Following an audit of Sadepan Chimica S.R.L., the Italian tax authorities issued an assessment of additional taxable income relating to non-interest bearing loans and bonds granted by Sadepan Chimica S.R.L. to its subsidiaries. The tax authorities considered that, in the financing relationship between the subsidiaries and the foreign associates – Polena S.A., based in Luxembourg, and Sadepan Chimica N.V., based in Belgium – the former had applied interest rates that did not correspond to the arm’s length value referred to in Article 9, paragraph 3, of the Italian Income Tax Code. U.I.R. As a result, the authorities issued separate tax assessments for the year 2013 claiming the higher amounts of interest income, calculated by applying an average rate of 3.83% for loans and 5.32% for bonds. Not satisfied with the assessment, Sadepan Chimica S.R.L. filed an appeal. The Regional Tax Commission (C.t.r.) confirmed the assessments and Sadepan Chimica S.R.L. filed an appeal with the Supreme Court. In the appeal Sadepan Chimica S.R.L. and its subsidiaries stated that the C.t.r. judgment were ‘irrelevant’ for not having analysed the general and specific conditions in relation to which the loans had been granted, and in so far as it held that it was for the taxpayer to provide evidence that the agreed consideration corresponded ‘to the economic values that the market attributes to such transactions. First of all, they claimed that the rules on the allocation of the burden of proof have been infringed; secondly, they complained of the failure to assess the evidence; they also claimed that the Office had used as a reference a market rate extraneous to the case at hand in that it was applicable to the different case of loans from financial institutions to industrial companies whereas it should have sought a benchmark relating to intra-group loans of industrial companies. They added that they had submitted to the judge of the merits, in order to determine in concrete terms the conditions of the financing, a number of elements capable of justifying the deviation from the normal value and, precisely a) the legal subordination of the financing b) the duration, c) the absence of creditworthiness, d) the indirect exercise of the activity through the subsidiaries; that, nevertheless, the C.t.r. had not assessed the economic and commercial reasons deduced. Judgement of the Supreme Court The Court ruled in favour of Sadepan Chimica S.R.L. and annulled the judgment under appeal on the grounds that it had failed to take account of the specific circumstances (solvency problems of the subsidiaries) relating to the transactions carried out by the related parties. Excerpts (English translation) “In fact, it still remains that a non-interest-bearing financing, or financing at a non-market rate, cannot be criticised per se, since it is possible for the taxpayer to prove the economic reasons that led it to finance its investee in the specific manner adopted. The rationale of the legislation is to be found in the arm’s length principle set forth in Article 9 of the OECD Model Convention, which provides for the possibility of taxing profits arising from intra-group transactions that have been governed by terms different from those that would have been agreed upon between independent companies in comparable transactions carried out in the free market. It follows from this conceptual core that “the valuation ‘at arm’s length’ disregards the original capacity of the transaction to produce income and, therefore, any negotiating obligation of the parties relating to the payment of consideration (see OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, paragraph 1.2). It is, in fact, a matter of examining the economic substance of the transaction that has taken place and comparing it with similar transactions carried out, in comparable circumstances, in free market conditions between independent parties and assessing its compliance with these (Cass. 20/05/2021, no. 13850 Cass. 15/04/2016, no. 749) Moreover, it is not excluded that intra-group gratuitous financing may have legal standing where it can be demonstrated that the deviation from the arm’s length principle was due to commercial reasons within the group, connected to the role that the parent company assumes in support of the other companies in the group (Court of Cassation 20/05/2021, no. 13850).” “In the OECD report published on 11/02/2020, on financial transactions, it is reiterated (as already stated in the OECD Commentary to Article 9 of the Model Convention) that, in intercompany financing transactions, the proper application of the arm’s length principle is relevant not only in determining the market value of the interest rates applied, but also in assessing whether a financing transaction is actually to be considered a loan or, alternatively, an equity contribution. It is also emphasised that, in order to distinguish a loan from an equity injection, among other useful indicators, the obligation to pay interest is of independent relevance. With reference to Italy, however, based on the application practice of the Agenzia delle Entrate (Circular No. 6/E of 30 March 2016 on leveraged buy-outs), the requalification of debt (or part thereof) into an equity contribution should represent an exceptional measure. Moreover, it is not ruled out that intra-group free financing may have legal standing where it can be demonstrated that the deviation from the arm’s length principle was due to commercial reasons within the group, related to the role that the parent company plays in supporting the other group companies. The Revenue Agency itself, already in Circular No. 42/IIDD/1981, had specified that the appropriateness of a transfer pricing method must be assessed on a case-by-case basis. “9.6. That being stated, this Court has clarified that, the examination by the court of merit must be directed along two lines: first, it must verify whether or not the office has provided the proof, which is due to it, that the Italian parent company has carried out a financing transaction in favour of the foreign subsidiary, as a legitimate prerequisite for the recovery of the taxation of the interest income on the loan, on the basis of the market rate observable in relation to loans ...

Since 2005, Belgium has applied a tax regime under which group companies could apply for tax exemptions on excess profits. The exemption could be obtained through a tax ruling from the Belgian tax authorities if the existence of a new situation could be demonstrated, i.e. a reorganisation leading to the relocation of the central entrepreneur to Belgium, the creation of jobs or investments. Profits were considered ‘excessive’ in the sense that they exceeded the profits that would have been made by comparable independent companies operating in similar circumstances and were exempted from corporate income tax. In 2016, the Commission found that the Belgian scheme constituted state aid that was unlawful and incompatible with the single market and ordered the recovery of the aid from 55 companies that had benefited from the practice. On 14 February 2019, the General Court annulled the Commission’s decision. It found, inter alia, that the Commission had wrongly concluded that the excess profits exemption scheme did not require further implementing measures and that the scheme therefore constituted an ‘aid scheme’ within the meaning of Regulation 2015/1589. It also rejected the Commission’s arguments concerning the existence of an alleged ‘systematic approach’ by the Belgian tax authorities. The Commission appealed to the Court of Justice and on 16 September 2002 the Court of Justice overturned the judgement of the General Court and ruled that the Commission had correctly established the existence of an unlawfull state aid scheme. Judgement of the EU General Court In this case, European Commission v Belgium, the General Court upheld the Commission’s 2016 decision, finding that the Belgian excess profits tax scheme constitutes unlawful state aid. Click here for other translations ...

In 2012, Flir Commercial Systems AB sold intangible assets from a branch in Belgium and subsequently claimed a tax relief of more than SEK 2 billion in fictitious Belgian tax due to the sale. The Swedish Tax Agency decided not to allow relief for the Belgian “tax”, and issued a tax assessment where the relief of approximately SEK 2 billion was denied and a surcharge of approximately SEK 800 million was added. An appeal was filed with the Administrative Court, In March 2020 the Administrative Court concluded that the Swedish Tax Agency was correct in not allowing relief for the fictitious Belgian tax. In the opinion of the Administrative Court, the Double tax agreement prevents Belgium from taxing increases in the value of the assets from the time where the assets were owned in Sweden. Consequently, any fictitious tax cannot be credited in the Swedish taxation of the transfer. The Court also considers that the Swedish Tax Agency was correct in imposing a tax surcharge and that there is no reason to reduce the surcharge. The company’s appeal is therefore rejected. An appeal was then filed with the Administrative Court of Appeal Decision of the Administrative Court of Appeal The Court upheld the decision of the Administrative Court and the assessment issued and the penalty added by the tax authorities. The Administrative Court of Appeal found that when assessing the amount of credit to be given for notional tax on a transfer of business, the tax treaty with the other country must also be taken into account. In the case at hand, assets were transferred to the company’s Belgian branch shortly before the assets were disposed of through the transfer of business. The tax treaty limited Belgium’s taxing rights to the increase in value accrued in Belgium after the allocation and a credit could be given up to an amount equal to that tax. In the case at hand, the company had claimed a notional credit for tax on the increase in value that had taken place in Sweden before the assets were transferred to Belgium, while the transferee company in Belgium was not taxed on the corresponding increase in value when the assets were subsequently disposed of, as the Belgian tax authority considered that the tax treaty prevented such taxation. The Court of Appeal held that there were grounds for back-taxation and the imposition of a tax surcharge on the basis of incorrect information. The information provided by the company was not considered sufficient to trigger the Tax Agency’s special investigation obligation and the tax fine was not considered unreasonable even though it amounted to a very large sum. Click here for English Translation Click here for translation ...

“HQ Lender GmbH” is the sole shareholder and at the same time the controlling company of A GmbH. The latter held 99.98% of the shares in B N.V., a corporation with its seat in Belgium. The remaining shares in B N.V. were held by HQ Lender GmbH itself. A GmbH maintained a clearing account for B N.V., which bore interest at 6% p.a. from 1 January 2004. No collateralisation was agreed in regards of the loan. In the year in dispute (2005), the interest rate on a working capital loan granted to the plaintiff by a bank was 3.14%. On 30 September 2005, A GmbH and B N.V. concluded a contract on a debt waiver against a debtor warrant (… €). The amount corresponded to the worthless part of the claims against B N.V. from the clearing account in the opinion of the parties to the contract. Although it was deducted from the balance sheet of A GmbH to reduce profits, the tax authorities neutralised the reduction in profits with regard to the lack of collateralisation of the claim in accordance with section 1 (1) of the German Income Tax Act (AStG) through an off-balance sheet addition. An appeal was filed by HQ Lender GmbH. Judgement of the BFH The BFH allowed the appeal of HQ Lender GmbH and referred the case back to the FG Düsseldorf. The FG has to determine whether there is a loan that can be recognized for tax purposes at all or whether this “clearing account” is more of an equity transfer by the shareholder. The distinction between loans occasioned by business and contributions occasioned by the company relationship is to be made on the basis of the totality of the objective circumstances. Individual criteria of the arm’s length comparison are not to be accorded the quality of indispensable prerequisites of the facts. The lack of collateral for a loan is one of the “conditions” within the meaning of § 1, para. 1 of the German Income Tax Act (AStG) which, when considered as a whole, can lead to the business relationship being unusual; the same applies to Article 9, para. 1 of the OECD Model Convention (here: Article 9 of the DTC-between Germany and Belgium 1967). Whether an unsecured intercompany loan is in conformity with the arm’s length principle in the context of an overall consideration of all circumstances of the individual case depends on whether a third party would also have granted the loan under the same conditions – if necessary, taking into account possible risk compensation. If an unsecured group loan would only have been granted at a higher interest rate than the one actually agreed, an income adjustment must be made primarily in the amount of this difference. In the context of arm’s length determinations, the granting of unsecured loans by third parties to the group parent company is not suitable to replace the assessment of the loan granted to a (subsidiary) company on the basis of the standard of an arm’s length granting of a loan. Click here for English translation Click here for other translation ...

Since 2005, Belgium has applied a system of exemptions for the excess profit of Belgian entities which form part of multinational corporate groups. Those entities were able to obtain a tax ruling from the Belgian tax authorities, if they could demonstrate the existence of a new situation, such as a reorganisation leading to the relocation of the central entrepreneur to Belgium, the creation of jobs, or investments. In that context, profits regarded as being ‘excess’, in that they exceeded the profit that would have been made by comparable stand-alone entities operating in similar circumstances, were exempted from corporate income tax. In 2016, the Commission found that that system of excess profit exemptions constituted a State aid scheme that was unlawful and incompatible with the internal market and ordered the recovery of the aid thus granted from 55 beneficiaries, including the company Magnetrol International. Belgium and Magnetrol International brought an action before the General Court of the European Union seeking the annulment of the Commission’s decision. On 14 February 2019, the General Court annulled the Commission’s decision. It found, inter alia, that the Commission had wrongly concluded that the excess profit exemption scheme did not require further implementing measures and that that scheme therefore constituted an ‘aid scheme’ within the meaning of Regulation 2015/1589. It also rejected the Commission’s arguments relating to the existence of an alleged ‘systematic approach’ by the Belgian tax authorities. On 24 April 2019, the Commission brought an appeal before the Court of Justice. According to the Commission, the General Court made errors in the interpretation of the definition of an ‘aid scheme’. The Judgement of the European Court of Justice The Court of Justice overturned the judgement of the General Court and ruled that the Commission correctly found that there was an aid scheme. The Court therefore sets aside the judgment delivered on 14 February 2019 by the General Court and referred the case back to the latter for it to rule on other aspects of the case. In its decision the Court of Justice notes that, for a state measure to be classified as an aid scheme, three cumulative conditions must be satisfied. First, aid may be granted individually to undertakings on the basis of an act. Secondly, no further implementing measure is required for that aid to be granted. Thirdly, undertakings to which individual aid may be granted must be defined ‘in a general and abstract manner’. As regards, first of all, the first condition, the Court clarifies the concept of an ‘act’. It confirms that the term may also refer to a consistent administrative practice by the authorities of a Member State where that practice reveals a ‘systematic approach’. Although the General Court found that the legal basis of the scheme at issue resulted not only from a provision of the Code des impôts sur les revenus 1992 (Income Tax Code 1992; ‘CIR 92’), 3 but also from the application of that provision by the Belgian tax authorities, it did not, however, draw all the appropriate conclusions from that finding. In particular, it did not take account of the fact that the Commission inferred the application of that provision not only from certain acts, 4 but also from a systematic approach on the part of those authorities. The General Court did, however, rely on the incorrect premise that the fact that certain key facts of the scheme at issue were not apparent from those acts, but from the rulings themselves, meant that those acts necessarily had to be the subject of further implementing measures. Consequently, by limiting its analysis to only the abovementioned normative acts, the General Court misapplied the term ‘act’. Next, as regards the second condition for defining an ‘aid scheme’, namely that no ‘further implementing measures’ are required, the Court of Justice notes that that issue is intrinsically linked to the determination of the ‘act’ on which that scheme is based. In the context of that examination, the General Court failed to take account of the fact that one of the essential characteristics of the scheme at issue lay in the fact that the Belgian tax authorities had systematically granted the excess profit exemption when the conditions were satisfied. Contrary to what the General Court held, the identification of such a systematic practice was capable of constituting a relevant factor in order to establish, where applicable, that the tax authorities did not in fact have any discretion. As regards the third condition defining an ‘aid scheme’, namely that the beneficiaries of the excess profit exemption are defined ‘in a general and abstract manner’, the Court of Justice notes that that issue is also intrinsically linked to the first two conditions, relating to the existence of an ‘act’ and the absence of ‘further implementing measures’. Accordingly, the errors of law made by the General Court concerning the first two conditions vitiated its assessment of the definition of the beneficiaries of the excess profit exemption. The Court of Justice therefore concludes that the General Court made several errors of law. Furthermore, as regards proof of the existence of a ‘systematic approach’, the Court of Justice finds that the sample of rulings examined by the Commission (22 selected in a weighted manner from a total of 66) is, by its nature, capable of representing a ‘systematic approach’ taken by the Belgian tax authorities. The Court of Justice therefore sets aside the judgment of the General Court. However, it finds that the state of the proceedings does not permit final judgment to be given as regards the pleas alleging, in essence, the incorrect classification of the excess profit exemption as State aid, in view of, inter alia, the absence of any advantage or selectivity, and as regards the pleas in law alleging, inter alia, infringement of the principles of legality and protection of legitimate expectations, in so far as the recovery of the alleged aid was incorrectly ordered, including from the groups to which the beneficiaries of that aid belong. The Court of Justice ...

In the Advocate General Opinion delivered 3 December 2020, in the EU Commissions “Aid scheme” case against Belgium and Magnetrol International, it is proposed that the Court of Justice set aside the 2019 judgment of the General Court, on the ground that the Commission has, contrary to the findings of the General Court, sufficiently demonstrated in its decision that the Belgian practice of making downward adjustments to profits of undertakings forming part of multinational groups meets the conditions for the existence of an ‘aid scheme’. “In conclusion, the General Court incorrectly assumed that the conditions of Article 1(d) of Regulation 2015/1589 were not met in the present case. On the contrary, in the contested decision the Commission sufficiently demonstrated that the Belgian practice of making downward adjustments of the profits of undertakings forming part of a multinational group constitutes an aid scheme within the meaning of Article 1(d) of Regulation 2015/1589. The appeal is therefore well founded.” ...

In 2012, Flir Commercial Systems AB sold intangible assets from a branch in Belgium and subsequently claimed a tax relief of more than SEK 2 billion in fictitious Belgian tax due to the sale. The Swedish Tax Agency decided not to allow relief for the Belgian “tax”, and issued a tax assessment where the relief of approximately SEK 2 billion was denied and a surcharge of approximately SEK 800 million was added. The Administrative Court concluded that the Swedish Tax Agency was correct in not allowing relief for the fictitious Belgian tax. A double taxation agreement applies between Sweden and Belgium. In the opinion of the Administrative Court, the agreement prevents Belgium from taxing the assets. Consequently, any fictitious tax cannot be deducted. The Administrative Court also considers that the Swedish Tax Agency was correct in imposing a tax surcharge and that there is no reason to reduce the surcharge. The company’s appeal is therefore rejected. Click here for translation ...

In a public statement the French General Directorate of Public Finance clarified that tax treatment of interest deductions taken by a French company on interest payments to a related Belgian company that benefits from the Belgian notional interest rate scheme. According to French Law, interest paid to foreign group companies is only deductible if a minimum rate of tax applies to the relevant income abroad. Click here for translation ...

In 2016, the Commission requested that Belgium reclaim around €700 million from multinational corporations in what the Commission found to be illegal state aid provided under the Belgian “excess profit” tax scheme. The tax scheme allowed selected multinational corporations to exempt “excess profits” from the tax base when calculating corporate tax in Belgium. The European Court of Justice concludes that the Commission erroneously considered that the Belgian excess profit system constituted an aid scheme and orders that decision must be annulled in its entirety, in as much as it is based on the erroneous conclusion concerning the existence of such a scheme. For state aid to constitute an ‘aid scheme’, it must be awarded without requiring “further implementing measures.” According to court, “the Belgian tax authorities had a margin of discretion over all of the essential elements of the exemption system in question.” Belgium could influence the amount and the conditions under which the exemption was granted, which precludes the existence of an aid scheme. For an aid scheme to exist EU regulation also requires, beneficiaries are defined “in a general and abstract manner” and the aid is awarded for an infinite period of time. This was not the case in the Belgian “excess profit” tax scheme. Click here for translation ...

In January 2016 the European Commission concluded that Belgium’s excess profits tax exemption scheme was incompatible with the internal market and unlawful and ordering recovery of the aid granted . Belgium’s excess profits tax exemption In the first step, the arm’s length prices charged in transactions between the Belgian entity of a group and the companies with which it is associated were fixed based on a transfer pricing report provided by the taxpayer. Those transfer prices were determined by applying the transactional net margin method (TNMM). A residual or arm’s length profit was thus established, which corresponded to the profit actually recorded by the Belgian entity. In the second step the Belgian entity’s adjusted arm’s length profit was established by determining the profit that a comparable standalone company would have made in comparable circumstances. The difference between the profit arrived at following the first and second steps (namely the residual profit minus the adjusted arm’s length profit) constituted the amount of excess profit which the Belgian tax authorities regarded as being the result of synergies or economies of scale arising from membership of a corporate group and which, accordingly, could not be attributed to the Belgian entity. Under the scheme at issue, that excess profit was not taxed. According to the Commission, that non-taxation granted the beneficiaries of the scheme a selective advantage, particularly since the methodology for determining the excess profit departed from a methodology that leads to a reliable approximation of a market-based outcome and thus from the arm’s length principle. The Commission considered that the measure in question constituted an aid scheme, based on Article 185(2)(b) of the CIR 92, as applied by the Belgian tax administration. According to the Commission, those acts constitute the basis on which the exemptions in question were granted. In addition, the Commission considered that those exemptions were granted without further implementing measures being required, since the advance rulings were merely technical applications of the scheme at issue. Furthermore, the Commission stated that the beneficiaries of the exemptions were defined in a general and abstract manner by the acts on which the scheme was based. Those acts referred to entities that form part of a multinational group of companies. Belgium appealed the decision to the European General Court. The Judgement of the General Court The General Court annulled the Commission’s decision. “Conclusion on the classification of the measures in question as an aid scheme 135   It follows from the foregoing considerations that the Commission erroneously considered that the Belgian excess profit system at issue, as presented in the contested decision, constituted an aid scheme. 136    Accordingly, it is necessary to uphold the pleas raised by the Kingdom of Belgium and Magnetrol International, alleging the infringement of Article 1(d) of Regulation 2015/1589, as regards the conclusion set out in the contested decision regarding the existence of an aid scheme. Consequently, without it being necessary to examine the other pleas raised against the contested decision, that decision must be annulled in its entirety, inasmuch as it is based on the erroneous conclusion concerning the existence of such a scheme.” ...

New Oxfam research shows that four pharmaceutical corporations — Abbott, Johnson & Johnson, Merck, and Pfizer — systematically allocate super profits in overseas tax havens. In eight advanced economies, pharmaceutical profits averaged 7 percent, while in seven developing countries they averaged 5 percent. In comparison, profits margins averaged 31 percent in countries with low or no corporate tax rates – Belgium, Ireland, Netherlands and Singapore. The report exposes how pharmaceutical corporations uses sophisticated tax planning to avoid taxes ...

Since June 2013, the European Commission has been investigating tax ruling practices of EU Member States. A Task Force was set up in summer 2013 to follow up on allegations of favourable tax treatment of certain companies, in particular in the form of unilateral tax rulings. The Treaty on the Functioning of the European Union (“TFEU”) provides that “any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.”. The State aid rules ensures that the functioning of the internal market is not distorted by anticompetitive behavior favouring some to the detriment of others. In June 2014 the Commission initiated a series of State aid investigations on Multinational Corporations related to transfer pricing practices and rulings. Final decisions now have been published in cases against: Ireland/Apple (Appealed to the EU Court) Belgium/Excess Profit Exemption (Final decision by the EU Court) The Netherlands/Starbucks (Appealed to the EU Court) Luxembourg/Fiat (Appealed to the EU Court) And formal investigations have later on been opened against: Luxembourg/Amazon Luxembourg/McDonald’s Luxembourg/GDF Suez(now Engie) In December 2014 the Commission extended the investigation to tax rulings from all Member States. Follow these investigations on the European Commission homepage for State Aid, Tax rulings State Aid – Tax rulings See the “TAXE 1” report by the European Parliament’s Special Committee on Tax Rulings and Measures Similar in Nature or Effect (“the TAXE Committee”) below ...

A Dutch company was engaged in smelting of zinc. The business was then restructured, for which the company received a small compensation payment. Dutch tax authorities disagreed with both the amount of compensation payment and the arm’s-length remuneration of the post restructuring manufacturing activities. Until 2003 the Dutch Company was a fully fledged business. The company owned the assets and controlled the risks relating to the activities. In the years after 2003, the company was involved in several business restructurings: Activities other than the actual production activities were gradually transferred to other group companies, among others the global marketing and services team (GMS), took over purchasing, sales and deployment of personnel. After becoming part of another group in 2007, the company entered a consultancy agreement with another group company under witch strategic and business development, marketing, sales, finance, legal support, IT, staffing and environmental services was now provided on a cost plus 7.5% basis. Under ‘Project X’, a Belgian company was established in April 2009, which concluded both a business transfer agreement and a cooperation agreement with related smelting companies (including the taxpayer). Under the business transfer agreement, the Belgian company purchased the working capital, including raw materials, products and debtors from the smelting companies. Under the cooperation agreement, which had a term of two years, the Belgian company provided the smelting companies with raw materials. The smelting companies would then process the materials and transfer the final products back to the Belgian company. The Belgian company’s remuneration was based on a cost plus 7.5% mark-up and a 3.5% return on equity. Under ‘Project Y’, the group moved its headquarters to a Swiss company. In the new structure, the Swiss company managed the production planning, purchasing, logistics and sales. The former agreement was terminated, for which the Duch company received a compensation payment of about €28 illion. A manufacturing services agreement was concluded between the Swiss company and the Dutch company under which the smelting companies were compensated based on cost plus 10%. In 2010 the Dutch company reported a taxable amount of €32 million. The Dutch tax authorities increased this amount to €187 million, arguing that at arm’s length the compensation payment should have been €185 million instead of €28 million. The tax authorities argued that: The taxpayer unfairly assumed an expected loss of income for the period of only one year, the remaining term of the cooperation agreement; The compensation payment calculated by the taxpayer was lower than past actual annual profits. The tax authorities provided that the calculation should also consider the foregoing of profits and costs relating to activities such as purchasing and selling. The taxpayer incorrectly assumed that the activities of the GMS were not conducted for the account and risk of the taxpayer; The taxpayer made a calculation error of €50 million and the cash flows in a real sense had been discounted against a nominal discount factor; and The tax authorities referred to the uniqueness of activities conducted by the taxpayer based on the costliness of the factory with huge investments and complexity of the process. The tax authorities also argued that the key functions of the taxpayer had not actually changed after moving the headquarters to Switzerland, and that this should be considered in calculating the compensation payment following the transfer. The company argued that: Under Project X activities relating to purchasing, sales and logistics had already been gradually transferred to other group entities before 2010. In determining the compensation payment, it was therefore not necessary to consider the profit potential of these activities that were no longer being performed by the taxpayer. During the negotiation of the compensation payment, consideration was given to its bargaining position and possibilities to request compensation for a period of time longer than the remaining one year of the cooperation agreement. According to the taxpayer, however, it appeared that compensation, due to poor prospects, was not on the agenda. Although large investments were made in the smelting plant, the taxpayer suggested that these investments mainly related to an adjustment of the production process in line with the environmental standards at the time. The smelting plant of the taxpayer was otherwise not distinctive compared with other smelting plants so as to justify a higher compensation payment. As a result of the business restructuring, the functional profile of the taxpayer changed. The taxpayer regarded itself as a toll manufacturer to be remunerated based on a cost-based approach. However, the tax authorities suggested that a profit split method should be applied considering the strongly interrelated activities of the taxpayer and the Swiss headquarters and the ownership of unique intangibles by both sides. In the Court’s view, the Dutch company was a toll manufacturer in 2010, and therefore the net cost plus method was an acceptable method to determine an arm’s-length remuneration of the current and future activities. The Court  also found that the company had complied with the Dutch documentation requirements and had adequately substantiated the use of tcost plus method. The Court therefor ruled that the tax authorities did not meet the burden of proof and the income adjustment was thus annulled. (The decision has been appealed by the tax authorities) Click here for English translation Click here for other translation ...

The question in this case, was whether EU community law precluded Belgien statutory rules under which interest payments were reclassified as dividends, and thus taxable, if made to a foreign shareholder company. A Belgian subsidiary was established and the two shareholders of the Belgian subsidiary and the parent company, established in the Netherlands, were appointed as directors. The subsidiary paid interest to the parent which was considered by the Belgian tax authorities in part to be dividends and was assessed as such. The European Court of Justice was asked to rule on the compatibility of these Belgien statutory rules with EU Community law The Court ruled that art. 43 and 48 EC precluded national legislation under which interest payments made by a company resident in a member state to a director which was a company established in another member state were reclassified as taxable dividends, where, at the beginning of the taxable period, the total of the interest-bearing loans was higher than the paid-up capital plus taxed reserves, whereas, in the same circumstances, interest payments made to a director which was a company established in the same member state were not reclassified and so were not taxable. National legislation introduced, as regards the taxation of interest paid by a resident company in respect of a claim to a director which was a company, a difference in treatment according to whether or not the latter company had its seat in Belgium. Companies managed by a director which was a non resident company were subject to tax treatment which was less advantageous than that accorded to companies managed by a director which was a resident company. Similarly, in relation to groups of companies within which a parent company took on management tasks in one of its subsidiaries, such legislation introduced a difference in treatment between resident subsidiaries according to whether or not their parent company had its seat in Belgium, thereby making subsidiaries of a non resident parent company subject to treatment which was less favourable than that accorded to the subsidiaries of a resident parent company. A difference in treatment between resident companies according to the place of establishment of the company which, as director, had granted them a loan constituted an obstacle to the freedom of establishment if it made it less attractive for companies established in other member states to exercise that freedom and they might, in consequence, refrain from managing a company in the member state which enacted that measure, or even refrain from acquiring, creating or maintaining a subsidiary in that member state. The difference in treatment amounted to a restriction on freedom of establishment which was prohibited, in principle, by art. 43 and 48 EC. Such a restriction was permissible only if it pursued a legitimate objective which was compatible with the Treaty and was justified by overriding reasons of public interest. It was further necessary, in such a case, that its application was appropriate to ensuring the attainment of the objective thus pursued and did not go beyond what was necessary to attain it. “In order for a restriction on the freedom of establishment to be justified on the ground of prevention of abusive practices, the specific objective of such a restriction must be to prevent conduct involving the creation of wholly artificial arrangements which do not reflect economic reality, with a view to escaping the tax normally due on the profits generated by activities carried out on national territory (Test Claimants in the Thin Cap Group Litigation, paragraph 74 and the case‑law cited” Even if the Belgian application of such a statutory limit sought to combat abusive practices, it went beyond what was necessary to attain that objective ...