The tax authorities had issued a notice of assessment in which payments for a parent company guarantee had been adjusted on the basis of the arm’s length principle. The Administrative Court of Appeal annulled the assessment. The tax authorities filed an appeal with the Supreme Administrative Court. Judgement of the Court The Supreme Administrative Court upheld the decision of the Administrative Court of Appeal and dismissed the appeal of the tax authorities. According to the Court, I – The Tax Administration may, under the provisions of article 58 of the CIRC, make corrections to the taxable income whenever, by virtue of special relations between the taxpayer and another person, whether or not subject to IRC, different conditions have been established in certain operations from those that are generally agreed upon between independent persons and these particular conditions have led to the profit ascertained on the basis of accounting being different from that which would have been ascertained had such special relations not existed. II – It is incumbent on the Tax Administration to allege and prove both the existence of special relations and the “normal circumstances” under which certain transactions take place, that is, the conditions under which, as a rule, those transactions take place between independent legal persons. III – As the assessment of comparability of transactions, required by Article 4(3) of Ministerial Order 1446-C/2001, is based on an economic criterion, the assessment issued under Article 58 of the CIRC must be annulled if the tax authorities were unable to demonstrate that, in the specific case, the transactions present relevant economic and financial characteristics that are sufficiently similar to ensure the high degree of comparability legally required in order for corrections to be made to the taxable amount via the transfer pricing regime. IV – The rules of hermeneutics of tax law do not allow Article 17 EBF to be interpreted as meaning that, in cases where employment contracts that are eligible under the aforementioned article terminate or commence during the tax period, the maximum limit of the increase provided for in no. 1 should be restricted in proportion to the time the contracts have been in force. V – In tax benefits that depend on the behaviour of the taxpayer, who may freely choose to fulfil the legally established conditions in order to enjoy them, the question of the principle of equality should be posed in relation to the conditions of access to the benefit and not in relation to the contours in which they are provided. VI – There is no discriminatory treatment, or even arbitrariness of the legal solution, if it is placed at the disposal of the taxpayer to optimise the variable effects of the tax benefit. Extracts from the judgement “In view of the provisions of article 5 of Ministerial Order no. 1446-C/2001, especially paragraph d), one cannot ignore the fact that the relationship between the Impugnant and its controlled companies cannot be comparable to the relationships established between entities that are independent from each other, as the latter are normally prevented under the terms of article 6(3) of the CSC from providing this type of guarantees to third parties, this function being reserved for credit institutions. In this regard, it should also be noted, as pointed out in the appealed decision, that the economic risk borne in the two operations is significantly different and “although the guarantee and the autonomous bank guarantee may share common characteristics, the way in which the risk falls on the guarantor and on the guarantor of the autonomous bank guarantee potentially generates differences that significantly affect their comparability” (emphasis added). 3.2.5.6 In conclusion, as it is the responsibility of the Tax Administration to demonstrate the verification of the prerequisites for applying the transfer price regime enshrined in Article 58(1) of the CIRC – which is the responsibility of the Portuguese Tax Authorities – it is important that the transfer price regime is applied. In conclusion, as it is the Tax Authorities’ duty to demonstrate the verification of the assumptions of application of the transfer pricing regime set forth in article 58, no. 1 of the CIRC – which, in this case, would translate into proving that the provision of guarantee by the Appellant and the provision of autonomous bank guarantees whose costs were supported by the Appellant, meet conditions to be considered comparable, as they present sufficiently similar relevant economic and financial characteristics -, which proof it failed to do, it is necessary to conclude, as did the appealed sentence, for the existence of error on the factual and legal assumptions of the assessment leading to its annulment in this part. The present appeal should, therefore, be dismissed in this part, on the grounds set out above.” Click here for English translation. Click here for other translation Portugal-vs-Servicos-de-Telecomunicacoes-e-Multimedia-SGPS-SA-December-2022-SAC-ORG ...

A Swiss company, Hôtel X. SA operates a hotel in Geneva. It is 50% owned by Y. (Suisse) SA. In its 2009 tax return, the Company declared a taxable profit of CHF 685,413. It specified that the amount of CHF 653,478 in advances to shareholder companies represented a loan granted to Y. (Suisse) SA and that the interest of CHF 17,471 recorded on this loan had been calculated on the basis of the average receivable for the 2008 and 2009 financial years, at a rate of 2.5%. The Company also stated that it had paid CHF 57,802 in interest on its bank mortgages. Following an audit, the tax authorities issued an assessment of additional taxable income CHF 5,850. According to the tax authorities, the Company should have applied an interest rate of 3.941% on the loan granted to Y. (Suisse) SA. Calculated on an average receivable of CHF 591,743, interest of CHF 23,321 should therefore have been taken into account. Consequently, the difference between this amount and the interest booked by the Company (CHF 17,471), i.e. CHF 5,850, had to be added to its taxable profit for the 2009 tax year. The Company unsuccessfully challenged the assessment by lodging a complaint and then an appeal with the Administrative Court. An appeal was then filed against the Administrative Court’s ruling with the Court of Justice of the Canton of Geneva. The Court of Justice dismissed the appeal by judgment of 19 February 2013. Hôtel X. SA then lodged an appeal with the Federal Court. Decision of the Court The Federal Administrative Court upheld the decision of the Court of Justice and dismissed the appeal of Hôtel X. SA. Excerpt in English “6.1 The Swiss Federal Supreme Court has on several occasions ruled on interest rates on loans between companies and shareholders or their close relations. In an earlier ruling, which concerned a loan that a company had granted without interest to its main shareholder, it held that the interest rate of 4% used by the Federal Tax Administration as the interest rate that the company should have applied to the loan was appropriate, as it was close to the interest rate charged by Swiss banks for loans granted without security during the period in question (Archives 19 p. 403). In another early ruling, which also concerned a loan that a company had granted to its main shareholder without interest, it confirmed the interest rate of 5% adopted by the Federal Tax Administration as the interest rate that should have been applied by the lending company, specifying that this was a “normal” rate, which was provided for in particular in art. 73 of the Swiss Code of Obligations (Archives 26 p. 137, para. 3). More recently, the Federal Supreme Court confirmed the method applied by the Federal Tax Administration to determine the arm’s length interest rate in the case of a loan granted in US dollars by a company to its US parent company, which had consisted in comparing the interest rates actually applied with the average US bond rates during the periods in question. According to the Federal Supreme Court, this comparison was justified since loans between associated companies must be qualified as long-term loans from a tax point of view (ruling 2A.355 /2004 of 20 June 2005, recitals 3.3 and 3.4, in RF 60/2005 p. 963, commented by PETER GURTNER, Archives 76 p. 53). In its case law, the Federal Court thus tends to apply the method of comparison with a comparable transaction (cf. recital 4.2) to determine the interest rate that would have been applied to a loan between independent third parties. This method is also recommended by the OECD when the transfer pricing issue concerns a loan of money, on the grounds that it is easy to apply in this context (OECD, op. cit., § 1.9; see also OECD Secretariat, Transfer Pricing Methodologies, July 2010, § 7). 6.2 Determining the interest rate on an arm’s length loan depends on a number of factors, including the amount and term of the loan (see in this respect judgment 2A.355/2004 of 20 June 2005, recital 3.3, in RF 60/2005 p. 963), its nature, its purpose (commercial credit, general purpose loan, mortgage loan, etc.), the collateral to which the loan may or may not be linked and the financial strength of the borrower. The financial situation of the lending company and the source of funding for the loan are also factors that must be taken into consideration. In its case law, however, the Federal Supreme Court has not addressed the question of the financial situation of the lending company or the source of financing for the loan when determining the arm’s length interest rate. Yet these factors are important, given that a company that is itself in debt has no economic reason to lend funds to its shareholder or partner rather than use those funds to repay its debt, unless the transaction proves profitable. Section 1.2 of the 2009 circular letter makes it possible to verify that the transaction allows the company to generate a profit margin, since the minimum interest rate on the loan granted to the shareholder or partner must be 0.25% or 0.5% higher than the interest rate paid by the company on its own interest expenses. 6.3 Section 1.2 assumes that there is an economic connection between the company’s own debt and the loan to the shareholder. This solution is admittedly very schematic. However, such a schematic approach is acceptable in this case, insofar as the method is provided for in an administrative directive and not in a standard that would have binding effect. Indeed, failure to comply with the rate resulting from the application of point 1.2 merely creates an indication of the existence of an appreciable benefit in money, since the taxpayer always retains the possibility of proving that the lower rate he has applied nevertheless complies with the arm’s length principle (see on this point below, recital 7).” “7.1.2 In the present case, the appellant ...