On 16 June 2022 McDonald’s France entered into an settlement agreement according to which it will pay €1.245 billion in back taxes and fines to the French tax authorities. The settlement agreement resulted from investigations carried out by the French tax authorities in regards to abnormally high royalties transferred from McDonald’s France to McDonald’s Luxembourg following an intra group restructuring in 2009. McDonald’s France doubled its royalty payments from 5% to 10% of restaurant turnover, and instead of paying these royalties to McDonald’s HQ in the United States, going forward they paid them to a Swiss PE of a group company in Luxembourg, which was not taxable of the amounts. During the investigations it was discovered that McDonald’s royalty fees could vary substantially from one McDonald’s branch to the next without any justification other than tax savings for the group. This conclusion was further supported by statements of the managers of the various subsidiaries as well as documentation seized which showed that the 100% increase in the royalty rate was mainly explained by a higher profitability of McDonald’s in France and a corresponding increase in taxes due. The investigations led the French tax authorities to question the overall economic substance of the IP company in Luxembourg and the contractual arrangements setup by the McDonald’s group. After being presented with the findings of the investigations and charged with tax fraud etc. McDonald’s was offered a public interest settlement agreement (CJIP) under Article 41-1-2 of the French Code of Criminal Procedure. The final settlement agreement between McDonald’s and the French authorities was announced in a press release from the Financial Public Prosecutor (English translation below). On 16 June 2022, the President of the Paris Judicial Court validated the judicial public interest agreement (CJIP) concluded on 31 May 2022 by the Financial Public Prosecutor (PRF) and the companies MC DONALD’S FRANCE, MC DONALD’S SYSTEM OF FRANCE LLC and MCD LUXEMBOURG REAL ESTATE S.A.R.L pursuant to Article 41-1-2 of the Criminal Procedure Code. under Article 41-1-2 of the Code of Criminal Procedure. Under the terms of the CJIP, MC DONALD’S FRANCE, MC DONALD’S SYSTEM OF FRANCE LLC and MCD LUXEMBOURG REAL ESTATE S.A.R.L, undertake to pay the French Treasury a public interest fine totalling 508,482,964 euros. Several French companies of the MC DONALD’S group have also signed a global settlement with the tax authorities, putting an end to the administrative litigation. The sum of the duties and penalties due under the overall settlement and the public interest fine provided for under the CJIP amounts to a total of EUR 1,245,624,269. Subject to the payment of the public interest fine, the validation of the CJIP extinguishes the public prosecution against the signatory companies. This agreement follows a preliminary investigation initiated by the PNF on 4 January 2016 after the filing of a complaint by the works council of MC DONALD’S OUEST PARISIEN. Opened in particular on the charge of tax fraud, the investigation had been entrusted to the Central Office for Combating Corruption and Financial and Fiscal Offences (OCLCIFF). This is the 10ᵉ CJIP signed by the national financial prosecutor’s office. The Financial Public Prosecutor Jean-François Bohnert Validated Settlement Agreement of 16 June 2022 English translation of the Validated Settelment Agreement Preliminary Settlement Agreement of 31 May 2022 with statement of facts and resulting taxes and fines English translation of the Preliminary Settlement Agreement of 31 May 2022

Nutreco España, S.A. had taken on significant debt to finance an acquisition of shares by other foreign group companies. Its role in the acquisition was limited to the channelling of funds. The debt consisted of an intercompany loan of 240 million euros granted by Nutreco Nederland B.V. and an amount of 100 million euros from a centralised treasury system (cash pool) within the Group. Interest payments on these loans totalled more than 30 million euros for the years 2011-2013, which Nutreco España, S.A. deducted from its taxable income. The tax authorities found that the financial arrangement was artificial and put in place only for the purpose of obtaining tax benefits. Deductions of expenses related to the debt was therefore denied and an assessment of additional taxable income issued. An appeal was filed Nutreco España, S.A. that ultimately ended up in the Supreme Court after being dismissed by the National High Court. Judgment The Supreme Court dismissed the appeal filed by Nutreco España, S.A., and upheld the prior judgment by the National High Court that denied the company’s deduction of financial expenses related to a complex cross-border financing structure used to acquire assets in Canada and the United States. The Court concluded that the presence of a cross-border element was not sufficient, in itself, to declare a transaction artificial. The artificiality of the transaction will be determined by analyzing whether the disputed transaction allows the taxable event to be totally or partially avoided or the tax base or debt to be reduced through acts or transactions from which no extra-tax benefits are derived. The financial structure in question—where Nutreco España assumed a debt to fund the acquisition made by other group entities abroad—had no relevant economic or legal effects beyond achieving tax savings. Since it did not generate additional benefits beyond the tax benefits, the operation was artificial, and the taxpayer must regularize the payment of the corresponding taxes. The court affirmed that national anti-abuse rules must be applied in line with EU principles, and that artificial arrangements designed to erode tax bases may be denied tax benefits. Excerpts in English “In short, the artificiality of the operation is constituted by the pursuit exclusively of a tax advantage, and not by the presence of a cross-border element, as the appellant repeatedly argues. 7. The tax administration has correctly identified the tax advantage sought, which consists of Nutreco España S.A. deducting the financial expenses of the loan used to make the aforementioned acquisition, thus eroding the tax base. Likewise, these financial expenses were also deducted in the tax jurisdictions where the group companies that made the acquisition are based. In this way, the Nutreco Group, with the operation designed in terms of how the funds were channelled, achieved a double deduction of the same financial expenses: in Spain and in the countries that finally made the acquisition from the Maple Group, Canada and the USA. It is true that the CJEU judgment of 20 January 2020, C-484/19, Lexel, states that ‘transactions carried out at arm’s length do not constitute purely artificial or fictitious arrangements carried out for the purpose of avoiding the tax normally due on profits generated by activities carried out in the national territory’, although this doctrine does not prevent the application of a national anti-abuse clause, article 15 LGT, provided that, as the court of first instance has done, said clause is interpreted in accordance with EU law to prevent the creation of purely artificial arrangements. Consequently, and in accordance with the case law of the CJEU, the Court of First Instance has found the existence of an abusive practice, consisting of creating a purely artificial arrangement, devoid of economic reality, with the sole purpose of obtaining a tax advantage. (…) In addition to the above, the national anti-abuse clause, article 15 of the General Taxation Law, is applied without distinction as to whether or not the group of companies is cross-border, it only requires that the requirements of the law be met which, in the case under examination, as has been pointed out, are concurrent. In accordance with the case law of the CJEU, the Court of First Instance has found the existence of an abusive practice, consisting of creating a purely artificial arrangement, devoid of economic reality, with the sole objective of obtaining a tax advantage.” Click here for English translation Click here for other translation Link to original Supreme Court Judgment No. 904/2025

“Health & Beauty AG” acted as a holding company within a larger international group. It had acquired 51% of the shares in I-GmbH in 2003 and the remaining 49% in 2009 from two Irish investment companies. The acquisition of the remaining shares was financed by a €12.4 million loan from A-BV at an interest rate of 7.855%. The loan was repaid early in 2013-2014 and interest expenses were claimed for the years 2009 to 2011. It had also deducted interest expences related to financing of subsidiaries in Spain and Italy. The tax authorities disallowed the deduction of these interest payments and an appeal was lodged, which ended up at the Austrian Federal Finance Court. Decision The court found that the loan agreement regarding the Acquisition of I-Gmbh was properly documented and at arm’s length and therefore the interest was deductible. It also concluded that “Health & Beauty AG” was the beneficial owner of the shares in I-GmbH, as it bore the risks and had the powers typical of an owner. Coordination with the group’s central departments did not negate its ownership status, nor did internal financial control or the fact that the purchase price was paid by another group company. The court rejected the tax authority’s claim that the structure was abusive because no tax benefits were realised from the transactions in question. Regarding interest expenses connected to group-financed grants to subsidiaries in Italy and Spain, the Court found that a large portion of the intra-group loans effectively was hidden equity contributions, thus disallowing the corresponding interest costs. The court also considered a dispute over the valuation of liabilities for unredeemed vouchers older than three years. It ruled that such liabilities should not be fully recognised at face value due to the extremely low probability of redemption, resulting in an upward adjustment of taxable income for 2011. Click here for English translation Click here for other translation

“II Real Estate Loan B.V.” had deducted 10% interest on loans from its shareholder in its taxable income. The tax authorities found that the 10% interest rate was not at arm’s length. Furthermore, according to the tax authorities the loans were “non-businesslike” and the deductibility of the interest was therefore limited. The district court upheld the assessment. Not satisfied, “II Real Estate Loan B.V.” appealed to the Court of Appeal. Judgment The Court of Appeal ruled largely in favour of the tax authorities, concluding that a significant portion of the interest was not deductible and was therefore deemed to be a dividend to the shareholders. The court reduced the interest rate on the loans from 10% to 2.43%. Excerpts in English 5.3.6.13. Since no (non profit-sharing) arm’s length interest rate can be found in the market, and the AHL thus qualifies as a so-called non-business loan for all years, in accordance with the non-business loan jurisprudence, an interest rate must then be determined as if the AHL had been provided by a third party under surety (cf. HR 25 November 2011, ECLI:NL:HR:2011:BN3442, BNB 2012/37, r.o. 3.3.4: “() The default risk assumed by a company in granting an imprudent loan is comparable to the risk assumed by a company that stands surety for a loan taken directly from a third party under similar conditions by an associated company. In view of this, in the case of an imprudent loan, the company’s taxable profit will have to be determined, as far as possible, in the same way as if it had guaranteed a loan taken by an associated company directly from a third party under comparable conditions. In view of the foregoing and partly for reasons of simplicity, the rule of thumb is that the interest on the imprudent loan is set at the interest that the associated company would have to pay if it borrowed from a third party with the guarantee of the group company under otherwise identical conditions. This will also prevent a difference in the earnings of the affiliated company with respect to the interest expense depending on whether it borrows under a guarantee from a third party or directly from the group company.”) On the basis of the so-called guarantee analogy included in the aforementioned judgment, the inspector determined the interest rate for the present case at a maximum of 2.38%. In doing so, he assumed the AHL but without taking into account the default risk. Furthermore, in connection with the escrow analogy, the inspector pointed to the credit rating of [name 4] Ltd. as the holding company of its three subsidiaries that are shareholders/creditors in the interested party with a total interest of 99.26% (see section 2 of the court ruling). [Name 4] Ltd. could therefore be a guarantor in this regard, according to the inspector, if the AHL were sourced from an independent third party. 5.3.6.14. The Court considers that the inspector correctly used the escrow analogy as a starting point to determine the interest payment. The Court considered that in that regard, it had been made plausible by the inspector that [name 4] Ltd. would qualify as a guarantor. However, in the opinion of the Court, neither party has made the interest rate to be taken into account sufficiently plausible. For instance, the inspector indicated under his primary argument that given the term of the loan there is reason to take into account a somewhat higher interest rate, while in the opinion of the Court he wrongfully completely ignores this when applying the surety analogy. The interested party also did not make the interest rate it defended plausible since in the reports and analyses on which that rate was based, the AHL was not taken as a starting point without default risk. Therefore, taking all things into consideration, the Court, applying the surety analogy in good justice, will set the interest rate on the AHL at 2.43%. 5.3.6.15. What has been considered above with respect to the renegotiated interest rate under application of the guarantee analogy, has the effect for the interested party as debtor that, in principle (see below at 5.3.6.16 and 5.3.6.17), it cannot deduct an amount in excess of the renegotiated interest payment; whatever more has been deducted from profits is considered a deduction. 5.3.6.16. Interested party further disputed that the AHL qualifies as an impaired loan within the meaning of the Supreme Court’s impaired loan jurisprudence because the affiliation requirement formulated in that jurisprudence was not met. To this end, the interested party first argues that, at least as the Court understands the interested party’s contention, more than 90% of the AHL was essentially provided to it by private pensioners and policyholders; in other words, the pension insurers are transparent. To this end, it points to the opinions it submitted (see 5.2.7). According to the interested party, there are therefore no creditors affiliated with the interested party to this extent. Secondly, the interested party pointed to Mr. [Person 4]’s shareholding of 0.74%. Therefore, since there is no affiliation within the meaning of the impaired loan jurisprudence, there cannot be an impaired loan granted by [Person 4] . 5.3.6.17. The Court considered as follows. The application of the non-business loan jurisprudence requires that the acceptance of the default risk is based on the shareholder relationship between the debtor and the creditor. There may also be an impracticable loan in the event of a disposal as referred to in Section 3.92 of the IB Act 2001 and situations in which a debtor risk that an independent third party would not have taken is accepted on the basis of personal relationships between natural persons (cf. HR 18 December 2015, ECLI:NL:HR:2015:3599, BNB 2016/38) or in cases where a company has accepted this debtor risk with the intention of serving the interest of its shareholder (cf. HR 20 March 2015, ECLI:NL:HR:2015:645). The inspector argued, without dispute, that the (pension) insurers who are parties to the AHL as creditors are, in any case, legal owners of

The Supreme Court in the Netherlands requested a preliminary ruling from the European Court of Justice to clarify its case-law on, inter alia, the freedom of establishment laid down in Article 49 TFEU, specifically whether it is compatible with that freedom for the tax authorities of a Member State to refuse to a company belonging to a cross-border group the right to deduct from its taxable profits the interest it pays on such a loan debt. The anti-avoidance rule in question is contained in Article 10a of the Wet op de vennootschapsbelasting 1969. The rule is >specifically designed to tackle tax avoidance practices related to intra-group acquisition loans. Under that legislation, the contracting of a loan debt by a taxable person with a related entity – for the purposes of acquiring or extending an interest in another entity – is, in certain circumstances, presumed to be an artificial arrangement, designed to erode the Netherlands tax base. Consequently, that person is precluded from deducting the interest on the debt from its taxable profits unless it can rebut that presumption. The Dutch Supreme Court (Hoge Raad) asked the European Court of Justice to clarify its findings in its judgment in Lexel, on whether such intra-group loans may be, for that purpose, regarded as wholly artificial arrangements, even if carried out on an arm’s length basis, and the interest set at the usual market rate. “(1) Are Articles 49 TFEU, 56 TFEU and/or 63 TFEU to be interpreted as precluding national legislation under which the interest on a loan debt contracted with an entity related to the taxable person, being a debt connected with the acquisition or extension of an interest in an entity which, following that acquisition or extension, is a related entity, is not deductible when determining the profits of the taxable person because the debt concerned must be categorised as (part of) a wholly artificial arrangement, regardless of whether the debt concerned, viewed in isolation, was contracted at arm’s length? (2) If the answer to Question 1 is in the negative, must Articles 49 TFEU, 56 TFEU and/or 63 TFEU be interpreted as precluding national legislation under which the deduction of  the interest on a loan debt contracted with an entity related to the taxable person and regarded as (part of) a wholly artificial arrangement, being a debt connected with the acquisition or extension of an interest in an entity which, following that acquisition or extension, is a related entity, is disallowed in full  when determining the profits of the taxable person, even where that interest in itself does not exceed the amount that would have been agreed upon between companies which are independent of one another? (3) For the purpose of answering Questions 1 and/or 2, does it make any difference whether the relevant acquisition or extension of the interest relates (a) to an entity that was already an entity related to the taxable person prior to that acquisition or extension, or (b) to an entity that becomes an entity related to the taxpayer only after such acquisition or extension?” The AG issued an opinion in March 2024 in which it was concluded that the Dutch anti-avoidance rule in Article 10a was both justified, appropriate and necessary – and therefore not in conflict with Article 49 of the TFEU. Judgment of the Court of Justice The Court of Justice agreed with the conclusion of the AG that the Dutch anti-avoidance rule in Article 10a was not in conflict with Article 49 of the TFEU. According to the Court Article 49 TFEU must be interpreted as not precluding national legislation under which, in the determination of a taxpayer’s profits, the deduction of interest paid in respect of a loan debt contracted with a related entity, relating to the acquisition or extension of an interest in another entity which becomes, as a result of that acquisition or extension, an entity related to that taxpayer, is to be refused in full, where that debt is considered to constitute a wholly artificial arrangement or is part of such an arrangement, even if that debt was incurred on an arm’s length basis and the amount of that interest does not exceed that which would have been agreed between independent undertakings. Excerpts “The Court also noted that the legislation at issue in the case that gave rise to the judgment of 20 January 2021, Lexel (C 484/19, EU:C:2021:34, paragraph 53), was capable of applying to debts arising from transactions governed by civil law, namely those concluded on an arm’s length basis, but did not concern fictitious arrangements. 82 It follows that the Court did not adopt a position, in that judgment, on the situation envisaged by the legislation at issue in the main proceedings with the specific aim of combating wholly artificial arrangements, as is apparent from paragraphs 60 and 61 of the present judgment, namely where the debts are incurred without business reasons, even though the loan terms correspond to those which would have been agreed between independent undertakings. 83 In particular, as is apparent from the judgment of 20 January 2021, Lexel (C 484/19, EU:C:2021:34), the economic validity of the loan and the related transactions at issue in the case giving rise to that judgment had neither been challenged before the Court nor examined by the Court. 84 Consequently, it cannot be inferred from paragraph 56 of the judgment of 20 January 2021, Lexel (C 484/19, EU:C:2021:34), that, where a loan and the related transactions are not justified by economic considerations, the mere fact that the terms of that loan correspond to those which would have been agreed between independent undertakings means that that loan and those transactions do not, by definition, constitute wholly artificial arrangements. 85 Therefore, the need to establish that a loan and the related legal transaction are based, to a decisive extent, on economic considerations does not appear to go beyond what is necessary in order to attain the objective pursued. 86 In addition, the referring court asks whether a total

December 31, 2008 “A Mining S.A.” sold a mine wash plant to Company B, with which it was associated until December 23, 2008. The sale of the plant was negotiated in parallel with various share acquisition negotiations, etc. The tax authorities considered the sale of the wash plant to be a controlled transaction because the agreement was negotiated while the parties were still related. On this basis, the agreed price for the washing plant was adjusted based on the CUP method in accordance with Portuguese arm’s length rules. The resulting assessment issued by the tax authorities was later confirmed by the Administrative Court. “A Mining S.A.” then appealed to the Supreme Administrative Court. Judgment The Supreme Administrative Court ruled in favor of “A Mining S.A.”, overturning the decision of the Administrative Court and annulling the assessment issued by the tax authorities. Excerpt in English “We therefore don’t see how we can maintain, as the Public Prosecutor’s Office before this Supreme Court maintains, that ‘[o]n the date the aforementioned contract was signed, the same special relationships existed between B… and A… as existed on the date of the contract signed on …/…/2008’. The fact is that the effects of the contract signed on …/…/2008, having verified the condition to which the parties subjected it, must be considered to have been produced on the date on which it was signed, and the date on which the condition was verified is irrelevant for this purpose. But, having ruled out the argument put forward by the Public Prosecutor’s Office, could it be the case, as the judgment under appeal held, that in order for the essential requirement for the application of the transfer pricing regime to be verified, namely the existence of special relationships, it is sufficient for these to exist when the deal was agreed, but no longer at the time it was concluded? In this regard, it must be recognised that the Central Administrative Court for the South does not clarify the reasons why it considered that the relevant moment for the verification of this requirement was when the deal was negotiated and not when it was concluded, when it existed at the first moment, but no longer at the second. In fact, it merely stated, as we have already said, that ‘although the sale of the industrial wash plant to B… formally took place on 31/12/2008, the date on which the parties to the deal were no longer in a situation of special relations (which ceased with the sale on 23/12/2008 of B… to D… SGPS, a company in the E… Group), the fact is that the conditions and terms of the deal had already been agreed prior to the formalisation of the operation’. For its part, the Appellant maintains that the relevant moment cannot be any other than that of the conclusion of the deal. Let’s see: Article 58(1) (now Article 63) of the CIRC states: ‘In commercial transactions, including, in particular, transactions or series of transactions concerning goods, rights or services, as well as financial transactions, carried out between a taxable person and any other entity, whether or not subject to IRC, with which it is in a situation of special relations, terms or conditions must be contracted, accepted and practised that are substantially identical to those that would normally be contracted, accepted and practised between independent entities in comparable transactions.’ First of all, let’s remember the legal concept of special relationships, which was provided to us by Article 58(4) (now Article 63) of the CIRC: ‘Special relationships are considered to exist between two entities in situations where one has the power to exercise, directly or indirectly, a significant influence on the management decisions of the other’. This legal concept is followed, in the same provision and throughout its nine paragraphs, by a list of situations in which the legislator presumes the ‘power to exercise, directly or indirectly, a significant influence on the management decisions of the other’. We can’t find in the text of the law any indication or explicit reference to the moment when the existence of the special relationship must be ascertained. However, as the appellant rightly pointed out, ‘the wording of Article 58(1) [of the CIRC, which today corresponds to Article 63] is clear in referring to transactions “carried out” and, consequently, to the date on which the transactions are entered into and produce their legal and economic effects (and not when they are negotiated) between related entities’. In fact, it is a general rule that the legal regime applicable and in the light of which the validity of the assessment act must be assessed is that in force on the date on which the taxable event occurs (in obedience to the tempus regit actum principle), which also means that the requirements for the application of that regime must be verified on that date, i.e., in this case, that the situation of special relations must be verified on the date on which the transaction that generated the capital loss was concluded. In the absence of any indication to the contrary, that time cannot be considered to be any other. The rationale of the system is the same, as the appellant has also pointed out. In fact, as stated in the conclusions of the appeal, the transfer pricing regime aims to protect competition and parity between bound and unbound entities, ‘seeking to prevent entities within a group and maintaining control over transferred assets, from transferring those same assets between themselves at prices different from those practised on the free market and, if necessary, in a reversible manner, in order to divert profits or create losses subject to a more favourable tax regime’ and “if the parties are not related at the time the operation takes place and its legal, economic and tax effects are produced in the sphere of the parties involved, there can be no intra-group transfer of profits or losses that could justify the application of the transfer pricing regime”. We therefore believe that

Vernay Europa B.V. had received dividends from its Italian subsidiary in the years 2013 to 2016 and requested a refund of withholding taxes in Italy based on the EU Parent-Subsidiary Directive. The claim was rejected by the Italian tax authorities. An appeal was made to the Supreme Court. Judgment The Supreme Court ruled in favour of Vernay Europa B.V. Beneficial ownership requires the satisfaction of three tests: 1. the substantive business test, 2. the control test and 3. the business purpose test. The Court found that Vernay Europa B.V. had been established in the Netherlands prior to the adoption of the Parent-Subsidiary Directive and that it had a real business activity. Furthermore, Vernay Europa B.V. retained a substantial part of the dividends received. Based on these facts, the Supreme Court upheld the appeal of Vernay Europa B.V. and referred the case back to the Court of Second Instance for a final decision on the facts in the light of the guidance provided by the Supreme Court. Click here for English translation Click here for other translation

A request for a preliminary ruling under Article 267 TFEU was made from the Constitutional Court of Belgium concerning the assessment of the validity of Article 8ab(1), (5), (6) and (7) of Council Directive 2011/16 as later amended by Directive 2018/822.  The request from the Belgian Court was made in the context of a number of proceedings between, inter alia, on the one hand, the de facto association, the Belgian Association of Tax Lawyers and others (‘the BATL’), the Ordre des barreaux francophones et germanophone (French- and German-speaking Bar Association; ‘the OBFG’), the Orde van Vlaamse Balies (Association of Flemish Bars) and others (‘the OVB’) and the Instituut van de Accountants en de Belastingconsulenten (Institute of Accountants and Tax Consultants) and others (‘the ITAA’) and, on the other, Premier ministre/Eerste Minister (Prime Minister, Belgium) concerning the validity of certain provisions of the Law of 20 December 2019 transposing Directive [2018/822] (Moniteur belge of 30 December 2019, p. 119025). The request to the European Court of Justice asked five questions: ‘(1) Does [Directive 2018/822] infringe Article 6(3) [TEU] and Articles 20 and 21 of the [Charter] and, more specifically, the principles of equality and non-discrimination as guaranteed by those provisions, in that [Directive 2018/822] does not limit the reporting obligation in respect of [reportable] cross-border arrangements to corporation tax, but makes it applicable to all taxes falling within the scope of [Directive 2011/16,] which include under Belgian law not only corporation tax, but also direct taxes other than corporation tax and indirect taxes, such as registration fees? (2) Does [Directive 2018/822] infringe the principle of legality in criminal matters as guaranteed by Article 49(1) of the [Charter] and by Article 7(1) of the [European Convention for the Protection of Human Rights and Fundamental Freedoms, signed in Rome on 4 November 1950 (‘the ECHR’)], the general principle of legal certainty and the right to respect for private life as guaranteed by Article 7 of the [Charter] and by Article 8 of the [ECHR], in that the concepts of ‘arrangement’ (and therefore the concepts of ‘cross-border arrangement’, ‘marketable arrangement’ and ‘bespoke arrangement’), ‘intermediary’, ‘participant’, ‘associated enterprise’, the terms ‘cross-border’, the different ‘hallmarks’ and the ‘main benefit test’ that [Directive 2018/822] uses to determine the scope of the reporting obligation in respect of [reportable] cross-border arrangements, are not sufficiently clear and precise? (3) Does [Directive 2018/822], in particular in so far as it inserts Article 8ab(1) and (7) into [Directive 2011/16], infringe the principle of legality in criminal matters as guaranteed by Article 49(1) of the [Charter] and by Article 7(1) of the [ECHR], and infringe the right to respect for private life as guaranteed by Article 7 of the [Charter] and by Article 8 of the [ECHR], in that the starting point of the 30-day period during which the intermediary or relevant taxpayer must fulfil its reporting obligation in respect of a [reportable] cross-border arrangement is not fixed in a sufficiently clear and precise manner? (4) Does Article 1(2) of [Directive 2018/822] infringe the right to respect for private life as guaranteed by Article 7 of the [Charter] and by Article 8 of the [ECHR], in that the new Article 8ab(5) which it inserted in [Directive 2011/16], [and which] provides that, where a Member State takes the necessary measures to give intermediaries the right to a waiver from filing information on a reportable cross-border arrangement where the reporting obligation would breach legal professional privilege under the national law of that Member State, that Member State is obliged to require the intermediaries to notify, without delay, any other intermediary or, if there is no such intermediary, the relevant taxpayer, of their reporting obligations, in so far as the effect of that obligation is to oblige an intermediary bound by legal professional privilege subject to criminal sanctions under the national law of that Member State to share with another intermediary, not being his client, information which he obtains in the course of the essential activities of his profession? (5) Does [Directive 2018/822] infringe the right to respect for private life as guaranteed by Article 7 of the [Charter] and by Article 8 of the [ECHR], in that the reporting obligation in respect of [reportable] cross-border arrangements interferes with the right to respect for the private life of intermediaries and relevant taxpayers which is not reasonably justified or proportionate in the light of the objectives pursued and which is not relevant to the objective of ensuring the proper functioning of the internal market?’ Judgment of the Court The European Court of Justice upheld the validity of Council Directive 2011/16, as amended by Council Directive 2018/822, finding that no factor had been disclosed in the request that would affect the validity of the Directive and its subsequent amendment. “1. The examination of the aspect to which the first question referred relates has disclosed no factor of such a kind as to affect the validity of Council Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation and repealing Directive 77/799/EEC, as amended by Council Directive (EU) 2018/822 of 25 May 2018, in the light of the principles of equal treatment and non-discrimination, and of Articles 20 and 21 of the Charter of Fundamental Rights of the European Union. 2. The examination of the aspects to which the second and third questions referred relate has disclosed no factor of such a kind as to affect the validity of Directive 2011/16, as amended by Directive 2018/822, in the light of the principle of legal certainty, the principle of legality in criminal matters enshrined in Article 49(1) of the Charter of Fundamental Rights and the right to respect for private life guaranteed in Article 7 of that Charter. 3. The invalidity of Article 8ab(5) of Directive 2011/16, as amended by Directive 2018/822, in the light of Article 7 of the Charter of Fundamental Rights, declared by the Court in the judgment of 8 December 2022, Orde van Vlaamse Balies and Others (C-694/20, EU:C:2022:963), applies only to

Howmet, a société par actions simplifiée (SAS), is the head of a tax group in which its subsidiary, Alcoa Holding France, now Arconic Holding France (AHF), is integrated. Following an audit of the accounts of these two companies, the tax authorities corrected their taxable profits for the 2011 and 2012 financial years  by disregarding the consequences of a contribution made to the Belgian company Alcoa Wheels Product Belgium (AWPB), now Alcoa Finance and Services Belgium (AFSB), of sums borrowed from the Swiss permanent establishment of a Luxembourg company belonging to the same economic group. It also reinstated the management fees paid by AHF to the group’s American parent company, Alcoa Inc., in AHF’s profits for the 2010 and 2011 financial years. In a ruling handed down on 19 November 2020, the Montreuil Administrative Court upheld Howmet’s claim for discharge of the additional corporate tax resulting from the adjustments based on abuse of rights and the corresponding surcharges, and dismissed the remainder of its claim. In a judgment of 31 March 2023 the Paris Administrative Court of Appeal, on appeal by the tax authorities set aside Articles 1 and 2 of that judgment and ordered Howmet to pay the tax, and dismissed its cross-appeal. An appeal was then filed by Howmet to annul this Judgment. Judgment The Conseil d’Etat rejected the appeal and upheld the decision of the Court of Appeal, ruling that this was an artificial arrangement whose sole purpose was to allow the deduction of interest in taxable income and thereby avoid taxation. Excerpt in English “9. In deducing from all of these circumstances the existence of an artificial arrangement whose sole purpose, by financing the Belgian company through a capital increase rather than through a loan, was to exempt AHF from having to record, as compensation for the interest deducted, income corresponding to interest from the Belgian company, thereby constituting an abuse of rights, the Court, which gave sufficient reasons for its judgment, neither erred in law nor incorrectly characterised the facts of the case. It was therefore able to deduce that the tax authorities were right to add back to the taxable profits of Howmet and AHF interest equivalent to the amounts deducted. 10. Finally, it follows from the foregoing that the Court was also able, without giving insufficient reasons for its judgment or committing an error of law, to reject the argument raised before it to the effect that the tax authorities could, without rejecting the acts described above, have made the same reassessment on the basis that the interest rate on the loans taken out was excessive, in the light of normal commercial management, in order to call into question in part the deductibility of the related interest. In addition, the applicants’ argument that, in the absence of an increase in the capital of the Belgian company AFSB, the main shareholder of the French companies had demanded the distribution of the unused cash which they had allegedly had at their disposal, and which was in any event unjustified, was in any event inoperative, as the disputed rectification stemmed from the fact that, once the acts constituting abuse of rights had been set aside, these sums had to be regarded as having directly financed the Spanish company AIESL.” Click here for English translation Click here for other translation

At issue was the “royalty-free” use of intangible assets under an agreement whereby PepsiCo’s Singapore affiliate sold concentrate to Schweppes Australia, which then bottled and sold PepsiCo soft drinks for the Australian market. As no royalties were paid under the agreement, no withholding tax was paid in Australia. The Australian Taxation Office (ATO) determined that the payments for “concentrate” from Schweppes to PepsiCo had been misclassified and were in part royalty for the use of PepsiCo’s intangibles (trademarks, branding etc.), and an assessment was issued for FY2018 and FY2019 where withholding tax was determined on that basis. The assessment was issued under the Australian diverted profits tax provisions. The assessment was appealed to the Federal Court, which in November 2023 found in favour of the tax authorities. PepsiCo then appealed to the Full Federal Court. Judgment In a split decision, the Full Federal Court overturned the decision of the Federal Court and found in favour of PepsiCo. Excerpts “In summary, we conclude that the payments made by the Bottler to the Seller were for concentrate alone and did not include any component which was a royalty for the use of PepsiCo/SVC’s intellectual property. The payments were in no part made in ‘consideration for’ the use of that intellectual property and they did not therefore include a ‘royalty’ within the definition of that term in s 6(1) of the ITAA 1936. Further, the payments were received by the Seller on its own account and they cannot be said to have been paid to PepsiCo/SVC. The Commissioner’s attempts to bring PepsiCo/SVC to tax under s 128B(2B) therefore fails for two interrelated reasons: there was no ‘royalty’ as required by s 128B(2B)(b) and the payments made to the Seller by the Bottler cannot constitute ‘income derived’ by PepsiCo/SVC within the meaning of s 128(2B)(a).” “PepsiCo/SVC’s appeals in the royalty withholding tax proceedings should be allowed, the orders made by the trial judge set aside and in lieu thereof there should be orders setting aside the notices of assessment for royalty withholding tax. The Commissioner’s appeals in the Part IVA proceedings should be dismissed. PepsiCo/SVC should have their costs in both sets of appeals as taxed, assessed or otherwise agreed. The parties should bring in a minute of order giving effect to these conclusions within 14 days.” Click here for translation

“Real Estate Loan B.V.” had deducted 10% interest on loans from its shareholder in its taxable income. The tax authorities found that the 10% interest rate was not at arm’s length. Furthermore, according to the tax authorities the loans were “non-businesslike” and the deductibility of the interest was therefore limited. The district court upheld the assessment. Not satisfied, “Real Estate Loan B.V.” appealed to the Court of Appeal. Judgment The Court of Appeal ruled largely in favour of the tax authorities, concluding that a significant portion of the interest was not deductible and was therefore deemed to be a dividend to the shareholders. The court found that the tax authorities had been able to prove that the loan was “non-businesslike”, as a third party would not have been willing to make a loan on similar terms to Real Estate Loan B.V. Applying the deemed guarantee approach, the court ruled that the interest rate should be set at 3.09%. Excerpts in English “5.3.6.11. The foregoing leads to the conclusion that the Inspector has made it plausible that no arm’s length interest rate can be determined under which an independent third party would have been willing to grant the same loan to the interested party, on otherwise the same terms and conditions, without stipulating an interest rate that is so high that the AHL would essentially become profit-sharing. If so, it must be assumed – barring special circumstances – that the lenders accepted this risk with the intention of serving the interest of the interested party. Special circumstances in the aforementioned sense have, in the opinion of the Court, neither been stated nor proved. 5.3.6.12. Since no arm’s length interest rate can be found in the market, and the AHL thus qualifies as a so-called impractical loan for all years, in accordance with the impractical loan jurisprudence, an interest rate must then be determined as if the AHL had been provided by a third party under surety (cf. HR 25 November 2011, ECLI:NL:HR:2011:BN3442, BNB 2012/37, r.o. 3.3.4: “(…) The default risk assumed by a company in granting an imprudent loan is comparable to the risk assumed by a company that stands surety for a loan taken directly from a third party under similar conditions by an associated company. In view of this, in the case of an imprudent loan, the company’s taxable profit will have to be determined as far as possible in the same way as if it had guaranteed a loan taken out directly from a third party under comparable conditions by an associated company. In view of the above and also for reasons of simplicity, the rule of thumb is that the interest on the unsecured loan is set at the interest that the affiliated company would have to pay if it borrowed from a third party with the group company’s guarantee under otherwise identical conditions. This will also prevent a difference in the earnings of the affiliated company with respect to the interest expense depending on whether it borrows under a guarantee from a third party or directly from the group company.”) On the basis of the so-called guarantee analogy included in the aforementioned judgment, the inspector determined the interest rate for the present case at a maximum of 2.59%. In doing so, he assumed the AHL but without taking into account the default risk. Furthermore, in connection with the surety analogy, the inspector pointed to the credit rating of [company 9] Ltd. as the holding company of its three subsidiaries that are shareholders/creditors in the interested party with a total interest of 85% (see section 2 of the court ruling). [Company 9] Ltd. could therefore be a guarantor in this regard, according to the inspector, if the AHL were sourced from an independent third party. 5.3.6.13. The Court considers that the inspector correctly used the escrow analogy as a starting point to determine the interest payment. The Court considers that in that regard, it has been made plausible by the inspector that [company 9] Ltd. would qualify as a guarantor. However, in the opinion of the Court, neither party has made the interest rate to be taken into account sufficiently plausible. For instance, the inspector indicated in his primary statement that, given the term of the loan, there is reason to take into account a somewhat higher interest rate, while – in the opinion of the Court of Appeal – he completely ignores this when applying the guarantee analogy. Also the interested party has not made the interest rate it defends plausible since in the reports and analyses on which it is based, the AHL has not been taken into account without default risk. Therefore, taking everything into consideration, the Court, applying the bailment analogy in good justice, will set the interest rate on the AHL at 3.09%.” Click here for English translation Click here for other translation

At issue was an intra-group loan that arose out of a reorganisation designed to accelerate the utilisation of tax losses and thereby generate tax savings for the Kwik-Fit group. According to the tax authorities the loan had an unallowable purpose under the rule in section 441 CTA 2009 and, on this basis, interest deductions on the loan were disallowed. Kwik-Fit´s appeals to the First-tier Tribunal and the Upper Tribunal were unsuccessful and an appeal was then filed with the Court of Appeal. Judgment The Court found that the unallowable purpose rule in section 441 CTA 2009 applied to the interest deductions and upheld the decisions of the First-tier and Upper Tribunals. Excerpt 35. The FTT then made the following findings: “101. We find, based on the evidence of Mr Ogura,that: (1)   the decision to implement the reorganisation was made as a whole group; the Appellants were part of that group so they understood and cooperated in that decision; (2)   the June 2013 Memorandum sets out what the directors of each company wanted to achieve, both for themselves and for the other members of the Kwik-Fit Group. That group purpose (as set out in that memorandum) was to create net receivables within Speedy 1, to enable utilisation of the losses in Speedy 1, and tax deductions for the interest expense of each debtor. That outcome was considered to be good for the whole group; (3)   an additional group purpose of thereorganisation was to simplify the intercompany balances within the Kwik-Fit Group; (4)   each of the Appellants knew the full details of the reorganisation which was being implemented, the steps they were required to take to implement that reorganisation, whether for themselves or as shareholder of another company involved in the reorganisation and understood as a matter of fact that the reorganisation had the effect of assigning the receivables under the Pre-existing Loans to Speedy 1. They understood that this was “for the benefit of the whole group”; and (5)   each of the Appellants had a choice as to whether or not to participate in the reorganisation, and if they had decided not to do so then the Pre-existing Loans to which they were party would have been left out of the reorganisation. The only potential reason for not participating given by Mr Ogura was if they had not wanted to pay the increased interest rate on those loans. (…) “88. In this case, the FTT’s conclusions were based on very particular factual features: a)The “group purpose” of the reorganisation, which the Appellants willingly adopted, was to achieve the tax benefits that I have already described: para. 101 of the FTT Decision, set out at [] above. b)There was an additional group purpose of simplifying intercompany balances (para. 101(3)), but that was clearly not considered by the FTT to be material. Further, the long-term aim of reducing the number of dormant companies was “merely part of the background noise”: para. 104 ([] above). c)The Appellants had a choice as to whether or not to participate in the reorganisation, the only reason given for not doing so being if they had not wanted to pay the increased rate of interest (para. 101(5)). d)The Pre-existing Loans were repayable on demand and the Appellants had little capacity to repay them, but there was no threat to call for their repayment. Instead, the Appellants understood that the increased interest rate “directly fed into the tax benefit for the group”. (See para. 102, set out above; the points are reiterated at para. 112.) In other words, the Appellants willingly agreed to take on the obligation to pay significant additional interest without any non-tax reason to do so. In contrast, if payment of interest at a commercial rate on a loan is the alternative to being required to repay it in circumstances where funds are still required, then that may well provide a commercial explanation for the borrower’s agreement to the revised rate. e)The increase in rate also had nothing to do with any recognition on the part of the Kwik-Fit group that it needed to make the change to avoid falling foul of the transfer pricing rules. There was no such recognition. The interest rate on the relevant loans was not set at LIBOR plus 5% because of a concern that the transfer pricing rules would otherwise be applied to adjust the rate upwards. Rather, the rate was set at LIBOR plus 5% to maximise the savings available while aiming to ensure that it was not objected to by HMRC as being excessive because it was above an arm’s length rate. Setting the rate at a level that sought to ensure that it did not exceed what would be charged at arm’s length i) meant that it could be accepted by the borrowers and ii) reduced the risk that the rate would be adjusted downwards for tax purposes, which would reduce the benefits available. The assumption was that the transfer pricing rules would not otherwise be applied to increase the interest rate. f)Mr Ghosh frankly acknowledged that the transfer pricing rules did not motivate the increase in rate, but the point is also made very starkly by the FTT’s findings that the Appellants could have chosen not to participate and that the interest rate would not have been increased on the Pre-existing Loans if they had not done so (paras. 101(5) and 102(4)), and by the group’s decision not to increase the rate of interest on other intra-group debt, including the Detailagent Loan (paras. 30 and 115; see [] and [32.] above). g)The result was that, although the commercial purpose for the Pre-existing Loans remained, the only reason for incurring the additional interest cost on the Pre-existing Loans was to secure tax advantages: para. 113 ([] above). The new rate was “integral” to the steps taken: para. 116 ([37.] above). h)As to the New Loans, the FTT found at paras. 103 and 117 that KF Finance and Stapleton’s did not have their own commercial purpose in taking them on and that the intended tax advantages were the main purpose for which KF Finance and Stapleton’s were party to them ([] and [37.] above).” Click here for translation

An intercompany loan was granted within the Apex Tool group at an interest rate of 6%. A tax assessment was issued by the tax authorities contesting the amount of interest deducted. The case ended up at the Conseil d’Etat, where it was referred back to the CAA. Following the referral of the case, Apex Tool Group asked the CAA to refund the amounts of €58,598, €50,099 and €653 corresponding to the excess corporation tax and social security contributions and to increase the balance of the interest deductions carried forward under the French thin cap rules from €1,435,512 to €2,401,651. Judgment of the Court The Court dismissed Apex Tool Group’s application. It found that the company had failed to provide evidence that the 6% interest rate on the loan was at arm’s length. Excerpts (Unofficial English translation) “8. It follows from the foregoing that the applicant company, which does not provide any further evidence enabling it to verify the characteristics and risk profile of Cooper Industrie France, the company to which the loan was granted, at the date on which the loan was granted, cannot be regarded as providing evidence that institutions or organisations would have been likely, given the specific characteristics of ATHF1 and in particular the risk profile it presented on the date the loan was issued, to grant it a loan with the same characteristics in July 2010 on an arm’s length basis. Consequently, the appellant company cannot be deemed to have provided the proof required of it that all of the disputed interest paid at the rate of 6% is deductible, in accordance with the provisions of I of Article 212 of the French General Tax Code referred to above. As a result, it is not entitled to claim repayment of the corporation tax and social security contributions it paid in respect of the 2011 and 2012 financial years. On the claims based on the provisions of II of Article 212 of the French General Tax Code: 9. Under the terms of 1 of II of Article 212 of the General Tax Code: “When the amount of interest paid by a company to all of its directly or indirectly affiliated companies within the meaning of 12 of Article 39 and deductible in accordance with I simultaneously exceeds the following three limits in respect of the same financial year: / a) The product corresponding to the amount of the said interest multiplied by the ratio existing between one and a half times the amount of shareholders’ equity, assessed at the company’s discretion at the beginning or end of the financial year, and the average amount of the sums left or made available by all of the directly or indirectly affiliated companies within the meaning of Article 12 of 39 during the financial year, b) 25% of the current profit before tax previously increased by the said interest, depreciation taken into account in determining that same profit and the share of lease payments taken into account in determining the sale price of the asset at the end of the contract, /c) The amount of interest paid to this company by companies that are directly or indirectly linked within the meaning of Article 12 of 39, / the fraction of interest exceeding the highest of these limits may not be deducted in respect of that financial year, unless that fraction is less than €150,000. / However, this fraction of interest that is not immediately deductible may be deducted in respect of the following financial year up to the amount of the difference calculated in respect of that financial year between the limit mentioned in b and the amount of interest deductible under I. The balance not deducted at the end of this financial year is deductible in respect of subsequent financial years under the same conditions, less a discount of 5% applied at the start of each of these financial years”. 10. It is common ground that SAS Apex Tool Group reported an amount of EUR 1,380,069 in respect of its stock of interest subject to deferred deduction at the close of the 2013 financial year, pursuant to the provisions of II of Article 212 of the General Tax Code, in respect of the loan of EUR 22,656,211.20 owed to the parent company ATG LLC. The applicant, who has requested a recalculation of the excess interest, maintains that it is entitled, firstly, to request that the interest be carried forward pursuant to the provisions of Article 212-I of the French General Tax Code and, secondly, to file an amended tax return showing a balance of interest remaining to be carried forward of 2,401,651 euros as at 31 December 2013. 11 As a result of the investigation, SAS Apex Tool Group, believing that it was entitled to deduct all of the interest on the loan in question from its taxable income on the basis of Article 212(I) of the French Tax Code, consequently recalculated its stock of deferred interest. However, as stated in paragraphs 6 to 8 of this judgment, the applicant did not prove that it met the conditions laid down by the provisions of Article 212-I of the General Tax Code and was therefore able to deduct the loan interest that it had incurred. In these circumstances, the tax authorities were right not to accept the company’s recalculation of its excess interest and the stock of deferred interest. Consequently, the company’s claims in this respect can only be rejected.” Click here for English translation Click here for other translation

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. The tax authorities (HMRC) denied tax deductions for the interest costs on two grounds: (1) HMRC claimed that no loans would have been made between parties acting at arm’s length, so that relief should be denied under the transfer pricing rules in Part 4 of the Taxation (International and Other Provisions) Act 2010. (2) HMRC also maintained that relief should be denied under the unallowable purpose rule in section 441 of the Corporation Tax Act 2009, on the basis that securing a tax advantage was the only purpose of the relevant loans. An appeal was filed by the BlackRock Group with the First Tier Tribunal, which in a decision issued in November 2020 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. According to the judgment issued in 2022, 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. An appeal was then filed by BlackRock with the Court of Appeal. Judgment The Court of Appeal found that tax deductions for the interest on the Loans were not restricted under the transfer pricing rules (cf. ground 1 above) but instead disallowed under the unallowable purpose rule in section 441 of the Corporation Tax Act 2009 (cf. ground 2 above). Excerpt regarding application of transfer pricing rules “34. Paragraph 1.6 of both the 1995 and 2010 versions of the OECD guidelines explains that what Article 9 of the model convention seeks to do is to adjust profits by reference to “the conditions which would have obtained between independent enterprises in comparable transactions and comparable circumstances” (a comparable “uncontrolled transaction”, as opposed to the actual “controlled transaction”). The 2010 version adds that this comparability analysis is at the “heart of the application of the arm’s length principle”, while explaining at para. 1.9 that there are cases, for example involving specialised goods or services or unique intangibles, where a comparability analysis is difficult or complicated to apply. 35. In its discussion of comparability analysis, para. 1.15 of the 1995 version states: “Application of the arm’s length principle is generally based on a comparison of the conditions in a controlled transaction with the conditions in transactions between independent enterprises. In order for such comparisons to be useful, the economically relevant characteristics of the situations being compared must be sufficiently comparable. To be comparable means that none of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or that reasonably accurate adjustments can be made to eliminate the effect of any such differences. In determining the degree of comparability, including what adjustments are necessary to establish it, an understanding of how unrelated companies evaluate potential transactions is required. Independent enterprises, when evaluating the terms of a potential transaction, will compare the transaction to the other options realistically available to them, and they will only enter into the transaction if they see no alternative that is clearly more attractive. For example, one enterprise is unlikely to accept a price offered for its product by an independent enterprise if it knows that other potential customers are willing to pay more under similar conditions. This point is relevant to the question of comparability, since independent enterprises would generally take into account any economically relevant differences between the options realistically available to them (such as differences in the level of risk or other comparability factors discussed below) when valuing those options. Therefore, when making the comparisons entailed by application of the arm’s length principle, tax administrations should also take these differences into account when establishing whether there is comparability between the situations being compared and what adjustments may be necessary to achieve comparability.” Similar text appears at paras. 1.33 and 1.34 of the 2010 version. 36. As can be seen from this, it is essential that the “economically relevant characteristics” are “sufficiently comparable”, in the sense of any differences either not having a material effect on the relevant condition (term) of the transaction, or being capable of being adjusted for with reasonable accuracy so as to eliminate their effect. 37. Paragraph 1.17 of the 1995 version expands on the concept of differences as follows: “… In order to establish the degree of actual comparability and then to make appropriate adjustments to establish arm’s length conditions (or a range thereof), it is necessary to compare attributes of the transactions or enterprises that would affect conditions in arm’s length dealings. Attributes that may be important include the characteristics of the property or services transferred, the functions performed by the parties (taking into account assets used and risks assumed), the contractual terms, the economic circumstances of the parties, and the business strategies pursued by the parties…” Again, this is reflected in the 2010 version, at

The case concerned interest payments of €15,636,270 on loans granted to finance the acquisition of shares in X-Group. In its corporate income tax return for FY2011, “Holding B.V.” had deducted an interest expense of €2,478,638 from its taxable profit, considering that the remaining part of its interest expenses were excluded from tax deductions under the interest limitation rule in Article 10a of the Corporate Income Tax Act. The tax authority disallowed tax deductions for the full amount refering to both local interest limitation rules and general anti-avoidance principles. It found that the main motive of the complex financial arrangement that had been set up to finance the acquisition of shares in the X-Group was to obtain tax benefits. An appeal was filed in which “Holding B.V.” now argued that the full amount of interest on the loans could be deducted from its taxable profits. It also argued that a loan fee could be deducted from its taxable profits in a lump sum. The District Court and the Court of Appeal largely ruled in favour of the tax authorities. An appeal and cross-appeal was then filed with the Supreme Court. Judgment of the Supreme Court. The Supreme Court found the principal appeal by “Holding B.V.” well-founded and partially reversed the judgment of the Court of Appeal. Excerpts in English “4.3.3 Article 10a(1) opening words and (c) of the Act aims to prevent the Dutch tax base from being eroded by the deduction of interest due on a debt incurred arbitrarily and without business reasons. This is the case if, within a group of affiliated entities, the method of financing a business-based transaction is prompted to such an extent by tax motives – erosion of the Dutch tax base – that it includes legal acts that are not necessary for the realisation of those business-based objectives and that would not have been carried out without those tax motives (profit drain). 4.3.4 In the genesis history of section 10a of the Act, it has been noted that the scope of this section is limited to cases of group profit drainage. Here, it must be assumed that an entity does not belong to the taxpayer’s group if that entity is not considered to be an associated entity under section 10a(4) of the Act.8 This means that Article 10a(1) chapeau and (c) of the Act lacks application in the case where, although the debt incurred by the taxpayer is related to the acquisition or expansion of an interest in an entity subsequently related to him (the taxpayer), that debt was incurred with another entity not related to him (the taxpayer). This is therefore the case even if this other entity has a direct or indirect interest in the taxpayer, or if this other entity is otherwise related to the taxpayer. This applies even if, in that case, the debt is not predominantly based on business considerations. As a rule, this situation does not fall within the scope of Section 10a(1) opening words and (c) of the Act. 4.3.5 The circumstance that, in the case referred to above in 4.3.4, Article 10a(1) opening words and (c) of the Act does not, as a rule, prevent interest from being eligible for deduction when determining profit, does not, however, mean that such deduction can then be accepted in all cases. Deduction of interest, as far as relevant here, cannot be accepted if (a) the incurring of the debt with the entity not related to the taxpayer is part of a set of legal transactions between affiliated entities, and (b) this set of legal transactions has been brought about with the decisive purpose of thwarting affiliation within the meaning of Section 10a(4) of the Act. Having regard to what has been considered above in 4.3.3 and 4.3.4 regarding the purpose of Section 10a(1) opening words and (c) of the Act, the purpose and purport of that provision would be thwarted if such a combination of legal acts could result in the deduction of that interest not being able to be refused under that provision when determining profits. 4.4 With regard to part A of plea II, the following is considered. 4.4.1 Also in view of what has been set out above in 4.3.1 to 4.3.5, the circumstances relevant in this case can be summarised as follows. (i) The loans referred to above in 2.5.3 are in connection with the acquisition of an interest in an entity that is subsequently a related entity to the interested party (the top holder). (ii) Sub-Fund I is a related entity to interested party within the meaning of section 10a(4) of the Act (see above in 2.3.1). (iii) Sub-Fund V is not such a related entity (see above in 2.3.2 and 2.3.5). (iv) All investors who participate as limited partners in LP 1 also and only participate as limited partners in LP 1A, so that sub-fund I and sub-fund V are indirectly held by the same group of investors. (v) In relation to both sub-funds I and V, the Court held – uncontested in cassation – that they are subject to corporation tax in Guernsey at a rate of nil. 4.4.2 The circumstances described above in 4.4.1 mean that the part of each of the loans granted by sub-fund V to the interested party does not, in principle, fall within the scope of section 10a(1)(c) of the Act. However, based on the same circumstances, no other inference is possible than that, if this part of each of the loans had been provided by sub-fund I and not by sub-fund V, this part would unquestionably fall within the purview of Section 10a(1)(c) of the Act, and the interested party would not have been able to successfully invoke the rebuttal mechanism of Section 10a(3)(b) of the Act in respect of the interest payable in respect of that part. 4.4.3 As reflected above in 3.2.2, the Court held that, in view of the contrived insertion of LP 1A into the structure, the overriding motive for the allocation

Mylan Australia Holding is a subsidiary of the multinational pharmaceutical company Mylan Group. Mylan Australia Holding is the head of the Australian tax consolidated group, which includes its subsidiary Mylan Australia Pty. In 2007, Mylan Australia Pty acquired the shares of Alphapharm Pty Ltd and a substantial loan (A$923,205,336) was provided by a group company in Luxembourg to finance the acquisition. In subsequent years the interest expense was deducted from the taxable income of Mylan’s Australian tax group. The Australian Taxation Office (ATO) issued amended assessments to Mylan Australia Holding disallowing approximately AUD 589 million of interest deductions claimed for the 2007 to 2017 tax years. The ATO had initially pursued the structure as a transfer pricing issue, but ultimately argued that the deductions should be disallowed under the general anti-avoidance rule. Mylan Australia Holding appealed to the Federal Court. Judgment of the Court The Federal Court decided in favour of Mylan Australia Holding and set aside the amended assessment issued by the tax office. Excerpts “The conclusions I have reached on the principal issues are as follows: (a) MAHPL did not obtain a tax benefit in connection with the primary scheme that may be calculated by reference to the primary counterfactual; (b) had none of the schemes been entered into or carried out, the most reliable — and a sufficiently reliable — prediction of what would have occurred is what I have termed the “preferred counterfactual”; (c) the principal integers of the preferred counterfactual are as follows: (i) MAPL would have borrowed the equivalent of AUD 785,329,802.60 on 7 year terms under the SCA (specifically the term applying to Tranche B), at a floating rate consistent with the rates specified in the SCA; (ii) MAPL would otherwise have been equity funded to the extent necessary to fund the initial purchase of Alphapharm and to stay within the thin capitalisation safe harbour ratio from time to time; (iii) Mylan would have guaranteed MAPL’s borrowing under the SCA; (iv) Mylan would not have charged MAPL a guarantee fee; (v) interest on the borrowing would not have been capitalised; (vi) MAPL would have been required to pay down the principal on a schedule consistent with that specified in the SCA and would have made voluntary repayments to reduce its debt as necessary to stay within the thin capitalisation safe harbour, from time to time; (vii) MAPL would not have taken out hedges to fix some or all of its interest rate expense; (viii) MAPL would have taken out cross-currency swaps into AUD at an annual cost of 3.81% per annum over AUD 3 month BBSW; and (ix) if MAPL’s cashflow was insufficient to meet its interest or principal repayment obligations, Mylan would have had another group company loan MAPL the funds necessary to avoid it defaulting on its obligations, resulting in MAPL owing those funds to that related company lender by way of an intercompany loan, accruing interest at an arm’s length rate; (d) MAHPL did (subject to matters of calculation) obtain a tax benefit in connection with the schemes, being the difference between the deductions for interest obtained in fact, and the deductions for interest that would be expected to be allowed on the preferred counterfactual; and (e) MAHPL has discharged its onus in relation to the dominant purpose enquiry specified by s 177D of the ITAA36 and so has established that the assessments issued to it were excessive.” “Conclusions on dominant purpose I do not consider that, having regard to the eight matters in s 177D(b), it would be concluded that Mylan or any other of the persons who entered into or caried out the schemes or any part of the schemes did so for the purpose of enabling MAHPL to obtain a tax benefit in connection with the schemes. Of the numerous topics addressed above in relation to those eight matters, only one supports a contrary conclusion: the failure to refinance PN A2 or otherwise revisit the interest rate paid on PN A2. Nevertheless, the authorities recognise that not all matters need to point in one direction, whether the conclusion is that that there was the requisite dominant purpose, or the converse: see, eg, Sleight at [67] (Hill J). Other matters addressed are neutral, or point to purposes other than obtaining a tax benefit in connection with the schemes. It must be recalled that merely obtaining a tax benefit does not satisfy s 177D: Guardian at [207] (Hespe J, Perry and Derrington JJ agreeing). Nor does selecting, from alternative transaction forms, one that has a lower tax cost of itself necessarily take the case within s 177D. It is, as the plurality explained in Spotless Services (at 416), only where the purpose of enabling the obtaining of a tax benefit is the “ruling, prevailing, or most influential purpose” that the requisite conclusion will be reached. In my assessment, MAHPL has established that, assessed objectively (and keeping in mind that the question is not what Mylan’s actual, subjective purpose was), the facts of this case do not attract that conclusion.” Click here for translation

The Supreme Court in the Netherlands requested a preliminary ruling from the European Court of Justice to clarify its case-law on, inter alia, the freedom of establishment laid down in Article 49 TFEU, specifically whether it is compatible with that freedom for the tax authorities of a Member State to refuse to a company belonging to a cross-border group the right to deduct from its taxable profits the interest it pays on such a loan debt.  The anti-avoidance rule in question is contained in Article 10a of the Wet op de vennootschapsbelasting 1969. The rule is specifically designed to tackle tax avoidance practices related to intra-group acquisition loans. Under that legislation, the contracting of a loan debt by a taxable person with a related entity – for the purposes of acquiring or extending an interest in another entity – is, in certain circumstances, presumed to be an artificial arrangement, designed to erode the Netherlands tax base. Consequently, that person is precluded from deducting the interest on the debt from its taxable profits unless it can rebut that presumption. The Dutch Supreme Court (Hoge Raad) asked the European Court of Justice to clarify its findings in its judgment in Lexel, on whether such intra-group loans may be, for that purpose, regarded as wholly artificial arrangements, even if carried out on an arm’s length basis, and the interest set at the usual market rate. “(1)      Are Articles 49 TFEU, 56 TFEU and/or 63 TFEU to be interpreted as precluding national legislation under which the interest on a loan debt contracted with an entity related to the taxable person, being a debt connected with the acquisition or extension of an interest in an entity which, following that acquisition or extension, is a related entity, is not deductible when determining the profits of the taxable person because the debt concerned must be categorised as (part of) a wholly artificial arrangement, regardless of whether the debt concerned, viewed in isolation, was contracted at arm’s length? (2)      If the answer to Question 1 is in the negative, must Articles 49 TFEU, 56 TFEU and/or 63 TFEU be interpreted as precluding national legislation under which the deduction of  the interest on a loan debt contracted with an entity related to the taxable person and regarded as (part of) a wholly artificial arrangement, being a debt connected with the acquisition or extension of an interest in an entity which, following that acquisition or extension, is a related entity, is disallowed in full  when determining the profits of the taxable person, even where that interest in itself does not exceed the amount that would have been agreed upon between companies which are independent of one another? (3)      For the purpose of answering Questions 1 and/or 2, does it make any difference whether the relevant acquisition or extension of the interest relates (a) to an entity that was already an entity related to the taxable person prior to that acquisition or extension, or (b) to an entity that becomes an entity related to the taxpayer only after such acquisition or extension?” Opinion of the Advocate General The Advocate General found that the Dutch anti-avoidance rule in Article 10a was both justified, appropriate and necessary – and therefore not in conflict with Article 49 of the TFEU – irrespective of the Court’s earlier judgment in the Swedish Lexel Case. Excerpts “(…) 71. In my view, the approach suggested by the intervening governments and the Commission is the correct one. Consequently, I urge the Court to revisit the approach it took in the judgment in Lexel on the matter at issue. 72. Freedom of establishment, as guaranteed by Article 49 TFEU, offers quite a wide opportunity for tax ‘optimisation’. The Court has repeatedly held that European groups of companies can legitimately use that freedom to establish subsidiaries in Member States for the purpose of benefiting from a favourable tax regime. (30) Thus, as X submits, A could legitimately choose to establish the internal bank of its group, C, in Belgium for that very purpose. Similarly, C may well grant loans to other companies of the group established in other Member States, like X in the Netherlands. Cross-border intra-group loans are not, per se, objectionable. (31) Certainly, such a loan may entail a reduction of the corporate tax base of the borrowing company in the Member State where it is established. Indeed, by deducting the interest on that loan from its taxable profits, that company reduces its tax liability with respect to that Member State. In effect, some of the profits made by the borrowing company are shifted, in the form of interest charges, from the Member State where it is established to the Member State where the lender company has its seat. However, that is something that the Member States must, in principle, accept in an integrated, single market such as the internal market of the European Union. 73. Nevertheless, the Court recognised a clear limit in that regard. It is a general legal principle that EU law, including freedom of establishment, cannot be relied on for abusive ends. The concept of ‘wholly artificial arrangements’ must be read in that light. Pursuant to the settled case-law of the Court, it is abusive for economic operators established in different Member States to carry out ‘artificial transactions devoid of economic and commercial justification’ (or, stated differently, ‘which do not reflect economic reality’), thus fulfilling the conditions to benefit from a tax advantage only formally, ‘with the essential aim of benefiting from [that] advantage’.(32) 74. Furthermore, in its judgment in X (Controlled companies established in third countries), (33) the Court has specified, with respect to the free movement of capital guaranteed by Article 63 TFEU, that ‘the artificial creation of the conditions required in order to escape taxation in a Member State improperly or enjoy a tax advantage in that Member State improperly can take several forms as regards cross-border movements of capital’. In that context, it held that the concept of ‘wholly artificial arrangement’ is capable of covering ‘any

In its 2014 and 2015 tax returns, Walmart Chile S.A. (later D&S S.A.) had deducted costs for various inter-group services and interest payments on an inter-group loan. Following an audit, the tax authorities disallowed these deductions. An appeal was made to the Tax Court, which largely ruled in favour of the tax authorities. Walmart – and the tax authorities – then appealed to the Court of Appeal. Judgment The Court of Appeal upheld the decision of the Tax Court. Click here for English translation Click here for other translation

The Australian Tax Office (ATO) had determined that Minerva had received a “tax benefit” in connection with a “scheme” to which Part IVA – Australian GAAR – applied. Minerva appealed to the Federal Court, which upheld the assessment of the ATO. Mylan then appealed the decision to the Full Federal Court. Judgment of the Full Federal Court The Full Federal Court found in favour of Minerva. Excerpts “121 The s 177D factors are to be considered in light of the counterfactual or other possibilities and the outcomes resulting from the scheme. Part of the difficulty in the present case is that the same commercial outcome for the parties would not have been achieved by a distribution of income to the special unitholder as was achieved by the distribution of income to the ordinary unitholder, putting aside the Australian income tax consequences. Jupiter was indebted to LF and the distributions from MFGT enabled the repayment of that debt. Vesta increased its capital investment in MFGT and increased MFGT’s equity capital base. The premise of the Commissioner’s case was that the failure to distribute to LF deprived LF of retained earnings. That “commercial” outcome was different from the commercial outcome in fact achieved. To adopt the language of Hely J in Macquarie Finance Ltd v Commissioner of Taxation [2005] FCAFC 205; (2005) 146 FCR 77 at [243], the fallacy in this case is that — contrary to the direction in s 177D(2) — it confines attention to the tax consequences of the actual and “counterfactual” transactions and leaves out of account the commercial advantages and consequences obtained by parties connected with the appellant and flowing from what was done. 122 As has been explained, the Commissioner’s case rested upon a comparison between the way in which the finance business was structured in 2007 and the way in which income flows occurred in the relevant years. It assumed, in effect, that there was no objective reason for the change in income flows other than a desire to secure a tax advantage. A case of that kind failed to engage with the unchallenged finding that the restructure in 2007 was not a scheme to which Part IVA applied and the evidence as to the changed commercial circumstances, including the business need for further sources of capital. Those changes had consequences for the role of LF, including as to its sources of income. The appellant was entitled to point to these matters as part of the context in which the objective reasons for the distributions of income from MHT were to be evaluated. 123 At the end of the day, the appellant as trustee of MHT made a distribution of distributable income in accordance with the terms of the MHT trust constitution and the terms on which the units in MHT had been issued. The making of that distribution resulted in MFGT being able to make a distribution to its unitholders which resulted in a real benefit to those unitholders. It was not disputed that a tax benefit had been obtained by the appellant. If distributions had been made differently more Australian tax would have been payable. But the identification of a tax benefit does not answer the question posited by s 177D. Nothing in the surrounding context objectively supports a conclusion that any party to any of the schemes either entered into or carried out any of the schemes for a dominant purpose of enabling the appellant to obtain a tax benefit.” Click here for translation

Heidelberg Italia S.R.L. sold goods at a lower mark-up (4% instead of a more appropriate 10%) to a subsidiary located in an Italian region enjoying certain tax advantages. According to the taxpayer the reduced mark-up served legitimate economic goals and furthermore the Italian transfer pricing rules in Article 110 did not apply to purely domestic transactions. The tax authorities disagreed and issued an assessment where the price of the goods sold to the subsidiary had been adjusted upward to a 10% mark-up. On appeal the court of first instance ruled in favour of Heidelberg and set aside the assessment of the tax authorities. However, this decision was later overturned by the Regional Tax Commission and the case then ended up in the Supreme Court. Judgment The Supreme Court held that the principles embodied in Article 9 TUIR require comparing the transaction to normal market conditions, even domestically, to ascertain whether the price deviates from the arm’s length standard. Although a later legislative decree clarified that Article 110 TUIR on transfer pricing does not apply to domestic transactions, it did not affect Article 9 TUIR, which remained fully applicable. The Court found that the Regional Tax Commission correctly used economic indicators—particularly the subsidiary’s profits while benefiting from tax breaks, and the subsequent incorporation of that subsidiary—to conclude that the low mark-up had no adequate economic justification. It also rejected the taxpayer’s additional arguments relating to insufficient reasoning and the alleged applicability of a more lenient penalty regime, ultimately dismissing the appeal and ordering the taxpayer to pay costs. Excerpt in English “Under these conditions, the reference to the verification of ‘price manoeuvres’ for the consequent tax audits remains valid, also with reference to the relationships between associated companies all resident in the national territory. Therefore, with regard to the arm’s length principle, which undoubtedly underlies the provisions of art. 9 TUIR, as mentioned, not involved by the subsequent interpretation legislation and subject to the principle of law, the evaluation of the normal value – indispensable for verifying the transaction’s compliance with competitive logic and its correspondence or not to the price manipulation – pertains to the ‘economic substance’ of the operation that must be compared with similar operations stipulated in free market conditions between ‘independent’ parties (Cass. 27/04/2021, n. 11053). In this perspective, therefore, in the case of ‘internal transfer pricing’, the assessment of the ‘uneconomic’ nature of the conduct must be evaluated, which constitutes a valid assumption of analytical-inductive assessment pursuant to art. 39, paragraph 1, letter d, of Presidential Decree 600/1973, in that it is based on the praesumptio hominis according to which anyone carrying out an economic activity should direct their conduct towards reducing costs and maximising profits. 600/1973, in that it is based on the praesumptio hominis whereby anyone carrying out an economic activity should direct their conduct towards reducing costs and maximising profits (in this sense the aforementioned Cass. no. 11093/2021 and also Cass. 10422/2023). From this point of view, the evaluation of the so-called ‘group interest’ also comes to the fore, which cannot ignore the safeguarding of the profitability and value of the individual companies that are part of it (in this sense again Cass. no. 11093/2021). To elaborate on what has already been said, although the interests of individual group companies may be sacrificed in order to pursue the collective interest of the group, this presupposes that the subsidiaries are granted the compensatory advantages referred to in Art. 2497 of the Civil Code and Art. 2634, paragraph 3, of the Civil Code. Therefore, if the act is prejudicial to the individual company of the group, it is up to those who invoke the group interest to justify the conduct of that company, to demonstrate that such prejudice is compensated by the unitary interest of the group itself (Cass., sez. un., 18 March 2010, n. 6538). It follows that an operation that takes place outside of market prices, moreover within a situation of corporate control – which is not that referred to in art. 2359 of the Italian Civil Code, but consists of the ability of one company to influence the commercial strategies of another – ordinarily constitutes an anomaly, which justifies tax assessment, with the consequent burden on the taxpayer to demonstrate that it does not exist. 1.2. Applying the above principles to the case in question, it emerges that the legal principle stated by this Court, in the terms indicated, remains valid and that the CTR (Regional Tax Commission) complied with it, when it focused its judgment on the uneconomic nature of the intra-group transfers, on the basis of a factual assessment based on the elements already reported above, to finally deduce such unprofitability and therefore reach the acceptance of the appeal proposed by the Agency.” Click here for English translation Click here for other translation

“S-Sociedade S.A.” had received a tax assessment and later a judgment based on transfer pricing rules (and not anti-avoidance rules), where the outcome of the tax audit would have been different if the transactions had been purely domestic rather than international. “S-Sociedade S.A.” considered that the judgment was flawed and appealed. Judgment of the Court The Court ruled in favour of “S-Sociedade S.A.” and annulled the tax assessment. Experts in English “In this regard, the following elements can be gleaned from European Union law: “The arm’s length principle necessarily forms part of the Commission’s assessment of tax measures granted to undertakings in a group under Article 107(1) of the Treaty, irrespective of whether and in what form a Member State has incorporated this principle into its national legal system. It is used to determine whether a group company’s taxable profits for corporate income tax purposes have been determined on the basis of a methodology that produces a reliable approximation of market-based results. A tax ruling that subscribes to such a methodology ensures that such a company is not treated favourably under the general rules for the taxation of corporate profits in the Member State concerned compared to stand-alone companies that are taxed on their accounting profits, which reflects prices determined on the market negotiated under arm’s length conditions. The arm’s length principle applied by the Commission to assess transfer pricing decisions under state aid rules is therefore an application of Article 107(1) of the Treaty, which prohibits unequal treatment in the taxation of undertakings in the same factual and legal situation. This principle is binding on the Member States, and national tax rules are not excluded from its scope.” (paragraph 172).” (…) “To summarise, the arm’s length principle in European Union law requires the application of a transfer pricing system that guarantees equal treatment, in tax terms, of economic agents in similar situations.” (…) “The Tax Administration’s analysis of the successive sales of the shareholdings in question does not focus on their substance, which means that the mechanism for correcting transfer prices, in accordance with the arm’s length principle, has been obliterated, as the primary and negative adjustment on the taxpayer’s initiative is not accepted (S…………….. Engineering), based on the symmetrical (positive) adjustment to the taxable income of the linked entity (A……………) or, alternatively, the rejection of the primary adjustment at the taxpayer’s initiative would be imposed, provided that with the inherent correlative symmetrical (negative) adjustment to the taxable base of the linked entity (A……………), which the case file does not show has occurred. In other words, given the existence of similar operations, given that the transfer of shareholdings in the company L…….. is at issue, given the existence of a market value for the operation in question, measured in the transaction between independent entities (A…………… and Y………….. Tazi), the Tax Administration rejects the deduction of the capital loss in question, without proving that the principles of full competition – the basis of the transfer pricing mechanism – economic double taxation of income, the basis of the correlative adjustment regime (14) and the principle of taxing taxable income on the basis of reliable elements provided by the market in competition, in accordance with European Union law, have or have not been observed. The correction in question results in negative discrimination against taxable persons resident in national territory, given that, according to the Tax Administration itself, the adjustment in question would only be possible, under national legislation, if the linked operation was headed at one end by a non-resident entity. Such an application of the transfer pricing regime clashes with the applicable European and national legal framework, in the terms set out above. The correction in question cannot therefore be maintained in the legal order. The appeal should therefore be upheld, replacing the contested decision with a decision upholding the appeal, with the consequent annulment of the contested tax act.” Click here for English translation Click here for other translation

A AB is part of an international group. The group was planning a reorganisation involving a number of intra-group transactions. As part of this reorganisation, A AB would acquire all the shares in B from the group company C. The acquisition would mainly be financed by A AB taking a loan from group company D, which is domiciled in another EU country. The terms of the loan, including the interest rate, would be at market terms. A AB requested an advance ruling to know whether the deduction of the interest expenses on the debt to D could be denied on the grounds that the debt relationship had been incurred exclusively or almost exclusively for the purpose of obtaining a significant tax advantage or because the acquisition of B was not essentially commercially motivated. If the interest was subject to non-deductibility, A AB wanted to know whether this would constitute an unauthorised restriction of the freedom of establishment under the EC Treaty. The Board of Advance Tax Rulings concluded that deductions for interest expenses could not be denied. Not agreeing with this ruling the tax authority filed an appeal with the Supreme Administrative Court. Judgment of the Court The Supreme Administrative Court upheld the decision of the Board of Advance Tax Rulings. Although the interest expenses were covered by the Acquisition Rule, it would be in breach of Article 49 TFEU (freedom of establishment) to deny the interest deductions. Excerpt “16. In the case HFD 2021 ref. 68, the Supreme Administrative Court found, with reference to the judgment of the Court of Justice of the European Union in Lexel (C-484/19, EU:C:2021:34), that the provision in Chapter 24, Section 18, second paragraph, of the Tax Code constitutes a restriction of the freedom of establishment which cannot be justified if it is applied to interest payments to companies in other Member States in situations where the companies involved would have been subject to the provisions on group contributions if both companies had been Swedish (paragraph 37). 17. According to the second paragraph of Section 18, interest expenses may not be deducted if the debt relationship has arisen exclusively or almost exclusively in order to obtain a significant tax advantage for the community of interest. According to its wording, the provision makes no distinction between interest paid to Swedish and foreign recipients. The reason why the provision is nevertheless considered to constitute a restriction on the freedom of establishment is that, as stated in the preparatory works, it is not intended to cover interest payments between companies covered by the provisions on group contributions. Such an interest payment is not considered to give rise to any tax advantage since the same result can be achieved with group contributions (Proposition 2012/13:1, pp. 254 and 334, and HFD 2021 ref. 68, paragraph 29, with reference to Lexel, paragraphs 35-44). 18. The question is whether there is reason to assess the provision in Chapter 24, section 19, first paragraph, of the Tax Code differently. According to that provision, interest expenses relating to an intra-group loan to finance an intra-group acquisition of participatory rights are not deductible if the acquisition is not essentially motivated by commercial considerations. Nor does that provision, according to its wording, make any distinction between interest paid to Swedish and foreign recipients. 19. In the first paragraph of Section 19, the prohibition of deduction has not, as in the second paragraph of Section 18, been made dependent on the existence of a possible tax advantage, but on what the borrowed capital has been used for, namely an intra-group acquisition of shareholding rights which is not essentially commercially motivated. Although the provision does not expressly state anything about tax benefits, in the opinion of the Supreme Administrative Court, it cannot be ignored that it is part of a system of rules whose overall purpose is to counteract tax planning with interest deductions. It is clear from the travaux préparatoires that the provision in Section 19, first paragraph also has this purpose (Government Bill 2017/18:245, pp. 193 and 366 et seq.). 20. It can thus be concluded from the travaux préparatoires that the provision in Section 19, first paragraph, is not intended to cover interest payments that do not entail any tax benefit, which is the case when the companies involved are covered by the provisions on group contributions. The refusal of a deduction for interest paid to companies in other Member States on the basis of the first paragraph of Section 19 may therefore, in the same way as when a deduction is refused on the basis of the second paragraph of Section 18, be regarded as entailing a difference in the treatment of domestic and cross-border situations which is, in principle, impermissible. 21. In HFD 2021 ref. 68, the Supreme Administrative Court held that the difference in treatment resulting from the provision in Chapter 24, Section 18, second paragraph, of the Income Tax Code cannot be justified by overriding reasons of public interest (paragraphs 30-36). As has been shown, the provisions in Section 18, second paragraph, and Section 19, first paragraph, have the same purpose, namely to counteract tax planning with interest deductions. Furthermore, both provisions cover transactions carried out under market conditions and are not limited to purely fictitious or artificial arrangements. The reasoning of the Court in the case is therefore equally relevant to the provision in Section 19(1). Thus, the difference in treatment resulting from that provision cannot be justified either. 22. It follows from the above that the provision in Chapter 24, Section 19, first paragraph, of the Tax Code also constitutes an unauthorised restriction of the freedom of establishment if it is applied to interest payments to companies in other Member States and the companies involved would have been subject to the provisions on group contributions if they had been Swedish. 23. It follows from the conditions submitted that A and D would have been subject to the provisions on group contributions if both companies had been Swedish. The

The disputes centered on whether the “UKR Loan B.V.”’s acquisition of loans from a bank for €1, which had originally been granted to a Ukrainian company, that was later acquired by SA B.V for €1, should be regarded as genuine loans or sham loans under tax law. Judgment The court found that the loans, despite being acquired for a symbolic €1, retained their legal character as civil-law loans with a repayment obligation. It rejected “UKR Loan B.V.”’s argument that they were effectively equity-like contributions and concluded that the repayments received were taxable income rather than capital repayments covered by the participation exemption. The appeals were declared unfounded, and the assessments upheld. Click here for English translation Click here for other translation

Prior to the payment of dividends by Husky Energy Inc. to its shareholders in 2003, two of its shareholders (companies resident in Barbados) transferred their shares to companies in Luxembourg under securities lending arrangements, and therefore Husky Energy Inc. only withheld dividend tax at a reduced rate of 5% under the Canada-Luxembourg Income Tax Treaty. Judgment of the Court The Court found Husky Energy liable for failing to withhold dividend tax at the non-Convention rate of 25%. As the dividends were not paid to the Barbados companies, the 15% rate under the Canada – Barbados Income Tax Convention was not available. The Canada-Luxembourg Income Tax Convention rate was also not available as the Luxembourg companies were not the beneficial owners of the dividends as they were required to pay compensation to the Barbados companies equal to the dividends received. Excerpts “Under the securities lending arrangements, companies resident in Luxembourg enjoyed nothing more than temporary custodianship of the funds received in payment of the Dividends. The compensation payments were preordained by the terms of the borrowing requests, and this preordination ensured that at all times, the Barbcos retained their rights to the full economic value of the Dividends.” “For the foregoing reasons, HWEI and LF Luxembourg were not the beneficial owners of the Dividends for the purposes of Article 10(2) because they were legally obligated from the outset of the securities lending arrangements to return the full amount of the Dividends to the Barbcos in the form of the compensation payments. This was to occur no later than approximately seven weeks after the commencement of the securities lending arrangements. Consequently, HWEI and LF Luxembourg were not entitled to the benefit of the reduced rates of Part XIII tax provided under Article 10(2) and, for the purposes of subsections 215(1) and (6), the amount of tax under Part XIII that Husky was required to withhold and remit in respect of the Dividends was 25% of the Dividends.” “The fact that the Barbcos transferred their common shares in Husky to the Luxcos under atypical securities lending arrangements really has no bearing on whether the Transactions abuse Article 10(2). The rationale of Article 10(2) is to provide relief from double taxation by allocating the right to tax dividends between Canada and Luxembourg in accordance with the theory of economic allegiance while retaining the protections against the use of conduit‐type arrangements afforded by the beneficial owner requirement and the voting power requirement. Consistent with the theory of economic allegiance described by the majority in Alta Energy, which recognizes that a recipient of passive income need not have any allegiance to the paying country, the focus of the rationale of Article 10(2) is not how the common shares of Husky came to be owned by the Luxcos, but whether the Luxcos satisfy the residence requirement, the beneficial owner requirement and the voting power requirement. Since the hypothetical being considered assumes these requirements have been satisfied, I see no basis on which to find that the securities lending arrangements abused Article 10(2). VII. Conclusion For the foregoing reasons, the appeal of Husky is dismissed with costs to the Respondent, and the appeals of HWLH and LFMI are allowed with costs to HWLH and LFMI and the HWLH Assessment and the LFMI Assessment are vacated. While this is an unusual result, it flows from the fact that the Minister assessed the successors of the Barbcos and did not assess the Luxcos.” Click here for translations

P.B. had deducted licence fees paid for the use of the trademark “B” which was owned by a related party. Following an audit, the tax authority issued an assessment where deductions for the fees had been disallowed. The tax authority stated that the transactions carried out by the P.B. in 2015 concerning the trademark, both in terms of the disposal of this asset and in terms of the subsequent acquisition of the right to use it, escape the notion of rational management and that these activities occurred under conditions that were clearly different from market conditions. According to the authority, their undoubted result was an unjustified transfer of income to the related entity B. sp. z o.o. An appeal was filed with the Administrative Court which later upheld the tax assessment, and P.B. then filed an appeal with the Supreme Administrative Court. Judgment of the Supreme Administrative Court The Court ruled in favour of P.B. by setting aside the decision of the administrative Court and the tax assessment. Excerpt “It follows from the case file that the authority did not question the effectiveness of the concluded agreements related to the right to use the trademark, but only questioned their tax consequences. There is no doubt that the Company used the trademarks and the expenses incurred in the form of licence fees were necessary to obtain revenue. Since the transaction of disposal of the right to the “B.” trademark was legally effective (the validity of these agreements was not challenged), it means that there was a transfer of ownership of these rights to another entity. The trademark licence agreement concluded between the Company and B. sp. z o.o. should be assessed similarly. In such circumstances, the licence fee documented by the invoice of […] December 2015 was charged to deductible costs and understated the Company’s income and thus the complainant’s tax base in 2015. It is undisputed that, in light of the accepted facts, the exclusive holder of the rights to use the trademark “B.” was the trademark company, and under the undisputed licence agreement, the Company was obliged to pay royalties. Moreover, it is undisputed that it used the right to the trademark in its operations, even in the form of a licence, and therefore the prerequisites for including this expense as a deductible cost were met. The provision of Article 25(1) u.p.d.o.p. authorised the authorities to determine only the conditions (prices) of these activities differently – and thus to replace the prices specified in the parties’ agreements (transactions) with prices that would correspond to hypothetical conditions (prices) agreed by unrelated parties. The occurrence of the prerequisites referred to in Article 25(1) of the u.p.d.o.p. provided the basis for estimating the Company’s income by possibly reducing the amount of its tax costs. However, this provision cannot be used to disregard the tax consequences of the legal actions performed between related parties in 2015, the effectiveness of which was not questioned by the tax authority. In this provision, the legislator exposed the arm’s length principle, which requires that prices in transactions between related parties be determined as if the companies were operating as independent entities, operating at arm’s length. However, in the facts of the case under consideration, the tax authorities and, following him, also the Court of First Instance, relying on the content of Article 25(1) of the u.p.d.o.p., critically assessed the legal transactions performed by related entities, undermining not only their economic sense (with which the Supreme Administrative Court agrees), but also, in essence, reclassified the legal transaction performed, in the form of a valid licence agreement, into an agreement for the provision of low-value services . In the opinion of the Supreme Administrative Court, Article 25(1) of the u.p.d.o.p. could not constitute a self-contained basis for “redefining” the disputed transaction. Challenging the scheme of operation applied by related parties must have a clear legal basis. Tax authorities may not use other provisions as a solution equivalent to a circumvention clause (cf. the NSA judgment of 8 May 2019, ref. II FSK 2711/18). The tax authorities, as well as the Court of first instance, did not present argumentation from which it would follow, by applying what rules of interpretation, they came to the conclusion that such a manner of application of Article 25(1) u.p.d.o.p. is legally possible and justified in the case under consideration. This provision, in fine, provides for the determination of income and tax due without ‘(…) taking into account the conditions resulting from these connections’, and does not allow for the substitution of one legal transaction (trademark licence agreement) for another transaction (provision of low-value services) and deriving from this second transaction legal consequences in terms of determining the amount of tax liability. It should be emphasised that the statutory determination of the subject of taxation, resulting from Article 217 of the Constitution of the Republic of Poland, is unquestionable. Therefore, the provisions from which the powers of tax authorities to change (reclassify) the subject of taxation are derived should be approached with great caution. The transfer pricing regulations (chapter 4b of the u.p.d.o.p.), introduced by the amending act of 23 October 2018 and effective as of 1 January 2019, constitute in some aspects a significant novelty. Although the content of Article 25(1) corresponds to the content of Article 23o(2), the regulations contained in Article 23o(4) u.p.d.o.p. do not find their counterpart in the previous provisions. The provision of Article 23o Paragraph 4 contains the wording “(…) without taking into account the controlled transaction, and where justified, determines the income (loss) of the taxpayer from the transaction relevant to the controlled transaction”. This is the explicitly expressed competence of the tax authorities to carry out the so-called recharacterisation (reclassification), i.e. reclassification of the transaction, which is what the tax authorities actually did in the present case. Even more so, such powers were not granted to the authorities by the Transfer Pricing Ordinance. Pursuant to Paragraph 9(2) of this regulation, the terms and conditions of the agreement

A Belgian company, A.L.L. BV, had declared certain income excempt that resulted from a complex intra-group restructuring involving capital gains and dividend distributions. The Belgian tax authorities found that these exemptions had been unduly claimed through abusive structures. Judgment The Court upheld the view that taxable income included items that were incorrectly reported as exempt by the taxpayer. It confirmed that national courts and authorities must apply the general EU principle prohibiting abuse of law, even if the relevant domestic anti-abuse provision has not yet entered into force. This principle allows the denial of tax benefits arising from EU law when the underlying transactions are artificial and aimed solely at obtaining an undue advantage, regardless of whether the formal legal criteria were met. The Court found that the restructuring activities of the taxpayer and its group—such as the use of holding structures, dividend flows, mergers, and rapid capital movements—lacked genuine economic substance and served mainly to distribute profits and internal capital gains tax-free to shareholders. These actions, though formally compliant, were deemed abusive as they frustrated the purpose of the Parent-Subsidiary Directive, which was to avoid double taxation in cross-border corporate structures—not to facilitate tax avoidance. Importantly, the Court clarified that abuse should be assessed based on all legal acts and entities involved across the group, not just the immediate parties to a transaction. The judgment also rejected arguments based on legal certainty and legitimate expectations, holding that EU anti-abuse principles apply retroactively to acts predating relevant case law, as long as good faith and serious disruption are not at issue. However, the Court partially annulled the lower court’s decision by holding that the reclassification of a capital reduction as a taxable dividend was not legally justified under EU anti-abuse law, as the exemption for paid-up capital returns was a matter of domestic law, not EU law. This part of the decision was remanded to the Antwerp Court of Appeals. Overall, the Court reaffirmed the supremacy and direct applicability of the EU anti-abuse principle, even in the absence of specific national implementation, while drawing a clear distinction between domestic and EU-based tax benefits. Click here for English Translation Click here for other translation

On 1 February 2010, E.K. and its subsidiary, E. S.A, concluded an agreement on the transfer of E.K.’s trade marks to E. S.A. Following the transfer (on the same day), E.K. concluded with E. S.A. an agreement to grant a licence for the use of the marks in return for payment to the licensor (E. S.A.) of a monthly remuneration. In 2011, E.K. recognised as a deductible expense the royalties paid to E. S.A. According to the tax authorities this resulted in E.K. understating its corporate income tax liability for 2011. According to the tax authorities, E. S.A. did not participate in any way in the creation of revenue, with the result that the profits generated by E.K. were ‘passed on’ in the form of royalties to a related company – E. S.A. The remuneration payable to the legal owner of the trademarks did not take into account the very limited functions performed by that entity in creating the value of the trademarks. The only function performed by E. S.A. in 2011 was to manage the legal protection of the trade marks, for which it would be entitled to a limited remuneration appropriate to its function. After receiving the resulting assessment of additional taxable income, a complaint was then filed by E.K. with the Director of the Tax Chamber which was later dismissed. An appeal was then filed by E.K. with the Administrative Court. Judgment of the Administrative Court. The Administrative Court set aside the Decision of the Tax Chamber and referred the case back to the Tax Chamber. Excerpts “… In the Court’s view, the faulty application of Article 11(1) and (4) of the u.p.d.o.p. affected the manner in which the applicant’s income was estimated and the estimation method adopted by the authorities, based on the erroneous assumption that the transaction analysed by the authorities consisted in the provision of trade mark administration services on behalf of the economic owner of those trade marks. In making that assumption, the authorities applied the net transaction margin method in order to determine the market level of the remuneration payable to the company for its trade mark administration functions. Meanwhile, the applicant provided the tax authority with the data that formed the basis for the calculation of the royalties, as well as the licence agreement. In view of the repetitive nature of such transactions on the market, the applicant used the comparable uncontrolled price method as the correct approach. The Court notes that the estimation of income by the methods indicated in Article 11(2) of the u.p.d.o.p. (comparable uncontrolled price method, reasonable margin method, selling price method) should be considered first, and only when it is not possible to apply these methods, the methods indicated in Article 11(3) of that Act (net transaction margin method, profit sharing method) will be applied. Furthermore, the applicant reasonably pointed out that in the comparability analysis the authorities should have taken into account the fact that intangible assets of significant value (trademarks) were involved in the examined transaction, being the only significant asset analysed by the parties to the examined transaction. As a result, the authorities incorrectly conducted the comparability analysis of the transaction involving the licence for the use of trademarks granted to the applicant by the limited partnership, which prejudges the validity of the allegation of a breach of Article 11(1)-(3) of the u.p.d.o.p. in conjunction with § 3, § 7, § 8, § 10 and § 11 of the MF Regulation. In the opinion of the Court, the basis for the decision in this case was not the provision of Article 11c(4) of the u.p.d.o.p. in the 2019 wording, hence the allegation of violation of this provision contained in the complaint does not merit consideration. In the opinion of the Court, the evidence gathered in the case allowed it to be resolved and, in this respect, the authorities did not fail to comply with Article 122 in conjunction with Article 187 § 1 of the Tax Ordinance. On the other hand, the allegation of a breach of Article 191 of the Tax Ordinance, consisting in the authorities’ faulty assessment of the market nature of the examined legal transactions, is justified. In the context of this allegation, however, it should be stipulated that the reclassification of a legal action by the authorities is not so much the result of a defective assessment of the evidence gathered, but results from the interpretation and manner of application of substantive law provisions adopted by the authorities (Article 11(1) and (4) of the u.p.d.o.p.). As aptly pointed out in the case law, in such a situation the state of facts was not so much established, but adopted by the tax authority. This is because the tax authority determines the factual state not on the basis of established circumstances, but reconstructs it, taking as a directional guideline the taxpayer’s intention to achieve the intended fiscal goal (unauthorised tax benefit). Thus, the state of facts adopted by the tax authorities does not so much result from the evidence gathered in the case, but from the assumption that if the taxpayer was guided only by economic and economic rationale and not by the intention to achieve an unauthorised tax benefit, it is precisely in the way the tax authority wants him to arrange his relations (judgment of the NSA of 8 May 2019, II FSK 2711/18). On the other hand, the consequence of the violation of substantive law is the legitimacy of the allegations of violation of Articles 120 and 121 § 1 of the Tax Ordinance by the authorities. On the other hand, due to the voluminous nature of the complaint, the Court referred to the allegations contained therein and their justification to the extent necessary to conduct a review of the appealed decisions (judgment of the Supreme Administrative Court of 26 May 2017, I FSK 1660/15). When re-examining the case, the authority will take into account the legal assessment presented above as to the interpretation and application, in the

At issue was the “royalty-free” use of intangible assets under an agreement whereby PepsiCo’s Singapore affiliate sold concentrate to Schweppes Australia, which then bottled and sold PepsiCo soft drinks for the Australian market. As no royalties were paid under the agreement, no withholding tax was paid in Australia. The Australian Taxation Office (ATO) determined that the payments for “concentrate” from Schweppes to PepsiCo had been misclassified and were in part royalty for the use of PepsiCo’s intangibles (trademarks, branding etc.), and an assessment was issued for FY2018 and FY2019 where withholding tax was determined on that basis. The assessment was issued under the Australian diverted profits tax provisions. The assessment was appealed to the Federal Court in February 2022. Judgment of the Court The Federal Court ruled in favor of the tax authorities. Following the decision of the Court, the ATO issued an announcement concerning the case. According to the announcement it welcomes the decision. “This decision confirms PepsiCo, Inc. (Pepsi) is liable for royalty withholding tax and, in the alternative, diverted profits tax would apply. This is the first time a Court has considered the diverted profits tax – a new tool to ensure multinationals pay the right amount of tax. Deputy Commissioner Rebecca Saint said this is a landmark decision as it confirms that the diverted profits tax can be an effective tool in the ATO’s arsenal to tackle multinational tax avoidance. However, the decision may be subject to appeal and therefore, may be subject to further consideration by the Courts in the event of an appeal. The Tax Avoidance Taskforce has for a number of years been targeting arrangements where royalty withholding tax has not been paid because payments have been mischaracterised, particularly payments for the use of intangible assets, such as trademarks. The ATO has issued Taxpayer Alert 2018/2 which outlines and puts multinationals on notice about our concerns. “The Pepsi matter is a lead case for our strategy to target arrangements where royalty withholding tax should have been paid. Whilst there may still be more to play out in this matter, it sends strong signals to other businesses that have similar arrangements to review and consider their tax outcomes.”

At issue was the point in time where intra-group receivables in the form of dividends denominated in a foreign currency could be said to have been received by the Dutch shareholder “DPP B.V.” for tax purposes. The Dutch participation exemption applies to dividends up to the point at which such a receivable must be capitalized as a separate asset in the balance sheet. Only from that point on would any foreign exchange loss or gain be tax deductible (or taxable). The District Court and the Court of Appeal ruled in favor of the tax authorities. Judgment of the Supreme Court The Dutch Supreme Court declared the appeal unfounded and upheld the judgment of the Court of Appeal. Click here for English translation Click here for other translation

The tax authorities had notified the companies GKN Driveline Firenze s.p.a. and GKN Italia s.p.a. of four notices of assessment, relating to the tax periods from 2002 to 2005, as well as 2011. The assessments related to the signing of a leasing contract, concerning a real estate complex, between GKN Driveline Firenze s.p.a. and the company TA. p.a. and the company TAU s.r.l.. A property complex was owned by the company GKN-Birfield s.p.a. of Brunico and was leased on an ordinary lease basis by the company GKN Driveline Firenze s.p.a. Both companies belonged to a multinational group headed by the company GKN-PLC, the parent company of the finance company GKN Finance LTD and the Italian parent company GKN-Birfield s.p.a., which in turn controlled GKN Driveline Firenze s.p.a. and TAU s.r.l. GKN Driveline Firenze s.p.a. expressed interest in acquiring ownership of the real estate complex; the real estate complex, however, was first sold to TAU s. s.r.l. and, on the same date, the latter granted it to the aforesaid company by means of a transfer lease. Further negotiated agreements were also entered into within the corporate group, as the purchase of the company TAU s.r.l. was financed by the company GKN Finance LTD, at the instruction of GKN- PLC, for an amount which, added to its own capital, corresponded to the purchase price of the property complex. The choice of entering into the transferable leasing contract, instead of its immediate purchase, had led the tax authorities to suggest that this different negotiation had had, as its sole motivation, the aim of unduly obtaining the tax advantage of being able to deduct the lease payments for the nine years of the contract while, if the property complex had been purchased, the longer and more onerous deduction of the depreciation allowances would have been required. The office had therefore suggested that the transaction had been carried out with abuse of law, given that the transfer leasing contract had to be considered simulated, with fictitious interposition of TAU s.r.l. in the actual sale and purchase that took place between GKN Driveline Firenze s.p.a. and GKN Birfield s.p.a. The companies filed appeals against the aforesaid tax assessments, which, after being joined, had been accepted by the Provincial Tax Commission of Florence. The tax authorities then appealed against the Provincial Tax Commission’s ruling. The Regional Tax Commission of Tuscany upheld the appeal of the tax authorities, finding the grounds of appeal well-founded. The appeal judge pointed out that the principle of the prohibition of abuse of rights, applicable also beyond the specific hypotheses set forth in Art. 37bis, Presidential Decree no. 600/1973, presupposes the competition of three characterising elements, such as the distorted use of legal instruments, the absence of valid autonomous economic reasons and the undue tax advantage. In the case at hand, the distorted use of the negotiation acts was reflected in the fact that the leasing contract had been implemented in a parallel and coordinated manner with a plurality of functionally relevant negotiation acts in a context of group corporate connection in which each of these negotiation acts had contributed a concausal element for the purposes of obtaining the desired result. In this context, it was presumable that the company TAU s.r.l., which had been dormant for a long time and had largely insufficient capital, had been appropriately regenerated and purposely financed within the same group to an extent corresponding to the cost of the deal and that, therefore, the leasing contract had been made to allow GKN Driveline Firenze s.p.a. to obtain the resulting tax benefits. The appeal court nevertheless held that the penalties were not applicable. GKN Driveline Firenze s.p.a. and GKN Italia s.p.a. filed an appeal with the Supreme Court. Judgment of the Supreme Court The Supreme Court set aside the decision of the Regional Tax Commission and refered the case back to the Regional Tax Commission, in a different composition. Excerpts “The judgment of the judge of appeal moves promiscuously along the lines of the relative simulation of the agreements entered into within the corporate group and the abuse of rights, with overlapping of factual and legal arguments, while it is up to the judge of merit to select the evidentiary material and from it to derive, with logically and legally correct motivation, the exact qualification of the tax case. In the case in point, the trial judge reasoned in terms of abuse of rights, assuming that the leasing transaction was carried out in place of the less advantageous direct sale, in terms of depreciation charges, but, in this context, he also introduced the figure of relative simulation, which entails a different underlying assumption: that is, that the leasing transaction was not carried out, since the parties actually wanted to enter into a direct sale. Also in this case, no specification is made, at the logical argumentative level, of the assumptions on the basis of which the above-mentioned relative simulation was deemed to have to be configured. Having thus identified the legal terms of the question, the reasoning of the judgment does not fully develop any of the topics of investigation that are instead required for the purposes of ascertaining the abuse of rights, both from the point of view of the anomaly of the negotiating instruments implemented within the corporate group and of the undue tax advantage pursued, while, on the other hand, it appears to be affected by intrinsic contradiction, because it is based simultaneously on both categories, abuse of rights and relative simulation, so that it is not clear whether, in the view of the appeal court, the tax recovery is to be regarded as legitimate because the leasing transaction was aimed exclusively at the pursuit of a tax saving or because that undue tax advantage was achieved through the conclusion of a series of fictitious transactions, both in relation to the financing and to the aforementioned leasing transaction in the absence of any real transfer of immovable property. In conclusion, the sixth plea in law

During FY 2014 – 2018 a South African company, ABSA, on four occasions bought tranches of preference shares in another South African company, PSIC 3. This entitled ABSA to dividends. The dividends received from PSIC 3 by ABSA were declared as tax free. The income in PSIC 3 was based on dividend payments on preference shares it owned in another South African company, PSIC 4. The income in PSIC 4 was from a capital outlay to an off shore trust, D1 Trust. The trust then lent money to MSSA, a South African subsidiary of the Macquarie Group, by means of subscribing for floating rate notes. The D1 Trust made investments by way of the purchase of Brazilian Government bonds. It then derived interest thereon. In turn, PSIC 4 received interest on its capital investment in D1 Trust. The South African Revenue Service held that ABSA had been a party to a tax avoidance scheme covered by local anti-avoidance provisions and first issued a notice of assessment and later a tax assessment according to which the income was taxable. According to the Revenue Service, the critical aspect of this series of transactions was the investment in Brazilian Government bonds by D1 Trust. This led to the view that Absa was a party to an arrangement comprising all these transactions and that ABSA had received an impermissible tax benefit in the form of a tax-free dividend. The proper result according to the Revenue Service ought to have been that interest income was received by Absa which would attract tax. ABSA brought the case to court, disputing having been a “party” to an “impermissible avoidance arrangement” and procuring a “tax benefit”. ABSA stated that it bought the preference shares in PSIC 3 on the understanding that PSIC 3 and MSSA had a back-to-back relationship and that the funds would flow directly to MSSA to repay debt to its parent the Macquarie Group. Absa was unaware of the intermediation of PSIC 4 and the D1 Trust, and of the D1 Trust’ s Brazilian transaction. Hence it could not, in this state of ignorance, have participated in an impermissible tax avoidance arrangement, nor did it have a tax avoidance motive in mind, and nor did it procure a tax benefit to which it was not entitled. The High Court ruled in favour of ABSA, observing that a taxpayer has to be, not merely present, but participating in the arrangement. “The fact that it might be the unwitting recipient of a benefit from a share of the revenue derived from an impermissible arrangement cannot constitute “taking part” in such an arrangement.” “That premise [that ABSA was a party to a tax avoidance scheme] was incorrect in law because the factual premise did not establish that Absa was a party to such arrangement nor that it had an intention to escape an anticipated tax liability nor that it received relief from a tax liability as result of acquiring preference shares in PSIC 3.” An appeal was then filed by the tax authorities with the Supreme Court of Appeal. Judgment of Court The Supreme Court of Appeal set aside the orders of the High Court finding that it lacked legal jurisdiction. Excerpt “[29] The high court took the view that the s 80J notices and the assessments were ‘inextricably linked’. It stated that the factual basis upon which SARS decided to apply the GAAR provisions was set out in the notices. It held that SARS had accepted the facts disclosed in the notices. On this basis, the high court held that SARS did not dispute that Absa and United Towers had no knowledge of the arrangement in which they had participated. They could therefore not have been parties to an arrangement which, unknown to them, had sought to avoid the payment of tax which they would otherwise have been required to pay. The high court therefore found that the application of the GAAR provisions in circumstances where they did not, as matter of fact, apply, was irrational and offended the principle of legality. Neither the assessments nor the s 80 J notices could stand. [30] The high court’s finding that SARS had accepted the facts as stated by Absa and United Towers, and in particular, their assertion that they had no knowledge of the nature and ambit of the scheme or arrangement, is incorrect. The notices do not state that SARS accepts the claim that Absa and United Towers had no knowledge of the full ambit of the scheme. The notices set out reasons for the belief that the GAAR provisions apply, no more. They are not statements of the accepted factual basis for application of the GAAR provisions. The correspondence relating to the s 80J notices pertinently states that SARS disputes the contentions raised by Absa and United Towers. These statements form part of the reasons given by SARS as to why it would not withdraw the s 80J notices. These averments are set out in the answering affidavits filed in opposition to the s 9 review. These affidavits were filed prior to the issuing of the notices of assessment which are the subject of the assessment review. There is accordingly no room for the conclusion that SARS accepted that Absa and United Towers were not parties to the avoidance arrangement. In the light of this the application of the GAAR provisions was not solely a question of law. (…) [33] The high court predicated its finding that it had jurisdiction to review the assessments on the basis that the challenge to the assessments involved solely a question of law. That, as I have indicated, was incorrect. Since the dispute did not involve solely a question of law, no exceptional circumstances existed to justify the high court assuming jurisdiction in the matter. It follows that in relation to theassessment review, it did not have the required jurisdiction to deal with the matter. The high court ought therefore to have dismissed the application. [34] In the circumstances, the

GSS Holdings had claimed a loss of USD 22.54 million which the IRS disallowed. In disallowing the loss, the IRS claimed that the loss was not an ordinary business loss, but was incurred as part of a series of transactions that resulted in the sale of capital assets between related parties. The trial court upheld the IRS’s adjustment and GSS Holdings appealed to the Court of Federal Claims. The Court of Federal Claims applied a combination of substance over form and step transaction doctrines to combine two transactions and dismissed GSS Holdings’ claims on that basis. GSS Holdings then appealed to the US Court of Appeals. Opinion of the Court The Court of Appeals found that the Federal Claims Court had misapplied the step transaction doctrine and remanded the case for reconsideration under the correct legal standard. Excerpt “As part of this examination, the Claims Court must determine the outset of the series of transactions, keeping in mind that the series of transactions should be considered as a whole. Comm’r v. Clark, 489 U.S. 726, 738 (1989); see also True, 190 F.3d at 1177; Brown v. United States, 868 F.2d 859, 862 (6th Cir. 1989). The parties dispute the timeframe for the outset, with GSS advocating for the 2006 and 2007 timeframe when the Aaardvark LAPA and First Loss Note agreement were negotiated and entered, and the government advocating for the 2011 timeframe when the Aaardvark LAPA was renewed6 and exercised and when the First Loss Note Account payment was made to BNS. See Appellant’s Br. 33, 44–45; Appellee’s Br. 30–31. Once the outset’s timeframe has been assessed, the Claims Court must determine the intent from the outset, which is an- other disputed issue between the parties. See Falconwood, 422 F.3d at 1349; Appellant’s Br. 46–48; Appellee’s Br. 30–37. If the Claims Court does conclude that the separate transactions were “really component parts of a single transaction intended from the outset to be taken for the purpose of reaching the ultimate result,” then the step transaction doctrine applies. See Falconwood, 422 F.3d at 1349 (citation omitted). The Claims Court should conduct this analysis on remand. We are not suggesting any particular outcome; we are simply instructing the Claims Court to apply the correct legal standard. Even if the Claims Court applied an erroneous legal standard, the government contends that the intent was the same regardless of the timeframe, and that the Claims Court agreed. See Appellee’s Br. 37 (first citing Decision at 489 (“A payment from the First Loss Note [A]ccount was always anticipated to be at least a partial offset of losses resulting from the sale of a distressed asset.”); and then citing Decision at 489 n.22 (“The First Loss Note was always intended to absorb the first loss stemming out of a decline in Liberty[] [Street]’s investments.”)); see also Appellee’s Br. 30–34. In other words, the government con- tends that the same outcome would be reached under the correct legal standard. GSS disagrees, contending that the intent differed at various timeframes. See Appellant’s Br. 46–48; Appellant’s Reply Br. 11–15. Since the Claims Court applied an incorrect legal standard, the Claims Court “should make a new determination under the correct standard in the first instance.” Walther, 485 F.3d at 1152 (declining to reach the merits of a similar argument). To the extent any finding of the Claims Court “is derived from the application of an improper legal standard to the facts, it cannot be allowed to stand.” Id. (citations omitted). “In such a circumstance, this court must remand for new factual findings in light of the correct legal standard.” Id. GSS contends that under the correct legal standard, the step transaction doctrine would not operate to collapse the individual steps into a single integrated transaction for tax purposes. See Appellant’s Br. 44–52. In other words, GSS urges this court to reach a determination under the correct legal standard in the first instance. But just as we will not do so at the government’s request, we will not do so at GSS’s request.” Click here for translation

JTI Acquisitions Company Ltd was a UK holding company, part of a US group, used as an acquisition vehicle to acquire another US group. The acquisition was partly financed by intercompany borrowings at an arm’s length interest rate. The tax authorities disallowed the interest expense on the basis that the loan was taken out for a unallowable purpose. Judgment of the Upper Tribunal The Court upheld the decision and dismissed JTI Acquisitions Company Ltd’s appeal. According to the Court, a main purpose of the arrangement was to secure a tax advantage for the UK members of the group. The fact that the loans were at arm’s length was relevant but not determinative.

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. Judgment 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

Mylan Australia Holding is a subsidiary of the multinational Mylan Group, which is active in the pharmaceutical industry. Mylan Australia Holding is the head of the Australian tax consolidated group, which includes its subsidiary Mylan Australia Pty. In 2007, Mylan Australia Pty acquired the shares of Alphapharm Pty Ltd. and to finance the acquisition, a substantial loan (A$923,205,336) was provided by a group company in Luxembourg. In the following years interest expenses was deducted from the taxable income of Mylan’s Australian tax group. The tax authorities issued a notice of assessment for the years 2009 to 2020 disallowing the deduction of excessive interest expense incurred as a result of the financing arrangement. Initially the tax authorities relied on both transfer pricing provisions and the general anti-avoidance provision (Pt IVA), but subsequently they relied only on the latter as the basis for the assessment. Mylan Australia Holding filed appeals on 4 June 2021 in respect of the 2009-2019 assessment and on 6 April 2022 in respect of the 2020 assessment. During the subsequent proceedings, the tax authorities requested Mylan to provide certain documents (including a PwC email of 2 October 2008 referring to a “financial model which we modified continuously … to evaluate the US tax effectiveness …”) related to the financial arrangement. Mylan however, refused to do so claiming that the documents were protected by Legal Professional privilege. Order of the Federal Court The Federal Court ordered Mylan Australia Holding to obtain and provide the requested documents. Excerpts “THE COURT ORDERS THAT: 1. By 14 July 2023, the Applicant take all reasonable steps available to it to obtain the documents, or copies thereof, which fall within the categories set out in Schedule 1, which are in the power, custody or control of Viatris Inc and/or Mylan Inc and/or Mylan Laboratories Inc. 2. Pursuant to r 20.15(1) of the Federal Court Rules 2011 (Cth), the Applicant give non-standard discovery of the categories of documents in Schedule 1 by 28 July 2023. 3. By 28 July 2023, the Applicant file and serve an affidavit as to the Applicant’s efforts made pursuant to order 1 and the nature of the searches made to locate documents responsive to the categories of documents in Schedule 1. …” Click here for translation

After the case was remanded by the Supreme Court in 2022, the Court of Appeal classified a Luxembourg company’s shareholder loan to “X Shareholder Loan B.V.” of €57,237,500 as an ‘imprudent loan’, with the result that the interest due on that loan was only tax deductible to a limited extent. The remaining interest was non-deductible because of fraus legis (evasion of the law). Allowing the interest due on the shareholder loan to be deductible would result in an evasion of tax, contrary to the purpose and purport of the 1969 Corporation Tax Act as a whole. The purpose and purport of this Act oppose the avoidance of the levying of corporate income tax, by bringing together, on the one hand, the profits of a company and, on the other hand, artificially created interest charges (profit drainage), in an arbitrary and continuous manner by employing – for the achievement of in itself considered business objectives – legal acts which are not necessary for the achievement of those objectives and which can only be traced back to the overriding motive of bringing about the intended tax consequence (cf. HR 16 July 2021, ECLI:NL:HR:2021:1152). Click here for English translation Click here for other translation

In 2007, Forbes Medi-Tech Inc. (now Deans Knight Income Corporation) was a British Columbia-based drug research and nutritional food additive business in financial difficulty. It had accumulated approximately $90 million of unclaimed non-capital losses and other tax credits. Non-capital losses are financial losses resulting from carrying on a business that spends more than it makes in a given year. Under the Income Tax Act (the Act), a taxpayer can reduce their income tax by deducting non-capital losses from its taxable income. If the taxpayer does not use all, or a portion, of the loss in the year it incurred it, they may carry the loss back three years, or forward 20 years. However, under section 111(5) of the Act, when another entity acquires control of the company, the new owners may not carry over those non-capital losses and deduct them from its future taxes, unless the company continues to operate the same or a similar business. Deans Knight wanted to use its non-capital losses but did not have sufficient income against which to offset them. In early 2008, it entered into a complex investment agreement with venture capital firm Matco Capital Ltd, to help it become profitable. The agreement was drafted in a way that ensured Matco did not acquire control of Deans Knight by becoming the majority shareholder because that would trigger the restriction on carrying over losses under section 111(5) of the Act. However, in effect, Matco gained considerable influence over Deans Knight’s business affairs. It found a separate mutual fund management company that would use Deans Knight as a corporate vehicle to raise money through an initial public offering. That money would then be used to transform Deans Knight into an investment business. This was attractive to Deans Knight because it could make use of its non-capital losses to shelter most of the new business’ portfolio income and capital gains. When Deans Knight filed its tax returns for 2009 to 2012, it claimed nearly $65 million in non-capital losses and other tax credits, thereby reducing its tax liability. The tax authorities reassessed Deans Knight’s tax returns and denied the deductions. The company appealed that decision to the Tax Court of Canada. The Tax Court found that Deans Knight gained a tax benefit through a series of transactions that it concluded primarily for tax avoidance purposes, but that the transactions did not amount to an abuse of the Act, namely section 111(5). The tax authorities appealed to the Federal Court of Appeal, which held that the transactions were abusive. It applied the “general anti-avoidance rule” (GAAR) under the Act to deny Deans Knight’s tax deductions. The GAAR operates to deny tax benefits flowing from transactions that comply with the literal text of the Act, but that nevertheless constitute abusive tax avoidance. Deans Knight appealed to the Supreme Court. Judgment of the Supreme Court The Court dismissed the appeal of Deans Knight and upheld the decision from the Court of Appeal. It found the transactions were abusive and the GAAR applied to deny the tax benefits. Despite complying with the literal text of a provision in the Act, a transaction is abusive if it frustrates its rationale. The rationale behind section 111(5) of the Act is to prevent corporations from being acquired by unrelated parties in order to deduct their unused losses against income from another business for the benefit of new shareholders. Deans Knight was fundamentally transformed through a series of transactions that achieved the outcome that the Act sought to prevent, while narrowly circumventing the restriction in section 111(5). Excerpt “the appellant was gutted of any vestiges from its prior corporate ‘life’ and became an empty vessel with [unused deductions]”. 

“A…, Sociedade Unipessoal LDA” had taken out two intra group loans with the purpose of acquiring 70% of the shares in a holding company within the group. The tax authorities disallowed the resulting interest expenses claiming that the loan transactions lacked a business purpose. The assessment was later upheld by the tax court in decision no. 827/2019-T. An appeal was then filed by “A…, Sociedade Unipessoal LDA” with the Supreme Administrative Court. Judgment of Supreme Administrative Court The Court dismissed the appeal and upheld the decision of the tax court and the assessment issued by the tax authorities. Experts “35. In general, a transaction is considered to have economic substance when it significantly alters the taxpayer’s economic situation beyond the tax advantage it may generate. Now, the analysis of the relevant facts leads to the conclusion that neither A… nor the financial position of the Group’s creditors knew any significant economic change, nor any other economic consequence resulted or was reasonably expected to result beyond the additional increase in interest payable on intra-group loans, certainly with a view to increasing deductions and reducing the taxable profit. Even if there is a business purpose in the transaction – which is not certain in view of the permanence of the underlying economic reality – the objective of reducing the tax exposure, with the consequent reduction of the tax base, appears manifestly preponderant (principal purpose test). 36. Despite the existence of a general clause and special anti-abuse clauses, as well as specific rules on transfer pricing, earnings stripping or thin capitalization, all tax legislation must be interpreted and applied, in its systemic unity, so as to curb the erosion of the tax base and the transfer of profits. This involves a teleological interpretation that is attentive to the object, purpose and spirit of the tax rules, preventing their manifestly abusive use through sophisticated and aggressive tax planning operations. This can only be the case with rules on deductible expenses, as in the case of article 23 of the CIRC, which must be interpreted and applied in accordance with the anti-avoidance objectives that govern the entire national, European and international legal system, in order to prevent the erosion of the tax base. 37. On the other hand, where the deductibility of expenses and losses is concerned, the burden of proof lies with the taxpayer, as this is a fact constituting the claimed deduction (Art. 74, 1 of the LGT). Therefore, the accounting expenses groundedly questioned by the AT, in order to be tax deductible, would have to be objectively proven by the taxpayer who accounted for them. The excessive interest expenses are not objectively in line with the criteria of reasonableness, habituality, adequacy and economic and commercial necessity underlying the letter and spirit of Article 23(1) and (2)(c) of the CIRC, against the backdrop of business normality, economic rationality and corporate scope. We are clearly faced with a form of interest stripping, in fact one of the typical forms of profit transfer and erosion of the tax base. The excessive interest generated and paid in the framework of the financing operations analysed must be considered as “disqualified interest” (disallowed interest). 38. 38. The setting up of credit operations within a group in order to finance an acquisition of shareholdings already belonging to the group, sometimes with interest rates higher than market values and generating chronic problems of lack of liquidity in the sphere of the taxpayer, can hardly be regarded as a business activity subject to generally acceptable standards of economic rationality, and as such worthy of consideration under tax law. The possibility of deducting the respective financial costs was or could never have been conceived and admitted by the tax legislator when it chiselled the current wording of Article 23 of the CIRC. Legal-tax concepts should always be understood by reference to the constitutionally structuring principles of the legal-tax system, to all relevant facts and circumstances in the transactions carried out and to the substantial economic effects produced by them on taxpayers, unless the law refers expressly and exclusively to legal form. In the interpretation and application of tax law the principle of the primacy of substance over form shall apply. 39. The AT is entrusted with the important public interest function of protecting the State’s tax base and preventing profit shifting. In interpreting and applying tax rules, it should seek to strike a reasonable, fair and well-founded balance between the principles of tax law and legal certainty and the protection of legitimate expectations, on the one hand, and, on the other, the constitutional and European requirements of administrative and tax responsiveness in view of the updating and deepening of understanding and knowledge of tax problems, on a global scale, due to the latest theoretical, evaluative and principal developments which, particularly in the last decade, have been occurring in the issue of tax avoidance. 40. 40. The facts in the case records do not allow for the demonstration of the existence of a (current or potential) economic causal connection between the assumption of the financial burdens at stake and their performance in A…’s own interest, of obtaining profit, given the respective object. Hence, the non-tax deductibility of the interest incurred in 2015 and 2016 should be considered duly grounded by the AT, as the requirements of article 23, no. 1, of the CIRC were not met, as this is the only legal basis on which the AT supports the correction resulting from the non-acceptance of the deductibility of financial costs for tax purposes, and it is only in light of this legal provision that the legality of the correction and consequent assessment in question should be assessed. A careful reading of both decisions clearly shows that the fact that different wordings of Article 23 of the CIRC were taken into consideration was not decisive for the different legal solutions reached in both decisions. In both decisions the freedom of management of the corporate bodies of the companies is accepted, and it is certain

The cases concerned in particular whether Takeda A/S under voluntary liquidation and NTC Parent S.à.r.l. were obliged to withhold tax on interest on intra-group loans granted by foreign group companies. The cases were to be assessed under Danish tax law, the EU Interest/Royalty Directive and double taxation treaties with the Nordic countries and Luxembourg. In a judgment of 9 January 2023, concerning dividends distributed to foreign parent companies, the Supreme Court has ruled on when a foreign parent company is a “beneficial owner” under double taxation treaties with, inter alia, Luxembourg, and when there is abuse of rights under the EU Parent-Subsidiary Directive. In the present cases on the taxation of interest, the Supreme Court referred to the judgment of January 2023 on the general issues and then made a specific assessment of the structure and loan relationships of the two groups. The Supreme Court stated that both groups had undergone a restructuring involving, inter alia, the contribution of companies in Sweden and Luxembourg, respectively, and that this restructuring had to be seen as a comprehensive and pre-organised tax arrangement. The Supreme Court held that the contributed companies had to be regarded as flow-through companies which did not enjoy protection under the Interest/Royalty Directive or under the double taxation conventions. According to the information submitted by the parties, it could not be determined what had finally happened to the interest after it had flowed through the contributed companies, and therefore it could not be determined who was the rightful owner of the interest. The Supreme Court then held that the tax arrangements constituted abuse. Takeda under voluntary liquidation and NTC Parent should therefore have withheld interest tax of approximately DKK 369 million and DKK 817 million respectively. Click here for English translation Click here for other translation

Howmet, a société par actions simplifiée (SAS), is the head of a tax group in which its subsidiary, Alcoa Holding France, now Arconic Holding France (AHF), is integrated. Following an audit of the accounts of these two companies, the tax authorities corrected their taxable profits for the 2011 and 2012 financial years by disregarding the consequences of a contribution made to the Belgian company Alcoa Wheels Product Belgium (AWPB), now Alcoa Finance and Services Belgium (AFSB), of sums borrowed from the Swiss permanent establishment of a Luxembourg company belonging to the same economic group. It also reinstated the management fees paid by AHF to the group’s American parent company, Alcoa Inc., in AHF’s profits for the 2010 and 2011 financial years. In a ruling handed down on 19 November 2020, the Montreuil Administrative Court upheld Howmet’s claim for discharge of the additional corporate tax resulting from the adjustments based on abuse of rights and the corresponding surcharges, and dismissed the remainder of its claim. An appeal was then filed by the tax authorities to annul this Judgment. Judgment The Paris Administrative Court of Appeal, on appeal by the tax authorities set aside Articles 1 and 2 of the judgment of the Administrative Court and ordered Howmet to pay the tax, and dismissed its cross-appeal. Click here for English translation Click here for other translation

A parent company resident in country Y1 was liable to tax on interest and dividends it had received from its Danish subsidiary. There should be no reduction of or exemption from withholding tax under the Parent-Subsidiary Directive or the Interest and Royalties Directive or under the double taxation treaty between Denmark and country Y1, as neither the parent company nor this company’s own Y1-resident parent company could be considered the rightful owner of the dividends and interest within the meaning of the directives and the treaty, and as there was abuse. The High Court thus found that the Y1-domestic companies were flow-through companies for the interest and dividends, which were passed on to underlying companies in the tax havens Y2-ø and Y3-ø. The High Court found that there was no conclusive evidence that the companies in Y2 were also flow-through entities and that the beneficial owner of the interest and dividends was an underlying trust or investors resident in Y4. The double taxation treaty between Denmark and the Y4 country could therefore not provide a basis for a reduction of or exemption from withholding tax on the interest and dividends. Nor did the High Court find that there was evidence that there was a basis for a partial reduction of the withholding tax requirement due to the fact that one of the investors in the company on Y3 island was resident in Y5 country, with which Denmark also had a double taxation treaty. Click here for English translation Click here for other translation

Skechers US Inc. had formed a related party entity, SKII, in 1999 and transferred IP and $18 million in cash to the entity in exchange for 100 percent of the stock. Skechers then licensed the IP back from SKII and claimed a franchise tax deduction for the royalties and also deductions for management fees and interest expenses on the unpaid balance of royalty fees. The Wisconsin tax authorities held that these were sham transaction lacking business purpose and disallowed the deductions. Judgment of the Tax Appeals Commission The Tax Appeals Commission ruled in favor of the tax authorities. Excerpt “(…) The burden of proof is on Petitioner to prove that the Department’s assessment is incorrect by clear and satisfactory evidence. In this case, Petitioner must prove that it had a valid nontax business purpose for entering into the licensing transaction that generated the royalty deductions claimed on its Wisconsin tax returns and that the licensing transaction had economic substance. Both are required. Petitioner did not present persuasive evidence or testimony of either requirement being met. Therefore, the Department’s assessments are upheld. CONCLUSIONS OF LAW Petitioner did not have a valid nontax business purpose for the creation of SKII. Petitioner did not have a valid nontax business purpose for entering into the licensing transactions between Skechers and SKII that generated the royalty deductions claimed on its Wisconsin tax returns. Petitioner’s licensing transactions between Skechers and SKII did not have economic substance. (…)”

Innodis granted loans to five wholly-owned subsidiaries between 2002 and 2004. The loans were unsecured, interest-free and had a grace period of one year. The subsidiaries to which the loans were granted were either start-up companies with no assets or companies in financial difficulties. The tax authorities (MRA) had carried out an assessment of the tax liability of Innodis Ltd in respect of the assessment years 2002 – 2003 and 2003 – 2004. In the course of the exercise, a number of items were added to the taxable income, including income from interest-free loans to subsidiaries and overseas passage allowances to eligible employees, which had been earmarked but not paid. The tax authorities were of the opinion that the grant of the interest-free loans was not on arm’s length terms in accordance with section 75 of the Income Tax Act 1995 (ITA) and was clearly preferential treatment of the subsidiaries. An assumed interest rate of 13% was applied to the loans, based on the market rate for loans made to Innodis for other purposes around the same time. Innodis Ltd appealed against the decision of the tax authorities to the Assessment Review Committee where all issues raised in the appeal were settled by agreement between the parties except those relating to the items of interest-free loans to subsidiaries and overseas passage allowances to employees. Innodis Ltd subsequently appealed to the Supreme Court. Judgment of the Supreme Court The Court dismissed the appeal of Innodis and upheld the decision of the Assessment Review Committee. Excerpt “With regard to the complaint of the appellant that the ARC wrongly accepted the application of “deemed interest” to assess the liability to tax as such notion has no legal basis, we note that the ARC clearly explained the expression “deemed interest” and its application. In that respect, the ARC observed that “deemed interest” is an expression commonly used in practice by the tax authorities and accountants to denote interest which a party should have claimed from another party if there had been no relationship between them. It also explained that the use of the expression of “deemed interest” was relevant since in the present case, in effect, the Appellant has been assessed on interest income, which it should have derived if it had been at arm’s length with its subsidiaries regarding the loans. It further observed that it is not correct to say that the assessment has no legal basis because it has always been the case for the MRA that this assessment is based on section 75 Income Tax Act 1995 and the term “deemed interest” was used in the heading to designate the nature of the amount assessed under section 75. We find no fault in the above reasoning of the ARC. As a matter of fact, we agree that, as found by the ARC, the assessment itself had a legal basis by virtue section 75, which empowers the Director General to do so if he is of the opinion that the transaction in question was not at “arm’s length.” Once this is done, it was necessary for the Director General to designate by an appropriate term the income that would have been derived if the transactions had been at “arm’s length.” Since the transactions targeted were loans, which in practice generate interests as income, there can be no wrong in designating the income that the applicant ought to have derived from them as “deemed interest”. Furthermore, as observed by the ARC, the concept of “deemed interest” is neither one invented by it or the respondent nor blatantly inappropriate since it is an expression used by the tax authorities and accountants to denote interest which a party should have claimed from another party if there had been no relationship between them. With regard to the application of the provisions under Part Vll of the Income Tax Act, particularly those under section 90, we note that in brushing aside the contentions of the appellant in that respect, the ARC made the following observations, with which we agree. Part VII concerns anti-avoidance provisions and section 90 relates to transactions designed to avoid liability to Income Tax. The MRA had decided to base its case on section 75 or the Income Tax Act as it was entitled to and to the extent that section 75 imposes on domestic companies an obligation to deal with subsidiaries at arm’s length, it is irrelevant whether section 90 could also have been applicable. It is therefore correct to say, as the ARC observed, that even if section 90 would have been applicable, it does not mean that the Director General was bound to apply section 90 or that section 75 was wrongly relied upon. Therefore, there is no substance in the appellant’s contention that the ARC was wrong to have discarded and failed to properly address its mind to the application of section 90 of the Income Tax Act 1995 and the arm’s length principle which is enunciated therein. For all the above reasons, the present appeal cannot succeed. We accordingly dismiss it with costs.” Click here for other translation

I. sp. z o.o. is a Polish tax resident. Its sole shareholder is an Italian tax resident company. The Company plans to pay a dividend to the shareholder in the future, and therefore asked the following question to the Polish Tax Chamber: in order to exercise the right to exempt a dividend paid to a shareholder from corporate income tax (withholding tax) under Article 22(4) of the Corporate Income Tax Act of 15 February 1992 (Journal of Laws of 2019, item 865, hereinafter the CIT), is the Company required to verify whether the entity to which the dividend is paid is the actual owner of the dividend? The Tax Chamber answered that verification of the beneficial ownership is part of the due diligence obligation introduced in Article 26(1) of the Corporate Income Tax Act in 2019. The company challenged this interpretation before the Administrative Court and the Court found the complaint well-founded and overturned the interpretation of the Tax Chamber. An appeal was then filed by the authorities with the Supreme Administrative Court. Judgment of the Supreme Administrative Court. The Court set aside the judgment of the Administrative Court in its entirety and decided in favor of the authorities. Excerpts “It should be recalled that the Danish judgments point out that the mechanisms of Directive 90/435 (now 2011/96) were ‘introduced to address situations where, without their application, the exercise by Member States of their taxing authority could lead to profits distributed by a subsidiary to its parent company being taxed twice (judgment of 8 March 2017, Wereldhave Belgium and Others, C-448/15, EU:C:2017:180, paragraph 39). On the other hand, such mechanisms cannot apply if the owner of the dividends is a company established for tax purposes outside the Union, since, in such a case, the exemption from withholding tax on the dividends in question in the Member State from which they were paid could lead to those dividends not being effectively taxed in the Union.” (paragraph 113 of the judgment). In paragraph 5 of the operative part of the judgment, it was held that where the Directive’s “withholding tax exemption regime for dividends paid by a company resident in a Member State to a company resident in another Member State is inapplicable because of a finding of fraud or abuse within the meaning of Article 1(2) of that Directive, the application of the freedoms guaranteed by the EU Treaty cannot be relied upon to challenge the first Member State’s regulation of the taxation of those dividends.” The CJEU noted that “a Member State must refuse to avail itself of provisions of Union law if those provisions are relied upon not to pursue their objectives but to obtain an advantage under Union law, when the conditions for obtaining that advantage are only formally fulfilled.” (paragraph 72 of the judgment). In the context of the theses Danish judgments, the reasoning in the CJEU judgment of 7 September 2017, which was extensively cited by the Applicant and the Court of First Instance, must be considered outdated. C-6/16 in the EQIOM case (publ. ZOTSiS.2017/9/I-641). For this reason, the Supreme Administrative Court considered it pointless to refer to it when assessing the correctness of the judgment under appeal. It is clear from the Danish judgments that the mechanisms created by the Directive cannot be applied contrary to its purpose. They certainly cannot be applied in a situation where the recipient of the dividend will not be its actual beneficiary. National legislation which, when levying withholding tax, makes the application of the tax preference conditional on the exercise of due diligence by the payer by carrying out verification that the recipient of the dividend is its actual beneficiary must therefore be regarded as compatible with the provisions of the Directive. At the same time, in the opinion of the Supreme Administrative Court in the panel hearing the case, even the absence of an express regulation on the verification of the entity that is the recipient of the dividend would not exempt the payer from verifying that the taxpayer is the actual beneficiary of the dividend. It would be unacceptable to argue that, prior to the introduction of the regulation of Article 26(1) of the A.P.C. in the version in force in 2019, the payer could act without due diligence when applying the withholding tax exemption. It is irrelevant for this assessment that neither Article 22(4) of the A.P.D.O.P. nor the Directive contains this requirement expressis verbis, as the payment of dividends without withholding tax would be treated as an abuse of the right. Contrasting this regulation with the provisions relating to the exemption from withholding tax under Article 21(3) of the A.P.C. and Directive No 2011/96, i.e. the provisions governing the exemption from withholding tax of, inter alia, interest on loans and royalties, does not prejudge the fact that there is no obligation to verify the status of the taxpayer when paying dividends. At this point, it is necessary to stipulate that the tax preference will be admissible in a situation where, although the dividend payment is not made to its actual beneficiary, the look-through approach is applied. This concept allows the application of preferential taxation, or tax exemption, in a situation where, although the payment is made through an intermediary – an entity that is not the actual beneficiary, this actual beneficiary is established in the EU (EEA) and is known. It should be noted that this principle does not seem to be questioned by the interpreting authority (cf. DKIS interpretation of 14 June 2022, No. 0111-KDIB2-1.4010.128.2022.2.AR, available at http://sip.mf.gov.pl.). The use of this example is relevant as it illustrates a situation where an intermediary that is not the actual beneficiary of the dividend, upon receipt, transfers the dividend to another group entity – the actual beneficiary also established in the EU (EEA). As this is not the case in the present case, this issue is not discussed further. In the opinion of the Supreme Administrative Court, a taxpayer who applies a tax preference at source

RRE and EBL Italia, belonged to the Belgian group ELECTRABEL SA (which later became the French group GDF Suez, now the Engie group); RRE, like the other Italian operating companies, benefited from a financing line from the Luxembourg subsidiary ELECTRABEL INVEST LUXEMBOURG SA (“EIL”). In the course of 2006, as part of a financial restructuring project of the entire group, EBL Italia acquired all the participations in the Italian operating companies, assuming the role of sub-holding company, and EIL acquired 45 per cent of the share capital of EBL Italia. At a later date, EBL Italia and EIL signed an agreement whereby EIL assigned to EBL Italia the rights and obligations deriving from the financing contracts entered into with the operating companies; at the same time, in order to proceed with the acquisition of EIL’s receivables from the operating companies, the two companies concluded a second agreement (credit facility agreement) whereby EIL granted EBL Italia a loan for an amount equal to the receivables being acquired. Both the tax commissions of first and of second instance had found the Office’s actions to be legitimate. According to the C.T.R., in particular, the existence of a “symmetrical connection between two financing contracts entered into, both signed on the same date (31/07/2006) and the assignments of such credits to EBL Italia made on 20/12/2006, with identical terms and conditions” and the fact that “EBL Italia accounted for the interest expenses paid to EIL in a manner exactly mirroring the interest income paid by Rosen, so as to channel the same interest, by contractual obligation, punctually to EIL’ showed that EBL Italia ‘had no management autonomy and was obliged to pay all the income flows, that is to say, the interest, obtained by Rosen immediately to the Luxembourg company EIL’, with the result that the actual beneficiary of the interest had to be identified in the Luxembourg company EIL. Judgment of the Court The Supreme Court confirmed the legitimacy of the notices of assessment issued by the Regional Tax Commission, for failure to apply the withholding tax on interest expense paid. According to the Court ‘abuse in the technical sense’ must be kept distinct from the verification of whether or not the company receiving the income flows meets the requirements to benefit from advantages that would otherwise not be due to it. One thing is the abuse of rights, another thing are the requirements to be met in order to be entitled to the benefits recognised by provisions inspired by anti-abuse purposes. “On the subject of the exemption of interest (and other income flows) from taxation pursuant to Article 26, of Presidential Decree No. 600 of 29 September 1973”, the burden of proof it is on the taxpayer company, which claims to be the “beneficial owner”. To this end, it is necessary for it to pass three tests, autonomous and disjointed” the recipient company performs an actual economic activity the recipient company can freely dispose of the interest received and is not required to remit it to a third party the recipient company has a function in the financing transaction and is not a mere conduit company (or société relais), whose interposition is aimed exclusively at a tax saving. The Supreme Court also ruled out the merely ‘domestic’ nature of the transaction as it actually consisted in a cross-border payment of interest. Click here for English translation Click here for other translation

The issue in the Danish beneficial ownership cases of NetApp Denmark ApS and TDC A/S was whether the companies were obliged to withhold dividend tax on distributions to foreign parent companies. The first case – NetApp Denmark ApS – concerned two dividend distributions of approximately DKK 566 million and DKK 92 million made in 2005 and 2006 to an intermediate parent company in Cyprus – and then on to NETAPP Bermuda. The second case – TDC A/S – concerned the distribution of dividends of approximately DKK 1.05 billion in 2011 to an intermediate parent company in Luxembourg – and then on to owner companies in the Cayman Islands. In both cases, the tax authorities took the view that the intermediate parent companies were so-called “flow-through companies” which were not the real recipients of the dividends, and that the real recipients (beneficial owners) were resident in countries not covered by the EU Parent-Subsidiary Directive (Bermuda and Cayman respectively). Therefore, withholding taxes should have been paid by the Danish companies on the distributions. Judgment of the Supreme Court The Supreme Court upheld the tax authorities’ assessment of additional withholding tax of 28 percent on a total amount of DKK 1,616 million plus a very substantial amount of interest on late payment. Only with regard to NetApp’s 2006 dividend payment of DKK 92 million did the court rule in favour of the company. Excerpts: “The Supreme Court agrees that the term “beneficial owner” must be understood in the light of the OECD Model Tax Convention, including the 1977 OECD Commentary on Anti-Abuse. According to these commentaries, the purpose of the term is to ensure that double tax treaties do not encourage tax avoidance or tax evasion through “artifices” and “artful legal constructions” which “enable the benefit to be derived both from the advantages conferred by certain national laws and from the tax concessions afforded by double tax treaties.” The 2003 Revised Commentaries have elaborated and clarified this, stating inter alia that it would not be “consistent with the object and purpose of the Convention for the source State to grant relief or exemption from tax in cases where a person who is resident of a Contracting State, other than as an agent or intermediary, merely acts as a conduit for another person who actually receives the income in question.” “The question is whether it can lead to a different result that NetApp Denmark – if the parent company at the time of the distribution had been NetWork Appliance Inc (NetApp USA) and not NetApp Cyprus – could have distributed the dividend to NetApp USA with the effect that the dividend would have been exempt from tax liability under the Double Taxation Convention between Denmark and the USA. On this issue, the CJEU’s judgment of 26 February 2019 states that it is irrelevant for the purposes of examining the group structure that some of the beneficial owners of the dividends transferred by flow-through companies are resident for tax purposes in a third State with which the source State has concluded a double tax treaty. According to the judgment, the existence of such a convention cannot in itself rule out the existence of an abuse of rights and cannot therefore call into question the existence of abuse of rights if it is duly established by all the facts which show that the traders carried out purely formal or artificial transactions, devoid of any economic or commercial justification, with the principal aim of taking unfair advantage of the exemption from withholding tax provided for in Article 5 of the Parent-Subsidiary Directive (paragraph 108). It also appears that, having said that, even in a situation where the dividend would have been exempt if it had been distributed directly to the company having its seat in a third State, it cannot be excluded that the objective of the group structure is not an abuse of law. In such a case, the group’s choice of such a structure instead of distributing the dividend directly to that company cannot be challenged (paragraph 110).” “In light of the above, the Supreme Court finds that the dividend of approximately DKK 92 million from NetApp Denmark was included in the dividend of USD 550 million that NetApp Bermuda transferred to NetApp USA on 3 April 2006. The Supreme Court further finds that the sole legal owner of that dividend was NetApp USA, where the dividend was also taxed. This is the case notwithstanding the fact that an amount of approximately DKK 92 million. – corresponding to the dividend – was not transferred to NetApp Cyprus until 2010 and from there to NetApp Bermuda. NetApp Bermuda had thus, as mentioned above, taken out the loan which provided the basis for distributing approximately DKK 92 million to NetApp USA in dividends from NetApp Denmark in 2006. Accordingly, the dividend of approximately DKK 92 million is exempt from taxation under Section 2(1)(c) of the Danish Corporate Income Tax Act in conjunction with the Danish-American Double Taxation Convention. NetApp Denmark has therefore not been required to withhold dividend tax under Section 65(1) of the Danish Withholding Tax Act.” Click here for English translation Click here for other translation

In 2013, Viva Telecom Bulgaria EAD, as borrower/debtor, entered into a convertible loan agreement with its parent company in Luxembourg, InterV Investment S.a.r.l.. According to the agreement, the loan was non-interest bearing and would eventually be converted into equity. The tax authorities considered the arrangement to be a loan and applied an arm’s length interest rate and applied withholding tax to the amount of interest expense calculated. Vivacom appealed to the Administrative Court, which, in a judgment issued in 2019, agreed with the tax authorities’ argument for determining the withholding tax liability. Judgment of the Supreme Administrative Court The Bulgarian Supreme Administrative Court requested a ruling from the CJEU, which was issued in case C-257/20. The CJEU ruled that the applicable EU directives do not prevent the application of withholding tax on notional interest. On this basis, the Bulgarian Supreme Administrative Court issued its decision on the application of withholding tax on notional interest under an interest-free loan agreement. Relying on the conclusions of the CJEU, the court confirmed the withholding tax imposed on the notional interest determined under the concluded financial agreement. The SAC also rejected the local taxpayer’s request to recalculate the tax due under the net basis regime. However, the court relied on a separate transfer pricing benchmark study, which established a market rate in favour of the taxpayer compared to the one initially used by the tax administration, resulting in a reduction of the tax assessment. Click here for English Translation Click here for other translation

As a general rule interest expenses are deductible for the purposes of income taxation of a business activity. However, for companies in a group, e.g. companies in the same group, certain restrictions on the deductibility of interest can apply. In Sweden one of these limitations is that if the debt relates to the acquisition of a participation right from another enterprise in the partnership, the deduction can only be made if the acquisition is substantially justified by business considerations, cf. Chapter 24, Sections 16-20 of the Swedish Income Tax Act. A AB is part of the international X group, which is active in the manufacturing industry. A restructuring is planned within the group which will result in A becoming the group’s Swedish parent company. As part of the restructuring, A will acquire all the shares in B AB, which is currently the parent company of the Swedish part of the group, from group company C, which is resident in another EU country. Payment for the shares will be made partly by a contribution in kind equivalent to at least 75 % of the purchase price and partly by A issuing an interest-bearing promissory note on the remaining amount. A AB requested a preliminary ruling from the Tax Board on whether the rules limiting the right to deduct interest would result in interest expenses incurred as a result of the intra-group acquisition of the shares in B AB not being deductible. The Board found that the restructuring is justified for organisational reasons and that it follows from the preparatory works and previous practice that the acquisition is therefore not commercially justified within the meaning of the legislation in question. According to the Board, the application of Swedish domestic law therefore means that no deduction should be allowed. However, the Board found that it would be contrary to the freedom of establishment under the TFEU to deny A AB deduction for the interest expenses. An appeal was filed by the tax authorities with the Supreme Administrative Court in which they requested that the preliminary ruling from the tax board be amended and answer the question by denying A AB a deduction for interest expenses. Judgment of the Court The Court upheld the decision of the Tax Board and allowed deductions for the interest expenses in question. Not for the Swedish rules being contrary to the freedom of establishment under the TFEU but by reason of the interest expenses being justified by business considerations. Excerpts ”15. The interest relates to a debt owed to C which is situated in another EU country. It is clear from the conditions provided that it is only C who is actually entitled to the interest income. Furthermore, the description of the circumstances of, and reasons for, the planned restructuring provided in the application do not constitute grounds for considering that the debt relationship must be created exclusively or almost exclusively in order for the community of interest to obtain a significant tax benefit. Deduction of the interest expenditure should therefore not be refused on the basis of Chapter 24, Section 18. 16. The question is then whether the deduction should be refused on the basis of Chapter 24, Section 19.” … ”26. In this case, a relatively long period of time has elapsed between the external acquisitions of the shares in Y Group’s Parent B – which were completed in 2015 – and the intragroup acquisition of the shares in that company that is now under consideration. However, the acquisition of B has been part of a larger process that has also involved the incorporation of Z Group and eventually W Group into X Group. As this is a process which is typically extensive and complex and which has resulted in the merger of several large manufacturing groups into one, the time lag should not lead to the conclusion that the intra-group acquisition is not substantially justified from a commercial point of view. Furthermore, it appears that the acquisition of the shares in B under consideration would not have taken place if the external acquisitions had not taken place. 27. Since the external acquisitions were made for commercial reasons and the acquisition under consideration in the context of the present restructuring is prompted by the external acquisitions, the acquisition can be considered to be substantially justified on commercial grounds. Accordingly, the deduction of interest expenses should not be denied under Chapter 24, Section 19. 28. The preliminary assessment is therefore confirmed.” Click here for English Translation Click here for other translation

It is disputed between the parties whether the A Corp. resident in the USA – a so-called S corporation – or its shareholders are entitled to full exemption and reimbursement of the capital gains tax with regard to a profit distribution by a domestic subsidiary of A Corp. (S-Corporation). A Corp. (S-Corporation) is a corporation under US law with its registered office in the United States of America (USA). It has opted for taxation as an “S corporation” under US tax law and is therefore not subject to corporate income tax in the USA; instead, its income is taxed directly to the shareholders resident in the USA (Subchapter S, §§ 1361 to 1378 of the Internal Revenue Code (IRC)). The shareholders of A Corp. (S-Corporation) are exclusively natural persons resident in the USA as well as trusts established under US law and resident in the USA, the beneficiaries of which are in turn exclusively natural persons resident in the USA. For several years, the A Corp. (S-Corporation) has held a 100% share in A Deutschland Holding GmbH. On the basis of a resolution on the appropriation of profits dated November 2013, A Deutschland Holding GmbH distributed a dividend in the amount of € (gross) to A Corp. (S-Corporation) on … December 2013. Of this, after deduction of the share for which amounts from the tax contribution account are deemed to have been used within the meaning of section 27 KStG (section 20 (1) no. 1 sentence 3 EStG), an amount of € …. € to the income from capital assets. A Deutschland Holding GmbH retained capital gains tax on this amount in the amount of 25% plus solidarity surcharge and thus a total of € … (capital gains tax in the amount of € … plus solidarity surcharge in the amount of €) and paid this to the tax office B. In a letter dated 14 March 2014, A Corp. (S-Corporation) informally applied for a full refund of the withheld capital gains tax plus solidarity surcharge. By letter of 21 May 2014, referring to this application, the company submitted, among other things, a completed application form “Application for refund of German withholding tax on investment income”, in which it had entered “A Corp. (S-Corporation) for its shareholders” as the person entitled to a refund . The shareholders were identified from an attached document. By decision of 4 September 2014, the tax authorites set the amount to be refunded to A Corp. (S-Corporation) as the person entitled to a refund at … (capital gains tax in the amount of … € as well as solidarity surcharge in the amount of €). This corresponds to a withholding tax reduction to 15 %. The tax authorities refused a further refund on the grounds that, due to the introduction of § 50d, para. 1, sentence 11 EStG in the version applicable at the time (EStG old version), the concession under Article 10, para. 2, letter a) DTT-USA could not be claimed. The residual tax was 15%, since the eligibility of the partners of A Corp. (S-Corporation) for the agreement had to be taken into account. This decision also took into account a further profit distribution by the A Deutschland Holding GmbH to the A Corp. (S-Corporation) from … December 2012 in the amount of …. €, for which a refund of capital gains tax in the amount of …. € and solidarity surcharge in the amount of …. € was granted. In this respect, the tax authorities already granted the request during the complaint proceedings by means of a (partial) remedy notice of 8 May 2015 and increased the capital gains tax to be refunded from € … to € … as requested. (cf. p. 70 ff. VA). The tax treatment of the 2012 profit distribution is therefore not a matter of dispute. Judgment of the Tax Court The Court decided in favour of A Corp. (S-Corporation) and its shareholders. Excerpt “125 An application to this effect has been made in favour of plaintiffs 2) to 17). The defendant correctly interpreted the application received by it on 22 May 2014, which expressly identifies the first plaintiff on behalf of its partners as being entitled to reimbursement, as such. Similar to a litigation status in the proceedings before the fiscal court, the discerning senate considers the filing of an application by a company “on behalf of its shareholders” to be effective, especially since the second to seventeenth plaintiffs promptly confirmed that the claim (of the first plaintiff) for a reduction of the withholding taxes to zero had been asserted by them or in their interest via the first plaintiff (cf. letter of 15 June 2015 as well as the attached confirmations of all shareholders, pp. 85 et seq. VA). The fact that the first plaintiff did not explicitly refer to this in the first informal application letter of 14 March 2014 (see file, pp. 1 f. VA) as well as in the letter of 21 May 2014 (see file, pp. 6 f. VA) is irrelevant. This is because the addition of the application “for its shareholders” can be found on the formal application both under point I “person entitled to reimbursement” and in the heading of the second page of the application, which is the relevant point. The fact that item IV of the application for the granting of the nesting privilege provides for an American corporation as the person entitled to a refund is harmless in this context. As a result of the provision of § 50d, para. 1, sentence 11 EStG, old version, which had only been introduced shortly before, there was not yet a different application form. In addition, the application of this provision was associated with considerable uncertainties, as its effect was disputed from the beginning. Finally, point IV of the application also states that the intercompany privilege under treaty law (in this case Article 10, para. 3 DTT-USA) is to be claimed on the merits. Moreover, the letter of 14

Frucor Suntory (FHNZ) had deducted purported interest expenses that had arisen in the context of a tax scheme involving, among other steps, its issue of a Convertible Note to Deutsche Bank, New Zealand Branch (DBNZ), and a forward purchase of the shares DBNZ could call for under the Note by FHNZ’s Singapore based parent Danone Asia Pte Ltd (DAP). The Convertible Note had a face value of $204,421,565 and carried interest at a rate of 6.5 per cent per annum. Over its five-year life, FHNZ paid DBNZ approximately $66 million which FHNZ characterised as interest and deducted for income tax purposes. The tax authorities issued an assessment where deductions of interest expenses in the amount of $10,827,606 and $11,665,323 were disallowed in FY 2006 and 2007 under New Zealand´s general anti-avoidance rule in s BG 1 of the Income Tax Act 2004. In addition, penalties of $1,786,555 and $1,924,779 for those years were imposed. The tax authorities found that, although such deductions complied with the “black letter” of the Act, $55 million of the $66 million paid was in fact a non- deductible repayment of principal. Hence only interest deduction of $11 million over the life of the Arrangement was allowed. These figures represent the deduction disallowed by the Commissioner, as compared to the deductions claimed by the taxpayer: $13,250,998 in 2006 and $13,323,806 in 2007. Based on an allegedly abusive tax position but mitigated by the taxpayer’s prior compliance history. In so doing, avoiding any exposure to shortfall penalties for the 2008 and 2009 years in the event it is unsuccessful in the present proceedings. The income years 2004 and 2005, in which interest deductions were also claimed under the relevant transaction are time barred. Which I will refer to hereafter as $204 million without derogating from the Commissioner’s argument that the precise amount of the Note is itself evidence of artifice in the transaction. As the parties did in both the evidence and the argument, I use the $55 million figure for illustrative purposes. In fact, as recorded in fn 3 above, the Commissioner is time barred from reassessing two of FHNZ’s relevant income tax returns. The issues The primary issue is whether s BG 1 of the Act applies to the Arrangement. Two further issues arise if s BG 1 is held to apply: (a) whether the Commissioner’s reconstruction of the Arrangement pursuant to s GB 1 of the Act is correct or whether it is, as FHNZ submits, “incorrect and excessive”; and (b) whether the shortfall penalties in ss 141B (unacceptable tax position) or 141D (abusive tax position) of the Tax Administration Act 1994 (TAA) have application. In 2018 the High Court decided in favor of Frucor Suntory This decision was appealed to the Court of Appeal, where in 2020 a decision was issued in favor of the tax authorities. The Court of Appeal set aside the decision of the High Court in regards of the tax adjustment, but dismissed the appeal in regards of shortfall penalties. “We have already concluded that the principal driver of the funding arrangement was the availability of tax relief to Frucor in New Zealand through deductions it would claim on the coupon payments. The benefit it obtained under the arrangement was the ability to claim payments totaling $66 million as a fully deductible expense when, as a matter of commercial and economic reality, only $11 million of this sum comprised interest and the balance of $55 million represented the repayment of principal. The tax advantage gained under the arrangement was therefore not the whole of the interest deductions, only those that were effectively principal repayments. We consider the Commissioner was entitled to reconstruct by allowing the base level deductions totaling $11 million but disallowing the balance. The tax benefit Frucor obtained “from or under” the arrangement comprised the deductions claimed for interest on the balance of $149 million which, as a matter of commercial reality, represented the repayment of principal of $55 million.” This decision was then appealed to the Supreme Court. Judgment of the Supreme Court The Supreme Court dismissed the appeal of Frucor and ruled in favor of the tax authorities both in regards of the tax adjustment and in regards of shortfall penalties. Excerpt “[80] The picture which emerges from the planning documents which we have reviewed is clear. The whole purpose of the arrangement was to secure tax benefits in New Zealand. References to tax efficiency in those planning documents are entirely focused on the advantage to DHNZ of being able to offset repayments of principal against its revenue. The anticipated financial benefits of this are calculated solely by reference to New Zealand tax rates. The only relevance of the absence of a capital gains liability in Singapore was that this tax efficiency would not be cancelled out by capital gains on the contrived “gain” of DAP under the forward purchase agreement. [81] There were many elements of artificiality about the funding arrangement. Of these, the most significant is in relation to the note itself. [82] Orthodox convertible notes offer the investor the opportunity to receive both interest and the benefit of any increases in the value of the shares over the term of the note. For this reason, the issuer of a convertible note can expect to receive finance at a rate lower than would be the case for an orthodox loan. [83] The purpose of the convertible note issued by DHNZ was not to enable it to receive finance from an outside investor willing to lend at a lower rate because of the opportunity to take advantage of an increase in the value of the shares. The shares were to wind up with DAP which already had complete ownership of DHNZ. As well, Deutsche Bank had no interest in acquiring shares in DHNZ. Instead, it had structured a transaction that generated tax benefits for DHNZ in return for a fee. Leaving aside the purpose of obtaining tax advantages in New Zealand, the convertible note

The issue was whether the benefits provided by the Argentina-Spain DTC were available to Empresa Distribuidora La Plata S.A., which was owned by two Spanish holding companies, Inversora AES Holding and Zargas Participaciones SL, whose shareholders were Uruguayan holding companies. The Argentine Personal Assets Tax provided that participations in Argentine companies held by non-resident aliens were generally subject to an annual tax of 0.5% or 0.25% on the net equity value of their participation. However, under the Argentina-Spain DTC, article 22.4, only the treaty state where the shareholders were located (Spain) had the right to tax the assets. On this basis, Empresa Distribuidora La Plata S.A. considered that its shares held by Spanish holding companies were not subject to the Personal Assets Tax. The tax authorities disagreed, finding that the Spanish holding companies lacked substance and that the benefits of the Argentina-Spain DTC were therefore not applicable. Judgment of the Tax Court The Tax Court ruled in favour of the tax authorities. The Court held that the treaty benefits did not apply. The Court agreed with the findings of the tax authorities that the Spanish companies had been set up for the sole purpose of benefiting from the Spain-Argentina DTC and therefore violated Argentina’s general anti-avoidance rule. Excerpt “According to the administrative proceedings, based on the background information requested from the International Taxation Directorate of the Spanish Tax Agency and other elements collected by the audit, it appears that: a) the company Inversora AES Americas Holding S.L., is made up as partners by AES Argentina Holdings S.C.A. and AES Platense Investrnents Uruguay S.C.A., both Uruguayan companies; b) the company Zargas Participaciones S.L., has as its sole partner ISKARY S.A., also a Uruguayan company. The purpose of the former is the management and administration of securities representing the equity of companies and other entities, whether or not they are resident in Spanish territory, investment in companies and other entities, whether or not they are resident in Spanish territory, and it has only three employees (one administrative and two in charge of technical areas) and has opted for the Foreign Securities Holding Entities Regime (ETVE). The second company, whose purpose is the management and administration of securities representing the equity of non-resident entities in Spanish territory, has had no employees on its payroll since its incorporation, and has also opted for the ETVE regime. Neither of the two companies is subject to taxation in their own country similar to that in the present case. According to the information provided by the Spanish Tax Agency (see fs. 34 of the Background Zargas Participaciones SL), there is no record that it has any shareholdings in the share capital of other companies. The evidence and circumstances of the case show that the Spanish companies lack genuine economic substance, with the companies AES Argentina Holdings S.C.A. and AES Platense Investments Uruguay S.C.A. (both Uruguayan) holding the shares of Inversora AES Americas Holding S.L. and the company ISKARY S.A. (also Uruguayan) holding 100% of the shares of Zargas Participaciones S.L. Thus, it is reasonable to conclude that the main purpose of their incorporation was to obtain the benefits granted by the Convention by foreign companies from a third country outside the scope of application of the treaty, without the plaintiff having been able to prove with the evidence produced in the proceedings that the Spanish companies carried out a genuine economic activity and that, therefore, they were not mere legal structures without economic substance (in the same sense CNCAF, Chamber I, in re “FIRST DATA CONO SUR S.R.L.” judgment of 3/12/2019). Consequently, the tax criterion should be upheld. With costs.” Click here for English Translation Click here for other translation

Owner B.V. was set up by a number of investors to acquire a Belgian entity with Dutch subsidiaries. After the acquisition the Dutch subsidiaries were merged into a fiscal unity with Owner B.V. Interest in an amount of EUR 1.7 million due on the debt related to the acquisition was considered by the court not deductible under section 10a of the Vpb Act. In addition, Owner B.V.’s profit had been reduced by EUR 6.0 million by interest on shareholder loans. The court deemed that 4.5 million of this amount was not deductible by virtue of fraus legis. The court further ruled that part of the costs charged to the Dutch company qualified as financing costs and could be deducted. Excerpts “5.8. The defendant has argued that under Section 8b of the Vpb Act, a full recharacterisation of the loans can and should take place, which the claimant disputes. According to the claimant, only an interest adjustment can be made under Section 8b of the Income Tax Act. In support of the view that the loan should be reclassified under Section 8b of the Vpb Act, the defendant has put forward essentially the same arguments as when arguing that there is an exception to the civil law form (the sham loan, participation loan or bottomless well loan). The court has already rejected these arguments above for the reasons stated there. The court does not see in the text of Section 8b of the Vpb Act, nor in the underlying provisions of the OECD Guidelines, a ground for creating a fourth exception on the basis of which a tax recharacterisation of the civil law loan can take place. The court finds confirmation for this opinion in the Supreme Court’s ruling of 25 November 2011 (ECLI:NL:HR:2011:BN3442, at paragraphs 3.3.1 to 3.3.3). In that judgment, it was ruled that in a case where the form of the loan is a loan and none of the three exceptions mentioned above applies, it is not in keeping with the legal system to assume that equity capital has been provided for the purposes of tax calculation. It also follows from that judgment that in determining an at arm’s length interest rate – except for the interest rate – it will have to be based on what the parties have agreed and that in doing so, the character of that agreement may not be affected. If an at arm’s length interest rate cannot be determined without essentially making the loan profit-sharing, the loan should not be classified as capital for tax purposes, but as an imprudent loan. That the interest rate should be adjusted under the arm’s length principle to the extent that it constitutes an imprudent loan has not been plausibly demonstrated by the defendant, as held below.” “8.3.3.2. In the court’s opinion, the loan commitments come so close to the provision of equity capital that they should be equated with it for the application of the doctrine of fraus legis. Although the loan commitments were designated as loans and there is also an obligation to repay the funds under the LPAs, if the following facts and circumstances are also taken into account, they show that, from the perspective of the underlying investors, it did not matter whether an interest-free shareholder loan was provided or equity. The court takes into account not only that the loan commitments are presented as equity in the LPs’ financial statements, but also that – as is not in dispute between the parties – were interest-free. As a result, the investors in the LPs would enjoy the full return on their investment (including the amounts received by the LPs as interest) in the form of profit distributions (or disposal benefits). In these circumstances, the court does not see sufficient ground in the possible characterisation of the loan commitments under UK company law as debt capital to treat the claimant’s case differently from the case at issue in the judgment of 16 July 2021.” “8.6.1. The claimant has argued that the application of fraus legis in its case is not compatible with the freedom of establishment enshrined in Article 49 of the Treaty on the Functioning of the European Union. She has referred to the Lexel judgment in this regard. The defendant does not consider such a restriction to be present. He refers in this regard to the judgment of the Amsterdam Court of Appeal of 30 September 2021, ECLI:NL:GHAMS:2021:2832 and the conclusions of A-G Wattel of 23 June 2021, ECLI:NL:PHR:2021:666, and of 31 August 2021, ECLI:NL:PHR:2021:780. 8.6.2. The court does not follow the claimant’s contention. The Supreme Court ruled, unclausibly, in r.o. 4.5.2 of its judgment of 16 July 2021 that litigants cannot invoke Union law in cases of abuse of rights. The court understands this judgment to mean that Union law does not preclude the application of fraus legis because that doctrine is precisely tailored to combat wholly artificial constructions that have no connection with economic reality and are only intended to obtain a tax advantage. Importantly, when determining the legal consequences of fraus legis, the principle of proportionality plays a decisive role, so that the entire interest deduction is not simply refused, but the part of the interest deduction that is justified must be assessed. The Lexel judgment does not preclude such a fight against wholly artificial constructions. The court adds that the doctrine of fraus legis applies without distinction in domestic and cross-border cases. In this regard, the court also refers to the opinion given under 6.5.2.” Click here for English Translation Click here for other translation

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. Judgment 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.”

“X Shareholder Loan B.V.” and its subsidiaries had been set up in connection with a private equity acquisition structure. In 2011, one of “X Shareholder Loan B.V.”‘s subsidiaries bought the shares of the Dutch holding company. This purchase was partly financed by a loan X bv had obtained from its Luxembourg parent company. The Luxembourg parent company had obtained the the funds by issuing ‘preferred equity certificates’ (PECs) to its shareholders. These shareholders were sub-funds of a private equity fund, none of which held a direct or indirect interest in “X Shareholder Loan B.V.” of more than one-third. The tax authorities found, that deductibility of the interest paid by “X Shareholder Loan B.V.” to its Luxembourg parent was limited under Section 10a Vpb 1969 Act. The Court of Appeal upheld the assessment. According to the Court, whether there is an intra-group rerouting does not depend on whether the parties involved are related entities within the meaning of section 10a, i.e. whether they hold an interest of at least one-third. Instead, it should be assessed whether all the entities involved belong to the same group or concern. This does not necessarily require an interest of at least one-third. No satisfied with the decision “X Shareholder Loan B.V.” filed an appeal with the Supreme Court. Judgment of the Supreme Court The Supreme Court declared the appeal well-founded and remanded the case to Court of Appeal for further consideration of the issues that had not addressed by the court in its previous decision. Click here for English translation Click here for other translation

The German BASF group is active in the chemical industry and has subsidiaries all over the world including Italy. In FY 2006 BASF Italia s.p.a. was served with two notices of assessment by the tax authorities. The tax assessments formulated three findings. 1. non-deductibility of the cancellation deficit – arising from the merger by incorporation of Basf Agro s.p.a. into Basf Italia s.p.a., resolved on 27 April 2004 – which the acquiring company had allocated to goodwill, the amortisation portions of which had been deducted in tenths and then, from 2005, in eighteenths. The Office had denied the deductibility on the ground that the company, in the declaration submitted electronically, had not expressly requested, as required by Article 6(4) of Legislative Decree No. 358 of 8 October 1997, the tax recognition of the greater value of goodwill recorded in the balance sheet to offset the loss from cancellation, as allowed by paragraphs 1 and 2 of the same provision. Moreover, as a subordinate ground of non-deductibility, the assessment alleged the unenforceability to the Administration of the same merger pursuant to Article 37-bis of Presidential Decree No 600 of 29 September 1973, assuming its elusive nature. 2. non-deductibility of the annulment deficit – arising from the merger by incorporation of Basf Espansi s.p.a. into Basf Italia s.p.a., resolved in 1998 – which the acquiring company had allocated partly to goodwill and partly to the revaluation of tangible fixed assets, the depreciation portions of which had been deducted annually. The Office, also in this case, had denied the deductibility due to the failure to express the relative option, pursuant to Article 6(4) of Legislative Decree No. 358 of 1997, in the company’s declaration. 3. non-deductibility of interest expenses arising from a loan obtained by the taxpayer to carry out the transactions above. The Provincial Tax Commission of Milan partially upheld BASF’s appeals against the tax assessments, upholding the latter limited to the finding referred to in the second finding, concerning the non-deductibility of the cancellation deficit arising from the merger by incorporation of Basf Espansi s.p.a.. The Lombardy CTR, accepted the first and rejected the second, therefore, in substance, fully confirming the tax assessments. BASF then filed an appeal with the Supreme Court against the judgment, relying on seven pleas. The sixth plea related to lack of reasoning in the CTR judgment in regards of non-deductibility for interest expenses arising from the intra group loan. Judgment of the Supreme Court The Supreme Court found that the (first and) sixth plea was well founded and remanded the judgment to the CTR, in a different composition. Excerpts “7. The sixth plea in law criticises, pursuant to Article 360(1)(3) of the Code of Civil Procedure, the judgment under appeal for breach of Article 110(7) of Presidential Decree No 917 of 1986, in so far as the CTR held that the interest expense incurred by the appellant in connection with the loan obtained from another intra-group company for the purchase of the share package of Basf Agro s.p.a. was not deductible. The plea is well founded. In fact, the CTR reasoned on this point solely by stating that the deduction was ‘held to be inadmissible on the basis of the thesis underlying the contested assessment, that is, the intention to evade tax’. Such ratio decidendi is limited to the uncritical mention of the Administration’s thesis, which, however, as far as can be understood from the concise wording used by the CTR, does not relate to the financing in itself, but to the transaction, referred to in the first relief, in which it was included. A transaction whose evasive nature was not even appreciated by the CTR, the question having been absorbed by the non-deductibility, for other reasons, of the negative component arising from the merger by incorporation of Basf Agro.” Click here for English translation Click here for other translation

In 2011, Petrolia SE established a wholly owned subsidiary in Norway – Petrolia Noco AS – to conduct oil exploration activities on the Norwegian shelf. From the outset, Petrolia Noco AS received a loan from the parent company Petrolia SE. The written loan agreement was first signed later on 15 May 2012. The loan limit was originally MNOK 100 with an agreed interest rate of 3 months NIBOR with the addition of a margin of 2.25 percentage points. When the loan agreement was formalized in writing in 2012, the agreed interest rate was changed to 3 months NIBOR with the addition of an interest margin of 10 percentage points. The loan limit was increased to MNOK 150 in September 2012, and then to MNOK 330 in April 2013. In the tax return for 2012 and 2013, Petrolia Noco AS demanded a full deduction for actual interest costs on the intra-group loan to the parent company Petrolia SE. An assessment was issued by the tax authorities for these years, where the interest deductions had been partially disallowed. The assessment for these years was later upheld in court. For FY 2014, 2015 and 2016, Petrolia Noco AS had also claimed a full deduction for actual interest costs on the entire intra-group loan to the parent company. It is the assessment for these years that is the subject of dispute in this case. The assessment was first brought to the Court of Oslo where a decision in favour of the tax authorities was issued in November 2021. This decision was appealed by Petrolia Noco AS to the Court of Appeal. Judgment of the Court The Court of Appeal dismissed the appeal and decided in favour of the Norwegian tax authorities. Excerpts “The Court of Appeal also agrees with the state that neither the cost plus method nor a rationality analysis can be considered applicable in this case. With the result the Court of Appeal has reached so far, the CUP method should be preferred – in line with the OECD guidelines. After this, in summary, it appears clear that the interest margin on the intra-group loan is significantly higher than in a comparable and independent market and thus not an arm’s length price. The higher interest implies a reduction in the appellant’s income, cf. Tax Act section 13-1 first paragraph. The Court of Appeal cannot see that the adjustments claimed by the appellant change this. In the Court of Appeal’s view, it is also clear that the reduction in income has its cause in the community of interest. Whether adjustments should be made to the basis of comparison at the time of the price change, the Court of Appeal comes back to when assessing the exercise of discretion. Consequently, there was access to a discretionary determination of the appellant’s income according to Section 13-1 first paragraph of the Tax Act, also with regard to the interest margin.” “In the Court of Appeal’s view, additional costs that would have been incurred by independent parties, but which are not relevant in the controlled transaction, must be disregarded. Reference is made to the OECD guidelines (2020) point C.1.2.2, section 10.96: In considering arm’s length pricing of loans, the issue of fees and charges in relation to the loan may arise. Independent commercial lenders will sometimes charge fees as part of the terms and conditions of the loan, for example arrangement fees or commitment fees in relation to an undrawn facility. If such charges are seen in a loan between associated enterprises, they should be evaluated in the same way as any other intra-group transaction. In doing so, it must be borne in mind that independent lenders’ charges will in part reflect costs incurred in the process of raising capital and in satisfying regulatory requirements, which associated enterprises might not incur. The decisive factor is whether the costs or rights that the effective interest margin in the observed exploration loans between independent parties is an expression of, are also relevant in the intra-group loan. As far as the Court of Appeal understands, the appellant does not claim that various fees or costs incurred in exploration loans from a bank have been incurred in the intra-group loan, and in any case no evidence has been provided for this. In the Court of Appeal’s view, such costs and fees are therefore not relevant in the comparison. The appellant, on the other hand, has stated that the loan limit that Petrolia SE had made available, and the fact that the loan limit was increased if necessary, means that a so-called “commitment fee”, which accrues in loans between independent parties where an unused credit facility is provided, must be considered built into the agreed interest rate. In the Court of Appeal’s view, Petrolia SE cannot be considered to have had any obligation to make a loan limit available or to increase the loan limit if necessary. It appears from the loan agreement point 3.2 that the lender could demand repayment of the loan at its own discretion. The appellant has stated that this did not entail any real risk for the borrower. It is probably conceivable that Petrolia SE did not intend for this clause to be used, and that the appellant had an expectation of this. In this sense, it was a reality in the loan framework. However, it is clear, and acknowledged by the appellant, that the point of financing the appellant through loans rather than higher equity was Petrolia SE’s need for flexibility. Thus, it appears to the Court of Appeal that it is clear that the appellant had no unconditional right to the unused part of the loan limit. The Court of Appeal therefore believes that the Board of Appeal has not made any mistakes by comparing with nominal interest margins. On this basis, the Court of Appeal can also see no reason why it should have been compared with the upper tier of the observed nominal interest margins in the exploration loans between independent parties. In

“Dividend B.V.” is the legal successor of a BV that has made (dividend) distributions. With respect to the distributions to a Luxembourg company (LuxCo), no Dutch dividend tax was withheld on the basis of the withholding tax exemption. Prior to the first distribution, the relevant shares in the BV were held by a limited partnership established in the Cayman Islands. This limited partnership transferred the shares in the BV to LuxCo in view of the first distribution. In the light of the T-Danmark judgment, the Court found that the tax authorities had proved that there had been an abuse of EU law, on the basis that without the use of LuxCo, a 15% withholding tax would have been due in the Netherlands, and after the use of LuxCo, this was not the case – based only on the formal conditions. The use of letter shares and preferred equity certificates avoided withholding tax in Luxembourg. LuxCo passed on 99.84% of the dividends received to its shareholder in a relatively short period of time and was liquidated shortly thereafter. LuxCo did not carry out any real economic activity. As “Dividend B.V.”‘s position in the case was arguable, the court annulled the default fines. Click here for English translation Click here for other translation

An intercompany loan in the form of a so-called international debt pushdown had been issued to Universal Music Japan to acquire the shares of another Japanese group company. The tax authority found that the loan transaction had been entered for the principal purpose of reducing the tax burden in Japan and issued an assessment where deductions of the interest payments on the loan had been disallowed for tax purposes. The Tokyo District Court decided in favour of Universal Music Japan and set aside the assessment. The Court held that the loan did not have the principle purpose of reducing taxes because the overall restructuring was conducted for valid business purposes. Therefore, the tax authorities could not invoke the Japanese anti-avoidance provisions to deny the interest deductions. In 2020 the decision of the district court was upheld by the Tokyo High Court. The tax authorities then filed an appeal with the Supreme Court Decision of the Court The Supreme Court dismissed the appeal and set aside the assessment of the tax authorities. “The term “economic rationality” is used to refer to the economic rationality of a series of transactions. In examining whether or not the entire series of transactions lacks economic rationality, it is necessary to consider (i) whether the series of transactions is unnatural, such as being based on procedures or methods that are not normally assumed or creating a form that deviates from the actual situation, and (ii) whether there are other rational reasons for such a reorganisation other than a decrease in tax burden. (iii) Whether there are any business objectives or other reasons other than a reduction in the tax burden that would constitute a rational reason for such a reorganisation.” “However, the borrowings in question were made under an agreement to be used solely for the purchase price of the shares of the domestic corporations in question and related costs, and in fact the appellant acquired the shares and brought the domestic corporations under its control, and there is no indication that the amount borrowed was unreasonably high in relation to its intended use. In addition, the interest and repayment period of the loan were determined based on the expected profit of the appellant, and there is no evidence that the appellant is currently experiencing any difficulty in paying the interest on the loan. It is therefore difficult to say that the above points make the borrowing unnatural or unreasonable. (d) Considering the above circumstances as a whole, the borrowing in question cannot be said to be unnatural or unreasonable from an economic and substantive standpoint, i.e. to lack economic rationality. Therefore, the borrowing in question does not fall within the scope of Article 132(1) of the Corporate Tax Act, which states that “the borrowing is deemed to result in an unreasonable decrease in the corporate tax burden if it is permitted”.” Click here for English Translation Click here for other translation

Heavy Transport Holding Denmark ApS, a subsidiary in the Heerema group, paid dividends to a parent company in Luxembourg which in turn paid the dividends to two group companies in Panama. The tax authorities found that the company in Luxembourg was not the beneficial owner of the dividends and thus the dividends were not covered by the tax exemption rules of the EU Parent/Subsidiary Directive or the Double Taxation Convention between Denmark and Luxembourg. On that basis an assessment was issued regarding payment of withholding tax on the dividends. An appeal was filed by Heavy Transport Holding Denmark ApS with the High Court. Judgment of the Eastern High Court The court dismissed the appeal of Heavy Transport Holding Denmark ApS and decided in favor of the tax authorities. The parent company in Luxembourg was a so-called “flow-through” company which was not the beneficial owner of the dividend and thus not covered by the tax exemption rules of the Parent/Subsidiary Directive and the Double Taxation Convention between Denmark and Luxembourg. The Danish subsidiary was held liable for the non-payment of dividend tax. Excerpt “The actual distribution On 23 May 2007, Heavy Transport Holding Denmark ApS distributed USD 325 million, corresponding to DKK 1,799,298,000, to its parent company Heavy Transport Finance (Luxembourg) SA. The amount was set off by the Danish company against a claim on the Luxembourg parent company arising from a loan of the same amount taken out by Heavy Transport Finance (Luxembourg) SA in Heavy Transport Holding Denmark ApS on 22 January 2007 to pay the purchase price for the company. Heavy Transport Finance (Luxembourg) SA acquired Heavy Transport Holding Denmark ApS from the two companies, Heavy Transport Group Inc. and Incomara Holdings SA, both resident in Panama and owners of both the Danish and Luxembourg companies. The purchase price was transferred from Heavy Transport Finance (Luxembourg) SA to the Panamanian companies on 24 January 2007. The loan from Heavy Transport Holding Denmark ApS to Heavy Transport Finance (Luxembourg) SA of USD 325 million is referred to in the loan agreement between the parties of 22 January 2007 as an ‘interim dividend’ and states that the amount will be paid as a ‘short term loan’ until such time as a resolution is passed at a future general meeting of Heavy Transport Holding Denmark ApS to distribute a dividend to the parent company in the same amount. The loan agreement also provides that the loan is to be repaid on demand or immediately after the dividend payment has been declared by offsetting it. It is undisputed that the company Heavy Transport Finance (Luxembourg) SA was set up as an intermediate holding company between the Panamanian companies and Heavy Transport Holding Denmark ApS with the aim of ensuring that no Danish withholding tax was triggered by the dividend distribution. Moreover, as regards the activities of Heavy Transport Finance (Luxembourg) SA, it appears that the company, which was apparently set up in 2004 to provide the financing for Heavy Transport Holding Denmark ApS and, after 22 January 2007, as the parent company of the company, did not have (and does not have) any employees, the administration of the company being outsourced to a group company in Luxembourg, Heerema Group Service SA. It is undisputed that the parent company had no other activity when it took over the Danish company. Heavy Transport Finance (Luxembourg) SA’s annual accounts for 2007 show that its assets as at 31 December 2007 consisted of cash of USD 148 551 and financial assets of USD 1 255 355 in its subsidiary Heavy Transport Holding Denmark ApS. In the light of the foregoing, the Court finds that Heavy Transport Finance (Luxembourg) SA was obliged and, moreover, was only able to repay the loan of USD 325 million to Heavy Transport Holding Denmark ApS by offsetting the dividend received and thus had no real power of disposal over the dividend. Consequently, and since the purpose of the transactions was undoubtedly to avoid Danish taxation of the dividends in connection with the repatriation of the funds to the shareholders in Panama, Heavy Transport Finance (Luxembourg) SA cannot be regarded as the beneficial owner of the dividends within the meaning of Article 10(2) of the Double Taxation Convention and, as a general rule, the tax should not be reduced in accordance with the rules of the Convention. Heavy Transport Finance (Luxembourg) SA is also not entitled to the tax exemption under the Parent/Subsidiary Directive, as it must be considered as a flow-through company with no independent economic and commercial justification, and must therefore be characterised as an artificial arrangement whose sole purpose was to obtain the tax exemption under the Directive, see the judgment of 26 February 2019 in Joined Cases C-116/16 and C-117/16. Significance of the possibility of liquidation under Article 59 of the current law on limited liability companies However, Heavy Transport Holding Denmark ApS claims that there is no abuse of the Parent/Subsidiary Directive, since the two shareholders in Panama, Heavy Transport Group Inc. and Incomara Holdings SA, instead of contributing the company Heavy Transport Finance (Luxembourg) SA to receive and distribute the ordinary dividends of Heavy Transport Holding Denmark ApS to the Panamanian companies, could have chosen to liquidate the Danish company pursuant to Article 59 of the current Anartsselskabslov, whereby any liquidation proceeds distributed by the parent company in Luxembourg would have been tax-free for the two shareholders. In its judgment of 26 February 2019, paragraphs 108-110, the CJEU has ruled on the situation where there is a double taxation convention concluded between the source State and the third State in which the beneficial owners of the dividends transferred by the flow-through company are resident for tax purposes. The Court held that such circumstances cannot in themselves preclude the existence of an abuse of rights. The Court stated that if it is duly established on the basis of all the facts that the traders have carried out purely formal or artificial transactions, devoid of any economic or

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. Judgment 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

The issue was whether interest on third-party loans guaranteed by related parties could be deducted under Slovenia’s thin capitalisation rules in Article 32(3) of the Corporate Income Tax Act. Judgment The Supreme Court annulled the lower court’s decision and the tax authority’s original ruling, remanding the case for a retrial. The court clarified that interest on third-party loans guaranteed by a “qualified partner” of the taxpayer is not tax deductible when such guarantees exceed four times the partner’s share in the taxpayer’s capital — unless the taxpayer can prove that the loan would have been obtained under the same terms without the guarantee. The concept of “guarantee” here does not require a direct, enforceable obligation for repayment from the guarantor’s assets; even implicit guarantees — creating a reasonable lender expectation of repayment support from the qualified partner — can trigger thin capitalisation rules. However, if the taxpayer shows that the guarantee did not impact the terms or availability of the loan (i.e., that the lender would have extended the same loan without any expectation of related-party backing), then the interest can remain deductible. Similarly, if an unrelated party would have provided the same guarantee under the same conditions, deductibility may also be preserved. But even in those cases, a separate transfer pricing assessment of the financing terms may still apply. Click here for English translation Click here for other translation

Since Arnoldo Mondadori Editore SpA’s articles of association prevented it from issuing bonds, financing of the company had instead been archived via an arrangement with its subsidiary in Luxembourg, Mondadori International S.A. To that end, the subsidiary issued a bond in the amount of EUR 350 million, which was subscribed for by US investors. The funds raised were transferred to Arnoldo Mondadori Editore SpA via an interest-bearing loan. The terms of the loan – duration, interest rate and amount – were the same as those of the bond issued by Mondadori International S.A. to the US investors. The Italian tax authority denied the withholding tax exemption in regards of the interest paid on the loan. According to the tax authorities Mondadori International S.A. had received no benefit from the transaction. The interest paid by Arnoldo Mondadori Editore SpA was immediately and fully transferred to the US investors. Mondadori International S.A. was by the authorities considered a mere conduit company, and the US investors were the beneficial owners of interest which was therefore subject to 12.5% withholding tax. Judgment of the Supreme Court The Supreme Court set aside the assessment of the tax authorities and decided in favor of Arnoldo Mondadori Editore SpA. The court held that the beneficial owner requirement should be interpreted in accordance with the current commentary on Article 11 of the OECD Model Tax Convention. On that basis Mondadori International S.A. in Luxembourg was the beneficial owner of the interest and thus entitled to benefit from the withholding tax exemption. Excerpt “First, the company must take one of the forms listed in the annex to Directive 2004/49; second, it must be regarded, under the tax legislation of a Member State, as resident there for tax purposes and not be regarded, under a double taxation convention, as resident for tax purposes outside the European Union; third, it must be subject to one of the taxes listed in Article 3(a)(iii) of Directive 2003/49, without benefiting from an exemption (cf. paragraph 147 of the aforementioned decision; also paragraph 120 of Court of Justice, 26 February 2019, Case C 116/16, T Danmark; No 117/18, Y Denmark). Nor is the national authority, then, required to identify the entity or entities which it considers to be the beneficial owner of the “interest” in order to deny a company the status of beneficial owner of the “interest” (paragraph 145). Finally, in its judgment of 26 September 2019 on Joined Cases C 115/16, C 118/16, C 119/16 and C 299/16, the Court of Justice expressed the principle that the beneficial owner is anyone who does not appear to be a construction of mere artifice, providing additional indicators or spy-indicators whose presence is an indication of exlusive intent. 4. Now, in the case at hand, it emerges from the principles set out above that the “actual beneficiary” of the interest on the Italian bond must be considered to be the Luxembourg company. And in fact, contrary to the case law examined above, in the case under examination, it is not disputed in the documents that Mondadori International s.a: 1) has existed for more than fifty years; 2) has its own real operational structure and does not constitute an “empty box 3) its corporate purpose is the holding and sale of shares in publishing companies; 4) it produced profits of over EUR 8 million in the tax year in question 5) it issued the bond six months before the Italian company when the latter could not do so and precisely because it could not do so: the two loans remain distinct by virtue of their negotiating autonomy and find different justification 6) the interest received by the Italian parent company was recognised in its financial statements and contributed to its income; 7) it has actual disposal of the sums, in the absence of contractually fixed obligations of direct (re)transfer 8) it issued its own bonds, discounting the relative discipline, placing its assets as collateral for the American investors. In particular, the breach and misapplication of the law emerges due to the examination of the contractual conditions, duly reported in the appeal for cassation, fulfilling the burden of exhaustiveness of the writing (see especially pages 134 – 136). There are no obligations, limits or conditions that provide for the transfer to the United States of the amounts received from Italy, thus leaving entrepreneurial autonomy and patrimonial responsibility in the hands of the Luxembourg company, which, moreover, has a vocation by statute for corporate operations of this type. These principles have misguided the judgment on appeal, which therefore deserves to be set aside and referred back to the judge on the merits so that he may comply with the aforementioned European and national principles, which we intend to uphold. 5. The appeal is therefore well-founded and deserves to be upheld, with the absorption of grounds 1, 2, 4, 6 and 7 of appeal r.g. no. 7555/2013 and the analogous grounds 2, 3, 4, 5, 7 and 8 of appeal r.g. no. 7557/2013, all of which focus on the same question of whether Mondatori Editore is the “beneficial owner” of the payment of interest on the bond loan.” Click here for English translation Click here for other translation

“GAAR S.A” is a holding company with a share capital of EUR 55,000.00. In 2010, “GAAR S.A” was in a situation of excess equity capital resulting from an accumulation of reserves (EUR 402,539.16 of legal reserves and EUR 16,527,875.72 of other reserves). The Board of Directors, made up of three shareholders – B………… (holder of 21,420 shares, corresponding to 42.84% of the share capital), C………… (holder of a further 21,420 shares, corresponding to 42.84% of the share capital) and D………… (holder of 7. 160 shares, corresponding to the remaining 14.32% of the share capital) – decided to “release this excess of capital” and, following this resolution, the shareholders decided: i) on 22.02.2010 to redeem 30,000 shares, with a share capital reduction, at a price of EUR 500.00 each, with a subsequent share capital increase of EUR 33. 000.00, by means of incorporation of legal reserves, and the share capital of the appellant will be made up of 20,000 shares at the nominal value of €2.75 each; and ii) on 07.05.2010, to cancel 10,000 shares, with a capital reduction, at the price of €1. 000.00 each, with a subsequent share capital increase of 27,500.00 Euros, by means of incorporation of legal reserves, and the share capital of the appellant is now composed of 10,000 shares at a nominal value of 5.50 Euros each (items E and F of the facts). As a result of this arrangements, payments were made to the shareholders in 2010, 2011 and 2012, with only the payment made on 4 September 2012 being under consideration here. On that date, cheques were issued for the following amounts: B………… – €214,200.00; C………… – €214,200.00; and D………… – €71,600.00. Payments which, according to “GAAR S.A”, since they constitute exempt capital gains, were not subject to taxation, that is, no deduction at source was made. Following an inspection the tax authorities decided, to disregard the arrangement, claiming that it had been “set up” by the respective shareholders with the aim of obtaining a tax advantage (whilst completely ignoring the economic substance of the arrangement). In short, the tax authorities considered that the transactions were carried out in order to allow “GAAR S.A” to distribute dividends under the “guise” of share redemption, thus avoiding the tax to which they would be subject. An appeal filed by “GAAR S.A.” with the Administrative Court was dismissed. An appeal was then filed with the Supreme Administrative Court. Judgment of the Supreme Administrative Court The Supreme Administrative Court dismissed the appeal and found that “GAAR S.A.” was liable for the payment of the tax which was not withheld at source and which should have been, we also consider that there is no error in the judgment under appeal in concluding that “at least in terms of negligence, it seems to us that the award of compensatory interest is, in cases such as the present, the natural consequence of the verification of the abuse, especially given the environmental and intellectual elements, demonstrating that there was a deliberate intention to avoid the due withholding tax” According to the court the tax authorities does not have to prove an “abusive” intention of the taxpayer. The tax authorities is not required to prove that the taxpayer opted for the construction leading to the tax saving in order to intentionally avoid the solution which would be subject to taxation. It is sufficient for the tax authorities to prove that the operation carried out does not have a rational business purpose and that, for this reason, its intentionality is exhausted in the tax saving to which it leads. Having provided this proof, the requirements of article 38(2) of the LGT should be considered to have been met. When the application of the GAAR results in the disregard of a construction and its replacement by an operation whose legal regulation would impose the practice of a definitive withholding tax act, it is the person who comes to be qualified as the substitute (in the light of the application of the GAAR) who is primarily liable for this tax obligation whenever the advantage that the third party obtains results from an operation carried out by him and it is possible to conclude, that he was the beneficiary of the operation. It is also possible to conclude, under the procedure set out in Article 63 of the CPPT, that the third party had a legal obligation to be aware of the alternative legal transaction that comes to be qualified as legally owed as a result of the disregard of the transaction carried out. Click here for English translation Click here for other translation

Apex Tool Holding France acquired all the shares of Cooper Industrie France, which has since become Apex Tool France. This transaction was financed by a ten-year vendor loan at a rate of 6%. This claim on Apex Tool Holding France was transferred on the same day by the seller to the parent company of this company, which is the head of a global group specialising in tool manufacturing and thus, from that date, the creditor of its subsidiary. Apex Tool Holding France reintegrated the fraction of interest relating to this intra-group loan exceeding the average annual effective rate charged by credit institutions for variable-rate loans granted to companies into its income for the years 2011 to 2013. Apex considered that an interest rate of 6 % was in line with that which it could have obtained from independent financial institutions or organisations under similar conditions. The analysis was set aside by the tax authorities and an assessment was issued where the deduction of interest had been reduced. Apex filed an appeal with the Administrative Court of Appeal. The Court found in favor of the tax authorities in a decision issued in March 2020. An appeal was then filed by Apex with the Supreme Court. Judgment of the Court The Supreme Court set aside the decision of the Court of Appeal and issued a decision in favor of Apex Tool Group. Excerpts (Unofficial English translation) “3. It is clear from the documents in the file submitted to the trial judges that in order to establish that the rate of 6% at which ATFH1 had paid the loan granted to it by its parent company, which was higher than the rate provided for in the first paragraph of 3° of 1 of Article 39 of the General Tax Code, was not higher than the rate that this company would have obtained from an independent financial institution, the applicant company relied on an initial study drawn up by its counsel. In the absence of previous loans obtained by ATFH1 in 2010, this study first determined the credit rating of the intra-group loan in dispute according to the methodology published by the rating agency Moody’s for the analysis of industrial companies, which took into account the company’s profile, in particular with regard to market data, its size, its profitability, the leverage effect and its financial policy. The rating was set at “BB+”. The study then compared ATHF’s interest rate of 6% with the rates of bond issues over the same period with comparable credit ratings, using data available in the Bloomberg database. The company also relied on an additional study that analysed the arm’s length rate in a sample of bank loans to companies in the non-financial sector with credit ratings ranging from ‘BBB-‘ to ‘BB’. 4. Firstly, in holding that the credit rating assigned to the intra-group loan granted to ATFH1 by the first study in accordance with the methodology set out in point 3 did not reflect the intrinsic situation of that company on the grounds that it had been determined by taking into account the aggregate financial statements of the group that ATHF1 formed with its subsidiaries and sub-subsidiaries whereas, as stated in point 2, for the application of the provisions of Articles 39 and 212 of the General Tax Code, the profile of the borrowing company must in principle be assessed in the light of the financial and economic situation of the group that this company forms with its subsidiaries, the Court erred in law. 5. Secondly, it is clear from the documents in the file submitted to the court that the sample of comparable companies used in the supplementary study, the relevance of which had not been contested by the administration, concerned companies in the non-financial sector such as ATFH1 and which had obtained credit ratings ranging from “BBB-” to “BB”, i.e. one notch above and below the “BB+” credit rating determined for the loan in question in the first study. In dismissing this additional study on the sole ground that the companies in the sample belonged to heterogeneous sectors of activity and that, consequently, it was not established that, for a banker, they would have presented the same level of risk as that of ATFH1, whereas the credit rating systems developed by the rating agencies aim to compare the credit risks of the rated companies after taking into account, in particular, their sector of activity, the Court erred in law. “ Click here for English translation Click here for other translation

At issue was whether interest expenses incurred as a result of intra-group liabilities related to the acquisition of shares were tax deductible. In August 2010, the Swedish companies H AB and B AB had agreed, among other things, to sell E Oy’s shares to B AB and to allow B AB to transfer its rights and obligations to purchase the said shares directly or indirectly to its own subsidiary. B AB’s subsidiary had established D Oy in August 2010. In September 2010, before the completion of the acquisition, B AB had transferred its rights and obligations to purchase E Oy’s shares to D Oy. Ownership of E Oy’s shares had been transferred to D Oy at the end of September 2010. D Oy had financed the acquisition of E Oy’s shares mainly with a debt it had taken from B AB, from which D Oy had deducted the interest expenses incurred in its annual taxation. The tax audit report considered that no business-independent business grounds had been presented for the transfer of the loan liability of the acquisition to D Oy in a multi-stage ownership and financing arrangement and that the arrangement had been implemented solely to benefit from the Finnish group grant scheme and interest deduction. On this basis, the interest expenses on the debt related to the acquisition of E Oy’s shares had been added to D Oy’s taxable income in the tax adjustments submitted for the tax years 2012–2015 to the detriment of the taxpayer and when the tax for 2016 was delivered. In addition, the Taxpayers’ Law Enforcement Unit had stated that the actions in question were entirely artificial in a way that was proportional to the Supreme Administrative Court’s yearbook decision in the Supreme Administrative Court 2016: The Administrative Court held that the arrangement as a whole had to be regarded as artificial. Hence, deductibility of the interest paid to the foreign group company could be denied on the basis of the tax avoidance provision. This decision was appealed to the Supreme Administrative Court by the company. Judgment of the Supreme Administrative Court The Court set aside the decision of the administrative court and ruled in favor of D Oy. The Court held that the establishment of an auxiliary company as a company acquiring shares in an acquisition between independent parties and the financing of the company partly with equity and partly with intra-group debt could not be considered as artificial transactions. In such a situation, the deductibility of interest could not be denied under the tax avoidance provision. D Oy had acquired E Oy’s shares from an independent party. Based on the preliminary work of the Business Income Tax Act, the legislator’s starting point was that in share transactions between independent parties, the tax benefits related to the use of holding companies are limited by amending the law. Therefore, and taking into account that the premise of the Business Income Tax Act was that interest expenses accrued in business activities are deductible, the establishment of a holding company as an acquiring company and the financing of a holding company as an artificial act. Nor did such a situation have to be equated with the situation presented in the Supreme Administrative Court’s yearbook decision KHO 2016: 72. D Oy was thus entitled to deduct the interest expenses of the debt related to the acquisition of E Oy in its taxation for the tax years 2012 and 2013 as provided in section 7 and section 18 (1) (2) of the Business Income Tax Act and section 7 of the same law in its taxation for 2014–2016. as provided for in Article 18 (1) (2) and Article 18a. Tax years 2012–2016. in the manner provided for in subsection 1 (2) and section 18 a. Tax years 2012–2016. in the manner provided for in subsection 1 (2) and section 18 a. Tax years 2012–2016. Click here for English translation Click here for other translation

At issue was whether interest expenses incurred as a result of intra-group liabilities related to the acquisition of shares were tax deductible. In 2005, CA / S, indirectly owned by private equity investors A and B, had purchased a listed share in DA / S. DA / S’s subsidiary EA / S had established H AB in July 2008. On 25 August 2008, EA / S had transferred approximately 83.8 per cent of F Oy’s shares in kind to H AB and sold the remaining approximately 16.2 per cent at the remaining purchase price. On August 26, 2008, EA / S had subscribed for new shares in G Oy and paid the share subscription price in kind, transferring 56 percent of H AB’s shares. On August 27, 2008, G Oy had purchased the remaining 44 percent of H AB’s shares. EA / S had granted G Oy a loan corresponding to the purchase price, the interest expenses of which the company had deducted annually in its taxation. The share transfers in 2008 had been reported to be related to the 2005 acquisition and In the share transfers carried out in 2008, EA / S’s direct holding in F Oy had been changed to indirect. The change in ownership structure was implemented within a short period of time as a series of share transfers. With the help of the share transfers, new debt relationships had been created in the Group, with the aim of transferring the interest burden on EA / S to G Oy corresponding to the purchase price of H AB’s shares. When the share transfers were considered as a whole, their purpose was to seek a tax advantage in the form of interest deductions. The share transfers had therefore not corresponded to the real nature or purpose of the case and were artificial in nature. The Administrative Court held that when the share transfers were considered as a whole, their purpose was to seek a tax advantage in the form of interest deductions. The share transfers had therefore not corresponded to the real nature or purpose of the case and were artificial in nature. Hence, deductibility of the interest paid to the foreign group company could be denied on the basis of the tax avoidance provision. This decision was appealed to the Supreme Administrative Court by the company. Judgment of the Supreme Administrative Court The Court dismissed the appeal and upheld the decision of the administrative court. It stated that the subsidiary had been used in a multi-stage arrangement within the group as a company acquiring shares and that the arrangement as a whole had to be considered wholly artificial. According to the settled case law of the Court of Justice of the European Union, national measures restricting the right to deduct interest do not infringe the freedom of establishment within the meaning of Article 49 TFEU if they deal only with purely artificial arrangements. The judgment of the Court of Justice in Case C-484/19, Lexel, does not have to be considered as a change in this settled case law. In the light of these factors and the artificial nature of the present share transfers, the Supreme Administrative Court held that the denial of the right to deduct interest expenses accrued to G Oy under section 28 of the Tax Procedure Act was not contrary to Article 49 TFEU in the present case. The denial of the right to deduct interest expenses was also not contrary to the prohibition of discrimination in the Nordic tax treaty. KHO 2021 178 Click here for English translation Click here for other translation

The US tax authorities had increased Whirlpool US’s taxable because income allocated to Whirlpool Luxembourg for selling appliances was considered taxable foreign base company sales income FBCSI/CFC income to the parent company in the U.S. under “the manufacturing branch rule” under US tax code Section 951(a). The income from sales of appliances had been allocated to Whirlpool Luxembourg  through a manufacturing and distribution arrangement under which it was the nominal manufacturer of household appliances made in Mexico, that were then sold to Whirlpool US and to Whirlpool Mexico. According to the arrangement the income allocated to Luxembourg was not taxable in Mexico nor in Luxembourg. Whirlpool challenged IRS’s assessment and brought the case to the US Tax Court. In May 2020 the Tax Court ruled in favor of the IRS. “If Whirlpool Luxembourg had conducted its manufacturing operations in Mexico through a separate entity, its sales income would plainly have been FCBSI [foreign base company sales income] under section 954(d)(1),”. The income should therefore be treated as FBCSI under the tax code, writing that “Section 954(d)(2) prevents petitioners from avoiding this result by arranging to conduct those operations through a branch.” Whirlpool brought this decision to US court of appeal. Judgment of the Court of Appeal The Court of Appeal upheld the decision of the tax court and found that under the text of the statute alone, the sales income was FBCSI that must be included in the taxpayer’s subpart F income. Excerpt: “The question presented is whether Lux’s income from its sales of appliances to Whirlpool-US and Whirlpool-Mexico in 2009 is FBCSI under §954(d)(2). That provision provides in full: Certain branch income. For purposes of determining foreign base company sales income in situations in which the carrying on of activities by a controlled foreign corporation through a branch or similar establishment outside the country of incorporation of the controlled foreign corporation has substantially the same effect as if such branch or similar establishment were a wholly owned subsidiary corporation deriving such income, under regulations prescribed by the Secretary the income attributable to the carrying on of such branch or similar establishment shall be treated as income derived by a wholly owned subsidiary of the controlled foreign corporation and shall constitute foreign base company sales income of the controlled foreign corporation. As the Tax Court aptly observed, § 954(d)(2) consists of a single (nearly interminable) sentence that specifies two conditions and then two consequences that follow if those conditions are met. The first condition is that the CFC was “carrying on” activities “through a branch or similar establishment” outside its country of incorporation. The second condition is that the branch arrangement had “substantially the same effect as if such branch were a wholly owned subsidiary corporation [of the CFC] deriving such income[.]” If those conditions are met, then two consequences follow as to “the income attributable to” the branch’s activities: first, that income “shall be treated as income derived by a wholly owned subsidiary of the controlled foreign corporation”; and second, the income attributable to the branch’s activities “shall constitute foreign base company sales income of the controlled foreign corporation.” 26 U.S.C. § 954(d)(2).” … “From these premises, § 954(d)(2) expressly prescribes the consequences that follow: first, that the sales income “attributable to” the “carrying on” of activities through Lux’s Mexican branch “shall be treated as income derived by a wholly owned subsidiary” of Lux; and second, that the income attributable to the branch’s activities “shall constitute foreign base company sales income of” Lux. That second consequence directly answers the question presented in this appeal. We acknowledge that § 954(d)(2) states that, if the provision’s two conditions are met, then “under regulations prescribed by the Secretary” the provision’s two consequences “shall” follow. And Whirlpool makes various arguments as to those regulations, seeking a result different from the one mandated by the statute itself. But the agency’s regulations can only implement the statute’s commands, not vary from them. (The Tax Court read the “under regulations” text the same way. See Op. at 38 (“The Secretary was authorized to issue regulations implementing these results.”)). And the relevant command here—that Lux’s sales income “shall constitute foreign base company sales income of” Lux—could hardly be clearer.” Click here for translation

In 1992, Loblaw Financial Holdings Inc. (“Loblaw Financial”), a Canadian corporation, incorporated a subsidiary in Barbados. The Central Bank of Barbados issued a licence for the subsidiary to operate as an offshore bank named Glenhuron Bank Ltd. (“Glenhuron”). Between 1992 and 2000, important capital investments in Glenhuron were made by Loblaw Financial and affiliated companies (“Loblaw Group”). In 2013, Glenhuron was dissolved, and its assets were liquidated. For the 2001, 2002, 2003, 2004, 2005, 2008 and 2010 taxation years, Loblaw Financial did not include income earned by Glenhuron in its Canadian tax returns as foreign accrual property income (“FAPI”). Under the FAPI regime in the Income Tax Act (“ITA”), Canadian taxpayers must include income earned by their controlled foreign affiliates (“CFAs”) in their Canadian annual tax returns on an accrual basis if this income qualifies as FAPI. However, financial institutions that meet specific requirements benefit from an exception to the FAPI rules found in the definition of “investment business” at s. 95(1) of the ITA. The financial institution exception is available where the following requirements are met: (1) the CFA must be a foreign bank or another financial institution listed in the exception provision; (2) its activities must be regulated under foreign law; (3) the CFA must employ more than five full-time employees in the active conduct of its business; and (4) its business must be conducted principally with persons with whom it deals at arm’s length. Loblaw Financial claimed that Glenhuron’s activities were covered by the financial institution exception to the FAPI rules. The Minister disagreed with Loblaw Financial and reassessed it on the basis that the income earned by Glenhuron during the years in issue was FAPI. Loblaw Financial objected and appealed the reassessments. The Tax Court held that the financial institution exception did not apply, as Glenhuron’s business was conducted principally with non-arm’s length persons. In reaching its decision, the court considered the scope of Glenhuron’s relevant business, looking at its receipt of funds and use of funds. It included in its analysis all receipts of funds indiscriminately, treating capital injections by shareholders and lenders like any other receipt of funds. The Tax Court also viewed Glenhuron’s use of funds as the management of an investment portfolio on the Loblaw Group’s behalf and regarded the influence of the Loblaw Group’s central management as pervading the conduct of business because of the Loblaw Group’s close oversight of Glenhuron’s investment activities. The Federal Court of Appeal disagreed with the Tax Court’s interpretation of the arm’s length requirement and with its analysis based on receipt and use of funds. It held that only Glenhuron’s income-earning activities had to be considered. It also found that direction, support, and oversight by the Loblaw Group should not have been considered, because these interactions are not income-earning activities and thus do not amount to conducting business with the CFA. It concluded that Glenhuron was dealing principally with arm’s length persons, and that Loblaw Financial was entitled to the benefit of the financial institution exception and did not need to include Glenhuron’s income as FAPI. It referred the reassessments back to the Minister for reconsideration However, the Tax Court’s interpretation of a technical provision in the Canadian legislation had the consequence that Loblaw would nonetheless have to pay $368 million in taxes and penalties. Judgment of the Supreme Court The Supreme Court upheld the decision of the Federal Court and set aside the assessment. The tax exception did apply, so Loblaw Financial did not have to pay taxes on the money made by Glenhuron. The arm’s length requirement was met. According to the Court “the FAPI regime is one of the most complicated statutory regimes in Canadian law”, but the question in this appeal is simple. Is a company “doing business” with a foreign affiliate when it manages and gives money to it? No. When the arm’s length requirement in the Income Tax Act is read in its grammatical and ordinary sense, it is clear money and management to an affiliate is not included in “doing business”. Loblaw Financial managed and gave money to Glenhuron, but it was not doing business with it. Rather, as a corporate bank, Glenhuron was doing business with other companies not related to it. So, the arm’s length requirement was met. As a result, the tax exception applied, and Loblaw Financial did not have to pay taxes on the money made by Glenhuron for the years in question. Click here for other translation

ALTA Energy, a resident of Luxembourg, claimed an exemption from Canadian income tax under Article 13(5) of the Canada-Luxembourg Income Tax Treaty in respect of a large capital gain arising from the sale of shares of ALTA Canada, its wholly-owned Canadian subsidiary. At that time, Alta Canada carried on an unconventional shale oil business in the Duvernay shale oil formation situated in Northern Alberta. Alta Canada was granted the right to explore, drill and extract hydrocarbons from an area of the Duvernay formation designated under licenses granted by the government of Alberta. The Canadian tax authorities denied that the exemption applied and assessed ALTA Energy accordingly. Article 13(5) of the Canada-Luxembourg Tax Treaty is a distributive rule of last application. It applies only in the case where the capital gain is not otherwise taxable under paragraphs (1) to (4) of Article 13 of the Treaty. Article 13(4) is relevant to the outcome of this appeal. Under that provision, Canada has preserved its right to tax capital gains arising from the disposition of shares where the shares derive their value principally from immovable property situated in Canada. However, the application of Article 13(4) is subject to an important exception. Property that would otherwise qualify as Immovable Property is deemed not to be such property in the circumstances where the business of the corporation is carried on in the property (the “Excluded Property” exception). The tax authorities argued that the Shares derived their value principally from Alta Canada’s Working Interest in the Duvernay Formation. The authorities also argued that the capital gain it realized would be taxable under Article 13(4) unless the Court agreed with ALTA’s submission that its full Working Interest is Excluded Property. ALTA Energy appealed the position of the tax authorities and argued the contrary view. According to ALTA, substantially all of ALTA Canada’s Working Interest remained Immovable Property because ALTA Canada drilled in and extracted hydrocarbons from only a small area of the Duvernay Formation that it controlled. In 2018 the Federal Court of Appeal decided in favour of ALTA Energie and the matter was referred back for reconsideration and reassessment. This decision was then appealed by the tax authorities before the Supreme Court The Judgment of the Supreme Court The Supreme Court dismissed the appeal of the tax authorities but with dissenting judges. Excerpts: [185] Nevertheless, we agree with Alta Luxembourg that treaty shopping is not inherently abusive. There is nothing necessarily improper about minimizing tax liability by selecting a beneficial tax regime in making an investment in a foreign jurisdiction (Crown Forest, at para. 49). Certain jurisdictions may provide tax incentives to attract businesses and investment; as such, taxpayers are entitled to avail themselves of such benefits to minimize tax. Thus, merely selecting a treaty to minimize tax, on its own, is not abusive. In fact, it may be consonant with one of the main purposes of tax treaties: encouraging trade and investment. [186] However, where taxing rights in a tax treaty are allocated on the basis of economic allegiance and conduit entities claim tax benefits despite the absence of any genuine economic connection with the state of residence, treaty shopping is, in our view, abusive. As Professors N. Bammens and L. De Broe explain, the use of “conduit companies” is disconnected from the objectives of bilateral tax treaties: . . . tax treaties are concluded for reasons of an economic nature: the contracting states want to stimulate reciprocal commercial relations by preventing double taxation. The use of conduit companies and treaty shopping structures has very little to do with this economic objective. Treaty shopping thus upsets the balance and reciprocity of the tax treaty: in order to preserve a tax treaty’s inherent reciprocity, its benefits must not be extended to persons not entitled to them. [Emphasis added; footnotes omitted.] (“Treaty Shopping and Avoidance of Abuse”, in Lang et al., Tax Treaties, 51, at p. 52; see also Li and Avella, at s. 2.1.1.3.) [187] In such cases, as here, the avoidance transaction would be contrary to the objectives of bilateral tax treaties and frustrate the object, spirit or purpose of the specific provisions related to the allocation of taxing rights. Preventing such abuse is the purpose of the GAAR: “. . . most double tax treaties do not contain specific limitations on the ability of third-country residents to treaty shop [and instead] rely on the concept of beneficial ownership or on domestic anti-abuse legislation to safeguard against hollow conduits” (Krishna (2009), at p. 540). Similarly, C. A. Brown and J. Bogle are of the view that the GAAR is “[t]he primary tool to fight treaty shopping in Canada currently” (“Treaty Shopping and the New Multilateral Tax Agreement — Is it Business as Usual in Canada?” (2020), 43 Dal. L.J. 1, at p. 4). [188] In conclusion, not all types of treaty shopping lead to abuse of a tax treaty. Only when an avoidance transaction frustrates the rationale of the relevant treaty provision will treaty shopping be abusive and the tax benefit denied. For instance, where contracting parties allocate taxing rights to the state of residence on the basis of economic allegiance, as in this case, treaty shopping will be abusive if the resident of a third-party state uses a conduit company to claim treaty benefits conferred by provisions requiring a genuine economic connection with the residence state. Therein lies the undermining of these provisions’ rationale clothed in a formalistic adherence to their text. Ignoring this is to render the GAAR empty of meaningful effect. Click here for other translation

The issue in these two cases is whether withholding tax was payable on interest paid to foreign group companies considered “beneficial owners” via conduit companies covered by the EU Interest/Royalties Directive and DTA’s exempting the payments from withholding taxes. The first case concerned interest accruals totalling approximately DKK 1,476 million made by a Danish company in the period 2007-2009 in favour of its parent company in Sweden in connection with an intra-group loan. The Danish Tax Authorities (SKAT) subsequently ruled that the recipients of the interest were subject to the tax liability in Section 2(1)(d) of the Corporation Tax Act and that the Danish company was therefore obliged to withhold and pay withholding tax on a total of approximately DKK 369 million. The Danish company brought the case before the courts, claiming principally that it was not obliged to withhold the amount collected by SKAT, as it disputed the tax liability of the recipients of the interest attributions. The second case concerned interest payments/accruals totalling approximately DKK 3,158 million made by a Danish company in the period 2006-2008 in favour of its parent company in Luxembourg in respect of an intra-group loan. SKAT also ruled in this case that the interest payments/write-ups were taxable for the recipients and levied withholding tax on them from the Danish company totalling approximately DKK 817 million. The Danish company appealed to the courts, claiming principally that the interest was not taxable. The Eastern High Court, as first instance, dealt with the two cases together. The European Court of Justice has ruled on a number of preliminary questions in the cases, see Joined Cases C-115/16, C-118/16, C119/16 and C-299/16. In both cases, the Ministry of Taxation argued in general terms that the parent companies in question were so-called “flow-through” companies, which were not the “beneficial owners” of the interest, and that the real “beneficial owners” of the interest were not covered by the rules on tax exemption, i.e. the EU Interest/Royalties Directive and the double taxation conventions applicable between the Nordic countries and between Denmark and Luxembourg respectively. Judgment of the Eastern High Court In both cases, the Court held that the parent companies in question could not be regarded as the “beneficial owners” of the interest, since the companies were interposed between the Danish companies and the holding company/capital funds which had granted the loans, and that the corporate structure had been established as part of a single, pre-organised arrangement without any commercial justification but with the main aim of obtaining tax exemption for the interest. As a result, the two Danish companies could not claim tax exemption under either the Directive or the Double Taxation Conventions and the interest was therefore not exempt. On 3 May 2021, the High Court ruled on two cases in the Danish beneficial owner case complex concerning the issue of taxation of dividends. The judgment of the Regional Court in Denmark vs NETAPP ApS and TDC A/S can be read here. Click here for English translation Click here for other translation

“Shipping Investor Cyprus” was a limited liability company domiciled in Cyprus. In the financial years 2010 and 2011 it received interest income from convertible bonds subject to German withholding tax. “Shipping Investor Cyprus” had no substance itself, but an associated company, also domiciled in Cyprus, had both offices and employees. The dispute was whether “Shipping Investor Cyprus” was entitled to a refund of the German withholding tax and whether this should be determined under the old or the new version of Section 50d(3) of the German Income Tax Act (EStG). The court of first instance concluded that “Shipping Investor Cyprus” claim for a refund was admissible because the old version of the provisions in Section 50d (3) EStG was contrary to European law. The tax authorities appealed this decision. Judgment of the National Tax Court The National Tax Court found that a general reference to the economic activity of another group company in the country of residence of the recipient of the payment was not sufficient to satisfy the substance requirement. According to the court, the lower court had not sufficiently examined whether the substance requirements of Section 50d (3) EStG – in its new version – were met. On this basis, the case was referred back to the lower court for a new hearing. Click here for English translation Click here for other translation

The Internal Revenue Service found that Tribune Media Company’s subordinated debt was not bona fide debt and that its guarantees of the debt were not bona fide guarantees. Opinion of the US Tax Court The Tax Court ruled mostly in favour of the IRS and held that the subordinated “debt” should be considered equity for tax purposes. However, the court ruled in favour of Tribune Media Company with respect to the guarantees. In determining the substance of the advances, the court considered 13 factors derived from the Dixie Dairies case (74 T.C. 476 (1980): • Names given to the certificates evidencing the indebtedness • Presence or absence of a fixed maturity date • Source of payments • Right to enforce payments • Participation in management as a result of the advances • Status of the advances in relation to regular corporate creditors • Intent of the parties • Identity of interest between creditor and stockholder • “Thinness” of capital structure in relation to debt • Ability of corporation to obtain credit from outside sources • Use to which advances were put • Failure of debtor to repay, and • Risk involved in making advances In particular, the court noted that there was no fixed maturity date and no meaningful right to enforce repayment of the debt. In addition, it appeared from the facts of the case that the parties intended the subordinated debt to be treated as equity. Click here for other translation

In 2003 Molinos Argentina had incorporated Molinos Chile under the modality of an “investment platform company” regulated by Article 41 D of the Chilean Income Tax Law. Molinos Argentina owned 99.99% of the shares issued by Molinos Chile, and had integrated the share capital of the latter through the transfer of the majority shareholdings of three Uruguayan companies and one Peruvian company. Molinos Argentina declared the dividends originating from the shares of the three Uruguayan companies and the Peruvian company controlled by Molinos Chile as non-taxable income by application of article 11 of the DTA between Argentina and Chile. On that factual basis, the tax authorities applied the principle of economic reality established in article 2 of Law 11.683 (t.o. 1998 and its amendments) and considered that Molinos Argentina had abused the DTA by using the Chilean holding company as a “conduit company” to divert the collection of dividends from the shares of the Uruguayan and Peruvian companies to Chilean jurisdiction, in order to avoid paying income tax in Argentina and similar income tax in Chile at the same time. The non-taxation in Argentina was due to the application of article 11 in the DTA which established that dividends were only taxed by the country in which the company distributing them was domiciled (in the case of Chile, because Molinos Chile was domiciled in Chile) and the non-taxation in Chile was verified – in turn – because the dividends originated in the Uruguayan and Peruvian companies did not pay income tax in that country because they were profits from investment platform companies which “will not be considered domiciled in Chile, so they will be taxed in the country only for Chilean source income”. The tax authorities considered that the incorporation of the holding company in Chile by Molinos Argentina was not justified from the point of view of the corporate structure, since it had no real economic link with the Uruguayan and Peruvian companies and lacked economic substance or business purpose, since the dividends distributed by those companies did not remain in Molinos Chile but was used as an intermediary to remit those profits almost immediately to Molinos Argentina. It was constituted with the sole purpose of eliminating the taxation and to conduct the income obtained in states that are not party to the DTA -Uruguay and Peru- through the State with which the double taxation treaty has been concluded and using the benefits offered by the latter. Judgment of the Supreme Court The Supreme Court’s ruled in favor of the tax authorities. Molinos’s conduct was not protected by the rules of the DTA. International standards must be interpreted in accordance with the principle of good faith. The conclusions reached by the National Tax Court and the National Chamber of Appeals in Federal Administrative Litigation was not seen as unreasonable or devoid of Foundation according to the doctrine of arbitrariness. Click here for English Translation

While living in France, Israel Daniel Amram (IDA) devised an idea for the development of a unique and efficient computerized interface that would link insurance companies and physicians and facilitate financial accounting between medical service providers and patients. IDA registered the trademark “SEPHIRA” and formed a company in France under the name SAS SEPHIRA . IDA then moved to Israel and formed Sephira & Offek Ltd. Going forward the company in Israel would provid R&D services to SAS SEPHIRA in France. All of the taxable profits in Israel was labled as “R&D income” which is taxed at a lower rate in Israel. Later IDA’s rights in the trademark was sold to Sephira & Offek Ltd in return for €8.4m. Due to IDA’s status as a “new Immigrant” in Israel profits from the sale was tax exempt. Following the acquisition of the trademark, Sephira & Offek Ltd licensed the trademark to SAS SEPHIRA in return for royalty payments. In the books of Sephira & Offek Ltd, the trademark was labeled as “goodwill” and amortized. Following an audit the tax authorities determined that the sale of the trademark was an artificial transaction. Furthermore, they found that part of the profit labeled by Sephira & Offek Ltd as R&D income (subject to a lower taxation in Israel) should instead be labeled as ordinary income. On that basis an assessment was issued. Sephira & Offek Ltd and IDA disapproved of the assessment and took the case to Court. Judgment of the Court The court ruled in favor of the tax authorities. The trademark  transaction was artificial, as commercial reasons for the transaction (other than tax optimization) had been provided. The whole arrangement was considered non-legitimate tax planning. The court also agreed that part of the income classified by the company as R&D income (subject to reduced taxes) should instead be taxed as ordinary income. Click here for English translation Click here for other translation

In this case, the Swiss tax authorities had refused to refund A SA withholding tax on an amount of the so-called distributable reserves. The refund was denied based on the Swiss “Old Reserves-doctrin”. “…the doctrine relates the existence of the practice of the Federal Tax Administration of 15 November 1990, known as the “purchase of a full wallet” (“Kauf eines vollen Portemonnaies” or the “old reserves” practice… According to this practice, “tax avoidance is deemed to have occurred when a holding company based in Switzerland buys all the shares of a company based in Switzerland with substantial reserves from persons domiciled (or having their seat) abroad at a price higher than their nominal value, …” The doctrin is applied by the tax authorities based on a schematic asset/liability test: if there are distributable reserves/retained earnings prior to the transfer of shares from a jurisdiction with a higher residual withholding tax to a jurisdiction with a lower one, the previous higher rate still applies on these reserves/retained earnings. Judgment of the Swiss Supreme Court The court ruled in favor of A SA and set aside the decision of the tax authorities. According to the court, the “Old Reserves-doctrin” only applies to cases of actual tax avoidance. According to previous case law, there is tax avoidance: when the legal form chosen by the taxpayer appears to be unusual, inappropriate or strange, and in any case unsuited to the economic objective pursued, when it must be accepted that this choice was abused solely with the aim of saving taxes that would be due if the legal relationships were suitably arranged, when the procedure chosen would in fact lead to a significant tax saving insofar as it would be accepted by the tax authorities. In this regard, the burden of proof is on the tax authorities. Click here for English translation Click here for other translation

In 2011 a Dutch group “Hunkemöller BV” acquired “Target BV” for EUR 135 million. The acquisition was financed by four French affiliates “FCPRs” in the Dutch Group – EUR 60,345,000 in the form of convertible instruments (intercompany debt) and the remainder in the form of equity. The convertible instruments carried an interest rates of 13 percent. The four French FCPRs were considered transparent for French tax purposes, but non-transparent for Dutch tax purposes. Hence the interest payments were deducted from the taxable income reported by the Group in the Netherlands, but the interest income was not taxed in France – the structure thus resulted in a tax mismatch. The Dutch tax authorities argued that the interest payments should not be deductible as the setup of the financing structure constituted abuse of law; the financing structure was set up in this particular manner to get around a Dutch anti-abuse rule which limits interest deduction on loans from affiliated entities in respect of certain “abusive transactions”. See the preliminary AG Opinion here Decision of the Supreme Court The Supreme Court ruled in favor of the tax authority. The aim and purpose of the law is to prevent the levy of corporate income tax becoming arbitrarily and continuously obstructed through bringing together the profits of a business on the one hand (i.e. through forming a CIT fiscal unity) and artificially creating interest charges on the other (profit-drainage), by using legal acts which are not necessary to the achievement of the commercial objectives of the taxpayer and which can only attributed to the overriding motive of producing the intended tax benefits. Click here for English translation Click here for other translation

X B.V., a private limited company established in the Netherlands, is part of a globally operating group (hereafter: the Group). In the years under review, the head office, which was also the top holding company, was located in the USA. Until 1 February 2008, the X B.V. was, together with BV 1 and BV 2, included in a fiscal unity for corporate income tax with the Interested Party as the parent company. As of 1 February 2008, a number of companies were added to the fiscal unity, including BV 3 and BV 4. X B.V. is considered transparent for tax purposes according to US standards. Its parent company is a company domiciled in the USA, as further described in 2.1.8 below. In 2006, BV 1 borrowed € 195,000,000 under a Euro Credit Facility (ECF), a head office guaranteed credit facility with a syndicate of sixteen banks. BV 1 contributed this amount in 2007 as share premium to BV 2. BV 2 paid the larger part of this amount as capital into BV 3. BV 2 and BV 3 have jointly paid the amount of (rounded off) € 195.000.000 into a newly established Irish holding company, Ltd 1. Ltd 1 used the capital contribution to purchase a company established in Ireland, Ltd 2 from a group company established in the United Kingdom for an amount of (rounded off) GBP 130.000.000. BV 3 (for 99 per cent) and BV 4 (for 1 per cent) jointly formed a French entity, SNC, on 28 November 2007. SNC is transparent for tax purposes under Dutch standards. For French tax purposes, SNC is a non-transparent group company. BV 3 sold its subsidiary, SA 1, on 6 December 2007 to SNC for €550,000,000, with SNC acknowledging the purchase price. On 12 December 2007, that claim against SNC was converted into capital. SA 1 merged with SNC on 15 January 2008, with SNC as the surviving legal entity. SNC acquired through the merger, inter alia, a bank debt of €45,000,000 to the Group cash pool managed by BV 2 with a bank (the Pool). This debt is the remainder of a loan taken out by SA 1 in 1998 for external acquisitions and which was refinanced from the Pool in 2004. BV 3 borrowed € 65,000,000 under the ECF on 6 February 2008 and on-lent this amount to SNC. SNC borrowed on the same day a total of € 240,000,000 under the ECF of which one loan of € 195,000,000 and one loan of € 45,000,000. SNC repaid the bank debt from the Pool with the loan of € 45,000,000. On 7 February 2008 it purchased Ltd 1, [F] NV and [G] from BV 3 for rounded € 255,000,000, financed by € 195,000,000 in ECF loans and the aforementioned loan from BV 3 of € 65,000,000, and further purchased an additional participation for rounded € 5,000,000. With the received € 255,000,000, BV 3 repaid its ECF debt of € 60,000,000. On 7 February 2008 it lent the remaining € 195,000,000 to BV 1, which repaid its ECF debt in February 2008. BV 2 sold the shares in a Moroccan and a Tunisian entity to SNC on 7 February 2008 against payment of € 5,088,000. BV 2 borrowed € 191,000,000 under the ECF to finance capital contributions in subsidiaries in Norway, Singapore and Switzerland, for external and internal purchase of shares in companies and for the expansion on 10 December 2008 with 8.71 percent (€ 12,115,000) of its 86.96 percent interest in [M] SpA indirectly held through a transparent Spanish SC of the English group companies [LTD 4] and [LTD 5] . On 29 May 2009, Luxco SA borrowed an amount of € 291,000,000 under the ECF. Luxco is a Luxembourg-based finance company that belongs to the Concern. Luxco on-lent that amount to BV 3 under the same conditions. In turn, BV 3 on-lent the same amount under the same conditions to SNC. With that loan, SNC repaid its ECF debt of € 240,000,000. It lent the remainder to its subsidiary [SA 2] in connection with the acquisition by SA 2 of [SA 3]. That acquisition took place on 25 May 2009 against acknowledgment of debt. SA2 repaid part of the loan from SNC with funds obtained from SA3. The remainder of the loan was converted into capital. On 24 June 2009, Luxco placed a public bond loan of € 500,000,000. Luxco used the net proceeds to provide a US dollar loan of € 482,000,000 to its US sister company [US] Inc (hereinafter: US Inc). US Inc is the parent company of the interested party. The currency risk has been hedged by Luxco with an external hedge. US Inc converted the funds from the Luxco loan into euros and subsequently granted a loan of € 482,000,000 to interested party on 1 July 2009. Interested party paid this amount into new shares in its indirect and affiliated subsidiary BV 5, as a result of which interested party obtained a direct interest of 99.996 percent in BV 5. From the paid-up funds, BV 5 provided two loans within the fiscal unity: a loan of € 191,000,000 to BV 2 and a loan of € 291,000,000 to BV 3. BV 2 and BV 3 used the funds obtained from these loans to pay off the ECF debt and the debt to Luxco, respectively. Luxco repaid its ECF debt on 1 July 2009. On 13 and 14 December 2010, BV 2 and BV 3 took out loans under the ECF amounting to € 197,000,000 and € 300,000,000 respectively. These amounts were equal to the principal and outstanding interest of their debts to BV 5. With the proceeds of these loans, BV 2 and BV 3 repaid their debts to BV 5. BV 5 distributed the net interest income as dividend and repaid € 482,000,000 of capital to interested party. Interested party repaid its debt to US Inc on 14 December 2010 (including outstanding interest). US Inc repaid its debt to Luxco on 14

On 3 May 2021, the Danish High Court ruled in two “beneficial owner” cases concerning the question of whether withholding tax must be paid on dividends distributed by Danish subsidiaries to foreign parent companies. The first case – NETAPP Denmark ApS – concerned two dividend distributions of approx. 566 million DKK and approx. 92 million made in 2005 and 2006 by a Danish company to its parent company in Cyprus. The National Tax Court had upheld the Danish company in that the dividends were exempt from withholding tax pursuant to the Corporation Tax Act, section 2, subsection. 1, letter c, so that the company was not obliged to pay withholding tax. The Ministry of Taxation brought the case before the courts, claiming that the Danish company should include – and thus pay – withholding tax of a total of approx. 184 million kr. The second case – TDC A/S – concerned the National Tax Tribunal’s binding answer to two questions posed by another Danish company regarding tax exemption of an intended – and later implemented – distribution of dividends in 2011 of approx. 1.05 billion DKK to the company’s parent company in Luxembourg. The National Tax Court had ruled in favor of the company in that the distribution was tax-free pursuant to section 2 (1) of the Danish Corporation Tax Act. 1, letter c, 3. pkt. The Ministry of Taxation also brought this case before the courts. The Eastern High Court has, as the first instance, dealt with the two cases together. The European Court of Justice has ruled on a number of questions referred in the main proceedings, see Joined Cases C-116/16 and C-117/16. In both cases, the Ministry of Taxation stated in general that the parent companies in question were so-called “flow-through companies” that were not real recipients of the dividends, and that the real recipients (beneficial owners) were in countries that were not covered by the EU parent / subsidiary directive. in the first case – NETAPP Denmark ApS – the High Court upheld the company’s position that the dividend distribution in 2005 of approx. 566 million did not trigger withholding tax, as the company had proved that the distribution had been redistributed from the Cypriot parent company, which had to be considered a “flow-through company”, to – ultimately – the group’s American parent company. The High Court stated, among other things, that according to the Danish-American double taxation agreement, it would have been possible to distribute the dividend directly from the Danish company to the American company, without this having triggered Danish taxation. As far as the distribution in 2006 of approx. 92 million On the other hand, the High Court found that it had not been proven that the dividend had been transferred to the group’s American parent company. In the second case – TDC A/S – the High Court stated, among other things, that in the specific case there was no further documentation of the financial and business conditions in the group, and the High Court found that it had to be assumed that the dividend was merely channeled through the Luxembourg parent company. on to a number of private equity funds based in countries that were not covered by tax exemption rules, ie. partly the parent / subsidiary directive, partly a double taxation agreement with Denmark. On that basis, the Danish company could not claim tax exemption under the Directive or the double taxation agreement with Luxembourg, and the dividend was therefore not tax-exempt. Click here for English translation

Unicomer (St. Vincent) Ltd. is engaged in the business of selling household furniture and appliances. In FY 2013 and 2014 Unicomer entered into an “insurance arrangement” involving an unrelated party, United insurance, and a related party, Canterbury. According to the tax authorities United Insurance had been used as an intermediate/conduit to funnel money from the Unicomer to Canterbury, thereby avoiding taxes in St. Vincent. In 2017 the Inland Revenue Department issued an assessments of additional tax in the sum of $12,666,798.23 inclusive of interest and penalties. The basis of the assessment centered on Unicomer’s treatment of (1) credit protection premiums (hereinafter referred to as “CPI”) under the insurance arrangement, (2) tax deferral of hire-purchase profits and (3) deductions for royalty payments. Unicomer appealed the assessment to the Appeal Commission where a decision was rendered in 2018. The Appeal Commission held that the CPI payments were rightfully disallowed by the tax authorities and that withholding tax was chargeable on these payments; the deferral of hire purchase profits was also disallowed; but royalty expenses were allowed. This decision was appealed by Unicomer to the Supreme Court. Judgment of the Supreme Court The Supreme Court predominantly ruled in favor of the tax authorities. The court upheld the decision of the Appeal Commission to disallow deductions for CPI’s and confirmed that withholding tax on these payments was chargeable. The deferral of taxation of hire-purchase profits was also disallowed by the court. However, although the additional taxes should of course be collected by the tax authorities, the procedure that had been followed after receiving the decision of the Appeal Commission – contacting the bank of Unicomer and having them pay the additional taxes owed by the company – was considered wholly unacceptable and amounted to an abuse of the power. The taxes owed should be collected following correct procedures. Click here for translation

“M Fastfood S.A” was incorporated as a subsidiary company of an entity not resident in Portuguese territory, M Inc., a company with registered office in the United States. “M Fastfood S.A” had obtained financing from M Inc. for investment in its commercial activity, which resulted in indebtedness totalling EUR 74,000,000.00. The activity of “M Fastfood S.A” is “the opening, assembling, promotion, management, administration, purchase, sale, rental, leasing and cession of exploration of restaurants, for which purpose it may acquire or grant licenses or sub-licenses and enter into franchise contracts. It also includes the purchase, sale, rental, administration and ownership of urban buildings and the acquisition, transfer, exploitation and licensing of copyrights, trademarks, patents and industrial and commercial secrets and, in general, any industrial property rights”. “M Fastfood S.A” was in a situation of excessive indebtedness towards that entity, in light of the average equity capital presented by it in 2004, on 27 January 2005 it submitted a request to the tax authorities for the purposes of demonstrating the equivalence of indebtedness towards an independent entity. Following a tax audit concerning FY 2004 the authorities considered that the interest limitation rule should be applied, which resulted in corrections to the taxable amount in respect of excess interest paid. “M Fastfood S.A” presented a report, which intended to demonstrate that the level and conditions of indebtedness towards M Inc. were similar to those that could be obtained if it had chosen to obtain financing from an independent financial institution. According to the report “M Fastfood S.A.” was, at the time, in a period of strong expansion, which resulted in the opening of 118 fast-food outlets in recent years. That within the scope of its implementation strategy in the national market, the location of the restaurants plays a fundamental role and constitutes a decisive factor for the success of the business. That the ideal or optimum location of the establishments is very costly and therefore substantial investment has become necessary. According to “M Fastfood S.A.”, the conditions obtained were favourable, in particular the interest rates agreed with M Inc., which were lower than those that would be charged by an independent financial institution, presenting as proof financing proposals issued by B… Bank. Based on the report M Fastfood concludes are sufficient to constitute proof that the conditions of the financing considered excessive are similar, or even more favourable, to the conditions practiced by independent entities, the reason why no. 1 of article 61 of the Corporate Income Tax Code is applicable”. The tax authorities found that, the evidence submitted by “M Fastfood S.A.” was insufficient to demonstrate that the debt obtained from M Inc. is at least as advantageous as it would have been had they used an independent financial institution. Decision of Supreme Administrative Court The Supreme Administrative Court set aside the the assessment issued by the tax authorities and decided in favour of “M Fastfood S.A.”. Experts ” … Article 56 EC must be interpreted as meaning that the scope of that legislation is not sufficiently precise. Article 56 EC must be interpreted as precluding legislation of a Member State which, for the purposes of determining taxable profits, does not allow for the deduction as an expense of interest paid in respect of that part of the debt which is classified as excessive, paid by a resident company to a lending company established in a non-member country with which it has special relations, but allows such interest paid to a resident lending company with which the borrowing company has such relations, where, if the lending company established in a third country does not have a holding in the capital of the resident borrowing company, that legislation nevertheless presumes that any indebtedness of the latter company is in the nature of an arrangement intended to avoid tax normally due or where it is not possible under that legislation to determine its scope of application with sufficient precision in advance. As it is up to the national judge faced with such an interpretation to decide on its application to the specific case, it is important to mention that the situation which this review intends to decide on is identical in its contours to the one assessed by the CJEU. In fact, it is clear that the situation at issue in this review falls within the scope of the free movement of capital, and that it translates into less favourable tax treatment of a resident company that incurs indebtedness exceeding a certain level towards a company based in a third country than the treatment reserved for a resident company that incurs the same indebtedness towards a company based in the national territory or in another Member State. What is at issue is deciding whether such discrimination may be justified as a means of avoiding practices the sole purpose of which is to avoid the tax normally payable on profits generated by activities carried on within the national territory. However, although we agree with the CJEU that the provisions in question – Articles 61 and 58 of the CIRC – are appropriate as a means of preventing tax avoidance and evasion, we must agree with the Court that such a restriction is disproportionate to the intended aim. As the court in question correctly states “as article 58 of the CIRC covers situations which do not necessarily imply a participation by a third country lending company in the capital of the resident borrowing company and as it can be seen that the absence of such a participation results from the company’s being a resident borrower”, the Court agrees with the Court. in the absence of such participation, it results from the method of calculation of the excess debt provided for in Article 61(3) that any debt existing between these two companies should be considered excessive, Article 61 consecrates a discriminatory measure which limits the free movement of capital as only non-resident entities are subject to the regime of Article 61 of the CIRC when IRC tax

The shareholder of “BO zoo” is a German company. The German parent held 100% of the shares of “BO zoo” continuously for more than 2 years. The German parent’s ownership of the shares was based on title. “BO zoo” asked the Tax Chamber whether, in order to apply the exemption provided for in Article 22(4) of the CIT Act, it is obliged to verify whether the German parent meets the definition of a beneficial owner of dividends within the meaning of Article 4a(29a) of the CIT Act. “BO zoo” took the position that no provision of the CIT Act makes the application of the exemption from CIT under Article 22(4) of the CIT Act conditional on the company receiving the dividend being the beneficial owner of the dividend. The Tax Chamber disagreed, arguing that the verification of the beneficial owner is part of the due diligence obligation introduced in Article 26(1) of the Corporate Income Tax Act in 2019. The company challenged this interpretation before the Administrative Court. The Court found the complaint of “BO zoo” well-founded and overturned the interpretation of the Tax Chamber. According to the Court, the obligation to verify the identity of the beneficial owner referred to in Article 28b of the CIT Act concerns a completely separate procedure, i.e. the procedure for the refund of withholding tax. It does not specify the conditions for claiming the exemption, but only the procedure for proving that tax has been withheld in spite of the exemption. The authorities appealed the decision to the Supreme Administrative Court. Judgment of the Supreme Administrative Court. The Court dismissed the appeal, holding that the position of the Administrative Court was correct and that, in the case of dividends, it is not necessary that the recipient of the dividend be the beneficial owner. Click here for English translation Click here for other translation

In 2005 an agreement was entered between the UK tax authority and GE Capital, whereby GE Capital was able to obtain significant tax benefits by routing billions of dollars through Australia, the UK and the US. HMRC later claimed, that GE Capital had failed to disclose all relevant information to HMRC prior to the agreement and therefore asked the High Court to annul the agreement. In December 2020 the High Court decided in favour of HMRC GE Capital then filed an appeal with the Court of Appeal. Judgment of the Court of Appeal The Court of Appeal allowed the appeal and set aside the decision of the High Court and thus the assessment af the HMRC.

Fruit old s.a.s was active in wholesale of fruit and vegetables. In 2003 it purchased products at a price higher than the market price from another company owned by the same partners, Fruit new s.r.l., and resold them at a price lower than the purchase price. Both companies were domiciled in Italy. Following these transactions the entire business of Fruit old s.a.s (premises, employees and customers) was transferred to Fruit new s.r.l. The tax authorities issued an assessment where the price of the transactions had been adjusted, since it was in the taxpayer’s interest to transfer income from the Fruit old s.a.s to Fruit new s.r.l. The company argued that the transactions in question only took place over a short period of three months. It also stated that the pricing of the transactions were motivated by an “intra-group strategy”. Lower courts had ruled in favour of the company and set aside the assessment of the tax authorities. Judgment of the Court The Supreme Court upheld the judgment of the lower court and dismissed the appeal of the tax authorities. Since this was a case involving two Italien companies, the rules set forth in Article 110, on international transfer prices could not be applied. Transactions between resident intra-group companies at a price different from the normal value determined pursuant to Article 9 of the Income Tax Act are not in it self indicative of an avoidance conduct. Click here for English translation Click here for other translation

In 2011, Petrolia SE established a wholly owned subsidiary in Norway – Petrolia Noco AS – to conduct oil exploration activities on the Norwegian shelf. From the outset, Petrolia Noco AS received a loan from the parent company Petrolia SE. The written loan agreement was first signed later on 15 May 2012. The loan limit was originally MNOK 100 with an agreed interest rate of 3 months NIBOR with the addition of a margin of 2.25 percentage points. When the loan agreement was formalized in writing in 2012, the agreed interest rate was changed to 3 months NIBOR with the addition of an interest margin of 10 percentage points. The loan limit was increased to MNOK 150 in September 2012, and then to MNOK 330 in April 2013. In the tax return for 2012 and 2013, Petrolia Noco AS demanded a full deduction for actual interest costs on the intra-group loan to the parent company Petrolia SE. Following an audit for FY 2012 and 2013, the tax authorities concluded that parts of the intra-group loan should be reclassified from loan to equity due to thin capitalization. Thus, only a deduction was granted for part of the interest costs. Furthermore, the authorities reduced the interest rate from 10 per cent to 5 per cent. For the income years 2012 and 2013, this meant that the company’s interest costs for distribution between the continental shelf and land were reduced by NOK 2,499,551 and NOK 6,482,459, respectively, and financial expenses by NOK 1,925,963 and NOK 10,188,587,respectively. The assessment was first brought to the Court of Oslo where a decision in favour of the tax authorities was issued in November 2019. This decision was appealed by Petrolia Noco AS to the Court of Appeal. Judgment of the Court The Court of Appeal also decided in favour of the Norwegian tax authorities. Excerpts “The Court adds for this reason that the appellant had higher debt ratio than the company could have had if the loan should have been taken up from an independent lender. In the Court of Appeal’s view, the fact that the appellant actually took out such a high loan as the intra-group loan is solely due to the fact that the lender was the company’s parent company. For this reason, there was a ” reduction ” in the appellant income ” due to” the community of interest. There is thus access to discretion in accordance with the Tax Act § 13-1 first paragraph.” “Thus, there is no basis for the allegation that the Appeals Board’s decision is based on an incorrect fact on this point, and in any case not a fact to the detriment of the appellant. Following this, the Court of Appeal finds that there are no errors in the Appeals Board’s exercise of discretion with regard to the determination of the company’s borrowing capacity. The decision is therefore valid with regard to the thin capitalization.” “The Court of Appeal otherwise agrees with the respondent that the cost- plus method cannot be considered applicable in this case. Reference is made to LB-2016-160306, where it is stated : For loans, however, there is a market, and the comparable prices are margins on loans with similar risk factors at the same time of lending . The cost- plus method provides no guidance for pricing an individual loan. An lender will, regardless of its own costs , not achieve a better interest rate on lending than what is possible to achieve in the market. The Court of Appeal agrees with this, and further points out that the risk picture for Petrolia Noco AS and Petrolia SE was fundamentally different. The financing costs of Petrolia SE therefore do not provide a reliable basis for assessing the arm’s length interest rate on the loan to Petrolia Noco AS.” “…the Court of Appeal can also see no reason why it should have been compared with the upper tier of the observed nominal interest margins in the exploration loans between independent parties. In general, an average such as the Appeals Board has been built on must be assumed to take into account both positive and negative possible variables in the uncontrolled exploration loans in a responsible manner. The Court of Appeal cannot otherwise see that the discretion is arbitrary or highly unreasonable. The decision is therefore also valid with regard to the price adjustment.” Click here for translation

A shared service center in Poland both provided intra-group services to the group and in doing so also received and paid for services from other group companies. At issue was payments for the services that the Shared Service Center in Poland received. Under some circumstances intra-group service costs are non-deductible in Poland according to local anti-avoidance provisions aimed at base eroding payments, and according to the tax authorities the payments for intra group services received by the Shared Service Center were non-deductible according to these anti-avoidance provisions. The tax authorities had considered that the payments for the received services were non-deductible according to these provisions. The Administrative Court ruled in favour of “Shared Service Center”. An appeal was then filed by the tax authorities. Judgment of the Supreme Administrative Court The Supreme Administrative Court dismissed the appeal and upheld the decision of the Administrative Court. Click here for English translation Click here for translation

During FY 2014 – 2018 a South African company, ABSA, on four occasions bought tranches of preference shares in another South African company, PSIC 3. This entitled ABSA to dividends. The dividends received from PSIC 3 by ABSA were declared as tax free. The income in PSIC 3 was based on dividend payments on preference shares it owned in another South African company, PSIC 4. The income in PSIC 4 was from a capital outlay to an off shore trust, D1 Trust. The trust then lent money to MSSA, a South African subsidiary of the Macquarie Group, by means of subscribing for floating rate notes. The D1 Trust made investments by way of the purchase of Brazilian Government bonds. It then derived interest thereon. In turn, PSIC 4 received interest on its capital investment in D1 Trust. The South African Revenue Service held that ABSA had been a party to a tax avoidance scheme covered by local anti-avoidance provisions and first issued a notice of assessment and later a tax assessment according to which the income was taxable. According to the Revenue Service, the critical aspect of this series of transactions was the investment in Brazilian Government bonds by D1 Trust. This led to the view that Absa was a party to an arrangement comprising all these transactions and that ABSA had received an impermissible tax benefit in the form of a tax-free dividend. The proper result according to the Revenue Service ought to have been that interest income was received by Absa which would attract tax. ABSA brought the case to court, disputing having been a “party” to an “impermissible avoidance arrangement” and procuring a “tax benefit”. ABSA stated that it bought the preference shares in PSIC 3 on the understanding that PSIC 3 and MSSA had a back-to-back relationship and that the funds would flow directly to MSSA to repay debt to its parent the Macquarie Group. Absa was unaware of the intermediation of PSIC 4 and the D1 Trust, and of the D1 Trust’ s Brazilian transaction. Hence it could not, in this state of ignorance, have participated in an impermissible tax avoidance arrangement, nor did it have a tax avoidance motive in mind, and nor did it procure a tax benefit to which it was not entitled. Judgment of the High Court The court ruled in favour of ABSA. The court observed that a taxpayer has to be, not merely present, but participating in the arrangement. “The fact that it might be the unwitting recipient of a benefit from a share of the revenue derived from an impermissible arrangement cannot constitute “taking part” in such an arrangement.” “That premise [that ABSA was a party to a tax avoidance scheme] was incorrect in law because the factual premise did not establish that Absa was a party to such arrangement nor that it had an intention to escape an anticipated tax liability nor that it received relief from a tax liability as result of acquiring preference shares in PSIC 3.” Click here for translation

A Dutch company, Lender B.V., had acquired companies through a private equity structure. The Dutch company that had been set up for the purpose of the acquisition was financed by subordinated loans payable to related parties established on the island of Guernsey. In the tax return for the Dutch company interest in the amount of € 13,157,632 was deducted in the taxable income based on an interest rate of 11,5 – 14 percent. The tax authorities denied the deduction, as the financing arrangement was considered abusive. Decision of the Supreme Court The Court decided in favor of the tax authorities. The interest on the loans was determined to 2.5% (instead of the agreed 11.5 – 14%). This interest was not deductible, because granting of the loans was considered as abusive. Furthermore, an Arrangement Fee of € 8.4 mio. could not be charged at once, but had to be capitalised. Click here for English translation Click here for other translation

The interested party bought AEX-listed shares, sold three-month futures based on those shares through its shareholder/broker [D], and lent the shares to [D] (stock lending). It received cash collateral ($ deposits as collateral) and a stock lending fee for its lending. According to the interested party, the shares always briefly reverted to its ownership around their dividend dates through registration in the interested party’s securities account with the French custodian bank on the basis of legal transactions between its shareholder [D] and it, represented by [D]. In dispute is the question whether the interested party is entitled to a set-off of € 39,249,246 in Dutch dividend tax withheld from the dividends on the shares lent by her. Did she receive the dividends (was she the beneficial owner?) and if so, was she also the ultimate beneficiary of the dividend? Also in dispute is whether the Inspector rightly imposed an information decision and thus a reversal and increase of the burden of proof on her for the years 2009/2010, 2011/2012 and 2012/2013 due to a breach of her administration or retention obligation. The Court of Appeal has deemed it decisive for the right of set-off whether (i) the interested party was the legal owner of the shares at the time of the dividend distribution and (ii) the beneficial owner of the dividend as referred to in Article 25(2)(1st sentence) of the Dutch Corporate Income Tax Act. The Court of Appeal concluded that the interested party had not made it plausible that she was the legal owner and therefore entitled to the proceeds, and alternatively held that she was not the beneficial owner either. According to the Court of Appeal, the interested party did not comply with its obligation to keep records and accounts because, among other things, crucial transaction data was missing from its administration. As a result, it cannot be determined whether the legal transactions alleged by the party have been carried out by it or on its behalf, the Court of Appeal considers the shortcomings of such importance that reversal of the burden of proof is not disproportionate. Preliminary ruling of the Supreme Court In the preliminary ruling, A-G Wattel believes that the Court of Appeal’s criterion for entitlement to proceeds (whether the interested party was the legal owner of the shares) is not entirely correct. What matters is who is entitled to the proceeds (the dividends), not who is a shareholder. Furthermore, given the fact that according to private international law, the question who is entitled to the dividend is not governed by the law of the country where the shares are administered (in this case France), but by the law of the country of incorporation of the company (in this case the Netherlands), the question of legal ownership is of little relevance and the French law invoked by the interested party is not relevant. According to A-G Wattel, the Court of Appeal’s findings of fact and evidentiary rulings imply that also based on the correct standard (entitlement to proceeds/dividends) the interested party, on whom the burden of proof rests, has not made it plausible that it was the direct recipient of the dividend and that (therefore) the dividends (and not something substituting or different) were included in the profit. Based on the very extensive and meticulous investigation of the facts and the many relevant documents, the A-G considers this opinion of the Court of Appeal understandable and (amply) substantiated. The main ground of appeal about ultimate entitlement is not discussed, but for the sake of completeness the A-G discusses the judgment of the Court of Appeal about ultimate entitlement and its division of the burden of proof. He considers it unclear which standard the Court of Appeal uses for the interpretation of (not) ‘ultimately entitled’. The Court of Appeal does not visibly follow the three objective criteria in Section 25(2) of the Corporate Income Tax Act, apparently assuming on the basis of the legislative history that the statutory negative description of beneficial owner does not intend to exclude that in other cases beneficial ownership is deemed to be absent. A-G Wattel considers this to be correct in itself, but the criterion for those other than the statutory cases would then have to be made explicit. However, the Court does not visibly follow the judgment or the official OECD commentary either. Moreover, the burden of proof in this question lies reversed, with the Inspector, but the Court of Appeal bases its subsidiary opinion that the interested party was not ultimately entitled on the same factual judgments and considerations as its primary opinion. If the Supreme Court is allowed to address this ground, A-G Wattel considers it well-founded as far as it complains about an incorrect distribution of the burden of proof and perhaps also as far as it complains about an incorrect standard, since the Court’s standard for ultimate entitlement is unclear. With regard to the information decision, Advocate General Wattel considers that the Court of Appeal could also decide, without violating the law or its obligation to state reasons, that the reversal and increase of the burden of proof is not disproportionate to the established facts, given the nature of the business of the interested party’s group and the very large tax interest. He noted that the interested party had little interest in this plea, since it could raise the justification for the information decision and the proportionality of a reversal of the burden of proof linked to it again in the proceedings concerning the VAT assessments for the relevant financial years. He did consider the complaint that the Court, in violation of Section 27e(2) AWR, did not give the interested party a term to remedy the administrative shortcomings to be well-founded. In his opinion, the case should be referred to the Court in order to assess whether rectification is still possible from the point of view of evidence. According to A-G Wattel, the remaining principal arguments do not lead to cassation either. In that case, the

“A…, Sociedade Unipessoal LDA” had taken out two intra group loans with the purpose of acquiring 70% of the shares in a holding company within the group. The tax authorities disallowed the resulting interest expenses claiming that the loan transactions lacked a business purpose. A complaint was filed with the Tax Court (CAAD). Decision of the Court The Court decided in favour of the tax authorities and upheld the assessment. Click here for English translation Click here for other translation

The Swedish Supreme Administrative Court (Högsta förvaltningsdomstolen) submitted a request for a preliminary ruling to the European Court of Justice on the compatibility of an interest limitation rule in the Swedish Law on income tax with the freedom of establishment provided for in Article 49 of the Treaty on the Functioning of the European Union. “5 Under Paragraph 10b of Chapter 24 of the Swedish Law on income tax, a company linked in a group of associated companies may not deduct interest expenses in relation to a debt owed to an associated company, unless otherwise provided for under Paragraph 10d or Paragraph 10e of that chapter. 6 The first subparagraph of Paragraph 10d of Chapter 24 of the Law on income tax provides that interest expenses relating to the debts referred to in Paragraph 10b of that chapter are deductible if the corresponding income would have been taxed at a nominal rate of at least 10% under the legislation of the State in which the company in the group of associated companies actually entitled to the income is established, if that company were to have only that income (‘the 10% rule’). 7 The third subparagraph of Paragraph 10d of Chapter 24 of the Law on income tax provides that, if the main reason for incurring the debt is that the group of associated companies would receive a substantial tax benefit, then no deduction for interest expenses may be made (‘the exception’). 8 The first subparagraph of Paragraph 10e of that chapter provides that, even if the condition of the 10% rule is not met, interest expenses relating to the debts referred to in Paragraph 10b of that chapter are deductible if the underlying debt is justified primarily on commercial grounds. However, that holds true only if the company in the group of associated companies that is actually entitled to the income corresponding to the interest expenses is established in a State within the European Economic Area (EEA) or in a State with which the Kingdom of Sweden has entered into taxation agreements.” Judgment of the Court The Court of Justice held that the Swedish tax system was discriminatory. “Article 49 TFEU must be interpreted as precluding national legislation, such as that at issue in the main proceedings, which provides that a company established in one Member State is not permitted to deduct interest payments made to a company belonging to the same group, established in another Member State, on the ground that the principal reason for the debt linking them appears to be the obtaining of a substantial tax benefit, whereas such a tax benefit would not have been deemed to exist if both companies had been established in the first Member State, as in that situation they would have been covered by the provisions on intra-group financial transfers.” Click here for translation

In 2005 “B Lender S.A” transferred a supplementary capital contributions to company C. The capital was to be paid back in 31 October 2009 and was provided interest-free. Tax Authorities adjusted the taxable income of “B Lender S.A” with an amount of EUR 1,586,272.23, of which EUR 1,575,958.86 was attributable to interest on capital transactions, which it reclassified as interest-bearing loan under the arm’s length provisions of article 58 of the CIRC. The assessment of additional income was upheld by a decision from the tax court. An appeal was then filed by “B Lender S.A.” Decision of Supreme Administrative Court The Supreme Administrative Court set aside the decision of the tax court and decided in favour of A “B Lender S.A.” Experts “The question translates, in short, into knowing whether the arm’s length principle requires or imposes that a transaction of performance of ancillary services, within the scope of a group of companies be taxed as if it earned interest, even if, in fact, it has been agreed that it does not earn interest. This is not a simple matter to be clarified and requires a prior conceptual and legal framework, which it is important to follow. … It is clear from the above that the tax authorities will act in accordance with the general rule allowing the reclassification of the transaction carried out by the parties, under the terms of the provisions of the above-mentioned rule. The defendant’s action, on the specific point of the material reclassification of the transaction in question, is not only not illegal, but is also anchored in this basic parameter of action, permitted and imposed by the law “which sets out and defines the general principles governing Portuguese tax law and the powers of the tax authorities and guarantees of taxpayers” [see LGT, preamble]. On the other hand, what the appellant foresees as a requalification of the transaction is nothing more than the association of the transaction to the typical contract in which it may be subsumed, in accordance with the command contained in the legal rule which regulates the figure of accessory payments (cf. the said Art 287(1) of the CSC). The classification of the “transfer of funds” operation, through the provision of ancillary services, as a loan therefore appears legitimate and the tax facts at issue herein do not involve any error of factual or legal assumptions. Going forward, what is important to decipher at this point is whether s 58 is such as to require or impose that the transaction in question be interest-bearing for tax purposes. … In the section dedicated to “guidance on the application of the arm’s length principle” (“C.”), one can read, with relevance to the solution of the present case: “The application of the arm’s length principle is generally based on a comparison between the conditions applied in a linked transaction and the conditions applied in a transaction between independent enterprises. For that comparison to be meaningful, the economic characteristics of the situations considered must be sufficiently comparable. (…) In order to determine the degree of comparability, and in particular the adjustments to be made in order to achieve that comparability, it is necessary to understand the way in which independent companies assess the terms of possible transactions. When weighing the terms of a possible transaction, independent companies will compare it with other options realistically available to them and will only conclude the transaction if they have no other clearly more advantageous alternative. For example, a company is unlikely to accept a price offered for one of its products by an independent company if it knows that other potential customers are willing to pay more under similar conditions. This element is relevant to the issue of comparability since independent firms generally take into account all economically significant differences between the options realistically available to them (…) when considering those options. Consequently, when making comparisons arising from the application of the arm’s length principle, the tax administration must also take such differences into account when defining whether the situations considered are comparable and what adjustments may be necessary for the purposes of such comparability.” [paragraph 1.15 of the document]. The same summary of the OECD guidelines on the matter reveals, in paragraph 1.36, as to the recognition of transactions actually carried out (ii.), and with particular acuity for the issue we are dealing with: “1.36.. The identification by the Tax Administration of a connected transaction should be based on the transaction that has actually taken place between the parties and on the way it has been structured by the parties, in accordance with the methods used by the taxpayer insofar as they are consistent with the methods set out in Chapters II and III. Save in exceptional cases, the tax administration shall not abstract from or substitute other transactions for the actual transactions. Restructuring legitimate business operations would amount to a wholly arbitrary procedure, the iniquity of which would be further aggravated by double taxation if the other tax administration involved took a different view on how the operation should be structured. 1.37. There are, however, two specific cases where, exceptionally, the tax authorities may be justified in disregarding the structure adopted by a taxpayer to carry out the linked transaction. The first case arises where there is a disagreement between the form of the transaction and its economic substance. The tax authorities may then disregard the qualification made by the parties and reclassify it according to its substance. This first case can be illustrated by the example of a company investing in an associated company in the form of an interest-bearing loan when, at arm’s length, given the economic situation of the borrowing company, the investment would not normally take that form. The tax authorities will then be entitled to qualify the investment by reference to its economic substance and to treat the loan as a capital subscription”. From the excerpts transcribed it is clear the guideline to be adopted in the treatment of the issue

In 2005 an agreement was entered between the UK tax authority and GE Capital, whereby GE Capital was able to obtain significant tax benefits by routing billions of dollars through Australia, the UK and the US. HMRC later claimed, that GE Capital had failed to disclose all relevant information to HMRC prior to the agreement and therefore asked the High Court to annul the agreement. The High Court ruled that HMRC could pursue the claim against GE in July 2020. Judgment of the High Court The High Court ruled in favour of the tax authorities.

A Colombian taxpayer had filed an unconstitutionality complaint against Article 70 (partial) of Law 1819 of 2016, “Whereby a structural tax reform is adopted, mechanisms for the fight against tax evasion and avoidance are strengthened, and other provisions are enacted.” The Constitutional Court ruled that the Colombian GAAR legislation was not unconstitutional. Click here for English translation Click here for other translation

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.

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.

Anti Tax Avoidance measures are now beeing implemented across the EU with effect as of 1 January 2019. The EU Anti Tax Avoidance Package (ATAP) was issued by the European Commission in 2016 to counter tax avoidance behavior of MNEs in the EU and to align tax payments with value creation. The package includes the Anti-Tax Avoidance Directive, an amending Directive as regards hybrid mismatches with third countries, and four Other measures. ATAD I The Anti-Tax Avoidance Directive (ATAD), COUNCIL DIRECTIVE (EU) 2016/1164 of 12 July 2016, introduces five anti-abuse measures, against tax avoidance practices that directly affect the functioning of the internal market. 1) Interest Limitation Rule  – Reduce profitshifting via exessive interest payments (Article 4) 2) Exit Taxation – Prevent tax motivated movement of valuable business assets (eg. intangibles) across borders (Article 5) 3) General Anti-Avoidance Rule (GAAR) – Discourage Artificial Arrangements (Article 6) 4) Controlled Foreign Company (CFC) – Reduce profits shifting to low tax jurisdictions (Article 7, 8) 5) Hybrid Mismatch Rule – Reduce Hybrid Mismatch Possibilities (Article 9 + ATAD II) The first measure, interest limitation rule aims to prevent profitshifting activities that take place via exessive interest payments . This rule restricts deductibility of interest expenses and similar payments from the tax base. The second measure, exit taxation, deals with cases where the tax base (eg. valuable intangible assets) is moved across borders. The third measure is the general antiavoidance rule (GAAR) which allows countries to tackle artificial tax arrangements not govened by rational economic reasons. The fourth measure is the controlled foreign company (CFC) rule, which is designed to deter profit-shifting to low-tax countries. The fifth measure, the rule on hybrid mismatches, aims to limit cases of double non-taxation and assymetric deductions resulting from discrepancies between different tax systems. ATAD II ATAD II, COUNCIL DIRECTIVE (EU) 2017/952) of 29 May 2017, an amending Directive as regards hybrid mismatches with third countries, contains a set of additional rules to neutralize hybrid mismatches where at least one of the parties is a corporate taxpayer in an EU Member State, thus expanding the application to Non-EU countries. The second directive also addresses hybrid permanent establishment (PE) mismatches, hybrid transfers, imported mismatches, reverse hybrid mismatches and dual resident mismatches. (Article 9, 9a and 9b) Other Measures Other measures included in the Anti Tax Avoidance Package Package are mainly aimed at sharing information and improving knowledge among EU Member States. 1) Country-by-Country Reporting (CbCR) – Improve Transparency (EU Directives on Administrative cooporation in the field of taxation) 2) Recommendation on Tax Treaties – Address Treaty Abuses 3) External Strategy – More Coherent Dealing with Third Countries 4) Study on Aggressive Tax Planning – Improve Knowledge (2015 Report on Structures of Aggressive Tax Planning and Indicators and 2017 Report on Aggressive Tax Planning Indicators)   The Country-by-Country Reporting (CbCR) requirement introduces a reporting requirement on global income allocations of MNEs to increase transparency and provide Member States with information to detect and prevent tax avoidance schemes. The Recommendation on Tax Treaties provides Member States with information on how to design their tax treaties in order to minimise aggressive tax-planning in ways that are in line with EU laws. The External Strategy provides a coherent way for EU Member States to work with third countries, for instance by creating a common EU black list of Low Tax Jurisdictions . The Study on Aggressive Tax Planning investigates corporate tax rules in Member States that are or may be used in aggressive tax-planning strategies. Implementation and Effect Most of the measures introduced in ATAD I are now implemented and in effect as of 1 January 2019. ATAD II, addressing hybrid mismatches with Non-EU countries, is also being implemented and will be in effect as of 1 January 2020. A Non official version of the 2016 EU Anti Tax Avoidance Directive with the 2017 Amendments

The facts underlying the notice of assessment are undisputed: a) Casa di Cura Santa Rita s.p.a. grants a free loan to Spazio Immobiliare 2000 s.r.l.; b) the latter company, substantially lacking its own means and wholly controlled by the former, uses the parent company’s loan in full to purchase certain assets; c) said assets are rented to the parent company against payment of a consideration, partly due also for the year 2004; d) payment of the consideration for the years of rental is deferred until 31/12/2005. In view of these facts, the tax authorities makes the following contentions: (a) the parent company did not directly purchase the goods and services from the subsidiary because it would not have been able to deduct the VAT due to the fact that it carried out almost all exempt transactions; (b) the subsidiary benefited from a VAT credit for the year 2004 (arising from the purchase of the goods then leased) which was then included in the group VAT settlement, but which it should have offset against the VAT paid by the parent company on the rentals c) the payment of the hire was contractually delayed between the parties in such a way as not to permit the aforesaid set-off; d) in this context, in which the payment of the hire was contractually delayed, the free loan granted by the parent company was the true consideration for the hire transaction, with the subsidiary’s obligation to pay the VAT relating to the transactions already in 2004. Judgment of the Supreme Court The Supreme Court upheld the decision in regards of the assessment but remanded the the question of penalties to the court of first instance. Excerpts “17.4. The reconstruction of the case by the CTR is immune from the criticisms addressed to it both in terms of infringement of the law (fifth ground of appeal) and in terms of contradictory reasoning (ninth ground of appeal); with the result that the aforesaid grounds must be rejected (if not declared inadmissible). 17.4.1. The reasoning of the CTR is in no way contradictory, in that: (a) it classifies the financing as consideration for the hire contract; (b) it holds that that consideration, if paid on time, would have given rise to a VAT liability of SI 2000 (c) maintains that the rental agreement between the parent company and the subsidiary provided for the deferment of payment of the consideration solely for the purposes of evasion (surreptitious deferment of the time of taxation under Article 6 of Presidential Decree No 633 of 1972); (d) asserts the existence of VAT evasion by the subsidiary. 17.4.2. This is an entirely straightforward factual finding, legitimately made on the basis of the allegations of the parties and not affected by SI 2000’s objections. Nor can the appellant, in the context of legitimacy, substitute its own different reconstruction of the facts for that made by the CTR, free from the contested logical defects. 17.4.3. In view of the CTR’s legitimate findings of fact, there is not even a violation of the law complained of, a violation that would only arise from the different classification of the parent company’s disbursements as gratuitous loans and the legitimacy of the deferment of the rental fee, as claimed by the appellant. 17.4.4. In other words, the alleged breach of law follows from the different reconstruction of the case made by SI 2000, so that the fifth plea is inadmissible rather than unfounded. 17.5. The assessment made by the Regional Tax Commission leads to the conclusion that we are not dealing with a case of avoidance or abuse of law, but only with an evasion of tax, resulting from the qualification of the inter partes transaction made by the Regional Tax Commission, a qualification that is not called into question by the appellant’s complaints. 17.6 The issue has already been addressed by the S.C. in a recent judgment (Cass. no. 27550 of 30/10/2018), for which “the non-payment of taxes in relation to a transaction qualified in a legally correct manner by the financial administration integrates a hypothesis of tax evasion and not of tax avoidance, which occurs when a negotiating instrument is used for the purpose of obtaining a tax advantage through a distorted use of tax legislation, so that the provisions of law and the principles developed by the case law, both domestic and EU, on the subject of abuse of law cannot be applied”. 17.6.1. It is worth retracing the reasoning of the aforementioned judgment. 17.6.2. ‘It is well known that “in tax matters, according to the Community and national case law, an abusive practice is an economic transaction which, through the “improper” and “distorted” use of the negotiating instrument, has as its predominant and absorbing (though not exclusive) purpose the avoidance of the tax rule, while the mere abstract configurability of a tax advantage is not sufficient to integrate the abusive case, since the concomitant condition of the non-existence of economic reasons other than the mere saving of tax and the ascertainment of the effective will of the contracting parties to obtain an undue tax advantage is required” (so Cass. No. 25758 of 05/12/2014; see, also, Cass. No. 19234 of 7 November 2012; Cass. No. 21782 of 20/10/2011; Cass. S.U. No. 30055 of 23 December 2008). 17.6.3. With specific reference to direct taxes, then, the prohibition of abuse of rights translates into a general anti-avoidance principle that is grounded, first of all, in the same constitutional principles that inform the Italian tax system (Cass. no. 3938 of 19/02/2014; Cass. no. 4604 of 26/02/2014) and, above all, in Art. 37 bis of Presidential Decree No. 600 of 29 September 1973 (Cass. No. 405 of 14/01/2015; Cass. No. 4561 of 06/03/2015), which allows the tax authorities to disallow and declare non-enforceable transactions and acts, in themselves devoid of valid economic reasons and directed to the sole purpose of obtaining tax benefits that are otherwise not due.” Click here for English translation Click here for other translation

The dispute concerns a tax assessments issued by the plaintiff (the Belgian tax administration) for FY 2002 and 2003. In particular, the claimant (Alcopa N.V – the first company to sign a European distribution contract with Hyundai) contests the classification of reimbursements received from the Korean company HYUNDAI MOTOR COMPANY for publicity services, for an amount of EUR 1,965,630.46 in assessment year 2002 and for an amount of EUR 1,057,007.00 in assessment year 2003, as abnormal or gratuitous benefits and the consequent rejection of the DBI [Definitief Belaste Inkomsten] deduction from the profits arising from those abnormal or gratuitous benefits in application of Section 207 ITC92. The Antwerp Court of First Instance, Antwerp Division, ruled by judgment dated 13 January 2016 that it was indisputably established that abnormal or gratuitous benefits were granted to the plaintiff, so that the tax administration correctly applied Section 207(2) ITC92 and did not allow a DBI deduction on these benefits. According to the first court, there was no conflict with the Parent-Subsidiary Directive. The Antwerp Court of Appeal confirmed this judgment by judgment of 19 December 2017. The plaintiff’s appealed this judgment to the Belgian Supreme Court. Based on the Conclusion of the Advocate General J. Van der Fraenen (ENG), the Supreme Court dismissed Alcopa’s appeal. “Article 207(2) CIR92, as applicable to the dispute, stipulates that no deduction may be made on the part of the profit arising from abnormal or gratuitous advantages mentioned in Article 79, nor on the basis of the special separate assessment of unreported expenses pursuant to Article 219.Pursuant to that provision, therefore, no deduction of dividends within the meaning of Article 202, § 1, 1°, ITC92 may be made from the portion of the profit that results from abnormal or gratuitous advantages.“ “The aforementioned Article 207, paragraph 2, CIR92 is intended to safeguard the taxation of profits that, between companies belonging to the same group, are artificially shifted to the company that has a large amount of deductions, but has not made sufficient profits to realise the deductions in full. The purpose of that transfer is thus to reduce the taxable profits of the transferring company, while offsetting the profits transferred to the acquiring company with the deductions. However, in order to prevent that result, no deduction may be made from the profits carried forward under that provision.“ “Article 1(2) of Council Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States (‘the Parent-Subsidiary Directive’) provides that that Directive does not preclude the application of national or agreement-based rules designed to combat fraud and abuse.“ “It is thus clear from the relationship between Article 1(2) and Article 4(1) of the Parent-Subsidiary Directive and the case-law of the Court of Justice that Article 4(1) of that directive does not preclude the application of Article 207(2) of the CIR92 , which seeks to safeguard the tax on profits deriving from an abnormal or gratuitous advantage resulting from a wholly artificial shift with the aim of offsetting, as far as possible, that shifted profit by deduction, inter alia, of dividends under the Parent-Subsidiary Directive.“ “It clearly follows that Article 4(1) of that directive does not have the effect that, where, after deduction of the other exempted profits, the balance of the profits of the parent company is insufficient to fully deduct from the taxable base dividends received from a subsidiary established in another Member State, those dividends must be immediately deducted from the profits arising from an abnormal or gratuitous advantage within the meaning of Article 207(2) CIR92. In that case, the result of Article 4(1) of the Parent-Subsidiary Directive is achieved by carrying forward the unused part of the deduction of dividends to a subsequent taxable period, in accordance with what the Court of Justice ruled in its judgment of 12 February 2009 in Case C-138/07 Belgische Staat v Cobelfret nv.“ “The ground that Article 4(1) of the Parent-Subsidiary Directive does require that the dividends received by the parent company are in any event immediately deducted from the taxable base, even if this means that the deduction must be made, in the event of an insufficient surplus, from the part of the profits from an abnormal or gratuitous advantage, fails in law.” Click Here for English Translation Click here for other translation

An assessment was issued where the tax administration denied the application treaty benefits, understanding that the dividends distributed by X S.A. a company with tax residence in Panama, to its shareholder NL Corp in the Netherlands did not qualify for the reduced rate provided for in the DTA because the latter was not the “beneficial owner” of the dividends. Judgment of the Tax Court The court upheld the assessment. “By virtue of the above, we consider that the possibility that the tax administration of the State in which the benefits of the Convention are requested, in this case Panama, also depends on the analysis of the body of evidence, and it is not apparent that the taxpayer has provided, in a timely manner, documentation related to the elements described above, therefore, we do not consider the request to be admissible, as it has not been duly supported by the taxpayer. By virtue of the foregoing considerations, and the fact that access to the benefits provided for in Article 10(a)(iii)(3) of the Panama-Netherlands Convention depends on compliance with all the requirements detailed in the preceding paragraphs, which have only been partially met, revealing significant evidentiary deficiencies, which lead us to conclude that there are insufficient reasons to revoke the contested acts, in light of the regulations, doctrine and case law analysed in this resolution.” Click here for English translation

This case concerns application of the New Zealand´s general anti-avoidance rule in s BG 1 of the Income Tax Act 2004. The tax authorities issued an assessment to Frucor Suntory NZ Ltd where deductions of interest expenses in the amount of $10,827,606 and $11,665,323 were disallowed in FY 2006 and 2007. In addition, penalties of $1,786,555 and $1,924,779 for those years were imposed. The claimed deductions arose in the context of an arrangement entered into by Frucor Holdings Ltd (FHNZ) involving, among other steps, its issue of a Convertible Note to Deutsche Bank, New Zealand Branch (DBNZ) and a forward purchase of the shares DBNZ could call for under the Note by FHNZ’s Singapore based parent Danone Asia Pte Ltd (DAP). The Note had a face value of $204,421,5654 and carried interest at a rate of 6.5 per cent per annum. Over its five-year life, FHNZ paid DBNZ approximately $66 million which FHNZ characterised as interest and deducted for income tax purposes. The tax authorities found that, although such deductions complied with the “black letter” of the Act, $55 million of the $66 million paid was in fact a non- deductible repayment of principal. Hence only interest deduction of $11 million over the life of the Arrangement was allowed. These figures represent the deduction disallowed by the Commissioner, as compared to the deductions claimed by the taxpayer: $13,250,998 in 2006 and $13,323,806 in 2007. Based on an allegedly abusive tax position but mitigated by the taxpayer’s prior compliance history. In so doing, avoiding any exposure to shortfall penalties for the 2008 and 2009 years in the event it is unsuccessful in the present proceedings. The income years 2004 and 2005, in which interest deductions were also claimed under the relevant transaction are time barred. Which I will refer to hereafter as $204 million without derogating from the Commissioner’s argument that the precise amount of the Note is itself evidence of artifice in the transaction. As the parties did in both the evidence and the argument, I use the $55 million figure for illustrative purposes. In fact, as recorded in fn 3 above, the Commissioner is time barred from reassessing two of FHNZ’s relevant income tax returns. The issues The primary issue in the proceedings is whether s BG 1 of the Act applies to the Arrangement. Two further issues arise if s BG 1 is held to apply: (a) whether the Commissioner’s reconstruction of the Arrangement pursuant to s GB 1 of the Act is correct or whether it is, as FHNZ submits, “incorrect and excessive”; and (b) whether the shortfall penalties in ss 141B (unacceptable tax position) or 141D (abusive tax position) of the Tax Administration Act 1994 (TAA) have application. The key parties The High Court decided in favor of Frucor Suntory The decision was appealed to the Court of Appeal, where a decision in favor of the tax authorities has now been issued. The Court of Appeal set aside the decision of the High Court in regards of the tax adjustment, but dismissed the appeal in regards of shortfall penalties. “We have already concluded that the principal driver of the funding arrangement was the availability of tax relief to Frucor in New Zealand through deductions it would claim on the coupon payments. The benefit it obtained under the arrangement was the ability to claim payments totalling $66 million as a fully deductible expense when, as a matter of commercial and economic reality, only $11 million of this sum comprised interest and the balance of $55 million represented the repayment of principal. The tax advantage gained under the arrangement was therefore not the whole of the interest deductions, only those that were effectively principal repayments. We consider the Commissioner was entitled to reconstruct by allowing the base level deductions totalling $11 million but disallowing the balance. The tax benefit Frucor obtained “from or under” the arrangement comprised the deductions claimed for interest on the balance of $149 million which, as a matter of commercial reality, represented the repayment of principal of $55 million.”

AFRICAN BARRICK GOLD PLC (now Acacia Mining Plc), the largest mining company operating in Tanzania, was issued a tax bill for unpaid taxes, interest and penalties for alleged under-declared export revenues. As a tax resident in Tanzania, AFRICAN BARRICK GOLD was asked to remit withholding taxes on dividend payments amounting to USD 81,843,127 which the company allegedly made for the years 2010, 2011, 2012 and 2013 (this sum was subsequently reduced to USD 41,250,426). AFRICAN BARRICK GOLD was also required to remit withholding taxes on payments which the mining entities in Tanzania had paid to the parent, together with payments which was made to other non-resident persons (its shareholders) for the service rendered between 2010 up to September 2013. AFRICAN BARRICK GOLD argued that, being a holding company incorporated in the United Kingdom, it was neither a resident company in Tanzania, nor did it conduct any business in Tanzania to attract the income tax demanded according to the tax assessment issued by the tax authorities. In 2016, the Tax Revenue Appeals Tribunal upheld the assessment issued by the tax authorities. AFRICAN BARRICK GOLD then filed an appeal to the Court of Appeal. Judgment of the Court of Appeal The Court dismissed the appeal of AFRICAN BARRICK GOLD and upheld the assessment issued by the tax authorities. Excerpts “In light of our earlier finding that the appellant is a resident company with sources of mining income from its mining entities in Tanzania, this ground need not detain us long. We shall dismiss this ground because assignment of TIN and VRN registration numbers are legal consequences of the appellant’s tax residence in Tanzania. From the premise of our conclusion that the appellant became a resident company from 11th March 2010 when it was issued with a Certificate of Compliance for purposes of registering its place of business in Tanzania, the appellant had statutory obligation to apply to the respondent for a tax identification number within 15 days of beginning to carry on the business.” “We shall not trouble ourselves with the way the Board and the Tribunal interchangeably discussed “tax avoidance” and “tax evasion” while these courts were determining the salient question as to whether the dividend the appellant received from its Tanzanian entities and which was paid out to the appellant’s shareholders abroad was subject to withholding tax. As we pointed earlier, neither the Board nor the Tribunal made any actionable criminal finding against the appellant in respect of tax evasion. Otherwise, we agree with Mr. Tito in his submission that since the dividend which the appellant paid to its foreign shareholders had a source in the United Republic in terms of section 69(a) of the ITA 2004, the appellant had a statutory duty under section 54(1)(a) of the ITA 2004 to withhold tax from such dividends. Because the appellant failed to withhold that tax, the appellant is liable to pay that withholding tax in terms of sections 82(l)(a)(b) and 84(3) of the ITA 2004.” Click here for translation

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.

GE Capital (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.”

“TELE SA” had applied a 15% withholding tax rate to lease payments for telecommunications equipment purportedly provided by a Chilean company that had been established by the Mexican parent of the “TELE” group. TELE SA claimed the payments qualified as royalties under Article 12 of the Peru-Chile double tax treaty. The Peruvian Tax Authority found the reduced 15 % rate did not apply to the lease payments because the Chilean entity was not the beneficial owner of the royalty payments. Hence an assessment was issued where withholding taxes had been calculated using a 30% rate under Peruvian domestic tax legislation. An appeal was filed with the Tax Court. Judgment of the Tax Court The Tax Court upheld the decision of the tax authorities and dismissed the appeal of “TELE SA”. The 15% withholding tax rate for royalty provided for in Article 12 of the double tax treaty between Peru and Chile did not apply to the payments as the Chilean company was not the beneficial owner, but a mere conduit. Click her for English Translation Click here for other translation

In the case of BlueCrest Capital Management Cayman Limited (& others), the key issues involved partnership profit/loss allocations for mixed member partnerships and the associated anti-avoidance legislation – limitation on tax relief for interest on unallowable purpose loans and the sale of occupational income provisions. Judgment The Tribunal found that the sale of occupational income rules could apply to charge Income tax on partnership capital contributions. Although the arrangements  did have a commercial purpose (retention and incentivization of partners), they also had as a main object the avoidance or reduction of liability to pay income tax. The test for application of the occupational income rules was therefore met.

The Italian Tax Authorities held that the withholding tax exemption under the European Interest and Royalty Directive did not apply to interest paid by Stiga s.p.a. to it’s parent company in Luxembourg. The interest was paid on a loan established in connection with a merger leverage buy out transaction. According to the Tax Authorities the parent company in Luxembourg was a mere conduit and could not be considered as the beneficial owner of the Italian income since the interest payments was passed on to another group entity. The Court rejected the arguments of the Italian Tax Authorities and recognized the parent company in Luxembourg as the beneficial owner of the interest income. In the decision, reference was made to the Danish Beneficial Owner Cases from the EU Court of Justice to clarify the conditions for application of the withholding tax exemption under the EU Interest and Royalty Directive and for determination of beneficial owner status. The Court also found that no tax abuse could be assessed. In this regard the court pointet out that the parent company in Luxembourg performed financial and treasury functions for other group entities and made independent decisions related to these activities. Click here for Translation

Following an audit the tax authorities issued a tax assessment and a substantial fine to S.p.A. ST. MEDICAL related to costs deducted in FY 2009, which the tax authorities claimed were partially fictitious. “the Economic Police carried out, on 22.10.2012, a tax audit of the appellant, which, during the contested management period (1.1.-31.12.2009), had as its business the wholesale trade in medical and surgical equipment, tools and similar items, keeping, for the purpose of monitoring its business, books and records of category C of the Commercial Code. During the audit carried out, in addition to the books kept by the appellant, various items of information found at its registered office (sales invoices, service receipts, delivery notes, delivery notes, exclusive distribution contracts between the appellant and foreign companies, with attached price lists of the products to be distributed, etc.) were seized for further processing, including items issued by the limited liability company ‘Praxis Company of Medical Equipment Ltd’ (‘Praxis’), established in Cyprus, the object of whose activity is either Following the completion of the processing of that information, the audit report of 12.3.2014 of the Financial Police was drawn up, which included the following findings: (a) the appellant company had Praxis as its main supplier, of which it was, in essence, the sole customer; (b) from 2008 onwards, the Cyprus company had as its sole shareholder the company ‘Poren Ventures Limited’, a company incorporated under the laws of the British Virgin Islands, with capital consisting of 50. 000 shares, of which 49 999 shares were held by the sole partner and manager of the appellant; c) the Cypriot company operated, in the context of triangular transactions, as an intermediary between suppliers – foreign companies (Alphatec Spine, Misonix INV, PFM, Sorin Group and Sorin Biomedica Cardio S.R.L. ) and the appellant, despite the fact that the latter was able to obtain the same products directly from foreign companies, with some of which it had concluded exclusive distribution agreements (Alphatec Spine, Misonix INV and PFM), (d) in the context of the transactions between them, the Cypriot company issued invoices to the appellant, in which it indicated purchase prices for the products supplied which were, on average, 241% higher than the prices at which the same products were priced by the foreign companies (see Case C-158/99, paragraph 1). See the relevant comparison tables, p. 27-56 and 96-108 of the audit report), and (e) the goods supplied were sent by the foreign firms directly to the appellant, which then sold them to public hospitals in the country at the high prices at which they had been supplied by the Cypriot company, thereby technically inflating the cost of their purchase (by recording the invoices issued in that regard in its books) and reducing its profit accordingly, to the detriment of the interests of the Greek State. ” The assessment and fine was later upheld by the Administrative Court and the Administrative Court of Appeal. Not satisfied with this result, S.p.A. ST. MEDICAL filed an appeal with the Supreme Administrative Court. Judgment of the Court The Court partially allowed the appeal of S.p.A. ST. MEDICAL and remanded the case back to the tax authorities in order to examine whether instead the conditions for imposition of a penalty provided for in Article 39(7) of the Income Tax Code were fulfilled. Excerpts “….transactions in which the value shown on the tax documents is higher than the value which could have been agreed under the prevailing market conditions do not, in principle, constitute a case of partial deception, provided that that value corresponds, as stated above, to the price actually agreed between the parties.” “In the view of the Court of First Instance, such is the nature of the overpricing of the products sold by the Cypriot company, resulting, in its view, from the large discrepancy between the purchase price and the selling price, from the close economic dependence of the two companies and from the general circumstances in which those transactions took place. However, in the light of what has already been said, that finding is incorrect, in the light of the ground of appeal in the main proceedings, as set out in the appeal of 24.10.2008 C 44/12 2019, because, since the value entered on the invoices issued for the transactions at issue was not less than the price actually agreed between the two undertakings, the fact that that value was, according to the tax authority’s assessment, unreasonably higher than that which would have been agreed if the transaction had been carried out without the intervention of the Cypriot company, is not sufficient in law for the tax documents issued in that regard to be classified as partially false. 4 of Law No. 2523/1997, the transactions at issue, which, due to their cross-border nature and the relationship that, at the relevant time, linked the appellant to the Cypriot company, due to the participation of the sole partner and manager of the former in the capital of the latter, fall exclusively within the scope of Article 39 of the Tax Code, so that it is not legally possible, and for this reason, to impose a fine under the Tax Code (see also Article 39 of the Tax Code), can be classified as partially fictitious” “For these reasons, the act challenged in the appellant’s appeal (172/29.4.2015 decision of the Head of the Athens IZ Tax Office) unlawfully imposed a fine under the C.B.S. for receiving partially fictitious invoices, while the appeal brought against that act was implicitly dismissed unlawfully for the same reason. Consequently, the claims of the defendant authority to the contrary (see the memorandum of 21.10.2019 of the AADC), the validity of which is not supported, as the court of first instance wrongly considered, by the explanatory memorandum of Law No. 2523/1997, from which it is clear that the regulation introduced by paragraph 4 of Article 19 attempted to remove the interpretative issues that had arisen in the past with regard to the treatment of tax items with

The US tax authorities had increased Whirlpool US’s taxable because income allocated to Whirlpool Luxembourg for selling appliances was considered taxable foreign base company sales income/CFC income to the parent company in the U.S. under “the manufacturing branch rule” under US tax code Section 951(a). The income from sales of appliances had been allocated to Whirlpool Luxembourg  through a manufacturing and distribution arrangement under which it was the nominal manufacturer of household appliances made in Mexico, that were then sold to Whirlpool US and to Whirlpool Mexico. According to the arrangement the income allocated to Luxembourg was not taxable in Mexico nor in Luxembourg. Whirlpool challenged IRS’s assessment and brought the case to the US Tax Court. The tax court ruled in favor of the IRS. “If Whirlpool Luxembourg had conducted its manufacturing operations in Mexico through a separate entity, its sales income would plainly have been FCBSI [foreign base company sales income] under section 954(d)(1),”. The income should therefore be treated as FBCSI under the tax code, writing that “Section 954(d)(2) prevents petitioners from avoiding this result by arranging to conduct those operations through a branch.”

In the case of Canadian grocery chain Loblaw, the Canadian Tax Court in 2018 found that using an offshore banking affiliate in a low tax jurisdiction – Barbados – to manage the groups investments did not constitute tax avoidance. However, the Tax Court’s interpretation of a technical provision in the Canadian legislation had the consequence that Loblaw would nonetheless have to pay $368 million in taxes and penalties. This decision has now been overturned by the Canadian Court of Appeal where a judgment in favor of Loblaw was delivered in April 2020.

Coffee Machine Ltd. was founded in Ireland and responsible for the trademark and patent administration as well as the management of the research and development activities of the A group, the world’s largest manufacturer of coffee machines. A Swiss subsidiary of the A group reported payments of dividend to the the Irish company and the group claimed that the payments were exempt from withholding tax under the DTA and issued a claim for a refund. Tax authorities found that the Irish company was not the beneficial owner of the dividend and on that basis denied the companies claim for refund. The lower Swiss court upheld the decision of the tax authorities. Judgment of the Supreme Court The Supreme Court upheld the decision of the lower court and supplemented its findings with the argument, that the arrangement was also abusive because of the connection between the share transfer in 2006 and the distribution of pre-acquisition reserves in 2007 and the total lack of substance in the Irish company. “…the circumstantial evidence suggests with a probability bordering on certainty that the complainant and the other companies involved wanted to secure a tax saving for themselves with the transfer of the shareholding in the subsidiary and the subsequent distribution of a dividend to the complainant, which they would not have been entitled to under the previous group structure. The economic objective asserted by the complainant – locating the research and development function, including the shareholding in the subsidiary, under the Irish grandparent company responsible for overseeing the licensing agreements – does not explain why the complainant went heavily into debt in order to ultimately use this borrowed capital to buy the subsidiary’s liquid funds, which were subject to latent withholding tax. It would have been much simpler for all parties involved and would have led to the same economic result if the subsidiary had instead distributed these funds to the sister company immediately before the transfer of the shareholding and the sister company had thus recorded an inflow of liquidity in the form of a dividend instead of a purchase price payment. Against this background, the chosen procedure appears to be outlandish and the legal arrangement artificial. Since the arrangement chosen by the complainant mainly served to obtain advantages from the DTA CH-IE and the AEOI-A CH-EU and the three characteristics of tax avoidance are met, the complainant must be accused of abuse of law both from the perspective of international law and from the perspective of internal law. “ “A person who, like the complainant, fulfils the criteria of abuse of the agreement and tax avoidance as defined by the practice cannot invoke the advantage pursuant to Art. 15 para. 1 aAIA-A CH-EU. As a result, the lower court did not violate either federal or international law by completely refusing to refund the withholding tax to the complainant on the basis of Art. 15 para. 1 aAIA-A CH-EU.” Click here for English translation Click here for other translation

BHP Billiton Ltd, an Australian resident taxpayer, is part of a dual-listed company arrangement (“the DLC Arrangement”) with BHP Billiton Plc (“Plc”). BHP Billiton Marketing AG is a Swiss trading hub in the group which, during the relevant years, was a controlled foreign company (CFC) of BHP Billiton Ltd because BHP Billiton Ltd indirectly held 58 per cent of the shares in the Swiss trading hub. BHP Billiton Plc indirectly held the remaning 42 per cent. The Swiss trading hub purchased commodities from both BHP Billiton Ltd’s Australian subsidiaries and BHP Billiton Plc’s Australian entities and derived income from sale of these commodities into the export market. There was no dispute that BHP Billiton Marketing AG’s income from the sale of commodities purchased from BHP Billiton Ltd’s Australian subsidiaries was “tainted sales income” to be included in the assessable income of BHP Billiton Ltd under Australian CFC provisions. The question was whether sale of commodities purchased from BHP Billiton Plc’s Australian entities (“the disputed income”) should also be included in the taxable income of BHP Billiton Ltd under Australian CFC provisions. Whether of not that income should also be included in the taxable income of BHP Billiton Ltd’s depends on whether BHP Billiton Plc’s Australian entities were to be considered “associates” of the Swiss Trading hub. The Australian Tax Office found, that the BHP Billiton Plc’s Australian entities were “associates” of the Swiss Trading hub and included income from those sales of commodities under Australian taxation according to Australian CFC provisions. BHP Billiton Ltd disagreed and filed a complaint over the decision to the Australian Tax Tribunal The Tax Tribunal found in favor of BHP Billiton Ltd. The Australian Tax Office disagreed with this decision an filed an appeal to the Federal Court. The Federal Court issued a split decision in 2019, where the appeal was allowed. BHP Biliton Ltd then appealed this decision to the High Court of Australia. The High Court of Australia dismissed the appeal of BHP Billiton and found in favor of the Australian Tax Office.

A intercompany loan had been granted within the Apex Tool group at an interest rate of 6 percent and to demonstrate the arm’s length nature of the interest rate the borrowing company provided a comparability analyses. The analysis was set aside by the tax authorities and an assessment was issued where the deduction of interest had been reduced. Apex then filed an appeal with the Administrative Court of Appeal. Judgment of the Court The Court dismissed the analyses provided by Apex and upheld the assessment of the tax authorities. Excerpts (Unofficial English translation) “9. The investigation shows that the credit rating assigned to the loan in question by Baker and McKenzie, after several adjustments, was not based on the intrinsic situation of ATHF1, particularly with regard to its lending activity and its development prospects. On the contrary, it was allocated on the basis of the aggregate financial statements of the sub-group it formed with four of its subsidiaries and sub-subsidiaries, only one of which, in any event, carried out the industrial activity that Apex Tool Group claims was the only relevant basis for comparison, in the absence of a basis for holding companies other than investment companies and conglomerates. Furthermore, although it is not excluded that the arm’s length rates can be evaluated by taking into account the yield of bond loans, this is only on condition, even supposing that the loan taken out constitutes a realistic alternative to an intra-group loan, that the companies serving as references are in comparable economic conditions. In the case in point, this condition cannot be considered to have been met for the companies in the Baker and McKenzie sample, for which it is only argued, firstly, that they have credit ratings close to that attributed to the ATHF1 loan and, secondly, that they had recourse to the bond market for transactions of the same duration and maturity. Lastly, although the additional study produced by Apex Tool Group shows arm’s length rates close to those obtained by ATHF1 from its parent company, it has not been established that the so-called comparable companies in the study sample, belonging to heterogeneous sectors of activity, would have presented the same level of risk for a banker as that which ATHF1 faced at the same time. Under these conditions, Apex Tool Group, which did not submit to the judge any offer of a loan from a banking establishment, does not provide the proof that ATHF1 was entitled to deduct the interest on the disputed loan up to the rate of 6% that it had actually paid.” “10. Under the terms of 1. of II of Article 212 of the General Tax Code: “When the amount of interest paid by a company to all directly or indirectly related companies within the meaning of Article 39(12) and deductible in accordance with I simultaneously exceeds the following three limits in respect of the same financial year: / a) The product corresponding to the amount of the said interest multiplied by the ratio existing between one and a half times the amount of the equity capital, assessed at the choice of the company at the opening or at the closing of the financial year and the average amount of the sums left or made available by all of the companies directly or indirectly linked within the meaning of Article 12 of Article 39 during the course of the financial year, b) 25% of the current result before tax previously increased by the said interest, the depreciation taken into account for the determination of this same result and the share of leasing rentals taken into account for the determination of the sale price of the asset at the end of the contract, /c) The amount of interest paid to this company by companies directly or indirectly linked within the meaning of Article 12 of Article 39, / the fraction of interest exceeding the highest of these limits cannot be deducted in respect of this financial year, unless this fraction is less than 150,000 . / However, this fraction of interest which is not immediately deductible may be deducted in respect of the following financial year up to the amount of the difference calculated in respect of that financial year between the limit mentioned in b and the amount of interest allowed for deduction under I. The balance not deducted at the end of this financial year is deductible in respect of subsequent financial years under the same conditions, subject to a discount of 5% applied at the beginning of each of these financial years. 11. Since ATHF1 was unable to benefit from the deductibility of the financial expenses arising from the loan taken out on 4 July 2010 beyond the rates of 3.91% and 3.39% set for the financial years ending in 2011 and 2012 respectively, it was not eligible for the extension of the deductibility limits set by II of Article 212 of the General Tax Code. Consequently, Apex Tool Group’s request that the calculation of ATHF1’s thin capitalisation interest be adjusted so that the balance of its interest subsequently carried forward at 31 December 2013 is increased from EUR 1,435,512 to EUR 2,401,651 can only be rejected. 12. It follows from all the foregoing that Apex Tool Group SAS is not entitled to argue that the Administrative Court of Melun wrongly rejected the remainder of its claim. Consequently, its claims for the application of Article L 761-1 of the Code of Administrative Justice can only be rejected.” Click here for English translation Click here for other translation

To acquire companies and resell them with capital gains a French Investment Fund distributed the capital of its investors (€ 5.4 billion in equity) between a French Fund Commun de Placement à Risques (FCPRs) and British Ltds managed by the French Investment Fund. For the purpose of acquiring the [X] group (the target), the French Investment Fund set up three legal entities in the Netherlands, [Y] UA, [B] BV, and [C] BV (the acquisition holding company). These three joint taxed entities are shown as Fiscal unit [A] below. The capital to be used for the acquisition of [X] group was divided into four FCPRs that held 30%, 30%, 30% and 10% in [Y] respectively. To get the full amount needed for the acquisition, [Y] members provided from their equity to [Y]: (i) member capital (€ 74.69 million by the FCPRs, € 1.96 million by the Fund Management, € 1.38 million by [D]) and (ii) investment in convertible instruments (hybrid loan at 13% per annum that is not paid, but added interest-bearing: € 60.4 million from the FCPRs and € 1.1 million from [D]). Within Fiscal unit [A], all amounts were paid in [B], which provided the acquisition holding company [C] with € 72.64 million as capital and € 62.36 million as loan. [C] also took out loans from third parties: (i) a senior facility of € 113.75 million from a bank syndicate and (ii) a mezzanine facility of € 35 million in total from [D] and [E]. On November 22, 2010, the French [F] Sàrl controlled by the French Investment Fund agreed on the acquisition with the owners of the target. “Before closing”, [F] transferred its rights and obligations under this agreement to [C], which purchased the target shares on January 21, 2011 for € 265 million, which were delivered and paid on January 31, 2011. As a result, the target was removed from the fiscal unit of the sellers [G] as of 31 January 2011 and was immediately included in the fiscal unit [A]. [C] on that day granted a loan of € 25 million at 9% to its German subsidiary [I] GmbH. Prior to the transaction the sellers and the target company had agreed that upon sale certain employees of the target would receive a bonus. The dispute is (i) whether the convertibles are a sham loan; (ii) if not, whether they actually function as equity under art. 10 (1) (d) Wet Vpb; (iii) if not, whether their interest charges are partly or fully deductible business expenses; (iv) if not, or art. 10a Wet Vpb stands in the way of deduction, and (v) if not, whether fraus legis stands in the way of interest deduction. Also in dispute is (vi) whether tax on the interest received on the loan to [I] GmbH violates EU freedom of establishment and (viii) whether the bonuses are deducted from the interested party or from [G]. Amsterdam Court of Appeal: The Court ruled that (i) it is a civil law loan that (ii) is not a participant loan and (iii) is not inconsistent or carries an arm’s length interest and that (iv) art. 10a Wet Vpb does not prevent interest deduction because the commitment requirement of paragraph 4 is not met, but (v) that the financing structure is set up in fraud legislation, which prevents interest deduction. The Court derived the motive from the artificiality and commercial futility of the financing scheme and the struggle with the aim and intent of the law from the (i) the norm of art. 10a Corporate Income Tax Act by avoiding its criteria artificially and (ii) the norm that an (interest) charge must have a non-fiscal cause in order to be recognized as a business expense for tax purposes. Re (vi), the Court holds that the difference in treatment between interest on a loan to a joined tax domestic subsidiary and interest on a loan to an non-joined tax German subsidiary is part of fiscal consolidation and therefore does not infringe the freedom of establishment. Contrary to the Rechtbank, the Court ruled ad (viii) that on the basis of the total profit concept, at least the realization principle, the bonuses are not borne by the interested party but by the sellers. Excerpts regarding the arm’s length principle “In principle, the assessment of transfer prices as agreed upon between affiliated parties will be based on the allocation of functions and risks as chosen by the parties. Any price adjustment by the Tax and Customs Administration will therefore be based on this allocation of functions and risks. In this respect it is not important whether comparable contracts would have been agreed between independent parties. For example, if a group decides to transfer the intangible assets to one group entity, it will not be objected that such a transaction would never have been agreed between independent third parties. However, it may happen that the contractual terms do not reflect economic reality. If this is the case, the economic reality will be taken into account, not the contractual stipulation. In addition, some risks cannot be separated from certain functions. After all, in independent relationships, a party will only be willing to take on a certain risk if it can manage and bear that risk.” “The arm’s-length principle implies that the conditions applicable to transactions between related parties are compared with the conditions agreed upon in similar situations between independent third parties. In very rare cases, similar situations between independent parties will result in a specific price. In the majority of cases, however, similar situations between independent third parties may result in a price within certain ranges. The final price agreed will depend on the circumstances, such as the bargaining power of each of the parties involved. It follows from the application of the arm’s-length principle that any price within those ranges will be considered an acceptable transfer price. Only if the price moves outside these margins, is there no longer talk of an arm’s-length price since a third party acting in

Brewery S.A. had transferred its trademarks to a subsidiary in Cyprus and in subsequent years paid royalties/licences for the use of the trademarks. The tax authorities had disregarded deductions of the royalty/licence payments for tax purposes, and the resulting assessment of additional taxable income was later upheld by the District Administrative Court. Judgment of the Supreme Administrative Court In its judgment, the court stated that it is beyond the scope of the legal possibilities of tax authorities to assess legal actions and to derive – contrary to their content – negative tax consequences for the taxpayer, if such authorisation does not directly result from a tax provision. The court referred to the position contained in the NSA’s judgment of 16 December 2005, in the light of which, the tax authorities have no grounds under tax law for questioning effectively concluded agreements, even if their purpose is to reduce the tax burden. Seeking to pay the lowest possible taxes is not prohibited by law; it is, as it were, a natural right of every taxpayer. It is up to the tax authorities and then the administrative court to assess how effectively (in accordance with the law) these aspirations are realised by a particular entity . In conclusion, the NSA stated that in the light of the above remarks and the factual circumstances of that case, it is reasonable to conclude that, from the perspective of the content of Article 15(1) of the TAX Act, only the assessment of the transaction between the appellant company and the Cypriot company, connected with determining whether the expenditure incurred on account of the concluded sub-license agreement fulfils the prerequisites resulting from that provision, and in particular whether there is a causal link between the incurred expenditure and the obtained (objectively obtainable) revenue or the preservation or protection of a source of revenue, is of significance. The court gave a positive answer to this question. Since the transaction of selling copyright to trademarks was legally effective, it means that the ownership of these rights was transferred to another entity, even if it is a company controlled by a domestic company. Therefore, if the exclusive holder of the rights to use certain property rights is another entity than the applicant company, and in order to maintain the current domestic production, it was necessary to use the right to these trademarks, even in the form of a sub-licence (the acquisition of which was also not questioned) and production and sale of goods with these trademarks was carried out, it is difficult not to see the connection of the incurred expense with the source of revenue, which is economic activity, and the fact that the expense was incurred in order to obtain revenue. The Court stated that the tax authorities did not make use in that case of the possibility provided in the legal state of 2011 by the provision of Article 11 of the tax act. This regulation, concerning the possibility of correcting the prices applied between related parties, in fact introduced an exception to the principle of determining income taking into account the prices applied between counterparties. Its purpose was and is to prevent the erosion of the tax base through the harmful transfer of profits between related parties. Click here for English Translation Click here for other translation

Two Swiss investors had established a structure for the management of a private equity fund in the form of a Swiss “Investment Advisor” AG and a Jersey “Investment Mananger” Ltd. They each held 50% of the shares in the Swiss AG and 50% of the shares in the Jersey Ltd. Swiss AG and Jersey Ltd then entered an investment advisory agreement whereby the Swiss AG carried out all advisory activities on behalf of Jersey Ltd and Jersey Ltd assumed all the risk of the investments. Both investors were employed by Swiss AG and Jersey Ltd had no employees execpt two directors who each received a yearly payment of CFH 15,000. According to the investment advisory agreement Jersey Ltd would remunerate the Swiss AG with 66% of the gross fee income. The Swiss AG would carry out all relevant functions related to investment advisory and recommend to Jersey Ltd acquisition targets which the latter would then evaluate and subsequently decides on and assume the risk of. For provision of the advisory functions two-thirds of the total fees (of 2.25% on Assets under Management) would go to the Swiss AG, and the remaining one-third would go to the Jersey Ltd. The Swiss AG had prepared a benchmarking analysis confirming that independent private equity fund of funds (Dachfonds) earned management fees of between 0.75% and 1% on Assets under Management, which was in line with the 0.75% attributed to the Jersey Ltd. The Swiss Tax Authorities regarded the two Swiss investors employed by the Swiss AG as the only two entrepreneurs in the structure that could have possibly taken any significant decisions. On that basis the tax authorities claimed that the 66/34 profit sharing was artificial and inconsistent with the substance of the arrangements. They argued that the Jersey Ltd should only be remunerated with a cost plus 10%. This assessment was brought to the first instance of the tax appelant court and then to the administrative court. Both courts ruled that the set-up was artificial and not in line with OECD standards, after applying a substance-over-form approach. Click here for translation

A shared service center in Poland both provided intra-group services to the group and in doing so also received and paid for services from other group companies. At issue was payments for the services that the Shared Service Center in Poland received. Under some circumstances intra-group service costs are non-deductible in Poland according to local anti-avoidance provisions aimed at base eroding payments, and according to the tax authorities the payments for intra group services received by the Shared Service Center were non-deductible according to these anti-avoidance provisions. The tax authorities had considered that the payments for the received services were non-deductible according to these provisions. Court decision Service costs that are directly connected with provision of services that generate income, and are included in the base for remuneration of the services provided are deductable and thus not covered by the non-deduction provisions. The Company’s revenues in connection with the support provided to related entities (domestic and foreign) was calculated based on the net transaction margin method or cost plus. This means that the cmpany determines the cost base (operating costs and in the case of the net transaction margin method general administrative costs) allocated appropriately to each recipient of the service to define revenues from services provided to related entities, and it is the cost base that is key to determine the Company’s remuneration for a given service. According to the Company, it operates a shared services center, and therefore provides support services. Therefore, the company bears a number of costs that are oriented towards the provision of the service for the person ordering the service. Although the costs incurred by the Company may have the nature of indirect costs (in accounting terms), in a business sense, individual cost elements affect the quality and nature of the service provided for the party ordering the service. This is the activity of shared service centers, which are cost centers that, through the skilful use of synergies, are able to create value (including value at the level of costs) for the service provider. The condition for excluding expenditure from cost limitation is that the expenditure as a tax deductible cost is directly related to the act of producing or purchasing a good or providing a service. In this case, a language interpretation outlines the boundaries of other interpretations, including functional ones. The interpretation of the provision of art. 15e paragraph 11 point 1, made by the authority in an unacceptable manner, inconsistent with the content of the norm contained therein, excludes service providers from the right to exclude from cost limitation referred to in art. 15e paragraph 1, despite meeting the conditions of this exclusion. The service expenditures were not artificial or economically unjustified, which should be counteracted by limiting costs (and thus limiting the right to classify expenditure as tax deductible costs). Therefore, it should be emphasized that functional (including teleological) interpretation of the limitation of being classified as tax deductible costs (Article 15e (1), which has a clear connection with the exclusion of this limitation (Article 15e (11) updop), leads to the conclusion, that the purpose of the restriction was to counteract aggressive optimization, the lack of economic justification for the expenditure incurred. This means that the exclusion of a restriction must be caused by the lack of such features of the expenditure incurred when considering the functional and systemic interpretation Click here for translation

X S.à.r.l./B.V. filed corporate income tax returns for the year 2012 as a foreign taxpayer, declaring a taxable profit and a taxable amount of nil. No dividend distribution had been declared for income tax purposes Following an audit, the tax authorities included the dividend distribution in the taxable income and tax was levied on the dividend distribution at a rate of 2.5 per cent. In dispute before the Supreme Court was whether the dividend distribution was taxable to the X S.à.r.l./B.V. under Section 17(3) opening words and (b) of the Act. The dispute centred on the questions (i) whether X S.à.r.l./B.V. held the substantial interest in Holding with the main purpose or as one of the main purposes to avoid the levying of income tax or dividend tax on the DGA, and (ii) whether this substantial interest was not part of the business assets of X S.à.r.l./B.V.. Depending on the answers to those questions, the dispute was whether levying corporate income tax on the dividend distribution (a) was prevented by the operation of Directive 2011/96/EU (hereinafter: the Parent-Subsidiary Directive), or (b) was contrary to the freedom of establishment provided for in Article 49 TFEU. Judgment of the Supreme Court The Supreme Court upheld the assessment issued by the tax authorities. Excerpt “When examining whether an arrangement is abusive, it is not sufficient to apply predetermined general criteria. In each specific case, the arrangement in question must be examined as a whole. Automatic application of an anti-abuse measure of general scope without the inspector being required to produce even the slightest evidence or indications of abuse goes beyond what is necessary to prevent abuse (see Eqiom and Enka, paragraph 32). If it is sufficient for the inspector to produce such initial evidence or indications, the taxpayer must be given the opportunity to produce evidence showing the existence of economic reasons for the arrangement (cf. ECJ 20 December 2017, Deister Holding AG and Juhler Holding A/S, joined cases C 504/16 and C 613/16, ECLI:EU:C:2017:1009, para 70). 2.6.6. In applying the scheme, the starting point for the allocation of the burden of proof is that the inspector states the facts and circumstances from which it follows that the subjective condition has been fulfilled, and, in the event of reasoned challenge, makes them plausible (cf. Parliamentary Papers II 2011/12, 33 003, no. 10, p. 94). This principle is in line with Union law (cf. T Danmark judgment, paragraph 117). 2.6.7. When applying Union law, the fulfilment of the subjective condition merely provides a presumption of proof that abuse has occurred. This is confirmed by the T Danmark judgment, paragraph 101. If such a presumption of abuse exists, the taxpayer must be given the opportunity to rebut that presumption. The taxpayer may overcome this presumption by establishing, and if necessary demonstrating, facts indicating that the holding of the substantial interest does not constitute a wholly artificial arrangement unrelated to economic reality. A group of companies may be regarded as a wholly artificial arrangement if, in a group structure involving (a) non-EU resident, underlying shareholder(s) and a company resident in the Netherlands, a body resident within the Union has been interposed in order to avoid the levying of Dutch income or dividend tax, without this EU body or the body’s establishment in the EU Member State having any real significance (cf. Parliamentary Papers II 2011/12, 33 003, no. 3, pp. 105 and 106, and T Danmark judgment, paragraph 100). 2.6.8. The Court did not disregard the foregoing in 2.6.2 to 2.6.7 above. The judgments challenged by ground I do not show an error of law and, as interwoven with valuations of a factual nature, cannot otherwise be examined for correctness by the Supreme Court in the cassation proceedings. Nor are those judgments incomprehensible. For this reason plea I also fails.” Click here for English translation Click here for other translation

In 2011, Petrolia SE established a wholly owned subsidiary in Norway – Petrolia Noco AS – to conduct oil exploration activities on the Norwegian shelf. From the outset Petrolia Noco AS received a loan from the parent company Petrolia SE. The written loan agreement was first signed later on 15 May 2012. The loan limit was originally MNOK 100 with an agreed interest rate of 3 months NIBOR with the addition of a margin of 2.25 percentage points. When the loan agreement was formalized in writing in 2012, the agreed interest rate was changed to 3 months NIBOR with the addition of an interest margin of 10 percentage points. The loan limit was increased to MNOK 150 in September 2012, and then to MNOK 330 in April 2013. In the tax return for 2012 and 2013, Petrolia Noco AS demanded a full deduction for actual interest costs on the intra-group loan to the parent company Petrolia SE. Following an audit for FY 2012 and 2013, the tax authorities concluded that parts of the intra-group loan should be reclassified from loan to equity due to thin capitalization. Thus, only a deduction was granted for part of the interest costs. Furthermore, the authorities reduced the interest rate from 10 per cent to 5 per cent. For the income years 2012 and 2013, this meant that the company’s interest costs for distribution between the continental shelf and land were reduced by NOK 2,499,551 and NOK 6,482,459, respectively, and financial expenses by NOK 1,925,963 and NOK 10,188,587,respectively. The Court decided in favor of the Norwegian tax authorities. Click here for translation

An intercompany loan in the form of a so-called international debt pushdown had been issued to Universal Music Japan to acquire the shares of another Japanese group company. The tax authority found that the loan transaction had been entered for the principal purpose of reducing the tax burden in Japan and issued an assessment where deductions of the interest payments on the loan had been disallowed for tax purposes. Decision of the Court The Tokyo District Court decided in favour of Universal Music Japan and set aside the assessment. The Court held that the loan did not have the principle purpose of reducing taxes because the overall restructuring was conducted for valid business purposes. Therefore, the tax authorities could not invoke the Japanese anti-avoidance provisions to deny the interest deductions. The case is now pending at the Tokyo High Court awaiting a final decision. Click here for English Translation

Fortum Project Finance (Fortum PF’) is a Belgian company, founded in 2008 by Fortum OYI, a Finnish company, and Fortum Holding bv, a Dutch company. The establishment of Fortum PF was part of an acquisition that the Finnish company Fortum OYI, through its Swedish subsidiary Fortum 1AB, was considering in Russia. However, the financing of this Russian acquisition did not go directly through Sweden but through Fortum PF in Belgium. Two virtually identical loan contracts were drawn up simultaneously on 19 March 2008. First, Fortum OYI granted credit facilities of EUR 3,000,000,000 to Fortum PF and with a second loan, Fortum PF ‘passed on’ the same amount to Fortum 1AB of Sweden. The funds, intended for the acquisition in Russia, did not pass through Belgium but went directly to Russia. 10 days later, capital increases were made to Fortum PF, with the Finnish company Fortum OYI contributing part of its loan to Fortum PF. In this way, a total of 2,389,196,655.06 euros of capital was created. According to the Belgian tax authorities, the interest received by Fortum PF from Fortum 1AB was not obtained under normal economic circumstances, but only for the purpose of obtaining tax deduction. Consequently, the interest had to be regarded as an abnormal and gratuitous advantage, and the deduction for risk capital pursuant to Article 207, second(1) of the Belgian Income Tax Code 92 denied. The deduction for risk capital amounting to EUR 69,749,709.95 was rejected. Fortum PF had disputed this and won the case before the Court of First Instance. The Court of Appeal in Antwerp considered it important that the applicability of article 207 ITC 92 for the deduction of risk capital did not simply mean that the case law of the Court of Cassation on the recovery of losses after profit shifts could be extended to the present case as argued by the tax authorities. The Court of Appeal elaborated that, while the Court’s interpretation of the concept of “abnormal and gratuitous advantages” is justified in the light of the ratio legis of Article 79 ITC 92 as regards combating the compensation of previous losses, this is not the case in the light of the ratio legis of the deduction for risk capital, i.e. the elimination of the economically unjustified discrimination between financing by debt capital and financing by risk capital; as a result, the concept of abnormal and gratuitous advantages had to be interpreted narrowly, taking into account the operation which would have conferred the advantage, without taking into account an overly broad context. The Court of Appeal in its judgment ruled that there were no abnormal transactions. The Court examined whether both the establishment of Fortum PF, the granting by Fortum OYI of a loan to Fortum PF, the granting by Fortum PF of a loan to Fortum 1 AB, the contribution by Fortum OYT of its claim to the capital of Fortum PF and the granting by Fortum OYI of interest to Fortum PF should be considered unusual in the economic circumstances in question. According to the Court of Appeal the creation of Fortum PF could not be considered abnormal simply because a financing company already existed within the group; furthermore, the view that Fortum PF did not have any economic activity in Belgium cannot be accepted, since the granting of a loan and its management implies an activity and that activity cannot be ignored. In addition, the fact that Fortum PF possesses few assets and would call on the staff of another company via a payroll location cannot be considered abnormal either, since it is inherent to a financing company that it needs assets and staff only to a limited extent for its activities. Furthermore, the fact that the company would not have engaged in any activities other than the management of the loan to Fortum 1AB cannot be considered abnormal either, since it is a large loan and the administration should not be involved in assessing the quantity of a taxpayer’s transactions; Nor can the fact that Fortum PF was involved in the financing operation be considered abnormal for the sole reason that the existing financing company could have been used or that Fortum OYI could have granted the loan directly to Fortum 1AB; furthermore, the conversion of Fortum OYI’s claim into capital cannot be considered abnormal; according to the Court of Appeal, this even corresponds to the objective pursued by the legislator in introducing the deduction for risk capital; in addition, the administration did not dispute that the interest granted by Fortum 1AB to Fortum PF was in line with the market and therefore not abnormal; in short, the whole construction cannot be considered abnormal for the simple reason that it was also motivated by tax considerations; moreover, it must be noted that the deduction for risk capital is regulated in a detailed manner in the law and provides for its own conditions to avoid abuse as well as a specific anti-abuse provision (Article 205ter, § 4 ITC 92). The Court of Appeal added that the administration adds a condition to the law when it states that the deduction for risk capital cannot be applied when it appears that the incorporation of a company in Belgium and the generation of income in it is done in order to apply the deduction for risk capital. Before the Court of Cassation, the Belgian State argued that the Court of Appeal had gone too far in its interpretation of the concept of abnormal and gratuitous advantages. The Belgian State thus defended in particular the “broad scope” of the anti-abuse provision of Articles 79 and 207 of ITC 92, including as regards the deduction of risk capital. Fortum had invoked a ground of inadmissibility of the Belgian State’s plea. According to Fortum, the Court of Appeal had established and explained that all the transactions in question were economically justified and not artificial. The plaintiff’s criticism to cassation was directed entirely against the ‘strict’ interpretation of the concept of abnormal and gratuitous advantage,

At issue in this case was UK loan relationship rules – whether a note issued as part of a structure for refinancing the US sub-group without generating net taxable interest income in the UK had an unallowable purpose and the extent of deductions referable to the unallowable purpose considered. The Court ruled in favor of the tax administration: “Did the $140m Promissory Note secure a tax advantage? 110.     In my view, the $140m Promissory Note secured a tax advantage for OIOH 2008 Ltd in that all of the interest arising in respect of the note (apart from 25% of the interest on $94m of the principal amount of the note) was set off against the taxable income of OIOH 2008 Ltd.  Those interest deductions were accordingly a “relief from tax” falling within Section 1139(2)(a) of the CTA 2010. 111.     I consider that that would be the case even if I had accepted Mr Ghosh’s submission to the effect that, because the Scheme was a single structure, the deductions arising as a result of step 8 of the Scheme should be regarded as inextricably linked to the additional interest income generated by steps 1 to 7 of the Scheme in OIOH 2008 Ltd, with the result that the single structure gave rise to no net deductions for tax purposes.  This is because I agree with Ms Wilson that the mere fact that a transaction happens to result in a net neutral tax position or even, as was the case here, a net positive tax position (as a result of the Disclaimer) does not mean, in and of itself, that there has been no “tax advantage”, as defined in Section 1139 of the CTA 2010. In a case where that net neutral or net positive tax position arises as a result of both the generation of income and the generation of deductions, the deductions are still reliefs from tax pursuant to which the amount of income giving rise to tax is reduced.  Consequently, in the words of Jonathan Parker LJ in Sema, it is a situation where “the taxpayer’s liability is reduced, leaving a smaller sum to be paid…[and]  a better position has been achieved vis-à-vis the Revenue.” 112.     In keeping with his position as referred to in paragraph 111 above, Mr Ghosh contended that a straightforward borrowing between two companies within the UK tax net in which the debits in the borrower exactly matched the credits in the lender should also not be regarded as giving rise to a tax advantage.  For the reason set out in paragraph 111 above, I also do not accept that contention. It seems to me that that transaction would be giving rise to a tax advantage (for the borrower) in the form of the deductions which it generated, regardless of the fact that there would be income in the lender which matched those deductions. Of course, the fact that that matching income existed might well be highly relevant in considering whether securing the borrower’s tax advantage was the main purpose, or one of the main purposes, of the borrower in entering into the borrowing, but that is a quite separate question. 113.     Having said that, it will be apparent from the findings of fact set out in paragraph 104 above that I have not accepted the basic premise on which the submissions set out in paragraphs 111 and 112 above are founded.  In other words, I do not accept that the current circumstances should be regarded as being akin to those pertaining where the same loan relationship gives rise to matching debits and credits. Instead, step 8 of the Scheme generated only debits and no credits and was implemented only after the US objectives which were one of OI Plc’s main purposes in procuring the implementation of the Scheme had been achieved by the implementation of steps 1 to 7 of the Scheme. The issue of the $140m Promissory Note was therefore a quite separate step from the steps which gave rise to the income in OIOH 2008 Ltd, a significant part of which was set off against the deductions to which the note gave rise. In those circumstances, it is difficult to see how the deductions to which the $140m Promissory Note gave rise should not be regarded as reliefs falling within the “tax advantage” definition. 114.     For completeness, although neither party referred to this part of the “tax advantage” definition in its submissions, I would have thought that the debits in this case might also fall within paragraph (c) of the definition of “tax advantage” in Section 1139(2) of the CTA 2010, as clarified by Section 1139(3) of the CTA 2010 – in other words, that the debits have given rise to “the avoidance or reduction of a charge to tax…by a deduction in calculating profits or gains”. Was that tax advantage a main purpose of the Appellant? 115.     Section 441 of the CTA 2009 applies to the Appellant in relation to the $140m Promissory Note only if securing the tax advantage to which I have referred above was the main purpose, or one of the main purposes, of the Appellant in issuing, and remaining party to, the $140m Promissory Note. 116.     I have already concluded in my findings of fact that the sole purpose of the Appellant in issuing, and remaining party to, the $140m Promissory Note was to secure the deductions arising in respect of the note and to surrender those deductions to OIOH 2008 Ltd.  It follows that, in my view, the Appellant’s only purpose in issuing, and remaining party to, the $140m Promissory Note was to secure a tax advantage for OIOH 2008 Ltd and that therefore Section 441 of the CTA 2009 applies to the Appellant in relation to the note. What debits are apportionable to the unallowable purpose? 117.      It also follows from that finding of fact that, on the just and reasonable apportionment required by Section 441(3) of the CTA 2009, all of the debits arising in respect of the $140m Promissory Note were attributable

A Luxembourg-based limited company (LU) held a 30% stake in an Austrian stock company operating an airport. LU employed no personnel and did not develop any activities. The parent company of LUP was likewise resident in Luxembourg. LUP had business premises in Luxembourg and employed three people. All of the shares in LUP were held by a company in the British Cayman Islands in trust for a non- resident Cayman Islands-based fund. In 2015, the Austrian Company distributed a dividend to LU. LU was not yet involved in the Austrian corporation “for an uninterrupted period of at least one year” thus withholding tax was withheld and deducted. A request for refunding of the withholding tax was denied by the tax office because the dividend was distributed to recipients in a third country and the tax authorities regarded the structure as abusive. LU then appealed the decision to the Federal Fiscal Court. The Court held that the appeal was unfounded, because the tax office rightly assumed that the structure was abusive within the meaning of Austrian tax rules. LU then filed an appeal to the Austrian Administrative High Court (VwGH). The High Court overruled the Federal Fiscal Court and found that LUP had actually developed activities. An economic reason for the set-up of a company structure- for example, the professional management of long-term investments in the EU by a management holding with several employees (the LUP as the Luxembourg parent company of the appellant) – exists even if the desired economic goal would have been achieved otherwise (i.e. with a holding company located outside the EU). According to the Court, an economic reason for a set-up exists if the economic objective, as put forward in this case, was better and safer to achieve. Thus, the structure was not abusive. Click here for English translation Click here for other translation

In moving to the United Kingdom, a New Zealand citizen, Mr. Eric Watson, restructured a significant shareholding into debt owed by a New Zealand company, Cullen Group Ltd, to two Cayman Island conduit companies, all of which he still controlled to a high degree. This allowed Cullen Group Ltd to pay an Approved Issuer Levy (AIL) totalling $8 million, rather than Non-Resident Withholding Tax of $59.5 million. The steps in the arrangement were as follows: (a) Mr Watson sold his shares in Cullen Investments Ltd to Cullen Group, at a (rounded) value of $193 million, being $291 million less his previous $98 million shareholder advances. The sale was conditional on Cullen Investments Ltd selling its shares in Medical Holdings Ltd to Mr Watson and on Cullen Investments Ltd selling its shares in Vonelle Holdings Ltd to Maintenance Ltd which was owned by Mr Watson. (b) Cullen Group’s purchase of the Cullen Investments Ltd shares from Mr Watson was funded by a vendor loan from Mr Watson of $193 million (Loan A). Mr Watson also lent Cullen Group $98 million (Loan B) which Cullen Group on-lent to Cullen Investments Ltd so that Cullen Investments Ltd could repay Mr Watson’s shareholder advance of that amount. (c) Mr Watson assigned his rights under Loans A and B to the two conduit companies, Modena and Mayfair, respectively. Mr Watson made back-to-back loans of $193 million (Modena Loan) and $98 million (Mayfair Loan) to each of them to fund their payment to him of consideration for those respective assignments in return for security over all property owned by Modena and Mayfair respectively. The result was therefore that Cullen Investments Ltd was owned by Cullen Group which owed money to Modena/Mayfair which owed money to Mr Watson. Effectively, instead of Mr Watson owning the shares in Cullen Investments Ltd, he held loans for the same value to Cullen Investments Ltd’s owner, Cullen Group, through Modena and Mayfair. He had exchanged equity for debt. The tax authorities held that Cullen Group had avoided $59.5 million of NRWT (withholding tax) while it paid $8 million in Approved Issuer Levy. An assessment in the amount of the difference, $51.5 million, was issued. There are three requirements for there to be tax avoidance in New Zealand: There is an arrangement which uses, and falls within, specific tax provisions. Viewed in light of the arrangement as a whole, the taxpayer has used the specific provisions in a way which cannot have been within the contemplation and purpose of Parliament when it enacted the provisions. The arrangement has a purpose or effect, that is more than merely incidental, of directly or indirectly altering the incidence of income tax. The High Court found there was a tax avoidance arrangement because it was not within Parliament’s contemplation and purpose in enacting the Approved Issuer Levy regime. Cullen Group Ltd was found liable for the $51.5 million difference plus interest and penalties.

In this case the Third Circuit of Appeal upheld the tax courts prior decision i a $377 million dispute involving the affiliate of a US based commodities trader. The Court found that SIH Partners LLLP, an affiliate of Pennsylvania-based commodities trader Susquehanna International Group LLP, owed taxes on approximately $377 million in additional income. The extra earnings stemmed from a $1.5 billion loan from Bank of America brokerage Merrill Lynch, which was guaranteed by SIH’s subsidiaries in Ireland and the Cayman Islands. The Tax Court’s ruling was based on regulations under Section 956 of the Internal Revenue Code, which states that U.S. shareholders must include their controlled foreign corporations’ applicable earnings, up to the amount of such a loan, in their own income when the foreign units invest in U.S. property.

The cases of T Danmark (C-116/16) and Y Denmark Aps (C-117/16) adresses questions related to interpretation of the EU-Parent-Subsidary-Directive. The issue is withholding taxes levied by the Danish tax authorities in situations where dividend payments are made to conduit companies located in treaty countries but were the beneficial owners of these payments are located in non-treaty countries. During the proceedings in the Danish court system the European Court of Justice was asked a number of questions related to the conditions under which exemption from withholding tax can be denied on dividend payments to related parties. The European Court of Justice has now answered these questions in favor of the Danish Tax Ministry; Benefits granted under the Parent-Subsidiary Directive can be denied where fraudulent or abusive tax avoidance is involved. Quotations from cases C-116/16 and C-117/16: “The general principle of EU law that EU law cannot be relied on for abusive or fraudulent ends must be interpreted as meaning that, where there is a fraudulent or abusive practice, the national authorities and courts are to refuse a taxpayer the exemption from withholding tax on profits distributed by a subsidiary to its parent company, provided for in Article 5 of Council Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, as amended by Council Directive 2003/123/EC of 22 December 2003, even if there are no domestic or agreement-based provisions providing for such a refusal.” “Proof of an abusive practice requires, first, a combination of objective circumstances in which, despite formal observance of the conditions laid down by the EU rules, the purpose of those rules has not been achieved and, second, a subjective element consisting in the intention to obtain an advantage from the EU rules by artificially creating the conditions laid down for obtaining it. The presence of a certain number of indications may demonstrate that there is an abuse of rights, in so far as those indications are objective and consistent. Such indications can include, in particular, the existence of conduit companies which are without economic justification and the purely formal nature of the structure of the group of companies, the financial arrangements and the loans.” “In order to refuse to accord a company the status of beneficial owner of dividends, or to establish the existence of an abuse of rights, a national authority is not required to identify the entity or entities which it regards as being the beneficial owner(s) of those dividends.” “In a situation where the system, laid down by Directive 90/435, as amended by Directive 2003/123, of exemption from withholding tax on dividends paid by a company resident in a Member State to a company resident in another Member State is not applicable because there is found to be fraud or abuse, within the meaning of Article 1(2) of that directive, application of the freedoms enshrined in the FEU Treaty cannot be relied on in order to call into question the legislation of the first Member State governing the taxation of those dividends.” Several cases have been awaiting the decision from the EU Court of Justice and will now be resumed in Danish courts.

The cases of N Luxembourg 1 (C-115/16), X Denmark A/S (C-118/16), C Danmark I (C-119/16) and Z Denmark ApS (C-299/16), adresses questions related to the interpretation of the EU Interest and Royalty Directive. The issue in these cases is withholding taxes levied by the Danish tax authorities in situations where interest payments are made to conduit companies located in treaty countries but were the beneficial owners of these payments are located in non-treaty countries. During the proceedings in the Danish court system the European Court of Justice was asked a number of questions related to the conditions under which exemption from withholding tax can be denied on interest payments to related parties. The European Court of Justice has now answered these questions in favor of the Danish Tax Ministry; Benefits granted under the Interest and Royalty Directive can be denied where fraudulent or abusive tax avoidance is involved. Quotations from cases C-115/16, C-118/16, C-119/16 and C-299/16: “The concept of ‘beneficial owner of the interest’, within the meaning of Directive 2003/49, must therefore be interpreted as designating an entity which actually benefits from the interest that is paid to it. Article 1(4) of the directive confirms that reference to economic reality by stating that a company of a Member State is to be treated as the beneficial owner of interest or royalties only if it receives those payments for its own benefit and not as an intermediary, such as an agent, trustee or authorised signatory, for some other person.” “ It is clear from the development — as set out in paragraphs 4 to 6 above — of the OECD Model Tax Convention and the commentaries relating thereto that the concept of ‘beneficial owner’ excludes conduit companies and must be understood not in a narrow technical sense but as having a meaning that enables double taxation to be avoided and tax evasion and avoidance to be prevented.” “Whilst the pursuit by a taxpayer of the tax regime most favourable for him cannot, as such, set up a general presumption of fraud or abuse (see, to that effect, judgments of 12 September 2006, Cadbury Schweppes and Cadbury Schweppes Overseas, C‑196/04, EU:C:2006:544, paragraph 50; of 29 November 2011, National Grid Indus, C‑371/10, EU:C:2011:785, paragraph 84; and of 24 November 2016, SECIL, C‑464/14, EU:C:2016:896, paragraph 60), the fact remains that such a taxpayer cannot enjoy a right or advantage arising from EU law where the transaction at issue is purely artificial economically and is designed to circumvent the application of the legislation of the Member State concerned (see, to that effect, judgments of 12 September 2006, Cadbury Schweppes and Cadbury Schweppes Overseas, C‑196/04, EU:C:2006:544, paragraph 51; of 7 November 2013, K, C‑322/11, EU:C:2013:716, paragraph 61; and of 25 October 2017, Polbud — Wykonawstwo, C‑106/16, EU:C:2017:804, paragraphs 61 to 63)….It is apparent from these factors that it is incumbent upon the national authorities and courts to refuse to grant entitlement to rights provided for by Directive 2003/49 where they are invoked for fraudulent or abusive ends.” “In a situation where the system, laid down by Directive 2003/49, of exemption from withholding tax on interest paid by a company resident in a Member State to a company resident in another Member State is not applicable because there is found to be fraud or abuse, within the meaning of Article 5 of that directive, application of the freedoms enshrined in the FEU Treaty cannot be relied on in order to call into question the legislation of the first Member State governing the taxation of that interest. Outside such a situation, Article 63 TFEU must be interpreted as: –not precluding, in principle, national legislation under which a resident company which pays interest to a non-resident company is required to withhold tax on that interest at source whilst such an obligation is not owed by that resident company when the company which receives the interest is also a resident company, but as precluding national legislation that prescribes such withholding of tax at source if interest is paid by a resident company to a non-resident company whilst a resident company that receives interest from another resident company is not subject to the obligation to make an advance payment of corporation tax during the first two tax years and is therefore not required to pay corporation tax relating to that interest until a date appreciably later than the date for payment of the tax withheld at source; –precluding national legislation under which the resident company that owes the obligation to withhold tax at source on interest paid by it to a non-resident company is obliged, if the tax withheld is paid late, to pay default interest at a higher rate than the rate which is applicable in the event of late payment of corporation tax that is charged, inter alia, on interest received by a resident company from another resident company; –precluding national legislation providing that, where a resident company is subject to an obligation to withhold tax at source on the interest which it pays to a non-resident company, account is not taken of the expenditure in the form of interest, directly related to the lending at issue, which the latter company has incurred whereas, under that national legislation, such expenditure may be deducted by a resident company which receives interest from another resident company for the purpose of establishing its taxable income.” Several cases have been awaiting the decision from the EU Court of Justice and will now be resumed in Danish courts.

Mining group BHP Billiton had not in it’s Australian CfC income included income from associated British group companies from sales of Australian goods through Singapore. The tax authorities held that the British companies in BHP’s dual-listed company structure fell within a definition of “associate”, and part of the income should therfore be taxed in Australia under local CfC legislation. In December 2017 BHP won the case in an administrative court but this decision was appealed to the Federal Court by the authorities. The Federal Court found in favor of the tax authority. The court found that both BHP’s Australian and British arms are associates, and therefore subject to tax in Australia under Australien CfC rules. BHP has now asked the High Court for leave to appeal.

Italien fashion group, Dolce & Gabbana, had moved ownership of valuable intangibles to a subsidiary established for that purpose in Luxembourg. The Italian Revenue Agency found the arrangement to be wholly artificial and set up only to avoid Italien taxes and to benefit from the privileged tax treatment in Luxembourg. The Revenue Agency argued that all decision related to the intangibles was in fact taken at the Italian headquarters of Dolce & Gabbana in Milan, and not in Luxembourg, where there were no administrative structure and only one employee with mere secretarial duties. Dolce & Gabbana disagreed with these findings and brought the case to court. In the first and second instance the courts ruled in favor of the Italian Revenue Agency, but the Italian Supreme Court ruled in favor of Dolce & Gabbana. According to the Supreme Court, the fact that a company is established in another EU Member State to benefit from more advantageous tax legislation does not as such constitute an abuse of the freedom of establishment. The relevant criteria in this regard is if the arrangement is a wholly artificial and as such does not reflect economic reality. Determination of a company’s place of business requires multible factors to be taken into consideration. The fact, that the Luxembourg company strictly followed directives issued by its Italian parent company is not sufficient to consider the structure as abusive and thus to relocate its place of effective management to Italy. A more thorough analysis of the activity carried out in Luxembourg should have been performed. According to the Supreme Court something was actually done in Luxembourg. Click here for English translation Click here for other translation

The issue in this case was the meaning of and standard for determining what constitutes “beneficial owner” as prescribed by Article 10(2)(a) of the Convention between the Government of the Republic of Korea and the Government of the Hungarian People’s Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income. Whether a tax treaty may be deemed inapplicable in the event that treaty abuse is acknowledged according to the principle of substantial taxation under the Framework Act on National Taxes even if constituting a beneficial owner of dividend income (affirmative) In a case where: (a) Company A, in paying dividends on six occasions to Hungary-based Company B that owns 50% of its shares, paid the withheld corporate tax based on the limited tax rate of 5% as prescribed by Article 10(2)(a) of the Convention between the Government of the Republic of Korea and the Government of the Hungarian People’s Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income; and (b) the competent taxing authority deemed the U.S.-based Company C, the ultimate parent company of the multinational business group to which Company B is affiliated with, to be the beneficial owner of dividend income and, subsequently, issued a notice of correction to the amount of corporate tax withheld against Company A by applying a limited tax rate of 15% pursuant to Article 12(2)(a) of the Convention between the Government of the Republic of Korea and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, the Court holding that the application of the Convention between the Government of the Republic of Korea and the Government of the Hungarian People’s Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income cannot be denied with respect to dividend income even if based on the principle of substantial taxation under Article 14(1) of the Framework Act on National Taxes; (g) nevertheless, the lower court held that the taxing authority’s disposition as above was lawful by deeming Company C to be the beneficial owner of dividend income solely from a tax saving perspective; and (h) in so doing, the lower court erred by misapprehending the legal doctrine.

This case concerns application of the general anti-avoidance rule in s BG 1 of the Income Tax Act 2004. The tax authorities issued an assessment where deductions of $10,827,606 and $11,665,323 were disallowed in the 2006 and 2007 income tax years respectively. In addition, penalties of $1,786,555 and $1,924,779 for those years were imposed. The claimed deductions arose in the context of an arrangement entered into by Frucor Holdings Ltd (FHNZ) involving, among other steps, its issue of a Convertible Note to Deutsche Bank, New Zealand Branch (DBNZ) and a forward purchase of the shares DBNZ could call for under the Note by FHNZ’s Singapore based parent Danone Asia Pte Ltd (DAP). The Note had a face value of $204,421,5654 and carried interest at a rate of 6.5 per cent per annum. Over its five-year life, FHNZ paid DBNZ approximately $66 million which FHNZ characterised as interest and deducted for income tax purposes. The tax authorities said that, although such deduction complied with the “black letter” of the Act, $55 million of the $66 million paid was in fact a non- deductible repayment of principal. Hence only interest deduction of $11 million only over the life of the Arrangement was allowed. These figures represent the deduction disallowed by the Commissioner, as compared to the deductions claimed by the taxpayer: $13,250,998 in 2006 and $13,323,806 in 2007. Based on an allegedly abusive tax position but mitigated by the taxpayer’s prior compliance history. In so doing, avoiding any exposure to shortfall penalties for the 2008 and 2009 years in the event it is unsuccessful in the present proceedings. The income years 2004 and 2005, in which interest deductions were also claimed under the relevant transaction are time barred. Which I will refer to hereafter as $204 million without derogating from the Commissioner’s argument that the precise amount of the Note is itself evidence of artifice in the transaction. As the parties did in both the evidence and the argument, I use the $55 million figure for illustrative purposes. In fact, as recorded in fn 3 above, the Commissioner is time barred from reassessing two of FHNZ’s relevant income tax returns. The issues The primary issue in the proceedings is whether s BG 1 of the Act applies to the Arrangement. Two further issues arise if s BG 1 is held to apply: (a) whether the Commissioner’s reconstruction of the Arrangement pursuant to s GB 1 of the Act is correct or whether it is, as FHNZ submits, “incorrect and excessive”; and (b) whether the shortfall penalties in ss 141B (unacceptable tax position) or 141D (abusive tax position) of the Tax Administration Act 1994 (TAA) have application. The key parties The Court found in favor of Frucor Suntory

Following the collapse of Enron in 2001, Goldman Sachs and Cargill had purchased a company previously known as Teeside Power Ltd. Teesside Power had claimed hundreds of millions of pounds were owed to the plant by other Enron subsidiaries. In a scheem devised by Ernst and Young, Teesside Power set up a Jersey-based company to avoid paying corporation tax on about £200 million by converting the receivables into shares. The Court of Appeal ruled in favour of the tax authorities and considered the scheme abusive tax avoidance covered by UK GAARs. The Court stated that statutory notes, although they are not endorsed by Parliament, are admissible as an aid to construction. The explanatory notes relating to the 2006 amendment to FA 1996 s 85A(1) confirmed that the amendment aimed to make it absolutely clear that the ‘fairly represent’ rule in s 84(1) takes priority over the accounting treatment mandated by s 85A(1). EWCA Civ 2075 (05 October 2018)”]

ALTA Energy, a resident of Luxembourg, claimed an exemption from Canadian income tax under Article 13(5) of the Canada-Luxembourg Income Tax Treaty in respect of a large capital gain arising from the sale of shares of ALTA Canada, its wholly-owned Canadian subsidiary. At that time, Alta Canada carried on an unconventional shale oil business in the Duvernay shale oil formation situated in Northern Alberta. Alta Canada was granted the right to explore, drill and extract hydrocarbons from an area of the Duvernay formation designated under licenses granted by the government of Alberta. The Canadian tax authorities denied that the exemption applied and assessed ALTA Energy accordingly. Article 13(5) of the Canada-Luxembourg Tax Treaty is a distributive rule of last application. It applies only in the case where the capital gain is not otherwise taxable under paragraphs (1) to (4) of Article 13 of the Treaty. Article 13(4) is relevant to the outcome of this appeal. Under that provision, Canada has preserved its right to tax capital gains arising from the disposition of shares where the shares derive their value principally from immovable property situated in Canada. However, the application of Article 13(4) is subject to an important exception. Property that would otherwise qualify as Immovable Property is deemed not to be such property in the circumstances where the business of the corporation is carried on in the property (the “Excluded Property” exception). The tax authorities argued that the Shares derived their value principally from Alta Canada’s Working Interest in the Duvernay Formation. The authorities also argued that the capital gain it realized would be taxable under Article 13(4) unless the Court agreed with ALTA’s submission that its full Working Interest is Excluded Property. ALTA Energy appealed the position of the tax authorities and argued the contrary view. According to ALTA, substantially all of ALTA Canada’s Working Interest remained Immovable Property because ALTA Canada drilled in and extracted hydrocarbons from only a small area of the Duvernay Formation that it controlled. The Judgment of the Court The appeal was allowed and the matter referred back to the tax authorities for reconsideration and reassessment.

The Court found that section 245 (GAAR) of the Canadian Income Tax Act did not apply to the transactions in question. Subsection 245(1) defines a “tax benefit” as a reduction, avoidance or deferral of tax. The Respondent says that the tax benefit BMO received was the reduction in its tax payable as a result of subsection 112(3.1) not applying to reduce its share of the capital loss on the disposition of the common shares of NSULC. In 2005, the Bank of Montreal (“BMO”) wanted to lend a total of $1.4 billion USD to a number of its US subsidiaries referred to as the Harris Group. BMO chose to borrow those funds from third parties. Tower Structure It would not have been tax efficient for BMO to simply borrow the funds and lend them to the Harris Group. Such a structure would have resulted in BMO having to pay US withholding tax on the interest payments it received from the Harris Group. As a result, BMO implemented what is commonly referred to as a “tower structure”. A tower structure is a complicated structure often used by Canadian companies to finance US subsidiaries in a tax efficient manner. It allows the deduction of interest costs by the Canadian company for Canadian tax purposes and the deduction of the corresponding interest costs by the US subsidiary for US tax purposes without having to pay withholding tax to the US on the repatriation of the funds. The tower structure implemented by BMO consisted of the following entities: (a) a Nevada limited partnership named BMO Funding L.P. (“Funding LP”) in which BMO had a 99.9% interest and a wholly owned subsidiary of BMO named BMO G.P. Inc. (“BMO GP”) had a 0.1% interest; (b) a Nova Scotia unlimited liability company named BMO (NS) Investment Company (“NSULC”) that was wholly owned by Funding LP; and (c) a Delaware limited liability company named BMO (US) Funding LLC (“LLC”) that was wholly owned by NSULC. BMO borrowed $150 million USD from a third party. It invested those funds in Funding LP. Funding LP, in turn, used those funds to acquire shares of NSULC which, in turn, used those funds to acquire shares in LLC. LLC then took the funds that it had received and lent them to the Harris Group. The balance of the required $1.4 billion USD came from a $1.25 billion USD loan obtained by Funding LP from a third party. Again, Funding LP used those funds to acquire shares of NSULC which, in turn, used those funds to acquire shares in LLC. LLC then took the funds that it had received and lent them to the Harris Group. Interest payments and dividends flowed through the tower structure at the end of each fiscal quarter. The Harris Group would pay interest to LLC. LLC would then use the money to pay dividends to NSULC. NSULC would pay corresponding dividends to Funding LP. Funding LP would use the funds it received to pay interest on the $1.25 billion USD that it had borrowed and would distribute the balance to BMO and BMO GP. BMO would, in turn, use the funds it received from Funding LP to pay interest on the $150 million USD that it had borrowed. The dividends received by BMO from NSULC (indirectly through Funding LP) were taxable dividends. BMO benefited from a subsection 112(1) deduction in respect of those dividends. From a business point of view, by borrowing US dollars to make an investment in a US asset, BMO effectively hedged its foreign exchange risk. If the Canadian dollar decreased in value against the US dollar between 2005 and 2010, then the increase in value (in Canadian dollars) of BMO’s indirect US dollar investment in the Harris Group would be matched by the increased cost (in Canadian dollars) of repaying the $1.4 billion USD in borrowed funds. Conversely, if the Canadian dollar increased in value against the US dollar between 2005 and 2010, then the decrease in value (in Canadian dollars) of BMO’s indirect US dollar investment in the Harris Group would be matched by the decreased cost (in Canadian dollars) of repaying the $1.4 billion USD in borrowed funds. However, from a tax point of view, BMO faced a potential problem with hedging its foreign exchange risk. There would not be any problem if the Canadian dollar decreased in value. Any increase in the value of the NSULC shares held by Funding LP that arose from a decrease in the value of the Canadian dollar would be taxable as a capital gain. That capital gain would be offset by the corresponding capital loss that would arise on the repayment of the $1.4 billion USD in borrowed funds. On the other hand, BMO would have a problem if the Canadian dollar increased in value. The resulting decrease in the value of the NSULC shares held by Funding LP would give rise to a capital loss. However, the stop-loss rule in subsection 112(3.1) would reduce that capital loss by an amount equal to the value of any non-taxable dividends that Funding LP had received from NSULC. As a result, the reduced capital loss would not be sufficient to fully offset the capital gain that would arise on the repayment of the $1.4 billion USD in borrowed funds. To avoid this potential mismatch of the capital gain and capital loss, BMO implemented a modification to the tower structure. Subsection 112(3.1) applies separately to each class of shares. Therefore, BMO decided to create a structure whereby NSULC had two classes of shares. When the first set of quarterly dividends was being paid, instead of paying a cash dividend, NSULC paid a stock dividend consisting of preferred shares. This resulted in Funding LP holding two classes of shares of NSULC: common shares with a high cost base and preferred shares with a low cost base. From that point forward, all quarterly dividends were paid on the preferred shares. By isolating the dividends in this manner, BMO ensured that,

The Canada Revenue Agency had issued a reassessments related to Loblaw’s Barbadian banking subsidiary, Glenhuron, for tax years 2001 – 2010. The tax authorities had determined that Glenhuron did not meet the requirements to be considered a foreign bank under Canadian law, and therefore was not exempt from paying Canadian taxes. “Loblaw took steps to make Glenhuron look like a bank in order to avoid paying tax. Government lawyers said Glenhuron did not qualify because, among other things, it largely invested the grocery giant’s own funds and was “playing with its own money.“ Tax Court found the transactions entered into by Loblaw regarding Glenhuron did result in a tax benefit but “were entered primarily for purposes other than to obtain the tax benefit and consequently were not avoidance transactions.” The Tax Court concludes as follows: “I do not see any extending the scope of paragraph 95(2)(l) of the Act. No, had there been any avoidance transactions the Appellant would not be saved by the fact it is not caught by a specific anti-avoidance provision.“ “The FAPI rules are complicated, or convoluted as counsel on both sides reminded me, though I needed no reminding. GAAR can be complicated. Taken together they weave a web of intricacy worthy of the 400 pages of written argument presented to me by the Parties. It has not been necessary for me to cover in exhaustive detail every strand of the web. Once I determined how to interpret the financial institution exemption, the complexity disappeared and the case could be readily resolved on the simple basis that Loblaw Financial’s foreign affiliate, a regulated foreign bank with more than the equivalent of five full time employees was conducting business principally with Loblaw and therefore could not avail itself of the financial institution exemption from investment business.“ “With respect to the calculation of the FAPI that arises from my determination, I agree with Loblaw Financial that the financial exchange gains/losses should not be treated on capital account but on income account. It does not matter whether the management fees from the Disputed Entities fall within paragraph 95(2)(b) of the Act as they would be part of GBL’s investment business caught by FAPI in any event.“

The Bundesfinanzhof confirmed prior case law according to which the provisions on hidden deposits and hidden profit distributions must be observed in the context of the additional taxation. On the question of economic activity of the controlled foreign company, the Bundesfinanzhof refers to the ruling of the European Court of Justice concerning Cadbury-Schweppes from 2006. According to paragraphs §§ 7 to 14 in the Außensteuergesetz (AStG) profits from controlled foreign companies without business activity can be taxed in Germany. In the case at hand the subsidiary was located in a rented office in Cyprus and employed a resident managing director. Her job was to handle correspondence with clients, to carry out and supervise payment transactions, manage business records and keep records. She was also entrusted with obtaining book licenses to order these sub-licenses for the benefit of three of Russia’s and Ukraine’s affiliates, which distributed the books in the Russian-speaking market. The license income earned by subsidiary was taxed at 10 percent in Cyprus. The Income was considered ‘passive’ as the subsidiary lacked the necessary ‘actual economic activity’. On that basis the Bundesfinanzhof rejected the appeal of the taxpayer. Click here for English translation Click here for other translation

In cases where a domestic corporation that operates a financial business (including a domestic place of business of a foreign corporation) borrowed money from a foreign controlling shareholder and such borrowed amount exceeds six times the amount invested in shares or equity interests by the foreign controlling shareholder, a certain amount of the interest paid in relation to the exceeding amount shall be excluded from deductible expenses of the domestic corporation and subsequently deemed to have been disposed of as a dividend of the domestic corporation pursuant to Article 67 of the Corporate Tax Act. In that sense, the interest paid in relation to the exceeding amount borrowed is regarded as a domestic source income of a foreign corporation, which is a foreign controlling shareholder. The Convention between the Republic of Korea and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, which allows dividend income and interest income to be taxed by both a residence country and a source country, defines the meaning of dividend income in Article 10(4) and the meaning of interest income in Article 11(5). Moreover, Article 28 of the former Adjustment of International Taxes Act stipulates that the relevant tax treaty preferentially applies to the classification of a domestic source income of a foreign corporation, notwithstanding Article 93 of the Corporate Tax Act. In view of the contents, structure, etc. of the pertinent statutory provisions, where a domestic corporation, including a domestic place of business of a foreign corporation, borrowed money from a foreign controlling shareholder, the interest paid in relation to the exceeding amount borrowed is regarded as a dividend and consequentially deemed a domestic source income of a foreign controlling shareholder, thereby falling under a dividend income in principle. However, the matter of whether to acknowledge a source country’s right to tax, as dividend income, the interest paid in relation to the exceeding amount borrowed under the applicable tax treaty ought to be determined depending on the tax treaty that the Republic of Korea concluded with the country where the relevant foreign corporation (foreign controlling shareholder) is a residence. In such a case where the interest paid constitutes another type of income (e.g., interest income), rather than dividend income, under the relevant tax treaty, then that classification should be the basis for either acknowledging the source country’s right to tax or setting the applicable limited tax rate. Click here for translation

A tax assessment based on Japanese CFC rules (anti-tax haven rules) had been applied to a Japanese Group’s (Denso), subsidiary in Singapore. According to Japanese CFC rules, income arising from a foreign subsidiary located in a state or territory with significantly lower tax rates is deemed to arise as the income of the parent company when the principal business of the subsidiary is holding shares or IP rights. However, the CFC rules do not apply when the subsidiary has substance and it makes economic sense to conduct business in the subsidiary in the low tax jurisdiction. According to the Supreme Court, total revenue, number of employees, and fixed facilities are relevant in this determination. The Singapore subsidiary managed it’s own subsidiaries or affiliates in other territories, and while the income from services to logistics in those territories represented 85% of its revenue, between 80% and 90% of it’s income came from dividends from its subsidiaries and affiliates. The Supreme Court held that the Singapore subsidiary had conducted a broad range of businesses – including finance and logistics – with the economically rational purpose of streamlining its ASEAN operations, and thus set aside the CFC taxation. Click here for English translation

In this case the Tax Court analyses the application of clause 10 (2) of the DTA between Panama and Luxembourg. The case originated in an assessment issued 26 November 2014 by the Directorate General of Revenue through which the tax administration denied the application of the aforementioned clause, understanding that the dividends distributed by Banco Bilbao Vizcaya Argentaria (Panama), S.A. a company with tax residence in Panama, to its shareholder BBVA Luxinvest, S.A. did not qualify for the reduced rate provided for in the DTA because the latter was not the “beneficial owner” of the dividends, as required by the DTA. The tax administration concluded that application of the reduced rate required the recipient of the dividends to demonstrate not only its legal status as a shareholder (or “legal owner”) of the dividends, but also that it was the ultimate recipient of the dividend payments distributed by Banco Bilbao Vizcaya Argentaria (Panama), S.A.. According to the tax administration, the documents provided did not constitute sufficient evidence to prove that BBVA Luxinvest, S.A. was indeed the beneficial owner of such dividend payments. Judgment of the Tax Court The court set aside the assessment. According to the court it had been proven that in the case at hand, Banco Bilbao Vizcaya Argentaria (Panama), S.A., was entitled to benefit from the payment of tax on dividends received in 2013, at the rate of 5%, as provided for in Article 10, paragraph 2, numeral a, of the Convention between Panama and Luxembourg for the avoidance of double taxation. Click here for English translation

The issue in this case was whether tax administration could tax a “non-existent income” through the “deeming provisions” of s 98 of Zimbabwe’s Income Tax Act. A lease agreement and a separate logistical agreement had been entered by CRS Ltd and a related South African company, for the lease of its mechanical trucks, trailers and tankers for a fixed rental. The tax payer contended that the rentals in the agreements were fair and reasonable. The tax administration contended that they were outrageously low so as to constitute under invoicing and tax avoidance. The court ruled in favor of the tax administration. Excerps from the Judgment: “Where any transaction, operation or scheme (including a transaction, operation or scheme involving the alienation of property) has been entered into or carried out, which has the effect of avoiding or postponing liability for any tax or of reducing the amount of such liability, and which in the opinion of the Commissioner, having regard to the circumstances under which the transaction, operation or scheme was entered into or carried out- (a) was entered into or carried out by means or in a manner which would not normally be employed in the entering into or carrying out of a transaction, operation or scheme of the nature of the transaction, operation or scheme in question; or (b) has created rights or obligations which would not nonnally be created between persons dealing at arm’s length under a transaction, operation or scheme of the nature of the transaction, operation or scheme in question; and the Commissioner is of the opinion that the avoidance or postponement of such liability or the reduction of the amount of such liability was the sole purpose or one of the main purposes of the transaction, operation or scheme, the Commissioner shall determine the liability for any tax and the amount thereof as if the transaction, operation or scheme had not been entered into or carried out, or in such manner as in the circumstances of the case he considers appropriate for the prevention or diminution of such avoidance, postponement or reduction.” “Accordingly, I agree with Mr Bhebhe that the agreements had the stipulated effect of avoiding or reducing the appellant’s liability for income tax. The circumstances prevailing at the time the agreement was entered into or carried out In the hyperinflationary era, the appellant averred that it could not secure local contracts that would enable it to fully utilize all its assets. The local currency Jost value at an alarming rate. The pricing of transport services became a nightmare. The income derived from transport services could not sustain the local operations. It was faced with the spectre of liquidation and staff retrenchments. The effect of which was that its loyal and skilled manpower mainly consisting of approximately 110 drivers would lose their only source of livelihood for themselves and their families while the company mechanical horses and trailers would deteriorate through disuse. The appellant could not access the foreign currency required to purchase spare parts and fuel necessary to keep the local operations running.” “It is a notorious fact of commercial life that related parties enter into contractual amngements. I did not discern any abnormalities in the nature of the agreements nor in the identities of the signatories. There was however an admixture of the normal and abnormal in the manner in which the agreements were carried out. For starters, the appellant overemphasized the indisputable uniqueness of the manner in which the agreements were carried out. In the letter of 24 October 2013 at p 50.1 para 11 the external accountants for the appellant wrote that “the appellant’s position is unique in the transport regime of Zimbabwe and there is no other haulier which provides a similar service.” The same point was repeated in the letter of 6 December 2013 at p 45.1 in para 1.2 where the same accountants indicated that they “were unaware of any Zimbabwean company which operates in the same unique situation as the appellant.” “In assessing the information availed to the Commissioner by the appellant and to this Court by both the appellant and the Commissioner, I am satisfied the agreements were carried out in a manner which would not normally be employed in such transactions. In the light of the formulation of Trollip JA in Hicklin v Secretary for Inland Revenue, supra, it appears to me that the two parties were not acting at arm’s length.” “It was clear that each party derived tangible benefits from the agreements. The related party had the right to lease the equipment and the obligation to pay rentals and maintain the equipment. The appellant received a fixed rental. The obligation to meet the maintenance and running expenses was unique and abnonnal. The fixed rentals which negated the cost plus mark-up principle was abnormal and would not have been concluded by parties dealing at arm’s length.” “It seems trite to me that the purpose of a private company is to make a profit. The appellant is not a non-profit making organisation. The appellant was content with the untenable situation in which it made and continues to make losses without any prospects of ever making a profit. It seems to me that the fixed rental was deliberately designed to ensure that the appellant would remain viable enough to survive liquidation and costly retrenchments and at the same avoid or reduce its income tax liability.” “I am satisfied that the avoidance or reduction of income tax liability was one of the main purposes of the agreement (s).” “In my view, the transactions undertaken by the appellant fell into the all-embracing provisions of s 98. The respondent correctly invoked this provision in assessing the appellant to income tax in each of the four tax years in question.” “The appellant strongly argued against the alteration of the contract of lease concluded between the related parties by the respondent. While Mr Bhebhe conceded that the respondent did not have the legal authority to alter the contract of the related parties

A Norwegian company, A, first acquired shares in Company C from a unrelated party D for tNKR 625. Company A then transferred the acquired shares in C to a subsidiary E, a shell company established by C for the purpose of the transaction. Company A then sold the shares in subsidiary E to the unrelated party D, from which it had originally bought the shares in C, for tNKR 3830, a price almost six times higher than the acquisition price, in a tax free transfer. Based on these facts, the Norwegian tax administration adjusted the price of the intra-group transfer shares in C from A to E. The Norwegian tax tribunal decided that the valuation af the shares in the intra-group transfer could be based on a linear appreciation in the share value. Click here for translation

In the case of Univar Holdco the Canadian tax authorities had applied Canadian Anti-Avoidance Rules to a serie of transactions undertaken by the Univar Group following the acquisition of the group’s Dutch parent. The (only) purpose of these transactions was to increase the amount of retained earnings that could be taken out of Canada without incurring withholding tax. The Federal Court of Appeal overturned the prior decision of the Tax Court and came to the conclusion that it had not been proved that the transactions were abusive tax avoidance – abuse of the Act. The Court also noted that subsequent amendments and commentary to the Act do not confirm that transactions caught by the subsequent amendments are abusive before the amendments are enacted. The 2017 decision of the Federal Court of Appeal The 2016 decision of the Tax Court

At issue was interest in relation to loans between related parties. Pursuant to Article 32(1) ZDDPO-2, interest on loans, except in the case of borrowers from banks and insurance companies, received from a shareholder or partner who, at any time during the tax period, directly or indirectly owns at least 25% of the shares or interests in the capital or voting rights of the taxable person, is not recognised as an expense if, at any time during the tax period, such loans exceed four times (in accordance with the transitional provision 81. The excess of loans is determined by reference to the amount and duration of the excess of loans during the tax period, unless the taxpayer proves that the excess of loans could have been obtained from a lender who is an unrelated person. The claimant argued in the proceedings that it could also have obtained the excess loans from an unrelated person, but failed to prove this. Click here for English translation Click here for other translation

Wells Fargo, an American multinational financial services company, had claimed foreign tax credits in the amount of $350 based on a “Structured Trust Advantaged Repackaged Securities” (STARS) scheme. The STARS foreign tax credit scheme has two components — a trust structure which produces the foreign tax credits and a loan structure which generates interest deductions. Wells Fargo was of the opinion that the STARS arrangement was a single, integrated transaction that resulted in low-cost funding. In 2016, a jury found that the trust and loan structure were two independent transactions and that the trust transaction failed both the objective and subjective test of the “economic substance” analysis. With respect to the loan transaction the jury found that the transaction passed the objective test by providing a reasonable possibility of a pre-tax profit, but failed the subjective test as the transaction had been entered into “solely for tax-related reasons.” The federal court ruled that Wells Fargo had not been entitled to foreign tax credits. The transaction lacked both economic substance and a non-tax business purpose. (The economic substance doctrine in the US had an objective and a subjective prong . The objective prong of the analysis considered whether a transaction had a real potential to produce an economic profit after consideration of transaction costs and without consideration of potential tax benefits. The subjective prong of the analysis considered whether the taxpayer had a non-tax business purpose for the transaction. The relationship between the two prongs had long been debated.  Some argued for application of the prongs disjunctively and others argued for application of the prongs conjunctively. When the US Congress codified the economic substance doctrine in 2010, it adopted a conjunctive formulation—denying tax benefits to a transaction if it failed to satisfy either prong.)

Santander Holding USA is a financial-services company that used a tax strategy called Structured Trust Advantaged Repackaged Securities (STARS) to generate more than $400 million in foreign tax credits. The scheme was developed and promoted to several U.S. banks by Barclays Bank PLC, a U.K. financial-services company, and the accounting firm KPMG, LLC. The Internal Revenue Service (IRS) ultimately concluded that the STARS transaction was a sham, and that the economic-substance doctrine therefore prohibited petitioner from claiming the foreign tax credits. The STARS-scheme was designed to transform the foreign tax credit into economic profit, at the expense of the U.S. Treasury. STARS involved an arrangement whereby the U.S. taxpayer paid tax to the United Kingdom, claimed a foreign tax credit for that U.K. tax, and simultaneously recouped a substantial portion of its U.K. tax. Instead of the typical one-to-one correlation of credits claimed to taxes paid, the taxpayer thus received one dollar in U.S. tax credits for substantially less than one dollar in foreign taxes paid. The STARS shelter was complex, but in  general terms worked as follows: The U.S. taxpayer diverted income from U.S. assets (such as loans to U.S. borrowers) into and out of a wholly owned Delaware trust that had a nominal U.K. trustee. Circulation of the income through the trust was purely a paper transaction, and no income was put at risk or deployed in any productive activities. Because the trustee was a U.K. resident, however, circulation of the income through the trust caused the income to become subject to U.K. tax, even though the assets and income never left the United States or the U.S. taxpayer’s control. The taxpayer would pay the trust’s U.K. tax and claim corresponding foreign tax credits on its U.S. return. STARS, however, incorporated a mechanism that allowed the taxpayer to recoup a substantial portion of the U.K. tax, while retaining the full amount of the U.S. foreign tax credits. Barclays, the entity that marketed STARS, acquired at the outset a formal interest in the Delaware trust. Under U.K. law, that formal interest allowed Barclays to claim certain U.K. tax benefits, ultimately permitting Barclays to recover almost the full amount (in this case, 85%) of the taxes that the taxpayer had paid. As part of the STARS strategy, Barclays agreed to return a significant percentage of that amount to the U.S. taxpayer, while keeping the rest as its fee. As a result, the U.S. taxpayer would receive an effective refund (through Barclays) of approximately 50% of its U.K. taxes, while claiming a foreign tax credit on its U.S. tax return as if it had paid 100% of those taxes. That benefit was achieved without putting any money at economic risk and without engaging in any productive business activities. The STARS strategy had an unlimited capacity to generate additional foreign tax credits, bounded only by the amount of income that a taxpayer could cycle through the trust petitioner employed the transaction to generate more than $400 million in foreign tax credits during the 2003-2007 tax years. The question before the Supreme Court was whether the economic substance of a transaction for which a taxpayer claims foreign tax credits on its federal tax return depends in part on whether the transaction was profitable after all foreign taxes were paid. Like other provisions of the Internal Revenue Code, foreign tax credits are subject to the “economic substance” doctrine under that longstanding common-law principle, which was codified by Congress in 2010. According to the doctrine a transaction are not allowable if the transaction does not have economic substance or lacks a business purpose. The doctrine reflects the principle that Congress does not intend for sham transactions to produce tax benefits, even if the transactions would otherwise trigger tax benefits under the pertinent statutory and regulatory provisions. The Court denies the petition for a writ of certiorari

The Court of Appeal upheld decisions of the High Court confirming the Commissioner of Inland Revenue’s disallowance of a $1,116,000 management fee for income tax purposes. The Court of Appeal dismissed Honk Land Trustees Limited’s (“HLT”) appeal on the following alternative grounds: (1) there was no satisfactory evidence to show that management services were in fact provided; (2) there was no sufficient nexus shown; and (3) in the event the management fees were deductible, they were nevertheless part of a void tax avoidance arrangement. Additionally, the Court of Appeal agreed that the Commissioner was entitled to impose abusive tax position shortfall penalties.

Tax avoidance scheme. Use of total return swap over shares in subsidiary to create a deemed creditor relationship. Value of shares depressed by novating liability for large loans to subsidiary. The scheme used by Ladbroke UK involved a total return swap and a novation of loans to extract reserves. Used to achieve a “synthetic transfer” of the JBB business to LB&G. In essence, this involved extracting the surplus which had accumulated in LGI and transferring it to LB&G prior to an actual sale of the JBB business to LB&G. The normal way to extract such reserves would be by a dividend payment. The Court ruled, that it is sufficient for the application of paragraph 13 (UK GAAR) that the relevant person has an unallowable purpose. Where the unallowable purpose is to secure a tax advantage for another person, HMRC do not have to show that the other person has in fact obtained a tax advantage, if the other person has been prevented from obtaining a tax advantage by the operation of paragraph 13. It would be impossible to construe paragraph 13 in that way where the relevant person intended to obtain a tax advantage for 40 itself, and there is nothing in the wording to indicate a different result where it intends to obtain a tax advantage for another.

A tax assessment based on Japanese CFC rules (anti-tax haven rules) had been applied to a “TH Corp”‘s, subsidiary in Singapore. According to Japanese CFC rules, income arising from a foreign subsidiary located in a state or territory with significantly lower tax rates is deemed to arise as the income of the parent company when the principal business of the subsidiary is holding shares or IP rights. However, the CFC rules do not apply when the subsidiary has substance and it makes economic sense to conduct business in the subsidiary in the low tax jurisdiction. Judgment of the court. According to the court, total revenue, number of employees, and fixed facilities are relevant in this determination. The Court held that the Singapore subsidiary had conducted a broad range of businesses – including finance and logistics – with the economically rational purpose of streamlining its ASEAN operations, and thus set aside the CFC taxation. Excerpt “Satisfaction of the substance and control criteria (a) According to the above-mentioned findings, A1 rents an office in Singapore and uses it for the regional control business. Therefore, it can be said that A1 has fixed facilities in Singapore, the country where its head office is located, which are deemed to be necessary for the conduct of its main business, the regional control business. Therefore, it satisfies the substantive criteria (Article 6-6(4) and (3) of the Act). (b) According to the facts certified above, A1 holds general meetings of shareholders and meetings of the board of directors, executes the duties of officers, and prepares and keeps accounting books in Singapore. Therefore, it can be said that A1 manages, controls and operates its own business in the country where its head office is located, and therefore, the management control standard (Article 66-6 Article 66-6, paragraphs 4 and 3). Conclusion According to the above, A1 satisfies all of the requirements for exemption from application, namely, the business criterion, the country of domicile criterion, the substance criterion and the control criterion. Therefore, the plaintiff is exempted from the application of Article 66-6(1) of the Measures Act in each of the fiscal years in question.” Click here for English translation Click here for other translation

IKEA Handel og Eiendom AS had deducted from its taxable income interest on an inter-company loan that had been established as the result of an intricate restructuring. The tax authorities issued a notice of assessment denying tax deduction of the interest payments based on the Norwegian non-statutory anti-avoidance rule. Appeals were filed by IKEA Handel og Eiendom AS and the cases ended up before the Supreme Court. Judgment. The Supreme Court ruled in favour of the tax authorities and upheld the assessment. According to the court, IKEA Handel og Eiendom AS was not entitled to a tax deduction for the interest paid on the loan. The Norwegian non-statutory anti-avoidance rule applied to the combined transactions as their main purpose was tax avoidance. The court clarified that the statutory anti-avoidance rule in section §13-1 is limited to transfer pricing and thin capitalisation cases and does not apply to equity transactions that are lawfully made under Norwegian company law. Excerpts in English “(81) In my view, section 13-1 does not apply where the series of dispositions includes actual equity dispositions that are lawfully made under Norwegian company law. The assessment themes contained in the non-statutory cut-through rule are suitable for assessing such cases. This also limits the challenges of drawing the line between the scope of application of the statutory and the non-statutory rule. For the sake of clarity, I add that section 13-1 can of course be applied to the parts of such a series of transactions that the provision covers, such as transfer pricing and thin capitalisation. However, as I have mentioned, the borrowing and interest expenses in our case are not affected by section 13-1. (82) I have therefore concluded that there is no authority in section 13-1 of the Taxation Act to deny Ikea Handel og Eiendom AS the right to the disputed deduction in the company’s income that section 6-40 basically provides.” …. (93) In my view, it is clear that this standard must also be applied to unnecessary methods of carrying out an otherwise necessary step in the transaction. The State has argued that the company itself could have established the property group, which would not have created the need for a loan-financed repurchase. It can also be questioned whether, in order to achieve the commercial purpose, it was necessary to transfer the shares in the property group Ikea Eiendom Holding AS to the company through a loan-financed purchase at fair value instead of the company acquiring them as a contribution in kind. (94) In my view, there is no doubt that tax savings were the main – perhaps the only – motivating factor in the choice of procedure. The procedure resulted in Ikea Handel og Eiendom AS incurring large costs in connection with the acquisition of properties that the company had just disposed of free of charge. These costs far exceeded the tax savings the company achieved through the interest deduction. The way in which the series of transactions were made can therefore have had no other purpose than to create a debt burden in Ikea Handel og Eiendom AS that provided a basis for a tax deduction in Norway, which overall was favourable for the Ikea group as such. I cannot see that the company has rebutted this. (95) I have therefore concluded that the main purpose of the way in which the series of transactions was carried out was to save tax. The basic condition is then fulfilled.” Click here for English translation Click here for other translation

Company A had acquired the business (assets and liabilities) of another company, through an Acquisition B.V. Company A provided a loan of EUR 300,000 to Acquisition B.V. in 2008. The Acquisition B.V. failed to perform well and went bankrupt in 2011. Company A claimed a write-down loss on the loan in its corporate income tax return. The Tax Administration stated that this was an extreme default risk loan and did not accept the loss. According to Dutch case law the main characteristic of an EDR loan is that an arm’s length interest rate cannot be found – the shareholder grants the loan under such circumstances that it is clear from the outset that it cannot be repaid and the shareholder does not have business interest, other than in its capacity as shareholder, to grant the loan. The Arnhem-Leeuwarden Court of Appeal disagreed with the Tax Administration. The Supreme Court stated that “special circumstance” between a creditor and a debtor occurs if a business relationship is involved. One that would have been of sufficient weight to the creditor to provide a loan under the same conditions and circumstances and to accept the resulting bad debt risk, even without an intercompany relationship. The Supreme Court argued that the Court of Appeal had provided insufficient grounds for there not being a “special circumstance” in this case. Another issue in this case was the fact that the debtor of the loan was not a subsidiary of company A. Instead, it was a sister company (80% shareholding). On this issue the Supreme Court clearly stated that “parallel” deduction of a write-down loss in respect of an extreme default risk loan is not possible. Click here for translation

A tax assessments based on anti-avoidance doctrine “gjennomskjæring” were set aside. The case dealt with the benefits of a multi-currency cash pool arrangement. The court held that the decisive question was whether the allocation of the benefits was done at arm’s length. The court dismissed the argument that the benefits should accure to the parent company as only common control between the parties which should be disregarded. The other circumstances regarding the actual transaction should be recognized when pricing the transaction. In order to achieve an arm’s length price, the comparison must take into account all characteristics of the controlled transaction except the parties’ association with each other. While the case was before the Supreme Court, the Oil Tax Board made a new amendment decision, which also included a tax assessment for 2002. This amendment, which was based on the same anti-avoidance considerations, was on its own to the company’s advantage. Following the Supreme Court judgment, a new amended decision was made in 2009, which reversed the anti-avoidance decision for all three years. The Supreme Court concluded that in 2009 the tax authorities could also change the tax assessment for 2002, even though this tax assessment was not considered by the Supreme Court in 2008. The Court pointed out that the need for amendments pursuant to section 9-5 no. 2, litra a) of the Tax Assessment Act extends beyond the limits for the substantive legal force, cf, section 9-6 no. 5, litra e) of the Tax Assessment Act, and stated that if the tax authorities have solved a classification or allocation issue for a transaction in the same way for several income years, and there is a final and enforceable judgment for one of the years, the provision gives the tax authorities the right and obligation to also consider the tax assessments for the other years. In the specific case, the amendment for 2002 followed from the Supreme Court’s judgment for the two preceding income years, and the tax authorities then had the authority to consider the tax assessment for this year. Click here for translation

The company had deducted impairment losses recognised on an investment in an Argentinean company (recently acquired from a related entity) arising from the conversion into capital of loans granted to the entity by other group companies, loans which had been acquired by the Spanish taxpayer. The tax administration argued that acquisition of such loans would not have taken place between independent parties due to the economic situation in Argentina at that time. The Supreme Court considered this conclusion to be wrong for two reasons: From a technical point of view, it was unacceptable to consider that the loans had no market value, since economic reality shows that even in situations of apparent insolvency there is an active market to purchase loans that are apparently uncollectible. If the loans acquired could have a market value, it was not possible to deny that they had such value without proving it; and From a legal point of view, it was not possible to disregard transactions actually carried out between related parties which could be attributed a market value by simply referring to the direct application of Article 9 of the International Convention on the avoidance of double taxation between Spain and France or between Spain and Argentina. It would have been necessary in this case to apply a general internal anti-abuse clause to carry out this reclassification. Click here for translation And Click here for translation

AFRICAN BARRICK GOLD PLC (now Acacia Mining Plc), the largest mining company operating in Tanzania, was issued a tax bill for unpaid taxes, interest and penalties for alleged under-declared export revenues from the Bulyanhulu and Buzwagi mines. Acacia Mining was accused of operating illegally in the country and for tax evasion. Decision of the Tax Revenue Appeals Tribunal The Tribunal decided in favour of the tax authorities. “The conclusion that can be drawn from the above definitions is that the explanation offered by ABG as the source of dividends, i.e., distributable reserves and IPO proceeds are far from being plausible. In the circumstances, it is fair to conclude that the respondent’s argument that the transactions were simply a design created by the appellant aimed at tax evasion was justified. One also wonders as to how could part of IPO proceeds, a one-off event, even if those proceeds were distributable as dividends (which in law they are not), could explain the payment of four-years, back-to-back dividends to the appellant’s shareholders. Since ABG’s only entities that carry on business anywhere in the world are the three Tanzanian gold-mining companies, ABG’s only source of revenue that could create net profits or retained earnings would be the three Tanzanian companies (or one or more of them). While none of them was allegedly making any profits, and since the appellant has no other subsidiary anywhere in the world engaged in business, one is compelled to further conclude that at least one, if not more or all, of the appellant’s three gold producing subsidiaries in Tanzania was making profit. We see no other plausible explanation. Ultimately, the fact that none of ABG’s subsidiaries is declaring any profit that could provide its holding company with such huge net profits sufficient to distribute to its shareholders four years in a row is what in our respectful opinion constitutes the evidence of a sophisticated scheme of tax evasion. To borrow the words of Lord Browne-Wilkinson, this Tribunal cannot accept to be relegated to a mere spectator, mesmerized by the moves of the appellant’s game, oblivious of the end result. The circumstances remind one of the wise words of Justice Benjamin Cardozo in Re Rouss, 116 N.E. 782 at 785, who stated: “Consequences cannot alter statutes but may help to fix their meaning.” We are thus of the respectful view that the Board was entitled to go beyond the mere plain meaning of the provisions of section 66 (4) (a) of the Income Tax Act. The circumstances fully justified the application of the purposive approach rule in construction of tax statutes, as promulgated by Lord Wilberforce in W. T. Ramsay and more elaborately explained by Lord Browne-Wilkinson in McGuckian. Hence, by recognizing the scheme behind the facade that ultimately enabled it to uncover the true source of the dividends that ABG was able to pay to its shareholders for four consecutive years, the Board took the correct view of the law. With these findings we see no merit in the first and second grounds of appeal, and we would dismiss both of them. This conclusion would allow us to now determine the third ground of the appeal to the effect that the Commissioner General was justified in invoking his powers under section 133 (2) of the Income Tax Act , 2004 and section 19 (4) of the Value Added Tax Act to register the appellant under the two Acts and issue it with TIN and VRN Certificates. In the ultimate result, we find no merit in this appeal. We dismiss it with costs.” Click here for translation

In this case the UK Supreme Court addressed the Ramsay approach, when it considered tax avoidance schemes which involved composite transactions designed to avoid payment of income tax on bankers’ bonuses. According to the Supreme Court the Ramsay case did not develop a special rule for tax avoidance schemes; instead it extended to tax cases the purposive approach to statutory construction which was orthodox in other areas of the law. The Ramsay principle established that the analysis of the facts depended upon the purposive construction of the statute. While this was not a new special rule for tax avoidance cases, the approach had proved particularly important in such cases. Excerpts from the Supreme Court Judgment “The Ramsay approach 61. As the House of Lords explained in Barclays Mercantile Business Finance Ltd v Mawson, in a single opinion of the Appellate Committee delivered by Lord Nicholls, the modern approach to statutory construction is to have regard to the purpose of a particular provision and interpret its language, so far as possible, in the way which best gives effect to that purpose. Until the case of W T Ramsay Ltd v Inland Revenue Comrs [1982] AC 300, however, the interpretation of fiscal legislation was based predominantly on a linguistic analysis. Furthermore, the courts treated every element of a composite transaction which had an individual legal identity (such as a payment of money, transfer of property, or creation of a debt) as having its own separate tax consequences, whatever might be the terms of the statute. As Lord Steyn said in Inland Revenue Comrs v McGuckian [1997] 1 WLR 991, p 999, in combination those two features – a literal interpretation of tax statutes, and an insistence on applying the legislation separately to the individual steps in composite schemes – allowed tax avoidance schemes to flourish to the detriment of the general body of taxpayers. 62. The significance of the Ramsay case was to do away with both those features. First, it extended to tax cases the purposive approach to statutory construction which was orthodox in other areas of the law. Secondly, and equally significantly, it established that the analysis of the facts depended on that purposive construction of the statute. Thus, in Ramsay itself, the terms “loss” and “gain”, as used in capital gains tax legislation, were purposively construed as referring to losses and gains having a commercial reality. Since the facts concerned a composite transaction forming a commercial unity, with the consequence that the commercial significance of what had occurred could only be determined by considering the transaction as a whole, the statute was construed as referring to the effect of that composite transaction. As Lord Wilberforce said: “The capital gains tax was created to operate in the real world, not that of make-belief. As I said in Aberdeen Construction Group Ltd v Inland Revenue Comrs [1978] AC 885, it is a tax on gains (or I might have added gains less losses), it is not a tax on arithmetical differences. To say that a loss (or gain) which appears to arise at one stage in an indivisible process, and which is intended to be and is cancelled out by a later stage, so that at the end of what was bought as, and planned as, a single continuous operation, there is not such a loss (or gain) as the legislation is dealing with, is in my opinion well and indeed essentially within the judicial function.” (p 326) 63. “Unfortunately”, the Committee commented in Barclays Mercantile at para 34, “the novelty for tax lawyers of this exposure to ordinary principles of statutory construction produced a tendency to regard Ramsay as establishing a new jurisprudence governed by special rules of its own”. In the Barclays Mercantile case the Committee sought to achieve “some clarity about basic principles” (para 27). It summarised the position at para 32: “The essence of the new approach was to give the statutory provision a purposive construction in order to determine the nature of the transaction to which it was intended to apply and then to decide whether the actual transaction (which might involve considering the overall effect of a number of elements intended to operate together) answered to the statutory description. … As Lord Nicholls of Birkenhead said in MacNiven v Westmoreland Investments Ltd [2003] 1 AC 311, 320, para 8: ‘The paramount question always is one of interpretation of the particular statutory provision and its application to the facts of the case.’” As the Committee commented, this is a simple question, however difficult it may be to answer on the facts of a particular case. 64. This approach has proved to be particularly important in relation to tax avoidance schemes as a result of two factors identified in Barclays Mercantile at para 34. First, “tax is generally imposed by reference to economic activities or transactions which exist, as Lord Wilberforce said, ‘in the real world’”. Secondly, tax avoidance schemes commonly include “elements which have been inserted without any business or commercial purpose but are intended to have the effect of removing the transaction from the scope of the charge”. In other words, as Carnwath LJ said in the Court of Appeal in Barclays Mercantile, [2002] EWCA Civ 1853; [2003] STC 66, para 66, taxing statutes generally “draw their life-blood from real world transactions with real world economic effects”. Where an enactment is of that character, and a transaction, or an element of a composite transaction, has no purpose other than tax avoidance, it can usually be said, as Carnwath LJ stated, that “to allow tax treatment to be governed by transactions which have no real world purpose of any kind is inconsistent with that fundamental characteristic.” Accordingly, as Ribeiro PJ said in Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46; (2003) 6 ITLR 454, para 35, where schemes involve intermediate transactions inserted for the sole purpose of tax avoidance, it is quite likely that a purposive interpretation will result in such steps being

In the Yahoo case, the Japanese Supreme Court applied the anti-avoidance provisions “…those deemed to result in an unreasonable reduction of the corporate tax burden…” as defined in Article 132-2 of the Corporate Tax Act (denial of acts or calculations related to reorganisation), where the meaning of “unreasonable” is “abusing the tax provisions related to reorganisation…as a means of tax avoidance” and serves as the criteria for determining the provisions applicability. Click here for English Translation Click here for other translation

There are a number of exceptions to the German interest limitation rule essentially limiting the annual interest deduction to 30% of EBITDA as shown in the accounts. One of these is the equity ratio rule exempting a subsidiary company from the interest limitation provided its equity ratio (ratio of shareholder’s equity to the balance sheet total) is no more than two percentage points lower than that of the group and no more than 10% of its net interest cost was paid to any one significant shareholder (a shareholder owning more than 25% of the share capital). A loss-making company paying slightly less than 10% of its total net interest cost to each of two significant shareholders claimed exemption from the interest limitation as its equity ratio was better than that of the group. The tax office applied the limitation as the two significant shareholders together received more than 10% of the net interest cost. The finance ministry decree on the application of the interest limitation supports this view. The Supreme Tax Court decided in favour of the taxpayer. The interest limitation is an exception to the general principle of taxing the net profit of a company and, as an exception, it must be clearly formulated. Given this demand for clarity, suggestions that applying the 10% limit to all significant shareholders collectively might better reflect the legislative intention have no relevance in the face of the clear wording of the statute – “one shareholder”. Similarly, the same wording also excludes suggestions that each significant shareholder is a related party to all others, since the wording clearly treats each shareholder separately. Click here for English translation Click here for other translation

The Australien Chevron case was about a $US 2.5 billion intercompany loan between Chevron Australia and its US subsidiary, Chevron Texaco, and whether the interest paid on the loan by Chevron Australia exceeded the arm’s length price. Chevron Australia had set up a company in the US, Chevron Texaco Funding Corporation, which borrowed money in US dollars at an interest rate of 1.2% and then made an Australian dollar loan at 8.9% to the Australian parent company. This 8,9% interest increased Chevron Australia’s costs, and reduced taxable profits. These interest payments, which was not taxed in the US, came back to Australia in the form of tax free dividends. The US company was just a shell created for the sole purpose of raising funds in the commercial paper market and then lending those funds to the Australian company. Chevron argued that the 8,9% interest rate was taking into account the risk of raising loans written in US dollars and then turning that into an Australian dollar loan. The Court ruled in favor of the tax administration and the case has since been appealed by Chevron. The ruling was based on the following arguments: The interest rate applied to the intra-group financial transaction was high because there was no security and no financial or operational covenants. Under similar conditions, an independent entity would have been required to provide security  and subject to financial or operational covenants Hence, at arm’s length the applicable interest rate would have been (much) lower.

A German company resolved a share capital reduction of €16 m in preparation for a capital repayment to avoid an IFRS consolidation requirement for its sole shareholder, a public utility. It took the reduction to capital reserve, waited as required by the German Company Act for one year after a public announcement to it’s creditors, reported the reduction to the German trade registry and repaid an amount of €4 m to the shareholder. This repayment was sufficient to reduce the assets below the level for the consolidation requirement. The tax administration recharacterised the payment to a “dividend distribution” subject to withholding tax under the German Corporate Tax Act provision to the effect that payments to shareholders are deemed to be made from retained earnings unless unambiguously specified as repayments of share capital. The Supreme Tax Court concluded that the unambiguous specification need not be solely in the capital reduction/repayment resolution itself. The reduction resolution stated being preparatory to a capital repayment to the shareholder, but did not state the (at the time unknown) amount. It was clear from all the circumstances that the repayment followed the capital reduction as soon as the German Company Act permitted. There was every indication that a capital payment was intended and nothing to suggest that anything else had ever been contemplated. Accordingly, the court accepted the payment as a tax-free repayment of share capital, despite the interim booking as a capital reserve. Click here for English translation Click here for other translation

The Supreme Tax Court has requested the Constitutional Court to rule on the conformity of the interest limitation with the constitutional requirement to tax like circumstances alike. The interest limitation disallows net interest expense in excess of 30% of EBITDA. However, the rule does not apply to companies with a total net annual interest cost of no more than €3 m or to those that are not part of a group. There are also a number of other exemptions, but the overall effect is to render the actual impact somewhat arbitrary. In particular, the asserted purpose of the rule – prevention of profit shifts abroad through deliberate under-capitalisation of the German operation – seemed somewhat illusory to the Supreme Tax Court in the light of the relatively high threshold and of the indiscriminate application to cases without foreign connotations. The court also pointed out that interest, as such, is a legitimate business expense and that the limitation rule can penalise financing arrangements generally seen as reasonable. Start-ups and crisis management were quoted as examples. Overall, the court found that the interest limitation rule does not meet the constitutional requirements of equal treatment and consistency of application. It has laid the question before the Constitutional Court for a ruling, together with a detailed explanation of its objections. These are a mixture of doubts on the legitimacy of some of the stated aims of the rule and on its suitability as an instrument in meeting others that are legitimate. Click here for English translation Click here for other translation

In this case a tax assessment based on Japanese CFC rules (anti-tax haven rules) had been applied to a Japanese Group’s subsidiary on Cayman Islands. According to Japanese CFC rules, income arising from a foreign subsidiary located in a state or territory with significantly lower tax rates is deemed to arise as the income of the parent company when the principal business of the subsidiary is holding shares or IP rights. However, the CFC rules do not apply when the subsidiary has substance and it makes economic sense to conduct business in the subsidiary in the low tax jurisdiction. The Court upheld the tax assessment. Click here for English translation

At issue was the concept of beneficial ownership of income flowing to non-residents from sources in the Slovak Republic. The application of this concept was questionable in a situation where the relevant international treaty did not require the non-resident to be the “beneficial” owner of the source of income. In assessing the transaction under examination, the Financial Report referred to the application of the concept of beneficial ownership of income, through the Commentary on the OECD Model Agreement (“Commentary”). The Supreme Court states that from the perspective of international law, the rules stated in the commentary are not legally binding but are adopted with the purpose of achieving the practical effect and can be transformed to legally binding if applied within the national system by the tax authorities and courts. From the perspective of national law, the OECD commentaries do not exist as standards and can only influence the interpretation of international treaties. Under the circumstances where the legal norm has not been duly published, where there is an absence of well-established practice, where the OECD Model and commentaries are not available in the official language and where there are contradictory opinions on the binding nature of the interpretative rules it cannot be expected from the taxpayer to follow such interpretative rules, until they become part of the international tax treaty. Click here for translation

An intermediate Japanese holding company in the IBM group acquired from its US parent all of the shares of a Japanese operating company. The Japanese holdings company then sold a portions of shares in the operating company back to the issuing company for the purpose of repatriation of earned profits. These sales resulted in losses in an amount of JPY 400 billion which for tax purposes were offset against the operating company’s taxable income in FY 2002 – 2005. The Japanese tax authorities did not allow deduction of the losses resulted from the sales referring to article 132 of the Corporation Tax Act of Japan (general anti avoidance regulation). The tax authorities found that the reduction of corporation tax due to the tax losses should be disregarded because there were no legitimate reason or business purpose for the transactions. According to the authorities the transactions would not have taken place between independent parties and the primary purpose of the transactions had been tax avoidance. Decision of the Tokyo High Court The Court decided in favour of IBM and annulled the tax assessment. The Court held that the establishment of the intermediate holding company and the following share transfers should not be viewed as one integrated transaction but rather as separate transactions, and that each of these transactions could not be considered lacking economic reality. In 2016 the Supreme Court rejected the tax authorities’ petition for a final appeal. (The Corporation Tax Act of Japan was amended in 2010 and similar tax losses resulting from share repurchases between a Japanese parent and its wholly-owned subsidiary can no longer be claimed.) Click here for English Translation of the Tokyo High Court decision

In the Rottapharm case The French “abnormal management action” principle was invoked. The Court overruled the decision of the tax administration under the principle of non-intervention, which prevents the tax administration from getting involved in company management. The fact that an advertising campaign costs more than the usual amount spent by the majority of companies in the same business area for similar products does not prove that the advertising campaign is an abnormal management action. Click here for translation

Following the Tax Courts decision in 2013 (2013 TCC 404), Judge Boyle J. in an order from September 2014 recused himself from completing the McKesson Canada proceeding in the Tax Court. This extended to the consideration and disposition of the costs submissions of the parties, as well as to confidential information order of Justice Hogan in this case and its proper final implementation by the Tax Court and its Registry. Postscript An appeal was filed by McKesson with the Federal Court, but the appeal was later withdrawn and a settlement agreed with the tax authorities. In May 2015 McKesson filed a 10-K with the following information regarding the settlement “…Income tax expense included net discrete tax benefits of $33 million in 2015, net discrete tax expenses of $94 million in 2014 and net discrete tax benefits of $29 million in 2013. Discrete tax expense for 2014 primarily related to a $122 million charge regarding an unfavorable decision from the Tax Court of Canada with respect to transfer pricing issues. We have received reassessments from the Canada Revenue Agency (“CRA”) related to a transfer pricing matter impacting years 2003 through 2010, and have filed Notices of Appeal to the Tax Court of Canada for all of these years. On December 13, 2013, the Tax Court of Canada dismissed our appeal of the 2003 reassessment and we have filed a Notice of Appeal to the Federal Court of Appeal regarding this tax year. After the close of 2015, we reached an agreement in principle with the CRA to settle the transfer pricing matter for years 2003 through 2010. Since the agreement in principle did not occur within 2015, we have not reflected this potential settlement in our 2015 financial statements. We will record the final settlement amount in a subsequent quarter and do not expect it to have a material impact to income tax expense.” Further information on the settlement was found in McKesson’s 10-Q filing from July 2015 “…We received reassessments from the Canada Revenue Agency (“CRA”) related to a transfer pricing matter impacting years 2003 through 2010, and filed Notices of Appeal to the Tax Court of Canada for all of these years. On December 13, 2013, the Tax Court of Canada dismissed our appeal of the 2003 reassessment and we filed a Notice of Appeal to the Federal Court of Appeal. During the first quarter of 2016, we reached an agreement to settle the transfer pricing matter for years 2003 through 2010 and recorded a discrete income tax benefit of $12 million for a previously unrecognized tax benefit.”

A russian subsidiary of British American Tobacco was found by the russian tax administration to have overpaid interest on loans from an affiliate in the Netherlands. The Court ruled in favor of the tax administration

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

In 2003, AQQ was incorporated as part of restructuring exercise in B Group and acquired several subsidiary companies in Singapore after obtaining the funds to do so by issuing convertible notes to a bank. Under the notes, AQQ was required to make periodic interest payments to the bank. During the relevant years of assessment, the acquired subsidiaries paid out dividends to AQQ, which constituted income chargeable to tax. These dividends carried tax credits arising from tax deemed deducted at source which could be set off against tax payable on AQQ’s chargeable income. At the same time, AQQ duly paid the interest due under the notes to the bank. These interest payments constituted interest expenses which were deductible from the dividend income. In its tax return AQQ claimed the deduction of the interest expenses from the dividend income as well as the benefit of the tax credits. The combined effect of claiming both was the precipitation of substantial tax refunds to AQQ. The tax athorities, found that AQQ had engaged in a tax avoidance arrangement. Following a decision of the High Court, where the court held that a financing arrangement that was entered into in conjunction with a corporate restructuring scheme amounted to tax avoidance, but also that the tax authorities had not acted reasonably and fairly in exercising its powers, two cross appeals were filed against the decision. Judgment of the High Court The High Court partially allowed the appeal of the tax authorities. Click here for translation SGCA 15″]

McKesson is a multinational group engaged in the wholesale distribution of pharmaceuticals. Its Canadian subsidiary, McKesson Canada, entered into a factoring agreement in 2002 with its ultimate parent, McKesson International Holdings III Sarl in Luxembourg. Under the terms of the agreement, McKesson International Holdings III Sarl agreed to purchase the receivables for approximately C$460 million and committed to purchase all eligible receivables as they arise for the next five years. The receivables were priced at a discount of 2.206% to face value. The funds to purchase the accounts receivable were borrowed in Canadian dollars from an indirect parent company of McKesson International Holdings III Sarl in Ireland and guaranteed by another indirect parent company in Luxembourg. At the time the factoring agreement was entered into, McKesson Canada had sales of $3 billion and profits of $40 million, credit facilities with major financial institutions in the hundreds of millions of dollars, a large credit department that collected receivables within 30 days (on average) and a bad debt experience of only 0.043%. There was no indication of any imminent or future change in the composition, nature or quality of McKesson Canada’s accounts receivable or customers. Following an audit, the tax authorities applied a discount rate of 1.013%, resulting in a transfer pricing adjustment for the year in question of USD 26.6 million. In addition, a notice of additional withholding tax was issued on the resulting “hidden” distribution of profits to McKesson International Holdings III Sarl. McKesson Canada was not satisfied with the assessment and filed an appeal with the Tax Court. Judgment of the Tax Court The Tax Court dismissed McKesson Canada’s appeal and ruled in favour of the tax authorities. The Court found that an “other method” than that set out in the OECD Guidelines was the most appropriate method to use, resulting in a highly technical economic analysis of the appropriate pricing of risk. The Court noted that the OECD Guidelines were not only written by persons who are not legislators, but are in fact the tax collecting authorities of the world. The statutory provisions of the Act govern and do not prescribe the tests or approaches set out in the Guidelines. According to the Court, the transaction at issue was a tax avoidance scheme rather than a structured finance product.

Coca-Cola Embonor S.A. had deducted interest payments on an loan to a related party in the Cayman Islands. Following an audit, the tax authorities concluded that the interest payments were not necessary expenses to produce income, as required by Article 31 of the Chilean Income Tax Law, and were therefore not deductible for tax purposes. An appeal was made to the Tax Court, which ruled in favour of the tax authorities.  Coca-Cola Embonor S.A. then appealed to the Court of Appeal which upheld the decision of the Tax Court. An appeal was then filed with the Supreme Court. Judgment The Supreme Court upheld the decision of the Court of Appeal and decided in favour of the tax authorities. The Court determined that the taxpayer failed to prove a direct relationship between the income and expenses, particularly since the related party in the Cayman Islands only reported losses and did not generate taxable income in Chile. ​ Click here for English Translation Click here for other translation

This case is about the importance of proving that the transaction has a real economic purpose, and that it does not artificially seek to achieve tax benefits. The courts also consider the spirit of the law, for example, the purpose of the tax exemptions relating to parent-subsidiary distributions is to involve the parent company in the business of the subsidiary. Click here for translation

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. Judgment 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. Judgment 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.

In 2003 Alesco NZ bought two other companies in New Zealand. Its Australian owner, Alesco Corporation, funded the acquisitions by advancing the purchase amount 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 the Commissioner’s treatment of the OCN funding structure as a tax avoidance arrangement under section BG 1 of the Income Tax Act of 1994 and the Income Tax Act of 2004 was upheld.

As part of a restructuring of the B Group, AQQ had been incorporated to acquire several Singapore subsidiaries using funds raised from issuing convertible notes to a bank. Interest on those notes was then claimed as a deduction against franked dividends paid by the subsidiaries. The tax authorities issued an assessment based on anti-avoidance provisions, asserting that AQQ had entered into an arrangement designed mainly to obtain a tax advantage. AQQ appealed against the assessment but the Income Tax Board of Review dismissed the appeal. AQQ then appealed to the High Court. Judgment of the Court The High Court agreed with the tax authorities that the arrangement was caught by anti-avoidance provisions because its main effect was to generate artificially high interest deductions while passing on section 44 tax credits, even though the broader group restructuring itself had legitimate commercial rationales. It held that AQQ could not rely on the exception in the anti-avoidance provision, section 33(3)(b) because the financing was contrived and lacked bona fide commercial reasons. However, the tax authorities in exercising their powers had acted unreasonably by disregarding both the dividend income and the interest expenses in their entirety. Only the artificial interest deductions should have been disregarded; the legitimate portion of the deductions as well as the dividend income ought to remain intact. The Court further found that the tax authorities could not raise additional assessments and set aside that part of the assessment and indicated the steps they ought instead to have taken. Click here for translation SGHC 249″]

PepsiCo had devised hybrid securities, which were treated as debt in the Netherlands and equity in the United States. Hence, the payments were treated as tax deductible interest expenses in the Netherlands but as tax free dividend income on equity in the US. The IRS held that the payments received from PepsiCo in the Netherlands should also be characterised as taxable interest payments for federal income tax purposes and issued an assessment for FY 1998 to 2002. PepsiCo brought the assessment before the US Tax Court. Based on a 13 factors-analysis the Court concluded that the payments made to PepsiCo were best characterised as nontaxable returns on capital investment and set aside the assessment. Factors considered were: (1) names or labels given to the instruments; (2) presence or absence of a fixed maturity date; (3) source of payments; (4) right to enforce payments; (5) participation in management as a result of the advances; (6) status of the advances in relation to regular corporate creditors; (7) intent of the parties; (8) identity of interest between creditor and stockholder; (9) “thinness” of capital structure in relation to debt; (10) ability of the corporation to obtain credit from outside sources; (11) use to which advances were put; (12) failure of debtor to repay; and (13) risk involved in making advances. “And, perhaps most convincingly, the “independent creditor test” underscores that a commercial bank or third party lender would not have engaged in transactions of comparable risk.” “However, after consideration of all the facts and circumstances, we believe that the advance agreements exhibited more qualitative and quantitative indicia of equity than debt.” “We hold that the advance agreements are more appropriately characterized as equity for Federal income tax purposes.”

A request for a preliminary ruling concerning the interpretation of Article 49 EC was filed by the Belgian Courts in a case between the Belgian tax autorities and Société d’investissement pour l’agriculture tropicale SA (SIAT) where the company had been denied tax deductions for service costs in an amount of BEF 28 402 251 paid to a related party in a low tax jurisdiction. Judgment of the Court The answer from the court was in favour of Société d’investissement pour l’agriculture tropicale SA. According to the Court “Article 49 EC must be interpreted as precluding legislation of a Member State, such as the legislation at issue in the main proceedings, under which payments made by a resident taxpayer to a non-resident company for supplies or services are not to be regarded as deductible business expenses where the non-resident company is not subject, in the Member State of establishment, to tax on income or is subject, as regards the relevant income, to a tax regime which is appreciably more advantageous than the applicable regime in the former Member State, unless the taxpayer proves that such payments relate to genuine and proper transactions and do not exceed the normal limits, whereas, under the general rule, such payments are to be regarded as deductible business expenses if they are necessary for acquiring or retaining taxable income and if the taxpayer demonstrates the authenticity and amount of those expenses.” Belgium-vs-SIAT-EU-Court-5-July-2012-Case-318-10

The Dutch company, Velcro Holdings BV (“VHBV”), licensed IP from an affiliated company in the Dutch Antilles, Velcro Industries BV (“VIBV”), and sublicensed this IP to a Canadian company, Velcro Canada Inc. (VCI). VHBV was obliged to pay 90% of the royalties received from VCI. within 30 days after receipt to VIBV. At issue was whether VHBV qualified as Beneficial Owner of the royalty payments from VCI and consequently would be entitled to a reduced withholding tax – from 25% (the Canadian domestic rate) to 10% (the rate under article 12 of the treaty between Canada and the Netherlands). The tax authorities considered that VHBV did not qualify as Beneficial Owner and denied application of the reduced withholding tax rate. Judgment of the Tax Court The court set aside the decision of the tax authorities and decided in favor of VCI. Excerpts: “VHBV obviously has some discretion based on the facts as noted above regarding the use and application of the royalty funds. It is quite obvious that though there might be limited discretion, VHBV does have discretion. According to Prévost, there must be “absolutely no discretion” – that is not the case on the facts before the Court. It is only when there is “absolutely no discretion” that the Court take the draconian step of piercing the corporate veil.” “The person who is the beneficial owner is the person who enjoys and assumes all the attributes of ownership. Only if the interest in the item in question gives that party the right to control the item without question (e.g. they are not accountable to anyone for how he or she deals with the item) will it meet the threshold set in Prévost. In Matchwood, the Court found that the taxpayer did not have such rights until the deed was registered; likewise, VIBV is not a party to the license agreements (having fully assigned it, along with its rights and obligations, to VHBV). It no longer has such rights and thus does not have an interest that amounts to beneficial ownership.” “For the reasons given above I believe that the beneficial ownership of the royalties rests in VHBV and not in VIBV and as such, the appeal is allowed and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment on that basis and further, the 1995 assessment dated October 25, 1996 is referred back to the Minister for reconsideration and recalculation on the basis that VIBV was a resident of the Netherlands in 1995 and therefore entitled to the benefit of that treaty.”

The deduction of losses resulting from a reorganisation involving a merger with a company in liquidation is not allowed if the sole reason for the merger was the deduction of such losses. In the present case, the Swiss Federal Supreme Court allowed the deduction of losses resulting from a merger with a company in liquidation after finding that the main reason for the merger was the acquisition of intellectual property owned by the company in liquidation. Excerpts from the Judgment “3.4 Furthermore, the offsetting of losses according to Art. 67 of the Federal Tax Act is – as is generally the case with any exercise of rights – subject to the prohibition of abuse (cf . Art. 2 para. 2 of the Civil Code). Thus, it is excluded in particular where there is tax avoidance or so-called shell company trading (cf. Brülisauer/Helbing, in: Kommentar zum Schweizerischen Steuerrecht, Bundesgesetz über die direkte Bundessteuer, 2nd ed. 2008, n. 15 on art. 67 DBG). According to the circular no. 5 “Restructuring” of the Federal Tax Administration of 1 June 2004 (no. 4.1.2.2.4), a tax avoidance exists in particular if the company to be transferred has been economically liquidated or put into liquid form (shell merger). According to some doctrine, however, there must always be tax avoidance for the refusal to offset losses (Höhn/Waldburger, loc. cit., § 48 para. 193 p. 544 f.; Glauser/Oberson, loc. cit., n. 20 i.f. on Art. 61 DBG; Spori/Gerber, loc. cit., ASA 71 p. 699). However, the question of tax avoidance only arises when the scope of application of the tax norm interpreted lege artis has been defined. According to the case law of the Federal Supreme Court, tax norms with economic connecting factors must be interpreted according to economic criteria. Only if the correct interpretation and application of the norm cannot prevent an abusive legal arrangement or an abusive use of rights does the question of tax avoidance arise…” (…) “4.4 The conclusion of the lower court that no economic continuity of the former Z.________ AG could be discerned in the appellant cannot therefore be upheld. The further factual findings of the lower court do not lead to a different result. The fact that the complainant did not show in detail how the expertise in the D.________factory and the remaining know-how in production had been transferred to the complainant does not invalidate the fact that a considerable increase in turnover had taken place. The argument also proves to be groundless in view of the complainant’s very detailed factual presentation in the proceedings before the court. The complainant has also comprehensibly explained why there were delays between the merger decision in 2002 and the merger (including legal disputes with third parties). This explains why Z.________ AG made its intangible assets available to the complainant free of charge as early as 2003. The aim of the merger was to combine the legal predecessor of the complainant, which was active in the field of F.________technik (construction sector), with Z.________ AG, which was also active in this field after the structural adjustment and sale of the non-profitable areas. This bundling of forces made perfect sense from an economic point of view. The various measures in the group are based on objective considerations to maintain the strengthening of the Y.________ group. The fact that tax planning aspects also played a role is legitimate and does not make the restructuring appear to be an abuse of rights. 4.5 The loss offset must therefore be recognised.”  Click here for English translation Click here for other translation

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 customers but the final invoice to the customers was issued by the related 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 SA. The Court found that, although the offshore companies did not perform any functions other than invoicing sales and contract functions, if the transfer pricing methodology was complied with, the minimum profitability required by the anti-avoidance rule was sufficient for the set-up to be considered legal. Click here for English Translation Click here for other translation

Following an audit the tax authorities assessed a significant income tax liability on AS Technomar & Adrem, arguing that the company had used offshore entities (T&A Ltd. Isle of Man and T&A L.L.C. Utah, USA) to shift profits and evade taxes. The tax authorities deemed these foreign entities as controlled by AS Technomar & Adrem and concluded that their transactions were artificial. The tax authorities contended that T&A Ltd. and T&A L.L.C. acted merely as intermediaries, reselling goods at higher prices to AS Technomar & Adrem or purchasing goods from it and selling them at inflated prices to third parties. The price difference was considered a hidden profit of AS Technomar & Adrem. The authorities justified the tax assessment under § 84 of the General Tax Code, which allows the recharacterization of artificial arrangements made for tax avoidance. AS Technomar & Adrem challenged the decision, arguing that the tax authorities wrongfully attributed the offshore companies’ income to them. The company maintained that T&A Ltd. and T&A L.L.C. were legally independent entities, and transactions between them were legitimate. The company further argued that transfer pricing rules (specifically § 50(4) of the Income Tax Act) should have been applied instead of § 84 of the Tax Code, as transfer pricing provisions would only allow taxation of the price differences rather than attributing all income to AS Technomar & Adrem. The Tallinn Administrative Court upheld the tax authority’s decision, ruling that the offshore companies were not independent and acted solely for AS Technomar & Adrem’s benefit. The court found that transfer pricing provisions did not apply because there was no actual transfer of profits between independent entities—rather, the offshore companies were merely an extension of the Estonian company. AS Technomar & Adrem appealed to the Tallinn Circuit Court, which again upheld the tax ruling, rejecting arguments about procedural violations, the limitation period, and previous tax authority decisions that had not imposed tax on similar transactions. Judgment of the Supreme Court The Supreme Court partially upheld the company’s appeal. While the court agreed that § 84 of the Tax Code was applicable and that AS Technomar & Adrem engaged in intentional tax evasion, it also ruled that profits earned before 31 December 1999 could not be taxed under the new Income Tax Act, which came into force in 2000. Consequently, part of the tax assessment was deemed unlawful. The case was sent back to the Administrative Court to determine what portion of the assessed income stemmed from pre-2000 transactions and should therefore be excluded from taxation. Additionally, the Supreme Court ruled that the tax assessment was made within the limitation period, rejecting AS Technomar & Adrem’s claim that it had been notified too late. Ultimately, the Supreme Court’s decision reaffirmed the tax authority’s power to recharacterize artificial transactions under § 84 of the Tax Code while also emphasizing the need to respect legal certainty by ensuring that taxation is consistent with the rules applicable at the time the income was earned. The case was remanded for further review to clarify the taxable portion of the company’s income. Click here for English translation Click here for other translation

In the Banca di Roma case, the Court of Appeals reiterated that the FTA is not allowed to decide whether a business is to be financed through debt or equity. The terms of Article 57 of the French Tax Code (FTC) do not have the purpose, nor the effect, of allowing the administration to assess the ‘normal’ nature of the choice made by a foreign company to finance through a loan, rather than equity, the activity of an owned or controlled French company, and to deduce, if the need arises, tax consequences (cf. Article 212 of the FTC – thin capitalisation). Click here for translation

In the Société d’acquisitions immobilières case the interest rate charged to a subsidiary was considered comparable with the interest rate the French entity would receive from a third party bank for an investment similar in terms and risk. The Court decided that the cash advance granted by a sub-subsidiary to its ultimate parent with which it had no business relations could constitute an “abnormal act of management” if the amount lent is clearly disproportionate to the creditworthiness of the borrowing company. Click here for translation

A holding company of an international Group was established in Spain and in it and in the Group’s operating entity, which was made dependent on it and with which it was fiscally consolidated, intra group loans were requested, for the acquisition of shares in other Group companies, which were mere asset relocations without any economic or business substance, with the sole objective of reducing taxation in Spain: Both in the Spanish holding company and in the operating entity, financial expenses were deducted as a result of that indebtedness, which lead to a drastic reduction in profits in the operating company and losses in the holding company, with the final result that this income remains untaxed. On this background an assessment was issued by the tax authorities where the financial expenses were disallowed under Spanish “fraud by law” provisions. As stated in Article 6.4 of the Civil Code: “Acts carried out under the protection of the text of a rule which pursue a result prohibited by the legal system, or contrary to it, shall be considered to have been carried out in fraud of law and shall not prevent the due application of the rule which it was sought to circumvent“. This, transferred to the tax sphere, is equivalent to the text of Article 24 of the LGT, in the wording given by Law 25/1995, of 20 July 1995 (applicable to the case in question), which states: “In order to avoid tax evasion, it shall be understood that there is no extension of the taxable event when tax is levied on events, acts or legal transactions carried out for the purpose of avoiding payment of the tax, under the cover of the text of rules issued for a different purpose, provided that they produce a result equivalent to that derived from the taxable event. Fraud of tax law must be declared in special proceedings in which the interested party is heard. 2. Events, acts or legal transactions carried out in fraudulent evasion of tax law shall not prevent the application of the evaded tax rule nor shall they give rise to the tax advantages that were intended to be obtained through them. 3. In the settlements made as a result of the tax evasion case, the tax rule that has been evaded shall be applied and the corresponding late payment interest shall be paid, without the imposition of penalties for these purposes alone“. Decision of the TEAC The TEAC confirmed the existence of fraud by law and upheld the assessment. All the actions are legal and real; there is no simulation, but from the set of all the circumstances, without proof that there is a substance and economic business reality, it is concluded that it is a simple exchange of shares within the Group, with the sole purpose of generating the financial expenses in the Spanish entities of the Group, all of which is declared in fraud of law, and the situation is regularised by not admitting the financial expenses involved. There are no international tax reasons for the alleged fraud of law (application of DTAs, infringement of Community Law, etc.) as the application of the concept of fraud of law should have been applied in the same way in the case of a Group with a national parent company and article 24 of the LGT, the provision from which the application of fraud of law derives, does not contain any distinction or restriction depending on whether residents or non-residents are involved. The rules on related-party transactions or transfer pricing do not apply, as it is not disputed that the transactions were carried out at market value; indeed, it is acknowledged that this was the case. It is from the set of circumstances analysed that the existence of fraud by law can be concluded. If it were possible to correct it through the mere application of a specific rule (either related-party transactions or thin capitalisation, etc.) we would no longer be dealing with a case of fraud by law. Click here for English translation Click here for other translation

The tax scheme in the Ben Nevis-case involved land owned by the subsidiary of a charitable foundation being licensed to a group of single purpose investor loss attributing qualifying companies (LAQC’s). The licensees were responsible for planting, maintaining and harvesting the forest through a forestry management company. The investors paid $1,350 per hectare for the establishment of the forest and $1,946 for an option to buy the land in 50 years for half its then market value. There were also other payments, including a $50 annual license fee. The land had been bought for around $580 per hectare. This meant that the the investors, if it wished to acquire the land after harvesting the forest, had to pay half its then value, even though they had already paid over three times the value at the inception of the scheme. In addition to the above payments, the investors agreed to pay a license premium of some $2 million per hectare, payable in 50 years time, by which time the trees would be harvested and sold. The investors purported to discharge its liability for the license premium immediately by the issuing of a promissory note redeemable in 50 years time. The premium had been calculated on the basis of the after tax amount that the mature forest was expected to yield. Finally the investors had agreed to pay an insurance premium of $1,307 per hectare and a further premium of $32,000 per hectare payable in 50 years time. The “insurance company” was a shell company established in a low tax jurisdiction by one of the promoters of the scheme. The insurance company did not in reality carry any risk due to arrangements with the land-owning subsidiary and the promissory notes from the group of investors. There was also a “letter of comfort” from the charitable foundation that it would make up any shortfall the insurance company was obliged to pay out. 90 per cent of the initial premiums received by the insurance company were paid to a company under the control of one of the promoters as commission and introduction fees tunneled back as loans to the promoters’ family trusts. Secure loans over the assets and undertakings secured the money payable under the promissory notes for the license premium and the insurance premium. The investors claimed an immediate tax deduction for the insurance premium and depreciated the deduction for the license premium over the 50 years of the license. The Inland Revenue disallowed these deductions by reference to the generel anti avoidance provision in New Zealand. Judgment of the Supreme Court The Supreme Court upheld the decisions of the lower courts and ruled in favor of the Inland revenue. The majority of the SC judges rejected the notion that the potential conflict between the general anti-avoidance rule and specific tax provisions requires identifying which of the provisions, in any situation, is overriding. Rather, the majority viewed the specific provisions and the general anti-avoidance provision as working “in tandem”. Each provides a context that assists in determining the meaning and, in particular, the scope of the other. The focus of each is different. The purpose of the general anti-avoidance provision is to address tax avoidance. Tax avoidance may be found in individual steps or in a combination of steps. The purpose of the specific provisions is more targeted and their meaning should be determined primarily by their ordinary meaning, as established through their text in the light of their specific purpose. The function of the anti-avoidance provision is “to prevent uses of the specific provisions which fall outside their intended scope in the overall scheme of the Act.” The process of statutory construction should focus objectively on the features of the arrangements involved “without being distracted by intuitive subjective impressions of the morality of what taxation advisers have set up.” A three-stage test for assessing whether an arrangement is tax avoidance was applied by the Court. The first step in any case is for the taxpayer to satisfy the court that the use made of any specific provision comes within the scope of that provision. In this test it is the true legal character of the transaction rather than its label which will determine the tax treatment. Courts must construe the relevant documents as if they were resolving a dispute between the parties as to the meaning and effect of contractual arrangements. They must also respect the fact that frequently in commerce there are different means of producing the same economic outcome which have different taxation effects. The second stage of the test requires the court to look at the use of the specific provisions in light of arrangement as a whole. If a taxpayer has used specific provisions “and thereby altered the incidence of income tax, in a way which cannot have been within the contemplation and purpose of Parliament when it enacted the provision, the arrangement will be a tax avoidance arrangement.” The economic and commercial effect of documents and transactions may be significant, as well as the duration of the arrangement and the nature and extent of the financial consequences that it will have for the taxpayer. A combination of those factors may be important. If the specific provisions of the Act are used in any artificial or contrived way that will be significant, as it cannot be “within Parliament’s purpose for specific provisions to be used in that manner.” The courts are not limited to purely legal considerations at this second stage of the analysis. They must consider the use of the specific provisions in light of commercial reality and the economic effect of that use. The “ultimate question is whether the impugned arrangement, viewed in a commercially and economically realistic way, makes use of the specific provisions in a manner that is consistent with Parliament’s purpose.” If the arrangement does make use of the specific provisions in a manner consistent with Parliament’s purpose, it will not be tax avoidance. The third stage is to consider whether tax avoidance

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

The question in this case, was whether EU community law precluded Belgien statutory rules under which interest payments were reclassified as dividends, and thus taxable, if made to a foreign shareholder company. A Belgian subsidiary was established and the two shareholders of the Belgian subsidiary and the parent company, established in the Netherlands, were appointed as directors. The subsidiary paid interest to the parent which was considered by the Belgian tax authorities in part to be dividends and was assessed as such. The European Court of Justice was asked to rule on the compatibility of these Belgien statutory rules with EU Community law The Court ruled that art. 43 and 48 EC precluded national legislation under which interest payments made by a company resident in a member state to a director which was a company established in another member state were reclassified as taxable dividends, where, at the beginning of the taxable period, the total of the interest-bearing loans was higher than the paid-up capital plus taxed reserves, whereas, in the same circumstances, interest payments made to a director which was a company established in the same member state were not reclassified and so were not taxable. National legislation introduced, as regards the taxation of interest paid by a resident company in respect of a claim to a director which was a company, a difference in treatment according to whether or not the latter company had its seat in Belgium. Companies managed by a director which was a non resident company were subject to tax treatment which was less advantageous than that accorded to companies managed by a director which was a resident company. Similarly, in relation to groups of companies within which a parent company took on management tasks in one of its subsidiaries, such legislation introduced a difference in treatment between resident subsidiaries according to whether or not their parent company had its seat in Belgium, thereby making subsidiaries of a non resident parent company subject to treatment which was less favourable than that accorded to the subsidiaries of a resident parent company. A difference in treatment between resident companies according to the place of establishment of the company which, as director, had granted them a loan constituted an obstacle to the freedom of establishment if it made it less attractive for companies established in other member states to exercise that freedom and they might, in consequence, refrain from managing a company in the member state which enacted that measure, or even refrain from acquiring, creating or maintaining a subsidiary in that member state. The difference in treatment amounted to a restriction on freedom of establishment which was prohibited, in principle, by art. 43 and 48 EC. Such a restriction was permissible only if it pursued a legitimate objective which was compatible with the Treaty and was justified by overriding reasons of public interest. It was further necessary, in such a case, that its application was appropriate to ensuring the attainment of the objective thus pursued and did not go beyond what was necessary to attain it. “In order for a restriction on the freedom of establishment to be justified on the ground of prevention of abusive practices, the specific objective of such a restriction must be to prevent conduct involving the creation of wholly artificial arrangements which do not reflect economic reality, with a view to escaping the tax normally due on the profits generated by activities carried out on national territory (Test Claimants in the Thin Cap Group Litigation, paragraph 74 and the case‑law cited” Even if the Belgian application of such a statutory limit sought to combat abusive practices, it went beyond what was necessary to attain that objective.

The question in this case was if a loan had been granted in accordance with the arm’s length principle. In it’s judgament the court relied on the principles that should drive a prudent and diligent business manager. “.. its behavior is to be qualified by reference to the medium-prudent and diligent creditor acting on the market in that the latter would have undeniably sought to have a clause allowing a reduction in the cost of its financing.” The principle of qualifying dealings based on a “ordentlicher und gewissenhafter Geschäftsleiter” can be attributed to the German origins of the tax system in Luxembourg. Click here for translation

The issue is whether MIL (INVESTMENTS) S.A. was exempt from Canadian income tax in respect of the capital gain of $425,853,942 arising in FY 1997 on the sale of shares of Diamond Field Resources Inc. by virtue of the Canadian Income Tax Act and the Convention Between Canada and The Grand Duchy of Luxembourg for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital (“Treaty”). The Canadian Tax Authorities found that MIL was not exempt under local anti avoidance provisions and issued an assessment where the capital gain had been added to the taxable income. Disagreeing with the assessment, MIL (INVESTMENTS) S.A. filed an appeal with the Tax Court. The tax court allowed the appeal of MIL (INVESTMENTS) S.A. and set aside the assessment issued by the tax authorities. An appeal was then filed with the Federal Court by the tax authorities. Judgment of Federal Court The Federal Court dismissed the appeal of the tax authorities and ruled in favor of MIL (INVESTMENTS) S.A. Excerpts “In order to succeed in this appeal, the appellant Her Majesty the Queen must persuade us that one transaction in the series of transactions in issue is an avoidance transaction, and that the tax benefit achieved by the respondent MIL (Investments) S.A. is an abuse or misuse of the object and purpose of article 13(4) of the Convention between Canada and the Grand Duchy of Luxembourg for the Avoidance of Double Taxation and the Prevention of fiscal Evasion with respect to Taxes on Income and on Capital (the Tax Treaty). … “It is clear that the Act intends to exempt non-residents from taxation on the gains from the disposition of treat exempt property. It is also clear that under the terms of the Tax Treaty, the respondent’s stake in DFR was treaty exempt property. The appellant urged us to look behind this textual compliance with the relevant provisions to find an object or purpose whose abuse would justify our departure from the plain words of the disposition. We are unable to find such an object or purpose. If the object of the exempting provision was to be limited to portfolio investments, or to non-controlling interests in immoveable property (as defined in the Tax Treaty), as the appellant argues, it would have been easy enough to say so. Beyond that, and more importantly, the appellant was unable to explain how the fact that the respondent or Mr. Boulle had or retained influence of control over DFR, if indeed they did, was in itself a reason to subject the gain from the sale of the shares to Canadian taxation rather than taxation in Luxembourg. To the extent that the appellant argues that the Tax Treaty should not be interpreted so as to permit double non-taxation, the issue raised by GAAR is the incidence of Canadian taxation, not the foregoing of revenues by the Luxembourg fiscal authorities. As a result, the appeal will be dismissed with costs.” An interesting article on the case has been published in 2008 by the University of Toronto, Faculty of Law. Click here for other translation

The legislation on ‘controlled foreign companies’ in force in the United Kingdom provided for the inclusion, under certain conditions, of the profits of subsidiaries established outside the United Kingdom in which a resident company has a controlling holding. The UK tax authorities thus claimed from the parent company of the Cadbury Schweppes group, established in the United Kingdom, tax on the profits made by one of the subsidiaries of the group established in Ireland, where the tax rate was lower. The Court was asked to consider whether this legislation was compatible with the provisions of the Treaty on freedom of establishment (Articles 43 and 48 EC). The Court recalled that companies or persons could not improperly or fraudulently take advantage of provisions of Community law. However, the fact that a company has been established in a Member State for the purpose of benefiting from more favourable tax legislation does not in itself suffice to constitute abuse of the freedom of establishment and does not deprive Cadbury Schweppes of the right to rely on Community law. The Court then analysed the legislation in terms of freedom of establishment. According to settled case-law, although direct taxation falls within the competence of the Member States, they must none the less exercise that competence consistently with Community law. The Court noticed the difference in the treatment of resident companies depending on whether the CFC legislation was or was not applicable: in the first instance the company is taxed on the profits of another legal person, whereas this is not the case in the latter instance (that is, when a resident company has a subsidiary taxed in the United Kingdom or a subsidiary established in another Member State where the tax rate is higher than in the United Kingdom). The Court noted that the separate tax treatment is such as to hinder the exercise of freedom of establishment, dissuading a resident company from establishing, acquiring or maintaining a subsidiary in a Member State with a lower tax rate. The Court pointed out that a national measure restricting freedom of establishment may be justified only where it specifically relates to wholly artificial arrangements aimed at circumventing the application of the legislation of the Member State concerned and does not go beyond what is necessary to achieve that purpose. In order to find that there is such an arrangement there must be, in addition to a subjective element, objective and ascertainable evidence – with regard, in particular, to the extent to which the CFC physically exists in terms of premises, staff and equipment – that the incorporation of this subsidiary does not reflect economic reality, that is to say it is not an actual establishment intended to carry on genuine economic activities in the host Member State. The tests conducted under the national legislation must incorporate these factors if they are to be compatible with Community law. The Substance Test 67 As suggested by the United Kingdom Government and the Commission at  the hearing, that finding must be based on objective factors which are ascertainable by third parties with regard, in particular, to the extent to which the CFC physically exists in terms of premises, staff and equipment. 68 If checking those factors leads to the finding that the CFC is a fictitious establishment not carrying out any genuine economic activity in the territory of the host Member State, the creation of that CFC must be regarded as having the characteristics of a wholly artificial arrangement. That could be so in particular in the case of a ‘letterbox’ or ‘front’ subsidiary (see Case C-341/04 Eurofood IFSC [2006] £CR 1-3813, paragraphs 34 and 35). 69 On the other hand, as pointed out by the Advocate General in point 103 of his Opinion, the fact that the activities which correspond to the profits of the CFC could just as well have been carried out by a company established in the territory of the Member State in which the resident company is established does not warrant the conclusion that there is a wholly artificial arrangement.

The issue is whether MIL (INVESTMENTS) S.A. was exempt from Canadian income tax in respect of the capital gain of $425,853,942 arising in its 1997 taxation year on the sale of shares of Diamond Field Resources Inc. by virtue of the Canadian Income Tax Act and the Convention Between Canada and The Grand Duchy of Luxembourg for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital (“Treaty”). The Canadian Tax Authorities found that MIL was not exempt under local anti avoidance provisions and issued an assessment where the capital gain had been added to the taxable income. Disagreeing with the assessment, MIL (INVESTMENTS) S.A. filed an appeal with the Tax Court. Judgment of Tax Court The court allowed the Appeal of MIL investments and set aside the assessment issued by the tax authorities. Excerpts “Accordingly, having found that, at the time of the Series, DFR had no desire of allowing itself to be sold to any buyer, I conclude that the Sale cannot be included in that series because of a mere possibility of a future potential sale of any shares.” “Having found that the Sale and none of the transactions in the Series are avoidance transactions, it is not necessary for me to analyze whether any of those transactions is abusive under subsection 245(4). If I were to do such an analysis, however, I would focus on whether a specific provision or article of the Treaty or Act was misused or abused. In the Appellant’s case, I would consider specifically, the exemptions relied upon by the Appellant in Article 13(4).” “I do not agree that Justice Iaccobucci’s obiter dicta can be used to establish a prima facie finding of abuse arising from the choice of the most beneficial treaty. There is nothing inherently proper or improper with selecting one foreign regime over another. Respondent’s counsel was correct in arguing that the selection of a low tax jurisdiction may speak persuasively as evidence of a tax purpose for an alleged avoidance transaction, but the shopping or selection of a treaty to minimize tax on its own cannot be viewed as being abusive. It is the use of the selected treaty that must be examined.” “The Respondent presented the alternative written argument that: Even if the GAAR does not apply to deny the treaty benefit in this case, it is still possible to deny the treaty based on the anti-abuse rule inherent within the Treaty itself. … … in light of the OECD commentary and the decision by Canada and Luxembourg not to include an explicit reference to anti-avoidance rules in their carefully negotiated Treaty, I find there is no ambiguity in the Treaty permitting it to be construed as containing an inherent anti-abuse rule. Simply put, the “ordinary meaning” of the Treaty allowing the Appellant to claim the exemption must be respected.” Click here for other translation

The CRA had issued a six assessments for fiscal years 1995-1999 based on the principle purpose of Univar's acquisition of shares of Van Waters & Rogers (Barbadosco) Ltd. being to permit Univar to avoid, reduce or defer the payment of tax that would otherwise be payable under the Act within the meaning of paragraph 95(6), and thus deemed not to have been acquired . "ITA 95(6) Where rights or shares issued, acquired or disposed of to avoid tax – For the purposes of this subdivision (other than section 90), (b) where a person or partnership acquires or disposes of shares of the capital stock of a corporation, either directly or indirectly, and it can reasonably be considered that the principal purpose for the acquisition or disposition of the shares is to permit a person to avoid, reduce or defer the payment of tax or any other amount that would otherwise be payable under this Act, those shares shall be deemed not to have been acquired or disposed of, as the case may be, and where the shares were unissued by the corporation immediately prior to the acquisition, those shares shall be deemed not to have been issued." The Amended Judgment from the Court The appeal from the six reassessments made under Part I of  the Income Tax Act with respect to the following taxation years is allowed and the reassessments are referred back to the Minister  of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment: With respect to the six reassessments, it cannot, under paragraph 95(6)reasonably be considered that the principal purpose for the acquisition of the shares of Barbadosco was to permit the Appellant to avoid, reduce or defer the payment of tax or any other amount that would otherwise be payable under the Act.

On 17 February 2003, the President of the Polish Supreme Administrative Court and the Ombudsman requested the Constitutional Court to declare that Article 24b par. 1 of the Tax Ordinance of 29 August 1997 – by giving the tax authorities and fiscal control bodies, while resolving a tax case, the right to disregard the effects of legal transactions which may give the taxpayer an advantage in the form of reduction of tax liability, increase of overpayment or refund of tax – violates the principle of citizens’ trust in the state and the created law resulting from Article 2 of the Constitution of the Republic of Poland and violates the principle of freedom of economic activity expressed in the freedom to arrange one’s civil law relations, i.e. Article 22 of the Constitution of the Republic of Poland. Article 24b of the Tax Ordinance had the following wording: “Art. 24b par. 1. Tax authorities and tax inspection bodies, when settling tax cases, shall disregard the tax consequences of legal actions, if they prove that from the performance of these actions one could not expect any significant benefits other than those arising from a reduction in the amount of tax liability, increase in loss, increase in overpayment or refund of tax. Par. 2. If the parties, by performing a legal transaction referred to in par. 1, have achieved an intended economic result for which another legal transaction or transactions is appropriate, the tax consequences are derived from that other legal transaction or transactions”. Judgment of the Constitutional Court In a split decision, the Court declared the provision in Article 24b § 1 of the Tax Ordinance inconsistent with the Constitution of the Republic of Poland. Excerpts “The infringement of the Constitution consists in enacting unclear and ambiguous provisions, which do not allow a citizen to foresee the legal consequences of his actions” /Judgment of 22 May 2002, K 6/02 – OTK ZU 2002 nr 3/A poz. 33 p. 448/. It follows from the principle of determinacy that “every legal regulation should be constructed correctly from the linguistic and logical point of view – it is only when this basic condition is met that it can be assessed in terms of the remaining criteria”.” “Phrases such as: “could not have been expected”, “other significant benefits”, “benefits resulting from the reduction of the amount of the liability” definitely do not allow to assume that “their jurisprudential interpretation will indeed be uniform and strict” and that “from their wording it will not be possible to derive a law-making power of the applying bodies”. It is worth noting here, that the aforementioned reservation, that a provision using indefinite phrases should not become the object of law-making activity of organs applying the law, has been formulated by the Constitutional Tribunal first and foremost in relation to the normative provisions applied by the courts” “In the opinion of the Constitutional Tribunal, such a statutory solution does not withstand criticism in the light of art. 93 clause 2 of the Constitution. On the one hand, it leads to a dangerous and undesirable blurring of the distinction between lawmaking and its interpretation, which results from giving the value of extended validity to the official interpretation, which is supposed to perform exclusively the function of subjectively limited ordering and unification of the jurisprudential activity. On the other hand, it makes acts addressed formally only to the internal structure of the state apparatus a means of influencing the sphere of taxpayers’ rights and freedoms, i.e. the sphere which may be regulated only by acts included in the closed category of sources of universally binding law. This kind of impact is not permissible either through sources of law of an internal character, or even less so through acts, which only seemingly have the value of purely interpretative actions, but in practice assume features similar to those displayed by normative acts. Therefore, apart from the inconsistency with art. 93 sec. 2 sentence 2 of the Constitution, the solution adopted in art. 14 par. 2 of the Tax ordinance may lead to “disruption” of the whole concept of the system of sources of law adopted by the legislator.” NB. A new Polish anti-avoidance clause was introduced by the Act of 13 May 2016 amending the Tax Ordinance and has been in force since 15 July 2016. Pursuant to the amended anti-avoidance provision in 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). Click here for English translation. Click here for other translation

Conclusion of the Tax Court: “The substance of the transactions is revealed in the lack of arm’s-length dealing between LIIBV and petitioners, the circular flow of funds, and the conduct of the parties by changing the terms of the agreements when needed to avoid deadlines. The Laidlaw entities’ core management group designed and implemented this elaborate system to create the appearance that petitioners were paying interest, while in substance they were not. We conclude that, for Federal income tax purposes, the advances from LIIBV to petitioners for which petitioners claim to have paid the interest at issue are equity and not debt. Thus, petitioners may not deduct the interest at issue for 1986, 1987, and 1988.” NOTE: 13 October 2016 section 385 of the Internal Revenue Code was issued containing regulations for re-characterisation of Debt/Equity for US Inbound Multinationals. Further, US documentation rules in Treasury Regulation § 1.385-2 facilitate analysis of related-party debt instruments by establishing documentation and maintenance requirements, operating rules, presumptions, and factors that impact treatment of a debt instrument as debt or equity.

In the Soladi case the court deemed it to be an “abnormal act of management” to provide an explicit financial guarantee free of charge, unless direct actual benefit for the entity providing this support can be justified. Click here for translation

In Baker International the court concluded that if interest is not charged in respect of deferrals of payments granted to a related company, it is considered either an abnormal act of management or is subject to Section 57 of the tax code. Excerpt “…it is clear from the investigation that the share of the applicant company’s turnover corresponding to sales of equipment to its subsidiary decreased significantly during the years under investigation, as did sales to Elf; whereas, on the other hand, the above-mentioned provisions of Article 57 prevented S.A. BAKER INTERNATIONAL FRANCE from charging its subsidiary sales prices that differed from the public prices; finally, neither the operating conditions decided by the company “Bi-Gabon” with regard to stocks and the taking back of equipment, nor the fact that the financial health of this subsidiary was able to provide it with income, can suffice to justify the interest that S. A. would have had in this matter. A. BAKER INTERNATIONAL FRANCE to grant interest-free payment deadlines; that, consequently, the administration, and then the first judges, were right to consider that the disputed payment terms constituted, regardless of how they were financed by the applicant company, a financial advantage granted without consideration to the “Bi-Gabon” subsidiary and, consequently, a transfer of profits within the meaning of the provisions of Article 57 of the General Tax Code;” Click here for English translation Click here for other translation

The decision is about a German distribution company of international groups, which is in a continual overall loss position. This case established an important principle that: ‘… an orderly and diligent manager will, for the corporation managed by him, introduce to the market and distribute a new product only if he can expect, based on a prudent and pre-prepared economic forecast, a reasonable overall profit within a foreseeable period of time with due consideration to the predictable market development’. This decision covered the market introduction of a new product by an already established company and stated that typically a market introduction phase, losses should not be accepted for longer than three years. A later Bundesfinanzhof decision from 15 May 2002 stated that a start-up loss phase can be substantially longer than 3 years based on facts and circumstances. Click here for English translation Click here for other translation

In the case of Ramsay a substance over form-doctrine was endorsed by the House of Lords (predecessor of the “UK Supreme Court” established in 2009). The “Ramsay principle” has since been applied in other cases involving tax avoidance schemes in the UK, where transactions have been constructed purely for tax purposes. Statutes referring to “commercial” concepts have also been applied in tax cases where transactions have lacked economic substance.

The Internal Revenue Service determined that advances made by Associated Grocers to Radio Broadcasting Co. were not loans but rather contributions of equity, and on this basis a bad debt deduction was disallowed for tax purposes. Opinion of the US Tax Court The Tax Court ruled in favour of the IRS and upheld the assessment where the bad debt deduction was disallowed. In making this decision, the court considered 13 factors: • Names given to the certificates evidencing the indebtedness • Presence or absence of a fixed maturity date • Source of payments • Right to enforce payments • Participation in management as a result of the advances • Status of the advances in relation to regular corporate creditors • Intent of the parties • Identity of interest between creditor and stockholder • “Thinness” of capital structure in relation to debt • Ability of corporation to obtain credit from outside sources • Use to which advances were put • Failure of debtor to repay, and • Risk involved in making advances Click here for other translation

In this case the court had to decide whether advances made by a shareholder to a corporation constituted loans or capital contributions. For that purpose a list of 13 factors was established by the court. (1) the names given to the certificates evidencing the indebtedness; (2) The presence or absence of a fixed maturity date; (3) The source of payments; (4) The right to enforce payment of principal and interest; (5) participation in management flowing as a result; (6) the status of the contribution in relation to regular corporate creditors; (7) the intent of the parties; (8) “thin” or adequate capitalization; (9) identity of interest between creditor and stockholder; (10) source of interest payments; (11) the ability of the corporation to obtain loans from outside lending institutions; (12) the extent to which the advance was used to acquire capital assets; and (13) the failure of the debtor to repay on the due date or to seek a postponement. NOTE: 13 October 2016 section 385 of the Internal Revenue Code was issued containing regulations for re-characterisation of Debt/Equity for US Inbound Multinationals. Further, US documentation rules in Treasury Regulation § 1.385-2 facilitate analysis of related-party debt instruments by establishing documentation and maintenance requirements, operating rules, presumptions, and factors that impact treatment of a debt instrument as debt or equity.

SA Etablissements Brepols, which had a profitable commercial activity in Belgium, transferred its entire activity to an new company, the SA Usines Brepols. At the same time, a loan was granted to the new company. The interest charge on that loan was so high that almost all of the profits of SA Usines Brepols were used to finance the loan and therefore no taxes were paid. However, S.A. Etablissements Brepols was taxed on the interest received, which at the time was at a reduced rate in Belgium. The tax administration considered that the taxpayer had only entered into the transactions for the main purpose of reducing the tax burden and disallowed the reduced taxation. The Court of Appeal agreed and held that the agreements concluded between the parties constituted evasion of the law. The Belgian Supreme court overturned the decision in its judgment of 6 June 1961 and stated the following: “There is no simulation prohibited in the field of taxation, nor does it prohibit fraudulent tax practices, when, in order to benefit from a more favorable tax regime, the parties, using the freedom of conventions, without violating any legal obligation, establish acts of which they accept all the consequences, even if the form they give them is not the most normal”. Click here for Translation

The Duke of Westminster’s gardener was paid weekly, but to reduce tax, his solicitors drew up a deed in which it was said that the earnings were not really wages, but were an annual payment payable by weekly instalments. The tax authorities held that for tax purposes the true relationship and the true nature of these payments were decisive – substance over form. Judgment of the House of Lords The House of Lords decided in favor of the Duke of Westminster and set aside the assessment. LORD TOMLIN. “… Apart, however, from the question of contract with which I have dealt, it is said that in revenue cases there is a doctrine that the Court may ignore the legal position and regard what is called “the substance of the matter,” and that here the substance of the matter is that the annuitant was serving the Duke for something equal to his former salary or wages, and that therefore, while he is so serving, the annuity must be treated as salary or wages. This supposed doctrine (upon which the Commissioners apparently acted) seems to rest for its support upon a misunderstanding of language used in some earlier cases. The sooner this misunderstanding is dispelled, and the supposed doctrine given its quietus, the better it will be for all concerned, for the doctrine seems to involve substituting “the incertain and crooked cord of discretion” for “the golden and streight metwand of the law.” 4 Inst 41 Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax. This so-called doctrine of “the substance” seems to me to be nothing more than an attempt to make a man pay notwithstanding that he has so ordered his affairs that the amount of tax sought from him is not legally claimable. The principal passages relied upon are from opinions of Lord Herschell and Lord Halsbury in your Lordships’ House. Lord Herschell L.C. in Helby v. Matthews [1895] AC 471, 475 observed: “It is said that the substance of the transaction evidenced by the agreement must be looked at, and not its mere words. I quite agree;” but he went on to explain that the substance must be ascertained by a consideration of the rights and obligations of the parties to be derived from a consideration of the whole of the agreement. In short Lord Herschell was saying that the substance of a transaction embodied in a written instrument is to be found by construing the document as a whole. Support has also been sought by the appellants from the language of Lord Halsbury L.C. in Secretary of State in Council of India v. Scoble. [1903] AC 299, 302 There Lord Halsbury said: “Still, looking at the whole nature and substance of the transaction (and it is agreed on all sides that we must look at the nature of the transaction and not be bound by the mere use of the words), this is not the case of a purchase of an annuity.” Here again Lord Halsbury is only giving utterance to the indisputable rule that the surrounding circumstances must be regarded in construing a document. Neither of these passages in my opinion affords the appellants any support or has any application to the present case. The matter was put accurately by my noble and learned friend Lord Warrington of Clyffe when as Warrington L.J. in In re Hinckes, Dashwood v. Hinckes [1921] 1 Ch 475, 489 he used these words: “It is said we must go behind the form and look at the substance …. but, in order to ascertain the substance, I must look at the legal effect of the bargain which the parties have entered into.” So here the substance is that which results from the legal rights and obligations of the parties ascertained upon ordinary legal principles, and, having regard to what I have already said, the conclusion must be that each annuitant is entitled to an annuity which as between himself and the payer is liable to deduction of income tax by the payer and which the payer is entitled to treat as a deduction from his total income for surtax purposes. There may, of course, be cases where documents are not bona fide nor intended to be acted upon, but are only used as a cloak to conceal a different transaction. No such case is made or even suggested here. The deeds of covenant are admittedly bona fide and have been given their proper legal operation. They cannot be ignored or treated as operating in some different way because as a result less duty is payable than would have been the case if some other arrangement (called for the purpose of the appellants’ argument “the substance”) had been made. I find myself, therefore, in regard to the annuities other than that of Blow, unable to take the same view as the noble and learned Lord upon the Woolsack. In my opinion in regard to all the annuities the appeal fails and ought to be dismissed with costs.” This “Duke of Westminster-doctrine” was later set aside in the Ramsay case where a substance over form-doctrine was endorsed by the House of Lords. The “Ramsay principle” has since been applied in other cases involving tax avoidance schemes in the UK, where transactions have been constructed purely for tax purposes. UK vs DUKE OF WESTMINSTER 1935

The first rulings where the IRS proposed recharacterizing transactions that could be considered abusive through use of transfer pricing provisions. Judgment of the Supreme Court The court instead applied the general anti-abuse doctrine. “It is earnestly contended on behalf of the taxpayer that, since every element required by the foregoing subdivision (B) is to be found in what was done, a statutory reorganization was effected, and that the motive of the taxpayer thereby to escape payment of a tax will not alter the result or make unlawful what the statute allows. It is quite true that, if a reorganization in reality was effected within the meaning of subdivision (B), the ulterior purpose mentioned will be disregarded. The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted. United States v. Isham, 17 Wall. 496, 84 U. S. 506; Superior Oil Co. v. Mississippi, 280 U. S. 390, 280 U. S. 395-396; Jones v. Helvering, 63 App.D.C. 204, 71 F.2d 214, 217. But the question for determination is whether what was done, apart from the tax motive, was the thing which the statute intended. The reasoning of the court below in justification of a negative answer leaves little to be said. When subdivision (B) speaks of a transfer of assets by one corporation to another, it means a transfer made “in pursuance of a plan of reorganization” [§ 112(g)] of corporate business, and not a transfer of assets by one corporation to another in pursuance of a plan having no relation to the business of either, as plainly is the case here. Putting aside, then, the question of motive in respect of taxation altogether, and fixing the character of the proceeding by what actually occurred, what do we find? Simply an operation having no business or corporate purpose — a mere device which put on the form of a corporate reorganization as a disguise for concealing its real character, and the sole object and accomplishment of which was the consummation of a preconceived plan, not to reorganize a business or any part of a business, but to transfer a parcel of corporate shares to the petitioner. No doubt, a new and valid corporation was created. But that corporation was nothing more than a contrivance to the end last described. It was brought into existence for no other purpose; it performed, as it was intended from the beginning it should perform, no other function. When that limited function had been exercised, it immediately was put to death. In these circumstances, the facts speak for themselves, and are susceptible of but one interpretation. The whole undertaking, though conducted according to the terms of subdivision (B), was in fact an elaborate and devious form of conveyance masquerading as a corporate reorganization, and nothing else. The rule which excludes from consideration the motive of tax avoidance is not pertinent to the situation, because the transaction, upon its face, lies outside the plain intent of the statute. To hold otherwise would be to exalt artifice above reality and to deprive the statutory provision in question of all serious purpose.” Click here for translation