12 December 2024, the German Federal Ministry of Finance published updated administrative principles on transfer pricing 2024 (VWG VP 2024). The updates mainly concern the chapter on financial transactions, where paragraphs 3d and 3e have recently been added to the AStG. Paragraph 3d concerns the determination of arm’s length interest rates, group or stand-alone rating and whether capital should be treated as a loan or equity, and paragraph 3e concerns the treatment of financing arrangements, i.e. cash pools, hedging, etc. New guidance is also provided on the application of OECD Pillar 1 – Amount B. Click here for an unofficial English Translation ...

14 August 2024, the Federal Ministry of Finance sent revised administrative principles for transfer prices 2023 dated 6 June 2023 regarding the topic of intra-group financing, which, among other things, takes into account new paragraphs 3d and 3e in the German TP provisions. An opportunity to comment on the draft will be available until 6 September 2024. Paragraphs 3d and 3e were recently added to the German Foreign Tax Act (AStG). Paragraph 3d concerns the determination of arm’s length interest rates, group or stand-alone rating and whether capital should be treated as a loan or equity and paragraph 3e concerns the treatment of financing arrangements, i.e. cash pools, hedging, etc. Click here for an unofficial English Translation ...

SAP AG (now SAP SE) is a German multinational software corporation that develops enterprise software to manage business operations and customer relations. The company is especially known for its ERP software. SAP France, a 98% subsidiary of SA SAP France Holding, itself wholly owned by the German group, had deposited funds under a Cash Management Agreement as sight deposits carrying an interest of 0%. Following an audit for the financial years 2012 and 2013, two assessment proposals were issued in December 2015 and November 2016, relating in particular to the 0% interest rate charged on the cash deposits. The tax authorities had added interest to SA SAP France’s taxable income calculated by reference to the rate of remuneration on sight deposits. SAP France contested the adjustments and furthermore requested the benefit of the reduced rate of corporation tax on income from industrial property, pursuant to Article 39 of the French General Tax Code, with regard to the royalties from the licensing agreements relating to Business Object products and Cartesis solutions. In regards to added interest on the deposited funds under a Cash Management Agreement the Court of Appeal decided in favor of the tax authorities. An appeal was then filed by SAP France with the Supreme Court, which by decision no. 461642 of 20 September 2022 set aside the decision and referred the case back to the Court of Appeal. Judgment The Court of Appeal ruled in favour of the tax authorities. Excerpts – English translation. “4. The investigation has shown that SA SAP France has made its surplus cash available to the German company SAP SE, which indirectly holds it as described above, in very large amounts ranging from €132 million to €432 million, under a cash management agreement entered into on 17 December 2009. Under the terms of the agreement, these sums were remunerated on the basis of an interest rate equal to the Euro OverNight Index Average (EONIA) interbank reference rate less 0.15 points. The French tax authorities do not dispute the normal nature of the agreement when it was entered into in 2009, or the rate that was thus defined between the parties. During 2012 and 2013, despite the application of this formula, which resulted in negative remuneration due to changes in the EONIA, the parties agreed to set the rate at 0%. As a result, there was no remuneration at all on the sums made available to the cash centre by SAP France from August 2012. The tax authorities compared this lack of remuneration to the remuneration that SA SAP France could have received by investing its money in financial institutions, based on the average rate of remuneration on sight deposits over the period. It then considered that the difference between the two sums constituted a transfer of profits within the meaning of the aforementioned provisions. Contrary to what the company maintains, such an absence of remuneration makes it possible to establish a presumption of transfer of profits for the transactions in question. 5. The company argues that the investment of the funds with SAP SE is particularly secure and that it enables its subsidiary to obtain immediate and unconditional financing from the central treasury. However, it does not deny, as the French tax authorities point out, that its subsidiary’s software marketing business generates structural cash surpluses and that the subsidiary has never had recourse to financing from the central treasury since its inception. Nor does it report any difficulty in investing surplus cash in secure financial products. In addition, it appears from the investigation that the cash flow agreement does not provide for a defined term and stipulates, in paragraph 2 of section IX, that, subject to compliance with a one-month time limit, the parties may terminate the agreement, without condition or penalty. Section XII of the same agreement also states that it has no effect on the independence of each of its co-contractors or on their autonomy of management and administration. SA SAP France therefore had no contractual obligation to remain in the central cash pool beyond a period of one month. Furthermore, the company does not dispute that the rate of interest on advances, which results from the terms of the agreement, is not fixed, even if the aforementioned 2009 agreement does not contain a review clause, and that the parties may agree on a different rate, as they did in 2012. In addition, by simply arguing that the comparable rate used by the authorities is not relevant, when sight deposits, contrary to what it claims, do not exclude any immediate withdrawal of funds, the company, which does not offer any other comparable rate, does not seriously criticise the rates used by the authorities, between 0.15% and 0.18% over the period, which correspond to the remuneration that SA SAP France could have obtained from a financial institution and which, contrary to what it claims, are not negligible, given the amounts of cash surpluses made available. Lastly, although the company argues that the rates used by the authorities could, in any event, only be reduced by 0.15%, which corresponds to the margin of the central treasury that was applied in the 2009 agreement, this discount cannot be accepted since the comparables used by the authorities necessarily include the margin of the financial institutions. The fact that this rate has never been questioned by the authorities since the agreement was signed in 2009 has no bearing on the present analysis, which relates to different years in dispute. In these circumstances, and while SA SAP France persisted in investing its cash, without remuneration, with an affiliated company, the applicant company did not establish that the advantages it granted to the German company SAP SE were justified by the obtaining of quid pro quos favourable to its business or, at the very least, by quid pro quos at least equivalent to the revenue forgone granted. It follows that the tax authorities were right to reinstate in the results of SA SAP France the advantage granted to ...

On 27 March 2024, new paragraphs (3d) and (3e) were added to the German Foreign Tax Act (Außensteuergesetz – AStG) regarding intragroup financing. Paragraph (3d) concerns the determination of arm’s length interest rates, group vs. stand-alone rating and whether capital is treated as a loan or equity. Paragraph (3e) concerns the treatment of financing arrangements, i.e. cash pools, hedging, etc ...

On 27 March 2024, new paragraphs (3d) and (3e) were added to the German Foreign Tax Act (Außensteuergesetz – AStG) regarding intragroup financing. Paragraph (3d) concerns the determination of arm’s length interest rates, group vs. stand-alone rating and whether capital is treated as a loan or equity. Paragraph (3e) concerns the treatment of financing arrangements, i.e. cash pools, hedging, etc ...

Following an audit of Otis Servizi s.r.l. for FY 2007, 2008 and 2009 an assessment of additional taxable income was issued by the Italian tax authorities. The first part of the assessment related to interest received by OTIS in relation to the contract called “Cash management service for Group Treasury” (hereinafter “Cash Pooling Contract”) signed on 20 March 2001 between OTIS and the company United Technologies Intercompany Lending Ireland Limited (hereinafter “UTILI”) based in Ireland (hereinafter “Cash Pooling Relief”). In particular, the tax authorities reclassified the Cash Pooling Agreement as a financing contract and recalculated the rate of the interest income received by OTIS to be between 5.1 and 6.5 per cent (instead of the rate applied by the Company, which ranged between 3.5 and 4.8 per cent); The second part of the assessment related to of the royalty paid by OTIS to the American company Otis Elevator Company in relation to the “Licence Agreement relating to trademarks and company names” and the “Agreement for technical assistance and licence to use technical data, know-how and patents” signed on 1 January 2004 (hereinafter referred to as the “Royalty Relief”). In particular, the tax authorities had deemed the royalty agreed upon in the aforesaid contracts equal to 3.5% of the turnover as not congruous, recalculating it at 2% and disallowing its deductibility to the extent of the difference between the aforesaid rates. Not satisfied with the assessment an appeal was filed by OTIS. The Regional Tax Commission upheld the assessments and an appeal was then filed with the Supreme Court. Judgement of the Supreme Court The Court decided in favour of OTIS, set aside the assessment and refered the case back to the Regional Tax Commission in a different composition. Excerpt related to interest received by OTIS under the cash pooling contract “In the present case, the Agenzia delle Entrate redetermined the rate of the interest income received by the OTIS in relation to the contract between the same and UTILI (cash pooling contract) concerning the establishment of a current account relationship for the unitary management of the group treasury. UTILI, as pooler or group treasurer, had entered into a bank account agreement with a credit institution in its own name, but on behalf of the group companies. At the same time, OTIS had mandated that bank to carry out the various tasks in order to fully implement the cash pooling agreement. Under this contract, all participating companies undertook to transfer their bank account balances (assets or liabilities) daily to the pooling company, crediting or debiting these balances to the pool account. As a result of this transfer, the individual current account balances of each participating company are zeroed out (‘zero balance cash pooling’). Notwithstanding the fact that the tax authorities do not dispute that this is a case relating to “zero balance cash pooling” (a circumstance that is, moreover, confirmed by the documents attached to the appeal), it should be noted that the same practice documentation of the Revenue Agency leads to the exclusion that, in the hypothesis in question, the cause of the transaction can be assimilated to a loan. In particular, in Circular 21/E of 3 June 2015, it is stated (p. 32) that “with reference to the sums moved within the group on the basis of cash pooling contracts in the form of the so-called zero balance system, it is considered that a financing transaction cannot be configured, pursuant to Article 10 of the ACE Decree. This is because the characteristics of the contract – which provides for the daily zeroing of the asset and liability balances of the group companies and their automatic transfer to the centralised account of the parent company, with no obligation to repay the sums thus transferred and with accrual of interest income or expense exclusively on that account – do not allow the actual possibility of disposing of the sums in question in order to carry out potentially elusive transactions’. These conclusions are confirmed in the answer to Interpretation No. 396 of 29 July 2022 (p. 5) where it is specified that ‘cash pooling contracts in the form of the so-called zero balance stipulated between group companies are characterised by reciprocal credits and debits of sums of money that originate from the daily transfer of the bank balance of the subsidiary/subsidiary to the parent company. As a result of this contract, the balance of the bank account held by the subsidiary/subsidiary will always be zero, since it is always transferred to the parent company. The absence of the obligation to repay the remittances receivable, the reciprocity of those remittances and the fact that the balance of the current account is uncollectible and unavailable until the account is closed combine to qualify the negotiated agreement as having characteristics that are not attributable to a loan of money in the relationship between the companies of the group’. That being so, the reasoning of the judgment under appeal falls below the constitutional minimum in so far as the CTR qualified the cash pooling relationship as a loan on the basis of the mere assertion that “the obligation to repay each other by the closing date of the account is not found in the case”. In so doing, the Regional Commission identified a generic financing contract function in the cash pooling without distinguishing between “notional cash pooling” and “zero balance cash pooling”, instead excluding, on the basis of the same documentation of practice of the Tax Administration, that in the second case (“zero balance”), a loan contract can be configured. The reasoning of the contested decision does not therefore make the basis of the decision discernible, because it contains arguments objectively incapable of making known the reasoning followed by the judge in forming his own conviction, since it cannot be left to the interpreter to supplement it with the most varied, hypothetical conjectures” (Sez. U. no. 22232 of 2016), the trial judge having failed to indicate in a congruous manner the elements from which he drew ...

“Electric Component Manufacturing KtF” is a Hungarian subsidiary of a global group that distributes electronic components in more than 150 countries worldwide. The tax authorities had conducted a comprehensive tax audit of the Hungarian company for the period from 1 October 2016 to 30 September 2017, which resulted in an assessment of additional taxable income. The transfer pricing issues identified by the tax authorities were the remuneration received by the Hungarian company for its manufacturing activities and excessive interest payments to a group company in Luxembourg. Judgement of the Supreme Court The Supreme Court set aside the judgment of the Court of Appeal and ordered the court to conduct new proceedings and issue a new decision. In its decision, the Court of Appeal had relied on an expert opinion, which the Supreme Court found to to be questionable, because there were serious doubt as to its correctness. Therefore, according to the order issued by the Supreme Court, the Court of Appeal may not undertake a professional assessment of the expert opinion that goes beyond the interpretation of the applicable legislation, nor may it review the expert opinion in the new proceedings in the absence of expertise. Excerpt “[58] In relation to the adjustment of the profit level indicator for manufacturing activities, the expert found that comparable companies do not charge taxes such as the local business tax and the innovation levy as an expense to operating profit, the amount of which distorts comparability, this is a clearly identifiable difference in the cost structure of the company under investigation and the comparable companies, so an adjustment should be made in accordance with the OECD guidelines and the Transfer Pricing Regulation, because the statistical application of the interquartile range restriction cannot be used to increase comparability. However, the Court of First Instance held that it was not disputed that, even if the interquartile range as a statistical method was used, it might be necessary to apply individual adjustments, but that the applicant had not provided the audit with a detailed analysis of the justification for the adjustment and had not provided any documentary evidence in the course of the two administrative proceedings to show how the adjustment applied served to increase comparability. However, the application for review relied on the contradictory nature of the reasoning in this respect, since, while the Court of First Instance criticised the lack of documentation to support the adjustment {Ist judgment, paragraph 34}, it shared the expert’s view that this would indeed require an investment of time and energy which taxpayers could not reasonably be expected to make {Ist judgment, paragraph 35}. [59] On the other hand, the judgment at first instance explained that the applicant had only carried out research in the course of the administrative proceedings into whether the countries of the undertakings used as comparators had a similar type of tax burden to the Hungarian local business tax, and the expert had referred in his expert opinion to the fact that the applicant had only identified this one difference when carrying out the comparative analysis, but, if a detailed analysis is carried out, each difference can be individually identified and quantified and it is for this reason that the OECD guidelines also allow a range of results to be taken into account, because it reduces the differences between the business characteristics of the associated enterprises and the independent companies involved in comparable transactions and also takes account of differences which occur in different commercial and financial circumstances. Thus, the expert did not share the expert’s view that, while the narrowing to the interquartile range includes differences that are not quantifiable or clearly identifiable, individual adjustments should always be applied in the case of clearly identifiable and quantifiable significant differences. Thus, the trial court took a contrary view to the expert on this issue. [60] Nor did the Court of First Instance share the expert’s view in relation to the interest rate on the intercompany loan granted to the applicant by its affiliate and did not accept the expert’s finding that the MNB’s interest rate statistics were an averaging of the credit spreads of the debtor parties involved in the financing transactions, on an aggregated basis and, consequently, the use of the MNB interest rate statistics is not in itself capable of supporting or refuting the arm’s length principle of the interest rate applied in intra-group lending transactions, whether long or short-term. Nor did it accept the method used and described by the applicant in the comparability field, since it did not consider that the applicant should have used an international database to look for comparative data, since comparability was questionable. Furthermore, it considered irrelevant the expert’s reference to the fact that the average loan interest rates in Hungary in 2016 were strongly influenced by the low interest rates on subsidised loans to businesses and criticised the fact that the expert did not consider it necessary to examine the applicant’s current account loans under the cash-pool scheme. [61] It can thus be concluded that the Court of First Instance, in its judgment, did not accept the reasoning of the private expert’s opinion and made professionally different findings from those of the expert on both substantive points. [62] The opinion of the appointed expert is questionable if a) it is incomplete or does not contain the mandatory elements of the opinion required by law, b) it is vague, c) it contradicts itself or the data in the case, or d) there is otherwise a strong doubt as to its correctness [Art. 316 (1) of the Civil Code]. The private expert’s opinion is questionable if a) the case specified in paragraph (1) is present [Art. 316 (2) a) of the Civil Code]. Section 316 of the Private Expert Act specifies and indicates precisely in which cases the expert’s opinion is to be considered as a matter of concern. Thus, the expert’s opinion is of concern if it is incomplete, vague, contradictory or otherwise doubtful. The latter case ...

HPI – CZ spol. s r.o. is a subsidiary in the Monier group which is active in the production, sales and services of roofing and insulation products. In June 2012 the Monier group replaced an existing cash pool arrangement with a new cash pool arrangement. The documents submitted show that on 1 April 2009 HPI concluded a cash pool agreement with Monier Group Services GmbH , which consisted in HPI sending the balance of its bank account once a week to the group’s cash pooling account – thus making those funds available to the other members of the group, who could use them to ‘cover’ the negative balances in their accounts. The companies that deposited funds into the cash pooling account received interest on these deposits at 1M PRIBOR + 3%; loans from the shared account bore interest at 1M PRIBOR + 3.75%. With effect from 1 June 2012, HPI concluded a new cash pooling agreement with a newly established company in Luxembourg, Monier Finance S.á.r.l. Under the new agreement, deposits were now remunerated at 1M PRIBOR + 0,17 % and loans at 1M PRIBOR + 4,5 %. HPI was in the position of a depositor, sending the funds at its disposal to the cash pooling account (but also having the possibility to draw funds from that account). Following an audit of HPI the tax authorities issued an assessment of additional income resulting from HPI’s participation in the new cash pool. According to the tax authorities the interest rates applied to HPI’s deposits in the new cash pool had not been at arm’s length. The tax authorities determined the arm’s length interest rates to be the same rates that had been applied by the parties in the previously cash pool arrangement from 1 January 2012 to 31 May 2012. HPI filed an appeal and in February 2022 the Regional court set aside the assessment issued by the tax authorities. The Regional Court held that the tax authority’s view, which determined the arm’s length interest rate by taking it to be the rate agreed in the old cash pool arrangement from 1 January 2012 to 31 May 2012, was contrary to the meaning of section 23(7) of the Income Tax Act. According to the Court it was for the tax authority to prove that the prices agreed between related parties differed from those agreed in normal commercial relations. In the absence of comparable market transactions between independent persons, the tax authority may determine the price as a hypothetical estimate based on logical and rational reasoning and economic experience. However, according to the Court the tax authorities did not even examine the normal price for the period from 1 January 2012 to 31 December 2012 but merely applied the interest rate from the cash pooling agreement in force until 31 May 2012. An appeal was then filed by the tax authorities with the Supreme Administrative Court. Judgement of the Supreme Administrative Court The Court decided in favour of HPI and upheld the decision from the Regional Court. Excerpt “….The applicant described the operation of the cash pool until 31 May 2012. Monier Group Services GmbH was the managing member and the applicant sent the balance of the account to the cash pool after assessing its cash flow. As from 1 June 2012, Monier Finance S.a.r.l. became the managing member and the balance was automatically sent to the cash pool account on a daily basis. The balance in the applicant’s bank account was thus zero every day. In the event of a negative balance, the applicant would balance the cash pool account. As regards the sharp drop in the interest rates in the cash pool, she stated that they were set according to the interest rates provided for deposits by local banks. In order to encourage members to join the cash pool, the managing member of the group offered them a rate equivalent to 1M EURIBOR or IBOR + 0,17 % (or 0,174 % in 2016). Thanks to the automatic sending of funds to the cash pool, the applicant saved approximately CZK 100-150 thousand per year in bank charges. In the end, the members set the rate as 1M PRIBOR + 0.17%. The 0,17 % corresponds to the margin of the banks, which, however, deducted it from the reference rate of 1M PRIBOR. The members of the cash pool thus obtained a rate 0.34% higher than the conventional banks. Thanks to the interest rate on a daily basis, the appreciation was higher, and this is what made the new contract from 1 June 2012 different from the original contract. Monier Finance acted as an “in-house bank” for the members of the Group and charged a premium in the form of higher interest for the risks associated with lending money to the members of the cash pool and administrative costs. [19] The tax authorities have not demonstrated a difference between the interest rate agreed between the applicant and the managing member of the cash pool on the one hand and the benchmark rate on the other. Nor did the tax authority prove the reference price (rate) and, on the contrary, required the applicant to explain the difference itself. In short, the applicant’s profit from the interest on the cash pool deposits had decreased, the tax authorities saw no reason for such a decrease and therefore considered the rate which was higher (the rate agreed until 31 May 2012) to be in line with the arm’s length principle. However, it completely refrained from establishing the price that would have been agreed between independent parties and instead asked the applicant to explain the decrease in the agreed interest rate. … —The tax administrator required the applicant to explain the difference between the rates, without having even ascertained the comparative rate itself. Indeed, the tax authorities merely assumed that the original cash pooling agreement provided for a deposit rate of 1M PRIBOR + 3 %. The fact that the new rate was significantly lower could be a ...

SAP AG (now SAP SE) is a German multinational software corporation that develops enterprise software to manage business operations and customer relations. The company is especially known for its ERP software. SAP France, a 98% subsidiary of SA SAP France Holding, itself wholly owned by the German group, had deposited funds under a Cash Management Agreement as sight deposits carrying an interest of 0%. Following an audit for the financial years 2012 and 2013, two assessment proposals were issued in December 2015 and November 2016, relating in particular to the 0% interest rate charged on the cash deposits. The tax authorities had added interest to SA SAP France’s taxable income calculated by reference to the rate of remuneration on sight deposits. SAP France contested the adjustments and furthermore requested the benefit of the reduced rate of corporation tax on income from industrial property, pursuant to Article 39 of the French General Tax Code, with regard to the royalties from the licensing agreements relating to Business Object products and Cartesis solutions. SAP France Holding, the head of the group is appealing against the ruling of 30 January 2020 by which the Montreuil Administrative Court rejected its requests for the reconstitution of its overall tax loss carry-forward in the amount of EUR 171,373 for 2012, 314,395 in duties for 2013 and the additional contribution to corporate income tax on the amounts distributed for 2012 and 2013, for amounts of €5,141 and €14,550 respectively, and, in application of the reduced tax rate, the refund of an overpayment of corporate income tax and additional contributions for €27,461,913 for the years 2012 to 2015. In regards to added interest on the deposited funds under a Cash Management Agreement the Court of Appeal decided in favor of the tax authorities. An appeal was filed by SAP France with the Supreme Court. Judgement of the Conseil d’État The Supreme Court set aside the decision of the Court of Appeal. Excerpt “2. Under the terms of Article 57 of the same code: “For the purposes of determining the income tax due by companies that are dependent on or control companies located outside France, the 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. The same procedure shall be followed in respect of undertakings which are dependent on an undertaking or a group which also controls undertakings situated outside France (…) In the absence of precise information for making the adjustments provided for in the first, second and third paragraphs, the taxable income shall be determined by comparison with that of similar undertakings normally operated. It follows from these provisions that, when it finds that the prices charged by an enterprise established in France to a foreign enterprise which is related to it – or those charged to it by this foreign enterprise – are lower – or higher – than those charged by similar enterprises normally operated, In the event that the charges levied in France by a related foreign company – or those invoiced to it by that foreign company – are lower – or higher – than those levied by similar companies operating normally, i.e. at arm’s length, the administration must be considered to have established the existence of an advantage which it is entitled to reintegrate into the results of the French company, unless the latter can prove that this advantage had at least equivalent counterparts for it. In the absence of such a comparison, the department is not, on the other hand, entitled to invoke the presumption of transfers of profits thus instituted but must, in order to demonstrate that an enterprise has granted a liberality by invoicing services at an insufficient price – or by paying them at an excessive price – establish the existence of an unjustified difference between the agreed price and the market value of the property transferred or the service provided 3. In order to judge that SAP France had granted SAP AG a advantage by renouncing, for the years 2012 and 2013, to receive a remuneration in return for the deposit of its cash surpluses with the latter, the administrative court of appeal ruled that the administrative court of appeal based its decision on the fact that this zero remuneration was unrelated to the remuneration to which the company would have been entitled if it had placed its cash surpluses with a financial institution on that date, without this absence of remuneration finding its counterpart in the possibility of financing cash requirements, which were non-existent for the years in question. In holding, however, that the fact that the rate of remuneration of the sums thus deposited with SAP AG resulted from the application of the rate formula provided for in the cash management agreement, which the parties chose to limit to a non-negative result during the performance of that agreement, is irrelevant in this respect, without investigating whether SAP France had acted in accordance with its interest in concluding the agreement in these terms on 17 December 2009, or what obligations it had during the years in dispute, the Administrative Court of Appeal erred in law. 4. It follows from the foregoing, without it being necessary to rule on the other grounds of appeal, that the company SAP France Holding is entitled to request the annulment of Article 3 of the judgment which it is challenging. In the circumstances of the case, it is appropriate to charge the State with the sum of 3,000 euros to be paid to the company SAP France Holding under Article L. 761-1 of the Administrative Justice Code.” Click here for English translation Click here for other translation ...

“XZ SA” is a Spanish parent of a tax consolidation group which is part of a multinational group. The Spanish group participates in the group’s cash pooling system, both as a borrower and as a provider of funds. The objective of cash pooling agreements is to manage the cash positions of the participating entities, optimising the group’s financial results by channelling the excess liquidity of the group companies that generate it to the group companies that need financing, resorting to third-party financing when the group itself is not able to finance itself. This achieves greater efficiency in the use of the group’s funds, as well as improving their profitability and reducing the administrative and general financial costs of the entities participating in the agreement. The tax authorities issued an assessment in which the interest rates on deposits and withdraws had been aligned and determined based on a group credit rating. A complaint was filed with the TEAC by XZ SA. Judgement of the TEAC The TEAC dismissed the complaint and upheld the tax assessment. The asymmetry in the treatment given by the taxpayer to credit and debit transactions in cash pooling is not admissible: As this system is configured, both types of transactions should have the same treatment; The analysis of the logic and philosophy that exists in transactions with financial institutions is not transferable to the cash pooling transactions involved here; in this, transactions that are channelled through the leading entity of the cash pooling, it follows from the functional analysis that it acts as a service provider managing and administering the cash pooling, but not as a credit institution that would assume the consequences of the contributions and drawdowns to/from the cash pool. And all the companies that are part of the cash pooling can be either contributors or receivers of funds, without it being generally known a priori what the debit or credit position of each of them will be. Reference is made to previous case law – TEAC, Case Rec. 6537/2017 and Supreme Court ruling of 5 November 2020 (appeal 3000/2018). Click here for English translation Click here for other translation ...

These cross-guarantees and set-off rights are a feature of an arrangement which would not occur between independent parties. Each guarantor is providing a guarantee for all members of the pool but will not have control over membership of the pool, has no control over the quantum of the debt which it is guaranteeing, and may not be able to access information on the parties for whom it is providing a guarantee. With other parties providing guarantees on the same loans, it may not be possible for the guarantor to evaluate its real risk in the event of a default. Thus, the practical result of the cross- guaranteeing arrangement is such that the formal guarantee may represent nothing more than an acknowledgement that it would be detrimental to the interests of the MNE group not to support the performance of the cash pool leader and so, by extension, the borrower. In such circumstances the guaranteed borrower may not be benefitting beyond the level of credit enhancement attributable to the implicit support of other group members. If the prevailing facts and circumstances support such a conclusion, no guarantee fee would be due, and any support, in case of a default from another group member, should be regarded as a capital contribution ...

As part of the cash pooling arrangement, cross-guarantees and rights of set-off between participants in the cash pool may be required. This raises the question of whether guarantee fees should be payable. It will always be appropriate to consider the particular facts and circumstances in any situation but there are certain factors which are likely to be common to many cash pools: there will be numerous members of the pool, there may be both entities with debit positions and entities with credit positions in the pool, each pool member may have a different stand-alone credit rating, and the pooling agreement with the bank is likely to require full cross-guarantees and rights of set-off between all pool participants ...

It is expected that all cash pool participants will be better off than in the absence of the cash pool arrangement. Under prevailing facts and circumstances that could imply, for instance, that all cash pool participants would benefit from enhanced interest rates applicable to debit and credit position within the cash pooling arrangement compared to the rates that they would expect to obtain from borrowing or depositing cash outside of the pool. However, it is important to note that cash pool members might be willing to participate in cash pool arrangements to access benefits from the membership of the cash pool other than an enhanced interest rate like, for instance, access to a permanent source of financing; reduced exposure to external banks; or access to liquidity that may not be available otherwise ...

Determining the arm’s length interest rates for the cash pool intra-group transactions may be a difficult exercise due to the lack of comparable arrangements between unrelated parties. In this context, banking arrangements involving the cash pool leader, taking into account functional differences between the bank and the cash pool leader, and the options realistically available to the cash pool members may inform the identification of comparable interest rates in the transfer pricing analysis ...

Eventually, the remuneration of the cash pool members will depend upon the specific facts and circumstances and the functions, assets and risks of each of the pool members. Therefore, this guidance does not intend to provide a prescriptive approach for allocating the cash pooling benefits to the participating cash pool members in any given situation but rather lays down the principles that should guide that allocation ...

The remuneration of the cash pool members will be calculated through the determination of the arm’s length interest rates applicable to the debit and credit positions within the pool. This determination will allocate the synergy benefits arising from the cash pool arrangement amongst the pool members and it will generally be done once the remuneration of the cash pool leader has been calculated ...

It should be borne in mind that the other group members which transact with T would still only do so if this left them no worse off than their next best option ...

Accordingly, T should be compensated for the functions it performs and the risks it assumes in accordance with the guidance in Section C.1. This may include earning part or all of the spread between the borrowing and lending positions which it adopts ...

The analysis under the guidance in Section D.1 of Chapter I indicates that the actual transactions should be accurately delineated as intra-group loans in the context of the treasury activities undertaken by Company T since Company T is performing functions and assuming risks that go beyond the coordination role of a cash pool leader. In particular, the functional analysis shows that Company T controls the financial risks contractually allocated to it and has the financial capacity to bear those risks ...

As part of the group liquidity arrangements, T operates an MNE group cash pooling arrangement and is responsible for deciding how to invest surplus funds or fund any shortfall. T sets the intra-group interest rates and is at risk for any differences between the rates it sets with other group members and the rates at which it transacts with the independent lenders. T also bears credit risk, liquidity risk and currency risk for intra-group finance and decides on how or whether to hedge such risks ...

Company T, a member of MNE Group Y, performs as the MNE group treasury entity and undertakes a range of different financial transactions both intra-group and externally. Company T’s main purpose is to provide treasury services to the other entities within the MNE group including strategy and management of group liquidity. T is responsible for raising finance across the MNE group by issuing bonds or borrowing from third party banks and arranges intra-group loans to meet the funding needs of other group members as necessary ...

A functional analysis shows that M is not subject to credit risk, which remains with the cash pool members, but merely performs a co-ordination function. Furthermore M is not performing the functions or assuming the risks that a bank would. Therefore M would not earn the kind of reward that a bank would earn such as retaining the interest spread between deposits and loans. Accordingly, M would earn a reward commensurate with the service functions it provides to the pool ...

As a result of the arrangements in place, M pays less interest to the bank or receives more interest than would have been the case absent the pooling arrangements ...

Under the cash management services agreement the bank makes any transfers necessary to meet the target balance for each pool participant with any net surplus deposited by M or any net overdrawn position being met by the bank lending to M. The facility that M may draw on is guaranteed by X. The third- party bank pays interest to, or receives interest from M based on the overall, pooled, position. In this instance, M receives surplus funds from MNE group members H and J and provides funds to MNE group members K and L which have a funding need. Interest on the balances of the pool participants is charged or paid in accordance with the pooling agreements ...

M sets up an intra-group cash pooling arrangement with an unrelated bank. Legal arrangements are put in place for all participants which allow transfers to or from M’s cash concentration account to meet a specified target balance for each pool participant ...

X is the parent entity of an MNE group which has subsidiaries H, J, K, and L which participate in a physical cash pooling arrangement with fellow subsidiary M acting as cash pool leader. All participants have the same functional currency and that is the only currency in the pool ...

The following examples illustrate the principles described above ...

Where accurate delineation of the actual transactions determines that a cash pool leader is carrying on activities other than coordination or agency functions, the pricing of such transactions would follow the approaches included in other parts of this guidance, as appropriate ...

In general, a cash pool leader performs no more than a co-ordination or agency function with the master account being a centralised point for a series of book entries to meet the pre-determined target balances for the pool members. Given such a low level of functionality, the cash pool leader’s remuneration as a service provider will generally be similarly limited ...

The appropriate reward of the cash pool leader will depend on the facts and circumstances, the functions performed, the assets used and the risks assumed in facilitating a cash pooling arrangement ...

As with many types of financial transactions, different intent and understanding can be ascribed to the labels or descriptions attached to particular transactions. Each case must be considered on its own facts and circumstances and in each case accurate delineation of the actual transactions in accordance with the principles of Chapter I will be needed before any attempt to decide on an approach to pricing a transaction ...

Credit risk refers to the risk of loss resulting from the inability of cash pool members with debit positions to repay their cash withdrawals. From the cash pool leader’s perspective, there needs to be a probability for it to incur losses derived from the default of cash pool members with debit positions to bear the credit risk. Therefore, an examination under Chapter I guidance will be required to determine, under the specific facts and circumstances, which entity within the MNE group is exercising control functions and has the financial capacity to assume the credit risk associated with the cash pool arrangement ...

Liquidity risk in a cash pool arrangement arises from the mismatch between the maturity of the credit and debit balances of the cash pool members. Assuming the liquidity risk associated to a cash pool requires the exercise of control functions beyond the mere offsetting of the credit and debit positions of the cash pool members. Therefore, an analysis of the decision-making process related to the amounts of the debit and credit positions within the cash pool arrangement will be required to allocate the liquidity risk under Chapter I ...

Before any attempt is made to determine the remuneration of the cash pool leader and participants, it is central to the transfer pricing analysis to identify and examine under Chapter I guidance the economically significant risks associated to the cash pooling arrangement. These could include liquidity risk and credit risk. These risks should be analysed taking into account the short-term nature of the credit and debit positions within the cash pooling arrangement (see paragraph 10.123) ...

A potential difficulty for tax administrations in analysing cash pooling arrangements is that the various entities in a cash pool may be resident across a number of jurisdictions, potentially making it difficult to access sufficient information to verify the position as set out by the taxpayer. It would be of assistance to tax authorities if MNE groups would provide information on the structuring of the pool and the returns to the cash pool leader and the members in the cash pool as part of their transfer pricing documentation. (See Annex I to Chapter V of these Guidelines about the information to be included in the master file) ...

One of the practical difficulties in such situations will be deciding how long a balance should be treated as part of the cash pool before it could potentially be treated as something else, for example a term loan. As cash pooling is intended to be a short-term, liquidity-driven arrangement, it may be appropriate to consider whether the same pattern is present year after year and to examine what policies the MNE group’s financial management has in place, given that yield on cash balances is a key financial management issue ...

Another key consideration in analysing intra-group funding arrangements which might be described as cash pooling are situations where members of an MNE group maintain debit and credit positions which, rather than functioning as part of a short-term liquidity arrangement, become more long term. It would usually be appropriate to consider whether, on accurate delineation, it would be correct to treat them as something other than a short-term cash pool balance, such as a longer term deposit or a term loan ...

An advantage of a cash pooling arrangement may be the reduction of interest paid or the increase of interest received, which results from netting credit and debit balances. The amount of that group synergy benefit, calculated by reference to the results that the cash pool members would have obtained had they dealt solely with independent enterprises, would generally be shared by the cash pool members, provided that an appropriate reward is allocated to the cash pool leader for the functions it provides in accordance with Section C.2.3. of this chapter ...

As indicated in paragraph 1.179, the determination of the results that arise from deliberate concerted group actions must be established through a thorough functional analysis. Accordingly, in the context of cash pooling arrangements, it is necessary to determine (i) the nature of the advantage or disadvantage, (ii) the amount of the benefit or detriment provided, and (iii) how that benefit or detriment should be divided among members of the MNE group ...

In delineating the cash pool transactions, it may be that the savings and efficiencies achieved are determined to arise as a result of group synergies created through deliberate concerted action (as discussed in Section D.8 of Chapter I) ...

No member of the pooling arrangement would expect to participate in the transaction if it made them any worse off than their next best option. The analysis of an MNE’s decision to participate in a cash pool arrangement should be done with reference to its options realistically available, taking into account that an MNE can obtain benefits as a member of the cash pool other than an improved interest rate (see paragraph 10.146) ...

The cash pool member is likely to be participating in providing liquidity as part of a broader group strategy, an arrangement in which the member can have a credit or debit position, which may include among its aims a range of benefits that can only be achieved as part of a collective strategy involving the pool members, done for the benefit of all of the pool participants, and the membership of which is limited to entities within the MNE group. Pool participants deposit cash to the pool (or withdraw cash from the pool), and not to (or from) a particular cash pool member ...

The accurate delineation of cash pooling arrangements would need to take into account not only the facts and circumstances of the balances transferred but the wider context of the conditions of the pooling arrangement as a whole. For example, a cash pool is likely to differ from a straightforward overnight deposit with a bank or similar financial institution in that a cash pool member with a credit position is not depositing money as a transaction in isolation with a view to a simple depositor return ...

The accurate delineation of the cash pooling transactions will depend on the particular facts and circumstances of each case. As cash pooling is not undertaken regularly, if at all, by independent enterprises, the application of transfer pricing principles requires careful consideration. As paragraph 1.11 notes “Where independent enterprises seldom undertake transactions of the type entered into by associated enterprises, the arm’s length principle can be difficult to apply because there is little or no direct evidence of what conditions would have been established by independent enterprises.” ...

With no physical transfers of funds, the transactional costs of operating a notional pool are likely to be less than transactional costs of operating a physical pool. Functions carried out by the bank would be accounted for in the charges or interest rate of the bank. With minimal functions carried out by the pool leader (because functions are primarily performed by the bank), there will be little, if any, value added by the pool leader to be reflected in the intra-group pricing. An appropriate allocation of the benefit created as a result of the elimination of the bank spread and/or the optimisation of a single debit or credit position would need to consider the contribution or burden of each pool participant ...

In a notional cash pool, some of the benefits of combining credit and debit balances of several accounts are achieved without any physical transfer of balances between the participating members’ accounts although the bank will usually require cross-guarantees from pool participants to enable the right to set off between accounts if necessary. The bank notionally aggregates the various balances of the individual accounts of participating members and pays or charges interest according to the net balance, either to a designated master account or to all participating accounts under a formula determined in the cash pooling agreement ...

In a typical physical pooling arrangement, the bank account balances of all the pool members are transferred daily to a single central bank account owned by the cash pool leader. Any account in deficit is brought to a target balance (usually zero) by a transfer from the master account to the relevant sub account. Depending on whether there is a surplus or a deficit after the members’ accounts have been adjusted to the target balance, the cash pool leader may borrow from the bank to meet the net funding requirement of the pool or deposit any surplus as appropriate ...

Although there are two basic types of cash pooling arrangements – physical and notional – other variations and combinations may be arranged to meet specific business needs. For example, a number of physical pools might be held, one for each currency in which the business operates, along with a notional pool which then combines those individual currency pools ...

In the context of this section, cash pooling is the pooling of cash balances as part of a short- term liquidity management arrangement. Cash pool arrangements are complex contracts which may involve controlled and uncontrolled transactions. For instance, one common structure is that the participating members of the MNE group conclude a contract with an unrelated bank that renders cash pooling services, and each participating member opens a bank account with that bank ...

The use of a cash pool is popular among multinational enterprises as a way of achieving more efficient cash management by bringing together, either physically or notionally, the balances on a number of separate bank accounts. Depending on the particular arrangements in place, a cash pool can help to achieve more effective liquidity management, whereby reliance on external borrowing can be reduced or, where there is a cash surplus, an enhanced return may be earned on any aggregated cash balance. Financing costs may also be reduced by eliminating the bank spread embedded in the interest which would be payable or receivable on a number of separate debit or credit account balances and by reducing banking transaction costs ...

The following sections outline the transfer pricing considerations which arise from some relevant treasury activities that are often performed within MNE groups, i.e. the provision of intra-group loans, cash pooling, and hedging activities ...

SAP AG (now SAP SE) is a German multinational software corporation that develops enterprise software to manage business operations and customer relations. The company is especially known for its ERP software. SA SAP France, a 98% subsidiary of SA SAP France Holding, itself wholly owned by the German group, had deposited funds under a Cash Management Agreement as sight deposits carrying an interest of 0%. Following an audit for the financial years 2012 and 2013, two assessment proposals were issued in December 2015 and November 2016, relating in particular to the 0% interest rate charged on the cash deposits. The tax authorities had added interest to SA SAP France’s taxable income calculated by reference to the rate of remuneration on sight deposits. SA SAP France contested the adjustments and furthermore requested the benefit of the reduced rate of corporation tax on income from industrial property, pursuant to Article 39 of the French General Tax Code, with regard to the royalties from the licensing agreements relating to Business Object products and Cartesis solutions. SA SAP France Holding, the head of the group is appealing against the ruling of 30 January 2020 by which the Montreuil Administrative Court rejected its requests for the reconstitution of its overall tax loss carry-forward in the amount of EUR 171,373 for 2012, 314,395 in duties for 2013 and the additional contribution to corporate income tax on the amounts distributed for 2012 and 2013, for amounts of €5,141 and €14,550 respectively, and, in application of the reduced tax rate, the refund of an overpayment of corporate income tax and additional contributions for €27,461,913 for the years 2012 to 2015. Judgement of the Court of Appeal In regards of the added interest on the deposited funds under a Cash Management Agreement the Court decided in favor of the tax authorities. Excerpt “In order to reintegrate into the taxable results of SA SAP France the interest at the monthly rate for sight deposits on the sums it made available to SAP AG under a cash management agreement concluded on 17 December 2009 between the parties, the department noted that SAP AG, now SAP SE, a company under German law, held 100% of SA SAP France Holding, SA SAP France’s parent company, and that the EONIA rate for interbank relations, reduced by 0.15% stipulated in the agreement, had led to a total absence of remuneration for the sums made available to the central treasury by SA SAP France as of August 2012, for very significant amounts ranging from 132 to 432 million euros. In these circumstances, the administration establishes the existence of an advantage consisting of the granting of interest-free advances by SA SAP France to the company SAP AG, located outside France, which controls it through SA SAP France Holding. If the latter argues that the rate stipulated is a market rate whose evolution is independent of the control of the parties, and that it was capped at 0 % whereas a strict application of the agreement would have led to a negative rate, these circumstances are inoperative, since this rate is unrelated to the remuneration to which SA SAP France could have claimed if it had placed its cash surpluses with a financial institution. Furthermore, by maintaining that the investment of its funds with SAP AG is particularly secure and that it enables it to obtain immediate and unconditional financing from the central treasury at the rate of EONIA + 30%, the applicant company does not justify an interest of its own which can be regarded as a consideration, since it is common ground that its situation vis-à-vis the central treasury was constantly in credit for very substantial amounts which greatly exceeded its working capital requirements. Finally, the monthly rate for sight deposits of between 0.15 and 0.18% applied by the department corresponds to the interest rate which SA SAP France could have obtained from a financial institution and the applicant does not propose a more relevant comparable. It follows that the administration establishes the existence during 2012 and 2013 of a transfer of profit, within the meaning of the provisions of Article 57 of the General Tax Code, from SA SAP France to the company SAP AG located outside France, for the amounts of EUR 171 373 in 2012 and EUR 484 986 in 2013, which the administration reintegrated into the results of SA SAP France.” Click here for English translation Click here for other translation ...

The VSSB Group provided liquidity to the group members by means of a cash-pool. Under the cash pool agreement, short-term and longer-term multi-currency financing transactions were carried out, including the applicant as a member of the group; the intermediary was the group member VSSB V. Service Center Budapest Zrt. (‘VSSB’). At the end of each month, the balances of the group members’ short positions (cash pool) with monthly settlement were transferred to the long term loan between the holding company, VSSB Group Plc. The members of the cash pool have either been continuously depositing funds or drawing on funds within the group. The Hungarian Service Center only deposited funds throughout the period under examination and had received a fixed rate of interest on the deposits. The funds deposited by the members of the group were transferred to the main account of the VSSB Group and from there to the company at the top of the financing structure, VGP. The cash pool member companies thus had a claim on VGP (in some years, depending on the treasury policy, this was transferred to company V.2). In the transfer pricing records of the Hungarian Service Center, each transaction was classified as a deposit. The transfer pricing rules were applied on the basis of deposit interest rates, which were taken into account as appropriate. The arm’s length price of the cash-pool transactions was determined by applying the CUP method (external). As comparables, it used deposit interest rates (published by Hungarian financial institutions, published by the MNB for demand and current account deposit transactions and for deposits committed within the year). The arm’s length price for longer-term positions was also determined by CUP method (taking into account the 1- and 12-month HUF current account deposit rates available in the Reuters database). Following an audit an assessment was issued by the tax authorities, where the interest on the deposits had been adjusted resulting in additional taxable income. This decision was brought before the court of first instance where the decision was set aside. The tax authorities then filed an appeal with the Court of Appeal, claiming that the court of first instance had not provided a sufficient basis for its decision. Judgement of the Court of Appeal The Court allowed the appeal and remanded the case to the court of first instance for reconsideration. Excerpt “The judgment of the court of first instance was not suitable for review on the merits, therefore the Curia set aside the final judgment on the basis of § 275 (4) of the old Civil Code and ordered the court of first instance to conduct a new procedure and issue a new decision. For the above reason for the annulment, the Court of First Instance could not take a position on the further arguments of the application for review, including the question of the legality of the first instance court’s instruction to repeat the proceedings. In a retrial, the court of first instance must proceed as the Curia has done in the present order, clarifying exactly what positions the tax authority’s finding relates to and whether the factual deficiencies in the defendant’s case exist; whether the facts of the case can be found to be such as to permit a decision on the merits of the dispute. If so, and if the court intends to accept the expert’s opinion as the basis for its judgment, the defendant will be in a position to decide on the necessary evidence if the court informs the defendant of its intention to do so, with an invitation to submit any counter-evidence or a possible motion for a declaration of proof.” Click here for English translation Click here for other translation ...

A Oyj was the parent company of the A-group, and responsible for the group’s centralised financial activities. It owned the entire share capital of D Oy and B Oy. D Oy in turn owned the entire share capital of ZAO C, a Russian company. A Oyj had raised funds from outside the group and lent these funds to its Finnish subsidiary B Oy, which in turn had provided a loan to ZAO C. The interest charged by B Oy on the loans to ZAO C was based on the cost of A Oyj’s external financing. The interest rate also included a margin of 0,55 % in tax year 2009, 0,58 % in tax year 2010 and 0,54 % in tax year 2011. The margins had been based on the average margin of A Oyj’s external financing plus 10 %. The Tax Administration had considered that the level of interest to be charged to ZAO C should have been determined taking into account the separate entity principle and ZAO C’s credit rating. In order to calculate the arm’s length interest rate, the synthetic credit rating of ZAO C had been determined and a search of comparable loans in the Thomson Reuters DealScan database had been carried out. On the basis of this approach, the Tax Administration had considered the market interest margin to be 2 % for the tax year 2009 and 3,75 % for the tax years 2010 and 2011. In the tax adjustments the difference between the interest calculated based on the adjusted rates and the interest actually charged to ZAO C had been added to A Oyj’s taxable income. Judgement of the Supreme Administrative Court The court overturned an earlier decision handed down by the Administrative Court of Helsinki and ruled in favour of A Oyj. The Supreme Administrative Court held that ZAO C had received an intra-group service in the form of financing provided by A Oyj through B Oy. The Court also considered that the cost-plus pricing method referred to in the OECD Transfer Pricing Guidelines was the most appropriate method for assessing the pricing of intra-group services. Thus, the amount of interest to be charged to ZAO C could have been determined on the basis of the costs incurred by the Finnish companies of the group in obtaining the financing, i.e. the cost of external financing plus a mark-up on costs, and ZAO C could have benefited from the better creditworthiness of the parent company of the group. Consequently the Supreme Administrative Court annulled the previous decisions of the Administrative Court and set aside the tax adjustments. Excerpts “B Oy has been responsible for financing ZAO C and certain other group companies with funds received from the parent company. The company is a so-called ‘shell company’ which has had no other activity since 2009 than to act as a company through which intra-group financing formally flows.” “The question is whether the tax assessments of A Oyj for the tax years 2009 to 2011 could be adjusted to the detriment of the taxpayer and the taxable income of the company increased pursuant to Article 31 of the Tax Procedure Act, because the level of the interest margin paid by ZAO C to the Finnish group companies was below the level which ZAO C would have had to pay if it had obtained financing from an independent party. The Supreme Administrative Court’s decision KHO 2010:73 concerns a situation where a new owner had refinanced a Finnish OY after a takeover. The interest rate paid by the Finnish Oy on the new intra-group debt was substantially higher than the interest rate previously paid by the company to an external party, which the Supreme Administrative Court did not consider to be at arm’s length. The present case does not concern such a situation, but whether ZAO C was able to benefit financially from the financing obtained through the Finnish companies of the group. In its previous case law, the Supreme Administrative Court has stated that the methods for assessing market conformity under the OECD Transfer Pricing Guidelines are to be regarded as an important source of interpretation when examining the market conformity of the terms of a transaction (KHO 2013:36, KHO 2014:119, KHO 2017:146, KHO 2018:173, KHO 2020:34 and KHO 2020:35). As explained above, the transfer pricing guidelines published by the OECD in 1995 and 2010 are essentially the same in substance for the present case. It is therefore not necessary to assess whether the company’s tax assessment for the tax year 2009 could have been adjusted to the detriment of the taxpayer on the basis of the 2010 OECD transfer pricing guidelines. According to the OECD transfer pricing guidelines described above, when examining the arm’s length nature of intra-group charges, a functional analysis must first be carried out, in particular to determine the legal capacity in which the taxpayer carries out its activities. The guidelines further state that almost all multinational groups need to organise specifically financial services for their members. Such services generally include cash flow and solvency management, capital injections, loan agreements, interest rate and currency risk management and refinancing. In assessing whether a group company has provided financial services, the relevant factor is whether the activity provides economic or commercial value to another group member which enhances the commercial position of that member. In contrast, a parent company is not considered to receive an internal service when it receives an incidental benefit that is merely the result of the parent company being part of a larger group and is not the result of any particular activity. For example, no service is received when the interest-earning enterprise has a better credit rating than it would have had independently, simply because it is part of a group. The financial activities of the A group are centralised in A Oyj. The group’s external and internal loan agreements have prohibited A Oyj subsidiaries from obtaining external financing in their own name. Where necessary, the subsidiaries have provided collateral for ...

In 2005 an agreement was entered between the UK tax authority and GE Capital, whereby GE Capital was able to obtain significant tax benefits by routing billions of dollars through Australia, the UK and the US. HMRC later claimed, that GE Capital had failed to disclose all relevant information to HMRC prior to the agreement and therefore asked the High Court to annul the agreement. In December 2020 the High Court decided in favour of HMRC. GE Capital then filed an appeal with the Court of Appeal. Judgement of the Court of Appeal The Court of Appeal overturned the judgement of the High Court and ruled in favour of GE Capital ...

“H Borrower and Lender A/S”, a Danish subsidiary in the H Group, had placed deposits at and received loans from a group treasury company, H4, where the interest rate paid on the loans was substantially higher than the interest rate received on the deposits. Due to insufficient transfer pricing documentation, the tax authorities (SKAT) issued a discretionary assessment of taxable income where the interest rate on the loans had been adjusted based on the rate received on the deposits. Decision of the Court The National Tax Tribunal stated that the documentation was deficient to such an extent that it could be equated with a lack of documentation. The tax authorities had therefore been entitled to make a discretionary assessment. The National Tax Court referred, among other things, to the fact that the company’s transfer pricing documentation lacked a basic functional analysis of the group treasury company with which the company had controlled transactions. “The National Tax Tribunal finds that the company has not proved that SKAT’s estimates are not in accordance with the arm’s length principle. It is hereby emphasized that the company has received a loan from H4, where the interest rate is based on a base interest rate plus a risk margin of 130 bps. Thus, the interest paid on these loans has been higher than the interest received by placing liquidity with H4. The National Tax Tribunal does not find it proved by the company that these two cash flows should constitute different financing instruments with different risks, and that the interest rates must therefore be different. The lack of functional analysis for H4 in the TP documentation means, in the opinion of the National Tax Tribunal, that it cannot be considered to be in accordance with the arm’s length principle, that H4 must receive a proportionately higher interest payment from the company than what is paid to the company. In this connection, it is taken into account that H4 has no employees and thus cannot be considered to have control over the risks associated with the various controlled transactions. The fact that the company has entered into different contractual obligations for the two cash flows is given less weight due to the lack of a functional analysis for H4. The company’s argument that the interest rate for deposits with H4 according to the National Tax Court’s previous decision, published by SKM2014.53.LSR, must be determined without risk margin, as there is a full set-off against the company’s loan from H4, can not either taken into account, as the interest rates for the two cash flows in this way would be different. The National Tax Tribunal finds that the decision in SKM2014.53.LSR must be interpreted as meaning that the interest rates for comparable cash flows that are fully hedged between two group parties must bear interest at the same rate, as the cash flows in this way cancel out each other.” Click here for translation ...

In 2005 an agreement was entered between the UK tax authority and GE Capital, whereby GE Capital was able to obtain significant tax benefits by routing billions of dollars through Australia, the UK and the US. HMRC later claimed, that GE Capital had failed to disclose all relevant information to HMRC prior to the agreement and therefore asked the High Court to annul the agreement. The High Court ruled that HMRC could pursue the claim against GE in July 2020. Judgement of the High Court The High Court ruled in favour of the tax authorities ...

General Electric (GE) have been routing financial transactions (AUS $ 5 billion) related to GE companies in Australia via the UK in order to gain a tax advantage – by “triple dipping” in regards to interest deductions, thus saving billions of dollars in tax in Australia, the UK and the US. Before entering into these transactions, GE obtained clearance from HMRC that UK tax rules were met, in particular new “Anti-Arbitrage Rules” introduced in the UK in 2005, specifically designed to prevent tax avoidance through the exploitation of the tax treatment of ‘hybrid’ entities in different jurisdictions. The clearance was granted by the tax authorities in 2005 based on the understanding that the funds would be used to invest in businesses operating in Australia. In total, GE’s clearance application concerned 107 cross-border loans amounting to debt financing of approximately £21.2 billion. The Australian Transaction was one part of the application. After digging into the financing structure and receiving documents from the Australian authorities, HMRC now claims that GE fraudulently obtained a tax advantage in the UK worth US$1 billion by failing to disclose information and documents relating to the group’s financing arrangements. According to the HMRC, GE provided UK tax officers with a doctored board minute, and misleading and incomplete documents. The documents from Australia shows that the transactions were not related to investments in Australian businesses, but part of a complex and contrived tax avoidance scheme that would circulate money between the US, Luxembourg, the UK and Australia before being sent back to the US just days later. These transactions had no commercial purpose other than to create a “triple dip” tax advantage in the UK, the US and Australia. HMRC are now seeking to annul the 2005 clearance agreement and then issue a claim for back taxes in the amount of $ 1 billion before interest and penalties. From GE’s 10 K filing “As previously disclosed, the United Kingdom tax authorities disallowed interest deductions claimed by GE Capital for the years 2007-2015 that could result in a potential impact of approximately $1 billion, which includes a possible assessment of tax and reduction of deferred tax assets, not including interest and penalties. We are contesting the disallowance. We comply with all applicable tax laws and judicial doctrines of the United Kingdom and believe that the entire benefit is more likely than not to be sustained on its technical merits. We believe that there are no other jurisdictions in which the outcome of unresolved issues or claims is likely to be material to our results of operations, financial position or cash flows. We further believe that we have made adequate provision for all income tax uncertainties.” The English High Court decision on whether the case has sufficient merit to proceed to trial: “150. For the above reasons, I refuse the application to amend in respect of paragraphs 38(b) and 38(e) of APOC and I will strike out the existing pleading in paragraph 38(e) of APOC. I will otherwise permit the amendments sought by HMRC insofar as they are not already agreed between the parties. Specifically, the permitted amendments include those in which HMRC seeks to introduce allegations of deliberate non-disclosure, fraud in respect of the Full Disclosure Representation, a claim that the Settlement Agreement is a contract of utmost good faith (paragraphs 49B and 53(ca) of APOC) and the claim for breach of an implied term (paragraphs 48 and 49 of APOC). 151. As to paragraph 68(b) of the Reply, I refuse the application to strike it out. To a large extent this follows from my conclusion in relation to the amendments to the APOC to add allegations of deliberate failure to disclose material information. In GE’s skeleton argument, a separate point is taken that paragraph 68(b) of the Reply is a free-standing plea that is lacking in sufficient particulars. I do not accept this: there can be no real doubt as to which parts of the APOC are being referred to by the cross-reference made in paragraph 68(b)(ii). 152. The overall result is that, while I have rejected the attempts to infer many years after the event that specific positive representations could be implied from limited references in the contemporaneous documents, the essential allegation which lay at the heart of Mr Jones QC’s submissions – that GE failed to disclose the complete picture, and that it did so deliberately – will be permitted to go to trial on the various alternative legal bases asserted by HMRC. I stress that, beyond the conclusion that there is a sufficient pleading for this purpose, and that the prospects of success cannot be shown to be fanciful on an interlocutory application such as this, I say nothing about the merits of the claims of deliberate non-disclosure or fraud.” ...

In February 2020, OECD released the report Transfer Pricing Guidance on Financial Transactions. The guidance in the report describes the transfer pricing aspects of financial transactions and includes a number of examples to illustrate the principles discussed in the report. Section B provides guidance on the application of the principles contained in Section D.1 of Chapter I of the OECD Transfer Pricing Guidelines to financial transactions. In particular, Section B.1 of this report elaborates on how the accurate delineation analysis under Chapter I applies to the capital structure of an MNE within an MNE group. It also clarifies that the guidance included in that section does not prevent countries from implementing approaches to address capital structure and interest deductibility under their domestic legislation. Section B.2 outlines the economically relevant characteristics that inform the analysis of the terms and conditions of financial transactions. Sections C, D and E address specific issues related to the pricing of financial transactions (e.g. treasury functions, intra-group loans, cash pooling, hedging, guarantees and captive insurance). This analysis elaborates on both the accurate delineation and the pricing of the controlled financial transactions. Finally, Section F provides guidance on how to determine a risk-free rate of return and a risk-adjusted rate of return. Sections A to E of this report are included in the OECD Transfer Pricing Guidelines as Chapter X. Section F is added to Section D.1.2.1 in Chapter I of the Guidelines, immediately following paragraph 1.106 ...

These cross-guarantees and set-off rights are a feature of an arrangement which would not occur between independent parties. Each guarantor is providing a guarantee for all members of the pool but will not have control over membership of the pool, has no control over the quantum of the debt which it is guaranteeing, and may not be able to access information on the parties for whom it is providing a guarantee. With other parties providing guarantees on the same loans, it may not be possible for the guarantor to evaluate its real risk in the event of a default. Thus, the practical result of the cross- guaranteeing arrangement is such that the formal guarantee may represent nothing more than an acknowledgement that it would be detrimental to the interests of the MNE group not to support the performance of the cash pool leader and so, by extension, the borrower. In such circumstances the guaranteed borrower may not be benefitting beyond the level of credit enhancement attributable to the implicit support of other group members. If the prevailing facts and circumstances support such a conclusion, no guarantee fee would be due, and any support, in case of a default from another group member, should be regarded as a capital contribution ...

As part of the cash pooling arrangement, cross-guarantees and rights of set-off between participants in the cash pool may be required. This raises the question of whether guarantee fees should be payable. It will always be appropriate to consider the particular facts and circumstances in any situation but there are certain factors which are likely to be common to many cash pools: there will be numerous members of the pool, there may be both entities with debit positions and entities with credit positions in the pool, each pool member may have a different stand-alone credit rating, and the pooling agreement with the bank is likely to require full cross-guarantees and rights of set-off between all pool participants ...

It is expected that all cash pool participants will be better off than in the absence of the cash pool arrangement. Under prevailing facts and circumstances that could imply, for instance, that all cash pool participants would benefit from enhanced interest rates applicable to debit and credit position within the cash pooling arrangement compared to the rates that they would expect to obtain from borrowing or depositing cash outside of the pool. However, it is important to note that cash pool members might be willing to participate in cash pool arrangements to access benefits from the membership of the cash pool other than an enhanced interest rate like, for instance, access to a permanent source of financing; reduced exposure to external banks; or access to liquidity that may not be available otherwise ...

Determining the arm’s length interest rates for the cash pool intra-group transactions may be a difficult exercise due to the lack of comparable arrangements between unrelated parties. In this context, banking arrangements involving the cash pool leader, taking into account functional differences between the bank and the cash pool leader, and the options realistically available to the cash pool members may inform the identification of comparable interest rates in the transfer pricing analysis ...

Eventually, the remuneration of the cash pool members will depend upon the specific facts and circumstances and the functions, assets and risks of each of the pool members. Therefore, this guidance does not intend to provide a prescriptive approach for allocating the cash pooling benefits to the participating cash pool members in any given situation but rather lays down the principles that should guide that allocation ...

The remuneration of the cash pool members will be calculated through the determination of the arm’s length interest rates applicable to the debit and credit positions within the pool. This determination will allocate the synergy benefits arising from the cash pool arrangement amongst the pool members and it will generally be done once the remuneration of the cash pool leader has been calculated ...

It should be borne in mind that the other group members which transact with T would still only do so if this left them no worse off than their next best option ...

Accordingly, T should be compensated for the functions it performs and the risks it assumes in accordance with the guidance in Section C.1. This may include earning part or all of the spread between the borrowing and lending positions which it adopts ...

The analysis under the guidance in Section D.1 of Chapter I indicates that the actual transactions should be accurately delineated as intra-group loans in the context of the treasury activities undertaken by Company T since Company T is performing functions and assuming risks that go beyond the coordination role of a cash pool leader. In particular, the functional analysis shows that Company T controls the financial risks contractually allocated to it and has the financial capacity to bear those risks ...

As part of the group liquidity arrangements, T operates an MNE group cash pooling arrangement and is responsible for deciding how to invest surplus funds or fund any shortfall. T sets the intra-group interest rates and is at risk for any differences between the rates it sets with other group members and the rates at which it transacts with the independent lenders. T also bears credit risk, liquidity risk and currency risk for intra-group finance and decides on how or whether to hedge such risks ...

Company T, a member of MNE Group Y, performs as the MNE group treasury entity and undertakes a range of different financial transactions both intra-group and externally. Company T’s main purpose is to provide treasury services to the other entities within the MNE group including strategy and management of group liquidity. T is responsible for raising finance across the MNE group by issuing bonds or borrowing from third party banks and arranges intra-group loans to meet the funding needs of other group members as necessary ...

A functional analysis shows that M is not subject to credit risk, which remains with the cash pool members, but merely performs a co-ordination function. Furthermore M is not performing the functions or assuming the risks that a bank would. Therefore M would not earn the kind of reward that a bank would earn such as retaining the interest spread between deposits and loans. Accordingly, M would earn a reward commensurate with the service functions it provides to the pool ...

As a result of the arrangements in place, M pays less interest to the bank or receives more interest than would have been the case absent the pooling arrangements ...

Under the cash management services agreement the bank makes any transfers necessary to meet the target balance for each pool participant with any net surplus deposited by M or any net overdrawn position being met by the bank lending to M. The facility that M may draw on is guaranteed by X. The third- party bank pays interest to, or receives interest from M based on the overall, pooled, position. In this instance, M receives surplus funds from MNE group members H and J and provides funds to MNE group members K and L which have a funding need. Interest on the balances of the pool participants is charged or paid in accordance with the pooling agreements ...

M sets up an intra-group cash pooling arrangement with an unrelated bank. Legal arrangements are put in place for all participants which allow transfers to or from M’s cash concentration account to meet a specified target balance for each pool participant ...

X is the parent entity of an MNE group which has subsidiaries H, J, K, and L which participate in a physical cash pooling arrangement with fellow subsidiary M acting as cash pool leader. All participants have the same functional currency and that is the only currency in the pool ...

The following examples illustrate the principles described above ...

Where accurate delineation of the actual transactions determines that a cash pool leader is carrying on activities other than coordination or agency functions, the pricing of such transactions would follow the approaches included in other parts of this guidance, as appropriate ...

In general, a cash pool leader performs no more than a co-ordination or agency function with the master account being a centralised point for a series of book entries to meet the pre-determined target balances for the pool members. Given such a low level of functionality, the cash pool leader’s remuneration as a service provider will generally be similarly limited ...

The appropriate reward of the cash pool leader will depend on the facts and circumstances, the functions performed, the assets used and the risks assumed in facilitating a cash pooling arrangement ...

As with many types of financial transactions, different intent and understanding can be ascribed to the labels or descriptions attached to particular transactions. Each case must be considered on its own facts and circumstances and in each case accurate delineation of the actual transactions in accordance with the principles of Chapter I will be needed before any attempt to decide on an approach to pricing a transaction ...

Credit risk refers to the risk of loss resulting from the inability of cash pool members with debit positions to repay their cash withdrawals. From the cash pool leader’s perspective, there needs to be a probability for it to incur losses derived from the default of cash pool members with debit positions to bear the credit risk. Therefore, an examination under Chapter I guidance will be required to determine, under the specific facts and circumstances, which entity within the MNE group is exercising control functions and has the financial capacity to assume the credit risk associated with the cash pool arrangement ...

Liquidity risk in a cash pool arrangement arises from the mismatch between the maturity of the credit and debit balances of the cash pool members. Assuming the liquidity risk associated to a cash pool requires the exercise of control functions beyond the mere offsetting of the credit and debit positions of the cash pool members. Therefore, an analysis of the decision-making process related to the amounts of the debit and credit positions within the cash pool arrangement will be required to allocate the liquidity risk under Chapter I ...

Before any attempt is made to determine the remuneration of the cash pool leader and participants, it is central to the transfer pricing analysis to identify and examine under Chapter I guidance the economically significant risks associated to the cash pooling arrangement. These could include liquidity risk and credit risk. These risks should be analysed taking into account the short-term nature of the credit and debit positions within the cash pooling arrangement (see paragraph 10.123) ...

A potential difficulty for tax administrations in analysing cash pooling arrangements is that the various entities in a cash pool may be resident across a number of jurisdictions, potentially making it difficult to access sufficient information to verify the position as set out by the taxpayer. It would be of assistance to tax authorities if MNE groups would provide information on the structuring of the pool and the returns to the cash pool leader and the members in the cash pool as part of their transfer pricing documentation. (See Annex I to Chapter V of these Guidelines about the information to be included in the master file) ...

One of the practical difficulties in such situations will be deciding how long a balance should be treated as part of the cash pool before it could potentially be treated as something else, for example a term loan. As cash pooling is intended to be a short-term, liquidity-driven arrangement, it may be appropriate to consider whether the same pattern is present year after year and to examine what policies the MNE group’s financial management has in place, given that yield on cash balances is a key financial management issue ...

Another key consideration in analysing intra-group funding arrangements which might be described as cash pooling are situations where members of an MNE group maintain debit and credit positions which, rather than functioning as part of a short-term liquidity arrangement, become more long term. It would usually be appropriate to consider whether, on accurate delineation, it would be correct to treat them as something other than a short-term cash pool balance, such as a longer term deposit or a term loan ...

An advantage of a cash pooling arrangement may be the reduction of interest paid or the increase of interest received, which results from netting credit and debit balances. The amount of that group synergy benefit, calculated by reference to the results that the cash pool members would have obtained had they dealt solely with independent enterprises, would generally be shared by the cash pool members, provided that an appropriate reward is allocated to the cash pool leader for the functions it provides in accordance with C.2.3 ...

As indicated in paragraph 1.159, the determination of the results that arise from deliberate concerted group actions must be established through a thorough functional analysis. Accordingly, in the context of cash pooling arrangements, it is necessary to determine (i) the nature of the advantage or disadvantage, (ii) the amount of the benefit or detriment provided, and (iii) how that benefit or detriment should be divided among members of the MNE group ...

In delineating the cash pool transactions, it may be that the savings and efficiencies achieved are determined to arise as a result of group synergies created through deliberate concerted action (as discussed in Section D.8 of Chapter I) ...

No member of the pooling arrangement would expect to participate in the transaction if it made them any worse off than their next best option. The analysis of an MNE’s decision to participate in a cash pool arrangement should be done with reference to its options realistically available, taking into account that an MNE can obtain benefits as a member of the cash pool other than an improved interest rate (see paragraph 10.146) ...

The cash pool member is likely to be participating in providing liquidity as part of a broader group strategy, an arrangement in which the member can have a credit or debit position, which may include among its aims a range of benefits that can only be achieved as part of a collective strategy involving the pool members, done for the benefit of all of the pool participants, and the membership of which is limited to entities within the MNE group. Pool participants deposit cash to the pool (or withdraw cash from the pool), and not to (or from) a particular cash pool member ...

The accurate delineation of cash pooling arrangements would need to take into account not only the facts and circumstances of the balances transferred but the wider context of the conditions of the pooling arrangement as a whole. For example, a cash pool is likely to differ from a straightforward overnight deposit with a bank or similar financial institution in that a cash pool member with a credit position is not depositing money as a transaction in isolation with a view to a simple depositor return ...

The accurate delineation of the cash pooling transactions will depend on the particular facts and circumstances of each case. As cash pooling is not undertaken regularly, if at all, by independent enterprises, the application of transfer pricing principles requires careful consideration. As paragraph 1.11 notes “Where independent enterprises seldom undertake transactions of the type entered into by associated enterprises, the arm’s length principle can be difficult to apply because there is little or no direct evidence of what conditions would have been established by independent enterprises.” ...

With no physical transfers of funds, the transactional costs of operating a notional pool are likely to be less than transactional costs of operating a physical pool. Functions carried out by the bank would be accounted for in the charges or interest rate of the bank. With minimal functions carried out by the pool leader (because functions are primarily performed by the bank), there will be little, if any, value added by the pool leader to be reflected in the intra-group pricing. An appropriate allocation of the benefit created as a result of the elimination of the bank spread and/or the optimisation of a single debit or credit position would need to consider the contribution or burden of each pool participant ...

In a notional cash pool, some of the benefits of combining credit and debit balances of several accounts are achieved without any physical transfer of balances between the participating members’ accounts although the bank will usually require cross-guarantees from pool participants to enable the right to set off between accounts if necessary. The bank notionally aggregates the various balances of the individual accounts of participating members and pays or charges interest according to the net balance, either to a designated master account or to all participating accounts under a formula determined in the cash pooling agreement ...

In a typical physical pooling arrangement, the bank account balances of all the pool members are transferred daily to a single central bank account owned by the cash pool leader. Any account in deficit is brought to a target balance (usually zero) by a transfer from the master account to the relevant sub account. Depending on whether there is a surplus or a deficit after the members’ accounts have been adjusted to the target balance, the cash pool leader may borrow from the bank to meet the net funding requirement of the pool or deposit any surplus as appropriate ...

Although there are two basic types of cash pooling arrangements – physical and notional – other variations and combinations may be arranged to meet specific business needs. For example, a number of physical pools might be held, one for each currency in which the business operates, along with a notional pool which then combines those individual currency pools ...

In the context of this section, cash pooling is the pooling of cash balances as part of a short- term liquidity management arrangement. Cash pool arrangements are complex contracts which may involve controlled and uncontrolled transactions. For instance, one common structure is that the participating members of the MNE group conclude a contract with an unrelated bank that renders cash pooling services, and each participating member opens a bank account with that bank ...

The use of a cash pool is popular among multinational enterprises as a way of achieving more efficient cash management by bringing together, either physically or notionally, the balances on a number of separate bank accounts. Depending on the particular arrangements in place, a cash pool can help to achieve more effective liquidity management, whereby reliance on external borrowing can be reduced or, where there is a cash surplus, an enhanced return may be earned on any aggregated cash balance. Financing costs may also be reduced by eliminating the bank spread embedded in the interest which would be payable or receivable on a number of separate debit or credit account balances and by reducing banking transaction costs ...

The Vodafone group provided liquidity to group members using a cash pool. The balance of the group members’ short positions settled on a monthly basis was transferred to Vodafone Plc at the end of each month. (hereinafter: the Parent Company) in the main account for a long term loan between the Parent Company and the respective member company. As a member of the cash pool, Vodafone Hungary also continuously deposited funds into the main account of the Vodafone Plc and received funds from the main account. Vodafone Hungary’s transactions were partly short-term (up to 1 month) and partly long-term position payments. Some transactions were classified as “deposits” in the transfer pricing register. Press release from the Court (Curia), December 2019 “Depending on the underlying facts, the issue of transfer pricing may be a technical issue and may be a purely legal issue. The subject of the procedure is not the classification of the underlying legal relationship, but the determination of the consideration applied to the legal relationship closest to the parameters of the given transaction. The group provided liquidity to the group members using the cash pool method. The balance of the group members’ short-term short positions at the end of each month was transferred to a long-term position between the Parent Company and the respective member company. The applicant acted in part as an intermediary between the members and the Parent Company, and in part it placed funds in the main account of the Parent Company and received funds therefrom. The applicant described each transaction as a ‘deposit’ in the transfer pricing register and took into account current account deposit interest when applying the transfer pricing rules. The first instance tax authority on 01.04.2012. – 31.03.2014. considered, inter alia, the corporate tax code to be that Act CXII of 1996 on Credit Institutions and Financial Undertakings (hereinafter: Hpt.) and Act IV of 1959 on the Civil Code. (hereinafter: the old Civil Code), the conceptual element of a deposit transaction is that the party receiving the deposit must be a financial institution (for the purposes of the Credit Institutions Act: a credit institution). The Parent Company is not a credit institution and is not entitled to collect deposits. However, during the audited period, Hpt. is familiar with parent-subsidiary group financing money lending. The transactions between the applicant and the Parent Company correspond accordingly, the normal market price being compared with the interest on the loans granted. The tax authority charged the applicant a tax difference for applying a lower interest rate than the normal market rate. Defendant reversed the first-instance decision because of the effect of other tax changes on pre-tax profit, otherwise upholding it. According to the assessment of the court of first instance, it was necessary to decide on a purely legal issue. The Parent Company is a subsidiary of Hpt. due to its rules, it is not possible to collect a deposit, the plaintiff may receive interest on a loan not on a deposit, but on a loan, the normal market price shall be determined accordingly. He therefore dismissed the action. The Curia, acting on the applicant’s request for review, assumed that the question of transfer pricing could be a matter of professional competence and could be a matter of law, depending on the facts on which it was based. In the litigation, the defendant formed the decision into a question of law by basing it on the Hpt. However, in determining the normal market price, it is not a question of classifying the underlying legal relationship, but of determining the consideration applied to the legal relationship closest to the parameters of the given transaction. In this case, even within the framework of Section 1 (7) of the Art., It cannot be decisive whether the Parent Company has the right to collect deposits or not. Nor can the risk elements of the classic credit / deposit scheme identified by the defendant be applied in a way that governs independent credit institutions, as cash pool systems have special operating parameters, this special situation inherently necessitates the application of a transfer price. The Curia then examined whether, on the basis of the information available, the Court of First Instance could reasonably rule on the issue of transfer pricing, even with the assistance of a forensic expert, and given a negative answer provided for the annulment of the final judgment, the annulment of the defendant’s decision as regards the determination of the normal market price, including the decision at first instance, and an order that the tax authorities at first instance reopen the proceedings. from the outset, this special situation necessitates the application of a transfer pricing.” Click here for translation ...

At issue in this case was whether a deposit in a cash pool constituted a loan. According to the company, cash transfers made as part of cash pooling cannot be considered a loan agreement because they do not contain elements that are material to the content of such contracts. In 2018 the provincial court issued a decision stating that a cash pool deposit constituted the granting of a loan irrespective of lacking written contracts. This decision was then appealed to the Supreme Administrative Court by the company. From the decision of the Supreme Administrative Court From an economic point of view, the financial system presented in the application involves the granting of loans because, as a result of financing the negative balance shown by the contractual participant by a surplus of funds accumulated by other participants, the participant is not obliged to pay interest to the bank for his debit an invoice that would have arisen if the shortcoming had not been covered by another contracting party. In place of debt debit crediting, which appears on the account maintained by a given participant, such crediting is carried out under a cash pooling agreement with the funds not of the bank, but of other or other participants of the agreement, who showed a positive balance and who thereby also financed the negative balance of other participants. In the light of the above, it should be considered that the actual purpose of the cash pooling agreement is to provide cash between entities of the group and to obtain benefits in the form of interest by these entities. Therefore, it is a type of loans granted between entities participating in this system. The form of carrying out the cash pooling agreement is irrelevant, since its purpose is to provide cash between entities from the group and to obtain benefits in the form of interest by these entities. It is widely accepted that a cash pooling agreement is a form of effective financial management, used by entities belonging to one capital group or entities affiliated economically in any other way. It amounts to concentrating cash from individual accounts of individual entities on a joint group account and managing the amount accumulated in this way, using economies of scale . This allows offsetting the temporary surpluses shown by one of the entities with temporary shortages in other entities. Thanks to this, the costs of crediting the activities of the group’s entities are minimized by crediting with the use of the group’s own funds. As part of the cash pooling agreement, participants indicate an entity organizing cash pooling and managing the system, the so-called Pool Leader ( agent ), which can be a specialized bank, as well as a unit from a group. The system manager under the agreement provides financial resources for all system participants to cover negative balances, and in the event of positive balances on participants’ accounts, funds are credited to his account (see K. Szymaniak, Cash pooling and insufficient capitalization and transfer pricing documentation obligation) in the light of NSA judgments – the beginning of a new case-law or isolated decisions, Monitor Podatkowy 2016, No. 5, p. 18). Contrary to the company’s view, the cash pooling agreement described in the application for individual interpretation meets the necessary conditions (essentialia negotii) of the loan agreement referred to in art. 16 clause 7b. Therefore, it can not reasonably be demanded that a cash pooling agreement , which should be included in unnamed contracts under Polish civil law, should fulfill all the material elements relevant to the contract named in a literally accepted manner in civil law. The lack of loan agreements prepared on the basis of the provisions of the Civil Code between participants of cash pooling does not preclude the possibility of recognizing certain transactions as meeting the definition in art. 16 clause 7b. This provision introduces its own definition of the aforementioned contract for the purposes of the provisions on so-called thin capitalization . It is also impossible to agree with the company’s arguments that in the agreement described in the application there is no obligation necessary for recognizing it as a type of loan an obligation to transfer a certain amount of money to the entity specified in the agreement , because the participants of this agreement do not know whether these funds will be used , in what amount and by which participant the other party to the transaction is not specified , there is no requirement to obtain the consent of the participant with a positive balance to transfer a specific amount of funds . On the contrary , the agreement described in the application expressly consented to the transfer of a certain amount of money to a specific entity – only by specifying the method of identifying and determining that entity . As the Court of First Instance rightly pointed out , in the same way it was indicated that there would be an agreement to commit to transfer funds to a specific entity . The other party to the transaction was determined by indicating how it was determined . Since the criteria and zeroing of balances are given , and the number of group members is constant , it is known in advance who and to what extent will be the other party to the transaction . Each of the participants in the agreement also agreed in advance to transfer the specified amount and method of funds in a positive cash balance . Therefore, the position of the Court of First Instance does not raise any objections that in the facts described in the application we are dealing with a loan agreement referred to in art. 16 clause 7b. Acknowledgment that the provisions of Art. 16 clause 1 point 60 and point 61 in connection with art. 16 clause 7. causes the applicant to be obliged to draw up the documentation referred to in art. 9a. The position of the Provincial Administrative Court in Warsaw in this ...

“X Iberica SA” is a Spanish subsidiary of a multinational group and also a participant in the group’s cash pooling system, both as a borrower and as a provider of funds. When the group is not able to finance itself, the vehicle called THE X TES US comes into play, which raises these funds from outside the group as a group and on the basis of the group’s credit quality. The objective of cash pooling agreements is to manage the cash positions of the participating entities, optimising the group’s financial results by channelling the excess liquidity of the group companies that generate it to the group companies that need financing, resorting to third-party financing when the group itself is not able to finance itself. This achieves greater efficiency in the use of the group’s funds, as well as improving their profitability and reducing the administrative and general financial costs of the entities participating in the agreement. The tax authorities issued an assessment in which the interest rates on deposits and withdraws had been aligned and determined based on a group credit rating. A complaint was filed with the TEAC by X Iberica SA. Judgement of the TEAC The TEAC dismissed the complaint and upheld the tax assessment. The asymmetry in the treatment given by the taxpayer to credit and debit transactions in cash pooling is not admissible: As this system is configured, both types of transactions should have the same treatment; The analysis of the logic and philosophy that exists in transactions with financial institutions is not transferable to the cash pooling transactions involved here; in this, transactions that are channelled through the cash pooling lead entity, it follows from the functional analysis that it acts as a service provider managing and administering the cash pooling, but not as a credit institution that would assume the consequences of the contributions and drawdowns to/from the cash pool. And all the companies that form part of the cash pooling can be either contributors or receivers of funds, without it being generally known a priori what the debtor or creditor position of each of them will be. For the determination of the arm’s length price, in the selection of the type of transaction used as comparable, it is not appropriate to start from the stand alone credit rating of the operating entities or economic beneficiaries of the financing, in this case, the Spanish subsidiary X IBERICA SA, but instead what is appropriate is the credit rating of the group. Excerpts “In the cash pooling system to which X Iberica SA belongs, the cash pool leader does not assume the same position as a bank, but merely administrative and management tasks, but does not assume the risk of default either from the economic or contractual point of view (in fact, there is no mention of this issue in XF BV’s annual report, nor is it mentioned in the current account agreement), but rather this risk is assumed by all the participating entities. The lead institution centralises the cash and grants financing to cash pooling institutions, but on behalf of the contributing institutions, which are the ones that actually have the funds to lend and assume the risk of default. In the context of the functional analysis referred to in the previous legal basis of this resolution, we must reiterate that the benefits of the operation accrue to all participants, and it would therefore be inconsistent to assign the functions of a financial institution to the centralised cash pooling system’s management entity, or the benefit that would accrue to it if we assign a higher rate to the loans than that applied to fund-raising. The functions that the claimant defends in its allegations as being assigned to the system’s managing entity are clearly limited, especially as regards decisions regarding the entities that use this system, which are the group entities according to their funding needs or surpluses. In this respect, we saw that the Guidelines link a greater risk assumed by the parties to a transaction with the assumptions of greater control over the activity we are analysing, which in this case is certainly scarce. We must therefore uphold the settlement arrangements and dismiss the claimant’s claims on this point as well.” Click here for English translation Click here for other translation ...

A Polish subsidiary in a German Group had taken out a significant inter-company loan resulting in a significantly reduced income due to interest deductions. At issue was application of the Polish arm’s length provisions and the arm’s length nature of the interest rate on the loan. The tax authorities had issued an assessment where the interest rate on the loans had been adjusted and the taxable income increased. On that basis, a complaint was filed by the company to the Administrative Court. The administrative court rejected the complaint and ruled in favor of the tax authorities. An appeal was then brought before the Supreme Administrative Court. The Supreme Administrative Court rejected the appeal, although it did not share some of the conclusions and statements of the Court of first instance. The key issue in the case was to determine is whether the provisions of Art. 11 (Containing the Polish arm’s length provisions), allowing the authority to determine the income of the Company and the tax due without taking into account the conditions arising from existing relationships, including capital applies. Art. 11 paragraph 1 and paragraph 4. allows for the this provision to apply if three cumulative conditions are met: 1) the existence of connections between the parties referred to in art. 11 paragraph 1 points 1-3 or in para. 4 item 1 or 2 update; 2) the impact of these connections resulting in conditions that differ from those that would be agreed between independent entities; 3) the taxpayer’s failure to recognize income or income lower than would be expected if the above mentioned connections had not been there. The Supreme Administrative Court agreed that these cumulative conditions are met. The authority has made estimates of income on the basis of § 21 paragraph. 1 and 2 cited above. Regulation in the light of which it rules, if the taxpayer to provide an entity affiliated with the taxpayer loan ( credit ) or will receive such a loan ( credit ), regardless of their purpose and destiny, or also give or receive in any form of warranty or guarantee, the price of the market for this service are the interest or commission or other form of remuneration, which agreeing on for such a service, provided on comparable terms , entities independent ( paragraph. 1). The arm’s length interest rate is determined on the basis of the interest, that the entity would have to pay an independent party for obtaining a loan ( loans ) for the same period in comparable circumstances. However, according to the Supreme Administrative Court the inter group loan agreement differs from the typical loan agreements concluded by banks. The applicant does not conduct an economic activity identical to that of banks; With regard to the nature of the transaction applicant suffered much less risk of insolvency of a counter party, than borne by the bank in relation to the borrowers; The Company had a much greater possibility of controlling the situation of the financial and solvency of the counter party in the course of the duration of the contract than the bank in case of a contract of credit; The applicant does not bear the costs of verifying the ability of credit counter party and had the opportunity to immediately recover the funds provided in the framework of the agreement, which differ from the conditions defined by the parties of the contract of credit, concluded with the bank; The applicant does not incur other costs associated with granting and service the loan , which usually bear the banks; The applicant functioning in the group ‘s capital, implemented assumptions and tasks of economic different from those, which are the essence of the activities of entities operating on the market of services financial. Since comparable transactions between unrelated entities could not be established during the period under consideration, the CUP method was not applicable to the disputed contract. The Supreme Administrative Court states that the judgment under appeal meets the requirements provided for in art. 141 § 4 and fully enables its instance control, despite some shortcomings. The tax authority, while re- examining the case, is not bound within the meaning of the legal assessment contained in the fragment of the justification of the Administrative Court questioned by the Supreme Administrative Court. Instead, the legal assessment contained in this judgment is binding. Considering the, the Supreme Administrative Court dismissed complaint. Click here for translation ...

A GmbH, based in Zurich, was a subsidiary of the D group operating mainly in the field of consumer electronics worldwide, headquartered in country E. A GmbH was primarily responsible for acquiring exploitation rights to … and other related activities. The D Group also owned company F in Land H, which was responsible for the global treasury and cash pooling of the Group. On December 1 2008 A GmbH had entered into an agreement with Company F for the short-term deposit of excess capital and short-term borrowing. Under the terms of the agreement, if the balance was in A GmbH’s favor, A GmbH would be credited interest based on the one-month London Interbank Bid Rate (LIBID) minus 6.25 basis points, but not less than 0.05%. Following an audit in relation to the tax periods of 1.4.2009-31.3.2010 and 1.4.2010-31.3.2011, the tax authorities took the view that the cash pool credit contains a proportion of long-term loans to company F and insofar as the interest rate (determined on the terms of short-term deposits ) was too low compared to third-party terms. In the two financial years a minimum balance of Fr. … resp . … had never fallen below the base amount as a long-term loan. An assessment was issued on May 26, 2014 as a result of insufficient interest resulting in a hidden profit distributions based on the LIBOR interest rates. The appeal against the decision was dismissed by the Tax Appeals Court on 25 November 2016 with regard to the direct federal tax of the 2009/10 tax period and was partially approved with regard to the federal tax period 2010/11. The partial approval was made because the court of appeal reduced the applicable interest rate for 2011 from 2.25% to 2.0%, resulting in a reduction of the hidden profit distribution. A GmbH was charged for the direct federal tax of 1.4.2009-31.3.2010 with a taxable net profit of Fr. … and for the period from 1.4.2010-31.3.2011 with a taxable net profit of Fr. …. The Administrative Court partially upheld the complaint filed by A GmbH against the decision of the Tax Appeals Court by judgment of 7 December 2016 (SB.2016.00008) and dismissed the case for further investigation and for a new decision to the Tax Appeals Tribunal. It considered that the deposit in the cash pool that qualifies as a longer-term credit must be recalculated in the light of the considerations. On the basis of the facts presented by A GmbH and the evidence submitted, the administrative court concluded that the interest rates applicable in the D Group for longer-term loans to company F were in line with market conditions and, in the specific case, for the longer-term interest rates qualifying assets are decisive. The tax recourse court partially upheld the complaint in the second case by decision of 25 July 2017 and assessed the complainant for the direct federal tax of 1.4.2009-31.3.2010 with a taxable net profit of Fr. … and for the period of 1.4.2010- 31.3.2011 with a taxable net profit of Fr. …. The case was appealed to the Administrative Court on 29 August 2017, by the Swiss Federal Tax Administration (FTA). The Federal Tax Administration requested that the decision of the Tax Appeals Tribunal should be set aside and the taxable net profit with regard to the direct federal tax of 1.4.2009-31.3.2010 be set at CHF. … and for the tax period from 1.4.2010-31.3.2011 to Fri …. In a statement of objection dated 21 September 2017, A GmbH requested the dismissal of the complaint under costs and repercussions Click here for translation ...

The German court concludes that a Cash Pool agreement must be clear and unambiguous both in substance and amount. If only a minimum and maximum interest rate has been agreed the arm’s length standard is not met. Click here for English translation Click here for other translation ...

The distinction between cash pool receivables and long-term loans. A GmbH is a group company of the global A-group. The A Group also includes company F Ltd, which is responsible for the global treasury and cash pooling of the A Group. In 2008, A GmbH entered into an agreement with F Ltd on the short-term deposit of excess liquidity and short-term borrowing (cash pool). Under the terms of the agreement, if the balance were in A GmbH’s favor, recievables would be credited interest based on the one-month London Interbank Bid Rate (LIBID) less 6 , 25 basis points, but at least 0.05%. The Swiss tax administration argued that a portion of the cash pool receivable had to be treated as a long-term loan bearing higher interest rates. The long-term loan was set to the minimum cash pool receivable balance of each fiscal year. The interest rate on the long-term loan was set to the Swiss „Safe Habor Rates“ according to the annual circular letters published by the Swiss Federal Tax Administration. The Tax Appeal Court largely confirmed the decision of the tax administration. However, it reduced the applicable interest rate for the calendar year 2011 from 2.25% to 2.00%. The Tax Appeal Court argued that the tax administration had unreasonably deviated from its longstanding method when determining the 2011 safe haven interest rate, so that the 2.25% mentioned in the circular letter were too high. A GmbH. appealed the decision to the Administrative Court. Based on the overall circumstances, the amount of the assets invested in the cash pool did not comply with the arm’s length principle according to the Administrative Court. In this respect, it was correct to qualify a portion of the cash pool receivable into a mid- or long-term loan. Concerning the size of the long term loan, the simple average of the cash pool receivable balance at the beginning and closing of the fiscal year could be taken as a starting point according to the Administrative Court. This question was referred back to the tax administration. Concerning the applicable interest rate on the long-term loan, the Administrative Court stated, that the tax authorities cannot in every case refer to the Swiss “Safe Habor Rates”. The Court concluded that the interest rates offered by F Ltd. for long-term intra-group loans were in line with the arm’s length principle. Click here for other translation ...

A tax assessments based on anti-avoidance doctrine “gjennomskjæring” were set aside. The case dealt with the benefits of a multi-currency cash pool arrangement. The court held that the decisive question was whether the allocation of the benefits was done at arm’s length. The court dismissed the argument that the benefits should accure to the parent company as only common control between the parties which should be disregarded. The other circumstances regarding the actual transaction should be recognized when pricing the transaction. In order to achieve an arm’s length price, the comparison must take into account all characteristics of the controlled transaction except the parties’ association with each other. While the case was before the Supreme Court, the Oil Tax Board made a new amendment decision, which also included a tax assessment for 2002. This amendment, which was based on the same anti-avoidance considerations, was on its own to the company’s advantage. Following the Supreme Court judgment, a new amended decision was made in 2009, which reversed the anti-avoidance decision for all three years. The Supreme Court concluded that in 2009 the tax authorities could also change the tax assessment for 2002, even though this tax assessment was not considered by the Supreme Court in 2008. The Court pointed out that the need for amendments pursuant to section 9-5 no. 2, litra a) of the Tax Assessment Act extends beyond the limits for the substantive legal force, cf, section 9-6 no. 5, litra e) of the Tax Assessment Act, and stated that if the tax authorities have solved a classification or allocation issue for a transaction in the same way for several income years, and there is a final and enforceable judgment for one of the years, the provision gives the tax authorities the right and obligation to also consider the tax assessments for the other years. In the specific case, the amendment for 2002 followed from the Supreme Court’s judgment for the two preceding income years, and the tax authorities then had the authority to consider the tax assessment for this year. Click here for translation ...

A Polish company were planning to enter into a inter-group cash pooling agreement. The cash pooling operation were to be managed by a foreign bank, which would open a group account as a basic account for Norwegien parent company, the pool leader. The question was whether the taxation of interest payments made from the Polish company to the pool leader will apply art. 21 par. 3 of the Corporate Income Tax Act, as a result of which interest should be exempt from withholding tax, and if not – whether the taxation of the interest will apply art. 11 of the tax treaty between Norway and Poland. In this judgement the Court stated that the cash pool leader cannot be regarded as the owner of all receivables paid to the group account, because it is not entitled to dispose of the interest in its sole discretion. The judgement in this case is aligned with prior rulings of 11 June 2015, file ref. No. II FSK 1518/13, and of 2 March 2016, file ref. No. II FSK 3666/13. Click here for translation ...

A Group had established a physical cash-pool where funds from participants was transferred to and from a consolidating account (cash pool). The Polish Supreme Administrative Court concluded that every agreement in which the lender is obligated to transfer ownership of a specified amount of funds to the borrower, and the borrower is obligated to return the amount and pay interest, even if obligations of the parties to the agreement are implicit, constitutes a loan agreement. 2016 Decision Click here for translation 2015 Decision Click here for translation ...

In a request for a binding ruling, a Polish Company indicated that it was joining an inter-group Cash Pooling Agreement (“Agreement”) in which the leader was based in Luxembourg. Under the Agreement, the pool leader acts as a regional financial center and consolidates the balances of current accounts of all the cash pool participants. The banking platform used by the Group for the purposes of Cash Pooling is operated by D. Bank (“DB”) based in Germany. The actual operation of the Cash pooling system will consist in automated transfers of positive balances existing on the accounts of participants of Cash pooling, including the applicant’s account at the end of the settlement day into the superior account of Leader. The Minister of Finance found that the role of Cash pool leader boils down to the management of cash that will flow from participants in the cash pooling system. It is the companies participating in this cash pool that can actually enjoy the privileges of ownership. Furthermore, an entity that does not have the right to decide fully who and to what extent it uses or has the right to dispose of the property can not be considered a beneficial owner, as defined in the Convention, and in relation to the purposes for which the contract was concluded. The cash pool leader does not receive taxable interest income within the meaning of art. 12 and art. 21 par. The Polish company appealed the ruling. The Administrative Court in Warsaw found that in circumstances where the payment is made to a Cash Pool Leader resident in a particular country, which then transfers the payment to the final recipient, the country in which the payment is made is not obliged to that intermediary to apply the provisions of the double taxation agreement. In the opinion of the court of first instance, the fact raised by the Company – that it is difficult to identify entities that ultimately receive interest paid by it – cannot prejudge the method of taxation. The appeal was therefore dismissed. See Case No. II FSK 1518-13 The company then filed an appeal to the Supreme administrative Court which was also dismissed. Click here for translation ...

K-Bul is a Bulgarian subsidiary in the K Group. In the years 2007 to 2013 certain financial intra-group contracts were entered (Two financial service contract – concluded on 02.10.2007 and a Loan agreement concluded on 26.01.2010). Following an audit, the market interest rate was determined by the tax authorities on the basis of the Bulgarian National Bank (BNB)’s interest rate statistics published on the Bank’s website, and for the first two contracts a market interest rate of 8.22% was adopted, as reported by the BNB for October 2007 for euro loans to non-financial corporations for a period of one to five years. The loan agreement concluded on 26.01.2010 has a market interest rate of 6,88 %, which corresponds to the BNB interest rate statistics for January 2010 for euro loans to non-financial corporations for a period of up to one year. On that basis the taxable income of K-Bul was restated by amounts representing the difference between the interest charged by the company for the relevant year and the market interest determined in the course of the audit proceedings. K-Bul then filed a complaint with the Administrative Court. The court held that the statistical data of the BNB used in the course of the audit did not constitute a proper method for establishing the market interest on the loans in question. The court held that the interest statistics maintained by the BNB cannot take into account the quantitative and qualitative characteristics of the specific transaction, which is an essential feature of market interest. An appeal was then filed by the tax authorities with the Supreme Administrative Court. Judgement of the Supreme Administrative Court The Supreme Administrative Court set aside the decision of the Administrative Court and remanded the case for a new trial. Excerpts “”In the light of that procedural conduct of the parties, it may be assumed that the court referred to the evidence adduced in the course of the appeal, but, as stated above, that evidence was not discussed. Further, the appellant’s argument in the appeal that the judgment is devoid of reasons as to why the court found it lawful to determine the interest rates under the contracts at issue and why those interest rates should be determined by applying LIBID and EURIBOR, given the undisputed fact that the Bulgarian company carries on its business in Bulgaria, is well founded. The above-mentioned infringements of the rules of reasoning are of a fundamental nature, since they lead to the conclusion that the disputed relations may have developed in a different manner from that accepted by the court. The Court of First Instance should not consider for the first time the evidence admitted in the case and should not establish new facts, since the right of the parties to two-instance proceedings would be infringed. On a retrial, the nature of the contractual relationship between the parties must be determined, taking into account the finding in the course of the audit that the provision of the funds took the form of a deduction of part of the sums owed by customers of the K. group to the Bulgarian company for sales of products made by the latter to them. The rest of the sales amounts were remitted to the LPF and were accounted for as repayment on credit granted, i.e. it has to be considered whether there is a K. Pooling Agreement in this case, taking into account also the manner of accounting of the amounts in question, namely, synthetic accounting of the long-term loans granted in foreign currency in account 226, as well as the description of the activity /page 12 of the evidence book admitted in the course of the proceedings/. If such an arrangement is established, then to the extent that each Participant in the K. Pooling will be able to both provide funds to the Leader and to use the other Participants’ funds through the Leader, any benefits that the individual Participant derives from its presence in this construct should be taken into account in determining whether the prices at which these transactions occur are market-based, and, if necessary, special knowledge should be used to determine the interest that the Participant receives for the funds provided” Click here for English Translation Click here for other translation ...

A AG granted loans to group companies as part of a cash pooling system via the parent company. The Swiss tax administration found the interest insufficient, resulting in a hidden profit distribution. According to the Swiss rules and doctrine, transactions between related parties must be consistent with the arm’s length principle. For the third-party comparison, the Court relied on the long-term interest rates, even if the cash pool balances were correctly accounted for as short-term loans. The basis for the third-party comparison for the cash pool interest rate was determined to be the market interest rate measured on the 5-year SWAP rate. The Court decision was partial approval of A AG and refusal to the Tax administration. Click here for other translation ...

A AG granted loans to group companies as part of a cash pooling system via the parent company. The Swiss tax administration found the interest insufficient, resulting in a hidden profit distribution. According to the Swiss rules and doctrine, transactions between related parties must be consistent with the arm’s length principle. For the third-party comparison, the Court relied on the long-term interest rates, even if the cash pool balances were correctly accounted for as short-term loans. The basis for the third-party comparison for the cash pool interest rate was determined to be the market interest rate measured on the 5-year SWAP rate. The Court decision was partial approval of A AG and refusal to the Tax administration. Click here for English translation. Click here for other translation ...

In a request for a binding ruling, a Polish Company indicated that it was joining an inter-group Cash Pooling Agreement (“Agreement”) in which the leader was based in Luxembourg. Under the Agreement, the pool leader acts as a regional financial center and consolidates the balances of current accounts of all the cash pool participants. The banking platform used by the Group for the purposes of Cash Pooling is operated by D. Bank (“DB”) based in Germany. The actual operation of the Cash pooling system will consist in automated transfers of positive balances existing on the accounts of participants of Cash pooling, including the applicant’s account at the end of the settlement day into the superior account of Leader. The Minister of Finance found that the role of Cash pool leader boils down to the management of cash that will flow from participants in the cash pooling system. It is the companies participating in this cash pool that can actually enjoy the privileges of ownership. Furthermore, an entity that does not have the right to decide fully who and to what extent it uses or has the right to dispose of the property can not be considered a beneficial owner, as defined in the Convention, and in relation to the purposes for which the contract was concluded. The cash pool leader does not receive taxable interest income within the meaning of art. 12 and art. 21 par. The Polish company appealed the ruling. The Administrative Court in Warsaw found that in circumstances where the payment is made to a Cash Pool Leader resident in a particular country, which then transfers the payment to the final recipient, the country in which the payment is made is not obliged to that intermediary to apply the provisions of the double taxation agreement. In the opinion of the court of first instance, the fact raised by the Company – that it is difficult to identify entities that ultimately receive interest paid by it – cannot prejudge the method of taxation. The appeal was therefore dismissed. Click here for translation ...

Decision on the criteria for the arm’s length test of interest rates on inter-company loans. This case i about intercompany loans created by zero balancing cash pooling and the funding of group companies by a group finance company. The Swiss Federal Supreme Court states – If the terms of inter-company loans are not conforming to market conditions, then the payment qualifies as a distribution and a special reserve must be made in the balance sheet of the lender. The Court also states – It is questionable from the outset whether a participation in the cash pool, by which the participant disposes of its liquidity, can pass the market conditions test at all. Click here for translation ...

Zero balancing/physical cash pooling involves a physical transfer of money from the accounts of individual group companies to the accounts of the group’s cash pooling company and risks can be considerable. Group companies participating ind the cash pool may loose there funds. Loans in the form of cash pool arrangements must be agreed at arm’s length terms. Click here for translation ...

The issue in the case was whether the applicable rates under the cash pool arrangement were on arm’s length, i.e. in accordance with the transfer pricing requirements. The Administrative Tax Court upheld most of the conclusions of the tax authorities. First, the Court found that the tax authorities were allowed to assess an arm’s length rate due to the lack of transfer pricing documentation. Second, the financial service fee of 0.25% was upheld. Third, the Court concluded that the rate on the short-term deposits and the corresponding loans (borrowed due to insufficient liquidity management) should be the same. The Administrative Tax Court observed that there was very little or no creditor risk on these gross corresponding loans/deposits because of the possibility of offsetting the balance. Hence, according to the Court, there was no basis for a spread on the gross balance. However, the rate spread on the net balance of the deposits was lowered from +1.18% to + 1.15%, equal to the borrowing rate spread. The Administrative Tax Court reasoned that the tax authorities had accepted the 1.15% rate spread as the market rate on loans made by the Danish subsidiary and that there were no facts indicating that the deposit rate should be different. The Administrative Tax Court also remarked that the adjustment made by the tax authorities was not a recharacterization, but rather a price adjustment. Click here for translation ...

In the Nestlé Finance case, a cash pool/treasury activity was transferred to a related Swiss entity. The function had been purely administrative, carried out exclusively for the benefit of parties related to the French company. The French company did not receive any compensation for the transfer of the cash pooling activity. First the Administrative Court concluded that the transfer of an internal administrative function to a foreign entity – even if the function only involved other affiliated companies ‘captive clientele’ – required the payment of arm’s-length compensation. This decision was then appealed and later revoked by a decision of the Administrative Court of Appeals. Click here for translation . . . Click here for translation ...

This case concerned the 2008 tax year, and the tax-payer was a company resident and incorporated in Portugal and a 100 percent subsidiary of a German company. The tax authorities assessed substantial corporate income tax because of a tax audit. The company claimed that the tax assessment violated the Portuguese transfer pricing regime because the tax authorities assumed that the company had provided a guarantee to its parent company, a related entity. However, according to the company, it could not be said that the subsidiary rendered a guarantee to its parent company under the cash-pooling agreement. The company also argued that the tax authorities were wrong in applying the comparable uncontrolled price method in order to obtain the arm’s-length price under the cash-pooling arrangement. The tax authorities in their answer stated that the contract between the parent and the subsidiary had clauses that deviated from a cash-pooling contract and they believed it should be deemed a mix of different contracts. According to the tax authorities, the company in addition to providing a guarantee to its parent ended up financing the activity of the parent company in less favorable terms for the company than if it was not in an affiliated relationship. According to the tax authorities, the company was a company with a budget surplus, which enables it to dispose of funds for financial applications such as savings deposits. The good financial situation of the Portuguese subsidiary contributes to a better credit rating than that of its parent company, and the subsidiary will be able to obtain loans much more easily than its parent company. According to the tax authorities, since the Portuguese subsidiary had excess funds, its account should show zero or a credit balance at all times (debit balances not being allowed). Inversely, the account of the parent company could have a debit balance (if the overall balance showed at all times zero or a credit balance). This means that the Portuguese subsidiary could not be financed under this agreement. Moreover, since the overall balance had to be positive or zero, the parent company would only obtain financing if the account of the subsidiary had enough balance to cover the needs of the parent company. The tax authorities further argued that according to clause 7 of the agreement, the Portuguese subsidiary guarantees any eventual liabilities through present or future credits with the bank. The tax authorities consider that according to normal market conditions the bank is protected and guaranteed by the better credit rating of the subsidiary. Without the subsidiary, the parent company would pay a higher interest rate to finance itself. Further, this agreement was only possible because there was a relationship between the parent company and its subsidiary. Otherwise, the subsidiary would never enter into this type of agreement. The tax authorities believed that those circumstances demonstrated a violation of the arm’s-length principle, since a company without a special relationship would pay a higher interest rate if not for the guarantee of the Portuguese subsidiary. If these types of arrangements were to be legitimized, it would be bad for the economy. Economic groups would end up assuming dominant positions in the market because they would obtain better interest rates for financing their activity, benefiting from the intragroup relationship. The cash-pooling agreement in question showed a guarantee relationship rendering it a mixed contract. Regarding the transfer pricing method, the tax authorities referred to what was decided in a previous case concerning the same taxpayer, except for a past comparable transaction in which the interest rate was different. After summing up the positions of the parties, the court described the notional cash pooling in which there was no physical movement of the balances between the individual accounts, just a virtual consolidation of the balances for determining the interest rate applicable to all accounts independent of the individual balances. The court explained that the interest rate foreseen in the agreement for credit balances was the base interest rate applied by the bank, and the interest rate that was applied to debit balances was the base interest rate applied by the bank plus 0.5 percent. Ac-cording to the agreement, the credit interest we was to be applied to debit balances if the overall balance of the accounts was positive. Inversely, if the overall balance of the accounts was negative, the interest over credit balances in the accounts would be calculated based on the interest rate applicable to debit balances in the accounts. According to clause 7 of the agreement, the Portuguese subsidiary and the parent company guarantee any eventual liabilities through present or future credits with the bank, and clause 8.2 states that when the bank wants to receive its guaranteed passive, it should use the credit balances in the accounts guaranteed ac-cording to clause 7. According to the court, it was not proven that these clauses ever operated during 2008. However, because during the life of the contract the subsidiary always had a credit balance, the tax authorities concluded that the subsidiary’s bank deposits played a guarantee role of the payment of the parent company’s debit be- Moreover, authorities concluded that the bank deposits of the subsidiary could not be openly moved because the parent company was the sole share-holder of the Portuguese subsidiary and therefore could determine the decisions of the subsidiary. The tax authorities further remarked that the subsidiary through its deposits allowed lower interest rates to be applied to the financing obtained by the parent company, concluding that the subsidiary’s bank deposits were in practice guarantees. In light of these facts, the tax authorities considered that the remuneration obtained by the subsidiary in its accounts with the bank was not at arm’s length. The court concluded that the cash-pooling agreement was more than a virtual merger of balances in order to optimize debit and credit interest, or existing clauses that created a true guarantee rendered by the Portuguese subsidiary to its parent company, the tax authorities argued. Therefore, according to the court, although the agreement was ...