In 2013 “A” SARL requested a tax ruling confirming that its US branch had sufficient substance to qualify as a permanent establishment. The tax authorities issued the ruling conferming this to be the case, but only premised on the information provided by “A” SARL. The ruling would not be valid if the facts or circumstances described therein were incomplete or inaccurate. In 2016, “A” SARL filed an amended tax return for 2013 in which it had effectively allocated a dividend in kind to the US branch. Despite of the above mentioned tax ruling, the tax authorities disallowed the amendments to the tax return, finding that the US branch did not have sufficient substance to qualify as a permanent establishment. Not satisfied with the decision “A” SARL filed an appeal with the Administrative Court. Judgement of the Administrative Tribunal The Court decided in favour of the tax authorities and denied the recognition of US permanent establishment. Excerpt (in English) “In view of all the inconsistencies noted above in relation to (i) the date on which the Branch was set up, (ii) the transfer to the Branch of the claimant company’s shareholdings in company “M” and (iii) the distribution of the dividend to the claimant company, and in the absence of detailed and concrete explanations from the plaintiff company concerning, in particular, the contradictions in the dates mentioned in the various resolutions of its Board of Directors, respectively in its initial and amending tax returns, the allegation that the disputed dividend in kind was attributed to it via the branch must be rejected as being unsupported by any tangible evidence. Indeed, it would have been incumbent on the plaintiff company to provide documents that would have made it possible to establish irrevocably and indisputably that the disputed bonds had first been transferred by “M” to the branch before being subsequently reallocated to it by the branch, such as, for example, a copy of the decision by the shareholders of “F” to distribute a dividend in kind to the branch, with a precise indication of the date of payment, proof of the registration of the bonds in “M”‘s share account, proof of the transfer of the bonds to “F”‘s share account, proof of the transfer of the bonds to “M”‘s share account, proof of the transfer of the bonds to “F”‘s share account, proof of the transfer of the bonds to “M”‘s share account and proof of the transfer of the bonds to “F”‘s share account. bonds to the branch’s securities account, or a copy of the minutes and decisions taken by the manager of the US Branch, and in particular a document issued by the latter stating that the … Eurobonds were continued by the branch to the plaintiff company after July 11, 2013 at 4:30 p.m., i.e. the time when, according to the aforementioned letter of July 11, 2013, the branch would have been allocated the plaintiff company’s holdings in company “F”, or, if applicable, on July 12, 2013, which it nevertheless remains in default of doing. This conclusion is not shaken by the documents submitted by the plaintiff company to establish the existence of a permanent establishment in the United States within the meaning of Article 5 of the Convention, namely the certificate of registration of the Stable Establishment with the Connecticut revenue authorities, the branch’s bank account details and the copy of the service contract between the branch and the American company “H”. Indeed, it must be noted that the certificate of registration of the Stable Establishment with the Connecticut Revenue Service contains no precise date, so that it has not been established that the said establishment was actually created on July 11, 2013, as the plaintiff company maintains. As for the other two documents, they are irrelevant to the issue of the actual transfer of the dividend in kind to the branch, and must therefore be rejected as irrelevant in this respect. The same is true of the copy of the document described by the plaintiff company as a “copy of the confirmation of the listing of the Eurobonds on the Jersey Stock Exchange”, dated October 9, 2013, which, in the absence of more detailed explanations, does not allow us to conclude that the disputed bonds were actually reallocated to the plaintiff company via the branch on July 12, 2013. It follows that it has not been unequivocally established that the key elements of the transaction in the present case correspond to those described in the request for an advance ruling, so that the ACD was not obliged to comply with it, in particular as regards the recognition of the branch as a permanent establishment and consequently the taxation of its profits in the United States. It follows from all the foregoing considerations that the tax office rightly refused to take into consideration the new tax balance sheet as provided by the plaintiff company together with the rectifying tax return dated November 15, 2016, so that the bulletins for community income tax and communal business tax for the year 2013, issued on September 21, 2016 are to be confirmed. It follows from all the foregoing considerations that the appeal is not well-founded in any of its pleas, so that the plaintiff company is to be dismissed.” Click here for English translation Click here for other translation ...

The owner of a buy sell distributor in the pharmaceutical sector had entered into a total return swap with the company and on that basis the company had deducted a commission corresponding to 85% of net profits from its taxable income. The tax authorities disallowed the deduction claiming the swap-arrangement was not at arm’s length. The commission-payments received by the owner was instead considered a non-deductible hidden distribution of profits (dividend) and a withholding tax of 15% was applied. An appeal was filed with the Administrative Tribunal. Judgement of the Administrative Tribunal The Tribunal found the appeal of “TR Swap SARL” unfounded and decided in favor of the tax authorities. Excerpt “However, the court is obliged to note that the commissions paid to Mr … on the basis of the … and corresponding to 85% of the net profits of the company … amount to … euros, … euros, … euros and … euros during the disputed tax years 2014 to 2017, i.e. a total of … euros, as shown in the management decision of 7 June 2019, these amounts not being contested by the claimant. However, the amounts made available to the companies …, respectively … by Mr … correspond, on the one hand, to a maximum annual amount of … euros, in respect of the administrative operating costs of the company … as well as, on the other hand, as it appears from the documents entitled “Margin Calculation Sheet” from April 2013 to March 2018 issued by the plaintiff, to an amount of …, within the framework of the line of credit, an amount that does not bear interest and that should be subject, according to the terms agreed between the parties concerned, to reimbursement so as to constitute only a loan. Thus, Mr …, by paying annually a maximum amount of … euros, i.e. a total maximum of … euros during the disputed years from 2014 to 2017, received, by way of commission and after the repayment of the credit line granted, a total amount of … euros, elements which allow the court to hold that the tax authorities have provided sufficient elements to hold that Mr … … was granted an advantage that exceeds a priori the market conditions between third parties, so as to cast doubt on the transactions currently at issue and reversing the burden of proof. It should then be noted that in order to establish the economically justified nature of the distribution of the net profits of the company … between Mr … and itself, the plaintiff only relied on a document describing “the method used to determine the transfer price, as well as all the data selected to calculate the transfer price over the period 2014-2018″, which however only contains interest rates provided without any other explanation and whose author is not known, so that it is devoid of any evidential value. Furthermore, in the face of the state party’s challenges, the plaintiff failed to submit to the court any element that would make it possible to establish the existence and reality of the risks allegedly weighing on Mr. … and justifying the payment of commissions to the latter according to the terms and conditions set out in the …. The Director [of the Tax Administration] was therefore right to hold that the tax office could legitimately consider that the disputed amounts paid to Mr … in the context of the … concluded with the plaintiff during the tax years 2014 to 2017 did not comply with the usual market conditions between third parties and that it thus concluded that there was a hidden distribution of profits. It follows from all of the above considerations and in the absence of any other pleas that the appeal under review must be dismissed as unfounded.” Click here for English translation Click here for other translation ...

C is the parent company of the C-group which is involved in the construction business. C is part of a joint venture and for the expansion of these activities a framework agreement on shareholder loans was concluded. Under the agreement two shareholder loans were granted: ***loan*** II totalling 212,935,716.33 euros and ***loan*** III totalling 446,000,000 euros. At issue is whether (***loan*** II and ***loan*** III) are to be regarded as hidden equity capital or debt capital. In regards of loan II a binding ruling had previously been issued stating that the loan was hidden equity. C took the position that both loan II and loan III were to be treated for tax purposes as equity capital. Following an audit the tax authorities assessed both shareholder loans as debt capital and added interest income to the taxable income of C. In regards of the binding ruling previously issued, the authorities stated that the underlying facts had changed to such an extend that the ruling was no longer binding. The court of first instance held in favour of C, and an appeal was then filed by the tax authorities. Judgement of the Court The court upheld the decision of the court of first instance and found that the shareholder loans should be treated as hidden equity capital. Excerpts Loan II “Pursuant to § 118 (7) BAO, there is a legal claim that the assessment under tax law made in the information notice is used as a basis for the levying of the tax if the actual facts do not or only insignificantly deviate from those on which the information notice was based. It is certain that the complainant was issued a legally binding information notice in connection with the interest on the shareholder loan ***loan*** II. This information notice confirms that the loan granted has the character of hidden equity capital; an interest calculation for income tax purposes can therefore be omitted. It is also clear that the facts on which the tax office based the information notice have not changed. However, the tax authority now assumes that the factual elements on which the legal assessment of the information notice was based, and which were actually realised, were irrelevant for the assessment of the hidden equity in the present case.” Loan III “The separation principle is derived from the legal personality of a corporation, which allows for tax-effective service relationships between the shareholder and the corporation (cf. e.g. VwGH 28.04.2011, 2007/15/0031). The limit of the separation principle is the arm’s length principle (cf. Raab/Renner in Lachmayer/Strimitzer/Vock (eds.), Die Körperschaftsteuer (KStG 1988) (32nd ed. 2019) § 8 marginal no. 146). In connection with the granting of shareholder loans, conditions that are not arm’s length speaks in favour of hidden equity (cf. e.g. Ressler/Stürzlinger in Lang/Rust/Schuch/Staringer (eds.) KStG2 (2016) § 8 marginal no. 47). Conditions that are not customary for third parties speak against the existence of a genuine or serious shareholder loan (cf. e.g. VwGH 14.12.2000, 95/15/0127; 26.07.2006, 2004/14/0151). In the opinion of the authority concerned, only the lack of interest speaks in favour of the shareholder loan not being customary for third parties. A single indication was not sufficient to reclassify a shareholder loan as hidden equity. On the other hand, the subjective intention to repay the loan was to be regarded as the basis for the assumption that the loan was in fact debt and not equity. The fact that subjectively there was already an intention to repay at the time the shareholder loan was granted is not questioned in principle by the complainant, who himself points out in justification of the chosen model that a greater flexibility for a possible later repayment should be ensured. In addition, the chosen construction can also be explained on the basis of the company law legislation of ***Land***, according to which a repayment of equity capital is only possible in the context of a capital reduction or in the event of liquidation (cf. the legal opinion submitted on 22 February 2022). For the Federal Supreme Finance Court it is clear that the shareholder loan ***loan*** III was not granted at arm’s length (see in detail the explanations and assessment of the circumstantial evidence as part of the evaluation of the evidence). Thus, in the opinion of the Federal Fiscal Court, there is no shareholder loan to be recognised for tax purposes, but hidden equity. Since no interest is to be paid on equity capital (for tax purposes), the appeal is to be upheld on this point and the interest payment made by the authorities is to be reversed.” Click here for English translation Click here for other translation ...

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 ...

In the Advocate General Opinion delivered 3 December 2020, in the EU Commissions “Aid scheme” case against Belgium and Magnetrol International, it is proposed that the Court of Justice set aside the 2019 judgment of the General Court, on the ground that the Commission has, contrary to the findings of the General Court, sufficiently demonstrated in its decision that the Belgian practice of making downward adjustments to profits of undertakings forming part of multinational groups meets the conditions for the existence of an ‘aid scheme’. “In conclusion, the General Court incorrectly assumed that the conditions of Article 1(d) of Regulation 2015/1589 were not met in the present case. On the contrary, in the contested decision the Commission sufficiently demonstrated that the Belgian practice of making downward adjustments of the profits of undertakings forming part of a multinational group constitutes an aid scheme within the meaning of Article 1(d) of Regulation 2015/1589. The appeal is therefore well founded.” ...