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 ...

The taxpayer paid interest on five loans concluded with its Dutch subsidiary (“BV2”) on 31 December 2017, claiming exemption from withholding tax on the basis of the double taxation treaty between Belgium and the Netherlands (Article 11, §3, (a)). The dispute concerns whether the Dutch subsidiary “BV2” can be considered the beneficial owner of these interests. The concept of “beneficial owner” is not defined in the Belgium-Netherlands double tax treaty. However, this concept is also used in the European Directive on interest and royalties. In the Court’s view, this concept must be interpreted in the same way for the application of the Belgian-Dutch double taxation treaty. Indeed, as members of the EU, Belgium and the Netherlands are also obliged to ensure compliance with EU law. The Court noted that, of the five loans on which the taxpayer paid interest to its subsidiary “BV2”, four loans were linked to four other loans granted by a Dutch company higher up in the group’s organisation chart and having the legal form of a “CV” (now an LLC), to the taxpayer’s Dutch parent company, “BV1”. The fifth loan on which the taxpayer pays interest to its subsidiary “BV2” is clearly linked to a fifth loan granted by the same “CV” (now LLC) to the said subsidiary “BV2”. The taxpayer’s subsidiary “BV2” and its parent company “BV1” together form a tax unit in the Netherlands. At the level of the tax unit, a ruling (“APA-vaststellingsovereenkomst”) has been obtained in the Netherlands, stipulating a limited remuneration for the financing activities that this tax unit carries out for the companies in the group. The “transfer pricing report” attached to the ruling request indicates that a Dutch CV is the lender and that the taxpayer is the final borrower in respect of the loans in question. The “APA-vaststellingsovereenkomst” also clearly shows the link between these various loans. The loans granted by the CV are then transferred to a new Delaware LLC. The mere fact that a tax unit exists between the taxpayer’s subsidiary “BV2” and the parent company “BV1” does not imply ipso facto that the subsidiary “BV2” is a conduit company and therefore does not, in principle, prevent it from being considered a “beneficial owner”. However, a tax unit may be part of an arrangement designed to avoid or evade tax in certain transactions. The tax unity between the subsidiary “BV2” and the parent company “BV1” of the taxpayer has the effect that the interest obtained by the subsidiary “BV2” is offset by the interest paid to the LLC, so that there is virtually no tax to pay on this interest. Furthermore, the taxpayer would not have been able to claim any exemption if he had paid the interest directly to the LLC and if the interposition of the Dutch companies had not been used. In addition to the aforementioned links between the various loans, the Court emphasised the fact that the claims against the taxpayer and the underlying debts were initially held by a single company, that they were then divided between the taxpayer’s Dutch subsidiary “BV2” (claims) and the parent company “BV1” (debts), and then, following a merger between this subsidiary and the parent company, were reunited within the same company (BV 1). According to the court, this also reveals the interlocking nature of these loans, as well as the artificial nature of the construction. It is at least implicit from the above facts that the Dutch subsidiary “BV2” and the parent company “BV1” act only as formal intermediaries and that the final lender is the LLC, which took over the loans from the CV. For the fifth loan, which was financed by the Dutch subsidiary “BV2” directly with the CV (now LCC), it appears that the Dutch company “BV2” has an obligation to pay interest to the CV (now LLC). For the other four loans, significant evidence of actual interest flows was found in the financial statements of the companies concerned. According to the court, the taxpayer had not met his burden of proving that he was the beneficial owner of the interest. The exemption from withholding tax was rightly rejected by the tax authorities on this basis. In addition, the withholding tax must be added to the amount of income for the calculation of the withholding tax (grossing up). Click here for English Translation Click here for other translation ...

Eli Lilly ČR imports pharmaceutical products purchased from Eli Lilly Export S.A. (Swiss sales and marketing hub) into the Czech Republic and Slovakia and distributes them to local distributors. The arrangement between the Czech company and the Swiss company is based on a Service Contract in which Eli Lilly ČR is named as the service provider to Eli Lilly Export S.A. (the principal). Eli Lilly ČR was selling the products at a lower price than the price it purchased them for from Eli Lilly Export S.A. According to the company this was due to local price controls of pharmaceuticals. However, Eli Lilly ČR was also paid for providing marketing services by the Swiss HQ, which ensured that Eli Lilly ČR was profitable, despite selling the products at a loss. Eli Lilly ČR reported the marketing services as a provision of services with the place of supply outside of the Czech Republic; therefore, the income from such supply was exempt from VAT in the Czech Republic. In 2016 a tax assessment was issued for FY 2011 in which VAT was added to the marketing services-income. An appeal was filed with the Administrative Court by Eli Lilly, but the Court dismissed the appeal and decided in favour of the tax authorities. An appeal was then filed with the Supreme Administrative Court. Judgement of the Court The appeal of Eli Lilly was again dismissed and the decision of the administrative court – and the assessment of additional VAT upheld. “The complainant’s objections were not capable of overturning the conclusion that the supply of marketing services and the supply of the distribution (sale) of medicines were provided to different entities and that, in the eyes of the average customer, they were not one indivisible supply.” Click here for English Translation Click here for other translation ...

Eli Lilly ČR imports pharmaceutical products purchased from Eli Lilly Export S.A. (Swiss sales and marketing hub) into the Czech Republic and Slovakia and distributes them to local distributors. The arrangement between the local company and Eli Lilly Export S.A. is based on a Service Contract in which Eli Lilly ČR is named as the service provider to Eli Lilly Export S.A. (the principal). Eli Lilly ČR was selling the products at a lower price than the price it purchased them for from Eli Lilly Export S.A. According to the company this was due to local price controls of pharmaceuticals. At the same time, Eli Lilly ČR was also paid for providing marketing services by the Swiss HQ, which ensured that Eli Lilly ČR was profitable, despite selling the products at a loss. Eli Lilly ČR reported the marketing services as a provision of services with the place of supply outside of the Czech Republic; therefore, the income from such supply was exempt from VAT in the Czech Republic. In 2016 a tax assessment was issued for FY 2011 in which VAT was added to the marketing services-income and later similar assessments were issued for the following years. An appeal was filed with the District Court by Eli Lilly which was dismissed by the Court. An appeal was then filed with the Supreme Administrative Court. Judgement of the Court The Supreme Administrative Court ruled in favor of Eli Lilly – annulled the judgement of the District Court and set aside the assessment of the tax authorities. “The Supreme Administrative Court found no reason to depart from the conclusions of the judgment in Case No 3 Afs 54/2020, even on the basis of the defendant’s additional arguments. Indeed, the applicant can be fully accepted that it is at odds with the reasoning of the Supreme Administrative Court and puts forward arguments on issues which are rather irrelevant to the assessment of the case. First of all, the defendant does not dispute in any relevant way that the disputed supplies were provided to two different entities (the distribution of medicines to the complainant’s customers and the provision of marketing services to Eli Lilly Export), and that the ‘average customer’ cannot perceive those supplies as a single supply. This conclusion does not in any way undermine the defendant’s reiteration of the complainant’s assertion at the income tax audit that, for the purposes of assessing the correctness of the transfer pricing set between the complainant and Eli Lilly Export in terms of section 23(7) of the Income Tax Act, the marketing service should be regarded as an integral part of the distribution of the medicines and cannot be viewed in isolation when assessing profitability. In terms of transfer pricing, the economic interdependence of the two activities was assessed, which was essential only to determine whether the profitability of each activity should be compared separately with entities carrying out only the relevant activity. However, the aggregate assessment of these activities in terms of Section 23(7) of the Income Tax Act, which involves offsetting profits and losses from different types of business activities and comparing profitability with entities performing a similar role (i.e. performing both marketing and distribution), does not necessarily mean that there is a single transaction for VAT purposes. This issue is assessed separately in accordance with the aspects of the VAT Act and the VAT Directive respectively. [32] Nor can the defendant’s other arguments, which it repeats in support of the conclusion that the provision of marketing services constitutes a supply incidental to the domestic sale of medicines, be accepted. It does not follow from the judgment in Case 3 Afs 54/202073 that the concept of ‘third party consideration’ cannot exist. The Supreme Administrative Court has not denied that the total value of the consideration received from the final customer for the purposes of determining the tax base may, in general, also include payments from third parties (see, for example, paragraphs 62 et seq. of the judgment referred to above). However, in the context of the present case, in the case of the distribution of pharmaceuticals, the Court held that the consideration for marketing services could not be regarded as part of the value of the consideration, since those services were not provided to ‘customers’ who were merely recipients of marketing information. The consideration for those services was not then spent on behalf of or for the benefit of the customers. As regards the defendant’s reference to the judgment of the CJEU in Firma Z, the conclusions expressed there concern a different factual situation and legal issue. The substantive issue was the offsetting of a reduction in the taxable amount of one supply against the taxable amount of another supply, which is excluded under the common VAT system. However, as noted above, in the present case the complainant does not supply any other supply to its customers at the same time as the pharmaceuticals. Therefore, if the conclusion of the tax administration were accepted, it would have received a higher amount of VAT than the amount paid for the supply which was the only supply received by the customer from the complainant (the pharmaceuticals). The complainant’s final, potential or immediate customers cannot be the recipients of a marketing service at all (see above). [33] Nor can the defendant’s view that the method of pricing the marketing services shows an ‘unquestionable link’ between the marketing services and the sale of medicines be accepted. In that connection, the defendant points out that the pricing of marketing services is not based solely on the costs of marketing, but also on the costs of distributing the goods (medicines). It therefore concludes that it is a payment by a third party (Eli Lilly Export) on top of the price of the medicines which the complainant sells at regulated prices. This argument of the defendant cannot stand. As a general rule, it is a matter for the parties to negotiate the price or the method of calculating it. Furthermore, ...

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 ...

“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 ...

An assessment was issued for FY 2017, whereby additional income tax was imposed on “GSS Ltd” in the amount of 843.344,38 €, plus a fine of 421.672,19 €, i.e. a total amount of 1.265.016,57 €. Various adjustments had been made and among them interest rates on intra group loans, royalty payments, management fees, and losses related to disposal of shares. Not satisfied with the assessment, an appeal was filed by “GSS Ltd.” Judgement of the Tax Court The court dismissed the appeal of “GSS Ltd.” and upheld the assessment of the tax authorities Excerpts “Because only a few days after the entry of the holdings in its books, it sold them at a price below the nominal value of the companies’ shares, which lacks commercial substance and is not consistent with normal business behaviour. Since it is hereby held that, by means of the specific transactions, the applicant indirectly wrote off its unsecured claims without having previously taken appropriate steps to ensure its right to recover them, in accordance with the provisions of para. 4 of Article 26 of Law 4172/2013 and POL 1056/2015. Because even if the specific actions were suggested by the lending bank Eurobank, the applicant remains an independent entity, responsible for its actions vis-à-vis the Tax Administration. In the absence of that arrangement, that is to say, in the event that the applicant directly recognised a loss from the write-off of bad debts, it would not be tax deductible, since the appropriate steps had not been taken to ensure the right to recover them. Because on the basis of the above, the audit correctly did not recognise the loss on sale of shareholdings in question. The applicant’s claim is therefore rejected as unfounded.” “Since, as is apparent from the Audit Opinion Report on the present appeal to our Office, the audit examined the existence or otherwise of comparable internal data and, in particular, examined in detail all the loan agreements submitted by the applicant, which showed that the interest rates charged to the applicant by the banks could not constitute appropriate internal comparative data for the purpose of substantiating the respective intra-group transactions, since the two individual stages of lending differ as to the nature of the transactions. (a) the existence of contracts (the bank loans were obtained on the basis of lengthy contracts, unlike the loans provided by the applicant for which no documents were drawn up, approved by the Board of Directors or general meetings), (b) the duration of the credit (bank loans specify precisely the time and the repayment instalments, unlike the applicant’s loans which were granted without a specific repayment schedule), (c) the interest rate (bank loans specify precisely the interest rate on the loan and all cases where it changes, unlike the applicant’s loans, (d) the existence of collateral (the bank loans were granted with mortgages on all the company’s real estate, with rental assignment contracts in the case of leasing and with assignment contracts for receivables from foreign customers (agencies), unlike the applicant’s loans which were granted without any collateral), (e) the size of the lending (the loans under comparison do not involve similar funds), (f) security conditions in the event of non-payment (the bank loans specified precisely the measures to be taken in the event of non-payment, unlike the applicant’s loans, for which nothing at all was specified), (g) the creditworthiness of the borrower (the banks lent to the applicant, which had a turnover, profits and real estate, unlike the related companies, most of which had no turnover, high losses and negative equity), (h) the purpose of the loan (83 % of the applicant’s total lending was granted to cover long-term investment projects as opposed to loans to related parties which were granted for cash facilities and working capital). Since, in the event that the applicant’s affiliated companies had made a short-term loan from an entity other than the applicant (unaffiliated), then the interest rate for loans to non-financial undertakings is deemed to be a reasonable interest rate for loans on mutual accounts, as stated in the statistical bulletin of the Bank of Greece for the nearest period of time before the date of the loan (www.bankofgreece.gr/ekdoseis-ereyna/ekdoseis/anazhthsh- ekdosewn?types=9e8736f4-8146-4dbb-8c07-d73d3f49cdf0). Because the work of this audit is considered to be well documented and fully justified. Therefore, the applicant’s claim is rejected as unfounded.” Click here for English translation Click here for other translation ...

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

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 ...

ViciunaiRus LLC was engaged in production and wholesale distribution of its products. During the inspection, the inspection concluded that the chain of contractual relations between the Company and its sole official distributor in the Russian Federation artificially had established intermediates that do not have assets and personnel. At the same time, the price of products increased by more than 20% in the course of movement along the chain of counter parties. During the period from 2012 to 2014, the tax authorities considered the inclusion of intermediaries in the sales structure to be of a artificial nature and aimed at understating the sales revenue. The taxpayer was additionally charged profit tax and VAT, and the additional tax was calculated based on the resale price at which the goods were received by the distributor. In 2012 and 2013 the transactions between the taxpayer and distributor were controlled. In 2014 they were not. The taxpayer objected to the tax authority’s decision; among other things, the taxpayer argued that the tax authority was obliged to apply the methods of determining market prices set forth in Section V.1 of the Tax Code when making additional accruals, but applied a different method (took the last link price). The court of first instance and the court of appeal concluded that the tax authority had exceeded its authority to make transfer pricing adjustments during the tax periods under review for controlled transactions between related parties. With regard to the amount of additional accruals for the period of 2014, the court rejected the taxpayer’s argument that the tax authority was obliged to follow the methods of transfer formation when calculating the tax liability. The applied method of additional accrual – the use of the price of the last link in the chain of intermediates – was recognized by the court as lawful. The Supreme Court cancelled the decision of the lower courts and sent the case back for re-consideration. The conclusion of the lower courts that in the period 2012-2013 the Inspectorate carried out price control for compliance with the market prices was erroneous. The price control was not carried out, but a set of circumstances was established, testifying to the coherence of actions of interdependent persons in order to obtain unjustified tax benefit. Taking into account the proof of the fact that the Company received an unjustified tax benefit, the tax authority correctly calculated the income that the Company should have received when selling goods directly to an interdependent person without using intermediary firms. Click here for translation ...

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 ...

At issue was the transfer of taxable assets from a shareholder to a 100% owned company, “VSR Inc”. This transfer of resulted in an understatement of profits in a controlled sale of vehicle scrapping rights. Following an audit, the tax authority concluded that the rights had been acquired in the previous quarter from the one transferred and that a sale value below cost could not be justified. According to the tax authorities the arrangement lacked economic or commercial substance. The sole purpose had been to lower the overall taxation. An revised tax assessment – and a substantial fine – was issued by the tax authorities. VSR filed an appeal. Judgement of the Court The court dismissed the appeal and decided in favor of the tax authorities. “Since it is apparent from the above that the above transactions were intended to transfer taxable material from the applicant’s sole proprietorship to the associated company under the name of ” “, TIN and to tax them at a lower average tax rate, all the above transactions are therefore artificial arrangements which are not consistent with normal business behaviour and lead to a significant tax advantage without any assumption of business risk on the part of ” “, TIN Because, for each of the 2005 withdrawal rights, which is identical to a vehicle registration number, the tax authority identified the corresponding purchase document and determined the total acquisition value of these rights at the amount of six hundred and six thousand one hundred and sixty euros (€ 606,160.00), i.e. an average acquisition price per withdrawal right of € 302.32. Consequently, the taxable amount transferred, in the form of an artificial arrangement, from the applicant’s sole proprietorship to the associated company with the name ” “, VAT number , amounts to € 405,580.00 (€ 606,160.00 – € 200,580.00). In the light of the foregoing, the applicant’s claims concerning the tax authority’s unsubstantiated assessment of the existence of artificial arrangements and the absence of the element of intention are rejected as unfounded. Since the public administration is bound by the principle of legality, as laid down in Article 26(1)(b) of the Staff Regulations, the Commission is bound by the principle of proportionality. 2, 43, 50, 50, 82, 83 and 95 & 1 of the Constitution (Council of State 8721/1992, Council of State 2987/1994), which implies that the administration must or may take only those actions provided for and imposed or permitted by the rules laid down by the Constitution, legislative acts, administrative regulatory acts adopted on the basis of legislative authorisation, as well as by any rule of higher or equivalent formal force to them. Since the review of constitutionality is a matter for the courts and does not fall within the competence of the administrative bodies, which are required to apply the existing legislative framework, it is inadmissible and is not being examined in the context of the present action. Consequently, the applicant’s allegation of a breach of the principle of economic freedom in Article 5 of the Constitution, the principle of proportionality in Article 25 para. 1 of the Constitution and the requirements of the Charter of Fundamental Rights of the European Union is rejected as being unfounded. Because the applicant’s claim that the excess amount already paid by ” “, TIN, as income tax (EUR 118 073,21) should be deducted from the income tax assessed on the applicant’s sole proprietorship, TIN, is rejected as unfounded in substance and in law, since there is no relevant provision in the tax legislation providing for such a deduction. With regard to the individual claim that the amount of the income difference found by the audit for his sole proprietorship of € 405,580.00 should be added to the expenses of the I.C.E., this is a matter that should be raised and dealt with by the I.C.E., which is a separate tax entity, and not by the applicant as a natural person, and is therefore irrelevant. “ Click here for English translation Click here for other translation ...

Eli Lilly ČR imports pharmaceutical products purchased from Eli Lilly Export S.A. (Swiss sales and marketing hub) into the Czech Republic and Slovakia and distributes them to local distributors. The arrangement between the local company and Eli Lilly Export S.A. is based on a Service Contract in which Eli Lilly ČR is named as the service provider to Eli Lilly Export S.A. (the principal). Eli Lilly ČR was selling the products at a lower price than the price it purchased them for from Eli Lilly Export S.A. According to the company this was due to local price controls of pharmaceuticals. Eli Lilly ČR was also paid for providing marketing services by the Swiss HQ, which ensured that Eli Lilly ČR was profitable, despite selling the products at a loss. Eli Lilly ČR reported the marketing services as a provision of services with the place of supply outside of the Czech Republic; therefore, the income from such supply was exempt from VAT in the Czech Republic. In 2016 a tax assessment was issued for FY 2011 in which VAT was added to the marketing services-income. Judgement of the Court The Court dismissed the appeal of Eli Lilly CR s.r.o. and decided in favour of the tax authorities. According to the court marketing services constituted partial supply that was part of the distribution activities and should have been considered, from the VAT perspective, a secondary activity used for the purpose of obtaining benefit from the main activity. Therefore, Eli Lilly CR s.r.o should have been paying VAT on income from the marketing services. “a customer purchasing medicinal products from the claimant is the recipient of a single indivisible supply (distribution and marketing),” “the aim of such marketing is certainly to increase the customer awareness of medicines distributed by the claimant, and, as a result to increase the marketability of these medicines” For Eli Lilly Export S.A., marketing was a secondary benefit. Eli Lilly CR s.r.o. was the owner of the products when the marketing services were provided. Eli Lilly Export S.A. was not the manufacturer of the products and did not hold the distribution license for the Czech market. Therefore, Eli Lilly Export S.A. could not be the recipient of the marketing services provided by Eli Lilly CR s.r.o. Hence, the payment received by Eli Lilly CR s.r.o. for marketing services was in fact “a payment received from a third person”. An appeal to the Supreme Administrative Court was filed on 14 February 2020 by Eli Lilly CR. Click here for English Translation Click here for other translation ...

Garnet-SPb was the exclusive representative of a German manufacturing company in Russia. Following introduction of restrictions on the supply of certain categories of goods to Russia by the European Union in 2014, the Company had used the services of an intermediary trading company. The intermediary offered the Company to purchase products previously purchased directly from the manufacturer. The difference between the export price of goods according to the manufacturer’s data and the price at which the goods were now purchased by the Company – through the intermediate – was over 40%. During the audit, the tax authority considered that the Company was able and actually exported the goods itself, the transition to the new delivery scheme was aimed at obtaining unjustified tax benefits in the form of overstatement of VAT deductions. The amount of additional income tax and VAT was calculated by the tax authority on the basis of the export value of these goods. The court of first instance ruled in favor of the taxpayer. The court did not see an unjustified tax benefit in the acquisition of goods from abroad through a chain of intermediaries due to the existence of restrictions due to EU sanctions. The new setup of supply was due to objective factors, and the tax authority unreasonably failed to take into account the Company’s arguments that under the EU restrictive measures the Company had grounds to engage intermediaries to guarantee the supply of equipment within the time agreed with its further customers. The tax authority has not proved, multiple deviation from market prices. The tax authorities had not established the market price of identical goods in Russia – taking into account its uniqueness and the current regime of measures limiting the turnover of such goods. The Court of Appeal overturned the decision of the Court of first instance and ruled in favor of the tax authorities. “On the basis of the investigation of the case materials the court of appeal concluded that in the case under consideration the tax authority rightfully proceeded from the established circumstances of artificial inclusion of disputed counter parties into the supply chain as intermediaries for the purpose of unjustified increase of the value of goods in order to overestimate the tax deductible expenses, therefore, it reasonably established the amount of expenses incurred by the taxpayer, taken into account for the purposes of taxation, based on the value of the equipment specified by the manufacturer” Click here for translation ...

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

In March 2018 a special EU committee on financial crimes, tax evasion and tax avoidance (TAX3) was established. Now, one year later, The EU Parliament has approved a controversial report from the committee. According to the report close to 40 % of MNEs’ profits are shifted to tax havens globally each year with some European Union countries appearing to be the prime losers of profit shifting, as 35 % of shifted profits come from EU countries. About 80 % of the profits shifted from EU Member States are channelled to or through a few other EU Member States. The latest estimates of tax evasion within the EU point to a figure of approximately EUR 825 billion per year. Tax avoidance via six EU Member States results in a loss of EUR 42,8 billion in tax revenue in the other 22 Member States, which means that the net payment position of these countries can be offset against the losses they inflict on the tax base of other Member States. For instance, the Netherlands imposes a net cost on the Union as a whole of EUR 11,2 billion, which means the country is depriving other Member States of tax income to the benefit of multinationals and their shareholders. The Commission has criticised seven Member States – Belgium, Cyprus, Hungary, Ireland, Luxembourg, Malta and the Netherlands – for shortcomings in their tax systems that facilitate aggressive tax planning, arguing that they undermine the integrity of the European single market. Member States now calls on the Commission to currently regard at least these five Member States as EU tax havens until substantial tax reforms are implemented ...

ViciunaiRus LLC was engaged in production and wholesale distribution of its products. During the inspection, the inspection concluded that the chain of contractual relations between the Company and its sole official distributor in the Russian Federation artificially had established intermediates that do not have assets and personnel. At the same time, the price of products increased by more than 20% in the course of movement along the chain of counter parties. During the period from 2012 to 2014, the tax authorities considered the inclusion of intermediaries in the sales structure to be of a artificial nature and aimed at understating the sales revenue. The taxpayer was additionally charged profit tax and VAT, and the additional tax was calculated based on the resale price at which the goods were received by the distributor. In 2012 and 2013 the transactions between the taxpayer and distributor were controlled. In 2014 they were not. The taxpayer objected to the tax authority’s decision; among other things, the taxpayer argued that the tax authority was obliged to apply the methods of determining market prices set forth in Section V.1 of the Tax Code when making additional accruals, but applied a different method (took the last link price). The court of first instance and the court of appeal concluded that the tax authority had exceeded its authority to make transfer pricing adjustments during the tax periods under review for controlled transactions between related parties. With regard to the amount of additional accruals for the period of 2014, the court rejected the taxpayer’s argument that the tax authority was obliged to follow the methods of transfer formation when calculating the tax liability. The applied method of additional accrual – the use of the price of the last link in the chain of intermediates – was recognized by the court as lawful. Click here for translation ...

Ensco Gerudi provided offshore drilling services to the petroleum industry in Malaysia. The company did not own any drilling rigs, but entered into leasing agreements with a rig owner within the Ensco Group. One of the rig owners in the group incorporated a Labuan company to facilitate easier business dealings for the taxpayer. Ensco Gerudi entered into a leasing agreement with the Labuan company for the rigs. Unlike previous transactions, the leasing payments made to the Labuan company did not attract withholding tax. The tax authorities found the Labuan company had no economic or commercial substance and that the purpose of the transaction had only been to benefit from the tax reduction. The High Court decided in favour of the taxpayer. The Court held that there was nothing artificial about the payments and that the transactions were within the meaning and scope of the arrangements contemplated by the government in openly offering incentives. The High Court ruled that taxpayers have the freedom to structure transactions to their best tax advantage in so far as the arrangement viewed in a commercially and economically realistic way makes use of the specific provision in a manner that was consistent with Parliament’s intention ...

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 tandem”. Each provides a context that assists in determining the meaning and, in particular, the scope of the other. The focus of each is different. The purpose of the general anti-avoidance provision is to address tax avoidance. Tax avoidance may be found in individual steps or in a combination of steps. The purpose of the specific provisions is more targeted and their meaning should be determined primarily by their ordinary meaning, as established through their text in the light of their specific purpose. The function of the anti-avoidance provision is “to prevent uses of the specific provisions which fall outside their intended scope in the overall scheme of the Act.” The process of statutory construction should focus objectively on the features of the arrangements involved “without being distracted by intuitive subjective impressions of the morality of what taxation advisers have set up.” A three-stage test for assessing whether an arrangement is tax avoidance was applied by the Court. The first step in any case is for the taxpayer to satisfy the court that the use made of any specific provision comes within the scope of that provision. In this test it is the true legal character of the transaction rather than its label which will determine the tax treatment. Courts must construe the relevant documents as if they were resolving a dispute between the parties as to the meaning and effect of contractual arrangements. They must also respect the fact that frequently in commerce there are different means of producing the same economic outcome which have different taxation effects. The second stage of the test requires the court to look at the use of the specific provisions in light of arrangement as a whole. If a taxpayer has used specific provisions “and thereby altered the incidence of income tax, in a way which cannot have been within the contemplation and purpose of Parliament when it enacted the provision, the arrangement will be a tax avoidance arrangement.” The economic and commercial effect of documents and transactions may be significant, as well as the duration of the arrangement and the nature and extent of the financial consequences that it will have for the taxpayer. A combination of those factors may be important. If the specific provisions of the Act are used in any artificial or contrived way that will be significant, as it cannot be “within Parliament’s purpose for specific provisions to be used in that manner.” The courts are not limited to purely legal considerations at this second stage of the analysis. They must consider the use of the specific provisions in light of commercial reality and the economic effect of that use. The “ultimate question is whether the impugned arrangement, viewed in a commercially and economically realistic way, makes use of the specific provisions in a manner that is consistent with Parliament’s purpose.” If the arrangement does make use of the specific provisions in a manner consistent with Parliament’s purpose, it will not be tax avoidance. The third stage is to consider whether tax avoidance ...

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