut the presumption. If the company can not do that, it bears the consequences of the lack of evidence. This applies in particular if it makes payments that are neither accounted for nor documented…” Furthermore, the Federal Supreme Court disallows transfer of tax losses where the absorbed subsidiary is an empty shell. The question addressed is whether the subsidiary, at the time of its absorption, was still engaged in active contract R&D. Only if this this was the case, the deduction of losses at the level of the absorbing parent company was permissible. Click here for translation Swiss case law 2C_834-2011, 2C_836-2011

In this case, the Dutch Supreme Court further outlined the Dutch perspective on the distinction between debt and equity in its already infamous judgments on the so-called extreme default risk loan (EDR loan) L sold a securities portfolio to B for EUR 5.3 million against B’s acknowledgement of debt to L for the same amount. The debt was then converted into a 10 year loan with  an interest rate of 5% and a pledge on the portfolio. Both L and B were then moved to the Netherlands Antilles. Later on L deducted a EUR 1.2 mill. loss on the loan to B due to a decrease in value of the securities portfolio. The Dutch Tax Authorities disallowed the deduction based on the argument, that the loan was not a business motivated loan. The Dutch Supreme Court ruled that in principle civil law arrangement is decisive in regard to taxation. However there are exceptions in which a civil law loan arrangement can be disregarded. A non-business motivated loan is defined as an intercompany loan that carries an interest rate which – given the terms and conditions of the loan – is not at arm’s length, and which a third party would not have granted given the risk involved. In such cases, any losses arising from the loan are not deductible for Dutch corporate tax purposes. But at the same time, the lender still has to report an arm’s length interest which equals the interest that the borrower would have paid in case it had borrowed from a third party with a guarantee from the lender. Click here for translation Netherland-vs-Corp-25-November-2011-Supreme-Court-case-nr-08-05323

X is the holding company of the so-called A-group, which is a recreation company driven. The activities in X was taking out cancellation insurance. Within the group an Irish company was established. Between X and an insurer, that insurer and a reinsurer and the reinsurer and the Irish company several contracts were concluded with regard to the cancellation activities. The court considers that the tax administration has proved that X has let on un-businesslike grounds earnings miss in favor of the Irish company. Click here for other translation Nederlands-vs-Corp-July-2011-Lower-Court-Case-nr-AWB-08-9105

This case was about the qualification of capital transfers to a US subsidiary – whether the capital should be qualified as a loan (as done by the company) or as a equity contribution (as agrued by the tax administration). The Supreme Court concluded that the capital transfers to the subsidiary as a whole should be classified as loans. The form chosen by the company (loan) had an independent commercial rationale and Section 13-1 of the Tax Code did not allow for reclassification of the capital transfer The Supreme Court ruled in favor of Telecomputing AS. Click here for translation Norway rt-2010-s-790-Telecomputing-rentefritt-lån

“X Beheer B.V.” was founded in 1992 and has been part of the A-group as a holding company ever since. The shares of “X Beheer B.V.” were transferred against the issue of depositary receipts to a trust office foundation. The depository receipt holders of “X Beheer B.V.” were also holders of the depository receipts of shares of F B.V. (hereinafter: F), formerly the holding company of the A-group. In 1995, a reorganisation took place as a result of the wish of a number of depositary receipt holders to dispose of their interests in F and “X Beheer B.V.”. However, the remaining group of depositary receipt holders did not have the financial means to buy out those depositary receipt holders, after which it was decided to establish the (take-over) holding company G Holding B.V. (hereinafter: Holding). The intention was that G Holding B.V. would gradually buy up packages of depositary receipts from depositary receipt holders who wished to sell. After four transactions, at the end of 1997 G Holding B.V. held 278 depositary receipts for shares in “X Beheer B.V.” (23.16%) and 38 depositary receipts for shares in F B.V. (7.3%). The purchases of these depositary receipts involved a total amount of Fl. 10,235,760. The purchase price was fully financed by a loan from “X Beheer B.V.” to G Holding B.V. It was intended that G Holding B.V., which had no other assets or financing, would repay the loan from “X Beheer B.V.” from a dividend stream to be generated from “X Beheer B.V.” and F B.V. The loan from “X Beheer B.V.” to G Holding B.V. was classified by “X Beheer B.V.” as a current account, to which the interest due was credited annually. The interest rate was 4.7% in 1996, 4.96% in 1997, 5.25% in 1998 and 5.63% in 2000. The balance of this loan rose from Fl. 4,526,692 at the end of 1995, through Fl. 10,717,470 at the end of 1997 and Fl. 12,509,550 at the end of 1999 to Fl. 13,213,837 at the end of 2000. During the term, a total amount of NLG 115,030 (in three different tranches) was repaid on the loan, which amount came from dividends paid by F B.V. A written loan agreement was never drawn up and a repayment schedule for the loan was never established. Collateral for the loan was neither requested nor provided. A Group’s results had been under pressure since the loan was taken out, partly due to changed market conditions, different production techniques and increasing competition. Losses were incurred in all financial years from 1996 to 2000. The total loss in these five years (commercial) amounted to Fl. 24,619,216. “X Beheer B.V.”‘s equity was negative since 1997. Partly as a result of these losses and this equity position, no dividend was ever paid from the A-group to G Holding B.V. In February 2001 “X Beheer B.V.” transferred its claim on G Holding B.V., with a nominal value of NLG 13,198,000, to F for the fair value of NLG 6,205,400. The G Holding B.V. shares were also sold for Fl. In “X Beheer B.V.”s corporation tax return for 2000, an additional provision of NLG 2,000,000 was made in respect of the loan to G Holding B.V., after a provision of NLG 5,000,000 had already been made in 1999. The tax authorities did not accept the 2,000,000 write off on the loan and disallowed the deduction. A complaint was filed by “X Beheer B.V.” which was later dismissed by the Court of Appeal. An appeal was then filed with the Supreme Court. Judgement of the Supreme Court The Supreme Court upheld the decision of the Court of Appeal and dismissed the appeal filed by “X Beheer B.V.”. Excerpt “3.5. The Court’s opinion that an independent third party would not have taken out the money loan under the circumstances outlined by the Court is of a factual nature, and not incomprehensible in the light of the circumstances taken into account by the Court – in particular the fact that no security was requested and provided – and in view of the circumstance that Holding, which did not have any other assets or any other financing, would have had to repay the loan from the interested party from a dividend flow to be generated from the interested party, among others. It follows from the Court’s judgment that – barring special circumstances – it must be assumed that the interested party accepted the full debtor risk with the intention of serving the interest of Holding in its capacity as shareholder. The mere fact that Holding was not a majority shareholder of the interested party does not alter this. Neither the Court’s ruling nor the documents in the case reveal that any facts or circumstances have been established or put forward to justify the conclusion that special circumstances as referred to above apply in this case. 3.6. It follows from the above that the Court of Appeal has correctly concluded that the interested party may not charge the Dfl 2,000,000 write-down on its loan to Holding to its result in the year under review. The complaints directed against the opinion of the Court of Appeal mentioned above in 3.3 and its conclusion cannot therefore lead to cassation. 3.7. It follows from the above that the remaining complaints directed against the opinion of the Court of Appeal – and the further grounds given – that the provision of money by the interested party to Holding should not be regarded as a business loan, fail for lack of interest.” Click here for English translation Click here for translation ECLI_NL_HR_2008_BD1108

The Brazilian group Marcopolo assembles bus bodies in Brazil for export. It used two related offshore companies, Marcopolo International Corporation, domiciled in the British Virgin Islands, and Ilmot International Corporation, domiciled in Uruguay, in a re-invoicing arrangement whereby the product was shipped from Marcopolo to the final customers but the final invoice to the customers was issued by the offshore companies. The tax authorities found that the arrangement lacked business purpose and economic substance and, on this basis, disregarded the transactions. Decision of the Administrative Court of Appeal The Court ruled in favour of Marcopolo. According to the Court, the transactions with the offshore companies had a business purpose and were therefore legitimate tax planning. Excerpts “6. The absence of an operational structure of the companies controlled by the Appellant, capable of supporting the transactions performed, even if, in isolation, it could be admitted within the scope of a “rational organization of the economic activity”, in the case at hand, gains greater significance because a) it constituted only one of the elements within a broad set of evidence presented by the tax authority; b) considering the size of the business undertaken (voluminous export), such absence cannot be such that one can even speculate on the very factual existence of such companies; and c) there is no effective evidence in the case records of the performance of the transactions of purchase and resale of products by such companies; 7. even if it can be admitted that the results earned abroad by the companies MIC and ILMOT were, by equity equivalence, reflected in its accounting, the Appellant does not prove having paid Income Tax and Social Contribution on Net Profits on those same results, thus not contradicting the arguments presented by the tax authority authorizing such conclusion; 8. There is no dispute in this case that a Brazilian transnational company cannot see, in addition to tax benefits, other reasons for conducting its operations through offshore financial centres. What is actually at issue is that, when asked to prove (with proper and suitable documentation) that its controlled companies effectively acquired and resold its products, the Appellant does not submit even a single document capable of effectively revealing a commercial relation between its controlled companies and the end recipients of said products; 9. it is also not disputed that the Brazilian economic environment, especially in the year submitted to the tax audit, is likely to lead to higher costs for national companies operating abroad, both in relation to competitors from developed countries, and in relation to competitors from other emerging countries. What is being questioned is that, specifically in the situation being examined herein, at no time did the Appellant at all materialize such costs, demonstrating on documents, by way of example, that in a given export transaction, if the transaction were effected directly, the cost would be X, the profit would be Y, and the tax paid would be Z, whereas, due to the form adopted, the cost would be X – n, the profit would be Y + m, and the tax paid represented Z + p. No, what the Appellant sought to demonstrate is that, considering a historical series of its exports, there was a significant increase in its revenues and, consequently, in the taxes paid. As already stated, if a significant capitalization of funds through evasive methods is admitted, no other result could be expected. (…) Thus, considering everything in the case records, I cast my vote in the sense of: a) dismissing the ex-officio appeal; b) partially granting the voluntary appeal in order to fully exempt the tax credit related to the withholding income tax, fully upholding the other assessments.” “I verify that, when doing business with companies or individuals located in Countries with Favorable Tax Treatment, the legislation adopted minimum parameters of values to be considered in exports; and maximum parameters in values to be considered in payments made abroad, under the same criteria adopted for transfer pricing. Here, it is important to highlight that the legislation did not equalize the concepts of business carried out with people located in Countries with Favorable Tax Regime and transfer pricing. What the law did was to equalize the criteria to control both, but for conceptually distinct operations. Thus, based on the assumption that Brazilian law specifically deals in its legislation, by means of a specific anti-avoidance rule, with transactions carried out with companies in countries with a favored tax regime, I cannot see how one can intend to disregard the transactions carried out by a Brazilian company with its foreign subsidiaries, since these are deemed to be offshore companies in the respective countries where they are incorporated. In fact, every country with a Favorable Tax Regime has, as a presupposition, the existence of offshore companies, in which the activities are limited to foreign business. In the case at hand, there are two wholly-owned subsidiaries of the Appellant, namely, MIC – Marcopolo International Corporation, located in the British Virgin Islands, and ILMOT International Corporation S.A., incorporated as an investment finance corporation – SAFI, in Uruguay. From what can be extracted from the case records, the deals carried out by the Appellant with the final purchasers of the products were intermediated by both companies, and the tax assessment charged, as income of the Appellant, the final values of the deals carried out by those intermediary companies with the purchasers abroad. However, this was not the legal treatment given by Brazilian law to business deals made with offshore companies established in Countries with a Favorable Tax Regime. Law 9430/96 is limited to checking whether the price charged is supported by the criteria set out in articles 18 to 22 thereof; once such minimum parameters are met, the business plan made by the taxpayer must be respected. Therefore, in this case, I believe that the Tax Authorities could not disregard the business carried out by the Appellant with its wholly-owned subsidiaries beyond what Law 9430/96 provides for the hypothesis of companies located in Countries

Headquarter Corp had transaction with it’s branch in the Turkish Mersin Free Zone. The branch imported the goods subject to the transaction from abroad for $ 2,298,137.79 and these goods were then transferred from the branch to the Headquarter Corps for US $ 3,214,135.00 without any special processing, production process or added value by the branch. The tax office issued an assessment where the price of the controlled transactions were adjusted based on the import price (internal CUP). Headquarter Corp brought the assessment to court. The tax court stated, that because the branch does not have a separate legal entity from the company, profits were not transferred out of the company as a result of the high-priced transaction. Therefor there was no hidden distribution of income. However, it was also concluded that the reason behind the sale of the goods sold to the Headquarter from the branch in the free zone of Mersin, at a price that was above market prices for comparable transactions, was an attempt to transfer profits to the tax free zone and excluding those profits from the tax declaration of the headquarter Corp. Headquarter Corp argued that the value of the goods purchased from the importer is evaluated according to the Free on Board (FOB) in the claims in the tax inspection report. Hence, an evaluation was made based on the method in which the seller, who sells the goods to the branch in the free zone, is liable for costs and damages until the goods in question are loaded on the ship, and it was emphasized that the insurance, freight and other costs incurred afterwards were not taken into account by the examiners. On that basis, Headquarter Corp filed an appeal to the Administrative Court. The Administrative concluded that the price difference of $ 915.997.21 between the seller in the free zone importing the said good and selling the goods to the Headquarter Corp did not reflect the economic and commercial realities without adding any added value to the product. The appeal request was overturned for a new decision. Click here for translation T 3-daire-e-2007-89-k-2007-2446-t-20-9-2007

This case is about a IP sale-and-license-back arrangement. The taxpayer acquired the shares in BV Z (holding). BV Z owns the shares in BV A and BV B (the three BVs form a fiscal unity under the CITA). BV A produces and sells shoes. In 1993, under a self-proclaimed protection clause, BV A sells the trademark of the shoes to BV C, which is also part of the fiscal unity. The protection clause was supposedly intended to protect the trademark in case of default of BV A. Taxpayer had created BV C prior to the sale of the trademark. In 1994, the taxpayer entered into a licensing agreement with BV C: the taxpayer pays NLG 2 to BV C per pair of shoes sold. Next, BV C is then moved to the Netherlands Antilles, which results in the end of the fiscal unity as of January 1, 1994. The roundtrip arrangement, the sale of an intangible and the subsequent payment of licensing fees, is now complete. In 1999 the royalty for use of the trademark was increased from fl. 2 per pair of shoes to fl. 2.50 per pair, resulting in annual royalty payments of fl. 300.000 from A BV to B BV. The Court disallowed tax deductions for the royalty payments. The payments were not proven to be at arm’s length. B BV had no employees to manage the trademarks. There were no business reasons for the transactions, only a tax motive. Hence the sale-and-license back arrangement was disregarded for tax purposes. Also, the licensing agreement were not found to produce effective protection of the brand and was therefore also considered part of a tax planning plan. Taxpayers often seek to maximise differences in tax rates through selling intangibles to a low- tax country and subsequently paying royalties to this country for the use of these intangibles, thereby decreasing the tax-base in the high-tax country. The arm’s length principle requires taxpayers to have valid business purposes for such transactions and requires them to make sure that the royalties are justified – why would an independent company pay royalties to a foreign company for an intangible it previously owned?’ To adress such situations a decree was issued in the Netherlands on August 11, 2004. The decree provided additional rules for transfers of intangibles when the value is uncertain at the time of the transaction (HTVI). It refers to situations in which an intangible is being transferred to a foreign group company and where this company furthermore licenses the intangible back to the transferor and/or related Dutch companies of this company. In these situations a price adjustment clause is deemed to have been entered. The deemed price adjustment clause prevents a sale at a very low price with a consequent high royalty fee to drain the Dutch tax base. Through the price adjustment clause the Dutch tax authorities are guaranteed a fair price for the sale of the intangible. Click here for translation Netherlands-vs-Corp-Maj-2007-IP-sale-and-license-back

The United States Tax Court sustained the IRS determination that there were no arm’s-length business reasons why payments would have been made for the intangible property in question and therefore refused to allow those expenses to be included in the Section 482 calculation of net taxable income. US-MedievalAttractions_decision_10091996