Category: Tax Avoidance Schemes

Tax avoidance schemes generally refer to complex tax arrangements setup by multinational enterprices to shift profits from high-tax jurisdiction to low-tax jurisdictions.
A difficult destinction has to be made between legal tax planning, abusive tax avoidance schemes which may or may not be legal, and illegal tax evation/sham transactions and arrangements.
It is generally the case that abusive/agressive tax avoidance schemes and arrangements, “colourable devices”, “dubious methods” and “fully artificial arrangements” set up with the primary or sole purpose of avoiding taxes are not permissible – even if the transactions are otherwise individually within the letter of the law.
Illegal tax evasion – fraud or sham transactions and arrangements – are usually considered criminal and prosecuted as such.

ATO and Singtel in Court over Intra-company Financing Arrangement

ATO and Singtel in Court over Intra-company Financing Arrangement

In 2001, Singtel, through its wholly owned Australian subsidiary, Singapore Telecom Australia Investments Pty Limited (Singtel Au), acquired the majority of the shares in Cable & Wireless Optus for $17.2 billion. The tax consequences of this acqusition was decided by the Federal Court in Cable & Wireless Australia & Pacific Holding BV (in liquiatie) v Commissioner of Taxation [2017] FCAFC 71. Cable & Wireless argued that part of the price paid under a share buy-back was not dividends and that withholding tax should therefor be refunded. The ATO and the Court disagreed. ATO and Singtel is now in a new dispute  – this time over tax consequences associated with the intra-group financing of the takeover. This case was heard in the Federal Court in August 2021. At issue is a tax assessments for FY 2011, 2012 and 2013 resulting in additional taxes in an amount $268 million. In the assessment interest deductions claimed in Australia on notes issued under a Loan Note Issuance Agreement (LNIA) has been disallowed by the ATO.
McDonald’s has agreed to pay €1.25bn to settle a dispute with French authorities over excessive royalty payments to Luxembourg

McDonald’s has agreed to pay €1.25bn to settle a dispute with French authorities over excessive royalty payments to Luxembourg

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 France vs MCD Ordonnance_validation_CJIP_tjparis_macdo_20220616 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 MCD vs France CJIP_TJ_paris_macdo_20220531
Rio Tinto has agreed to pay AUS$ 1 billion to settle a dispute with Australian Taxation Office over its Singapore Marketing Hub

Rio Tinto has agreed to pay AUS$ 1 billion to settle a dispute with Australian Taxation Office over its Singapore Marketing Hub

On 20 July 2022 Australian mining group Rio Tinto issued a press release announcing that a A$ 1 billion settlement had been reached with the Australian Taxation Office. “The agreement resolves the disagreement relating to interest on an isolated borrowing used to pay an intragroup dividend in 2015. It also separately resolves the pricing of certain transactions between Rio Tinto entities based in Australia and the Group’s commercial centre in Singapore from 2010-2021 and provides certainty for a further five-year period. Rio Tinto has also reached agreement with the Inland Revenue Authority of Singapore (IRAS) in relation to transfer pricing for the same periods. Reaching agreement with both tax authorities ensures Rio Tinto is not subject to double taxation. As part of this agreement, Rio Tinto will pay to the ATO additional tax of A$613m for the twelve historical years (2010 to 2021). This is in addition to the A$378m of tax paid in respect of the original amended assessments issued by the ATO. Over this period, Rio Tinto paid nearly A$80bn in tax and royalties in Australia. Peter Cunningham, Rio Tinto Chief Financial Officer, said “We are glad to have resolved these longstanding disputes and to have gained certainty over future tax outcomes relating to our Singapore marketing arrangements. Rio Tinto remains committed to our commercial activities in Singapore and the valuable role played by our centralised commercial team.†Additional Information Rio Tinto was issued amended assessments in respect of iron ore marketing in 2017 (A$447m for the 2010 to 2013 years), for aluminium marketing in 2020 (A$86m for the 2010 to 2016 years) and for the intragroup dividend financing matter in 2021 (A$738m for the 2015 to 2018 years). The agreements separately reached with the ATO and IRAS cover the transfer pricing related to the marketing of all products between Australia and Singapore, including iron ore and aluminium, for all historical years from 2010 to 2021 and the future period to 2026. The ATO settlement payment includes A$55m of interest and A$22m of penalties. On 20 March 2020, Rio Tinto lodged requests for dispute resolution between the ATO and IRAS under the double tax treaty between Australia and Singapore (as disclosed in Rio Tinto’s 2020 half-year results). As a result of the agreements reached with both tax authorities, those requests have been withdrawn.” The settlement agreement has also been announced by the Australian Tax Office. ATO vs RIO TINTO70098 See also Australia vs Rio Tinto and BHP Billiton, April 2017 – Going to Court and Mining Group Rio Tinto in new A$ 86 million dispute with the ATO over pricing of aluminum
Uber-files - Tax Avoidance promoted by the Netherlands

Uber-files – Tax Avoidance promoted by the Netherlands

Uber files – confidential documents, leaked to The Guardian newspaper shows that Uber in 2015 sought to deflect attention from its Dutch conduits and Caribbean tax shelters by helping tax authorities collect taxes from its drivers. At that time, Uber’s Dutch subsidiary received payments from customers hiring cars in cities around the world (except US and China), and after paying the drivers, profits were routed on as royalty fees to Bermuda, thus avoiding corporate income tax. In 2019, Uber took the first steps to close its Caribbean tax shelters. To that end, a Dutch subsidiary purchased the IP that was previously held by the Bermudan subsidiary, using a $16 billion loan it had received from Uber’s Singapore holding company. The new setup was also tax driven. Tax depreciations on the IP acquired from Bermuda and interest on the loan from Singapore will significantly reduce Uber’s effective tax rate in years to come. Centre for International Corporate Tax Accountability and Research (CICTAR) has revealed that in 2019 Uber’s Dutch headquarter pulled in more than $US5.8 billion in operating revenue from countries around the world. “The direct transfer of revenue from around the world to the Netherlands leaves little, if any, taxable profits behind,“. “Uber created an $8 billion Dutch tax shelter that, if unchecked, may eliminate tax liability on profits shifted to the Netherlands for decades to come.” According to the groups 10-Q filing for the quarterly period ended June 30, 2022, Uber it is currently facing numerous tax audits. “We may have exposure to materially greater than anticipated tax liabilities. The tax laws applicable to our global business activities are subject to uncertainty and can be interpreted differently by different companies. For example, we may become subject to sales tax rates in certain jurisdictions that are significantly greater than the rates we currently pay in those jurisdictions. Like many other multinational corporations, we are subject to tax in multiple U.S. and foreign jurisdictions and have structured our operations to reduce our effective tax rate. Currently, certain jurisdictions are investigating our compliance with tax rules. If it is determined that we are not compliant with such rules, we could owe additional taxes. Certain jurisdictions, including Australia, Kingdom of Saudi Arabia, the UK and other countries, require that we pay any assessed taxes prior to being allowed to contest or litigate the applicability of tax assessments in those jurisdictions. These amounts could materially adversely impact our liquidity while those matters are being litigated. This prepayment of contested taxes is referred to as “pay-to-play.†Payment of these amounts is not an admission that we believe we are subject to such taxes; even when such payments are made, we continue to defend our positions vigorously. If we prevail in the proceedings for which a pay-to-play payment was made, the jurisdiction collecting the payment will be required to repay such amounts and also may be required to pay interest. Additionally, the taxing authorities of the jurisdictions in which we operate have in the past, and may in the future, examine or challenge our methodologies for valuing developed technology, which could increase our worldwide effective tax rate and harm our financial position and operating results. Furthermore, our future income taxes could be adversely affected by earnings being lower than anticipated in jurisdictions that have lower statutory tax rates and higher than anticipated in jurisdictions that have higher statutory tax rates, changes in the valuation allowance on our U.S. and Netherlands’ deferred tax assets, or changes in tax laws, regulations, or accounting principles. We are subject to regular review and audit by both U.S. federal and state tax authorities, as well as foreign tax authorities, and currently face numerous audits in the United States and abroad. Any adverse outcome of such reviews and audits could have an adverse effect on our financial position and operating results. In addition, the determination of our worldwide provision for income taxes and other tax liabilities requires significant judgment by our management, and we have engaged in many transactions for which the ultimate tax determination remains uncertain. The ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made. Our tax positions or tax returns are subject to change, and therefore we cannot accurately predict whether we may incur material additional tax liabilities in the future, which could impact our financial position. In addition, in connection with any planned or future acquisitions, we may acquire businesses that have differing licenses and other arrangements that may be challenged by tax authorities for not being at arm’s-length or that are otherwise potentially less tax efficient than our licenses and arrangements. Any subsequent integration or continued operation of such acquired businesses may result in an increased effective tax rate in certain jurisdictions or potential indirect tax costs, which could result in us incurring additional tax liabilities or having to establish a reserve in our consolidated financial statements, and could adversely affect our financial results. Changes in global and U.S. tax legislation may adversely affect our financial condition, operating results, and cash flows. We are a U.S.-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. U.S. tax legislation enacted on December 22, 2017, and modified in 2020, the Tax Cuts and Jobs Act (“the Actâ€), has significantly changed the U.S. federal income taxation of U.S. corporations. The legislation and regulations promulgated in connection therewith remain unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and incremental implementing regulations by the U.S. Treasury and U.S. Internal Revenue Service (the “IRSâ€), any of which could lessen or increase certain adverse impacts of the legislation. In addition, it remains unclear in some instances how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities. Furthermore, beginning on
Netherlands vs "POEM B.V.", June 2023, Court of Appeal, Case No. BKDH-21/01014 to BKDH-21/01020 (ECLI:NL:GHSHE:2023:2393)

Netherlands vs “POEM B.V.”, June 2023, Court of Appeal, Case No. BKDH-21/01014 to BKDH-21/01020 (ECLI:NL:GHSHE:2023:2393)

In 2001 “POEM B.V.” was incorporated in the Netherlands under Dutch law by its shareholder X, and has since then been registered in the Dutch trade register. In 2010 its administrative seat was moved to Malta where it was also registered as an ‘Oversea Company’. X was from the Netherlands but moved to Switzerland in 2010. In “POEM B.V.”‘s Maltese tax return for the year 2013, the entire income was registered as ‘Untaxed Account’ and no tax was paid in Malta. “POEM B.V.” distributed dividend to X in FY 2011-2014. Following an audit the Dutch tax authorities issued an assessment where corporate income tax and withholding tax over the dividend had been calculated. The assessment was based on Article 4 (4) of the Dutch-Maltese DTA under which “POEM B.V.” was deemed to be a resident of the Netherlands. Not satisfied with the assessment “POEM B.V.” filed an appeal arguing that it was a resident of Malta (or alternatively Switzerland) and that the Netherlands therefore has no taxing right over the profits or the dividends. Judgement of the Court The Court decided in favour of the tax authorities and upheld the assessment of taxable income in the Netherlands. Excerpts: “5.38. In view of the aforementioned facts and circumstances, taken together and weighed up, the Court sees no evidence to suggest that, in the years in question, core decisions were prepared in substance in Malta and that substantive discussions took place there, let alone to rule that the core decisions were taken there. The interested party has thus failed to rebut the presumption of proof. This leads to the conclusion that the actual management of interested party was exercised from the Netherlands. Interested party was therefore resident in the Netherlands for the purposes of the Netherlands-Malta Convention in the years in question. For that case, it is not in dispute between the parties – rightly so – that the treaty does not impede the Dutch right of taxation and that the tax assessments in question were rightly imposed to that extent.” “5.40. Pursuant to Article 4(1) of the Netherlands-Switzerland Convention 2010, the interested party was a resident of the Netherlands if, under the laws of the Netherlands, she was subject to tax there by reason of her residence, stay, place of management or any other similar circumstance. The second sentence of that provision makes it clear that a person who is subject to tax only in respect of income from sources in the Netherlands is not deemed to be a resident of the Netherlands. For the application of this residence provision, the Court has previously held that in order to be a resident of one of the countries, a person must be fully subject to the tax in that country (‘full tax liability’) (see Court of Appeal of The Hague 24 June 2020, ECLI:NL:GHDHA:2020:1044, r.o. 5.63-5.65). 5.41. By virtue of the residence fiction in Article 2(4) of the Vpb Act, the interested party was a resident of the Netherlands within the meaning of Article 4(1) of the Netherlands-Switzerland Treaty 2010. Having held above in 5.38 that the interested party was a resident of the Netherlands for the purposes of the Netherlands-Malta Convention, the full subjection of the interested party in the Netherlands under Article 4(1) of the Netherlands-Switzerland 2010 Convention is not limited by the application of that Convention.” “5.47. In the opinion of the Court of Appeal, in the face of the substantiated challenge by the Inspector, the interested party, which argued that it is actually managed in a country other than the country in which the formal management sits, has the burden of demonstrating facts and circumstances that justify the conclusion that its actual management is in Switzerland. The mere circumstance that its sole shareholder and co-director resides in Switzerland is insufficient for that purpose – also in view of his varying places of residence (cf. HR 2 July 2021, ECLI:NL:HR:2021:1044, BNB 2021/156). Since the interested party did not put forward anything else to substantiate its claim, the conclusion is that the interested party is a resident of the Netherlands for the purposes of the Netherlands-Switzerland Convention 2010. For that case, it is not in dispute between the parties – rightly so – that the treaty does not impede the Dutch right of taxation and that the tax assessments in question were also rightly imposed to that extent.†Click here for English translation Click here for other translation Netherlands vs POEM BV July 2023 ORG
Canada vs Deans Knight Income Corporation, May 2023, Supreme Court, Case No. 2023 SCC 16

Canada vs Deans Knight Income Corporation, May 2023, Supreme Court, Case No. 2023 SCC 16

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. Judgement 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]â€.  Canada vs Deans_Knight_Income_Corp 2023 SCC 16
Portugal vs "A..., Sociedade Unipessoal LDA", May 2023, Supremo Tribunal Administrativo, Case No 036/21.8BALSB

Portugal vs “A…, Sociedade Unipessoal LDA”, May 2023, Supremo Tribunal Administrativo, Case No 036/21.8BALSB

“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. Judgement 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. 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. 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 that in
Portugal vs "A..., Sociedade Unipessoal LDA", May 2023, Supremo Tribunal Administrativo, Case No JSTA000P31011

Portugal vs “A…, Sociedade Unipessoal LDA”, May 2023, Supremo Tribunal Administrativo, Case No JSTA000P31011

“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. Judgement 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
Denmark vs Takeda A/S (former Nycomed A/S) and NTC Parent S.à.r.l., May 2023, Supreme Court, Cases 116/2021 and 117/2021

Denmark vs Takeda A/S (former Nycomed A/S) and NTC Parent S.à.r.l., May 2023, Supreme Court, Cases 116/2021 and 117/2021

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 judgement 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 116-117-2021-dom-til-hjemmesiden

Denmark vs Copenhagen Airports Denmark Holdings ApS, February 2023, High Court, Case No SKM2023.404.OLR

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 ØLD Beneficial Owner CHP Airport
US vs Skechers USA Inc., February 2023, Wisconsin Tax Appeals Commission, Nos. 10-I-171 AND 10-I-172

US vs Skechers USA Inc., February 2023, Wisconsin Tax Appeals Commission, Nos. 10-I-171 AND 10-I-172

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. Judgement 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. (…)” US vs Skechers Final DO

South Africa vs Coronation Investment Management SA (Pty) Ltd, February 2023, Supreme Court of Appeal, Case No (1269/2021) [2023] ZASCA 10

During 2012, Coronation Investment Management SA (Pty) Ltd (CIMSA) was a 90% subsidiary of Coronation Fund Managers Limited and the 100% holding company of Coronation Management Company and Coronation Asset Management (Pty) Ltd (CAM), both registered for tax in South Africa. CIMSA was also the 100% holding company of CFM (Isle of Man) Ltd, tax resident in Isle of Man. CFM (Isle of Man) Ltd, in turn, was the 100% owner of Coronation Global Fund Managers (Ireland) Limited (CGFM) and Coronation International Ltd (CIL), which were registered and tax resident in Ireland and the United Kingdom respectively. At issue was whether the net income of CGFM should be included in the taxable income of CIMSA, or whether a tax exemption in terms of s 9D of the Income Tax Act 58 of 1962 (the Act) was applicable to the income earned by CGFM. This depends on what the primary functions of CGFM in Ireland are. If the primary operations are conducted in Ireland, then the s 9D exemption applies. Of particular significance is that CGFM has adopted an outsource business model and the attendant ramifications that may have for its tax status. Aligned to this is whether the primary business of CGFM is that of investment (which is not conducted in Ireland), or that of maintaining its licence and managing its service providers (which is conducted in Ireland). The tax authorities assessed the tax liability of CIMSA for the 2012 tax year to include the entire ‘net income’ of CGFM. The tax authorities accepted that CGFM met the FBE definition, in all respects but one: economic substance. As at 2012, CGFM had offices in Dublin with a staff component of four people, consisting of a managing director, two accounting officers and a compliance officer. All the staff were resident in Ireland. It was not disputed that CGFM had conducted its business for more than a year through one or more offices in Dublin (s 9D(1)(a)(i)), or that it had ‘a fixed place of business’ in Ireland (s 9D(1)(a)(ii)) which was suitably staffed and equipped with suitable facilities (s 9D(1)(a)(ii), (iii) and (iv)). The tax authorities also accepted that the business was located in Ireland for a reason other than the postponement or reduction of South African tax (s 9D(1)(a)(iv)). However, it contended that CGFM did not meet the economic substance requirements, as ‘the primary operations’ referred to in s 9D(1)(a)(ii),(iii) and (iv) were not based in Ireland. Accordingly, the Dublin office was not suitably staffed with employees, not suitably equipped, nor did it have the suitable facilities to conduct ‘the primary operations’ of CGFM’s business. An appeal was filed and the Tax Court set aside the assessment. The court found that CGFM was a ‘foreign business establishment’ (FBE) as defined in s 9D(1) of the Act and, accordingly, qualified for a tax exemption. Hence, no amount of income from CGFM should be included in CIMSA’s income under s 9D of the Act. An appeal was then filed by the tax authorities with the Supreme Court of Appeal. Judgement of Court The Court set aside the decision of the Tax Curt and issued a decision in favour of the tax authorities. Excerpt “[54]   The essential operations of the business must be conducted within the jurisdiction in respect of which exemption is sought. While there are undoubtedly many functions which a company may choose to legitimately outsource, it cannot outsource its primary business. To enjoy the same tax levels as its foreign rivals, thereby making it internationally competitive, the primary operations of that company must take place in the same foreign jurisdiction. [55]   On these particular facts, I conclude that the primary operations of CGFM’s business (and, therefore, the business of the controlled foreign company as defined) is that of fund management which includes investment management. These are not conducted in Ireland. Therefore, CGFM does not meet the requirements for an FBE exemption in terms of s 9D(1). As a result, the net income of CGFM is imputable to CIMSA for the 2012 tax year in terms of s 9D(2).” Click here for translation Commissioner for South African Revenue Service v Coronation Investment Management SA (Pty) Ltd (12692021) 2023 ZASCA 10 (7 February 2023)

Italy vs Engie Produzione S.p.a, January 2023, Supreme Court, Case No 6045/2023 and 6079/2023

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. Judgement 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 Italy vs Engie 28 Feb 2023 Supreme Court No 6045-2023 and 6079-2023
Denmark vs NetApp Denmark ApS and TDC A/S, January 2023, Supreme Court, Cases 69/2021, 79/2021 and 70/2021

Denmark vs NetApp Denmark ApS and TDC A/S, January 2023, Supreme Court, Cases 69/2021, 79/2021 and 70/2021

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 Denmark vs Netapp and TDC 9 January 2023 case no 69-70-79-2021

Germany vs A Corp. (S-Corporation), November 2022, Finanzgericht Cologne, Case No 2 K 750/19

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. Judgement 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
India vs Google India Private Limited, Oct. 2022, Income Tax Appellate Tribunal, 1513/Bang/2013, 1514/Bang/2013, 1515/Bang/2013, 1516/Bang/2013

India vs Google India Private Limited, Oct. 2022, Income Tax Appellate Tribunal, 1513/Bang/2013, 1514/Bang/2013, 1515/Bang/2013, 1516/Bang/2013

Google Ireland licenses Google AdWords technology to its subsidiary in India and several other countries across the world. The Tax Tribunal in India found that despite the duty of Google India to withhold tax at the time of payment to Google Ireland, no tax was withheld. This was considered tax evasion, and Google was ordered to pay USD 224 million. The case was appealed by Google to the High Court, where the case was remanded to the Income Tax Appellate Authority for re-examination. Judgement of the ITAT After re-examining the matter on the orders of the Karnataka High Court, the Income Tax Appellate Authority concluded that the payments made by the Google India to Google Ireland between 2007-08 and 2012-13 was not royalties and therefore not subject to withholding tax. Excerpts “30. On a consideration of all the above agreements and the facts on record, we find that none of the rights as per section 14(a)/(b) and section 30 of the Copyright Act, 1957 have been transferred by Google Ireland to the assessee in the present case. As held by the Hon’ble Apex Court in the case of Engineering Analysis Centre of Excellence Private Limited v. CIT & Anr. (supra), mere use of or right to use a computer program without any transfer of underlying copyright in it as per section 14(a)/(b) or section 30 of the Copyright Act, 1957 will not be satisfying the definition of Royalty under the Act / DTAA. Similarly, use of confidential information, software technology, training documents and others are all ‘literary work’ with copyrights in it owned by the foreign entity and there was no transfer or license of copyrights in favour of the assessee company. Hence, the impugned payments cannot be characterised as ‘Royalty’ under the DTAA. 31. The lower authorities have held that the assessee has been granted the use of or right to use trademarks, other brand features and the process owned by Google Ireland for the purpose of distribution of Adwords program and consequently the sums payable to Google Ireland are royalty. As per Article 12 of India – Ireland DTAA, consideration for the use of or right to use any patent, trade mark, design or model, plan, secret formula or process is regarded as royalty. In the present case, as per the distribution agreement, “Google Brand Features” means the Google trade names, trademarks, service marks, logos, domain names, and other distinctive brand features, with some but not all examples at “http://www.google.com/permissions/trademarks.html” (or such other URL that Google may provide from time to time), and such other trade names, trademarks, service marks, logos, domain names, or other distinctive brand features that Google may provide to Distributor for use solely under this Agreement. As per para 6 of the distribution agreement, each party shall own all right, title and interest, including without limitation all Intellectual Property Rights, relating to its Brand Features and Google Irland grants to the assessee / distributor nonexclusive and nonsublicensable licence during the Term to display Google Brand Features solely for the purpose of distributor’s marketing and distribution of AdWords Program under the terms and subject to the conditions set forth in this Agreement. It is thus evident that the trademark and other brand features are not used independently or de hors the distribution agreement but they are incidental or ancillary for the purpose of carrying out the marketing and distribution of Adword program. The Delhi High Court in DIT v Sheraton International Inc [2009] 313 ITR 267 held that when the use of trade mark, trade name etc are incidental to the main service of advertisement, publicity and sales promotion and further when there is no consideration payable for such use of trade mark, trade name etc, the consideration cannot be characterised as royalty. Applying the said principle, in the present case, use of Google Brand Features etc are de hors any consideration payable to Google Ireland and further they are incidental and ancillary for achieving the main purpose of marketing and distributing the Google Adwords Program. Hence, the lower authorities were not right in treating the payments as Royalty. 32. As regards the applicability of ‘use of or right to use industrial, commercial or scientific equipment” the CIT(A) held that the assessee cannot be said to have gained right to use any scientific equipment, since, Google Ireland has not parted with the copyright it holds in the Adwords program and hence it cannot be said that any kind of technical knowhow has been transferred to the assessee company. The CIT(A) was not in agreement with the AO on the above issue without prejudice to his view in holding that the remitted amount is royalty on different grounds. The revenue has not challenged the said finding of CIT(A). Hence, the impugned payments cannot be regarded as made for ‘use of or right to use industrial, commercial or scientific equipment’. The remaining portion of definition of ‘Royalty’ under the India – Ireland DT AA is consideration for information concerning industrial, commercial or scientific experience. The AO has not characterised the impugned payments as a consideration for the above. In any case, CIT(A) has given a finding that it cannot be said that any kind of technical knowhow has been transferred to the assessee company. This has not been challenged by the revenue. 33. Thus on an overall analysis of the entire facts on record, we hold that the impugned payments cannot be regarded as royalty under the India – Ireland DTAA. It is true that the Google Adword program was commercially and profitably exploited in a commercial sense and profitable manner in India to generate revenues from Indian customers or advertisers. This is the business or commercial aspect of the transaction. However, the stand of the lower authorities that the impugned payments are in the nature of Royalty cannot be upheld especially under Article 12 of the India – Ireland DTAA merely because the marketing, distribution and ITES activities are carried out in India and revenues are
Argentina vs Empresa Distribuidora La Plata S.A., September 2022, Tax Court, Case No 46.121-1, INLEG-2022-103065548-APN-VOCV#TFN

Argentina vs Empresa Distribuidora La Plata S.A., September 2022, Tax Court, Case No 46.121-1, INLEG-2022-103065548-APN-VOCV#TFN

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. Judgement 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.” judgement of 3/12/2019). Consequently, the tax criterion should be upheld. With costs.” Click here for English Translation Click here for other translation Argentina-vs-Empresa-Distribuidora-La-Plata

New Zealand vs Frucor Suntory, September 2022, Supreme Court, Case No [2022] NZSC 113

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 excessiveâ€; 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. Judgement 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

UK vs BlackRock, July 2022, Upper Tribunal, Case No [2022] UKUT 00199 (TCC)

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 Issueâ€). 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 Issueâ€). An appeal was then filed with the Upper Tribunal by the tax authorities. Judgement of the Upper Tribunal The Upper Tribunal found that the First Tier Tribunal had erred in law and therefore allowed HMRC’s appeal on both the transfer pricing issue and the unallowable purpose issue. The First Tier Tribunal’s Decision was set aside and the tax authorities amendments to LLC5’s tax returns were confirmed. Transfer Pricing “The actual provision of the loans from LLC4 to LLC5 differed from any arm’s length provision in that the loans would not have been made as between independent enterprises. The actual provision conferred a potential advantage in relation to United Kingdom taxation. The profits and losses of LLC5, including the allowing of debits for the interest and other expenses payable on the Loans, are to be calculated for tax purposes as if the arm’s length provision had been made or imposed instead of the actual provision. In this case, no arm’s length loan for $4 billion would have been made in the form that LLC4 made to LLC5 and hence HMRC’s amendments to the relevant returns should be upheld and confirmed.” Unallowable Purpose “The FTT did not err in finding that LLC5 had both a commercial purpose and an unallowable tax advantage main purpose in entering into the Loans. However, it was wrong to decide that the just and reasonable apportionment was solely to the commercial purpose. But for the tax advantage purpose there would have been no commercial purpose to the Loans and all the relevant facts and circumstances lead inexorably to the conclusion that the loan relationship debits should be wholly attributed to the unallowable tax purpose and so disallowed.” HMRC_v_Blackrock_Holdco_LLC5_UT-2021-000022_-_final_decision_
Italy vs BASF Italia s.p.a., June 2022, Supreme Court, Cases No 19728/2022

Italy vs BASF Italia s.p.a., June 2022, Supreme Court, Cases No 19728/2022

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 judgement in regards of non-deductibility for interest expenses arising from the intra group loan. Judgement of the Supreme Court The Supreme Court found that the (first and) sixth plea was well founded and remanded the judgement 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 Italy vs BASF SC June 2022
Poland vs D. Sp. z oo, April 2022, Administrative Court, Case No I SA/Bd 128/22

Poland vs D. Sp. z oo, April 2022, Administrative Court, Case No I SA/Bd 128/22

D. Sp. z oo had deducted interest expenses on intra-group loans and expenses related to intra-group services in its taxable income for FY 2015. The loans and services had been provided by a related party in Delaware, USA. Following a inspection, the tax authority issued an assessment where deductions for these costs had been denied resulting in additional taxable income. In regards to the interest expenses the authority held that the circumstances of the transactions indicated that they were made primarily in order to achieve a tax advantage contrary to the object and purpose of the Tax Act (reduction of the tax base by creating a tax cost in the form of interest on loans to finance the purchase of own assets), and the modus operandi of the participating entities was artificial, since under normal trading conditions economic operators, guided primarily by economic objectives and business risk assessment, do not provide financing (by loans or bonds) for the acquisition of their own assets, especially shares in subsidiaries, if these assets generate revenue for them. In regards to support services (management fee) these had been classified by the group as low value-added services. It appeared from the documentation, that services concerned a very large number of areas and events that occurred in the operations of the foreign company and the entire group of related entities. The US company aggregated these expenses and then, according to a key, allocated the costs to – among others – Sp. z o.o. The Polish subsidiary had no influence on the amount of costs allocated or on the verification of such costs. Hence, according to the authorities, requirements for tax deduction of these costs were not met. An appeal was filed by D. Sp. z oo with the Administrative Court requesting that the tax assessment be annulled in its entirety and that the case be remitted for re-examination or that the proceedings in the case be discontinued. Judgement of the Administrative Court The Court dismissed the complaint of D. Sp. z oo and upheld the assessment issued by the tax authorities. Excerpt in regards of interest on intra-group loans “The authorities substantively, with reference to specific evidence and figures, demonstrated that an independent entity would not have agreed to such interest charges without obtaining significant economic benefits, and that the terms of the economic transactions adopted by the related parties in the case at hand differ from the economic relations that would have been entered into by independent and market-driven entities, rather than the links existing between them. One must agree with the authority that a loan granted to finance its own assets is free from the effects of the borrower’s insolvency, the lender does not bear the risk of loss of capital in relation to the subject matter of the loan agreement, since, in principle, it becomes the beneficiary of the agreement. This in turn demonstrates the non-market nature of the transactions concluded. The lack of market character of the transactions demonstrated by the authorities cannot be justified by the argumentation about leveraged buyout transactions presented in the complaint (page 9). This is because the tax authorities are obliged to apply the provisions of tax law, which in Article 15(1) of the A.l.p. outline the limits within which a given expense constitutes a tax deductible cost. In turn, Article 11 of the A.l.t.d.o.p. specifies premises, the occurrence of which does not allow a given expense to be included in tax deductible costs. This is the situation in the present case. Therefore, questioning the inclusion of the above-mentioned interest as a tax deductible cost, the authorities referred to Article 11(1), (2), (4) and (9) of the A.p.d.o.p. and § 12(1) and (2) of the Ordinance of the Minister of Finance of 10 September 2009 and the findings of the OECD contained in para. 1.65 and 1.66 of the “Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations” (the Guidelines were adopted by the OECD Committee on Fiscal Affairs on […] and approved for publication by the OECD Council on […]). According to these guidelines: 1.65. – However, there are two specific situations where, exceptionally, it may be appropriate and justified for a tax administration to consider ignoring the construction adopted by the taxpayer when entering into a transaction between associated enterprises. The first arises when the economic substance of the transaction differs from its form. In this case, the tax administration may reject the parties’ qualification of the transaction and redefine it in a manner consistent with its substance. An example could be an investment in a related company in the form of interest-bearing debt, and according to the principle of the free market and taking into account the economic situation of the borrowing company, such a form of investment would not be expected. In this case, it might be appropriate to define the investment according to its economic substance – the loan could be treated as a subscription to capital. Another situation arises where the substance and form of the transaction are consistent with each other, but the arrangements made in connection with the transaction, taken as a whole, differ from those that would have been adopted by commercially rational independent companies, and the actual structure of the transaction interferes with the tax administration’s ability to determine the appropriate transfer price; 1.66. – In both of the situations described above, the nature of the transaction may derive from the relationship between the parties rather than be determined by normal commercial terms, or it may be so structured by the taxpayer to avoid or minimise tax. In such cases, the terms of the transaction would be unacceptable if the parties were transacting on a free market basis. Article 9 of the OECD Model Convention, allows the terms and conditions to be adjusted in such a way that the transaction is structured in accordance with the economic and commercial realities of the parties operating under the free market principle. Bearing in mind the aforementioned guidelines, in the
Japan vs Universal Music Corp, April 2022, Supreme Court, Case No 令和2(行ヒ)303

Japan vs Universal Music Corp, April 2022, Supreme Court, Case No 令和2(行ヒ)303

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 Japan vs Universal Music SC
Denmark vs Heavy Transport Holding Denmark ApS, March 2021, High Court, Cases B-721-13

Denmark vs Heavy Transport Holding Denmark ApS, March 2021, High Court, Cases B-721-13

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. Judgement 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
Norway vs Fortis Petroleum Norway AS, March 2022, Court of Appeal, Case No LB-2021-26379

Norway vs Fortis Petroleum Norway AS, March 2022, Court of Appeal, Case No LB-2021-26379

In 2009-2011 Fortis Petroleum Norway AS (FPN) bought seismic data related to oil exploration in the North Sea from a related party, Petroleum GeoServices AS (PGS), for NKR 95.000.000. FBN paid the amount by way of a convertible intra-group loan from PGS in the same amount. FPN also purchased administrative services from another related party, Consema, and later paid a substantial termination fee when the service contract was terminated. The acquisition costs, interest on the loan, costs for services and termination fees had all been deducted in the taxable income of the company for the years in question. Central to this case is the exploration refund scheme on the Norwegian shelf. This essentially means that exploration companies can demand cash payment of the tax value of exploration costs, cf. the Petroleum Tax Act § 3 letter c) fifth paragraph. If the taxpayer does not have income to cover an exploration cost, the company receives payment / refund of the tax value from the state. On 21 November 2018, the Petroleum Tax Office issued two decisions against FPN. One decision (the “Seismic decision”) which applied to the income years 2010 to 2011, where FPN was denied a deduction for the purchase of seismic services from PGS and interest on the associated seller credit, as well as ordinary and increased additional tax (hereinafter the «seismic decision»), and another decision (the “Consema decision”) which applied to the income years 2011 and 2012 where, FPN’s claim for deduction for the purchase of administrative services from Consema for the income years 2011 and 2012 was reduced at its discretion, and where FPN was also denied a deduction for the costs of the services and a deduction for termination fees. Finally in regards of the “Seismic decision” an increased additional tax of a total of 60 per cent, was added to the additional taxation on the basis of the incorrectly deducted seismic purchases as FPN had provided incorrect and incomplete information to the Oil Tax Office. In the “Seismic decision” the tax office argued that FPN used a exploration reimbursement scheme to run a “tax carousel” In the “Consema decision” the tax office found that the price paid for the intra-group services and the termination fee had not been determined at arm’s length. An appeal was filed by Fortis Petroleum Norway AS with the district court where, in December 2020, the case was decided in favour of the tax authorities. An appeal was then filed with the Court of Appel Judgement of the Court of Appeal The court upheld the decisions of the district court and decided in favour of the tax authorities. The Court concluded that the condition for deduction in the Tax Act § 6-1 on incurred costs on the part of Fortis Petroleum Norway AS was not met, and that there was a basis for imposing ordinary and increased additional tax. The Court of Appeal further found that the administrative services and the termination fee were controlled transactions and had not been priced at arm’s length. Excerpts – Regarding the acquisition of seismic exploration Based on the case’s extensive evidence, and especially the contemporary evidence, the Court of Appeal has found that there was a common subjective understanding between FPN and PGS, both at the planning stage, during the conclusion of the agreement, in carrying out the seismic purchases and in the subsequent process. should take place by conversion to a subscription price that was not market-based. Consequently, seismic would not be settled with real values. This was made possible through the common interest of the parties. The parties also never significantly distanced themselves from this agreement. The Court of Appeal has heard testimonies from the management of PGS and FPN, but can not see that these entail any other view on the question of what was agreed. The loan was never repaid, and in the end it was converted to the pre-agreed exchange rate of NOK 167. In the Court of Appeal’s view, there is no other rational explanation for this course than that it was carefully adapted to the financing through 78 per cent of the exploration refund. The share value at the time of conversion was down to zero. The Court of Appeal agrees with the state that all conversion prices between 167 and 0 kroner would have given a share price that reflected the value in FPN better and which consequently had given PGS a better settlement. On this basis, the Court of Appeal believes that the conversion rate did not cover the 22 percent, and that there was a common perception that this was in line with the purpose of the establishment of FPN, namely not to pay “a penny” of fresh capital. The Court of Appeal has also emphasized that the same thing that happened in 2009 was repeated in 2010 and 2011. For 2009, the Oil Tax Office came to the conclusion that it was a pro forma event and a shift in financial risk. In 2010 and 2011, the same actors used the same structure and procedure to finance all costs from the state. It is thus the Court of Appeal’s view that there was a common understanding between the parties to the agreement that the real relationship within was different from that which was signaled to the tax authorities regarding sacrifice and which provided the basis for the deduction. Furthermore, in the Court of Appeal’s view, the loan transactions were not fiscally neutral. The seismic purchases constituted the only source of liquidity and were covered in their entirety by the state. In light of ESA’s decision from 2018 as an element of interpretation, such a loss of fiscal neutrality would indicate that when the company has thus not borne any risk itself, sacrifice has not taken place either. Even if the debt had been real, assuming a sale without a common interest of the parties, in the Court of Appeal’s view in a tax context it could not be decisive, as long as 22
France vs IKEA, February 2022, CAA of Versailles, No 19VE03571

France vs IKEA, February 2022, CAA of Versailles, No 19VE03571

Ikea France (SNC MIF) had concluded a franchise agreement with Inter Ikea Systems BV (IIS BV) in the Netherlands by virtue of which it benefited, in particular, as a franchisee, from the right to operate the ‘Ikea Retail System’ (the Ikea concept), the ‘Ikea Food System’ (food sales) and the ‘Ikea Proprietary Rights’ (the Ikea trade mark) in its shops. In return, Ikea France paid Inter Ikea Systems BV a franchise fee equal to 3% of the amount of net sales made in France, which amounted to EUR 68,276,633 and EUR 72,415,329 for FY 2010 and 2011. These royalties were subject to the withholding tax provided for in the provisions of Article 182 B of the French General Tax Code, but under the terms of Article 12 of the Convention between France and the Netherlands: “1. Royalties arising in one of the States and paid to a resident of the other State shall be taxable only in that other State”, the term “royalties” meaning, according to point 2. of this Article 12, “remuneration of any kind paid for the use of, or the right to use, (…) a trade mark (…)”. As the franchise fees paid by Ikea France to Inter Ikea Systems BV were taxable in the Netherlands, Ikea France was not obligated to pay withholding taxes provided for by the provisions of Article 182 B of the General Tax Code. However, the tax authorities held that the arrangement set up by the IKEA group constituted abuse of law and furthermore that Inter Ikea Systems BV was not the actual beneficiary of the franchise fees paid by Ikea France. On that basis, an assessment for the fiscal years 2010 and 2011 was issued according to which Ikea France was to pay additional withholding taxes and late payment interest in an amount of EUR 95 mill. The court of first instance decided in favor of Ikea and the tax authorities then filed an appeal with the CAA of Versailles. Judgement of the CAA of Versailles The Court of appeal upheld the decision of the court of first instance and decided in favor of IKEA. Excerpt “It follows from the foregoing that the Minister, who does not establish that the franchise agreement concluded between SNC MIF and the company IIS BV corresponds to an artificial arrangement with the sole aim of evading the withholding tax, by seeking the benefit of the literal application of the provisions of the Franco-Dutch tax convention, is not entitled to maintain that the administration could implement the procedure for abuse of tax law provided for in Article L. 64 of the tax procedure book and subject to the withholding tax provided for in Article 182 B of the general tax code the royalties paid by SNC MIF by considering them as having directly benefited the Interogo foundation. On the inapplicability alleged by the Minister of the stipulations of Article 12 of the tax convention without any reference to an abusive arrangement: If the Minister maintains that, independently of the abuse of rights procedure, the provisions of Article 12 of the tax treaty are not applicable, it does not follow from the investigation, for the reasons set out above, that IIS BV is not the actual beneficiary of the 70% franchise fees paid by SAS MIF. It follows from all of the above that the Minister is not entitled to argue that it was wrongly that, by the contested judgment, the Versailles Administrative Court granted SAS MIF the restitution of an amount of EUR 95,912,185 corresponding to the withholding taxes payable by it, in duties, increases and late payment interest, in respect of the financial years ended in 2010 and 2011. Consequently, without there being any need to examine its subsidiary conclusions regarding increases, its request must be rejected.” Click here for English translation Click here for other translation France vs Ikea, CAA de VERSAILLES, 1ère chambre, 08_02_2022, 19VE03571
Sweden vs Flir Commercial Systems AB, January 2022, Administrative Court of Appeal, Case No 2434–2436-20

Sweden vs Flir Commercial Systems AB, January 2022, Administrative Court of Appeal, Case No 2434–2436-20

In 2012, Flir Commercial Systems AB sold intangible assets from a branch in Belgium and subsequently claimed a tax relief of more than SEK 2 billion in fictitious Belgian tax due to the sale. The Swedish Tax Agency decided not to allow relief for the Belgian “taxâ€, and issued a tax assessment where the relief of approximately SEK 2 billion was denied and a surcharge of approximately SEK 800 million was added. An appeal was filed with the Administrative Court, In March 2020 the Administrative Court concluded that the Swedish Tax Agency was correct in not allowing relief for the fictitious Belgian tax. In the opinion of the Administrative Court, the Double tax agreement prevents Belgium from taxing increases in the value of the assets from the time where the assets were owned in Sweden. Consequently, any fictitious tax cannot be credited in the Swedish taxation of the transfer. The Court also considers that the Swedish Tax Agency was correct in imposing a tax surcharge and that there is no reason to reduce the surcharge. The company’s appeal is therefore rejected. An appeal was then filed with the Administrative Court of Appeal Decision of the Administrative Court of Appeal The Court upheld the decision of the Administrative Court and the assessment issued and the penalty added by the tax authorities. The Administrative Court of Appeal found that when assessing the amount of credit to be given for notional tax on a transfer of business, the tax treaty with the other country must also be taken into account. In the case at hand, assets were transferred to the company’s Belgian branch shortly before the assets were disposed of through the transfer of business. The tax treaty limited Belgium’s taxing rights to the increase in value accrued in Belgium after the allocation and a credit could be given up to an amount equal to that tax. In the case at hand, the company had claimed a notional credit for tax on the increase in value that had taken place in Sweden before the assets were transferred to Belgium, while the transferee company in Belgium was not taxed on the corresponding increase in value when the assets were subsequently disposed of, as the Belgian tax authority considered that the tax treaty prevented such taxation. The Court of Appeal held that there were grounds for back-taxation and the imposition of a tax surcharge on the basis of incorrect information. The information provided by the company was not considered sufficient to trigger the Tax Agency’s special investigation obligation and the tax fine was not considered unreasonable even though it amounted to a very large sum. Click here for English Translation Click here for translation Sv Flir 2434-2436-20
Zimbabwe vs Delta Beverages Ltd., Supreme Court, Judgement No. SC 3/22

Zimbabwe vs Delta Beverages Ltd., Supreme Court, Judgement No. SC 3/22

Delta Beverages Ltd, a subsidiary of Delta Corporation, had been issued a tax assessment for FY 2009, 2010, 2011, 2012, 2013 and 2014 where various fees for service, technology license of trademarks, technology and know-how paid to a group company in the Netherlands (SAB Miller Management BV) had been disallowed by the tax authorities (Zimra) of Zimbabwe resulting in additional taxes of US$42 million which was later reduced to US$30 million. An appeal was filed with the Special Court (for Income Tax Appeals) where, in a judgment dated 11 October 2019, parts of the assessment was set aside. Not satisfied with the result, an appeal (Delta Beverages) and cross-appeal (tax authorities) was filed with the Supreme Court. Judgement of the Supreme Court. The Supreme Court set aside the judgement of the Special Court (for Income Tax Appeals) and remanded the case for reconsiderations in relation to the issue of tax avoidance. Excerpts from the Supreme Court judgement regarding deductions for royalties paid for trademarks: “I respectfully agree with the reasoning of the court a quo. A product’s standing and marketability is enhanced by its trademark which has acquired a reputation and become desirable on the market. The trademarks in issue are of international repute. They in my view add value to the main appellant’s beverages and make it possible for the appellant to make an income from the trademarked products. It is apparent from the various agreements entered into between the franchisors and the holding company that what was being sought was to benefit from the reputation of the international brands and trademarks.” “In respect of the royalties the issue is whether or not the main appellant was a party to the agreements on the royalties, which were to be paid for or had ratified the agreements entitling it to claim its payments for them as deductions in its tax returns. A reading of the record establishes that the agreements in terms of which royalties were payable were entered into by Delta Corporation or its predecessors in title and there is no specific mention of the appellant. There is however mention of Delta Corporation’s subsidiaries. It is common cause that the main appellant is a subsidiary of Delta Corporation (Private) Limited.” “In any event, evidence on record establishes that the cross appellant’s main challenge cannot prevail because the Exchange Control Authority granted authority for the payment of those royalties. The record proves that on 19 August 2011, the exchange control authority granted authority to the holding company to pay royalties of up to 5 percent to the Dutch Company less withholding tax.” “Once it is established that the main appellant is the one which operated the beverages business and benefited from the contract between the Dutch company and the holding company, it follows that it lawfully deducted the royalties it paid to the Dutch company.” Excerpts from the Supreme Court judgement regarding deductions for technical services (calculated based on turnover) – tax avoidance: In determining this issue the court [Special Court (for Income Tax Appeals)] a quo commented on its perception that there might have been tax avoidance in the manner in which the technical services agreement was concluded between the parties. It commented that if the Commissioner had attacked the deduction of these services from the main appellant’s taxable income it would have been fatal to the main appellant’s claim. “The witness failed to explain why the Dutch company paid the South African entity that supplied the technical services to the appellant on its behalf on a cost plus mark-up basis but charged the local holding company on a percentage of turnover basis. Such a failure may have been fatal to the appellant’s case had the Commissioner disallowed the technical fees in terms of s 98 the Income Tax Act.” “It is apparent from the court a quo’s comments that it perceived that there might have been a case of tax avoidance by the main appellant’s holding company and the Dutch company. It is also apparent that it took no further steps to inquire into that possibility but proceeded to determine the appeal on other factors not connected to tax avoidance as if the appeal before it was an appeal in the strict sense. It thus left the issue of tax avoidance hanging as no further inquiry into it was made, nor did it make a decision on the issue.” “It is clear from the underlined part of the quotation that the issue of avoidance should be determined to enable the Commissioner or as in this case the Special Court to determine how the tax payer should be taxed. The determination of tax issues require clarity and incisiveness in decision making. This is because the law requires that those who should pay tax should do so and those who fall outside that requirement should not be taxed. There should be no room for those within the group which should be taxed escaping through failure by the Commissioner to net them in and if he fails the Special Court in the exercise of its full jurisdiction should net them in. … It is therefore my view that once the court a quo realised that there might be tax avoidance it should have exhaustively inquired into and made a determination on it. It should have sought to determine the correct position of the law instead of identifying a possible error by the Commissioner and allowing it to pass. Taxation is by the law and not official errors or laxity. …where a tax matter has been placed before the Special Court for adjudication a taxpayer should not escape liability simply because the Commissioner failed to invoke the appropriate taxing provision. In casu the omission by the court a quo to determine the issue of tax avoidance will have the effect of allowing the main appellant to get away with tax avoidance, if that can be proved on inquiry. That view is strengthened by the court a quo’s view that the failure by
Netherlands - Crop Tax Advisers, January 2022, Court of Appeal, Case No. 200.192.332/01, ECLI:NL:GHARL:2022:343

Netherlands – Crop Tax Advisers, January 2022, Court of Appeal, Case No. 200.192.332/01, ECLI:NL:GHARL:2022:343

The question at issue was whether a Crop tax adviser had acted in accordance with the requirements of a reasonably competent and reasonably acting adviser when advising on the so-called royalty routing and its implementation. Judgement of the Court of Appeal “Crop is liable for the damages arising from the shortcoming. For the assessment of that damage, the case must be referred to the Statement of Damages, as the District Court has already decided. To answer the question of whether the likelihood of damage resulting from the shortcomings is plausible, a comparison must be made between the current situation and the situation in which business rates would have been applied. For the hypothetical situation, the rates to be recommended by the expert should be used. For the current situation, the Tax Authorities have agreed to adjusted pricing. The question whether and to what extent [the respondents] et al. can be blamed for insufficiently limiting their loss in the negotiations with the tax authority, as argued by Crop, should be adjudicated in the proceedings for the determination of damages, because it has not been made plausible beforehand that Crop’s obligation to pay compensation should lapse in full because this is required by the requirements of fairness under the given circumstances” Click here for English Translation Click here for other translation ECLI_NL_GHARL_2022_343
Portugal vs "GAAR S.A.", January 2022, Supremo Tribunal Administrativo, Case No : JSTA000P28772

Portugal vs “GAAR S.A.”, January 2022, Supremo Tribunal Administrativo, Case No : JSTA000P28772

“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. Judgement 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 Supremo Tribunal Administrativo 02507-15
Australia vs Singapore Telecom Australia Investments Pty Ltd, December 2021, Federal Court of Australia, Case No FCA 1597

Australia vs Singapore Telecom Australia Investments Pty Ltd, December 2021, Federal Court of Australia, Case No FCA 1597

Singapore Telecom Australia Investments Pty Ltd entered into a loan note issuance agreement (the LNIA) with a company (the subscriber) that was resident in Singapore. Singapore Telecom Australia and the subscriber were ultimately 100% owned by the same company. The loan notes issued totalled approximately $5.2 billion to the subscriber. The terms of the LNIA was amendet on three occasions – the first amendment and the second amendment were expressed to have effect as from the date when the LNIA was originally entered into. The interest rate under the LNIA as amended by the third amendment was 13.2575% Following an audit the tax authorities issued an amended assessment under the transfer pricing provisions and denied interest deductions totalling approximately $894 million in respect of four years of income. According to the tax authorities the conditions agreed between the parties differed from the arm’s length principle. Singapore Telecom Australia appealed the assessment to the Federal Court. Judgement of the Federal Court The court upheld the the assessment issued by the tax authorities and dismissed the appeal of Singapore Telecom Australia. Click here for translation Singapore Telecom Australia Investments Pty Ltd FCA 1597
Finland vs D Oy, December 2021, Supreme Administrative Court, Case No. KHO:2021:179

Finland vs D Oy, December 2021, Supreme Administrative Court, Case No. KHO:2021:179

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. Judgement 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 KHO 2021 179
France vs UBS AG and UBS SA, December 2021, CAA of Paris, Dossier No. 19/05566 Arrét No. 192/21

France vs UBS AG and UBS SA, December 2021, CAA of Paris, Dossier No. 19/05566 Arrét No. 192/21

Swiss banking group, UBS, had set up a system aimed at facilitating tax evasion and money laundering of wealthy French taxpayers. Judgement of the Court of Appeal By judgment of the Paris Court of Appeal dated 13 December 2021, the Swiss parent, UBS AG, was found guilty of banking and financial canvassing and of facilitating tax evasion and money laundering. The Court Sentenced UBS AG to a fine of €3,750,000.00 and confiscation of €1,000,000,000.00. Furthermore UBS AG was ordered to pay €800,000,000.00 for damages to the French State. UBS FRANCE SA, the French subsidiary, was found guilty of complicity in banking and financial canvassing and sentenced to a fine of €1,875,000.00. Click here for English translation France vs UBS Dec 2021
Tax Avoidance Schemes
Finland vs G Oy, December 2021, Supreme Administrative Court, Case No. KHO:2021:178

Finland vs G Oy, December 2021, Supreme Administrative Court, Case No. KHO:2021:178

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. Judgement 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 KHO 2021 178
US vs Whirlpool, December 2021, U.S. Court of Appeals, Case No. Nos. 20-1899/1900

US vs Whirlpool, December 2021, U.S. Court of Appeals, Case No. Nos. 20-1899/1900

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),â€. 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. Judgement 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 corporationâ€; 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.â€)). 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 21a0280p-06
Canada vs Loblaw Financial Holdings Inc., December 2021, Supreme Court, Case No 2021 SCC 51

Canada vs Loblaw Financial Holdings Inc., December 2021, Supreme Court, Case No 2021 SCC 51

In 1992, Loblaw Financial Holdings Inc. (“Loblaw Financialâ€), 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. (“Glenhuronâ€). Between 1992 and 2000, important capital investments in Glenhuron were made by Loblaw Financial and affiliated companies (“Loblaw Groupâ€). 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 (“FAPIâ€). Under the FAPI regime in the Income Tax Act (“ITAâ€), Canadian taxpayers must include income earned by their controlled foreign affiliates (“CFAsâ€) 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. Judgement 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 lawâ€, 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 businessâ€. 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 Canada vs Loblaw SC 2021
Denmark vs Takeda A/S and NTC Parent S.a.r.l., November 2021, High Court, Cases B-2942-12 and B-171-13

Denmark vs Takeda A/S and NTC Parent S.a.r.l., November 2021, High Court, Cases B-2942-12 and B-171-13

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. Judgement 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 Takeda AS and NTC Parents Sarl Nov 2021 case no b-2942-12
Germany vs "Shipping Investor Cyprus", November 2021, Bundesfinanzhof, Case No IR 27/19

Germany vs “Shipping Investor Cyprus”, November 2021, Bundesfinanzhof, Case No IR 27/19

“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. Judgement 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 BFH-Urteil-I-R-27-19
Spain vs SGL Carbon Holding, September 2021, Tribunal Supremo, Case No 1151/2021  ECLI:EN:TS:2021:3572

Spain vs SGL Carbon Holding, September 2021, Tribunal Supremo, Case No 1151/2021 ECLI:EN:TS:2021:3572

A Spanish subsidiary – SGL Carbon Holding SL – had significant financial expenses derived from an intra-group loan granted by the parent company for the acquisition of shares in companies of the same group. The taxpayer argued that the intra-group acquisition and debt helped to redistribute the funds of the Group and that Spanish subsidiary was less leveraged than the Group as a whole. The Spanish tax authorities found the transactions lacked any business rationale other than tax avoidance and therefor disallowed the interest deductions. The Court of appeal upheld the decision of the tax authorities. The court found that the transaction lacked any business rationale and was “fraud of law” only intended to avoid taxation. The Court also denied the company access to MAP on the grounds that Spanish legislation determines: The decision was appealed by SGL Carbon to the Supreme Court. Judgement of the Supreme Court The Supreme Court dismissed the appeal of SGL CARBON and upheld the judgment. Click here for English translation Click here for other translation Spain STS_3572_2021
Argentina vs Molinos Río de la Plata S.A., September 2021, Supreme Court, Case No CAF 1351/2014/1/RH1

Argentina vs Molinos Río de la Plata S.A., September 2021, Supreme Court, Case No CAF 1351/2014/1/RH1

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. Judgement 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 Argentina FALLO CAF 001351_2014_CS001
Israel vs Sephira & Offek Ltd and Israel Daniel Amram, August 2021, Jerusalem District Court, Case No 2995-03-17

Israel vs Sephira & Offek Ltd and Israel Daniel Amram, August 2021, Jerusalem District Court, Case No 2995-03-17

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. Judgement 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 Israel vs Sephira & Offek Ltd_2995-03-17
Switzerland vs "A SA", July 2021, Federal Supreme Court, Case No 2C_80/2021

Switzerland vs “A SA”, July 2021, Federal Supreme Court, Case No 2C_80/2021

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. Judgement 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 Sch vs A SA old reserves July 2021 2C 80-2021
Malaysia vs Ensco Gerudi Malaysia SDN. BHD., July 2021, Juridical Review, High Court, Case No. WA-25-233-08-2020

Malaysia vs Ensco Gerudi Malaysia SDN. BHD., July 2021, Juridical Review, High Court, Case No. WA-25-233-08-2020

Ensco Gerudi provided offshore drilling services to the petroleum industry in Malaysia, including leasing drilling rigs, to oil and gas operators in Malaysia. In order to provide these services, the Ensco entered into a Master Charter Agreement dated 21.9.2006 (amended on 17.8.2011) (“Master Charter Agreement”) with Ensco Labuan Limited (“ELL”), a third-party contractor, to lease drilling rigs from ELL. Ensco then rents out the drilling rigs to its own customers. As part of the Master Charter Agreement, Ensco agreed to pay ELL a percentage of the applicable day rate that Ensco earns from its drilling contracts with its customers for the drilling rigs. By way of a letter dated 12.10.2018, the tax authorities initiated its audit for FY 2015 to 2017. The tax authorities issued its first audit findings letter on 23.10.2019 where it took the position that the pricing of the leasing transactions between the Applicant and ELL are not at arm’s length pursuant to s 140A of the Income Tax Act 1967 (“ITA”). The tax authorities proposed that the profit earned by ELL should remain with the Ensco by reducing the cost of the leasing asset by 20% or equivalent to the margin obtained by ELL. Ensco disputed the tax assessment and brought the case to court for an appeals review. Decision of the High Court The High Court granted orders in terms of Ensco’s application allowing an appeal. Excerpts “It has been said that additional assessment is rooted in fairness and that there is a duty on the part of the Respondent [tax authorities] being an important public authority to give its reasons more so, when the issues pertaining to transfer pricing are complex matters and can never be straightforward. As the Applicant [Ensco] has submitted and this Court agrees, that at the very least, the most basic Transfer Pricing Report by the Respondent will be able to shed some light on the Applicant on this issue because without some basis, how would the Applicant be able to adequately defend itself before the Special Commissioners of Income Tax. The Applicant’s [Ensco] basis and justifications for the pricing of the leasing transactions is definitely in stark contrast to the Respondent’s failure to provide its own Transfer Pricing Report to the Applicant. In the present matter, exceptional circumstances of the case have been established at the leave stage which is a starting point in judicial review cases. Illegality, unlawful treatment, error of law and failure to adhere to legal principles established by the Courts tantamount to an excess of jurisdiction and all of which this Court finds have been demonstrated by the Applicant. ensco gerudi v kphdn

Luxembourg vs “Lux PPL SARL”, July 2021, Administrative Tribunal, Case No 43264

Lux PPL SARL received a profit participating loan (PPL) from a related company in Jersey to finance its participation in an Irish company.  The participation in the Irish company was set up in the form of debt (85%) and equity (15%). The profit participating loan (PPL) carried a fixed interest of 25bps and a variable interest corresponding to 99% of the profits derived from the participation in the Irish company, net of any expenses, losses and a profit margin. After entering the arrangement, Lux PPL SARL filed a request for an binding ruling with the Luxembourg tax administration to verify that the interest  charge under the PPL would not qualify as a hidden profit distribution subject to the 15% dividend withholding tax. The tax administration issued the requested binding ruling on the condition that the ruling would be terminate if the total amount of the interest charge on the PPL exceeded an arm’s length charge. Later, Lux PPL SARL received a dividend of EUR 30 million from its participation in the Irish company and at the same time expensed interest on the PPL in its tax return in an amount of EUR 29,630,038. The tax administration found that the interest charged on the PPL exceeded the arm’s length remuneration. An assessment was issued according to which a portion of the interest expense was denied and instead treated as a hidden dividend subject to the 15% withholding tax. Lux PPL SARL filed an appeal to the Administrative Tribunal in which they argued that the tax ruling was binding on the tax administration. In regards to interest charge, Lux PPL SARL argued that according to the OECD TPG, if the range comprises results of relatively equal and high reliability, it could be argued that any point in the range satisfies the arm’s length principle. Judgement of the Administrative Tribunal The Tribunal found the appeal of Lux PPL SARL justified and set aside the decision of the tax administration. According to the Tribunal, the arm’s length interest charge under the PPL could be determined by a comparison with interest on fixed interest loan and any interest charge within the arm’s length range would satisfy the arm’s length principle. Click here for English translation Click here for other translation Lux vs LUXPPL SA July 2021 Case No 43264
European Commission vs Luxembourg and Engie, May 2021, EU General Court, Case No T-516/18 and T-525/18

European Commission vs Luxembourg and Engie, May 2021, EU General Court, Case No T-516/18 and T-525/18

Engie (former GDF Suez) is a French electric utility company. Engie Treasury Management S.à.r.l., a treasury company, and Engie LNG Supply, S.A, a liquefied natural gas trading company, are both part of the Engie group. In November 2017, Total has signed an agreement with Engie to acquire its LNG business, including Engie LNG Supply. In 2018 the European Commission has found that Luxembourg allowed two Engie group companies to avoid paying taxes on almost all their profits for about a decade. This is illegal under EU State aid rules because it gives Engie an undue advantage. Luxembourg must now recover about €120 million in unpaid tax. The Commission’s State aid investigation concluded that the Luxembourg tax rulings gave Engie a significant competitive advantage in Luxembourg. It does not call into question the general tax regime of Luxembourg. In particular, the Commission found that the tax rulings endorsed an inconsistent tax treatment of the same structure leading to non-taxation at all levels. Engie LNG Supply and Engie Treasury Management each significantly reduce their taxable profits in Luxembourg by deducting expenses similar to interest payments for a loan. At the same time, Engie LNG Holding and C.E.F. avoid paying any tax because Luxembourg tax rules exempt income from equity investments from taxation. This is a more favourable treatment than under the standard Luxembourg tax rules, which exempt from taxation income received by a shareholder from its subsidiary, provided that income is in general taxed at the level of the subsidiary. On this basis, the Commission concluded that the tax rulings issued by Luxembourg gave a selective advantage to the Engie group which could not be justified. Therefore, the Commission decision found that Luxembourg’s tax treatment of Engie endorsed by the tax rulings is illegal under EU State aid rules. The decision was appealed to the European General Court by Luxembourg and Engie. Judgement of the Court The General Court decided in favour of the Commission and held that a set of tax rulings issued by Luxembourg artificially reduced Engie’s tax bill by around €120 million. The tax rulings endorsed two financing structures put in place by Engie that treated the same transaction both as debt and as equity, with the result that its profits remained untaxed. The General Court has also confirmed that State aid enforcement can be a tool to tackle abusive tax planning structures that deviate from the objectives of the general tax system. See the Press Release of the Court Click here for Unofficial English Translation Click here for other translation CELEX_62018TJ0516_FR_TXT
St. Vincent & the Grenadines vs Unicomer (St. Vincent) Ltd., April 2021, Supreme Court, Case No SVGHCV2019/0001

St. Vincent & the Grenadines vs Unicomer (St. Vincent) Ltd., April 2021, Supreme Court, Case No SVGHCV2019/0001

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. Judgement 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 Unicomer (St. Vincent) Ltd v Appeal Commissioners
Denmark vs NETAPP ApS and TDC A/S, May 2021, High Court, Cases B-1980-12 and B-2173-12

Denmark vs NETAPP ApS and TDC A/S, May 2021, High Court, Cases B-1980-12 and B-2173-12

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 companyâ€, 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 DK beneficial Owner HC 3 May 2021-b198012-og-b217312
UK vs GE Capital, April 2021, Court of Appeal, Case No [2021] EWCA Civ 534

UK vs GE Capital, April 2021, Court of Appeal, Case No [2021] EWCA Civ 534

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. Judgement of the Court of Appeal The Court of Appeal overturned the judgement of the High Court and ruled in favour of GE Capital. HMRC-v-GE CAPITAL 2021
South Africa vs ABSA bank, March 2021, High Court, Case No 2019/21825

South Africa vs ABSA bank, March 2021, High Court, Case No 2019/21825

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. Judgement 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 SARS vs ASBA Bank_SATC
Netherlands vs "Share Owner/Lender", February 2021, Supreme Court (Preliminary ruling by the Advocate General), Case No 20/01884

Netherlands vs “Share Owner/Lender”, February 2021, Supreme Court (Preliminary ruling by the Advocate General), Case No 20/01884

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 Amsterdam 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) she was also 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. 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 cale 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 yield / basis of inclusion) the interested party, on whom the burden of proof rests, has not made it plausible that she was the direct recipient of the dividend and that (therefore) the dividends (and not something substituting or different) were included in her 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 Market maker 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’s judgment that the tax authorities should not be lacking in the applicant’s records is neither incomprehensible nor insufficiently reasoned. In his opinion, 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

Canada vs Cameco Corp., February 2021, Supreme Court, Case No 39368.

Cameco, together with its subsidiaries, is a large uranium producer and supplier of the services that convert one form of uranium into another form. Cameco had uranium mines in Saskatchewan and uranium refining and processing (conversion) facilities in Ontario. Cameco also had subsidiaries in the United States that owned uranium mines in the United States. The Canadian Revenue Agency found that transactions between Cameco Corp and the Swiss subsidiary constituted a sham arrangement resulting in improper profit shifting. Hence, a tax assessment was issued for FY 2003, 2005, and 2006. Cameco disagreed with the Agency and brought the case to the Canadian Tax Court. In 2018 the Tax Court ruled in favor of Cameco and dismissed the assessment. This decision was appealed by the tax authorities to the Federal Court of Appeal. The Federal Court of Appeal in 2020 dismissed the appeal and also ruled in favor of Cameco A application for leave to appeal from the judgment of the Federal Court of Appeal was then brought to the Canadian Supreme Court by the tax authorities. The application for leave to appeal was dismissed by the Supreme Court. 39368_Cameco_Judgment_on_Leave-Jugement_sur_demande
Portugal vs "A..., Sociedade Unipessoal LDA", January 2021, Tax Court (CAAD), Case No 827/2019-T

Portugal vs “A…, Sociedade Unipessoal LDA”, January 2021, Tax Court (CAAD), Case No 827/2019-T

“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 P827_2019-T - 2021-01-25 - JURISPRUDENCIA
Switzerland vs "Contractual Seller SA", January 2021, Federal Supreme Court, Case No 2C_498/2020

Switzerland vs “Contractual Seller SA”, January 2021, Federal Supreme Court, Case No 2C_498/2020

C. SA provides “services, in particular in the areas of communication, management, accounting, management and budget control, sales development monitoring and employee training for the group to which it belongs, active in particular in the field of “F”. C. SA is part of an international group of companies, G. group, whose ultimate owner is A. The G group includes H. Ltd, based in the British Virgin Islands, I. Ltd, based in Guernsey and J. Ltd, also based in Guernsey. In 2005, K. was a director of C. SA. On December 21 and December 31, 2004, an exclusive agreement for distribution of “F” was entered into between L. Ltd, on the one hand, and C. SA , H. Ltd and J. Ltd, on the other hand. Under the terms of this distribution agreement, L. Ltd. undertook to supply “F” to the three companies as of January 1, 2005 and for a period of at least ten years, in return for payment. Under a supply agreement C. SA agreed to sell clearly defined quantities of “F” to M for the period from January 1, 2005 to December 31, 2014. In the course of 2005, 56 invoices relating to sales transactions of “F” to M. were drawn up and sent to the latter, on the letterhead of C. SA. According to these documents, M. had to pay the sale price directly into two accounts – one held by H. Ltd and the other by J. Ltd. Part of this money was then reallocated to the supply of “F”, while the balance was transferred to an account in Guernsey held by J. Ltd. The result was, that income from C. SA’s sale of “F” to M was not recognized in C. SA but instead in the two off-shore companies H. Ltd and J. Ltd. Following an audit, the Swiss tax authorities issued an assessment where C. SA and A were held liable for withholding taxes on a hidden distribution of profits. A and C. SA brought this assessment to Court. Decision of the Court The Court decided – in accordance with the 2020 judgment of the Federal Administrative Court – in favor of the tax authorities and the appeal of C. SA and A was dismissed. Click here for English translation Click here for other translation Swiss-Bundesgericht-2C_498-2020
UK vs GE Capital, December 2020, High Court, Case No [2020] EWHC 1716

UK vs GE Capital, December 2020, High Court, Case No [2020] EWHC 1716

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. Judgement of the High Court The High Court ruled in favour of the tax authorities. UK vs GE 2021 COA 1716

Netherlands vs X B.V., December 2020, Supreme Court (Preliminary ruling by the Advocate General), Case No 20/02096 ECLI:NL:PHR:2020:1198

This case concerns a private equity takeover structure with apparently an intended international mismatch, i.e. a deduction/no inclusion of the remuneration on the provision of funds. The case was (primarily) decided by the Court of Appeal on the basis of non-business loan case law. The facts are as follows: A private equity fund [A] raised LP equity capital from (institutional) investors in its subfund [B] and then channelled it into two (sub)funds configured in the Cayman Islands, Fund [C] and [D] Fund. Participating in those two Funds were LPs in which the limited partners were the external equity investors and the general partners were Jersey-based [A] entities and/or executives. The equity raised in [A] was used for leveraged, debt-financed acquisitions of European targets to be sold at a capital gain after five to seven years, after optimising their EBITDA. One of these European targets was the Dutch [F] group. The equity used in its acquisition was provided not only by the [A] funds (approximately € 401 m), but also (for a total of approximately € 284 m) by (i) the management of the [F] group, (ii) the selling party [E] and (iii) co-investors not affiliated with [A]. 1.4 The equity raised in the [A] funds was converted into hybrid, but under Luxembourg law, debt in the form of preferred equity shares: A-PECs (€ 49 m) and B-PECs (€ 636 m), issued by the Luxembourg mother ( [G] ) of the interested party. G] has contributed € 43 million to the interested party as capital and has also lent or on-lent it approximately € 635 million as a shareholder loan (SHL). The interested party has not provided [G] with any securities and owes [G] over 15% interest per year on the SHL. This interest is not paid, but credited. The SHL and the credited interest are subordinated to, in particular, the claims of a syndicate of banks that lent € 640 million to the target in order to pay off existing debts. That syndicate has demanded securities and has stipulated that the SHL plus credited interest may not be repaid before the banks have been paid in full. The tax authority considers the SHL as (disguised) equity of the interested party because according to him it differs economically hardly or not at all from the risk-bearing equity (participation loan) c.q. because this SHL is unthinkable within the OECD transfer pricing rules and within the conceptual framework of a reasonable thinking entrepreneur. He therefore considers the interest of € 45,256,000 not deductible. In the alternative, etc., he is of the opinion that the loan is not business-like, that Article 10a prevents deduction or that the interested party and its financiers have acted in fraudem legis. In any case he considers the interest not deductible. According to the Court of Appeal, the SHL is a loan in civil law and not a sham, and is not a participation loan in tax law, because its term is not indefinite, meaningless or longer than 50 years. However, the Court of Appeal considers the loan to be non-business because no securities have been stipulated, the high interest is added, it already seems impossible after a short time to repay the loan including the added interest without selling the target, and the resulting non-business risk of default cannot be compensated with an (even) higher interest without making the loan profitable. Since the interested party’s mother/creditress ([G] ) is just as unacceptable as a guarantor as the interested party himself, your guarantor analogy ex HR BNB 2012/37 cannot be applied. Therefore, the Court of Appeal has instead imputed the interest on a ten-year government bond (2.5%) as business interest, leading to an interest of € 7,435,594 in the year of dispute. It is not in dispute that 35,5% of this (€2,639,636) is deductible because 35,5% of the SHL was used for transactions not contaminated (pursuant to Section 10a Vpb Act). The remaining €4,795,958 is attributable to the contaminated financing of the contaminated acquisition of the [F] Group. The Court of Appeal then examined whether the deduction of the remaining € 4,795,958 would be contrary to Article 10a of the Dutch Corporate Income Tax Act or fraus legis. Since both the transaction and the loan are tainted (Article 10a Corporate Income Tax Act), the interested party must, according to paragraph 3 of that provision, either demonstrate business motives for both, or demonstrate a reasonable levy or third-party debt parallelism with the creditor. According to the Court of Appeal, it did not succeed in doing so for the SHL, among other things because it shrouded the financing structure behind [G], in particular that in the Cayman Islands and Jersey, ‘in a fog of mystery,’ which fog of mystery remains at its evidential risk. On the basis of the facts which have been established, including the circumstances that (i) the [A] funds set up in the Cayman Islands administered the capital made available to them as equity, (ii) all LPs participating in those funds there were referred to as ‘[A] ‘ in their names, (iii) all those LPs had the same general partners employed by [A] in Jersey, and (iv) the notification to the European Commission stated that the Luxembourg-based [H] was acquiring full control of the [F] group, the Court formed the view that the PECs to [G] had been provided by the [A] group through the Cayman Islands out of equity initially contributed to [B] LP by the ultimate investors, and that that equity had been double-hybridised through the Cayman Islands, Jersey and Luxembourg for anti-tax reasons. The interested party, on whom the counter-evidence of the arm’s length nature of the acquisition financing structure rested, did not rebut that presumption, nor did it substantiate a third-party debt parallelism or a reasonable levy on the creditor, since (i) the SHL and the B-PECs are not entirely parallel and the interest rate difference, although small, increases exponentially through the compound interest, (ii) the SHL is co-financed by A-PECs, whose interest rate
India vs. M/s Redington (India) Limited, December 2020, High Court of Madras, Case No. T.C.A.Nos.590 & 591 of 2019

India vs. M/s Redington (India) Limited, December 2020, High Court of Madras, Case No. T.C.A.Nos.590 & 591 of 2019

Redington India Limited (RIL) established a wholly-owned subsidiary Redington Gulf (RG) in the Jebel Ali Free Zone of the UAE in 2004. The subsidiary was responsible for the Redington group’s business in the Middle East and Africa. Four years later in July 2008, RIL set up a wholly-owned subsidiary company in Mauritius, RM. In turn, this company set up its wholly-owned subsidiary in the Cayman Islands (RC) – a step-down subsidiary of RIL. On 13 November 2008, RIL transferred its entire shareholding in RG to RC without consideration, and within a week after the transfer, a 27% shareholding in RC was sold by RG to a private equity fund Investcorp, headquartered in Cayman Islands for a price of Rs.325.78 Crores. RIL claimed that the transfer of its shares in RG to RC was a gift and therefore, exempt from capital gains taxation in India. It was also claimed that transfer pricing provisions were not applicable as income was exempt from tax. The Indian tax authorities disagreed and found that the transfer of shares was a taxable transaction, as the three defining requirements of a gift were not met – that the transfer should be (i) voluntary, (ii) without consideration and that (iii) the property so transferred should be accepted by the donee. The tax authorities also relied on the documents for the transfer of shares, the CFO statement, and the law dealing with the transfer of property. The arm’s length price was determined by the tax authorities using the comparable uncontrolled price method – referring to the pricing of the shares transferred to Investcorp. In the tax assessment, the authorities had also denied deductions for trademark fees paid by RIL to a Singapore subsidiary for the use of the “Redington” name. The tax authorities had also imputed a fee for RIL providing guarantees in favour of its subsidiaries. RIL disagreed with the assessment and brought the case before the Dispute Resolution Panel (DRP) who ruled in favour of the tax authorities. The case was then brought before the Income Tax Appellate Tribunal (ITAT) who ruled in favour of RIL. ITAT’s ruling was then brought before the High Court by the tax authorities. The decision of the High Court The High Court ruled that transfer of shares in RG by RIL to its step-down subsidiary (RC) as part of corporate restructuring could not be qualified as a gift. Extraneous considerations had compelled RIL to make the transfer of shares, thereby rendering the transfer involuntary. The entire transaction was structured to accommodate a third party-investor, who had put certain conditions even prior to effecting the transfer. According to the court, the transfer of shares was a circular transaction put in place to avoid payment of taxes. “Thus, if the chain of events is considered, it is evidently clear that the incorporation of the company in Mauritius and Cayman Islands just before the transfer of shares is undoubtedly a means to avoid taxation in India and the said two companies have been used as conduits to avoid income tax†observed the Court. The High Court also disallowed deductions for trademark fees paid by RIL to a Singapore subsidiary. The court stated it was illogical for a subsidiary company to claim Trademark fee from its parent company (RIL), especially when there was no documentation to show that the subsidiary was the owner of the trademark. It was also noted that RIL had been using the trademark in question since 1993 – long before the subsidiary in Singapore was established in 2005. Regarding the guarantees, the Court concluded these were financial services provided by RIL to it’s subsidiaries for which a remuneration (fee/commission) was required. India vs Ms Redington (India) Limited 10 Dec 2020 Madras High Court FY 09 10

Spain vs JACOBS DOUWE EGBERTS ES, SLU., November 2020, Tribunal Superior de Justicia, Case No STSJ M 7038/2019 – ECLI:EN:TS:2020:3730

At issue in this case was whether or not it is possible to regularize transactions between companies by directly applying art. 9.1 of DTA between Spain and French, without resorting to the transfer pricing methods provided for in local Spanish TP legislation. Application of article 9 and taxing according to local tax legislation is often a question of determining the arm’s length price. But sometimes other rules will apply regardless of the value – for instance anti avoidance legislation where the question is not the price but rather the justification and substance of the transaction. In the present case the arm’s length price of the relevant transaction was not discussed, but rather whether or not transaction of shares had sufficient economic substance to qualify for application of Spanish provisions for tax depreciation of the shares in question. The National Court understood that the share acquisition lacked substance and only had a tax avoidance purpose. It could not be understood that the appellant company has undergone a actual depreciation of its shares to the extent necessary to make a tax deduction. Judgement of the supreme Court The Supreme Court dismissed the appeal and upheld the decision of the National Court. The court pointed out that the regularization of transactions between Spanish and French companies, through the application of art. 9.1 in the DTA, can be carried out without the need to resort to the methods provided for in local legislation for determining the arm’s length value of transactions between related parties. Excerpts “IV.- What has just been stated are the abstract terms of the regulation contained in the aforementioned Article 9.1; and this shows that its individualisation or practical application to some singular facts will raise two different problems. The first will be to determine whether the specific commercial or financial transactions concluded between these two legal persons, Spanish and French, have an explanation that justifies them according to the legal or economic logic that is present in this type of relationship. The second problem will have to be tackled once the first one just mentioned has been positively resolved, or when it has not been raised; and it will consist of quantifying the tax scope of the singular commercial or financial operation whose justification has been recognised or accepted. V.- The above shows that the application of this Article 9.1 Tax Treaty must be accompanied by the application of internal rules; and these may be constituted by Article 16 of the TR/LISOC or by other different internal rules, for the reasons expressed below. Thus, Article 10 TR/LISOC shall be applied when, without questioning the justification of the transactions concluded between entities or persons that deserve to be considered as “associated enterprises”, only the quantification or the value, in market terms, of the object or price of these transactions is in dispute. But other internal rules will have to be applied when what is disputed with regard to these transactions is not the amount of their object but the justification of the legal transaction that materialises them, because this externalises a single purpose of fiscal avoidance and is not justified by circumstances or facts that reveal its legal or economic logic. And these rules, as the Abogado del Estado argues in his opposition to the cassation, may be embodied by those which regulate the powers recognised by the LGT 2003 to the Administration in order to achieve a correct application of the tax rules, such as those relating to assessment, the conflict in the application of the tax rule and simulation (Articles 13, 15 and 16 of that legal text). VI.- The answer which, on the basis of what has just been set out, must be given to the question of objective appeal, defined by the order which agreed the admission of the present appeal, must be that expressed below. That the regularisation of transactions between Spanish and French companies, by means of the application of Article 9.1 of the Agreement between the Kingdom of Spain and the French Republic for the avoidance of double taxation and the prevention of evasion and avoidance of fiscal fraud in the field of income tax and wealth tax of 10 October 1995, can be carried out without the need to resort to the methods provided for determining the market value in related transactions and to the procedure established for that purpose in the internal regulations. ELEVENTH – Decision on the claims raised in the appeal. I.- The application of the above criterion to the controversy tried and decided by the judgment under appeal leads to the conclusion that the infringements alleged in the appeal are not to be assessed. This is for the following reasons. The main question at issue was not the amount or quantification of the transactions which resulted in the acquisition by the appellant SARA LEE SOUTHERN EUROPE SL (SLSE) of shares in SLBA Italia. It was the other: whether or not the acquisition of those shares was sufficiently justified to be considered plausible and valid for making the allocations which had been deducted for the depreciation of securities of SARA LEE BRANDED APPAREL, SRL. The tax authorities and the judgment under appeal, as is clear from the foregoing, understood that this acquisition lacked justification and only had a tax avoidance purpose, because this was the result of the situation of economic losses that characterised the investee company in the years preceding the acquisition. They invoked Article 9.1 of the DTA to point out that, in those circumstances of economic losses, the parameter of comparability with normal or usual transactions between independent companies, which that article establishes in order to accept that a related-party transaction actually existed, could not be assessed in the transactions in question. And they reached the final conclusion that, in those particular circumstances, it cannot be understood that the appellant company has undergone a depreciation of its shares to the extent necessary to make a deduction based on those shares.” Click here for English translation Click here
UK vs Blackrock, November 2020, First-tier Tribunal, Case No TC07920

UK vs Blackrock, November 2020, First-tier Tribunal, Case No TC07920

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

UK vs Total E&P North Sea UK Ltd, October 2020, Court of Appeal, Case No A3/2019/1656

Companies carrying on “oil-related activities†are subject to both corporation tax and a “supplementary chargeâ€. “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 Periodâ€) rather than that from 24 March (“the Later Periodâ€) 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 reasonableâ€. The Court of Appeal concluded that treating each time period as if they were two separate accounting periods, and allocating income, expenditure and allowances to the periods accordingly was just and reasonable. Capital allowances could be treated similarly for notionally separate periods. UK vs TOTAL E&P 2020
Italy vs Spazio Immobiliare 2000 s.r.l., September 2020, Supreme Court, Cases No 20823/2020

Italy vs Spazio Immobiliare 2000 s.r.l., September 2020, Supreme Court, Cases No 20823/2020

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. Judgement 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 Italy vs
European Commission vs. Ireland and Apple, September 2020, Appeal of the Judgement of the General Court on the Apple tax State aid case in Ireland

European Commission vs. Ireland and Apple, September 2020, Appeal of the Judgement of the General Court on the Apple tax State aid case in Ireland

The European Commission has decided to appeal the decision of the EU General Court in the State Aid case of Apple and Ireland. According to the European Commission Ireland gave illegal tax benefits to Apple worth up to €13 billion, because it allowed Apple to pay substantially less tax than other businesses. In a decision issued july 2020 the General Court held in favor of Apple and Ireland. This decision will now be reviewed by the European Court of Justice. “Statement by Executive Vice-President Margrethe Vestager on the Commission’s decision to appeal the General Court’s judgment on the Apple tax State aid case in Ireland Brussels, 25 September 2020 “The Commission has decided to appeal before the European Court of Justice the General Court’s judgment of July 2020 on the Apple State aid case in Ireland, which annulled the Commission’s decision of August 2016 finding that Ireland granted illegal State aid to Apple through selective tax breaks. The General Court judgment raises important legal issues that are of relevance to the Commission in its application of State aid rules to tax planning cases. The Commission also respectfully considers that in its judgment the General Court has made a number of errors of law. For this reason, the Commission is bringing this matter before the European Court of Justice. Making sure that all companies, big and small, pay their fair share of tax remains a top priority for the Commission. The General Court has repeatedly confirmed the principle that, while Member States have competence in determining their taxation laws taxation, they must do so in respect of EU law, including State aid rules. If Member States give certain multinational companies tax advantages not available to their rivals, this harms fair competition in the European Union in breach of State aid rules. We have to continue to use all tools at our disposal to ensure companies pay their fair share of tax. Otherwise, the public purse and citizens are deprived of funds for much needed investments – the need for which is even more acute now to support Europe’s economic recovery. We need to continue our efforts to put in place the right legislation to address loopholes and ensure transparency. So, there’s more work ahead – including to make sure that all businesses, including digital ones, pay their fair share of tax where it is rightfully due.â€
New Zealand vs Frucor Suntory, September 2020, Court of appeal, Case No [2020] NZCA 383

New Zealand vs Frucor Suntory, September 2020, Court of appeal, Case No [2020] NZCA 383

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 excessiveâ€; 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.” NZ v Frucor September 2020
Tanzania vs African Barrick Gold PLC, August 2020, Court of Appeal, Case No. 144 of 2018, [2020] TZCA 1754

Tanzania vs African Barrick Gold PLC, August 2020, Court of Appeal, Case No. 144 of 2018, [2020] TZCA 1754

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. Judgement 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 ocr-civil-appeal-no-144-2018-african-barrick-gold-plcappellant-versus-commissioner-general-tra-respo
Tanzania vs Mantra (Tanzania) Limited, August 2020, Court of Appeal, Case No 430 of 2020

Tanzania vs Mantra (Tanzania) Limited, August 2020, Court of Appeal, Case No 430 of 2020

Mantra Limited is engaged in mineral exploration in Tanzania. In carrying out its business, it procured services from non-resident service providers mostly from South Africa. In 2014, Mantra Limited wrote to the tax authorities requesting for a refund of withholding taxes of USD 1,450,920.00 incorrectly paid in relation to services that were performed outside Tanzania by non-resident service providers for the period between July, 2009 and December, 2012. The tax authorities refused the request maintaining that, the services in question were rendered in Tanzania and Article 7 of the DTA was irrelevant in as much as it was limited to business profits and not business transactions. Unsuccessfull appeals were filed by Mantra and in 2020 the case ended up in the Court of Appeal where Mantra argued based on the following grounds:- 1. That the Tax Revenue Appeals Tribunal grossly erred in law by holding that the Board was correct in holding that payments for services rendered/ performed abroad by non-resident suppliers had a source in the United Republic of Tanzania; 2. That the Tax Revenue Appeals Tribunal grossly erred in law by holding that Article 7 of the Double Taxation Agreement does not apply on the Appellant’s case; and 3. That the Tax Revenue Appeals Tribunal erred in law by holding that the Appellant was not justified to claim refund o f incorrectly paid withholding tax. Judgement of the Court of Appeal The Court of Appeal decided in favor of the tax authorities. On the first ground “On our part, we fully subscribe to this recent position of law and differ with the previous position in Pan African Energy Tanzania Limited (supra) for two main reasons. First, as correctly held in Tullow Tanzania BV (supra), the respective authority, much as it was based on an Indian decision construing a statute which is not worded similarly to ours, is istinguishable and thus inapplicable in the instant case. Second and more importantly is the fact that, the position in Tullow Tanzania BV (supra) is the more recent position. The settled position as it stands today is such that, where there are two conflicting decisions of the Court on the similar matter, the Court, unless otherwise justified, is expected to follow the more recent decision. … In view of the foregoing discussion therefore, we dismiss the first ground of appeal. “ On the second ground “Guided by the above authority therefore, it is our firm opinion that the Tribunal was right in holding that the exemption under Article 7 of the DTA was not applicable to the appellant’s business transactions. We thus dismiss the second ground for want of merit.” On the third ground “Since we have held in relation to the first and second grounds that, the charging of withholding taxes was correct, there is consequently nothing to refund and, therefore, the third ground becomes redundant because there remains no withholding tax to refund.” Mantra Tanzania Ltd vs The Commissioner General Tanzania Revenue Authority (Civil Appeal No 430 of 2020) 2021 TZCA 657 (5 November 2021)
UK vs General Electric, July 2020, High Court, Case No RL-2018-000005

UK vs General Electric, July 2020, High Court, Case No RL-2018-000005

General Electric (GE) have been routing financial transactions (AUS $ 5 billion) related to GE companies in Australia via the UK in order to gain a tax advantage – by “triple dipping†in regards to interest deductions, thus saving billions of dollars in tax in Australia, the UK and the US. Before entering into these transactions, GE obtained clearance from HMRC that UK tax rules were met, in particular new “Anti-Arbitrage Rules†introduced in the UK in 2005, specifically designed to prevent tax avoidance through the exploitation of the tax treatment of ‘hybrid’ entities in different jurisdictions. The clearance was granted by the tax authorities in 2005 based on the understanding that the funds would be used to invest in businesses operating in Australia. In total, GE’s clearance application concerned 107 cross-border loans amounting to debt financing of approximately £21.2 billion. The Australian Transaction was one part of the application. After digging into the financing structure and receiving documents from the Australian authorities, HMRC now claims that GE fraudulently obtained a tax advantage in the UK worth US$1 billion by failing to disclose information and documents relating to the group’s financing arrangements. According to the HMRC, GE provided UK tax officers with a doctored board minute, and misleading and incomplete documents. The documents from Australia shows that the transactions were not related to investments in Australian businesses, but part of a complex and contrived tax avoidance scheme that would circulate money between the US, Luxembourg, the UK and Australia before being sent back to the US just days later. These transactions had no commercial purpose other than to create a “triple dip†tax advantage in the UK, the US and Australia. HMRC are now seeking to annul the 2005 clearance agreement and then issue a claim for back taxes in the amount of $ 1 billion before interest and penalties. From GE’s 10 K filing “As previously disclosed, the United Kingdom tax authorities disallowed interest deductions claimed by GE Capital for the years 2007-2015 that could result in a potential impact of approximately $1 billion, which includes a possible assessment of tax and reduction of deferred tax assets, not including interest and penalties. We are contesting the disallowance. We comply with all applicable tax laws and judicial doctrines of the United Kingdom and believe that the entire benefit is more likely than not to be sustained on its technical merits. We believe that there are no other jurisdictions in which the outcome of unresolved issues or claims is likely to be material to our results of operations, financial position or cash flows. We further believe that we have made adequate provision for all income tax uncertainties.” The English High Court decision on whether the case has sufficient merit to proceed to trial: “150. For the above reasons, I refuse the application to amend in respect of paragraphs 38(b) and 38(e) of APOC and I will strike out the existing pleading in paragraph 38(e) of APOC. I will otherwise permit the amendments sought by HMRC insofar as they are not already agreed between the parties. Specifically, the permitted amendments include those in which HMRC seeks to introduce allegations of deliberate non-disclosure, fraud in respect of the Full Disclosure Representation, a claim that the Settlement Agreement is a contract of utmost good faith (paragraphs 49B and 53(ca) of APOC) and the claim for breach of an implied term (paragraphs 48 and 49 of APOC). 151. As to paragraph 68(b) of the Reply, I refuse the application to strike it out. To a large extent this follows from my conclusion in relation to the amendments to the APOC to add allegations of deliberate failure to disclose material information. In GE’s skeleton argument, a separate point is taken that paragraph 68(b) of the Reply is a free-standing plea that is lacking in sufficient particulars. I do not accept this: there can be no real doubt as to which parts of the APOC are being referred to by the cross-reference made in paragraph 68(b)(ii). 152. The overall result is that, while I have rejected the attempts to infer many years after the event that specific positive representations could be implied from limited references in the contemporaneous documents, the essential allegation which lay at the heart of Mr Jones QC’s submissions – that GE failed to disclose the complete picture, and that it did so deliberately – will be permitted to go to trial on the various alternative legal bases asserted by HMRC. I stress that, beyond the conclusion that there is a sufficient pleading for this purpose, and that the prospects of success cannot be shown to be fanciful on an interlocutory application such as this, I say nothing about the merits of the claims of deliberate non-disclosure or fraud.” UK-vs-GE-2020
Netherlands vs X B.V., July 2020, Supreme Court (Preliminary ruling by the Advocate General), Case No ECLI:NL:PHR:2020:672

Netherlands vs X B.V., July 2020, Supreme Court (Preliminary ruling by the Advocate General), Case No ECLI:NL:PHR:2020:672

X bv is part of the worldwide X group, a financial service provider listed on the US stock exchange. At issue is deductibility of interest payments by X bv on a € 482 million loan granted by the parent company, US Inc. In 2010 the original loan between X bv and US Inc. was converted into two loans of € 191 million and € 291 million granted by a Luxembourg finance company in the X group, to two jointly taxed subsidiaries of X bv. According to the Dutch Tax Authorities, the interest payments on these loans falls under the provisions in Dutch art. 10a of the VPB Act 1969 whereby interest deductions are restricted. The Court of appeal disagreed and ruled in favor of X bv. This decision was appealed to the Supreme Court by the tax authorities. In a preliminary ruling, the Advocate General advises the Supreme Court to dismiss the appeal. According to the Advocate General, X bv is entitled to the interest deduction. The conditions of the loans are at arm’s length. Taxpayers are free in their choice of financing their participations, including choosing financing arrangements based on tax reasons. The loans have not been taken out on the basis of non-business (shareholder) motives. Nor is it important that the interest deducted in the Netherlands is also deducted in the US and France (under the Dutch provisions applicable in the years of the disputed transactions). Click here for translation ECLI_NL_PHR_2020_672
European Commission vs. Ireland and Apple, July 2020, General Court of the European Union, Case No. T-778/16 and T-892/16

European Commission vs. Ireland and Apple, July 2020, General Court of the European Union, Case No. T-778/16 and T-892/16

In a decision of 30 August 2016 the European Commission concluded that Ireland’s tax benefits to Apple were illegal under EU State aid rules, because it allowed Apple to pay substantially less tax than other businesses. The decision of the Commission concerned two tax rulings issued by Ireland to Apple, which determined the taxable profit of two Irish Apple subsidiaries, Apple Sales International and Apple Operations Europe, between 1991 and 2015. As a result of the rulings, in 2011, for example, Apple’s Irish subsidiary recorded European profits of US$ 22 billion (c.a. €16 billion) but under the terms of the tax ruling only around €50 million were considered taxable in Ireland. Ireland appealed the Commission’s decision to the European Court of Justice. The Judgement of the European Court of Justice The General Court annuls the Commission’s decision that Ireland granted illegal State aid to Apple through selective tax breaks because the Commission did not succeed in showing to the requisite legal standard that there was an advantage for the purposes of Article 107(1) TFEU. According to the Court, the Commission was wrong to declare that Apple Sales International and Apple Operations Europe had been granted a selective economic advantage and, by extension, State aid. The Court considers that the Commission incorrectly concluded, in its primary line of reasoning, that the Irish tax authorities had granted Apple’s Irish subsidiaries an advantage as a result of not having allocated the Apple Group intellectual property licences to their Irish branches. According to the Court, the Commission should have shown that that income represented the value of the activities actually carried out by the Irish branches themselves, in view of the activities and functions actually performed by the Irish branches of the two Irish subsidiaries, on the one hand, and the strategic decisions taken and implemented outside of those branches, on the other. In addition, the Court considers that the Commission did not succeed in demonstrating, in its subsidiary line of reasoning, methodological errors in the contested tax rulings which would have led to a reduction in chargeable profits in Ireland. The defects identified by the Commission in relation to the two tax rulings are not, in themselves, sufficient to prove the existence of an advantage for the purposes of Article 107(1) TFEU. Furthermore, the Court considers that the Commission did not prove, in its alternative line of reasoning, that the contested tax rulings were the result of discretion exercised by the Irish tax authorities and that, accordingly, Apple Sales International and Apple Operations Europe had been granted a selective advantage. Apple-Ireland-vs-EU-Commission-150720
Canada vs Cameco Corp., June 2020, Federal Court of Appeal, Case No 2020 FCA 112.

Canada vs Cameco Corp., June 2020, Federal Court of Appeal, Case No 2020 FCA 112.

Cameco, together with its subsidiaries, is a large uranium producer and supplier of the services that convert one form of uranium into another form. Cameco had uranium mines in Saskatchewan and uranium refining and processing (conversion) facilities in Ontario. Cameco also had subsidiaries in the United States that owned uranium mines in the United States. In 1993, the United States and Russian governments executed an agreement that provided the means by which Russia could sell uranium formerly used in its nuclear arsenal. The net result of this agreement was that a certain quantity of uranium would be offered for sale in the market. Cameco initially attempted to secure this source of uranium on its own but later took the lead in negotiating an agreement for the purchase of this uranium by a consortium of companies. When the final agreement was signed in 1999, Cameco designated its Luxembourg subsidiary, Cameco Europe S.A. (CESA), to be the signatory to this agreement. The agreement related to the purchase of the Russian uranium was executed in 1999 among CESA, Compagnie Générale des Matières Nucléaires (COGEMA) (a French state-owned uranium producer), Nukem, Inc. (a privately owned United States trader in uranium), Nukem Nuklear GMBH and AO “Techsnabexport†(Tenex) (a Russian state-owned company). This agreement, which is also referred to as the HEU Feed Agreement, initially provided for the granting of options to purchase the uranium that Tenex would make available for sale. In the years following 1999, there were a number of amendments to this agreement. In particular, the fourth amendment in 2001, in part, obligated the western consortium (CESA, COGEMA and Nukem) to purchase a certain amount of uranium (paragraph 82 of the reasons). On September 9, 1999, CESA entered into an agreement with Urenco Limited (Urenco) (a uranium enricher) and three of its subsidiaries to purchase uranium that Urenco would be receiving from Tenex. Also in 1999, Cameco formed a subsidiary in Switzerland. This company, in 2001, changed its name to Cameco Europe AG (SA, Ltd) (CEL). In 2002, CESA transferred its business (which was described in the transfer agreement as “trading with raw materials, particularly uranium in various formsâ€) to CEL under the Asset Purchase and Transfer of Liabilities Agreement dated as of October 1, 2002, but executed on October 30, 2002. Therefore, CESA transferred to CEL the rights that CESA had to purchase uranium from Tenex and Urenco. CEL also purchased Cameco’s expected uranium production and its uranium inventory. It would appear that this arrangement did not include any uranium that was sold by Cameco to any customers in Canada (paragraph 40 of the Crown’s memorandum). At certain times, Cameco also purchased uranium from CEL. The profits in issue in this appeal arose as a result of the sale of uranium by CEL that it purchased from three different sources: Tenex, Urenco, and Cameco. When the arrangements with Tenex and Urenco were put in place in 1999, the price of uranium was low. In subsequent years, the price of uranium increased substantially. As a result, the profits realized by CEL from buying and selling uranium were substantial. The Canadian Revenue Agency found that the transactions between Cameco Corp and the Swiss subsidiary constituted a sham arrangement resulting in improper profit shifting.  According to the Canadian Revenue Agency, Cameco would not have entered into any of the transactions that it did with CESA and CEL with any arm’s length person, cf. paragraph 247(2) of the Act. All of the profit earned by CEL should therefore be reallocated to Cameco Corp. Hence, a tax assessment was issued for FY 2003, 2005, and 2006 where $43,468,281, $196,887,068, and $243,075,364 was added to the taxable income of Cameco Canada. Cameco disagreed with the Agency and brought the case to the Canadian Tax Court. In 2018 the Tax Court ruled in favor of Cameco and dismissed the assessment. This decision was then appealed by the tax authorities to the Federal Court of Appeal. The Federal Court of Appeal dismissed the appeal and also ruled in favor of Cameco. “In this appeal, the Crown does not challenge any of the factual findings made by the Tax Court Judge. Rather, the Crown adopts a broader view of paragraphs 247(2)(b) and (d) of the Act and submits that Cameco would not have entered into any of the transactions that it did with CESA and CEL with any arm’s length person. As a result, according to the Crown, all of the profit earned by CEL should be reallocated to Cameco. The Crown, in its memorandum, also indicated that it was raising an alternative argument related to the interpretation of paragraph 247(2)(a) of the Act. … However, subparagraph 247(2)(b)(i) of the Act does not refer to whether the particular taxpayer would not have entered into the particular transaction with the non-resident if that taxpayer had been dealing with the non-resident at arm’s length or what other options may have been available to that particular taxpayer. Rather, this subparagraph raises the issue of whether the transaction or series of transactions would have been entered into between persons dealing with each other at arm’s length (an objective test based on hypothetical persons) — not whether the particular taxpayer would have entered into the transaction or series of transactions in issue with an arm’s length party (a subjective test). A test based on what a hypothetical person (or persons) would have done is not foreign to the law as the standard of care in a negligence case is a “hypothetical ‘reasonable person’†(Queen v. Cognos Inc., [1993] 1 S.C.R. 87, at page 121, 1993 CanLII 146). … The Crown’s position with respect to this hypothetical transaction is also contradicted by its position in this case. Essentially, in this case, Cameco became aware of an opportunity to purchase Russian sourced uranium from Tenex and Urenco and chose to complete those arrangements through a foreign subsidiary rather than purchasing this uranium itself and selling it to third-party customers in other countries. This was a foreign-based business opportunity to
Greece vs S.p.A. ST. MEDICAL, May 2020, Supreme Administrative Court, Case No A 985/2020

Greece vs S.p.A. ST. MEDICAL, May 2020, Supreme Administrative Court, Case No A 985/2020

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 2010, 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.-31.12.2010), 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 …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. ” “according to the auditors’ estimate, to the value of these products in case their purchase had been made directly by the foreign companies, without the mediation of the Cypriot company, amounted to 1.531.457€, i.e. an amount, by 3.384.906€, lower than the value indicated on the invoices issued for the respective transactions (4.916.364€). During the audit, it was also found that, for the supply of those goods, the appellant, although it had entered in its books all the purchase invoices issued by Praxis in 2010, ultimately paid to Praxis, by means of bank transfers, only part of the value indicated on those invoices, namely €4,809,073, against a total debt of €10,119,105. The report of the Economic Police was sent to the appellant’s Income Tax Department IZ of Athens, which carried out a new tax audit…” “Following this, the auditor of the Athens IZ Tax Office…..drew up the report of 29. 4.4.2015, in which it fully adopted the findings of the Financial Police, from which, in its assessment, it appeared that the foreign firms treated the appellant and Praxis as a single enterprise, in the interests of the same person. In the same report, it proposed to impose a fine on the appellant for the receipt by it of invoices issued by the Cypriot company which were partially fictitious in terms of price. There followed the 173/29.4.2015 act of the Head of the Athens IZ Tax Office, by which, invoking Articles 2(2)(a) and (b) of the Greek Tax Code, the Head of the Athens Tax Office issued a decision of the Head of the Athens Tax Office. 1 and 18 par. 2 of the Commercial Code and 5 par. 10 and 19 par. 4 of Law No. 2523/1997, imposed a fine on the appellant for receiving partially fictitious tax information, amounting to twice the value of the transactions classified as fictitious (€3,384,906 x 2 = €6,769,813). “ 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. Judgement of the Supreme Administrative 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
US vs Whirlpool, May 2020, US tax court, Case No. 13986-17

US vs Whirlpool, May 2020, US tax court, Case No. 13986-17

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),â€. 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-050520-TC-Opinion
Canada vs Loblaw Financial Holdings Inc., April 2020, Federal Court of Appeal, Case No 2020 FCA 79

Canada vs Loblaw Financial Holdings Inc., April 2020, Federal Court of Appeal, Case No 2020 FCA 79

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 judgement in favor of Loblaw was delivered in April 2020. Canada-vs-Loblaw-April-2020-SC
Switzerland vs Coffee Machine Group, April 2020, Federal Supreme Court, Case No 2C_354/2018

Switzerland vs Coffee Machine Group, April 2020, Federal Supreme Court, Case No 2C_354/2018

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. Judgement 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 Swiss BO 2c_354-2018

Sweden vs Flir Commercial Systems AB, March 2020, Stockholm Administrative Court, Case No 28256-18

In 2012, Flir Commercial Systems AB sold intangible assets from a branch in Belgium and subsequently claimed a tax relief of more than SEK 2 billion in fictitious Belgian tax due to the sale. The Swedish Tax Agency decided not to allow relief for the Belgian “tax”, and issued a tax assessment where the relief of approximately SEK 2 billion was denied and a surcharge of approximately SEK 800 million was added. The Administrative Court concluded that the Swedish Tax Agency was correct in not allowing relief for the fictitious Belgian tax. A double taxation agreement applies between Sweden and Belgium. In the opinion of the Administrative Court, the agreement prevents Belgium from taxing the assets. Consequently, any fictitious tax cannot be deducted. The Administrative Court also considers that the Swedish Tax Agency was correct in imposing a tax surcharge and that there is no reason to reduce the surcharge. The company’s appeal is therefore rejected. Click here for translation FÖRVALTNINGSRÄTTEN I STOCKHOLM MÃ¥l nr 28256-18, 28261-18 och 22183-19

Australia vs BHP Biliton Limited, March 2020, HIGH COURT OF AUSTRALIA, Case No [2020] HCA 5

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. Australia-vs-BHP-Billiton-Ltd-March-2020
Netherlands vs Hunkemöller B.V., January 2020, AG opinion - before the Supreme Court, Case No ECLI:NL:PHR:2020:102

Netherlands vs Hunkem̦ller B.V., January 2020, AG opinion Рbefore the Supreme Court, Case No ECLI:NL:PHR:2020:102

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

Taiwan vs Goodland, February 2020, Supreme Administrative Court, Case No 147 of 109

Goodland Taiwan had sold 7 machines to a local buyer via a related party in Hongkong thus avoiding taxes on sales profits. The transaction had been audited by the Taiwanese tax administration and an assessment issued. Goodland brought the case to court. The Supreme Administrative court dismissed the appeal and upheld the assessment. “The appeal alleges that the original judgment failed to conduct an investigation, but does not specify what the original judgment found to be wrong or what specific legal norm was violated. In fact, Article 2 of the Regulations Governing the Recognition of Income from Controlled Foreign Enterprises by Profit-making Enterprises, as cited in the appeal, states that Article 3 and Article 4, paragraph 2, of the Regulations Governing the Recognition of Income from Controlled Foreign Enterprises and the Unusual Transfer Pricing Check for Business Enterprises, as cited in the appeal, are all specific to the income tax law and may not be consistent with the judgment of related parties under the business tax law. In addition, in this case, the U.S. and local companies are at least covered by the fact that the income tax of the business is not in compliance with the requirements of Article 3 and Article 4(2) of the regular transfer pricing audit. The method of recognizing the income of a controlled foreign enterprise is based on the premise that there is a difference between domestic and foreign income tax liabilities, and is not related to the determination of related parties under business tax law. It is difficult to argue that the original decision did not apply these provisions and that the application of the law was incorrect or that the reasons for the decision were inadequate.As to the statement in the appeal that “the factual findings of the original judgment are contrary to the law of civil contracts”, the reasoning of the appeal is that “the original judgment is contrary to the law of civil contracts”.It is not clear what the specific breach of the law is, as the argument is brief and vague and lacks a complete legal reasoning.3. In conclusion, the original decision is clear and detailed and there is nothing that can be said to be unlawful. The grounds of appeal, as set forth in the original judgment, are only general allegations of the application of the law, but not specific allegations of “inapplicability of the law”, “improper application of the law”, or “the circumstances listed in Article 243, Paragraph 2 of the Administrative Procedure Law”. In accordance with the preceding provisions and explanations, the appeal should be considered unlawful.” Click here for English Translation 最高行政法院109å¹´è£å­—第147號è£å®š
Czech Republic vs. ACTRAD s.r.o., February 2020, Supreme Administrative Court, No. 7 Afs 176/2019 - 26

Czech Republic vs. ACTRAD s.r.o., February 2020, Supreme Administrative Court, No. 7 Afs 176/2019 – 26

The issue in this case was the pricing of advertising services acquired by ACTRAD s.r.o. from related parties PRESSTEX PRINT and PRESSTEX MEDIA . According to the authorities ACTRAD instead of acquiring advertising and promotional services directly from the sports clubs (which was possible), used the services of intermediaries PRESSTEX PRINT and PRESSTEX MEDIA, who increased the price of the services provided significantly (290, 229 and 102 times), without adding any value to the transaction. The final price paid for the advertisement thus increased 290 times in 2011, 229 times in the first half of 2012 and 102 times in the second half of 2012 compared to the initial invoice. This increase occurred while the content, scope and form of the services remained unchanged. The result of the arrangement was a reduction in the tax bases of ACTRAD s.r.o. The tax authorities issued an assessment of additional income taxes for FY 2011 and 2012 in a total amount of ~CZK 80.000.000. ACTRAD s.r.o. disagreed with the assessment and brought the case to court. The regional court ruled in favor of the tax authorities and this decision was then appealed the decision to the Supreme Administrative Court. Judgement of the Supreme Administrative Court The Supreme Administrative Court dismissed the appeal of ACTRAD s.r.o. as unfounded. “As has been repeatedly stated above, the tax authority, in full compliance with the wording of the law and the relevant case-law, sought out the entities to which advertising was also provided at the time and in the places in question (or, alternatively, obtained the prices of advertising directly from the provider). He then determined the reference price as the highest amount of the range found. This procedure does not require any expertise beyond that which is normally available to the tax authorities’ officials. The Court of Cassation also finds no merit in the complainant’s objection that the Regional Court should have departed ‘from the established judicial practice of evaluating expert reports’.” “In the opinion of the Supreme Administrative Court, the tax administration authorities acted in full compliance with the legal provisions and did not commit any faults for which the Regional Court should have annulled their decision. In the light of the above (proof of the existence of connected persons and different prices), it was for the complainant to explain and substantiate to its satisfaction the difference between the prices found. The complainant did not fulfil that obligation, since during the tax (and court) proceedings it did not allege or prove rational reasons for incurring costs higher than the normal price between persons in normal commercial relations.” “The Supreme Administrative Court did not find any other defects in the decisions of the tax administration authorities and the Regional Court for which their decisions should be annulled. Their conclusions are fully supported by the legislation and the administrative file and are fully reasoned. The Court of First Instance agrees with their assessment and adopts it in full and refers to it in detail. For that reason, the Court of Cassation could not even find it possible for the applicant to dispute their reasoning.” Click here for English Translation Click here for other translation 0176_7Afs_1900026A_20200213103130_20200303094022_prevedeno
Switzerland vs Swiss Investment AG, February 2020, Administrative Court Zurich, Case No SB.2018.00094 and SB.2018.00095

Switzerland vs Swiss Investment AG, February 2020, Administrative Court Zurich, Case No SB.2018.00094 and SB.2018.00095

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 Verwaltungsgericht

Luxembourg vs L SARL, January 2020, Luxembourg Administrative Tribunal, Case No 41800

In 2013, L SARL requested in writing an “advance tax agreement†regarding the tax treatment of Mandatory Redeemable Preference Shares (MRPS) which generated a preferred dividend for its sole shareholder. L SARL wanted confirmation that the MRPS would be characterised as debt and that payments under the MRPS would therefore be tax deductible. The tax administration issued an advance tax agreement confirming that the content of the request complied with the tax laws and administrative practices in force. However, despite the agreement the tax authorities challenged the 2013 tax return and demanded proof that the return on the MRPS complied with the arm’s length principle. L SARL found that such proof was not necessary since the MRPS’ tax treatment had already been agreed by the tax administration agreement. The tax administration disagreed and issued an assessment. The case was brought before the Administrative Tribunal. The Administrative Tribunal held that an advance tax agreement is binding upon the tax administration where the following conditions are met: the taxpayer’s question must be in writing; the taxpayer’s request must be sufficiently clear and complete to allow the LTA to adequately analyse the taxpayer’s situation; the tax administration’s answer must come from a duly authorised tax official, or an official who the taxpayer could legitimately expect to be duly authorised; the tax administration must have had the intention of being bound by the information given to the taxpayer; and the tax administration’s answer must have had decisive influence on the taxpayer. These conditions were met and the Tribunal concluded that the tax administration was bound to the advance tax agreement. The Tribunal added that in the presence of an advance tax agreement, the tax authority cannot characterise the same structure and operations as an abuse of law, since the reality and legality of the taxpayer’s actions has already been acknowledged. Click here for other translation Lux 280220 Case No 41800
Tax Avoidance Schemes
Netherlands vs "X S.à.r.l./B.V. ", January 2020, Supreme Court, Case No 18/00219 (ECLI:NL:HR:2020:21)

Netherlands vs “X S.à.r.l./B.V. “, January 2020, Supreme Court, Case No 18/00219 (ECLI:NL:HR:2020:21)

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. Judgement 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 Dutch-Case-No-18-00219-ORG

European Commission vs. Luxembourg and Fiat Chrysler Finance Europe, September 2019, General Court of the European Union, Case No. T-755/15

On 3 September 2012, the Luxembourg tax authorities issued a tax ruling in favour of Fiat Chrysler Finance Europe (‘FFT’), an undertaking in the Fiat group that provided treasury and financing services to the group companies established in Europe. The tax ruling at issue endorsed a method for determining FFT’s remuneration for these services, which enabled FFT to determine its taxable profit on a yearly basis for corporate income tax in the Grand Duchy of Luxembourg. In 2015, the Commission concluded that the tax ruling constituted State aid under Article 107 TFEU and that it was operating aid that was incompatible with the internal market. It also noted that the Grand Duchy of Luxembourg had not notified it of the proposed tax ruling and had not complied with the standstill obligation. The Commission found that the Grand Duchy of Luxembourg was required to recover the unlawful and incompatible aid from FFT. The Grand Duchy of Luxembourg and FFT each brought an action before the General Court for annulment of the Commission’s decision. They criticise the Commission in particular for: (1) having adopted an analysis leading to tax harmonisation in disguise; (2) having found that the tax ruling at issue conferred an advantage, notably on the ground that it did not comply with the arm’s length principle, contrary to Article 107 TFEU and to the obligation to state reasons and in breach of the principles of legal certainty and protection of legitimate expectations; (3) having found that that advantage was selective, contrary to Article 107 TFEU; (4) having found that the measure at issued restricted competition and distorted trade between Member States, contrary to Article 107 TFEU and to the obligation to state reasons; and (5) having breached the principle of legal certainty and infringed the rights of the defence, by ordering that the aid at issue be recovered. In it’s judgment, the General Court dismisses the actions and confirms the validity of the Commission’s decision. In the first place, with regard to the plea relating to tax harmonisation in disguise, the Court notes that, when considering whether the tax ruling at issue complied with the rules on State aid, the commission did not engage in any ‘tax harmonisation’ but exercised the power conferred on it by EU law by verifying whether that tax ruling conferred on its beneficiary an advantage as compared to ‘normal’ taxation, as defined by national tax law. In the second place, as regards the pleas relating to the absence of an advantage, the Court first considered whether, for a finding of an advantage, the Commission was entitled to analyse the tax ruling at issue in the light of the arm’s length principle as described by the Commission in the contested decision. In that regard, the Court notes in particular that, in the case of tax measures, the very existence of an advantage may be established only when compared with ‘normal’ taxation and that, in order to determine whether there is a tax advantage, the position of the recipient as a result of the application of the measure at issue must be compared with his position in the absence of the measure at issue and under the normal rules of taxation. The Court goes on to note that the pricing of intra-group transactions is not determined under market conditions. It states that, where national tax law does not make a distinction between integrated undertakings and stand-alone undertakings for the purposes of their liability to corporate income tax, that law is intended to tax the profit arising from the economic activity of such an integrated undertaking as though it had arisen from transactions carried out at market prices. The Court holds that, in those circumstances, when examining, pursuant to the power conferred on it by Article 107(1) TFEU, a fiscal measure granted to such an integrated undertaking, the Commission may compare the fiscal burden of such an integrated undertaking resulting from the application of that fiscal measure with the fiscal burden resulting from the application of the normal rules of taxation under the national law of an undertaking placed in a comparable factual situation, carrying on its activities under market conditions. The Court makes clear that the arm’s length principle as described by the Commission in the contested decision is a tool that allows the Commission to check that intra-group transactions are remunerated as if they had been negotiated between independent companies. Thus, in the light of Luxembourg tax law, that tool falls within the exercise of the Commission’s powers under Article 107 TFEU. The Commission was therefore, in the present case, in a position to verify whether the pricing for intra-group transactions endorsed by the tax ruling at issue corresponds to prices that would have been negotiated under market conditions. The Court further notes that it does not follow from the contested decision that the Commission found that every tax ruling necessarily constitutes State aid. Second, with regard to demonstrating the actual existence of an advantage, the Court examined whether the Commission was right to find that the methodology for calculating FFT’s remuneration, as endorsed by the tax ruling at issue, did not enable an arm’s length remuneration to be obtained and whether this resulted in a reduction of FFT’s taxable profit. In that regard, the Court concludes that the Commission correctly found that the arrangements for the application of the transactional net margin method (TNMM) endorsed by the tax ruling at issue were incorrect and, specifically, that the whole of FFT’s capital should have been taken into account and a single rate should have been applied. In any event, the Commission also correctly considered that the method consisting, on the one hand, in using FFT’s hypothetical regulatory capital and, on the other, in excluding FFT’s shareholdings in Fiat Finance North America (FFNA) and Fiat Finance Canada (FFC) from the amount of the capital to be remunerated could not result in an arm’s length outcome. Consequently, the Court finds that the methodology approved by the tax ruling

European Commission vs. The Netherlands and Starbucks, September 2019, General Court of the European Union, Case No. T-760/15 and T-636/16

In 2008, the Netherlands tax authorities concluded an advance pricing arrangement (APA) with Starbucks Manufacturing EMEA BV (Starbucks BV), part of the Starbucks group, which, inter alia, roasts coffees. The objective of that arrangement was to determine Starbucks BV’s remuneration for its production and distribution activities within the group. Thereafter, Starbucks BV’s remuneration served to determine annually its taxable profit on the basis of Netherlands corporate income tax. In addition, the APA endorsed the amount of the royalty paid by Starbucks BV to Alki, another entity of the same group, for the use of Starbucks’ roasting IP. More specifically, the APA provided that the amount of the royalty to be paid to Alki corresponded to Starbucks BV’s residual profit. The amount was determined by deducting Starbucks BV’s remuneration, calculated in accordance with the APA, from Starbucks BV’s operating profit. In 2015, the Commission found that the APA constituted aid incompatible with the internal market and ordered the recovery of that aid. The Netherlands and Starbucks brought an action before the General Court for annulment of the Commission’s decision. They principally dispute the finding that the APA conferred a selective advantage on Starbucks BV. More specifically, they criticise the Commission for (1) having used an erroneous reference system for the examination of the selectivity of the APA; (2) having erroneously examined whether there was an advantage in relation to an arm’s length principle particular to EU law and thereby violated the Member States’ fiscal autonomy; (3) having erroneously considered the choice of the transactional net margin method (TNMM) for determining Starbucks BV’s remuneration to constitute an advantage; and (4) having erroneously considered the detailed rules for the application of that method as validated in the APA to confer an advantage on Starbucks BV. In it’s judgment, the General Court annuls the Commission’s decision. First, the Court examined whether, for a finding of an advantage, the Commission was entitled to analyse the tax ruling at issue in the light of the arm’s length principle as described by the Commission in the contested decision. In that regard, the Court notes in particular that, in the case of tax measures, the very existence of an advantage may be established only when compared with ‘normal’ taxation and that, in order to determine whether there is a tax advantage, the position of the recipient as a result of the application of the measure at issue must be compared with his position in the absence of the measure at issue and under the normal rules of taxation. The Court goes on to note that the pricing of intra-group transactions is not determined under market conditions. It states that where national tax law does not make a distinction between integrated undertakings and stand-alone undertakings for the purposes of their liability to corporate income tax, that law is intended to tax the profit arising from the economic activity of such an integrated undertaking as though it had arisen from transactions carried out at market prices. The Court holds that, in those circumstances, when examining, pursuant to the power conferred on it by Article 107(1) TFEU, a fiscal measure granted to such an integrated company, the Commission may compare the fiscal burden of such an integrated undertaking resulting from the application of that fiscal measure with the fiscal burden resulting from the application of the normal rules of taxation under the national law of an undertaking placed in a comparable factual situation, carrying on its activities under market conditions. The Court makes clear that the arm’s length principle as described by the Commission in the contested decision is a tool that allows it to check that intra-group transactions are remunerated as if they had been negotiated between independent companies. Thus, in the light of Netherlands tax law, that tool falls within the exercise of the Commission’s powers under Article 107 TFEU. The Commission was therefore, in the present case, in a position to verify whether the pricing for intragroup transactions accepted by the APA corresponds to prices that would have been negotiated under market conditions. The Court therefore rejects the claim that the Commission erred in identifying an arm’s length principle as a criterion for assessing the existence of State aid. Second, the Court reviewed the merits of the various lines of reasoning set out in the contested decision to demonstrate that, by endorsing a method for determining transfer pricing that did not result in an arm’s length outcome, the APA conferred an advantage on Starbucks BV. The Court began by examining the dispute as to the Commission’s principal reasoning. It notes that, in the context of its principal reasoning, the Commission found that the APA had erroneously endorsed the use of the TNMM. The Commission first stated that the transfer pricing report on the basis of which the APA had been concluded did not contain an analysis of the royalty which Starbucks BV paid to Alki or of the price of coffee beans purchased by Starbucks BV from SCTC, another entity of the group. Next, in examining the arm’s length nature of the royalty, the Commission applied the comparable uncontrolled price method (CUP method). As a result of that analysis, the Commission considered that the amount of the royalty should have been zero. Last, the Commission considered, on the basis of SCTC’s financial data, that Starbucks BV had overpaid for the coffee beans in the period between 2011 and 2014. The Court holds that mere non-compliance with methodological requirements does not necessarily lead to a reduction of the tax burden and that the Commission would have had to demonstrate that the methodological errors identified in the APA did not allow a reliable approximation of an arm’s length outcome to be reached and that they led to a reduction of the tax burden. As regards the error identified by the Commission in respect of the choice of the TNMM and not of the CUP method, the Court finds that the Commission did not invoke any element to support as such
France vs Google, September 2019, Court approval of CJIP Agreement - Google agrees to pay EUR 1 billion in fines and taxes to end Supreme Court Case

France vs Google, September 2019, Court approval of CJIP Agreement – Google agrees to pay EUR 1 billion in fines and taxes to end Supreme Court Case

The district court of Paris has approved a  “convention judiciaire d’intérêt public” negotiated between the French state and Google for an amount of € 500 million plus another agreement with the French tax authorities which amounts to 465 million euros. The agreement puts an end to the French lawsuits against Google for aggressive tax evasion, and litigation with the tax administration relating to adjustments for the periods going from 2005 to 2018. The CJIP “convention judiciaire d’intérêt public“, was established by Article 22 of Law No. 2016-1691 of 9 December 2016 in France on transparency and fight against corruption. By Law No. 2018-898 of October 23, 2018 the law was extended to cover cases for tax evasion. According to the CJIP legal actions can be ended in return for the payment of a fine. The dispute concerned the existence of a permanent establishment of Google Ireland in France. In Googles European headquarters in Ireland the corporate tax rate is (12.5%). However, according to the French tax authorities most of the profits related to the French marked was attributable to a Permanent establishment in France. The case was first brought before the Administrative Court in Paris (July 2017) and then the Paris Administrative Court of Appeal (April 2019). Both courts found in favor of Google and canceled the tax adjustments. The state then brought the case before the French Supreme Court and now – to end the proceedings – Google has entered into the CJIP agreement. According to the agreement Google will not have to admit to tax avoidance or evasion. Click here for translation Google France The full CJIP agreement between France and Google have been published on the website of the French Agency for Anti-corruption. Click here for translation Google 190903_CJIP

Australia vs. Glencore, August 2019, High Court, Case No. [2019] HCA 26 S256/2018

The Australian Tax Office had obtained information from the Paradise Paper-leak and used the information in a tax assessment of Glencore. Glencore held that such leaked information was confidential (protected by legal professional privilege) and could not be used in a tax assessment. On that basis Glencore filed an appeal to the High Court. High Court Decision The Australien High Court dismissed the appeal and allowed use of the leaked information for tax assessment purposes. “In no way do these cases support the notion that common law courts elsewhere are granting injunctions with respect to privileged material on the basis only of the wrongfulness associated with its taking.  Certainly, it is necessary for an equity to arise that the person to be restrained must have an obligation of conscience, but the basis for an injunction is the need to protect the confidentiality of the privileged document. The plaintiffs’ case for the grant of relief on a basis other than confidentiality is simply this:  that any furtherance of the public interest which supports the privilege is sufficient to warrant the creation of a new, actionable right respecting privileged documents.  This is not how the common law develops.  The law develops by applying settled principles to new circumstances, by reasoning from settled principles to new conclusions, or determining that a category is not closed.  Even then the law as developed must cohere with the body of law to which it relates.  Policy considerations may influence the development of the law but only where that development is available having regard to the state of settled principles.  Policy considerations cannot justify an abrupt change which abrogates principle in favour of a result seen to be desirable in a particular case. In the absence of further facts it is not possible to say whether the plaintiffs are without any possibility of a remedy.  But if there is a gap in the law, legal professional privilege is not the area which might be developed in order to provide the remedy sought.” Australia vs Glencore August 2019 HC PP2

Japan vs. Universal Music Corp, June 2019, Tokyo District Court, Case No å¹³æˆ27(行ウ)468

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 Jap UM 2019

Netherlands vs Crop Tax Advisors, June 2019, Court of the Northern Netherlands, Case No 200.192.332/01

The question at issue was whether a tax adviser at Crop BV had acted in accordance with the requirements of a reasonably competent and reasonably acting adviser when advising on the so-called royalty routing and its implementation and when giving advice on trading. Click here for translation NL royalty routing1

France vs. Google, April 2019, Administrative Court of Appeal, Case N° 17PA03065

The French tax administration argued that Google had a permenent establishment in France because the parent company in the US and its subsidiary in Ireland had been selling a service – online ads – to customers in France. In 2017 the administrative court found that Google France did not have the capability to carry out the advertising activities on its own. Google Ireland Limited therefore did not have a permanent establishment in France. The same conclution was reached i 2019 by the Administrative court of appeal. Click here for translation France vs Google April 2019, No 17PA03065,
Spain vs SGL Carbon Holding, April 2019, Audiencia Nacional, Case No ES:AN:2019:1885

Spain vs SGL Carbon Holding, April 2019, Audiencia Nacional, Case No ES:AN:2019:1885

A Spanish subsidiary – SGL Carbon Holding SL – had significant financial expenses derived from an intra-group loan granted by the parent company for the acquisition of shares in companies of the same group. The taxpayer argued that the intra-group acquisition and debt helped to redistribute the funds of the Group and that Spanish subsidiary was less leveraged than the Group as a whole. The Spanish tax authorities found the transactions lacked any business rationale other than tax avoidance and therefor disallowed the interest deductions. The Court held in favor of the authorities. The court found that the transaction lacked any business rationale and was “fraud of law” only intended to avoid taxation. The Court also denied the company access to MAP on the grounds that Spanish legislation determines: Article 8 Reglamento MAP: Mutual agreement procedure may be denied, amongst other, in the following cases: … (d) Where it is known that the taxpayer’s conduct was intended to avoid taxation in one of the jurisdictions involved. (…) Click here for translation Spain vs SGL Carbon Holding April 22 2019 1885
Spain vs Acer Computer Ibérica S.A., March 2019, AUDIENCIA NACIONAL, Case No 125:2017, NFJ073359

Spain vs Acer Computer Ibérica S.A., March 2019, AUDIENCIA NACIONAL, Case No 125:2017, NFJ073359

Acer Computer Ibérica S.A. (ACI) is part of the multinational ACER group, which manufactures and distributes personal computers and other electronic devices. Acer Europe AG (AEAG), a group entity in Switzerland, centralises the procurement of the subsidiaries established in Europe, the Middle East and Africa, and acts as the regional management centre for that geographical area. ACI is responsible for the wholesale marketing of electronic equipment and material, as well as in the provision of technical service related to these products in Spain and Portugal. ACI is characterized as a limited risk distributor by the group. At issue was deductibility of payments resulting from factoring agreements undertaken ACI with unrelated banks, adopted to manage liquidity risks arising from timing mismatches between its accounts payable and accounts receivable. Based on an interpretation of the limited risk agreement signed between ACI and its principal AEAG, the tax authorities disregarded the allocation of the risk – and hence allocation of the relevant costs – to ACI. The tax authorities considered that the financial costs arising from the relocation of cancelled orders, those arising from differences in the criteria for calculating collection and payment deadlines and those arising from delays in shipments are due to the application of incorrect criteria for the accounting and invoicing of certain transactions. It also considers that the assumption of those costs by ACI is in contradiction with its classification as a low-risk distributor and does not comply with the distribution of functions and risks between ACI and AEAG, which results from the distribution contract and the transfer pricing report. An assessment for FY 2006 – 2008 where the costs were added back to the taxable income of Acer Computer Ibérica S.A. was issued. Judgement of the Federal Court The court dismissed the appeal of Acer and upheld the tax assessment in which deductions for the costs in question had been disallowed. Excerpts “The interpretation of the contract terms which we uphold follows the above mentioned OECD Guidelines: In arm’s length transactions, the contract terms generally define, expressly or implicitly, how responsibilities, risks and results are allocated between the parties.” “However, it is irrelevant, in view of the foregoing on the assumption of risk, that ACI’s financing costs are higher than those of comparable undertakings (as the tax authorities maintain), since the refusal of deductibility is based on the fact that the costs claimed to be deductible are not borne by the appellant in accordance with the terms of the contract.” Click here for English Translation Click here for other translation Spain vs Acer March 2019 AN ORG
European Commission vs. UK, April 2019, European Commission, Case no C(2019) 2526 final

European Commission vs. UK, April 2019, European Commission, Case no C(2019) 2526 final

Back in 2017 the European Commission opened an in-depth probe into a UK scheme that exempts certain transactions by multinational groups from the application of UK rules targeting tax avoidance. The EU commission concluded its investigations in a decision issued 2 April 2019. According to the decision the UK “Group Financing Exemption” is in breach of EU State aid rules. Under the Scheme foreign multinationals would benefit from tax exemption of profits related to payments of interest on intragroup loans. “In conclusion, the Commission finds that the United Kingdom has unlawfully implemented the contested measure to the benefit of certain UK resident companies in breach of Article 108(3) of the Treaty. The Commission also finds that the Group Financing Exemption constitutes State aid that is incompatible with the internal market within the meaning of Article 107(1) of the Treaty, in as far as it applies to non-trading finance profits from qualifying loan relationships, which profits fall within Section 371EB (UK activities) of TIOPA. By virtue of Article 16 of Regulation (EU) 2015/1589 the United Kingdom is required to recover all aid granted to the beneficiaries of the Group Financing Exemption.” “The group financing exemption scheme, included in the Taxes Acts as Chapter 9 of Part 9A of Taxation (International and Other Provisions) Act 2010, constitutes aid within the meaning of Article 107(1) of the Treaty, in as far as it applies to non-trading finance profits from qualifying loan relationships, which profits fall within Section 371EB (UK activities) of Part 9A of TIOPA. It does not constitute aid when applied to non-trading finance profits from qualifying loan relationships that fall within Section 371EC (capital investments from the UK) of Part 9A of TIOPA and that do not fall within Section 371EB (UK activities) of Part 9A of TIOPA. To the extent that the group financing exemption scheme constitutes aid, it forms an ‘aid scheme’ within the meaning of Article 1(d) of Regulation (EU) No. 2015/1589. The aid granted under the aid scheme is incompatible with the internal market and was unlawfully put into effect by the United Kingdom in breach of Article 108(3) of the Treaty. “The United Kingdom shall recover all incompatible aid granted under the aid scheme from the beneficiaries of that aid.” “Recovery of the aid in accordance with Article 2 shall be immediate and effective.” “(1) Within two months following notification of this Decision, the United Kingdom shall submit the following information to the Commission: (a) a list of the beneficiaries that have received aid under the aid scheme; (b) a list of the tax payers that have applied the group financing exemption to non-trading finance profits from qualifying loan relationships falling within Section 371EC (capital investments from the UK) of Part 9A of TIOPA and not falling within Section 371EB (UK activities) of Part 9A of TIOPA; (c) for each beneficiary, the CFC charge actually charged in determining the beneficiary’s liability under the corporate income tax return, for each tax year that he has applied the group financing exemption, as well as the relevant corporate income tax return forms;128 (d) for each beneficiary, the CFC charge that would have been charged if he had not applied the group financing exemption, including underlying calculations, for each tax year that the beneficiary has applied the group financing exemption; (e) the total aid amount and its detailed calculation (principal aid amount and recovery interest) to be recovered from each beneficiary; (f) documents demonstrating that the beneficiaries have been ordered to repay the aid. (2) For each beneficiary, the United Kingdom shall supply the Commission with supporting evidence demonstrating how the extent to which non-trading finance profits from qualifying loan relationships fall within Section 371EB of Part 9A of TIOPA has been calculated. (3) For each tax payer, referred to in paragraph (1)(b) of this Article, the United Kingdom shall supply the Commission with supporting evidence demonstrating that the non-trading finance profits from qualifying loan relationships fall within Section 371EC of Part 9A of TIOPA and do not fall within Section 371EB of Part 9A of TIOPA. (4) The United Kingdom shall keep the Commission informed of the progress of the national measures taken to implement this Decision until recovery of the aid in accordance with Article 2 has been completed. On request by the Commission, it shall immediately submit information on the national measures already taken and on those planned to be taken, in order to comply with this Decision, including detailed information on the amounts of aid and recovery interest already recovered from the beneficiaries.” The UK government together with a long list of 75 Multinational Groups benefitting from the Scheme have appealed the decision to the General Court of the European Union. Related TP guidelinesRelated TP case laws TPG2022 Chapter X paragraph 10.66As a credit rating depends on a combination of quantitative and qualitative factors, there is still likely to be some variance in creditworthiness between borrowers with the same credit rating. In addition, when making comparisons between borrowers using the kind of financial metrics... TPG2022 Chapter X paragraph 10.96In considering arm’s length pricing of loans, the issue of fees and charges in relation to the loan may arise. 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Austria vs LU Ltd, March 2019, VwGH, Case No Ro 2018713/0004

Austria vs LU Ltd, March 2019, VwGH, Case No Ro 2018713/0004

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 Austrich vs Corp 27 March 2019 RO-2018-13-0004
New Zealand vs Cullen Group Limited, March 2019, New Zealand High Court, Case No [2019] NZHC 404

New Zealand vs Cullen Group Limited, March 2019, New Zealand High Court, Case No [2019] NZHC 404

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. 1Cuo

Denmark vs T and Y Denmark, February 2019, European Court of Justice, Cases C-116/16 and C-117/16

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. eur-lex.europa.eu_

Denmark vs N, X, C, and Z Denmark, February 2019, European Court of Justice, Cases C-115/16, C-118/16, C-119/16 and C-299/16

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. EU-NXCZ
Russia vs Ashin Steel Trading House, February 2019, Court of Appeal, Case No. A76-19287/2018

Russia vs Ashin Steel Trading House, February 2019, Court of Appeal, Case No. A76-19287/2018

A group company, PI, purportedly provided management services to the Ashin Steel Trading House. During the audit for FY 2013-2015 the tax authority came to the conclusions that Ashin Steel Trading House and the PI had “deliberately created a management relationship scheme so that service providers are listed on the staff of an entrepreneur who pays tax on the ONS with the object of taxation “income””. Significant sums of money was transferred to PIs in the form of payments for the provision of management services for their subsequent withdrawal and to the accounts of an individual (from the accounts of the PI), which allowed the Company to minimize tax revenues. The tax authority recalculated the Company’s expenses for the management services, using a combination of transfer pricing methods – cost plus and comparable profitability. The Decision of the Court of Appeal: The CUP method has priority, but in cases where it is not subject to application, the tax authority has the right to use one of the other methods:“Thus, the provisions of Article 105.7 of the Russian National Assembly do not establish the mandatory consistent application of methods for determining the market price of goods established by subparagraphs 2-5 paragraphs 1 of Article 105.7 of the Russian Federation, in the event that the method of comparable market prices cannot be applied. The tax authority in this case is entitled to choose from any remaining methods, as well as their « combination.” Due to the specifics of the PI’s activities, it was not possible to apply the CUP method, so instead the tax authorities had used a combination of methods. On this issue the Court stated: “the method used by the tax authority to determine costs is not contrary to tax law“. The court also referred to the industry-based performance measures summarized by the Federal Tax Service: The profitability of similar activities in 2013-2015 is significantly lower than the indicators used by the tax authority, in connection with which the court correctly stated that the measures applied by the tax authority do not violate the rights of the taxpayer. Click here for translation A76-19287-2018

Italy vs Dolce & Gabbana, December 2018, Supreme Court, Case no 33234/2018

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 Italy vs Dolce & Gabbana 21122018 Supreme Court Case No 33234 2018
Switzerland vs "Pharma X SA", December 2018, Federal Supreme Court, Case No 2C_11/2018

Switzerland vs “Pharma X SA”, December 2018, Federal Supreme Court, Case No 2C_11/2018

A Swiss company manufactured and distributed pharmaceutical and chemical products. The Swiss company was held by a Dutch parent that held another company in France. R&D activities were delegated by the Dutch parent to its French subsidiary and compensated with cost plus 15%. On that basis the Swiss company had to pay a royalty to its Dutch parent of 2.5% of its turnover for using the IP developed. Following an audit the Swiss tax authorities concluded that the Dutch parent did not contribute to the development of IP. In 2006 and 2007, no employees were employed, and in 2010 and 2011 there were only three employees. Hence the royalty agreement was disregarded and an assessment issued where the royalty payments were denied. Instead the R&D agreement between the Dutch parent and the French subsidiary was regarded as having been concluded between the Swiss and French companies Judgement of the Supreme Court The Court agreed with the decision of the tax authorities. The Dutch parent was a mere shell company with no substance. Hence, the royalty agreement was disregarded and replaced with the cost plus agreement with the French subsidiary. The Court found that it must have been known to the taxpayer that a company without substance could not be entitled to profits of the R&D activities. On that basis an amount equal to 75% of the evaded tax had therefore rightly been imposed as a penalty. Click here for English translation Click here for other translation 2C_11-2018
South Africa vs Sasol Oil, November 2018, Supreme Court of Appeal, Case No 923/2017

South Africa vs Sasol Oil, November 2018, Supreme Court of Appeal, Case No 923/2017

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

New Zealand vs Frucor Suntory, November 2018, High Court, Case No NZHC 2860

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 excessiveâ€; 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 NewZealand 2018

Netherlands vs X B.V., November 2018, Supreme Court, Case No 17/03918

A Dutch company, Lender BV, provided loans to an affiliated Russian company on which interest was paid. The Dispute was (1) whether the full amount of interest should be included in the taxable income in the Netherlands, or if part of the “interest payment” was subject to the participation exemption or (2) whether the Netherlands was required to provide relief from double taxation for the Russian dividend tax and, if so, to what amount. The Tax court found it to be a loan and the payments therefor qualified as interest and not dividend. The participation exemption does not apply to interest. In addition, the court ruled that the Russian thin-capitalization rules did not have an effect on the Netherlands through Article 9 of the Convention for the avoidance of double taxation between the Netherlands and Russia. Application of the participation exemption was not an issue. In the opinion of the court, a (re) qualification of interest as a dividend on the basis of the thin capitalization rules in Russia cannot be based on Article 10 of the Treaty. This has not been explicitly included in the text of the treaty and, in the opinion of the court, could not have been the intention of the countries in the absence of a concrete substantiation with facts and / or circumstances. Since the income on the basis of Article 11 of the Treaty cannot be taxed in Russia, the Netherlands is not required to provide relief from double taxation for the Russian dividend tax deducted therefrom. The appeal is unfounded. Click here for other translation NL vs Loan BV19

UK vs GDF Suez Teesside, October 2018, UK Court of Appeal, Case No [2018] EWCA Civ 2075

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). ”GDF EWCA Civ 2075 (05 October 2018)”]
Canada vs Cameco Corp., October 2018, Tax Court of Canada, Case No 2018 TCC 195

Canada vs Cameco Corp., October 2018, Tax Court of Canada, Case No 2018 TCC 195

Canadian mining company, Cameco Corp., sells uranium to a wholly owned trading hub, Cameco Europe Ltd., registred in low tax jurisdiction, Switzerland, which then re-sells the uranium to independent buyers. The parties had entered into a series of controlled transactions related to this activity and as a result the Swiss trading hub, Cameco Europe Ltd., was highly profitable. Following an audit, the Canadian tax authorities issued a transfer pricing tax assessment covering years 2003, 2005, 2006, and later tax assessments for subsequent tax years, adding up to a total of approximately US 1.5 bn in taxes, interest and penalties. The tax authorities first position was that the controlled purchase and sale agreements should be disregarded as a sham as all important functions and decisions were in fact made by Cameco Corp. in Canada. As a second and third position the tax authorities held that the Canadian transfer pricing rules applied to either recharacterise or reprice the transactions. The Tax Court concluded that the transactions were not a sham and had been priced in accordance with the arm’s length principle. The tax authorities have now decided to appeal the decision with the Federal Court of Appeal. See also Canada vs Cameco Corp, Aug 2017, Federal Court, Case No T-856-15 and Cameco’s settelment with the IRS Canada-vs-Cameco-Corp-Oct-2018tcc195
European Commission concludes on investigation into Luxembourg's tax treatment of McDonald's under EU state aid regulations, September 2018

European Commission concludes on investigation into Luxembourg’s tax treatment of McDonald’s under EU state aid regulations, September 2018

Following an investigation into Luxembourg’s tax treatment of McDonald’s under EU state aid regulations since 2015, the EU Commission concluded that the tax rulings granted by Luxembourg to McDonald’s in 2009 did not provide illegal state aid. According to the Commission, the law allowing McDonald’s to escape taxation on franchise income in Luxembourg – and the US – did not amount to an illegal selective advantage under EU law. The double non-taxation of McDonald’s franchise income was due to a mismatch between the laws of the United States and Luxembourg. See the 2015 announcement of formal opening of the investigations into McDonald’s tax agreements with Luxembourg from the EU Commission EU vs McDonal IP-18-5831_EN

Canada vs Bank of Montreal, September 2018, Tax Court of Canada, Case No 2018 TCC 187

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 (“BMOâ€) 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 structureâ€. 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 LPâ€) in which BMO had a 99.9% interest and a wholly owned subsidiary of BMO named BMO G.P. Inc. (“BMO GPâ€) had a 0.1% interest; (b) a Nova Scotia unlimited liability company named BMO (NS) Investment Company (“NSULCâ€) that was wholly owned by Funding LP; and (c) a Delaware limited liability company named BMO (US) Funding LLC (“LLCâ€) 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,

Canada vs Loblaw Companies Ltd., September 2018, Canadian tax court, Case No 2018 TCC 182

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.“ LOBLAW-FINANCIAL-HOLDINGS-INC-2076_2015-2998_IT_G
Russia vs Togliattiazot, September 2018, Russian Arbitration Court, Case No. No. Ð55-1621 / 2018

Russia vs Togliattiazot, September 2018, Russian Arbitration Court, Case No. No. Ð55-1621 / 2018

A Russian company, Togliattiazot, supplied ammonia to the external market through a Swiss trading hub, Nitrochem Distribution AG. The tax authority found that the selling price of the ammonia to Nitrochem Distribution AG had not been determined by Togliattiazot in accordance with the arm’s length principle but had been to low. Hence, a transfer pricing assessment was issued where the CUP method was applied. At first, the company argued that Togliattiazot and Nitrochem Distribution AG were not even affiliates. Later, the company argued that transfer prices had been determined in accordance with the TNM-method. The court ruled in favor of the Russian tax authority. Based on information gathered by the tax authorities – SPARK-Interfax and Orbis Bureau Van Djik bases, Switzerland’s trade register, Internet sites, and e-mail correspondence etc – the tax authorities were able to prove in court, the presence of actual control between Togliattiazot and Nitrochem. The TNMM method applied by Togliattiazot was rejected by the court because “the method applied by the taxpayer, based on the conditions of the controlled transaction, did not allow determining the comparability with the conditions of comparable transactions between non-related partiesâ€. Click here for other translation Russia-TP-case-A55-1621-2018_20180906_Reshenie
US vs Pacific management Group, August 2018, US Tax Court Case, Memo 2018-131

US vs Pacific management Group, August 2018, US Tax Court Case, Memo 2018-131

This case concerned a tax scheme where taxable income was eliminated using factoring and management fees to shift profits. The Tax Court held that the scheme was in essence an attempt to eliminate the taxes. Factoring and management fees were not deductible expenses but rather disguised distributions of corporate profits and generally currently taxable to the individual shareholders as constructive dividends or as income improperly assigned to the corporations. In the TC Memo interesting views on the arm’s length nature of factoring and management fees is elaborated upon. TC memo 2018-131 US vs Pacific management Group 20aug 2018 TC memo 2018-131
Tax Avoidance Schemes
European Commission's investigations into member state transfer pricing and tax ruling practices

European Commission’s investigations into member state transfer pricing and tax ruling practices

Since June 2013, the European Commission has been investigating tax ruling practices of EU Member States. A Task Force was set up in summer 2013 to follow up on allegations of favourable tax treatment of certain companies, in particular in the form of unilateral tax rulings. The Treaty on the Functioning of the European Union (“TFEUâ€) provides that “any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.â€. The State aid rules ensures that the functioning of the internal market is not distorted by anticompetitive behavior favouring some to the detriment of others. In June 2014 the Commission initiated a series of State aid investigations on Multinational Corporations related to transfer pricing practices and rulings. Final decisions now have been published in cases against: Ireland/Apple (Appealed to the EU Court) Belgium/Excess Profit Exemption (Final decision by the EU Court) The Netherlands/Starbucks (Appealed to the EU Court) Luxembourg/Fiat (Appealed to the EU Court) And formal investigations have later on been opened against: Luxembourg/Amazon Luxembourg/McDonald’s Luxembourg/GDF Suez(now Engie) In December 2014 the Commission extended the investigation to tax rulings from all Member States. Follow these investigations on the European Commission homepage for State Aid, Tax rulings State Aid – Tax rulings See the “TAXE 1” report by the European Parliament’s Special Committee on Tax Rulings and Measures Similar in Nature or Effect (“the TAXE Committee”) below. EU Special Committee, November 2015, Report on Tax Rulings and Other Measures
Netherlands vs X B.V., November 2018, Supreme Court, Case No 17/03918

Netherlands vs X B.V., November 2018, Supreme Court, Case No 17/03918

Company X B.V. held all the shares in the Irish company A. The Tax Agency in the Netherlands claimed that the Irish company A qualified as a “low-taxed investment participation”. The court agreed, as company A was not subject to a taxation of 10 per cent or more in Ireland. The Tax Agency also claimed that X B.V.’s profit should include a hidden dividend due to company A’s providing an interest-free loan to another associated Irish company E. The court agreed. Irish company E had benefited from the interest-free loan and this benefit should be regarded as a dividend distribution. It was then claimed by company X B.V, that the tax treaty between the Netherlands and Ireland did not permit including hidden dividends in X’s profit. The Supreme Court disagreed and found that the hidden dividend falls within the scope of the term “dividends†in article 8 of the tax treaty. Click here for other translation Nederland July 2018 ECLI NL PHR 2018 737
Spain vs ICL ESPAÑA, S.A. (Akzo Nobel), March 2018, Audiencia Nacional, Case No 1307/2018  ECLI:ES:AN:2018:1307

Spain vs ICL ESPAÑA, S.A. (Akzo Nobel), March 2018, Audiencia Nacional, Case No 1307/2018 ECLI:ES:AN:2018:1307

ICL ESPAÑA, S.A., ICL Packaging Coatings, S.A., were members of the Tax Consolidation Group and obtained extraordinary profits in the financial years 2000, 2001 and 2002. (AKZO NOBEL is the successor of ICL ESPAÑA, as well as of the subsidiary ICL PACKAGING.) On 26 June 2002, ICL ESPAÑA, S.A. acquired from ICL Omicron BV (which was the sole shareholder of ICL ESPAÑA, S.A. and of Elotex AG and Claviag AG) 45.40% of the shares in the Swiss company, Elotex AG, and 100% of the shares in the Swiss company of Claviag AG. The acquisition was carried out by means of a sale and purchase transaction, the price of which was 164.90 million euros, of which ICL ESPAÑA, S.A. paid 134.90 million euros with financing granted by ICL Finance, PLC (a company of the multinational ICL group) and the rest, i.e. 30 million euros, with its own funds. On 19 September 2002, ICL Omicron BV contributed 54.6% of the shares of Elotex AG to ICL ESPAÑA, S.A., in a capital increase of ICL ESPAÑA, S.A. with a share premium, so that ICL ESPAÑA, S.A. became the holder of 100% of the share capital of Elotex AG. The loan of 134,922,000 € was obtained from the British entity, ICL FINANCE PLC, also belonging to the worldwide ICL group, to finance the acquisition of the shares of ELOTEX AG. To pay off the loan, the entity subsequently obtained a new loan of €75,000,000. The financial burden derived from this loan was considered by ICL ESPAÑA as an accounting and tax expense in the years audited, in which for this concept it deducted the following amounts from its taxable base – and consequently from that of the Group: FY 2005 2,710,414.29, FY 2006 2,200,935.72, FY 2007 4,261,365.20 and FY 2008 4.489.437,48. During the FY under review, ICL ESPAÑA SA has considered as a deductible expense for corporate tax purposes, the interest corresponding to loans obtained by the entity from other companies of the group not resident in Spain. The financing has been used for the acquisition of shares in non-resident group companies, which were already part of the group prior to the change of ownership. The amounts obtained for the acquisition of shares was recorded in the groups cash pooling accounts, the entity stating that “it should be understood that the payments relating to the repayment of this loan have not been made in accordance with a specific payment schedule but rather that the principal of the operation has been reduced through the income made by Id ESPAÑA SA from the cash available at any given time”. Similarly, as regards the interest accrued on the debit position of ICL ESPAÑA SA, the entity stated that “the interest payments associated with them have not been made according to a specific schedule, but have been paid through the income recorded by ICL ESPAÑA SA in the aforementioned cash pooling account, in the manner of a credit policy contract, according to the cash available at any given time”. The Spanish tax authorities found the above transactions lacked any business rationale other than tax avoidance and therefor disallowed the interest deductions for tax purposes. This decision was appealed to the National Court. Judgement of the National Court The Court partially allowed the appeal. Excerpts “It follows from the above: 1.- The purchase and sale of securities financed with the loan granted by one of the group companies did not involve a restructuring of the group itself. The administration claims that the transfer of 100% ownership of the shares of both Swiss companies is in all respects formal. And it is true that no restructuring of the group can be seen as a consequence of the operation, nor is this alleged by the plaintiff. 2.- There are no relevant legal or economic effects apart from the tax savings in the operation followed, since, as we have pointed out, we are dealing with a merely formal operation, with no substantive effect on the structure and organisation of the Group. 3.- The taxation in the UK of the interest on the loan does not affect the correct application of Spanish tax legislation, since, if there is no right to deduct the interest generated by the loan, this is not altered by the fact that such interest has been taxed in another country. It is clear that the Spanish authorities cannot make a bilateral adjustment in respect of the amounts paid in the United Kingdom for the taxation of the interest received. For this purpose, provision is made for the mutual agreement procedure under Article 24 of the Convention between the Kingdom of Spain and the United Kingdom of Great Britain and Northern Ireland for the avoidance of double taxation and the prevention of fiscal evasion in relation to taxes on income and on capital and its Protocol, done at London on 14 March 2013 (and in the same terms the previous Instrument of Ratification by Spain of the Convention between Spain and the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion in respect of Taxes on Income and on Capital, done at London on 21 October 1975, Article 26 ).” “For these reasons, we share the appellant’s approach and we understand that the non-compliance with the reinvestment takes place in the financial year 2004 (as the start of the calculation of the three-year period is determined by the deed of sale dated 29 June 2001), and that therefore the regularisation on this point should be annulled because it corresponds to a financial year not covered by the inspection.” “Therefore, and in the absence of the appropriate rectification, this tax expense would be double-counted, firstly because it was considered as a tax expense in 1992 and 1999, and secondly because it was included in seventh parts – in 2003 and in the six subsequent years – only for an amount lower than the amount due, taking into account the proven
Italy vs Coim S.p.A., January 2018, Supreme Court, Case No 2240/2018

Italy vs Coim S.p.A., January 2018, Supreme Court, Case No 2240/2018

Following a judgement by Regional Administrative Tribunal an appeal was filed by Coim S.p.A Among various other issues Coim S.p.A. complains of breach and misapplication of Article 9 of Presidential Decree No 917 of 22 December 1986, pursuant to Article 360(1)(3) of the Code of Civil Procedure, on the ground that the Regional Administrative Tribunal held that the recovery of the higher price calculated on the basis of the presumed normal value of the transfers made by the taxpayer to certain subsidiaries was lawful. The taxpayer claims that the appeal judges erred in finding that the Office had correctly applied the so-called CUP (comparable uncontrolled price method) price comparison method to determine normal value, in particular as regards the identification of the relevant market, the different stage of marketing of the goods tested compared to the comparative goods and the different commercial functions performed by the subsidiaries compared to the comparators. Judgement of the Supreme Court Indeed, the grounds of the judgment under appeal do not indicate the application of different parameters for the purpose of calculating the normal value of the goods or services transferred from those laid down by the OECD Guidelines referred to in the application. The criticism is therefore intended, rather, to challenge the result of the assessment made in this regard on the basis of the alleged use of reference data different from those prescribed or in any event inadequate, thus placing the criticism not on the rule of judgement applied but rather on the recognition of the fact, which can be criticised, if necessary, only in terms of motivation, pursuant to and within the limits of Article 360, paragraph 1, no. 5, of the Code of Civil Procedure. … 16. By the third ground of appeal, the appellant alleges infringement and misapplication of Article 9 of the consolidated law on income tax, Article 11 of the Sixth Council Directive 77/388/EEC of 17 May 1977 and Article 13 of Presidential Decree No 633 of 26 October 1972, in relation to Article 360(1)(3) of the Code of Civil Procedure, in so far as the C.T.R. failed to find that the act imposing penalties was unlawful because it erroneously assumed that the normal value of the prices of goods sold between intra-group companies was also relevant for the purpose of determining the taxable amount for VAT, and in any event because it determined that value on the basis of criteria which did not comply with the OECD directives. The appellant also complains, at the same time, of a defect in the statement of reasons, on the ground that the C.T.R. made irrelevant and wholly inadequate findings. … 18. The third ground of appeal is well-founded in so far as it alleges, in a manner which is sufficient to answer all other complaints, breach of the law in relation to the deemed applicability of the rules on transfer pricing also for the purposes of determining the VAT taxable amount. Transfer pricing is based on the concept of normal market value as set forth in Articles 9 and 76, paragraph 5 (now 110, paragraph 7) of Presidential Decree No. 917 of 22 December 1986 (see also Article 9 of the OECD Model Convention) and meets the need for a fair division of profits in the various countries where multinational groups operate. For VAT, on the other hand, the consideration actually received is a key element of the tax application mechanism, based on the principle of neutrality of the tax (which would be violated if the taxable base were calculated as an amount hypothetically higher than the consideration received): a principle which has always been derived from the EU Directives (most recently set forth in Article 73 of Directive 112/2006/EC) and implemented in Italy by Article 13 of Presidential Decree No. 633 of 26 October 1972. In particular, Article 17 of the Sixth Council Directive 77/388/EEC of 17 May 1977 links the right to deduct to the chargeability and inherent nature of the acquisition of the goods or services, without making any reference, and in any event not directly, to the value of the goods or services. The European Court has also held that the fact that an economic transaction is carried out at a price above or below the normal market price is irrelevant (ECJ, 20 January 2005, Case C-412/03, Hotel Scandic Gasabach, p. 22). Nor is there tax avoidance or evasion if the goods or services are supplied at artificially low or high prices between the parties, both of whom have a right to deduct VAT, as it is only at the level of the final consumer that tax losses may occur (CJEC 26 April 2012, Joined Cases C-621/10 and C-129/11, Balkan, p.47). The taxable amount for the supply of goods or services for consideration thus consists of the consideration actually received by the taxable person and represents the subjective value actually received and not an estimated value according to objective criteria (CJEU, 19 December 2012, case C-549/11, p. 48-49; CJEU, 26 April 2012, cited above, p. 43; CJEU, 5 April 2012, cited above, p. 43), p.43; Court of Justice, 5 February 1981, Cooperatieve Aardappelenbewaarplaats, 154/80, p.13; guideline reiterated also for group transactions: Court of Justice, 9 June 2011, case C-285/10, Campsa Estaciones de Servicio SA, p.27). Explicit confirmations in this regard are also to be found in the recent intervention of the European Commission, summarised in Working Paper 923 of 28 February 2017. It should therefore be reiterated that “under normal conditions, the Administration is not allowed to recalculate the value of the services purchased by the entrepreneur, excluding the right to deduct if the value is deemed uneconomic and therefore different from the one to be considered normal or in any case such as to produce an economic result” (Court of Cassation 04/06/2014, no. 12502, to which we refer also for other case law references). The calculation of VAT on the consideration may be disregarded if the tax authorities demonstrate the manifest and macroscopic uneconomic nature
India vs. Vodafone India Services Pvt Ltd, Jan 2018, ITA No.565 Ahd 2017

India vs. Vodafone India Services Pvt Ltd, Jan 2018, ITA No.565 Ahd 2017

The 2018 Vodafone case from India – whether termination of option rights under an agreement can be treated as a “deemed international transaction” under section 92B(2) of the Income Tax Act. Vodafone India Services had a call option to buy shares in SMMS Investment Pvt Ltd — which held 5.11% equity capital of the Vodafone India through a web of holdings for 2.78 crore if the fair market value of these shares was less than 1,500 crore. If the fair market value was higher, it had to pay a little more. Under the same agreement, if Vodafone India Services terminated its right to acquire the share, the company would have to pay Rs 21.25 crore. Instead of exercising the call option and acquiring the valuable shares at a very low price, Vodafone India Service terminated the option and paid 21.25 crore. The tax administration held that the Vodafone India Service should have received a substantial consideration for not exercising the option. Vodafone India Services held that termination of an option was not a transaction. It also argued that it was not an international transaction, but a deal between domestic companies. The tribunal held in favor of the tax administration. The deal was deemed an international transaction. The consideration value was to be based on the price of the shares that was later sold in the market. Se also India vs. Vodafone 2012 India vs Vodafone India Services Pvt Ltd, Jan 2018, ITA No.565 Ahd 2017 -
Spain vs. Afinsa and Filatelico, Nov. 2017, Supreme Court, Case no 4008/2017

Spain vs. Afinsa and Filatelico, Nov. 2017, Supreme Court, Case no 4008/2017

The Supreme Court of Spain ruling in the Afinsa Tangibles SA stamp-fraud case – a pyramid scheme that cheated 350,000 people out of billions of dollars. One of the biggest fraud cases in the history of Spain. In May 2016, the head offices of two investment firms, Forum Filatelico and Afinsa Tangibles, were sealed off by 300 police officers who seized documents, bundles of banknotes worth €10 million and various works of art. The directors of the companies was accused of fraud, embezzlement, criminal insolvency, money laundering and tax evasion. Although Forum Filatelico reported post-tax profits of nearly €90 million in 2004, investigations revealed that both companies were effectively bankrupt, with more than €3.5 billion unaccounted for. Click here for translation Spain 21112017 TP sag
Tax Avoidance Schemes
India vs Google, Oct. 2017, Income Tax Appellate Tribunal

India vs Google, Oct. 2017, Income Tax Appellate Tribunal

Google Ireland licenses Google AdWords technology to its subsidiary in India and several other countries across the world. The Tax Tribunal in India found that despite the duty of Google India to withhold tax at the time of payment to Google Ireland, no tax was withheld. This was considered tax evasion, and Google was ordered to pay USD 224 million. The case has now been appealed by Google to the Supreme Court of India. India-vs-Google-28-oct-2017-TAX-APPELLATE-TRIBUNAL

Canada vs Univar Holdco, October 2017, Federal Court of Appeal, Case No 2017 FCA 207

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 Canada vs Univar Holdco 13102017 The 2016 decision of the Tax Court Canada vs Univar Holdco June 2016tcc159
UK vs. BNP PARIBAS, September 2017, FIRST-TIER TRIBUNAL TAX CHAMBER, TC05941

UK vs. BNP PARIBAS, September 2017, FIRST-TIER TRIBUNAL TAX CHAMBER, TC05941

The issues in this case was: Whether the price of purchase of right to dividends were deductible. Whether the purchase and sale of right to dividends was trading transaction in course of Appellant’s trade. Whether the purchase price expenditure incurred wholly and exclusively for purposes of the trade. Whether HMRC were permitted to argue point in relation to section 730 ICTA that was not raised in closure notice and which they stated they were not pursuing Whether the price of sale of right to dividends should be disregarded for the purposes of calculating Appellant’s trading profits under section 730(3) ICTA BNP-vs-HMRC
Tanzania vs. Acacia Mining Plc, July 2017, $150 billion tax bill

Tanzania vs. Acacia Mining Plc, July 2017, $150 billion tax bill

The London-based gold mining firm, Acacia Mining Plc, the largest mining company operating in Tanzania, was in July 2017 issued a $190 billion tax bill. The bill is split into $40 billion in unpaid taxes and an additional $150 billion in interest and penalties. The case is based on the findings of government-appointed committees. Following the release of a government-ordered audit of the mining industry, Acacia Mining was  accused of operating illegally in the country and tax evasion. The charge covers alleged under-declared export revenues from the Bulyanhulu and Buzwagi mines over periods between 2000 and 2017. For its part, Acacia, while refuting the government’s findings, “re-iterates that it has fully declared all revenuesâ€.
France vs. Google, July 2017, Administrative Court

France vs. Google, July 2017, Administrative Court

The French tax administration argued that Google had a permenent establishment in France because the parent company in the US and its subsidiary in Ireland had been selling a service – online ads – to customers in France. The administrative court found that Google France did not have the capability to carry out the advertising activities on its own. Google Ireland Limited therefore did not have a permanent establishment in France. Click here for translation France-vs-Google-July-2017
South Africa vs Sasol, 30 June 2017, Tax Court, Case No. TC-2017-06 - TCIT 13065

South Africa vs Sasol, 30 June 2017, Tax Court, Case No. TC-2017-06 – TCIT 13065

The taxpayer is registered and incorporated in the Republic of South Africa and carries on business in the petrochemical industry. It has some of its subsidiaries in foreign jurisdictions. Business activities include the importation and refinement of crude oil. This matter concerns the analysis of supply agreements entered into between the XYZ Corp and some of its foreign subsidiaries. It thus brings to fore, inter alia the application of the South African developing fiscal legal principles, namely, residence based taxation, section 9D of the Income Tax Act 58 of 1962 and other established principles of tax law, such as anti-tax avoidance provisions and substance over form. Tax avoidance is the use of legal methods to modify taxpayer’s financial situation to reduce the amount of tax that is payable SARS’s ground of assessment is that the XYZ Group structure constituted a transaction, operation or scheme as contemplated in section 103(1) of the Act. The structure had the effect of avoiding liability for the payment of tax imposed under the Act. The case is based on the principle of substance over form, in which event the provisions of section 9D will be applicable. Alternatively the respondent’s case is based on the application of section 103 of the Act. XYZ Group denies that the substance of the relevant agreements differed from their form. It contends that both in form and substance the relevant amounts were received by or accrued to XYZIL from sale of crude oil by XYZIL to SISIL. XYZ Group states that in order to treat a transaction as simulated or a sham, it is necessary to find that there was dishonesty. The parties did not intend the transaction to have effect in accordance with its terms but intended to disguise the transaction. The transaction should be intended to deceive by concealing what the real agreement or transaction between the parties is. Substance over form: If the transaction is genuine then it is not simulated, and if it is simulated then it is a dishonest transaction, whatever the motives of those who concluded the transaction. The true position is that „the court examines the transaction as a whole, including all surrounding circumstances, any unusual features of the transaction and the manner in which the parties intend to implement it, before determining in any particular case whether a transaction is simulated. Among those features will be the income tax consequences of the transaction. Tax evasion is of course impermissible and therefore, if a transaction is simulated, it may amount to tax evasion. But there is nothing impermissible about arranging one’s affairs XYZ as to minimise one’s tax liability, in other words, in tax avoidance. If the revenue authorities regard any particular form of tax avoidance as undesirable they arefree to amend the Act, as occurs annually, to close anything they regard as a loophole. That is what occurred when s 8C was introduced. Once that is appreciated the argument based on simulation must fail. For it to succeed, it required the participants in the scheme to have intended, when exercising their options to enter into agreements of purchase and sale of shares, to do XYZ on terms other than those set out in the scheme. Before a transaction is in fraudem legis in the above sense, it must be satisfied that there is some unexpressed agreement or tacit understanding between the parties. The Court rules as follows: The question is whether the substance of the relevant agreements differs from form. The interposition of XIXL and the separate reading of “back-to-back†agreements take XIXL out of the equation. Regrettably no matter how the appellant’s witnesses try to dress the contracts and their implementation, the surrounding circumstances; implementation of the uncharacteristic features of the transaction point to none other than disguised contracts. The court can only read one thing not expressed as it is; tax avoidance. Based on the evidence the court concludes that the purpose of relevant supply agreements was to avoid the anticipated tax which would accrue to XYZIL, a CFC if it sold the crude oil directly to XYZ. The court has concluded that the whole scheme and or the implementation of supply agreements is a sham. The court, therefore cannot consider the facsimile argument in isolation to support the averment that the contracts were concluded in IOM. Furthermore there is nothing before court to the effect that XYZIL has an FBE with a truly active business with connections to South Africa being used for bona fide non- tax business purposes. There is not even a shred of evidence alluding to the existence of an FBE. Section 76 (2) empowers SARS with a discretion to remit a portion or all of the additional tax assessment in terms of section 76 (1). Additional tax prescribed in Section 76(1) is 200% of the relevant tax amount. The appeal is dismissed. The assessments by the South African Revenue Services for 2005, 2006 and 2007 tax years as well as interest and penalties, are confirmed. LAPD-DRJ-TC-2017-06 - TCIT 13065 JHB 30 June 2017

US vs Wells Fargo, May 2017, Federal Court, Case No. 09-CV-2764

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.) wells_fargo_opinion_2017

US vs Santander Holding USA Inc, May 2017, Supreme Court, Case No. 16-1130

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 Supreme Court US vs santander
Russia vs Lesprom Forestry Company, May 2017, Appeal Court, Case No. A29-7607/2016

Russia vs Lesprom Forestry Company, May 2017, Appeal Court, Case No. A29-7607/2016

Lesprom Forestry Company had sold sand and construction services to a related party, Road Company LLC. The tax authority concluded that the Company had created a tax avoidance scheme aimed at artificially underestimating the income on transactions with Road Company LLC. The price for sand and construction work was revised and tax liabilities on income tax and VAT recalculated. Determining the arm’s length price of sandAn official website of the Federal State Statistics Service posted information on the average prices of manufacturers of industrial goods… [however] this statistical information does not contain the physical characteristics of the product and the terms for its sale. Therefore this information could not be used.The minimum and maximum gross margin amounted to: 14.25 and 27.04 in 2012, 2.39 and 6.57 in 2013, and 3.04 and 25.58 in 2014. The gross profitability received by Road Company LLC in 2013-2014, was significantly above the arm’s length range of gross margins, 51.87% and 73.55%, respectively.” Determining the arm’s length price for construction workGiven that the Company’s accounting of income and expenses in the audited period was conducted on the basis of the cash method, the amount of costs required and incurred by the taxpayer in connection with the performance of contract works could not be reliably determine. To determine the price of the work performed , the tax authorities had analysed the cost of comparable work (preparatory work on the development of exploration wells, construction of bridges on the road entrance to exploratory wells, preparatory work for drilling wells in public sources of information. According to the information and price agencies Platts, Argus etc. do not contain detailed information on the terms of the transactions. Thus, publicly available information could not be used ….The only comparable transactions available to Lesprom LLC, were transactions concluded between Road Company LLC and a sub contractor, Trans-Stroy LLC. According to these agreements cost of the general construction services amounted to 5% of the total cost of the work. On that basis, the market price for construction services delivered by Lesprom was set to 5% of the total cost of the work. The courts of three instances found the tax assessment legal. Click here for translation A29-7607-2016f
US vs Microsoft, May 2017, US District Court

US vs Microsoft, May 2017, US District Court

In an ongoing transfer pricing battle between Microsoft and the IRS related to Microsofts’ use of a IP subsidiary in Puerto Rico to shift income and reduce taxes, the District Court of Washington has now ordered Microsoft to provide a number of documents as requested by the IRS. US vs Microsoft May 2017 US District Court In a prior decision from November 2015 the District Court ruled, that the IRS’ use of an external representative was not in conflict with US regulations. Microsoft argued that the IRS’ use of an outside law firm, Quinn Emanuel Urquhart & Sullivan, to assist in the audit was an improper delegation of its authority to examine taxpayer books. The Court ruled that the government had a legitimate purpose in continuing to pursue the audit, and that the use of Quinn Emanuel was not a breach of IRS authority that would invalidate the summonses. “The court’s role in this matter is not to pass judgment on the IRS’ contracting practices, but to enforce or not enforce the summonses,†Martinez wrote. The law allows the IRS some flexibility in its use of outside contractors, he said, and Microsoft’s characterization of the role of Quinn Emanuel “greatly exceeds what is evident in the record.†U.S. v. MICROSOFT CORP November 2015
Australia vs Chevron Australia Holdings Pty Ltd, 21 April 2017, Federal Court 2017 FCAFC 62

Australia vs Chevron Australia Holdings Pty Ltd, 21 April 2017, Federal Court 2017 FCAFC 62

This case was about a cross border financing arrangement used by Chevron Australia to reduce it’s taxes – a round robin. 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. The loan increased Chevron Australia’s costs and reduced taxable profits. The 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. Australian Courts ruled in favor of the tax administration and the case was since appealed by Chevron. In April 2017 the Federal Court decided to dismiss Chevron’s appeal. (Following the Federal Court’s decision, Chevron appealed to the High Court, but in August 2017 Chevron announced that the appeal had been withdrawn.) Australia vs Chevron 2017 Federal Court, 2017 FCAFC 62
European Commission vs. The Netherlands and Starbucks, March 2017 and October 2015, State Aid Investigation

European Commission vs. The Netherlands and Starbucks, March 2017 and October 2015, State Aid Investigation

The European Commission’s investigation on granting of selective tax advantages to Starbucks BV, cf. EU state aid rules. EU-vs-Starbucks-March-2017-State-Aid-investigation-2 EU-Starbucks-2015
US vs. Amazon, March 2017, US Tax Court, Case No. 148 T.C. No 8

US vs. Amazon, March 2017, US Tax Court, Case No. 148 T.C. No 8

Amazon is an online retailer that sells products through Amazon.com and related websites. Amazon also sells third-party products for which it receives a commissions. In a series of transactions  in 2005 and 2006, Amazon US transferred intangibles to Amazon Europe, a newly established European HQ placed in Luxembourg. A Cost Sharing Arrangement (“CSAâ€), whereby Amazon US and Amazon Europe agreed to share costs of further research, development, and marketing in proportion to the benefits A License Agreement, whereby Amazon US granted Amazon Europe the right to Amazon US’s Technology IP An Assignment Agreement, whereby Amazon US granted Amazon Europe the right to Amazon US’s Marketing IP and Customer Lists. For these transfers Amazon Europe was required to make an upfront buy-in payment and annual payments according to the cost sharing arrangement for ongoing developments of the intangibles. In the valuation, Amazon had considered the intangibles to have a lifetime of 6 to 20 years. On that basis, the buy-in payment for pre-existing intangibles had been set to $254.5 million. The IRS disagreed with the valuation and calculated a buy-in payment of $3.5 billion, by applying a discounted cash-flow methodology to the expected cash flows from the European business. The IRS took the position, that the intangibles transferred to Amazon Europe had an indefinite useful life and had to be valued as integrated components of an ongoing business rather than separate assets. The case brought before the US Tax Court HAD two issues had to be decided: Amazon Europe’s buy-in payment with respect to the intangibles transferred; and The pool of cost, on which Amazon Europe ongoing cost sharing payments were to be calculated. The Courts decision on Amazon Europe’s buy-in payment IRS’s position of “indefinite useful life” in the valuation of the intangibles and the buy in payment was rejected by the court, and the comparable uncontrolled transaction (“CUTâ€) method applied by Amazon – after appropriate upward adjustments – was found to be the best method. The Courts decision on Cost Share Payments The Court found that Amazon’s method for allocating intangible development costs, after adjustments, was reasonable. US CSA regulations pre- and post 2009  US CSA regs in effect for 2005-2006 refer to the definition of intangibles set forth in section 1.482-4(b), Income Tax Regs. Here intangibles are defined to include five enumerated categories of assets, each of which has “substantial value independent of the services of any individual.†These include patents, inventions, copyrights, know-how, trademarks, trade names, and 20 other specified intangibles. The definition of intangibles in the pre 2009 CSA regs did not include value of workforce in place, going concern value, goodwill, and growth options, corporate resources or opportunities. In 2009 new CSA regs were introduced in the US where the concept of “platform contribution transaction†(PCT) applies. According to the new regs. there are no limit on the type of intangibles that must be compensated under a cost sharing arrangement. But these new US CSA regulations did not apply to the years 2005 – 2006 in the Amazon case. See also the US vs. Veritas case from 2009. 2019 UPDATE The 2017 decision of the Tax Court has later been appealed by the Commissioner of Internal Revenue US-vs-Amazon-March-2017-US-Tax-Court-2
New Zealand vs Honk Land Trustee Limited, 10 March 2017, Court of Appeal

New Zealand vs Honk Land Trustee Limited, 10 March 2017, Court of Appeal

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. NewZealand vs Honk-Land-Trustees-Limited-v-Commissioner-of-Inland-Revenue
UK vs. Ladbroke Group, February 2017, case nr. UT/2016/0012 & 0013

UK vs. Ladbroke Group, February 2017, case nr. UT/2016/0012 & 0013

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. UK Ladbrokes-UK-2017
Russia vs ZAO NK Dulisma, January 2017, Court of Appeal, Case No. Ð40-123426/2016

Russia vs ZAO NK Dulisma, January 2017, Court of Appeal, Case No. Ð40-123426/2016

In 2012, ZAO NK Dulisma, a Russian oil and gas company, sold crude oil via an unrelated Hong Kong-based trader. In Russia, transactions with unrelated parties may be deemed controlled transactions for Transfer Pricing purposes, provided certain conditions are met. The Russian Tax Authorities audited the transactions with the Hong Kong trader and found that the price had been understated. The arm’s length price was determined using a CUP method, based on data from Platts quote for Dubai grade oil, adjusted for quality and terms of delivery etc. The court ruled in favor of the tax authorities, confirming that the application of the CUP method and the use of Platts data was justified. Click here for translation A40-123426-2016
Russia vs Continental Tires RUS LLC , Aug. 2014, Russian Court of Appeal, Case No Ð40- 251161/2015

Russia vs Continental Tires RUS LLC , Aug. 2014, Russian Court of Appeal, Case No Ð40- 251161/2015

Continental Tires RUS LLC had been issued a substantial loan from Continental AG (Germany). Following an audit the tax authority established that the main purpose of the loans was the systematic withdrawal of funds abroad. According to the tax authorities the loan transactions were concluded for the purpose of artificially raising cash in the form of loans and, accordingly, artificially increasing accounts payable, while the shortage of working capital arose and arises from the special, continuous and coordinated provision of deferred payments to buyers of tyre products. Judgement of the Russian Court of Appeal The Court ruled in favor of the tax administration. Excerpt: “The provisions of Article 252 of the Tax Code stipulate that the taxpayer reduces the income received by the amount of expenses incurred. Expenses are considered to be justified and documented expenses of the taxpayer. Reasonable expenses are defined as economically justified expenses, the evaluation of which is expressed in monetary form. Documented expenses shall mean expenses supported by documents executed in accordance with the legislation of the Russian Federation. Expenses are deemed to be any expenses on condition that they are incurred for the purpose of carrying out activities aimed at generating income. In accordance with Clause 3 of the Resolution of the Plenum of the Supreme Arbitration Court of the Russian Federation of 12.10.2006 â„– 53 “On arbitration courts assessing the validity of taxpayers receiving tax benefits”. (hereinafter – Ruling No. 53) tax benefit may be recognised as unjustified, in particular, if for taxation purposes transactions are taken into account not in accordance with their real economic sense or transactions are taken into account not due to reasonable economic or other reasons (business purposes). It is established that the Moscow Arbitration Court in Case No. A40-123542/14 states that, based on an analysis of taxation and financial results of the parent company Continental AG in Germany, the court considered that the so-called interest income received from the taxpayer in Russia actually has nothing to do with the economic activity of the subsidiary in Russia, is not related to the efficiency and business purpose of the taxpayer in the Russian Federation, and has the goal of servicing the losses of the parent company, in the absence of the holding company. In the aforementioned judicial act, the court concluded that the purpose of the relevant operations involving the provision of loans by the parent company to the company (the subsidiary) was to withdraw assets and profit from taxation in Russia, with the creation of fictitious “income” in Germany, without actually paying taxes on it, given the declaration of multimillion losses in view of the permanent reduction of taxable income by means of interest expenses, in connection with which the court regarded these actions as receiving unjustified tax benefits, entailing a loss of taxable profit. Thus, the court concludes that, as a result of the tax control measures taken, the Inspectorate came to a justified and lawful conclusion.” Click here for English translateion Click here for other translation Решение от 24102016 по делу Ð40 251161 2015
Norway vs. IKEA Handel og Ejendom, October 2016, HRD 2016-722

Norway vs. IKEA Handel og Ejendom, October 2016, HRD 2016-722

In 2007, IKEA reorganised its property portfolio in Norway so that the properties were demerged from the Norwegian parent company and placed in new, separate companies. The shares in these companies were placed in a newly established property company, and the shares in this company were in turn sold to the original parent company, which then became an indirect owner of the same properties. The last acquisition was funded through an inter-company loan. Based on the non-statutory anti-avoidance rule in Norwegian Tax Law, the Supreme Court concluded that the parent company could not be allowed to deduct the interest on the inter-company loan, as the main purpose of the reorganisation was considered to be to save tax. The anti-avoidance rule in section 13-1 of the Tax Act did not apply in this circumstance. Click here for translation Norway vs IKEA-Handel-og-Ejendom-HRD-2016-722
Norway vs. ConocoPhillips, October 2016, Supreme Court HR-2016-988-A, Case No. 2015/1044)

Norway vs. ConocoPhillips, October 2016, Supreme Court HR-2016-988-A, Case No. 2015/1044)

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 Norway HR-2016-988-A-ConocoPhillips-Skandinavia
European Commission has opened investigation into Luxembourg's tax treatment of the GDF Suez group (now Engie), September 2016

European Commission has opened investigation into Luxembourg’s tax treatment of the GDF Suez group (now Engie), September 2016

The European Commission has opened an in-depth investigation into Luxembourg’s tax treatment of the GDF Suez group (now Engie). The Commission has concerns that several tax rulings issued by Luxembourg may have given GDF Suez an unfair advantage over other companies, in breach of EU state aid rules. The Commission will assess in particular whether Luxembourg tax authorities selectively derogated from provisions of national tax law in tax rulings issued to GDF Suez. They appear to treat the same financial transaction between companies of GDF Suez in an inconsistent way, both as debt and as equity. The Commission considers at this stage that the treatment endorsed in the tax rulings resulted in tax benefits in favour of GDF Suez, which are not available to other companies subject to the same national taxation rules in Luxembourg. As from September 2008, Luxembourg issued several tax rulings concerning the tax treatment of two similar financial transactions between four companies of the GDF Suez group, all based in Luxembourg. These financial transactions are loans that can be converted into equity and bear zero interest for the lender. One convertible loan was granted in 2009 by LNG Luxembourg (lender) to GDF Suez LNG Supply (borrower); the other in 2011 by Electrabel Invest Luxembourg (lender) to GDF Suez Treasury Management (borrower). The Commission considers at this stage that in the tax rulings the two financial transactions are treated both as debt and as equity. This is an inconsistent tax treatment of the same transaction. On the one hand, the borrowers can make provisions for interest payments to the lenders (transactions treated as loan). On the other hand, the lenders’ income is considered to be equity remuneration similar to a dividend from the borrowers (transactions treated as equity). The tax treatment appears to give rise to double non-taxation for both lenders and borrowers on profits arising in Luxembourg. This is because the borrowers can significantly reduce their taxable profits in Luxembourg by deducting the (provisioned) interest payments of the transaction as expenses. At the same time, the lenders avoid paying any tax on the profits the transactions generate for them, because Luxembourg tax rules exempt income from equity investments from taxation. The final result seems to be that a significant proportion of the profits recorded by GDF Suez in Luxembourg through the two arrangements are not taxed at all. The two arrangements between LNG Luxembourg (lender) and GDF Suez LNG Supply (borrower) as well as Electrabel Invest Luxembourg (lender) and GDF Suez Treasury Management (borrower) work as follows: Under the terms of the convertible zero interest loan the borrower would record in its accounts a provision for interest payments, without actually paying any interest to the lender. Interest payments are tax deductible expenses in Luxembourg. The provisioned amounts represent a large proportion of the profit of each borrower. This significantly reduces the taxes the borrower pays in Luxembourg. Had the lender received interest income, it would have been subject to corporate tax in Luxembourg. Instead, the loans are subsequently converted into company shares in favour of the lender. The shares incorporate the value of the provisioned interest payments and thereby generate a profit for the lenders. However, this profit – which was deducted by the borrower as interest – is not taxed as profit at the level of the lender, because it is considered to be a dividend-like payment, associated with equity investments. State aid Luxembourg GDF Suez sept 2016
US Treasury response to European Commission for recent State Aid Actions, 2016

US Treasury response to European Commission for recent State Aid Actions, 2016

The US Treasury in 2016 strongly criticized the European Commission for it’s state aid actions relating to US Corporations; Apple, Starbucks, Amazon, and McDonald’s. US Treasury white paper of August 2016 US White-Paper-EC-State-Aid August 24, 2016 US Treasury letter of February 2016 US Treasury letter of February 2016 EC state aid rulings
European Commission vs. Ireland and Apple, August 2016, State Aid Decision

European Commission vs. Ireland and Apple, August 2016, State Aid Decision

According to the European Commission Ireland gave illegal tax benefits to Apple worth up to €13 billion The European Commission has concluded that Ireland granted undue tax benefits of up to €13 billion to Apple. This is illegal under EU state aid rules, because it allowed Apple to pay substantially less tax than other businesses. Ireland must now recover the illegal aid. EU-Commission-Apple
Spain vs. PEUGEOT CITROEN AUTOMOVILES, May 2016, Supreme Court, case nr. 58/2015

Spain vs. PEUGEOT CITROEN AUTOMOVILES, May 2016, Supreme Court, case nr. 58/2015

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 Spain-vs-PEUGEOT-CITROEN-AUTOMOVILES-May-2016-Supreme-Court-case-nr-58-2015 And Click here for translation Spain-vs-PEUGEOT-CITROEN-AUTOMOVILES-December-2014-National-Appellate-Court-case-nr-317-2011

Tanzania vs. AFRICAN BARRICK GOLD PLC, March 2016, Tax Revenue Appeals Tribunal, Case No. 16 of 2015

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 african barick
India vs. Li & Fung (Trading) Ltd. March 2016, ITTA

India vs. Li & Fung (Trading) Ltd. March 2016, ITTA

Li & Fung (Trading) Ltd., Hong Kong, entered into contracts with its global third party customers for provision of sourcing services with respect to products to be sourced by such global customers directly from third party vendors in India. For the sourcing services, the Hong Kong company received a 5% commission of the FOB value of goods sourced. The company in India was providing sourcing support services to the Hong Kong group company, and remunerated at cost plus 5 percent mark-up for provision of these services. The tax administration found that the the company in India should get the 5% commission on the free on board (FOB) value of the goods sourced from India as the Hong Kong company contributed no value. The Tribunal held that the compensation received by the company in Hong Kong – 5% of the FOB value – should be distributed between the company in India and the company in Hong Kong in the ratio of 80:20 based on there functional profiles. • The company in India had actually performed all critical functions, assumed significant risks and had also developed unique intangibles over the years. • The company in Hong Kong did not have either any technical expertise or manpower to carry out the sourcing activities. Se also India vs Li & Fung 2013 and India vs Li & Fung 2011 Li_&_Fung_(India)_Pvt._Ltd.,_New_..._vs_Assessee_on_23_March,_2016
Japan vs Yahoo, February 2016, Supreme Court, Case No  平æˆ27(行ヒ)177

Japan vs Yahoo, February 2016, Supreme Court, Case No  平æˆ27(行ヒ)177

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 Japan vs Yahoo SC Case no 085709_hanrei
Italy vs PDM D srl, February 2016, Supreme Court case no. 6331-2016

Italy vs PDM D srl, February 2016, Supreme Court case no. 6331-2016

This case is about deduction of certain “cost” related to sale of property and intragroup financing between an Italian company and a related group company in Luxembourg. Judgment of the Supreme Court The Court ruled partly in favour of the tax authorities and partly in favour of the PDM D srl. I regards to the deduction of the “guarantee” granted in relation to the sale of real estate the Court states: “In the present case, in the absence of proof of the above requirements in the reference financial year (2005/2006), and since the costs in question have not yet been actually incurred, but are future costs that may be incurred in subsequent financial years, following a comparison between the amount actually received from the leases and the fixed amount guaranteed by the seller company and therefore depending on the actual development of the lease relationship, the tax recovery is legitimate. ” In regards to the arm’s length nature of the interest rate the Court states: “This Court has therefore affirmed that ‘the burden of proof on the Office – in the matter of transfer pricing – is limited to demonstrating the existence of transactions between related companies and the clear deviation between the agreed consideration and the market value (abnormal value), since this burden does not extend to the proof of the elusive function of the transaction’, and that, on the other hand, ‘in the face of the evidence offered by the Administration, it is up to the taxpayer to demonstrate – by virtue of the principle of proximity of the evidence, inferable from Article 2697 of the Civil Code. – It is for the taxpayer to demonstrate – by virtue of the principle of closeness of evidence, as inferable from Article 2697 of the Civil Code – not only the existence and relevance of the deducted costs, but also any other element that allows the Office to consider that the transaction took place at market value.” “In the present case, the C.T.R. made a precise assessment, applying the concept of “economic normality of the transaction”, considering justifiable the agreement, in favour of the Luxembourg parent company, of an interest rate of 2%, taking into account the specific concrete characteristics (the fact that it was an intra-group loan but with a short term and of an amount exceeding one million euros, as well as the lower average riskiness of the borrowing company, a company under Luxembourg law, financed by a company from the South, in particular), which made the financing in any event not comparable to other financing provided by the same company or by the banking system. The statements contained in the judgment are therefore consistent with the rules governing the remuneration of intra-group financing and with the rules on transfer pricing, with reference to the appropriateness of the interest rate and its correspondence to the “normal market value”.” Click here for English translation Click here for other translation Italy Corp-vs-Italy-6331-2016
Australia vs. Orica Limited, December 2015 Federal Court, FCA 1399; 2015 ATC 20-547.

Australia vs. Orica Limited, December 2015 Federal Court, FCA 1399; 2015 ATC 20-547.

The Orica case involve funding of an overseas entity or operations by an Australian entity, where the funds are subsequently provided back to the Australian entity or its Australian associate in a manner which purportedly generates Australian tax deductions while not generating corresponding Australian assessable income (Free dip). The arrangements essentially involve the “round robin” movement of funds where an entity claims income tax deductions in Australia for costs of borrowing or obtaining other financial benefits (including satisfaction of liabilities) from an overseas party the loan or other financial benefit provided by the overseas party is in substance funded, directly or indirectly, by an investment by the entity claiming the deductions or its Australian associate the return on the Australian investment, reflecting the financing costs payable to the overseas party, comes back to Australia in a non-taxable or concessionally taxed form, for example, as a distribution from an overseas subsidiary which is not assessable under Subdivision 768-A of the Income Tax Assessment Act 1997 (ITAA 1997). Similar arrangements may display some or all of the following features: the entity claiming the Australian tax deductions is related to the overseas party providing the loan or other financial benefit the overseas party is an entity resident in a low tax jurisdiction, or is otherwise not taxable in the overseas country on any financing costs payable by the entity claiming the deductions, for example, because it can claim foreign tax credits or tax losses in the overseas country use of hybrid entities or instruments such that: i. the financing costs payable to the overseas party which are deducted in Australia are not taxable in the relevant overseas jurisdiction, or ii. the financing costs are deducted twice, i.e. once in Australia and once by the hybrid entity or the hybrid entity’s owners in the overseas jurisdiction the financing costs payable to the overseas party is not income taxable in Australia under Australia’s controlled foreign company (CFC) provisions the non-assessable foreign sourced income distributed to the Australian entity increases its ‘conduit foreign income’ balance so it can distribute unfranked dividends funded from its Australian profits to its foreign shareholders free of dividend withholding tax there is no cash transfer of relevant funds and relevant steps are said to be carried out by journal entries the arrangement produces a commercial outcome or achieves an overall advantage to the global group because of the Australian tax benefits. Australia-vs-Orica-Limited-December-2015-Federal-Court-of-Australia
European Commission opens formal investigation into Luxembourg's tax treatment of McDonald's under EU state aid regulations, December 2015

European Commission opens formal investigation into Luxembourg’s tax treatment of McDonald’s under EU state aid regulations, December 2015

The European Commission has formally opened an investigation into Luxembourg’s tax treatment of McDonald’s. Tax ruling granted by Luxembourg may have granted McDonald’s an advantageous tax treatment in breach of EU State aid rules On the basis of two tax rulings given by the Luxembourg authorities in 2009, McDonald’s Europe Franchising has paid no corporate tax in Luxembourg since then despite recording large profits (more than €250 million in 2013). These profits are derived from royalties paid by franchisees operating restaurants in Europe and Russia for the right to use the McDonald’s brand and associated services. The company’s head office in Luxembourg is designated as responsible for the company’s strategic decision-making, but the company also has two branches, a Swiss branch, which has a limited activity related to the franchising rights, and a US branch, which does not have any real activities. The royalties received by the company are transferred internally to the US branch of the company. The Commission requested information on the tax rulings in summer 2014 following press allegations of advantageous tax treatment of McDonald’s in Luxembourg. Subsequently, trade unions presented additional information to the Commission. The Commission’s assessment thus far has shown that in particular due to the second tax ruling granted to the company McDonald’s Europe Franchising has virtually not paid any corporate tax in Luxembourg nor in the US on its profits since 2009. In particular, this was made possible because: A first tax ruling given by the Luxembourg authorities in March 2009 confirmed that McDonald’s Europe Franchising was not due to pay corporate tax in Luxembourg on the grounds that the profits were to be subject to taxation in the US. This was justified by reference to the Luxembourg-US Double Taxation Treaty. Under the ruling, McDonald’s was required to submit proof every year that the royalties transferred to the US via Switzerland were declared and subject to taxation in the US and Switzerland. However, contrary to the assumption of the Luxembourg tax authorities when they granted the first ruling, the profits were not to be subjected to tax in the US. While under the proposed reading of Luxembourg law, McDonald’s Europe Franchising had a taxable presence in the US, it did not have any taxable presence in the US under US law. Therefore McDonald’s could not provide any proof that the profits were subject to tax in the US, as required by the first ruling (see further details below). McDonald’s clarified this in a submission requesting a second ruling, insisting that Luxembourg should nevertheless exempt the profits not taxed in the US from taxation in Luxembourg. The Luxembourg authorities then issued a second tax ruling in September 2009 according to which McDonald’s no longer required to prove that the income was subject to taxation in the US. This ruling confirmed that the income of McDonald’s Europe Franchising was not subject to tax in Luxembourg even if it was confirmed not to be subject to tax in the US either. With the second ruling, Luxembourg authorities accepted to exempt almost all of McDonald’s Europe Franchising’s income from taxation in Luxembourg. In their discussions with the Luxembourg authorities, McDonald’s argued that the US branch of McDonald’s Europe Franchising constituted a “permanent establishment” under Luxembourg law, because it had sufficient activities to constitute a real US presence. Simultaneously, McDonald’s argued that its US-based branch was not a “permanent establishment” under US law because, from the perspective of the US tax authorities, its US branch did not undertake sufficient business or trade in the US. As a result, the Luxembourg authorities recognised the McDonald’s Europe Franchising’s US branch as the place where most of their profits should be taxed, whilst US tax authorities didnotrecognise it. The Luxembourg authorities therefore exempted the profits from taxation in Luxembourg, despite knowing that they in fact were not subject to tax in the US. EU State aid Case opening Luxembourg McDonalds
Australia vs. Chevron Australia Holdings Pty Ltd . October 2015, Federal Court of Australia, case No. 3 and 4

Australia vs. Chevron Australia Holdings Pty Ltd . October 2015, Federal Court of Australia, case No. 3 and 4

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. Australia-vs-Chevron-2015 Australia-vs-Chevron-Australia-Holdings-Pty-Ltd-No-3-2015-FCA-1092
European Commission vs Luxembourg and Fiat, October  2015, State Aid Decision

European Commission vs Luxembourg and Fiat, October 2015, State Aid Decision

The European Commission have decided that selective tax advantages for Fiat in Luxembourg are illegal under EU state aid rules. EU-FIAT-2015
Norway vs. GE Healthcare AS, May 2015, Supreme Court , HRD-2015-01008-A

Norway vs. GE Healthcare AS, May 2015, Supreme Court , HRD-2015-01008-A

The Supreme Court concluded that the Norwegian taxation of incomes in Ireland were not in violation of the treaty Article 7. 1 and showed that the double taxation which thus arose, in Article 24. 2 gave GE Healthcare AS a tax deduction in Norway equal to the taxes paid by income in Ireland. Such deduction was made by tax decision in the case. GE Healthcare AS was thus protected against the overall tax burden in Norway and Ireland were greater than if the income were only taxed in Norway. There was no reason to limit the taxation of GE Healthcare AS beyond this. Click here for translation Norway vs GE-Healthcare-AS-sak-2014-1968-HRD-2015-01008-A

Japan vs. IBM, March 2015, Tokyo High Court, Case no 第265å·ï¼ï¼•ï¼–(順å·ï¼‘2639)

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 IBM JAP THC12639

Argentina vs Alfred C. Toepfer International S.A., March 2015, Supreme Court TF 27.014-I

In the case of Argentina vs Alfred C. Toepfer International S.A,  the “sixth method” had been applied to intra-group transfers of commodities. Click here for Translation Argentina vs Alfred C Toepfer International SA TF 27-014-I
European Commission opens investigation of transfer pricing arrangements on corporate taxation of Amazon in Luxembourg, October 2014

European Commission opens investigation of transfer pricing arrangements on corporate taxation of Amazon in Luxembourg, October 2014

The European Commission has opened an in-depth investigation to examine whether the decision by Luxembourg’s tax authorities with regard to the corporate income tax to be paid by Amazon in Luxembourg comply with the EU rules on state aid. The opening of an in-depth investigation gives interested third parties and the Member States concerned an opportunity to submit comments. It does not prejudge the outcome of the investigation. The tax ruling in favour of Amazon under investigation dates back to 2003 and is still in force. It applies to Amazon’s subsidiary Amazon EU Sàrl, which is based in Luxembourg and records most of Amazon’s European profits. Based on a methodology set by the tax ruling, Amazon EU Sàrl pays a tax deductible royalty to a limited liability partnership established in Luxembourg but which is not subject to corporate taxation in Luxembourg. As a result, most European profits of Amazon are recorded in Luxembourg but are not taxed in Luxembourg. The Commission considers that the amount of this royalty, which lowers the taxable profits of Amazon EU Sàrl each year, might not be in line with market conditions. The Commission has concerns that the ruling could underestimate the taxable profits of Amazon EU Sàrl, and thereby grant an economic advantage to Amazon by allowing the group to pay less tax than other companies whose profits are allocated in line with market terms. The Commission will now continue investigating to determine whether its concerns are confirmed. State aid Luxembourg Amazon, October 2014
US Senate Hearings on Offshore Profit Shifting and Abusive Tax Schemes 

US Senate Hearings on Offshore Profit Shifting and Abusive Tax Schemes 

See the documents from the US Senate hearings on offshore profit shifting and abusive tax schemes Offshore Profit Shifting and the U.S. Tax Code – Part 1 (Microsoft & Hewlett-Packard) and Part 2 (Apple Inc.), Carl Levin’s opening statements. Profit Shifting Part 1, September 2012 OPENING, LEVIN-Carl US Senate hearing on Profit Shifting, May 2013, OPENING LEVIN-Carl
Finland vs. Corp, July 2014, Supreme Administrative Court HFD 2014:119

Finland vs. Corp, July 2014, Supreme Administrative Court HFD 2014:119

A Ab had in 2009 from its majority shareholder B, based in Luxembourg, received a EUR 15 million inter-company loan. A Ab had in 2009 deducted 1,337,500 euros in interest on the loan. The loan had been granted on the basis that the banks financing A’s operations had demanded that the company acquire additional financing, which in the payment scheme would be a subordinated claim in relation to bank loans, and by its nature a so-called IFRS hybrid, which the IFRS financial statements were treated as equity. The loan was guaranteed. The fixed annual interest rate on the loan was 30 percent. The loan could be paid only on demand by A Ab. The Finnish tax authorities argued that the legal form of the inter-company loan agreed between related parties should be disregarded, and the loan reclassified as equity. Interest on the loan would therefore not be deductible for A Ab. According to the Supreme Administrative Court interest on the loan was tax deductible. The Supreme Administrative Court stated that a reclassification of the loan into equity was not possible under the domestic transfer pricing provision alone. Further, the Supreme Administrative Court noted that it had not been demonstrated or even alleged by the tax authorities that the case was to regarded as tax avoidance. The fact that the OECD Transfer Pricing Guidelines (Sections 1.65, 1.66 and 1.68) could in theory have allowed a reclassification of the legal form of the loan into equity was not relevant because a tax treaty cannot broaden the tax base from that determined under the domestic tax provisions. Consequently, the arm’s length principle included in Article 9 of the tax treaty between Finland and Luxembourg only regarded the arm’s length pricing of the instrument, not the classification of the instrument. Click here for other translation Finland-2014-July-Supreme-Administrative-Court-HFD-2014-119

Malaysia vs Syarikat Ibraco-Peremba, May 2014, Court of Appeal, Case No. W-01-177-04/2013

Syarikat Ibraco-Peremba was a property development company in Malaysia. The company had entered into a series of elaborate transactions to avoid paying income tax on the profits made from the sale of a developed land. Profits arising from the companies sale of developed land would be treated as business income and subject to income tax. The company first incorporated a subsidiary and then, after selling the lands to the subsidiary, entered into a contract with it to develop the lands. Upon completion of the project, the company sold its shares in the subsidiary to a related company and the subsidiary company subsequently sold the developed lands to third parties. The subsidiary and related companies were then closed. The Court of Appeal held that the taxpayer had made the arrangement for the primary purpose of minimizing tax. Although Section 140 did not explicitly state that the tax administration has the power to disregard a series of transactions, as opposed to a single transaction, each individual step or transaction in an arrangement could be looked at as a whole. Malaysia-vs-Corp-2016
Finland vs. Corp. February 2014, Supreme Administrative Court HFD 2014:33

Finland vs. Corp. February 2014, Supreme Administrative Court HFD 2014:33

A Ltd, which belonged to the Norwegian X Group, owned the entire share capital of B Ltd and had on 18.5.2004 sold it to a Norwegian company in the same group. The Norwegian company had the same day transferred the shares back on to A Ltd. C ASA had also been transferred shares in other companies belonging to the X group. C ASA was listed on the Oslo Stock Exchange in June 2004. Following the transaction with the subsidiary the Tax Office had raised A Ltd’s income for 2004 with 62,017,440 euros on the grounds that the price used in the transaction were considered below the shares’ market value. Further, a tax increase of EUR 620 000 had been applied. A Ltd stated that the purchase price for the shares of B Ltd had been determined on the basis of the company’s net present value, calculated according to a calculation of the present value of cash flows in the B Ab. The calculation was made by an outside expert. The purchase price had been calculated using “media kalkyl” that led to a lower value than the optional price determination calculations, which were based on high and low growth. Media kalkyl differed from other calculations in respect of certain variables that significantly affected the final outcome. For several of the variables used a description of how they were derived from B Ltd’s budget was missing, from historical data, data for comparison companies or other data. Variables not declared were also used in the calculation by the external expert, which was based on factor analysis and which was presented to support the calculations. The Supreme Administrative Court noted that although the cash flow calculations in principle can be considered to be an acceptable way to determine the market price of shares in companies not listed on the stock exchange, the estimates presented by the company could not be considered a reliable account of the price that would have been used in a transfer between independent parties. Because any comparison price that would have been based on events that could be equated with those at issue in this case were not available, and the yield based value of B Ltd had been established in a reliable manner, and since B Ltd’s assets under the Company’s balance had essentially consisted of financial assets, the fair value of B Ltd’s for taxation considered B Ltd’s net asset value. Using the net asset value was not wrong either for the reason that C ASA immediately after the listing of company had a market value lower than the net asset value. Nor were the fact that C ASA at the time of listing of the company had a 20 percent minority stake, sufficient to show that the purchase price corresponded to the market price. Consequently, the Company’s income in the taxation could be relevant amounts. With regard to the measures with which the company had tried to clarify the current value and that the issue concerned the appeal could be considered to make room for interpretation, the Supreme Administrative Court, removed the tax increase imposed in connection with the taxation. Fiscal year 2004 The law on the taxation procedure (1558/1995) 31, 32 and 57 § Click here for other translation Finland-2014-February-Supreme-Administrative-Court-HFD-2014-33
New Zealand vs Alesco New Zealand Limited and others, Supreme Court, SC 33/2013, NZSC 66 (9 July 2013)

New Zealand vs Alesco New Zealand Limited and others, Supreme Court, SC 33/2013, NZSC 66 (9 July 2013)

In 2003 Alesco New Zealand Ltd (Alesco NZ) bought two other New Zealand companies. Its Australian owner, Alesco Corporation (Alesco), funded the acquisitions by advancing the purchase monies of $78 million. In consideration Alesco NZ issued a series of optional convertible notes (OCNs or notes). The notes were non-interest bearing for a fixed term and on maturity the holder was entitled to exercise an option to convert the notes into shares. Between 2003 and 2008 Alesco NZ claimed deductions for amounts treated as interest liabilities on the notes in accordance with relevant accounting standards and a determination issued by the Commissioner against its liability to taxation in New Zealand. In the High Court Heath J upheld1 the Commissioner’s treatment of the OCN funding structure as a tax avoidance arrangement under s BG 1 of the Income Tax Act 1994 and the Income Tax Act 2004 (the ITA). Alesco NZ appeals that finding and two consequential findings. The amount at issue is about $8.6 million. Included within that figure are revised assessable income tax, shortfall penalties and use of money interest. However, Alesco NZ’s appeal has wider fiscal consequences. The Commissioner has treated similar funding structures used by other entities as tax avoidance arrangements. Decisions on those disputed assessments await the result of this litigation. The Commissioner estimates that over $300 million is at issue including core tax and penalties plus accruing use of money interest. Two other features of this appeal require emphasis. First, in contrast to a number of recent cases on tax avoidance, the Commissioner does not impugn the underlying commercial transactions. She accepts that Alesco NZ’s acquisitions were not made for the purpose or effect of avoiding tax and that the company had to raise funds to enable completion. Her challenge is to the permissibility of the OCN funding mechanism actually deployed or what is called an intermediate step in implementing the underlying transactions. Second, the Commissioner accepts that when viewed in isolation from the statutory anti-avoidance provisions the OCN structure complied technically with the relevant financial arrangements rules, the deductibility provisions relating to expenditure and interest then in force, together with the spreading formula provided by the Commissioner’s determination known as G228 (an instrument issued by the Commissioner to provide a method for assessing income and costs on debt instruments under the financial arrangements rules, to which we shall return in more detail). The meaning, purpose and effect of the financial arrangements rules, and the regime they introduced in 1985 for the purpose of assessing the income returns and deductibility of costs on particular debt instruments, are at the heart of this appeal. Relevant facts In January 2003 Alesco agreed to purchase for $46 million the shares in a New Zealand company, Biolab Ltd, a distributor of medical laboratory equipment. This sum was later increased to $55 million by a supplementary payment. Alesco nominated its New Zealand subsidiary, Alesco NZ, as the purchaser. While the purchase monies were to be raised in Australia, Alesco’s board had not then decided on the appropriate funding structure. Judgement from the Court of Appeal: A Alesco NZ’s appeal is dismissed. B Alesco NZ must pay costs to the Commissioner for a complex appeal on a band B basis and usual disbursements. We certify for two counsel. Judgement from the Supreme Court: A Leave to appeal is granted. B The approved grounds of appeal are whether, in light of the principles laid down by this Court in Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue and other cases on tax avoidance: (i) the structure used by the applicants for funding the transactions is a tax avoidance arrangement; (ii) the Commissioner’s application of shortfall penalties was a proper exercise of the relevant statutory powers; (iii) the Commissioner’s reassessments were a proper exercise of the relevant statutory powers. Alesco New Zealand Limited and others v Commissioner of Inland Revenue 2013
Czech Republic vs. EWE s.r.o., June 2013, Supreme Administrative Court , Case No 7 Afs 48/2013 – 31

Czech Republic vs. EWE s.r.o., June 2013, Supreme Administrative Court , Case No 7 Afs 48/2013 – 31

EWE s.r.o first criticised the Regional Court for the lack of logical reasoning in the grounds of the judgment, based on evidence that it had established a legal relationship with another person mainly for the purpose of reducing the tax base. Although the facts adduced by the administrative court show that ‘some third parties’ created a relationship between them for that purpose, it does not indicate which evidence shows that it was she who created such a relationship for the purpose of reducing the tax base, as is intended by section 23(7)(b)(5) of the Income Tax Act. This defect in the court’s decision is all the more serious since she herself argued that no evidence was adduced in the administrative proceedings (in the tax inspection report) to show that she was knowingly involved in a chain of otherwise connected persons. It is thus merely the unproven assumptions of the tax authorities. No such evidence was presented by the Police of the Czech Republic in its complaint to the tax administrator. In so far as the Regional Court subsequently found such findings to be correct, its judgment is based on insufficient or incorrect findings of fact. If the administrative court accepted the conclusions of the administrative authorities that the conditions for the application of Section 23(7) of the Income Tax Act were met, it was obliged to state on what evidence it agreed with the conclusion of the Tax Directorate. However, the Regional Court failed to do so and its judgment is therefore unreviewable. This is also because no such evidence exists and was not adduced by the tax administrator, the Tax Directorate or the Regional Court. As far as it is aware, in other cases – for example, in the case of the appeal of STECOMTRA s.r.o., Tax Registration No:26847469 (another end customer of the chain in question), the Tax Directorate in Ostrava stated in its decision on the appeal that the tax administrator had failed to collect such evidence to show that the appellant knew or could have known that it was part of the chain (while it had the same documents from the police as the administrative authorities in its case). Since in her case it was not established that she was a person otherwise connected within the meaning of section 23(7) of the Income Tax Act, there was no legal reason for the tax authorities to ask her to prove the difference between her purchase price and the normal price. She was, therefore, not required to satisfactorily prove the alleged price difference. The tax authorities were therefore not legally entitled to adjust the tax base by the difference found. Any determination of the normal price was therefore irrelevant. The taxpayer’s normal price was the price at which it purchased the services from its supplier (Property). That company also offered its services to others at the prices paid to it. The price invoiced in her case was also the price for similar advertising in other media. The Regional Court therefore not only misinterpreted Section 23(7) of the Income Tax Act, but also incorrectly considered her burden of proof. If there were no material doubts on the part of the tax authority, there was no obligation on the tax authority to prove the differences between the prices. It cannot therefore be concluded that, as a taxable person, it did not satisfactorily document and prove the difference in prices between the services it purchased and similar services contracted between unrelated parties. The Regional Court thus erred in its consideration of the issue of the taxpayer’s burden of proof (Article 92(5)(d) of the Tax Code). Since the Regional Court, without giving any further reasons, merely followed the legal opinion of the Tax Directorate, thereby approving, inter alia, the unlawful procedure of the administrative authorities, its judgment is also unreviewable. By that defective procedure, the administrative court also infringed the applicant’s right to seek protection of her rights before an independent and impartial tribunal. In its written observations on the appeal, the Directorate of Appeal considers that the extraordinary appeal is unfounded. The judgment of the Regional Court is factually correct and not unreviewable. The objection that the Regional Court, like the administrative authorities, does not indicate which evidence shows that the appellant established a legal relationship with another person mainly for the purpose of reducing the tax base is entirely unfounded. Both the Regional Court and the administrative authorities have dealt with the question of otherwise connected persons and have duly established that fact. The complainant was at the end of the chain when it purchased advertising at 22 times the price charged by the first link in the chain, which provided the service at the normal price. Both the existence of this chain and the amounts invoiced in this chain were proven. The administrative authorities have thus met their burden of proof under Article 23(7) of the Income Tax Act and have established the objective situation, namely that the complainant was part of a chain of otherwise connected persons. The applicant therefore requests the Supreme Administrative Court to dismiss the appeal. Judgement of the Court The Court dismissed the appeal of EWE s.r.o. Excerpt “The Supreme Administrative Court notes that a person under section 23(7)(b)(5) of the Income Tax Act is any person who benefits from the actions of persons in a chain whose effect and purpose is predominantly to reduce the tax base or increase the tax loss (here, a 22-fold increase in the tax-effective expenditure). This does not change the complainant’s assumption that the Tax Directorate is obliged to prove the subjective aspect of such unfair conduct, i.e. her knowledge of such conduct (intent), i.e. that she entered into the contractual relationship with knowledge of a possible reduction in her tax base. The question of fault is relevant in criminal law, but not in the tax administration proceedings (tax law). Moreover, the fact that a possible expense originated with persons who are otherwise related does not in itself
UK Parliament, House of Commons, Committee of Public Accounts, Hearings on Tax Avoidance Schemes

UK Parliament, House of Commons, Committee of Public Accounts, Hearings on Tax Avoidance Schemes

Follow the work of the UK Parliament, House of Commons Committee of Public Account, on corporate tax avoidance schemes. http://www.parliament.uk/business/committees/committees-a-z/commons-select/public-accounts-committee/taxation/ Statements from Amazon, Google and Starbucks, November 2012 UK Parlement, September 2012 Google Amazon Starbucks Statement from Google June 2013 UK Parlement, June 2013, Tax Avoidance–Google
Switzerland vs. Y Holding AG, May 2013, Federal Supreme Court, Case No. 2C_1086/2012

Switzerland vs. Y Holding AG, May 2013, Federal Supreme Court, Case No. 2C_1086/2012

A finance company registered in Guernsey was found to have effective place of management in Switzerland due to lack of functional substance in Guernsey. The Swiss Federal Supreme Court stated that the effective place of management is to be distinguished from the activity of the Board of Directors and the General Assembly and from mere administrative activity, such as accounting. Thus, the effective place of management of a company is where the company has its economic center. Management of the ongoing business in the context of the purpose of the company is decisive, including the decisions made in relation to the core business. According to the Federal Supreme Court, the only business of X Ltd was forwarding the start-up capital provided by Y Holding AG in the form of loans to Group companies. X Ltd activities in Guernsey were of a purely administrative nature, and in the exclusive interest of Y Holding AG. The decisions on the respective lending activities was made by the management of Y Holding AG in Switzerland. The low rent of the business premises in Guernsey, low telephone costs, and just two part-time employees with low pay supported the fact that the effective place of management was located in Switzerland and not in Guernsey. Click here for translation Swiss case law 2C_1086-2012
New Zealand vs Alesco New Zealand Ltd March 2013 Court of Appeal NZCA 40

New Zealand vs Alesco New Zealand Ltd March 2013 Court of Appeal NZCA 40

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. NewZealand-vs-Alesco-New-Zealand-Ltd-March-2013
Nederlands vs "Paper Trading B.V.", October 2011, Supreme Court, Case No 11/00762, ECLI:NL:HR:2011:BT8777

Nederlands vs “Paper Trading B.V.”, October 2011, Supreme Court, Case No 11/00762, ECLI:NL:HR:2011:BT8777

“Paper Trading B.V.” was active in the business of buying and selling paper. The paper was purchased (mostly) in Finland, and sold in the Netherlands, Belgium, France, and Germany. The purchasing and selling activities were carried out by the director of Paper Trading B.V. “Mr. O” who was also the owner of all shares in the company. In 1994, Mr. O set up a company in Switzerland “Paper Trader A.G”. The appointed director of “Paper Trader A.G” was a certified tax advisor, accountant, and trustee, who also acted as director of various other companies registered at the same address. The Swiss director took care of administration, correspondence, invoicing and corporate tax compliance. A couple of years later, part of the purchasing and selling of the paper was now carried out through “Paper Trader A.G”. However, Mr. O proved to be highly involved in activities on behalf of “Paper Trader A.G”, and the purchase and sale of its paper. Mr. O was not employed by “Paper Trader A.G”, nor did he receive any instructions from the company. From witness statements quoted by the Court in the context of a criminal investigation, it followed that Mr. O de facto ran “Paper Trader A.G” like Paper Trading B.V. Mr. O decided on a case-by-case basis whether a specific transaction was carried out by either one of the companies. Moreover, both companies had the same suppliers of paper, paper products, logistics providers and buyers. The only difference was the method of invoicing and payment. The tax authorities issued additional corporate income tax assessments for fiscal years 1996, 1997 and 1998. For fiscal year 1999, the tax authorities issued a corporate income tax assessment that deviated from the corporate income tax return filed by Paper Trading B.V. These decisions were appealed at the Court of Appeal in Amsterdam (the Court). Ruling The Court considered it plausible that the attribution of profit was not based on commercial consideration, but motivated by the interest of the Mr O. The aim was to siphon a (large) part of the revenue achieved from trading activities from the tax base in the Netherlands. The Court of Appeal ruled that the income generated by Paper Trader A.G had to be accounted for at the level of the Paper Trading B.V. For administrative services, Paper Trader A.G was entitled to a cost plus remuneration of 15%. Certain expenses could not be included in the cost basis, such as factoring and insurance fees. Judgement of the Supreme Court The Supreme Court confirmed the ruling. Click here for English translation Click here for other translation ECLI_NL_PHR_2011_BT8777
Indonesia vs "Asian Agri Group", December 2012, Supreme Court, Case No. 2239 K/PID.SUS/2012

Indonesia vs “Asian Agri Group”, December 2012, Supreme Court, Case No. 2239 K/PID.SUS/2012

This case is about extensive tax evasion set up by the tax manager of the Asian Agri Group. According to the tax authorities income from export sales had been manipulated. Products were sent directly to the end buyer, whereas the invoices recorded that the products were first sold to companies in Hong Kong and then sold to a company in Macau or the British Virgin Islands before they were finally sold to the end buyer. The intermediary companies were proven to have been used only for the purpose of lowering the taxable income by under-invoicing the sales prices compared to the sales price to the end buyer. Various fees had also been deducted from the companies income to further lower the tax payment. These included a “Jakarta fee”, a Hedging fee and a Management fee. Judgement of the Supreme Court The court ruled that the tax manager was guilty of submitting an incorrect or incomplete tax return. On that basis the tax manager was sentenced to a probationary imprisonment for two years on condition that, within one year, Asian Agri Group’s 14 affiliated companies paid a fine of twice the underpaid tax amount – 2 x Rp. 1.259.977.695.652,- = Rp. 2.519.955.391.304,-. Click here for translation (Hundreds of pages from the judgement containing lists of thousands of invoices and payments have been omitted in the translated version) putusan_2239_k_pid.sus_2012_20220425
Canada vs McKesson Canada Corporation, December 2013, Tax Court of Canada, Case No. 2013 TCC 404

Canada vs McKesson Canada Corporation, December 2013, Tax Court of Canada, Case No. 2013 TCC 404

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. Judgement 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. Canada_Tax_Court_McKesson
Spain vs. Bicc Cables Energía Comunicaciones S.A., July 2012, Supreme Court, Case No. 3779/2009

Spain vs. Bicc Cables Energía Comunicaciones S.A., July 2012, Supreme Court, Case No. 3779/2009

In May 1997, BICC CABLES ENERGÃA COMUNICACIONES, S.A. acquired 177 class B shares in BICC USA Inc. (BUSA) for USD 175 million. The par value of each share was one dollar. The acquisition price of the shares was set on the basis of an Arthur Andersen Report which stated that the fair market value of BUSA was USD 423 million. BUSA was the holding company of four investee companies, so the valuation was made in relation to each of the groups of investee companies. The shares acquired by BICC CABLES were Class B shares, with a fixed annual dividend of 4.5% of the total investment. This dividend was paid, at BUSA’s discretion and in accordance with the agreements entered into between the parties, either in cash or by delivery of shares in the Class B company. The acquisition was financed by (1) Ptas. 3,450,000,000,000 charged to the unrestricted reserves account of BICC CABLES and (2) 22,000,000,000 pesetas through a loan granted by an English bank at an interest rate of 6.03%. As a result of the acquisition, BICC CABLES received a shareholding percentage of 15%, which was much lower than what would correspond to the cost of the shares (175 million US dollars) in relation to the value estimated by the auditing company (423 million US dollars). In 1998, BUSA delivered 32 Class A shares to BICC CABLES as a dividend, valued at 1,321,546,634 pesetas. In 1999, no dividend was paid to the company. In June 1999, BICC CABLES repaid part of the loan early (Ptas. 3,600,000,000). Furthermore, in November 1999, BICC OVERSEAS INVESTMENTS Ltd. (BOIL) acquired the BUSA shares owned by BICC CABLES and, at the same time, subrogates itself to the part of the loan which had not been repaid. The shareholding structure of BICC CABLES was as follows: (1) BICC OVERSEAS INVESTMENTS Ltd. (BOIL), a <>, holds 615,000 shares (43.69% of the capital), 2) BICC CEAT CAVI SRL (BICC Plc.), the parent company of the group, holds 226,451 shares (19.05%), and (3) BANCO SANTANDER holds 500,000 non-voting shares (35.5%). In February 2000 SANTANDER sold its shares to BICC Plc. In 1997, BICC CABLES considered Ptas. 899,129,800 as tax deductible financial expenses arising from the loan. In 1998, the expenses linked to the loan Ptas. 1,326,600,000 were deducted from the taxable income. Dividend received this year (the 32 BUSA class A shares valued at Ptas. 1,321,546,634), was not included in the profit and loss account. The company claimed that income corresponding to the dividend would be accounted for when the shares were sold. In 1999, financial expenses related to the loan Ptas. 489,099,461 were considered deductible. In 2000, the partial repayment of the loan and the loss on the transfer of the shares to BOIL were accounted for, despite the fact that they corresponded to two transactions carried out in 1999″. On this bagground a tax assessment was issued by the tax authorities, in which the tax effects (deductions and losses) of the above transactions were disregarded. This assessment was appealed to the Court by BICC. The court of first instance dismissed the appeal and decided in favour of the tax authorities. Judgement of the Supreme Court The Supreme Court likewise found that the transaction would not have been agreed by independent parties and thus not had been in accordance with the arm’s length principle. Excerpts from the case “The application to the case of the provision in question does not appear to be conditional, contrary to what is claimed in the application, on the classification of the transaction in question as <> or <>. If the absence of free will on the part of the taxpayer is established, if it can be stated that the activity in question was exclusively determined by the link between the companies and if it is clearly inferred – from the evidence – that the same transaction would not have been carried out by independent companies, the competent tax authorities may make the appropriate adjustments, including, in this case, the annulment of any tax effect that might derive from the transaction in question.” “it can be concluded, in agreement with the contested decisions, that the transaction resulted in BICC USA Inc. (BUSA) obtained substantial financial resources without the incorporation of shareholders from outside the group; furthermore, it gave rise to costs for the Spanish entity, which obtained no advantage or profit whatsoever, but only losses. It can easily be concluded that the operation was decided and imposed by the group’s parent company in order to increase the resources of its American subsidiary and that, in any event, in view of the above data, such an operation would not have been carried out by an independent company.” “In any case, it is clear that the Administration has made use of the anti-avoidance rules contained in article nine of the Double Taxation Convention, which constitutes our domestic law.” Click here for English translation Click here for other translation Spain-vs-Bicc-Cables-July-2012-Supreme-Court
Italy vs Take Two Interactive Italia s.r.l., July 2012, Supreme Court, no 11949/2012

Italy vs Take Two Interactive Italia s.r.l., July 2012, Supreme Court, no 11949/2012

In this case the Italien company, T. S.r.l. is entirely controlled by H. S.A., registered in Switzerland, and is part of the American multinational group T., being its only branch in Italy for the exclusive marketing of its software products (games for personal computers, play station, etc.). T. S.r.l. imports these products through T. Ltd (which is also part of the same multinational group and controlled by the same parent company), which is registered in the United Kingdom and is the sole supplier of the products that are marketed by the Italian branch. On 31st October 2004 (the last day of the financial year), T. S.r.l. posted an invoice that the British company T. Ltd had issued on that date for £ 947,456. This accounts document referred to “Price adjustment to product sold during FY 2003/2004â€, and charges the Italian company with adjustment increases to previously applied prices relative to certain software products the company had purchased during the aforesaid financial year. The Inland Revenue challenged the operation claiming it was evasive, and addressed to reducing the taxable profit of the Italian company by the abusive use of transfer pricing. To back up these claims the Inland Revenue emphasised that: • the operation was carried out on the last day of the financial year; • it involved posting an invoice for the adjustment increases to previously applied prices by the English supplier company; • the prices differ from the average purchase price for the same products by T. S.r.l.. Supreme Court established that: “(…)the application of transfer pricing regulations does not fight the concealment of the price, which is a form of evasion, but the manoeuvres that affect an evident price, allowing the surreptitious transfer of profits from one country to another, which has a tangible effect on the applicable tax regime. Therefore, given these essential requirements it must be considered that this regulation constitutes – according to the more widespread interpretation in case law in this court – an anti-avoidance provision (…)â€. The infringement of an anti-avoidance provision means that the burden of proof for recourse to this premise of fact, in principle is the responsibility of the Inland Revenue office that intends carrying out the controls. Therefore, the Supreme Court felt that: “(…) when determining company income, or rather, the problem of sharing the intra-group costs, the question of pertinence must be considered as well as the existence of the declared costs further to charging for a service or asset transfer to the subsidiary from the holding, or another company that is controlled by the same company (…). The burden for demonstrating the existence and pertinence of these negative income items, and, as in the case in question, it concerns costs derived from services or assets loaned or transferred by a foreign holding to an Italian subsidiary, each element that enables the inland revenue to verify the arm’s length value of the relative costs – further to the so-called principle of sphere of influence– can only be the responsibility of the taxpayerâ€. Transfer pricing legislation is included among the anti-avoidance dispositions, as it is addressed to fight the transfer of income from one country to another by “manipulating†the intra-group costs. Consequently, the burden of proof that there are the premises of fact of evasion lies, mainly, with the Inland Revenue, which should prove the grounds for the adjustment, or the deviation from the applied cost with respect to the arm’s length value. However, as the sharing of intra-group costs also involves the matter of whether the costs exist and are pertinent, the burden of proof of the costs to the company’s business lies with the taxpayer according to the Supreme Court. The Italien Supreme Court have drawn a distinction between cases regarding income and cases regarding expenses. In cases regarding income the burden of proof lies with the tax authorities. In cases regarding costs, the burden of proof lies with the taxpayer. Click here for English translation Click here for other translation Italy-vs-Take-Two-Interactive-Italia-srl-2012
India vs Vodafone International Holdings BV, 2012, Supreme Court

India vs Vodafone International Holdings BV, 2012, Supreme Court

In the Vodafone case, the Supreme Court of India found that tax planning within the law will be valid as long as it does not amount to a colourable device. India Vodafone-International-Holding-BV-2012
Philippines vs Filinvest Development Corporation, July 2011, Supreme Court, G.R. No. 163653

Philippines vs Filinvest Development Corporation, July 2011, Supreme Court, G.R. No. 163653

In the Filinvest case an assessment had been issued where the tax authorities had imputed interest on an interest free loan. Judgement of the Tax Court The Court set aside the assessment. The tax authorities power to allocate gross income does not include the power to impute ‘theoretical interest’ because there must be actual or, at the very least, probable receipt or realisation by the taxpayer of the income that is being allocated. Philippines vs Filinvest Development Corporation July 2011 Supreme Court 163653y
South Africa vs. NWK LtD, Dec. 2010, Supreme Court of Appeal, Case No. 27/10

South Africa vs. NWK LtD, Dec. 2010, Supreme Court of Appeal, Case No. 27/10

Over a period of five years, from 1999 to 2003, the respondent, NWK Ltd, claimed deductions from income tax in respect of interest paid on a loan to it by Slab Trading Company (Pty) Ltd (Slab), a subsidiary of First National Bank (FNB), in the sum of R 96.415.776. The deductions were allowed. But in 2003 the appellant, the Commissioner for the South African Revenue Service, issued new assessments disallowing the deductions and refusing to remit any part of the interest on the amounts assessed. He also imposed additional tax and interest in terms of ss 76 and 89quat of the Income Tax Act 58 of 1962. The amount claimed pursuant to the additional assessments, including additional tax, was R 47.360.583. The basis of the revised assessments by the Commissioner was that the loan was not a genuine contract: it was part of a series of transactions entered into between NWK and FNB and its subsidiaries, all designed to disguise the true nature of the transaction between NWK and FNB, with the intention of NWK avoiding or reducing its liability for tax. NWK appealed against the assessments and the imposition of additional interest and penalties. Boruchowitz J and two assessors in the Tax Court held at Johannesburg upheld the appeal. It is against the order of the Tax Court that the Commissioner appeals. The basis of the Commissioner‟s argument on appeal is that the loan was simulated: that it had to be viewed in the light of several other agreements concluded between NWK and FNB, and FNB and its subsidiaries, which together showed that a sum of only R50m was lent by FNB to NWK, and that the transactions were devised to increase the ostensible amount lent so that deductions of interest on a greater amount could be claimed. NWK argued, on the other hand, that there was an honest intention on the part of NWK, represented by Mr E Barnard, its financial director, to execute the contracts in accordance with their tenor, and the claims for deductions were valid. The Tax Court accepted this contention and upheld the appeal to the Tax Court on this basis. The Supreme Court of Appeal ruled in favor of the Revenue Service (a) The objection to the assessments is dismissed and the additional assessments are upheld. (b) The objection to the imposition of additional tax of 200 per cent is upheld. (c) Additional tax of 100 per cent of the total amount of the additional assessments is imposed in terms of s 76 of the Income Tax Act 58 of 1962. CSARS-v-NWK-27-10-2010-ZASCA-168-1-December-2010
US vs. Veritas Software Corporation, December 2009

US vs. Veritas Software Corporation, December 2009

The issue in the VERITAS case involved the calculation of the buy-in payment under VERITAS’ cost sharing arrangement with its Irish affiliate. VERITAS US assigned all of its existing European sales agreements to VERITAS Ireland. Similarly,VERITAS Ireland was given the rights to use the covered intangibles and to use VERITAS US’s trademarks, trade names and service marks in Europe, the Middle East and Africa, and in Asia-Pacific and Japan. In return, VERITAS Ireland agreed to pay royalties to VERITAS US in exchange for the rights granted. The royalty payment included a prepayment amount (i.e. lump-sum payment) along with running royalties that were subject to revision to maintain an arm’s length rate. Thereafter, VERITAS Ireland began co-developing, manufacturing and selling VERITAS products in the Europe, the Middle East and Africa markets as well as in the Asia-Pacific and Japan markets. These improvements, along with the establishment of new management, allowed VERITAS’ 2004 annual revenues to be five times higher than its 1999 revenues from Europe, the Middle East and Africa, and Asia-Pacific and Japan. the IRS’s economic expert employed the income method to calculate the buy-in payment (for pre-existing intangibles that were to be used by the parties to develop future technology under the cost sharing arrangement). These calculations were based on the assumption that the transfer of pre-existing intangibles by VERITAS US was “akin to a sale†and should be evaluated as such. To value the transfer, the IRS expert aggregated the intangibles so that, in effect, he treated the transfer as a sale of VERITAS US’s business, rather than a sale of each separate intangible asset. The aggregation of  the intangibles was necessary, in the view of the IRS expert, because the assets collectively (the package of intangibles) possessed synergies and, as a result, the package of intangibles was more valuable than each individual intangible asset standing alone. The Court rejected the IRS’s method on the following premises: The IRS did not differentiate between the value of  subsequently developed intangibles and pre-existing intangibles, thus including intangibles beyond what  is required for the buy-in payment; The IRS included intangibles such as access to VERITAS US’s marketing and R&D teams, which are not among the intangibles recognized by the US transfer pricing rules; and The IRS incorrectly assigned a perpetual useful life for transferred intangibles that have a useful life of four years. US veritas
Spain vs X SL, June 2009, TEAC, Case No Rec. 656/2007

Spain vs X SL, June 2009, TEAC, Case No Rec. 656/2007

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 Spain vs X SL Rec 656-2007
New Zealand vs BNZ Investments Ltd,  July 2009, HIGH COURT

New Zealand vs BNZ Investments Ltd, July 2009, HIGH COURT

The case: Is each of six similar structured finance transactions entered into by the plaintiffs (the BNZ) a ‘tax avoidance arrangement’ void under s BG 1 Income Tax Act 1994? That is the primary issue in these five consolidated proceedings brought by the BNZ against the Commissioner, challenging his assessments issued after he voided each of the transactions pursuant to s BG 1. The BNZ claims the transactions are not caught by s BG 1. A second issue, arising only if s BG 1 applies, is the correctness of the way in which the Commissioner has, pursuant to s GB 1, counteracted the tax advantage obtained by the BNZ under the transactions. The Commissioner disallowed the deductions claimed by the BNZ, as its costs of the transactions. The BNZ claims the deductions should be disallowed only to the extent they are excessive or ‘overmarket’. A third, and perhaps strictly antecedent, issue is whether the guarantee arrangement fee (GAF) or guarantee procurement fee (GPF) charged in each transaction is properly deductible under s BD 2. The transactions are so-called ‘repo’ deals: the BNZ made an equity investment in an overseas entity on terms requiring the overseas counterparty to repurchase that investment when the transaction terminated. The transactions were structured to enable the BNZ to deduct its expenses of earning the income yielded by its investment, while receiving that income free of tax. In the case of the first transaction, that tax relief resulted from a credit for foreign tax paid. The BNZ’s income from the five subsequent transactions was relieved of tax by the conduit regime. That domestic tax ‘asymmetry’ – tax deductible costs earning tax exempted income – made the transactions highly profitable for the BNZ. The BNZ contends each of these transactions involved real obligations, notably those resulting from the BNZ raising $500 million on the New Zealand money market and advancing that to the counterparty upon a repo obligation. Further, the BNZ’s case is that the transactions made legitimate use both of crossborder tax arbitrage and the domestic tax ‘asymmetry’ just described. Cross-border tax arbitrage refers to the different tax treatment of the transaction in New Zealand and the foreign counterparty’s jurisdiction. New Zealand tax law treated the transactions as equity investments, the counterparties’ jurisdictions (the United States of America for the first three transactions; the United Kingdom for the later three) as secured loans. That enabled the counterparties to deduct, as interest, the distribution they made which the BNZ received free of tax in New Zealand. The BNZ submits that the evidence establishes that “tax driven structures and tax arbitrage are common and accepted elements of international financeâ€. The Bank says the central or critical question in the case is the appropriate approach in law to the asymmetry between deductible expenditure and tax relieved income around which these transactions or arrangements were structured. The essential bases on which the Commissioner asserts s BG 1 catches the transactions are: a) They substantially altered the incidence of tax for the BNZ. Indeed, that was their only purpose or effect. It certainly was not a merely incidental purpose or effect. The Commissioner adopted the description of one of his witnesses: … A prime purpose of the profit-maximising actions of these transactions was to use the tax base to make money. They had no commercial purpose or rationale. Absent the tax benefits they generated, the transactions were loss-making, in that the BNZ provided funding to the counterparties at substantially less than its cost of funds. The Commissioner contended “the tax tail wagged the commercial dogâ€. They were not within the scheme and purpose of the regimes they utilised to generate tax exempted income, the foreign tax credit (FTC) and conduit relief regimes respectively. In the case of the FTC regime utilised by the first (Gen Re 1) transaction, the transaction also did not comply with the applicable specific provisions. d) The principal deductible expenses claimed by the BNZ (the fixed rate it paid on an interest rate swap and the GAFs or GPFs) were contrived and artificial. e) The transactions were structured on a formulaic basis, which had the artificial consequence that, the higher the transaction costs, the higher the tax benefits they generated. The six transactions in issue span eight income tax years between 1998 and 2005. Three further transactions, two of them earlier in time, also featured in the evidence. While those three further transactions have a similar structure, they have the distinguishing feature of being New Zealand tax positive. The BNZ obtained binding rulings from the Commissioner on each of those three transactions, which I will call ‘the ruled transactions’. Approximately $416 million of tax hinges on the outcome of these proceedings. Challenge proceedings brought by the Westpac Banking Corporation began in Auckland on 30 June. Proceedings brought by other New Zealand trading banks have yet to come on for trial. If occasional press reports are accurate, the total amount of tax in issue is over $1.5 billion. The Court found in favor of the tax authorities. The case was later settled out of court. New Zealand vs BNZ Investments Ltd v Commissioner of Inland Revenue 15 july 2009
New Zealand vs Westpac Banking Corporation, February 2009, High Court, Case no CA624/07

New Zealand vs Westpac Banking Corporation, February 2009, High Court, Case no CA624/07

Westpac Banking Corporation has challenged amended assessments issued by the Commissioner of Inland Revenue to its taxation liability for the years 1999 to 2005. The assessments impugn the bank’s taxation treatment of nine structured finance transactions entered into with overseas counterparties in that period. The funds invested in each transaction ranged between NZD390m and NZD1.5b. By August 2002 Westpac’s total investment in the transactions was NZD4.36b, representing 18% of its assets. The Commissioner says that the purpose or effect of the transactions or parts of them was tax avoidance. He has reassessed Westpac to liability of $586m. With the addition of use of money interest of $375m, the total amount of tax at issue is $961m (including voluntary payments of $443m made by the bank under protest). In brief summary, the transactions were structured in this way: Westpac, acting through subsidiaries, purchased preference shares issued by specially formed subsidiaries (in one case a partnership was used) within a counterparty group of companies in the United States and the United Kingdom. Another subsidiary within the group assumed an obligation to repurchase the shares in five years or less. Westpac paid that subsidiary a fee, known as the guarantee procurement fee or GPF, to procure the parent company’s guarantee of the subsidiary’s obligations. The counterparty jurisdictions treated the transactions for taxation purposes according to their economic substance as loans. Dividends payable on the shares were thus deductible interest for the issuer. By contrast, New Zealand revenue law treated the dividends according to their legal form as income returned to Westpac on equity investments which was exempt from taxation liability. This cross-border differential created the first element of taxation asymmetry inherent in the transactions. The Commissioner makes these allegations: The GPF was an artifice, designed to create a taxation benefit for the parties to share. The mechanism was the dividend rate which was fixed to incorporate both asymmetries and to provide the counterparty with the funds to pay that dividend. By this means the bank was able to offset substantial expenditure against its New Zealand sourced income. And the counterparty received or borrowed large sums at significantly less than market rates. Without this artificial benefit, the financing would never have taken place. The commercial viability of these transactions, the Commissioner says, depended wholly on the achievability of the deductions which were their goal, and on the existence of certain interdependent prerequisites that drove the structure and detail of the arrangements. In particular, he identifies a New Zealand financial institution with a significant tax capacity; a suitable overseas counterparty with a tolerance for tax driven deals; statutory mechanisms within the New Zealand system which Westpac could use to ensure that the income stream was exempt or relieved from tax and to obtain deductions for tax purposes for the costs; and a statutory mechanism within an overseas tax jurisdiction allowing the counterparty to obtain deductions for the distribution stream. Westpac carries the statutory burden of proving what is effectively a negative. It contests the Commissioner’s assessments. The bank says that it advanced real money to real parties and assumed a real and substantial credit risk; that the business purpose of each transaction was to provide funding to the counterparty group; that the transactions, if viewed with commercial and economic realism, made use of specific taxation provisions in a manner consistent with Parliament’s purpose; and that, contrary to the Commissioner’s contention, the transactions were pre-tax positive. The bank denies any element of artificiality, contrivance or lack of business purpose in its use of the specific deduction provisions. It denies also that it shared the benefit of its deductibility entitlement with the counterparty through the dividend rate calculation. And it says that it acted entirely within its legal rights in choosing a structure that used permissible tax advantages. The Judgement In the result, Westpac’s challenge to the Commissioner’s reassessments must fail. The bank has failed to discharge its onus of proving that the Commissioner erred, either in law or in fact. It may count itself fortunate that he did not, on his hypothetical reconstruction, disallow the bank’s claim for its exempt income. Summary In summary, I have found as follows: (1) Westpac’s claim for deductions for the GPF were unlawful, and the Commissioner is entitled to disallow them in entirety; (2) In any event, Koch and the other three transactions were tax avoidance arrangements entered into for a purpose of avoiding tax; (3) The Commissioner has correctly adjusted the deductions claimed by Westpac in order to counteract its tax advantage gained under an avoided arrangement. It follows that I dismiss Westpac’s applications on Koch, CSFB, Rabo 1 and Rabo 2 for an order cancelling or varying the Commissioner’s amended assessment. The case was later settled out of court New Zealand vs WESTPAC BANKING CORPORATION 7 October 2009 High Court CIV 2005-404-2843 Westpac Banking Corporation v Commissioner of Inland Revenue 20 February 2009

New Zealand vs Ben Nevis Forestry Ventures Ltd., December 2008, Supreme Court, Case No [2008] NZSC 115, SC 43/2007 and 44/2007

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. Judgement 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 tandemâ€. 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
Brazil vs Marcopolo SA, June 2008, Administrative Court of Appeal (CARF), Case  No. 11020.004103/2006-21, 105-17.083

Brazil vs Marcopolo SA, June 2008, Administrative Court of Appeal (CARF), Case No. 11020.004103/2006-21, 105-17.083

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
Canada vs MIL (INVESTMENTS) S.A., June 2007, Federal Court of Canada, Case No 2007 FCA 236

Canada vs MIL (INVESTMENTS) S.A., June 2007, Federal Court of Canada, Case No 2007 FCA 236

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. Judgement 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 Canada v. MIL (Investments) S.A. - Federal Court of Appeal
Switzerland vs A Holding ApS, November 2005, Tribunal Fédéral Suisse, 2A.239/2005

Switzerland vs A Holding ApS, November 2005, Tribunal Fédéral Suisse, 2A.239/2005

A Holding ApS is the owner of all shares in F. AG, domiciled in G. (Canton of Schaffhausen), which it acquired in December 1999 for a total price of Fr. 1. F. AG produces consumer goods. In accordance with the resolution of the general meeting of F. AG on 30 November 2000, a dividend of Fr. 5,500,000 was distributed. Of this amount, F. Ltd paid Fr. 1,925,000 as withholding tax to the Swiss Federal Tax Administration and the remaining amount of Fr. 3,575,000 to Holding ApS. On 15 December 2000, the latter in turn decided to distribute a dividend of 26,882,350 Danish kroner to C. Ltd. On 19 December 2000, A Holding ApS submitted an application to the competent Danish authority for a refund of the withholding tax in the amount of Fr. 1,925,000. The Danish authority confirmed the application and forwarded it to the Federal Tax Administration. By decision of 3 April 2003, the Federal Tax Administration rejected the application for a refund of the withholding tax. The reason given was that A Holding ApS was not engaged in any real economic activity in Denmark; it had been established solely for the purpose of availing itself of the benefits of the Agreement of 23 November 1973 between the Swiss Confederation and the Kingdom of Denmark for the Avoidance of Double Taxation in respect of Taxes on Income and on Capital. The appeals filed by A Holding ApS against this decision were dismissed by the Federal Tax Administration in its objection decision of 4 September 2003 and subsequently by the Federal Tax Appeals Commission in its decision of 3 March 2005. The A Holding ApS filed an administrative appeal with the Federal Administrative Court on 18 April 2005. It requested that the decision of the Federal Tax Appeals Commission be annulled and that the Federal Tax Administration be ordered to pay it the amount of CHF 1,925,000 plus 5% interest thereon since 29 January 2001. Judgement of the Court of Appeal The Court found that the Appeals Commission was correct in refusing to refund the withholding tax claimed by A Holding ApS on the grounds of abuse of the agreement. The appeal therefore proves to be unfounded and must be dismissed. Exceerpt “3.6.4 The complainant does not meet any of the conditions just mentioned. As the lower court found binding for the Federal Supreme Court (cf. Art. 105 para. 2 OG), it has neither its own office premises nor its own staff in Denmark. Accordingly, it did not record any fixed assets or any rental or personnel expenses. The “director” of the complainant, E. who apparently controls the entire group and is resident in Bermuda, performs all management functions according to the complainant’s own statement of facts and does not receive any compensation for this. Thus, the complainant itself does not carry out any effective business activity in Denmark; administration, management of current business and corporate management are not carried out there. It only has a formal seat in Denmark. Significantly, the complainant also immediately forwarded the dividends to its parent company. The complainant’s arguments that it also intends to hold other European shareholdings of the entire group are irrelevant. What is decisive is that, according to the above, the complainant ultimately proves to be a letterbox company and that, apart from tax considerations, no economically significant reasons for its presence in Denmark are apparent. The complainant’s objection that, in view of its detailed statements in the proceedings before the court, it is untenable for the Appeals Commission to claim that it [the complainant] “undisputedly” has no facilities and activities at all, does not lead to a different conclusion. The statements in question before the Appeals Commission do not contradict the above findings. The complainant has failed to show what significant activities it carries out in Denmark itself. If, on the one hand, it is established that the person resident in Bermuda carries out all management activities for the holding company and that there are no other staff, it is not sufficient for the complainant to merely allege, in an unsubstantiated manner, that it works with external resources as far as necessary and that the Danish company H. (as the complainant’s auditors) carries out such outsourced functions in a professional manner. 3.6.5 Other reasons that would justify the granting of the advantages of the agreement (cf. n. 19 and 21 of the OECD Commentary on Art. 1 OECD-MA 2003 and 1995 respectively) are also not given here. Even if the aforementioned circular letter 1999 of the Swiss Federal Tax Administration is used for comparison, no contradiction can be ascertained with regard to point 3 (critical with regard to the decision challenged here: Markus Reich/Michael Beusch, Entwicklungen im Steuerrecht, SJZ 101/2005 p. 266). According to that point 3, holding companies that exclusively or almost exclusively manage and finance participations may use more than 50 per cent of the income eligible for treaty relief to meet the claims of persons not entitled to treaty relief, provided that these expenses are justified on business grounds and can be substantiated; holding companies that engage in other activities in addition to managing and financing participations may not use more than 50 per cent of the income eligible for treaty relief (critically: Silvia Zimmermann, Kreisschreiben vom 17. 12.1998 on the abuse decision, StR 54/1999 p. 157 f.). The regulation in the circular presupposes that the company domiciled in Switzerland actually manages and finances the participations from here. From a mirror image perspective – insofar as such a mirror image may be possible at all – this requirement would not be met by the complainant, which is domiciled in Denmark and is a letterbox company, as explained above (E. 3.6.4). 3.6.6 Finally, the model clause listed in point 21.4 of the OECD Commentary on the OECD-MA 2003 would not lead to any other conclusion. According to this clause, the provisions of Art. 10 DTA (dividends) “shall not apply” if “the principal intention or one of the principal
India vs Azadi Bachao Andolan, 2003, Supreme Court

India vs Azadi Bachao Andolan, 2003, Supreme Court

In this case the Court held that while a “colourable device” could result in the transaction being considered a sham, that did not mean that tax planning within the law will not be permitted. India vs Azadi-Bachao-Andolan
Tax Avoidance Schemes

UK vs. W. T. Ramsay Limited, March 1981, HOUSE OF LORDS, Case No. HL/PO/JU/18/241

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. UK vs RAMSAY LIMITED 1981

US vs Moline Properties Inc, June 1943, US Supreme Court, Case No 660

US doctrine of corporate entity. US vs Moline Properties US Supreme Court usrep319436
Gregory v. Helvering, January 1935, U.S. Supreme Court, Case No. 293 U.S. 465 (1935)

Gregory v. Helvering, January 1935, U.S. Supreme Court, Case No. 293 U.S. 465 (1935)

The first rulings where the IRS proposed recharacterizing transactions that could be considered abusive through use of transfer pricing provisions. Judgement 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 US Supreme Court Gregory v Helvering 293 U.S. 465 (1935)
UK vs. Duke of Westminster, May 1935, HOUSE OF LORDS, Case No. 19 TC 490, [1935] UKHL TC_19_490

UK vs. Duke of Westminster, May 1935, HOUSE OF LORDS, Case No. 19 TC 490, [1935] UKHL TC_19_490

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 substanceâ€) 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 TC_19_490