A Polish company, “H. spółka z o.o.”, is a member of a group engaged in investment activities in Europe. H had granted loans to related companies and received loans and contributions from the sole shareholder in Luxembourg. H submitted a request to the tax authorities for an opinion on the tax consequences of these financial arrangements. The tax authority denied the request on the basis that the main purpose of the transaction and the manner in which it was carried out were artificial. Dissatisfied, H appealed to the Administrative Court. Judgment of the Administrative Court The Administrative Court dismissed the appeal. Excerpt “In the Court’s view, the above position of the authority is reasonable and is reflected in the evidence presented by the requesting payer. As can be seen from the evidence presented and the findings of fact based on that evidence, R. S.a.r.l. is a passive holding company with its residence in the Principality of Luxembourg and holds and manages only assets in the form of shares in subsidiaries located in Poland. The aforementioned cash flows between the taxpayer, its shareholder and its subsidiaries indicate that it conducts its activity solely as an intermediary, that it is entirely financed by its sole shareholder, the SICAV-RAIF, that it uses the loans obtained from the fund to finance investments in subsidiaries and that it grants loans to such entities – through the intermediary of the payer – and that the payer transfers the recovered capital and interest to its shareholder, the fund, either as repayment of loans granted to it or as an advance on dividends. Contrary to the applicant’s position, the above is illustrated by the data from the financial statements. Indeed, these are not cash flows of any kind, but flows correlated in time and value, which authorised the conclusions set out in the refusal. The taxpayer also has a close property and personal relationship with the fund and its management company. In the case, the taxpayer’s property and personal substrate was not shown to be sufficient in terms of the nature and scope of its business activities. The same applies to the demonstrated costs of the activity and their adequacy to the object and scope of the activity. The allegation of evidentiary deficiencies in this respect is therefore completely unjustified, since the initiating taxpayer did not present the relevant evidence in this respect. In these circumstances, in the Court’s view, the authority’s finding that the taxpayer actually finances its activities with the funds of the sole shareholder is justified. In such a situation, he cannot be regarded as the actual owner of the interest paid by the payer in connection with the loan agreements in question. Therefore, it does not meet the condition for the application of the exemption from flat-rate income tax on interest income provided for in Article 21(3)(4)(a) of the CIT Act, i.e. the condition of being the actual owner of the interest receivable. Taking into account the facts established above and having regard to the understanding of the notion: “actual owner” resulting from Article 4a point 29 of the CIT Act, one should agree with the argumentation of the authority that the taxpayer only formally acts as a lender. Indeed, it is evident from the material on record that it obtains financing primarily intra-group and transfers the funds it receives from interest to its sole shareholder, the fund, within a short period of time. On the other hand, in order to consider a given entity as a real owner of receivables, it would have to be stated, in the light of Article 4a point 29 of the CIT Act, that it receives receivables for its own benefit (including independently deciding on their use and bearing the economic risk related to the loss of the receivables), is not an intermediary, representative, trustee or other entity obliged to transfer all or part of the receivables to another entity and conducts real economic activity in the country of its registered office. This is not, as mentioned above, about a demonstrated entitlement to receive the receivable for oneself by a formal document, but about the absence of an obligation (formal or informal) to transfer the receivable to another entity. For the assessment of the status of the actual owner of the receivable, facts indicating a certain economic reality are relevant. These facts are indicated by the authority in the contested act and their conclusions are logical. The authority was therefore justified in concluding that the taxpayer is not the real owner of the interest, which in fact – as an intermediary – he makes available to his partner. It is also not engaged in a real economic activity and its current participation in the structure of the group is of an artificial nature, aimed at achieving not so much economic and economic as tax objectives. In fact, the authority established that the SICAV-RAIF is not subject to corporate income tax (it is, as the party admitted, a tax transparent entity) and therefore does not meet the condition of taxation of the entire income it earns with CIT regardless of the place where it is earned, as stipulated in Article 21(3)(2) of the CIT Act. Thus, as it was rightly stated in the case, the inclusion of the taxpayer in the group structure was aimed at benefiting an unauthorised entity (the fund) from the exemption of interest paid by subsidiaries, including the payer, from flat-rate corporate income tax. Contrary to the applicant’s position, in a situation where the payment of interest was made bypassing the holding company, directly to the real owner (the fund), the tax exemption could not be used. In the Court’s opinion, the assessment regarding the artificiality of the taxpayer’s construction and its aiming directly at obtaining a tax advantage in the form of taking advantage of the exemption provided for in Article 21(3) of the CIT Act should therefore also be deemed to be confirmed by the evidence. There is therefore also a reasonable presumption of a decision applying Article 22c of the CIT Act, due to the assumption that ...

A Belgian company, A.L.L. BV, had declared certain income excempt that resulted from a complex intra-group restructuring involving capital gains and dividend distributions. The Belgian tax authorities found that these exemptions had been unduly claimed through abusive structures. Judgment The Court upheld the view that taxable income included items that were incorrectly reported as exempt by the taxpayer. It confirmed that national courts and authorities must apply the general EU principle prohibiting abuse of law, even if the relevant domestic anti-abuse provision has not yet entered into force. This principle allows the denial of tax benefits arising from EU law when the underlying transactions are artificial and aimed solely at obtaining an undue advantage, regardless of whether the formal legal criteria were met. The Court found that the restructuring activities of the taxpayer and its group—such as the use of holding structures, dividend flows, mergers, and rapid capital movements—lacked genuine economic substance and served mainly to distribute profits and internal capital gains tax-free to shareholders. These actions, though formally compliant, were deemed abusive as they frustrated the purpose of the Parent-Subsidiary Directive, which was to avoid double taxation in cross-border corporate structures—not to facilitate tax avoidance. Importantly, the Court clarified that abuse should be assessed based on all legal acts and entities involved across the group, not just the immediate parties to a transaction. The judgment also rejected arguments based on legal certainty and legitimate expectations, holding that EU anti-abuse principles apply retroactively to acts predating relevant case law, as long as good faith and serious disruption are not at issue. However, the Court partially annulled the lower court’s decision by holding that the reclassification of a capital reduction as a taxable dividend was not legally justified under EU anti-abuse law, as the exemption for paid-up capital returns was a matter of domestic law, not EU law. This part of the decision was remanded to the Antwerp Court of Appeals. Overall, the Court reaffirmed the supremacy and direct applicability of the EU anti-abuse principle, even in the absence of specific national implementation, while drawing a clear distinction between domestic and EU-based tax benefits. Click here for English Translation Click here for other translation ...

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 ...

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

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