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

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

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

A Regional Tax Court in Germany had requested a preliminary ruling from the European Court of Justice on two questions related to German transfer pricing documentation requirements. whether the freedom of establishment (Article 49 TFEU) or the freedom to provide services (Article 56 TFEU) is to be interpreted in such a way that it precludes the obligation to provide transfer pricing documentation for transactions with a foreign related parties (Section 90 (3) AO) and whether the sanctions regulated in section 162(4) AO could be contrary to EU law The Regional Tax Court considered that these provisions establish special documentation requirements for taxpayers with transactions with foreign related parties. In the event of non-compliance with these documentation requirements, section 162(4) AO leads to a sanction in the form of a fine/surcharge. Neither was provided for taxpayers with transactions with domestic related parties. However, such discrimination can be justified by compelling reasons in the public interest. In this context, the Regional Tax Court considered the legitimate objective of preventing tax avoidance and the preservation of the balanced distribution of taxation powers between the Member States as possible grounds for justification. However, the Tax Court was not confident in regards to the level of sanctions – i.e. whether the fine/surcharges went beyond what was necessary to achieve the intended purpose. Judgement of the European Court of Justice The Court ruled that German transfer pricing documentation requirement and related sanctions was not in conflict with EU law. “Article 49 TFEU must be interpreted as meaning that it does not preclude national legislation under which, in the first place, the taxpayer is subject to an obligation to provide documentation on the nature and content of, as well as on the economic and legal bases for, prices and other terms and conditions of his, her or its cross-border business transactions, with parties with which he, she or it has a relationship of interdependence, in capital or other aspects, enabling that taxpayer or those parties to exercise a definite influence over the other, and which provides, in the second place, in the event of infringement of that obligation, not only that his, her or its taxable income in the Member State concerned is rebuttably presumed to be higher than that which has been declared, and the tax authorities may carry out an estimate to the detriment of the taxpayer, but also that a surcharge of an amount equivalent to at least 5% and at most 10% of the excess income determined is imposed, with a minimum amount of EUR 5 000, unless non-compliance with that obligation is excusable or if the fault involved is minor.” ...

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 ...

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 ...

A Regional Court of Romania requested a preliminary ruling from the European Court of Justice in the Case of Impresa Pizzarotti. Impresa Pizzarotti is the Romanian branch of SC Impresa Pizzarotti & C SPA Italia (‘Pizzarotti Italia’), established in Italy. In 2017, the Romanian tax authorities conducted an audit of an branch of Impresa Pizzarotti. The audit revealed that the branch had concluded, as lender, two loan agreements with its parent company, Pizzarotti Italia: one dated 6 February 2012 for EUR 11 400 000 and another dated 9 March 2012 for EUR 2 300 000. Those sums had been borrowed for an initial period of one year, which could be extended by way of addendum, that the loan agreements did not contain any clause concerning the charging of interest by Impresa Pizzarotti, and that although the outstanding amount as of 1 January 2013 was EUR 11 250 000, both loans had been repaid in full by 9 April 2014. Transactions between Romanian persons and non-resident related persons are subject to the rules on transfer pricing. The concept of ‘Romanian persons’ covers a branch which is the permanent establishment of a non-resident person The tax authorities held that the local branch of Impresa Pizzarotti, was to be treated as a person related to Pizzarotti Italia and that the interest rate on those loans should have been set at market price, in accordance with the rules on transfer pricing. Consequently, a tax assessment was issued based on the tax audit report of the same date imposing on Impresa Pizzarotti a tax increase of 297 141.92 Romanian lei (RON) (approximately EUR 72 400) and an additional taxable amount of RON 1 857 137 (approximately EUR 452 595). Impresa Pizzarotti subsequently brought the case before the Romanian national court, the Tribunalul Cluj (Regional Court, Cluj, Romania), seeking annulment of the tax assessment. Impresa Pizzarotti held that the national provisions relied on by the tax office infringe Articles 49 and 63 TFEU, in so far as they provide that transfers of money between a branch established in one Member State and its parent company established in another Member State constitute transactions which may be subject to the rules on transfer pricing, whereas those rules do not apply where the branch and its parent company are established in the territory of the same Member State. The Romanian Court decided to stay the proceedings and to refer the following question to the Court of Justice for a preliminary ruling: “>‘Do Articles 49 and 63 [TFEU] preclude national legislation such as [Articles 11(2) and 29(3) of the Tax Code], which provides that a transfer of money from a company branch resident in one Member State to the parent company resident in another Member State may be reclassified as a revenue-generating transaction, with the consequent obligation to apply the rules on transfer pricing, whereas, if the same transaction had been effected between a company branch and a parent company, both of which were resident in the same Member State, that transaction could not have been reclassified in the same way and the rules on transfer pricing would not have been applied?’ Judgement of the Court The Court concluded that Romanian transfer pricing regulations were not in breach with the EU Fredoms of Establishment, cf. Article 49 TFEU. “By taxing the permanent establishment on the basis of the presumed amount of the remuneration for the advantage granted gratuitously to the parent company, in order to take account of the amount which that permanent establishment would have had to declare in respect of its profits if the transaction had been concluded in accordance with market conditions, the legislation at issue in the main proceedings thus allows Romania to exercise its power to tax in relation to activities carried out in its territory.” “…national legislation…, which seeks to prevent profits generated in the Member State concerned from being transferred outside the tax jurisdiction of that Member State via transactions that are not in accordance with market conditions, without being taxed, is appropriate for ensuring the preservation of the allocation of the power to tax between Member States.” “…national legislation which provides for a consideration of objective and verifiable elements in order to determine whether a transaction represents an artificial arrangement, entered into for tax reasons, is to be regarded as not going beyond what is necessary to attain the objectives relating to the need to maintain the balanced allocation of the power to tax between Member States and to prevent tax avoidance where, first, on each occasion on which there is a suspicion that a transaction goes beyond what the companies concerned would have agreed under fully competitive conditions, the taxpayer is given an opportunity, without being subject to undue administrative constraints, to provide evidence of any commercial justification that there may have been for that transaction…” “…, it appears that the Romanian legislation at issue in the main proceedings does not go beyond what is necessary to attain the legitimate objective underlying that legislation.” “…, the answer to the question referred is that Article 49 TFEU must be interpreted as not precluding, in principle, legislation of a Member State under which a transfer of money from a resident branch to its parent company established in another Member State may be reclassified as a ‘revenue-generating transaction’, with the consequent obligation to apply the rules on transfer pricing, whereas, if the same transaction had been effected between a company branch and a parent company, both of which were established in the same Member State, that transaction would not have been classified in the same way and the rules on transfer pricing would not have been applied.” Article 49 TFEU must be interpreted as not precluding, in principle, legislation of a Member State under which a transfer of money from a resident branch to its parent company established in another Member State may be reclassified as a ‘revenue-generating transaction’, with the consequent obligation to apply the rules on transfer pricing, whereas, if the same transaction had been effected between a company branch and a parent company, both of which were established ...

The Danish company Bevola had a PE in Finland. The PE incurred a loss when it was closed in 2009 that could not be utilized in Finland. Instead, Bevola claimed a tax deduction in its Danish tax return for 2009 for the loss suffered in Finland. A deduction of the loss was disallowed by the tax authorities because section 8(2) of the Danish Corporate Tax Act stipulates that the taxable income does not include profits and losses of foreign PEs (territoriality principle). Bevola would only be entitled to claim a tax deduction for the Finnish loss in the Danish tax return by making an election of international joint taxation under section 31 A. However, such an election means that all foreign entities must be included in the Danish tax return and the election is binding for a period of 10 years. The decision of the tax authorities was confirmed by the National Tax Tribunal on 20 January 2014. The taxpayer filed an appeal with the Eastern High Court claiming that section 8(2) was incompatible with the EU principle of freedom of establishment, because Bevola would have been entitled to claim a tax deduction if the loss had been suffered by a domestic Danish PE. A reference was made to the ECJ decision in case C-446/03, Marks & Spencer. The High Court asked the European Court of Justice if Article 49 TFEU preclude a national taxation scheme such as that at issue in the main proceedings under which it is possible to make deductions for losses in domestic branches, while it is not possible to make deductions for losses in branches situated in other Member States, including in circumstances corresponding to those in the Court’s judgment [of 13 December 2005] in Marks & Spencer, C 446/03, EU:C:2005:763, paragraphs 55 and 56, unless the group has opted for international joint taxation on the terms as set out in the main proceedings? The Court held that section 8(2) causes losses of foreign PEs to be treated less favorable compared to losses of domestic PEs. The fact that a taxpayer could opt for international joint taxation did not make a difference because this scheme was subject to two strict conditions. Comparability of the situations should be evaluated based on the purpose of the relevant legislation. The purpose of the Danish law was to prevent double taxation of profits and double deduction of losses. With regard to losses suffered by a PE in another Member State which has ceased activity and whose losses cannot be deducted in that Member State, the situation of a company having such a PE was held not to be different from that of a company with a domestic PE, from the point of view of the objective of preventing the double deduction of losses. The Court added that the aim of section 8(2) more generally is to ensure that the taxation of a company with such a PE is in line with its ability to pay tax. Yet the ability to pay tax of a company with a foreign PE which has definitively incurred losses is affected in the same way as that of a company whose domestic PE has incurred losses. On this basis, the Court concluded that the difference in treatment concerned situations that were objectively comparable. According to the Court, section 8(2) could be justified by overriding reasons in the public interest relating to the balanced allocation of powers of taxation between Member States, the coherence of the Danish tax system, and the need to prevent the risk of double deduction of losses ...

The Spanish Tax administration made an income adjustment of Citresa (a Spanish subsidiary of the Schweeps Group) Corporate Income Tax for FY 2003, 2004, 2005 and 2006, resulting in a tax liability of €38.6 millon. Citresa entered into a franchise agreement and a contract manufacturing agreement with Schweppes International Limited (a related party resident in the Netherlands). The transactions between the related parties were not found to be in accordance with the arm’s length principle. In the parent company, CITRESA, the taxable income declared for the years 2003 to 2005 was increased as a result of an adjustment of market prices relating to the supply of certain fruit and other components by Citresa to Schweppes International Limited. In the subsidiary, SCHWEPPES, S.A. (SSA), the taxable income declared for the years 2003 to 2006 was increased as a result of adjustment of market prices relating to the supply of concentrates and extracts by the entity Schweppes International Limited, resident in Holland, to SSA. The taxpayer had used the CUP method to verify the arm’s length nature of the transaction while the Spanish Tax administration – due to lack of comparable transactions – found it more appropriate to use the transactional net margin method (TNMM). Prior to 1 December 2006, the Spanish Corporate Income Tax Act (CIT) established three methods of pricing related transactions (the “Comparable Uncontrolled Price Method”, the “Cost Plus Method” and the “Resale Price Method”) and if none were applicable it established the application of the “Transactional Profit Split Method”. Thus, the “Transactional Net Margin Method” was not included at the time the market value of related transactions was established. However, as the Tax Treaty between Spain and the Netherlands was applicable, the Spanish Tax Authorities considered that the OECD Transfer Pricing Guidelines could be directly applicable. Consequently, as the “Transactional Net Margin Method” was envisaged in the above-mentioned Guidelines, the Spanish Tax Authorities understood that this method could be used as a valid pricing method. The case ended up in Court where Citresa argued that the assessment was in breach of EU rules on freedom of establishment and that the TNM method had been applied by the authorities without any legal basis in Spain for the years in question. Judgement of the Court In regards to the claimed violation of the principle of freedom of establishment cf. TFEU article 49, the Court stated: “….the mere purposes of argument, that there can be no doubt as to the conformity with European Union Law of the regime of related-party transactions in Spain, in the terms in which this infringement is proposed to us, which is what is strictly speaking being postulated in cassation for the first time, it being sufficient to support this assertion to record some elementary considerations, such as that the censure is projected indiscriminately on the whole of the law (that is to say, on the legal regime of related-party transactions), which is to say, on the legal regime of related-party transactions, on the legal regime of related-party transactions regulated by Article 16 of Law 43/1995, of 27 December 1995, on Corporate Income Tax, and then Article 16 of Royal Legislative Decree 4/2004, of 5 March 2004, which approves the revised text of the Law on Corporate Income Tax – TRLIS), while, at the same time and in open contradiction, it advocates the application of the precept to resolve the case, thus starting from its compliance with European Union Law.” In regards to application of the transactional net margin method, the Court stated: “…tax years cover the period from January 2003 to February 2006. Article 16.3 of Law 43/1995, in the wording applicable to the case, and the same provision of the TRLIS, in its original version, established the following: “In order to determine the normal market value, the tax authorities shall apply the following methods: Market price of the good or service in question or of others of similar characteristics, making, in this case, the necessary corrections to obtain equivalence, as well as to consider the particularities of the transaction. The following shall be applicable on a supplementary basis: The sale price of goods and services calculated by increasing the acquisition value or production cost of the goods and services by the margin normally obtained by the taxable person in comparable transactions entered into with independent persons or entities or by the margin normally obtained by companies operating in the same sector in comparable transactions entered into with independent persons or entities. Resale price of goods and services established by the purchaser, reduced by the margin normally obtained by the aforementioned purchaser in comparable transactions arranged with independent persons or entities or by the margin normally obtained by companies operating in the same sector in comparable transactions arranged with independent persons or entities, considering, where applicable, the costs incurred by the aforementioned purchaser in order to transform the aforementioned goods and services. Where none of the above methods are applicable, the price derived from the distribution of the joint result of the transaction in question shall be applied, taking into account the risks assumed, the assets involved and the functions performed by the related parties”. This hierarchical list exhausts the possible methods available to the administration for establishing the market value of the transactions to which it has been applied. It consists of four methods: one of them, which we can call direct or primary, that of the market price of the good or service in question (art. 16.3.a) LIS); two others that the law itself declares to be supplementary, that of the increase in acquisition value and that of the resale price (art. 16.3.b) of the legal text itself); and finally, as a residual or supplementary second degree method, that of the distribution of the joint result of the operation in question (art. 16.3.c) LIS). These obviously do not include the valuation method used by the tax inspectorate in this case, that of the net margin of all transactions, introduced ex novo by Law 36/2006, of 29 November, on measures for the ...