Fibusa SAS is a holding company with holdings in four Romanian companies whose purpose is to develop wind power stations in Romania. In 2011, 2012, In 2011, 2012, 2013 and 2014, Fibusa granted these companies interest-free loans for a period of less than one year, renewable for the same period, with the possibility of repaying these loans at any time, for a total amount of almost 26 million euros in 2011, more than 33 million euros in 2012 and more than 35.5 million euros in 2013 and 2014, which were financed mainly by loans taken out by it. 2,086,730 for the year ended 2013 and €2,385,774 for the year ended 2014. Following an audit, an assessment of additional corporate income tax and corresponding penalties for the financial years 2011 – 2014 was issued by the tax authorities. The lack of interest on the loans was considered indirect transfers of profits abroad. Not satisfied with the assessment Fibusa filed an complaint which was rejected by the Administrative Court in December 2020. An appeal was then filed by Fibusa with the Administrative Court of Appeal. Judgement of the Court The court upheld the assessment but made adjustments to the applicable interest rate on the loans and thus the amounts of additional taxable income calculated by the tax authorities. Excerpts (Unofficial English translation) “8. Under the terms of Article 57 of the General Tax Code, which is applicable to corporation tax by virtue of Article 209 of the same Code: “For the purposes of calculating the income tax due by companies that are dependent on or control companies located outside France, profits indirectly transferred to the latter, either by way of an increase or decrease in purchase or sale prices, or by any other means, are incorporated into the results shown in the accounts (…)”. 9. These provisions establish, as soon as the administration establishes the existence of a link of dependence and a practice falling within the provisions of Article 57 of the General Tax Code, a presumption of indirect transfer of profits which can only be usefully challenged by the company liable to tax in France if it provides proof that the advantages it granted were justified by the obtaining of consideration.” “11. As the court held, in view of the relationship of dependence between the applicant company and its subsidiaries and its waiver of the right to receive interest in return for the advances granted, the presumption of indirect transfer of profits established by the provisions of Article 57 of the General Tax Code can be rebutted by Fibusa only if it proves that the advantages thus granted were justified by the obtaining of consideration.” “Although the applicant company refers to the situation of financial difficulty in which these companies found themselves, there is no evidence in the investigation to confirm the reality of these difficulties before 2014, the year in which the companies were admitted to insolvency proceedings under Romanian law. Furthermore, the accounting information produced by the applicant company, while showing investments made by those subsidiaries, also shows that they did not achieve any turnover and the information provided by the Romanian authorities indicates that the investments made are, for the most part, not related to wind farm projects and that the companies do not have any of the administrative authorisations required for such installations. In those circumstances, in the absence of any evidence to corroborate the reality of the activity of the beneficiary companies or of financial difficulties as from 2011, the applicant company, which invoked at first instance the financial difficulties of the subsidiaries and invokes on appeal the prospects of dividends which it expected to receive by granting the loans granted, does not justify any consideration for those interest-free loans. Thus, the administration was right to consider that the advantages granted by the applicant company to its subsidiaries constituted indirect transfers of profits.” “14. With regard to the sums borrowed by Fibusa to finance the advances granted to its subsidiaries, i.e. EUR 21 004 750 in 2011, EUR 26 309 187 in 2012, EUR 24 047 500 in 2013 and EUR 27 257 711 in 2014, it follows from what has been said above that it is appropriate to retain 1,188,828 in 2011, EUR 2,036,937 in 2012, EUR 2,418,713 in 2013 and EUR 1,594,425 in 2014, corresponding to the interest actually borne by Fibusa during each financial year in respect of the loans it took out. 15. With regard to the sums made available to Fibusa’s subsidiaries but not borrowed by it, namely EUR 4 981 250 in 2011, EUR 6 813 313 in 2012, EUR 11 487 500 in 2013 and EUR 8 332 789 in 2014, the applicant company relied at first instance on the rates of 4.25%, 3.75%, 3% and 2.4%, corresponding to the average interest rates for advances on securities applied by the Banque de France. It is not contested by the administration and there is nothing in the investigation to show that the rates of remuneration that the company could have obtained from a financial institution or similar body with which it would have placed sums of an equivalent amount under similar conditions would have been higher. In these circumstances, these rates should be retained and the company should be relieved of the amount of the taxes in dispute corresponding to the difference between the taxes to which it was subject and those resulting from the application of these rates to the sums of EUR 4,981,250 in 2011, EUR 6,813,313 in 2012, EUR 11,487,500 in 2013 and EUR 8,332,789 in 2014.” Click here for English translation Click here for other translation ...

The Tax Authority had made a transfer pricing adjustment for FY 2007 in the amount of €262,500.00 arising from the provision of a guarantee for payment granted under a credit agreement between a bank and its subsidiary. The adjustment had been determined using a CUP method where the pricing of the controlled transaction had been compared to the pricing of uncontrolled bank guarantees. The Court of first instance held that “it cannot be concluded that the transactions at issue here are comparable on the basis of the criterion adopted by the Tax Authorities referred to above. In fact, although the guarantee and the independent bank guarantee may share common features, the way in which the risk falls on the guarantor and on the guarantor of the independent bank guarantee potentially generates differences that significantly affect their comparability.” An appeal was filed by the tax authorities. Decision of Supreme Administrative Court The Court dismissed the appeal of the tax authorities. In accordance with article 58 of the CIRC (wording at the time of the facts), the AT could make the corrections that are necessary for the determination of the taxable profit whenever, by virtue of special relations between the taxpayer and another person, subject or not subject to IRC, different conditions have been established to those that would normally be agreed upon between independent persons, leading to the profit ascertained on the basis of accounting being different from that which would be ascertained in the absence of such relations. The Tax Authority has the burden of proving the existence of those special relations, as well as the terms under which operations of the same nature normally take place between independent persons and under identical circumstances, and the act must be annulled if that proof is not provided, which means that the correction referred to in Article 58 of the CIRC cannot therefore be based on indications or presumptions, the AT having to prove the abovementioned legal requirements in order to be able to correct the taxpayer’s taxable amount under that regime. The provision of a guarantee by the Defendant constitutes a situation that has no equivalent between independent entities, since this type of provision is proper of related entities and to that extent there is no term of comparison between the situation of a guarantee provided by a bank and the guarantee provided by the dominant company in favour of its subsidiary and as follows from the provisions of article 6, paragraphs 1 and 3 of the Commercial Companies Code, the provision of real or personal guarantees for the debts of other entities is, as a general rule, considered to be contrary to the pursuit of the company’s purpose (profit), and operations relating to the provision of (remunerated) guarantees may only be carried out by credit institutions and financial companies. Bearing in mind the fact that the bank guarantee has its own characteristics that differentiate it from the guarantee, as profusely explained in the judgment appealed against, leads us to conclude that the conditions for the provision of a bank guarantee by a banking institution cannot serve as a model of comparison for the purpose of determining the remuneration to be fixed for the guarantee provided by the Appellant since the two transactions are not sufficiently comparable, in accordance with the provisions of Article 4(3) of Order in Council No 1446-C/2001, particularly since part of the benefits which the defendant expects to gain from the provision of the guarantee in favour of its subsidiary arise from its status as a shareholder, a situation which has no economic equivalent in the case of the provision of a bank guarantee by a bank. Furthermore, for a transaction to be considered comparable it must have economic characteristics similar to those of non-binding transactions. It therefore “it seems unquestionable that the assumption of a payment guarantee by the parent company (for the debts of a controlled company) does not alter, in a significant manner, the liability regime already applicable to it by virtue of the provisions of articles 501 and 491 of the Commercial Companies Code. In summary, in view of the reality of the situation in the case, the conclusion of the sentence appealed must be followed in the sense that, in view of what article 58, nos. 1 and 2, of the Corporate Income Tax Code and article 5 of Ministerial Order no. 1446-C/2001 establish as regards the liability regime of the company in question, the conclusion of the sentence appealed must be followed. no. 1446-C/2001 establish as to the factors to be assessed in order to ascertain the comparability of the transactions, we conclude that the Tax Authorities failed to demonstrate that, in the specific case, the provision of the guarantee by the Impugnant and the provision of autonomous bank guarantees whose expenses were borne by the Impugnant meet the conditions to be considered comparable, as they present relevant economic and financial characteristics that are sufficiently similar, and ensure a high degree of comparability, so as to correct the taxable amount through the transfer pricing regime provided for in article 58, no. 1, of the IRC Code. 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US Citybank was performing activities in Italy by means of a branch/permanent establishment. The Italian PE granted loan agreements to its Italian clients. Later on, the bank decided to sell these agreements to a third party which generated losses attributed to the PE’s profit and loss accounts. Following an audit of the branch concerning FY 2003 in which the sale of the loan agreements took place, a tax assessment was issued where the tax authorities denied deduction for the losses related to the transfer of the agreements. The tax authorities held that the losses should have been attributed to the U.S. parent due to lack of financial capacity to assume the risk in the Italien PE. First Citybank appealed the assessment to the Provincial Tax Court which ruled in favor of the bank. This decision was then appealed by the tax authorities to the Regional Tax Court which ruled in favor of the tax authorities. Finally Citybank appealed this decision to the Supreme Court. Judgement of the Supreme Court The Supreme Court reversed the judgement of the Regional Tax Court and decided in favor of Citybank. “This Court, recently (Cass. 19/09/2019, no. 23355), dealing with the Convention between Italy and the United Kingdom on double taxation (Article 7 of which has the same content as Article 7 of the cited Convention between Italy and the United States of America), has specified that: (a) the permanent establishment, from a tax point of view, is a distinct and autonomous entity with respect to the ‘parent company’, the income of which, produced in the territory of the State, is subject to tax, pursuant to Article 23, paragraph 1, letter e), T.U.I.R.; (b) Article 7, paragraph 2, of the Convention between Italy and the United Kingdom against double taxation, entered into on 21 October 1988 (and ratified by Law n. 329 of 1990, ), provides for the application of Article 7, paragraph 2, of the Convention between Italy and the United Kingdom. (b) Article 7, paragraph 2, of the Convention between Italy and the United Kingdom for the avoidance of double taxation, concluded on 21 October 1988 (and ratified by Law No. 329 of 1990), which provides that where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. (c) the OECD Commentary (§ 18. 3.), with respect to the said Article 7, has clarified that the permanent establishment must be endowed with: “a capital structure appropriate both to the enterprise and to the functions it performs. For these reasons, the prohibition on deducting expenses connected with internal financing – that is to say, those which constitute a mere allocation of the parent company’s own resources – should continue to apply generally.”. In the present case, the Regional Commission complied with the above principles of law when it held that the Convention placed limits on the deductibility of the negative components of the Italian branch’s income, understood both as interest expense and as expenses connected with the management of the loan (in the case at hand, these were losses on loans and commission charges for the assignment of loan agreements).” Click here for English translation Click here for other translation > ...

HBP is a company resident in the United Kingdom, which also carries on banking business in Italy through its Milan branch (‘HSBC Milano’), which, for income tax purposes, qualifies as a permanent establishment (‘PE’ or ‘branch’) and grants credit facilities to Italian companies and industrial groups, including (from 1996) Parmalat Spa. HBP brought separate actions before the Milan Provincial Tax Commission challenging two notices of assessment for IRPEG and IRAP for 2003 and for IRES and IRAP for 2004, which taxed interest expense (147,634 euros for 2003 and 143,302 euros for 2004) on loans to Parmalat Spa. (€ 147,634, for 2003; € 143,302, for 2004) on loans from the ‘parent company’ in favour of the ‘PE’, and losses on receivables (€ 9,609,545, for 2003, and € 3,330,382, for 2004), as negative components unduly deducted by the permanent establishment, even though they related to revenues and activities attributable to the ‘parent company’. According to the Office, the PE is considered, from a tax point of view, to be an autonomous entity distinct from the parent company, both under domestic and supranational law, and is therefore, in accordance with Article 7(2) of the Convention between Italy and the United Kingdom for the avoidance of double taxation, subject to the same tax regime as independent entities, with certain consequences from the point of view of the quantification of its income. The Milan Provincial Tax Commission (CTP), with judgment No. 117/2010, allowed the appeals and annulled both notices as they lacked the “necessary tax basis”. The Lombardy Regional Administrative Court, with the judgment in question, after hearing the United Kingdom bank, upheld the Agency’s appeal, disregarding, first of all, the appellant’s objection that the 60-day deadline had not been met, pursuant to Article 12(7) of the Statute of Taxpayers’ Rights, with respect to the notice of assessment for 2003 (“notice for 2003″), on the grounds that the tax assessment notice took account of the urgency of the matter in view of the very short time remaining before the expiry of the time limit for assessment action. As regards the substance of the assessments, with reference to the dispute concerning interest expense, the CTR held that it was deductible only in respect of interest accrued on an amount exceeding the notional endowment fund of €6.3 million (equal to the minimum amount of the banks’ initial capital, according to Bankitalia’s provisions), which could be deducted under Article 7 of the Convention, in order to ensure the principle of free competition between the permanent establishment and the Italian credit institutions. With regard to loan losses, the CTR stated that: ‘Article 109 TUIR refers to the principle of correlation between costs and revenues […] mentioned in the notices of assessment. Article 110, paragraph 7 of the TUIR refers to the principle of free competition”, according to which the components of income, deriving from intercompany transactions with companies not resident in the territory of the State, are valued on the basis of the “normal value” of the goods sold and services received, which entails the equal tax treatment of companies carrying out banking activities, with the determination of a notional endowment fund, which aims to avoid favouring undercapitalised companies. It therefore agreed with the calculations made in the notices of assessment in which, on the finding that the branch, which did not have the regulatory capital (amounting to €45,435. 337, determined in relation to the amount of the credit lines granted to Parmalat Spa) required from an independent party, had transferred to the “parent company”, in the form of interest expense on loans received from the latter, 71.18% of the profits accrued on the “Parmalat credit”, retaining the remaining 28.82%, for the principle of correlation between costs and revenues, for the purposes of their tax deductibility, only 28.82% of the “Parmalat losses” were charged to the “PE”, amounting in total, in the two-year period from 2003 to 2004, to euro 18. 174.135. Finally, the CTR confirmed the legitimacy of the administrative sanctions for violation of tax regulations, excluding the objective uncertainty of the latter. 6. HBP appeals for the annulment of this judgment, on the basis of ten grounds, illustrated by a memorandum pursuant to Article 378 of the Code of Civil Procedure, to which the Agency resists with a counter-appeal. Judgement of the Supreme Court (a) the permanent establishment, from a tax point of view, is a distinct and autonomous entity with respect to the ‘parent company’, the income of which, produced in the territory of the State, is subject to tax, pursuant to Article 23, paragraph 1, letter e), T.U.I.R.; (b) Article 7, paragraph 2, of the Convention between Italy and the United Kingdom against double taxation, entered into on 21 October 1988 (and ratified by Law n. 329 of 1990, ), provides for the application of Article 7, paragraph 2, of the Convention between Italy and the United Kingdom. (b) Article 7, paragraph 2, of the Convention between Italy and the United Kingdom for the avoidance of double taxation, concluded on 21 October 1988 (and ratified by Law No. 329 of 1990), which provides that where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. (c) the OECD Commentary (§ 18. 3.), with respect to the said Article 7, has clarified that the permanent establishment must be endowed with: “a capital structure appropriate both to the enterprise and to the functions it performs. For these reasons, the prohibition on deducting expenses connected with internal financing – that is to say, those which constitute a mere allocation of the parent company’s own resources – should continue to apply generally.”. In ...

In 2014, the tax authorities issued the Italien Bank a notice of assessment with which it reclaimed for taxation IRAP for 2009 part of the interest expense paid by the bank to a company incorporated under Irish law, belonging to the same group which, according to the tax authorities, it also controlled. In particular, the tax authorities noted that the spread on the bond was two points higher than the normal market spread. The Bank appealed the assessment, arguing that there was no subjective requirement, because at the time of the issue of the debenture loan it had not yet become part of the group of which the company that had subscribed to the loan belonged. It also pleaded that the assessment was unlawful because it applied a provision, Article 11(7) TUIR, provided for IRES purposes, the extension of which to IRAP purposes was provided for by Article 1(281) of Law 147/13, a provision, however, of an innovative nature, the retroactivity of which was considered to be in conflict with the Community principles of legitimate expectations and with Articles 23, 41, 42 and 53 of the Italian Constitution. Decision of the Court The Court dismissed the appeal and decided in favor of the tax authorities. Click her for English translation Click here for other translation ...

In the INC bank case the tax administration had characterised part of the interest-bearing debt of a local branch of a Dutch bank, ING DIRECT B.V,  as “free” capital, in “accordance” with EU minimum capitalisation requirements and consequently reduced the deductible interest expenses in the taxabel income of the local branch for FY 2002 and 2003. The adjustment had been based on interpretation of the Commentaries to the OECD Model Convention, article 7, which had first been approved in 2008. Judgement of the National Court The court did not agree with the “dynamic interpretation” of Article 7 applied by the tax administration in relation to “free” capital, and ruled in favor of the branch of ING Direct. “In short, in accordance with the terms of the aforementioned DGT Consultation of 1272-98 of 13 July, “Consequently, to the extent that the branch or establishment is that of a banking institution, the interest paid to the head office will be deductible”, the appeal must be upheld in its entirety. Click here for English translation Click here for other translation ...

Bayerische Hypo und Vereinsbank AG (HVB-AG), a banking institution under German law, set up a French branch under the name “HVB-AG Paris” and contributed ten million Deutschmarks to this structure. The French branch also took out loans from the company’s head office or from third-party companies Following an audit of the branch’s accounts, the tax authorities, after considering that these loans revealed an insufficiency of the contribution made by the head office, particularly in relation to the equity capital that the branch should have had if it had had legal personality, refused to allow the interest corresponding to the fraction of the loans deemed excessive to be deducted from the results taxable in France in respect of the branch’s activity and demanded that the company pay additional corporation tax for the financial year ending in 1994, together with increases In order to justify this reassessment, the tax authorities first argued, during the contradictory reassessment procedure, that the disputed interest characterized a transfer of profits to the German head office within the meaning of Article 57 of the General Tax Code, and then by way of substitution of a legal basis that the interest was not borne by an autonomous company carrying on the same or similar activities as the branch under the same or similar conditions and dealing with the company’s head office as an independent company within the meaning of the provisions of Article 209(I) of the General Tax Code in conjunction with the stipulations of Article 4 of the Franco-German tax treaty of 21 July 1959; In 2008, the Paris administrative court discharged the disputed tax assessment. This decision was then appealed by the tax authorities to the Supreme Administrative Court. Judgement of the Supreme Administrative Court The Supreme Administrative Court upheld the decision of the administrative court and dismissed the appeal of the tax authorities. Excerpts “Considering, on the other hand, that there is no need, in order to interpret the stipulations of Article 4(2) cited above, to refer to the comments formulated by the Tax Committee of the Organisation for Economic Co-operation and Development (OECD) on Article 7 of the model convention drawn up by this organisation, since these comments were made after the adoption of the stipulations in question; that, in the wording applicable to the facts of the case, these provisions must be understood as authorising the State of the branch to attribute to the branch the profits that the interested party would have made if, instead of dealing with the rest of the company, it had dealt with separate companies under ordinary market conditions and prices; that, on the other hand, these stipulations do not have the object or, consequently, the effect of allowing that State to attribute to the branch the profits which would have resulted from the contribution to the interested party of own funds of an amount different from that which, entered in the accounting records produced by the taxpayer, faithfully retraces the withdrawals and contributions made between the various entities of the company; that, in particular, the tax authorities cannot substitute for this latter amount the equity capital with which the branch should have been endowed, by virtue of the applicable regulations or with regard, in particular, to the outstanding risks to which it is exposed, if it had enjoyed legal personality; 7. Considering that it follows from this that the terms of Article 209(I) of the General Tax Code subjecting to corporation tax “profits the taxation of which is attributed to France by an international convention on double taxation” could not, any more than the terms and rules mentioned in point 3, have the effect of attributing to the French tax authorities the taxation of profits established in accordance with the disputed reassessments; 8. Considering that it follows from all the above that, without needing to rule on the objection raised by HVB-AG, the Paris Administrative Court of Appeal, which was not required to respond to all the arguments raised before it, sufficiently reasoned its decision and did not commit an error of law, nor did it distort the documents in the file submitted to it by ruling, after having dismissed the domestic law grounds on which the tax authorities intended to base the contested taxes, that the stipulations of Article 4 of the Franco-German tax treaty could not be usefully invoked for the same purpose; that, consequently, the Minister responsible for the budget is not entitled to request the annulment of the judgment he is challenging;” Click here for English translation Click here for other translation ...