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 parties”. Click here for other translation ...

I. S.p.A. had received a tax assessment in which the tax authorities had corrected various items, including the inclusion of interest on an intra-group loan and the disallowance of tax deductions for the cost of intra-group services. The Provincial Tax Commission had cancelled the assessment, but following an appeal by the tax authorities, the Regional Court partially confirmed the assessment. Judgement of the Supreme Court The Supreme Court set aside the judgement of the Regional Court and refered the case back to the Court, in a different composition. Excerpts Controlled transactions “Correctly, therefore, the CTR has independently appreciated the notion of parent (or subsidiary) company provided for by the tax law. This solution is also consistent with the provisions of the OECD Transfer Pricing Guidelines of 1995 (but also with the previous and subsequent ones), which inspire the national regulations, which are not binding but relevant in terms of interpretation (Article 9 of the OECD Model, in particular, takes into consideration – and derives consequences in terms of the taxation of profits – the case in which the relationship is between two (associated) companies and the constraint derives from conditions accepted or imposed that differ from those that would have been agreed upon by independent companies). Nor should it be misleading that the CTR used the term “dominant influence”, which already existed in the previous text of Article 75, paragraph 4, of Presidential Decree No. 597 of 1973, since it is a formula suitable for describing the content of direct or indirect control, as set forth in Article 76, paragraph 5, (now 110) TUIR. 6.2. The CTR adequately motivated the belief expressed as to the existence, in this case, of a situation of control in light of the fact that the president and director of the K. Group, “to which K. M. KG, purchaser of the medical equipment, belongs … “possesses … a non-majority but slightly minority shareholding, equal to 45% of the shares of the company I., however, he has a dominant influence in the ordinary shareholders’ meeting in that the shareholding he holds exceeds the sum of the shares held by the three Italian partners (15% V. L., 20% V. A., 5% Z. C.)” and that furthermore “he is in any case able to exercise a dominant influence on the company I. thanks to the “strategic” role of “Sales and marketing” manager that he holds within” the company itself.” The arm’s length principle in regards to interest-free loans “10.2. To this second approach the court, also with a view to overcoming the conflict, considers to adhere. In fact, it is of paramount importance to identify the actual ratio of the institution, which is to be found in the arm’s length principle, set forth in Article 9 of the OECD Model Convention, the consideration of which cannot but be unitary regardless of the nature of the transaction, so that international non-interest-bearing loans between subsidiaries/parent companies are also included in the rules under review in view of the need to objectify the value of the transactions for tax purposes only. A number of reasons militate in support of this conclusion: – Article 110(7) of the Income Tax Code is a special rule with respect to the provisions concerning the determination of capital income: the special feature is the circumstance that one of the two parties (belonging to the same corporate group) involved in the financing transaction is based outside the territory of the State; hence, Article 45(2) of the Income Tax Code is inapplicable and any non-performance clauses cannot be relied on for tax purposes; – the connotation of the restrictive character of the freedom of negotiation attributed to the transfer pricing discipline is irrelevant; the ratio of the discipline aims at replacing the subjective value of the transaction with the objective and normalised value, so that it covers every managerial act potentially capable of inducing an increase or decrease in taxable income regardless of the legal structure of the relationships between the parties, whether onerous or free of charge; – there is no need for a restrictive interpretation: the phrase ‘components of income arising from transactions’ refers not only to actual but also to those that are generated even only potentially; – the current OECD Guidelines, while not re-proposing the specific indications already present in the 1979 version (which affirmed the general rule that the disbursement of a loan should always be followed by the charging of interest where, in the same circumstances, this would have been agreed upon by independent third parties), are unambiguous in clarifying (Chapter VII of the 2010 Guidelines, paras. 7.14 and 7.15 with respect to the identification and remuneration of financing as intra-group services, as well as 7.19, 7.29 and 7.31 with respect to the determination of the payment), that the remuneration of an intra-group financing must, as a rule, take place through the payment of an interest rate corresponding to that which would have been expected between independent companies in comparable circumstances. Such an arrangement also appears to be compatible with the principles of EU law in relation to the need to protect the balanced allocation of taxing power between Member States (see Court of Justice, judgment of 21 January 2010, Société de Gestión Industrie/le SA, in C-311/08, in relation to gratuitous benefits (“extraordinary and without consideration”) granted by a resident company to a company established in another Member State).” Click here for English translation Click here for other translation ...

In the case of Société Lifestand vivre debout, the Court considered that there was economic control in a situation where the rent for Swiss premises used by a Swiss entity was paid by a French company. The functions related to the activity of the Swiss company were actually performed by the French company. The French manager managed the Swiss company. Consequently, the transactions conducted between these two entities needed to comply with transfer pricing rules. Click here for other translation ...