In a press release dated November 7, 2022, TELE2 announced a SEK 1,8 billion win related to tax deductions for foreign exchange losses on intra-group loans, that had previously been disallowed by the Swedish tax authorities in an assessment issued back in 2019. According to the tax authorities the company would not – at arms length – have agreed to a currency conversion of certain intra-group loans which resulted in the loss. Tele2 appealed the decision to the Administrative Court where, during the proceedings, the authorities acknowledged deductions in part of the currency loss – SEK 745 millions. Hence, at issue before the Court was disallowed deductions of the remaining amount of SEK 1 billion. In January 2021 the administrative court dismissed TELE2’s appeal in regards of the remaining amount of SEK 1 billion. Tele2 then filed an appeal with the Court of Appeal. The Court of Appeal decided in favour of Tele2 and granted the full tax deduction. According to the court, a reasonable and probable explanation for the currency loss had been provided by the company. Excerpts: ” Although it may be considered somewhat remarkable that the revocation clause in the Form of Selection Note does not more clearly reflect the party intent and purpose that the company claims the clause has, the Court of Appeal considers that the company has provided a reasonable and probable explanation in this respect. … The Court of Appeal also considers that the alleged intention of the parties and the purpose of the withdrawal clause are supported by the chronology of events leading up to the buy-out of Asianet from MTS. When it became clear that the transaction would go ahead, the withdrawal clause was removed, moreover without changing the market interest rate on the loans to MTS. In addition, the Court of Appeal considers that there is some ambiguity in how the revocation clause should be read with regard to the possibility of revoking the conversion retroactively, i.e. with effect from 1 September 2015. In conclusion, the Court of Appeal considers that it is not clear that it has been a realistic option for the company to withdraw the conversion on the basis of the withdrawal clause. The fact that the company did not revoke the conversion cannot therefore be used as a basis for denying the company a deduction for the remaining exchange rate loss of SEK 1 095 764 000 after tax on the basis of the adjustment rule. … The Administrative Court of Appeal considers that the company incurred a risk of foreign exchange losses through the conversion on 1 September 2015 due to the decoupling of the KZT from the USD. However, the decoupling took place on 20 August 2015, at which time the KZT exchange rate fell by approximately 30%. Subsequently, the exchange rate recovered and at the time of the conversion, according to the company’s report, which was not challenged by the Swedish Tax Agency, it was slightly higher than at the time of the decoupling from the USD. Although there must have been a significant risk of a further fall in the exchange rate, the Court of Appeal considers that KZT could not be considered to be in free fall at the time of conversion. Nor can it be considered that it was clear that it was highly unlikely that the conversion would not result in an exchange rate loss for the company. It also appears that a functioning banking and foreign exchange market existed in Kazakhstan after the KZT was decoupled from the USD. The interest rate received by the company from MTS both before and after the conversion has been in line with market conditions. The Administrative Court of Appeal has also, as stated above, found no reason to question the company’s description of how the conditions for MTS to repay the loans to the company improved after the conversion. In conclusion, the Administrative Court of Appeal considers that the conversion cannot be used as a basis for denying the company a deduction for the remaining exchange loss of SEK 1 095 764 000 by means of after-taxation, on the basis of the correction rule. The appeal must therefore be allowed.” TELE2 Press Release dated November 7, 2022 ...

Another possible reason for the use of a captive insurance by an MNE group in addition to those listed is the difficulty or impossibility of getting insurance coverage for certain risks. Where such risks are insured by a captive insurance this may raise questions as to whether an arm’s length price can be determined and the commercial rationality of such an arrangement (see Section D.2 of Chapter I) ...

More difficult transfer pricing issues may arise, however, if the contract instrument is entered into by the treasury entity or another MNE group entity, with the result that the positions are not matched within the same entity, although the MNE group position is protected. Where off-setting hedging contract instruments exist within the MNE group but not within the same entity, or where contract instruments do not exist within the MNE group but the MNE group position is protected (as may be the case with a natural hedge, for example), it would be inappropriate to match the hedges within the same entity or recognise hedging transactions where written contracts do not exist without a comprehensive analysis of the accurate delineation of the actual transactions under Section D.1 of Chapter I (for example, the existence of a deliberate concerted action to engage in a hedge of a specific risk) and the commercial rationality of the transactions under Section D.2 of Chapter I ...

Where it is considered that the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner in comparable circumstances, the guidance at Section D.2 of Chapter I may also be relevant ...

The conditions of financial transactions between independent enterprises will be the result of various commercial considerations. In contrast, an MNE group has the discretion to decide upon those conditions within the MNE group. Thus, in an intra-group situation, other considerations such as tax consequences may also be present ...

Based on these findings, it can be concluded that Company A continues to perform the same functions and assume the same risks as before the restructuring took place. In particular, Company A continues to have the capability and actually performs control functions in relation to the risk of exploitation of the intangibles. It also carries on the functions related to the development, maintenance and execution of the worldwide marketing strategy. Company Z has no capability to perform control functions, and does not in fact perform the control functions needed to assume the intangible related risks. Accordingly, the accurate delineation of the transaction after the restructuring may lead to the conclusion that this is in substance a funding arrangement between Company A and Company Z, rather than a restructuring for the centralisation of intangible management. An assessment may be necessary of the commercial rationality of the transaction based on the guidance in Section D.2 of Chapter I taking into account the full facts and circumstances of the transaction ...

As indicated in paragraph 8.33, the guidance in Chapter VI on hard-to-value intangibles may equally apply in situations involving CCAs. This will be the case if the objective of the CCA is to develop a new intangible that is hard to value at the start of the development project, but also in valuing contributions involving pre-existing intangibles. Where the arrangements viewed in their totality lack commercial rationality in accordance with the criteria in Section D.2 of Chapter I, the CCA may be disregarded ...

This section sets out circumstances in which the transaction between the parties as accurately delineated can be disregarded for transfer pricing purposes. Because non-recognition can be contentious and a source of double taxation, every effort should be made to determine the actual nature of the transaction and apply arm’s length pricing to the accurately delineated transaction, and to ensure that non-recognition is not used simply because determining an arm’s length price is difficult. Where the same transaction can be seen between independent parties in comparable circumstances (i.e. where all economically relevant characteristics are the same as those under which the tested transaction occurs other than that the parties are associated enterprises) non-recognition would not apply. Importantly, the mere fact that the transaction may not be seen between independent parties does not mean that it should not be recognised. Associated enterprises may have the ability to enter into a much greater variety of arrangements than can independent enterprises, and may conclude transactions of a specific nature that are not encountered, or are only very rarely encountered, between independent parties, and may do so for sound business reasons. The transaction as accurately delineated may be disregarded, and if appropriate, replaced by an alternative transaction, where the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner in comparable circumstances, thereby preventing determination of a price that would be acceptable to both of the parties taking into account their respective perspectives and the options realistically available to each of them at the time of entering into the transaction. It is also a relevant pointer to consider whether the MNE group as a whole is left worse off on a pre-tax basis since this may be an indicator that the transaction viewed in its entirety lacks the commercial rationality of arrangements between unrelated parties ...

The consequences of risk allocation in Example 3 in paragraph 1.85 depend on analysis of functions under step 3. Company A does not have control over the economically significant risks associated with the investment in and exploitation of the asset, and those risks should be aligned with control of those risks by Companies B and C. The functional contribution of Company A is limited to providing financing for an amount equating to the cost of the asset that enables the asset to be created and exploited by Companies B and C. However, the functional analysis also provides evidence that Company A has no capability and authority to control the risk of investing in a financial asset. Company A does not have the capability to make decisions to take on or decline the financing opportunity, or the capability to make decisions on whether and how to respond to the risks associated with the financing opportunity. Company A does not perform functions to evaluate the financing opportunity, does not consider the appropriate risk premium and other issues to determine the appropriate pricing of the financing opportunity, and does not evaluate the appropriate protection of its financial investment. In the circumstances of Example 3, Company A would not be entitled to any more than a risk-free return as an appropriate measure of the profits it is entitled to retain, since it lacks the capability to control the risk associated with investing in a riskier financial asset. The risk will be allocated to the enterprise which has control and the financial capacity to assume the risk associated with the financial asset. In the circumstances of example, this would be Company B. Company A does not control the investment risk that carries a potential risk premium. An assessment may be necessary of the commercial rationality of the transaction based on the guidance in Section D.2 taking into account the full facts and circumstances of the transaction. (Company A could potentially be entitled to less than a risk-free return if, for example, the transaction is disregarded under Section D.2.) ...

In exceptional circumstances, it may be the case that no associated enterprise can be identified that both exercises control over the risk and has the financial capacity to assume the risk. As such a situation is not likely to occur in transactions between third parties, a rigorous analysis of the facts and circumstances of the case will need to be performed, in order to identify the underlying reasons and actions that led to this situation. Based on that assessment, the tax administrations will determine what adjustments to the transaction are needed for the transaction to result in an arm’s length outcome. An assessment of the commercial rationality of the transaction based on Section D.2 may be necessary ...

A Spanish subsidiary – SGL Carbon Holding SL – had significant financial expenses derived from an intra-group loan granted by the parent company for the acquisition of shares in companies of the same group. The taxpayer argued that the intra-group acquisition and debt helped to redistribute the funds of the Group and that Spanish subsidiary was less leveraged than the Group as a whole. The Spanish tax authorities found the transactions lacked any business rationale other than tax avoidance and therefor disallowed the interest deductions. The Court of appeal upheld the decision of the tax authorities. The court found that the transaction lacked any business rationale and was “fraud of law” only intended to avoid taxation. The Court also denied the company access to MAP on the grounds that Spanish legislation determines: The decision was appealed by SGL Carbon to the Supreme Court. Judgement of the Supreme Court The Supreme Court dismissed the appeal of SGL CARBON and upheld the judgment. Click here for English translation Click here for other translation ...

A non-interest-bearing loan had been granted by GI Group S.p.A., to a related company – Goldfinger Limited – in Hong Kong, in order to acquire a 56% shareholding in the Chinese company Ningbo Gi Human Resources Co. Limited. The Italien tax authorities had issued an assessment, where an interest rate on the loan had been determined and an amount equal to the interest calculated on that basis had been added to the taxable income of GI Group S.p.A. GI Group brought this assessment to the Regional Tax Commission where a decision was rendered setting aside the assessment. This decision was appealed to the Supreme Court by the tax authorities. Judgement of the Supreme Court The Supreme court upheld the appeal of the tax authorities and referred the case back to the Regional Tax Commission. According to the Supreme Court, the decision of the Tax Commission dit not comply with the principles of law concerning the subject matter of evidence and the burden of proof on tax authorities and the taxpayer. Excerpts: “…In conclusion, according to the Court, “such discipline, being aimed at repressing the economic phenomenon of transfer pricing, i.e. the shifting of taxable income as a result of transactions between companies belonging to the same group and subject to different national laws, does not require the administration to prove the avoidance function, but only the existence of “transactions” between related companies at a price apparently lower than the normal one” “according to the application practice of the Italian Revenue Agency (Circular No. 6/E of 30 March 2016 on leveraged buy-outs), the reclassification of debt (or part of it) as a capital contribution should represent an “exceptional measure”. Moreover, it is not excluded that free intra-group financing may have a place in the legal system where it can be demonstrated that the deviation from the arm’s length principle is due to “commercial reasons” within the group, related to the role that the parent company assumes in supporting the other companies of the group; “ “…the Regional Commission did not comply with the (aforementioned) principles of law concerning the subject-matter of the evidence and the criterion for sharing the burden of proof, between the tax authorities and the taxpayer, on the subject of international transfer pricing. In essence, the examination of the trial judge had to be oriented along two lines: first, it had to verify whether or not the tax office had provided the evidence, to which it was entitled, that the Italian parent company had carried out a financing transaction in favour of the foreign subsidiary, as a legitimate condition for the recovery of the taxation of the interest income on the loan, on the basis of the market rate observable in relation to loans with sufficiently “comparable” characteristics and provided to entities with the same credit rating as the associated debtor company (see the OECD Report 2020), the determination of which is quaestio facti referred to the judge of merit; secondly, once this preliminary profile had been established, also on the basis of the principle of non-contestation, it had to be verified whether, for its part, the company had demonstrated that the non-interest-bearing loan was due to commercial reasons within the group, or in any event was consistent with normal market conditions or whether, on the contrary, it appeared that that type of transaction (i.e. the loan of money) between independent companies operating in the free market would have taken place under different conditions. Instead, as stated above (see p. 2 of the “Findings”), the C.T.R. required the Office to demonstrate facts and circumstances extraneous to the onus pro bandi of the Administration, such as the existence of an interest of Goldfinger Ltd in obtaining and remunerating the loan and, again, that there had been other similar onerous intra-group loans; Click here for English translation Click here for other translation ...

The Swedish group TELE2, one of Europe’s largest telecommunications operators, had invested in an entity in Kazakhstan, MTS, that was owned via a joint venture together with an external party. Tele2 owned 51% of the Joint venture and MTS was financed by Tele2’s financing entity, Tele2 Treasury AB, which, during 2011-2015, had issued multiple loans to MTS. In September 2015, the currency on the existing internal loans to MTS was changed from dollars to KZT. At the same time a ‘Form of Selection Note’ was signed according to which Tele2 Treasury AB could recall the currency denomination within six months. A new loan agreement denominated in KZT, replacing the existing agreements, was then signed between Tele2 Treasury AB and MTS. In the new agreement the interest rate was also changed from LIBOR + 4.6% to a fixed rate of 11.5%. As a result of these contractual changes to the loan agreements with MTS, Tele2 Treasury AB in its tax filing deducted a total currency loss of SEK 1 840 960 000 million for FY 2015. Following an audit, the Swedish tax authorities issued an assessment where the tax deduction for the full amount had been disallowed. However, during the proceedings at Court the authorities acknowledged deductions for part of the currency loss – SEK 745 196 000 – related to the period between 22 October to 31 December 2015. Hence, at issue before the Court was disallowed deductions of the remaining amount of SEK 1 095 794 000. Decision of the Court The Administrative Court ruled in favor of the tax authorities. Tele2 Treasury AB could not deduct exchange rate losses resulting from the loan arrangements with MTS related to the period between 1 September and 21 October 2015. “…there have been no reasons to assume that MTS has risked bankruptcy, and that the company’s right to interest and repayments would thus have been in jeopardy. Thus, MTS’s financial position cannot be a reason to believe that the currency conversion would have been commercially justified. With regard to commerciality, the court considers it strange that an independent lender would take great risks to secure the financing when the borrower and another external player are to carry out a merger. That the company assumed responsibility for getting MTS financing in place speak instead of that it was the financial interests of the common interests that prompted the decision to conduct currency conversion. The court thus considers that the company cannot be considered to have any significant interest in securing MTS financing. In this context, the company has stated that other companies within the Tele2 Group’s financial interests must be taken into account when assessing the current issue. However, as stated by the Administrative Court above, the relationship with any other companies in a partnership with the trader shall not be taken into account. In this context, the company has referred to the Court of Appeal in Gothenburg’s judgment of 30 September 2011 in case no. 5854-10. However, the Administrative Court cannot, based on the circumstances and reasoning in the judgment, read out any general conclusions that could provide support for the company’s view in the current cases. The Administrative Court therefore considers that the company’s reasons for the conversion cannot be considered to be any other than reasons attributable to the common interest with MTS.” According to a press release from TELE2 the decision will be appealed. Click here for translation ...

Where it is considered that the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner in comparable circumstances, the guidance at Section D.2 of Chapter I may also be relevant ...

The conditions of financial transactions between independent enterprises will be the result of various commercial considerations. In contrast, an MNE group has the discretion to decide upon those conditions within the MNE group. Thus, in an intra-group situation, other considerations such as tax consequences may also be present ...

At issue was the transfer of taxable assets from a shareholder to a 100% owned company, “VSR Inc”. This transfer of resulted in an understatement of profits in a controlled sale of vehicle scrapping rights. Following an audit, the tax authority concluded that the rights had been acquired in the previous quarter from the one transferred and that a sale value below cost could not be justified. According to the tax authorities the arrangement lacked economic or commercial substance. The sole purpose had been to lower the overall taxation. An revised tax assessment – and a substantial fine – was issued by the tax authorities. VSR filed an appeal. Judgement of the Court The court dismissed the appeal and decided in favor of the tax authorities. “Since it is apparent from the above that the above transactions were intended to transfer taxable material from the applicant’s sole proprietorship to the associated company under the name of ” “, TIN and to tax them at a lower average tax rate, all the above transactions are therefore artificial arrangements which are not consistent with normal business behaviour and lead to a significant tax advantage without any assumption of business risk on the part of ” “, TIN Because, for each of the 2005 withdrawal rights, which is identical to a vehicle registration number, the tax authority identified the corresponding purchase document and determined the total acquisition value of these rights at the amount of six hundred and six thousand one hundred and sixty euros (€ 606,160.00), i.e. an average acquisition price per withdrawal right of € 302.32. Consequently, the taxable amount transferred, in the form of an artificial arrangement, from the applicant’s sole proprietorship to the associated company with the name ” “, VAT number , amounts to € 405,580.00 (€ 606,160.00 – € 200,580.00). In the light of the foregoing, the applicant’s claims concerning the tax authority’s unsubstantiated assessment of the existence of artificial arrangements and the absence of the element of intention are rejected as unfounded. Since the public administration is bound by the principle of legality, as laid down in Article 26(1)(b) of the Staff Regulations, the Commission is bound by the principle of proportionality. 2, 43, 50, 50, 82, 83 and 95 & 1 of the Constitution (Council of State 8721/1992, Council of State 2987/1994), which implies that the administration must or may take only those actions provided for and imposed or permitted by the rules laid down by the Constitution, legislative acts, administrative regulatory acts adopted on the basis of legislative authorisation, as well as by any rule of higher or equivalent formal force to them. Since the review of constitutionality is a matter for the courts and does not fall within the competence of the administrative bodies, which are required to apply the existing legislative framework, it is inadmissible and is not being examined in the context of the present action. Consequently, the applicant’s allegation of a breach of the principle of economic freedom in Article 5 of the Constitution, the principle of proportionality in Article 25 para. 1 of the Constitution and the requirements of the Charter of Fundamental Rights of the European Union is rejected as being unfounded. Because the applicant’s claim that the excess amount already paid by ” “, TIN, as income tax (EUR 118 073,21) should be deducted from the income tax assessed on the applicant’s sole proprietorship, TIN, is rejected as unfounded in substance and in law, since there is no relevant provision in the tax legislation providing for such a deduction. With regard to the individual claim that the amount of the income difference found by the audit for his sole proprietorship of € 405,580.00 should be added to the expenses of the I.C.E., this is a matter that should be raised and dealt with by the I.C.E., which is a separate tax entity, and not by the applicant as a natural person, and is therefore irrelevant. “ Click here for English translation Click here for other translation ...

A Spanish subsidiary – SGL Carbon Holding SL – had significant financial expenses derived from an intra-group loan granted by the parent company for the acquisition of shares in companies of the same group. The taxpayer argued that the intra-group acquisition and debt helped to redistribute the funds of the Group and that Spanish subsidiary was less leveraged than the Group as a whole. The Spanish tax authorities found the transactions lacked any business rationale other than tax avoidance and therefor disallowed the interest deductions. The Court held in favor of the authorities. The court found that the transaction lacked any business rationale and was “fraud of law” only intended to avoid taxation. The Court also denied the company access to MAP on the grounds that Spanish legislation determines: Article 8 Reglamento MAP: Mutual agreement procedure may be denied, amongst other, in the following cases: … (d) Where it is known that the taxpayer’s conduct was intended to avoid taxation in one of the jurisdictions involved. (…) Click here for translation ...

Based on these findings, it can be concluded that Company A continues to perform the same functions and assume the same risks as before the restructuring took place. In particular, Company A continues to have the capability and actually performs control functions in relation to the risk of exploitation of the intangibles. It also carries on the functions related to the development, maintenance and execution of the worldwide marketing strategy. Company Z has no capability to perform control functions, and does not in fact perform the control functions needed to assume the intangible related risks. Accordingly, the accurate delineation of the transaction after the restructuring may lead to the conclusion that this is in substance a funding arrangement between Company A and Company Z, rather than a restructuring for the centralisation of intangible management. An assessment may be necessary of the commercial rationality of the transaction based on the guidance in Section D.2 of Chapter I taking into account the full facts and circumstances of the transaction ...

As indicated in paragraph 8.33, the guidance in Chapter VI on hard-to-value intangibles may equally apply in situations involving CCAs. This will be the case if the objective of the CCA is to develop a new intangible that is hard to value at the start of the development project, but also in valuing contributions involving pre-existing intangibles. Where the arrangements viewed in their totality lack commercial rationality in accordance with the criteria in Section D.2 of Chapter I, the CCA may be disregarded ...

This section sets out circumstances in which the transaction between the parties as accurately delineated can be disregarded for transfer pricing purposes. Because non-recognition can be contentious and a source of double taxation, every effort should be made to determine the actual nature of the transaction and apply arm’s length pricing to the accurately delineated transaction, and to ensure that non-recognition is not used simply because determining an arm’s length price is difficult. Where the same transaction can be seen between independent parties in comparable circumstances (i.e. where all economically relevant characteristics are the same as those under which the tested transaction occurs other than that the parties are associated enterprises) non-recognition would not apply. Importantly, the mere fact that the transaction may not be seen between independent parties does not mean that it should not be recognised. Associated enterprises may have the ability to enter into a much greater variety of arrangements than can independent enterprises, and may conclude transactions of a specific nature that are not encountered, or are only very rarely encountered, between independent parties, and may do so for sound business reasons. The transaction as accurately delineated may be disregarded, and if appropriate, replaced by an alternative transaction, where the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner in comparable circumstances, thereby preventing determination of a price that would be acceptable to both of the parties taking into account their respective perspectives and the options realistically available to each of them at the time of entering into the transaction. It is also a relevant pointer to consider whether the MNE group as a whole is left worse off on a pre-tax basis since this may be an indicator that the transaction viewed in its entirety lacks the commercial rationality of arrangements between unrelated parties ...

The consequences of risk allocation in Example 3 in paragraph 1.85 depend on analysis of functions under step 3. Company A does not have control over the economically significant risks associated with the investment in and exploitation of the asset, and those risks should be aligned with control of those risks by Companies B and C. The functional contribution of Company A is limited to providing financing for an amount equating to the cost of the asset that enables the asset to be created and exploited by Companies B and C. However, the functional analysis also provides evidence that Company A has no capability and authority to control the risk of investing in a financial asset. Company A does not have the capability to make decisions to take on or decline the financing opportunity, or the capability to make decisions on whether and how to respond to the risks associated with the financing opportunity. Company A does not perform functions to evaluate the financing opportunity, does not consider the appropriate risk premium and other issues to determine the appropriate pricing of the financing opportunity, and does not evaluate the appropriate protection of its financial investment. In the circumstances of Example 3, Company A would not be entitled to any more than a risk-free return as an appropriate measure of the profits it is entitled to retain, since it lacks the capability to control the risk associated with investing in a riskier financial asset. The risk will be allocated to the enterprise which has control and the financial capacity to assume the risk associated with the financial asset. In the circumstances of example, this would be Company B. Company A does not control the investment risk that carries a potential risk premium. An assessment may be necessary of the commercial rationality of the transaction based on the guidance in Section D.2 taking into account the full facts and circumstances of the transaction. (Company A could potentially be entitled to less than a risk-free return if, for example, the transaction is disregarded under Section D.2.) ...

In exceptional circumstances, it may be the case that no associated enterprise can be identified that both exercises control over the risk and has the financial capacity to assume the risk. As such a situation is not likely to occur in transactions between third parties, a rigorous analysis of the facts and circumstances of the case will need to be performed, in order to identify the underlying reasons and actions that led to this situation. Based on that assessment, the tax administrations will determine what adjustments to the transaction are needed for the transaction to result in an arm’s length outcome. An assessment of the commercial rationality of the transaction based on Section D.2 may be necessary ...

A Norwegian subsidiary of an international group (Hess Oil), refinanced an intra-group USD loan two years prior to the loans maturity date. The new loan was denominated in Norwegian kroner and had a significantly higher interest rate. The tax authorities reduced the interest payments of the Norwegian subsidiary pursuant to section 13-1 of the Tax Act for fiscal years 2009 – 2011, thereby increasing taxable income for years in question with a total of kroner 262 million. The Court of Appeal found for the most part in favor of the tax administraion. Under the circumstances of the case, neither the claimed refinancing risk nor the currency risk could sufficiently support it being commercially rational for the subsidiary to enter into the new loan agreement two years prior to the maturity date of the original USD loan. When applying the arm’s length principle, the company’s refinancing risk had to be based on the Norwegian company’s actual situation as a subsidiary in the Hess Oil group. Click here for translation ...

The case involved export transactions carried out by a company domiciled in Brazil, Marcopolo, manufacturing bus bodies (shells) which were sold to subsidiary trading companies domiciled in low tax jurisdictions (Jurisdição com Tributação Favorecida). The trading companies would then resell the bus bodies (shells) to unrelated companies in different countries. The tax authorities argued that the sale of the bus bodies to the intermediary trading companies carried out prior to the sale to the final customers lacked business purpose and economic substance and were therefore a form of abusive tax planning. The Court reached the decision that the transactions had a business purpose and were therefore legally acceptable. Click here for translation ...

In this ruling, the Swiss Federal Supreme Court comments on the application of the arm’s length principel and the burden of proff in Switzerland. “Services, which have their legal basis in the investment relationship, are to be offset against the taxable income of the company to the extent that they would otherwise not be granted to a third party under the same circumstances or not to the same extent and would not constitute a capital repayment. This rule of the so-called third-party comparison (or the principle of “dealing at arm’s length”) therefore requires that even legal transactions with equity holders or between Group companies be conducted on the same terms as would be agreed with external third parties on competitive and market conditions.” “Swiss Law – with the exception of individual provisions – does not have any actual group law and treats each company as a legally independent entity with its own bodies which have to transact the business in the interest of the company and not in that of the group, other companies or the controlling shareholder. Legal transactions between such companies are therefore to be conducted on the same terms as they would be agreed with external third parties. In particular, the Executive Committee (or the controlling shareholder) is not allowed to distribute the profits made by the various companies freely to these companies>… ” “In the area of non-cash benefits, the basic rule is that the tax authority bears the burden of proof of tax-increasing and increasing facts, whereas the taxable company bears the burden of all that the tax abolishes or reduces. In particular, the authority is responsible for proving that the company has rendered a service and that it has no or on reasonable consideration in return. If the authority has demonstrated such a mismatch between performance and consideration, it is for the taxable company to rebut the presumption. If the company can not do that, it bears the consequences of the lack of evidence. This applies in particular if it makes payments that are neither accounted for nor documented…” Furthermore, the Federal Supreme Court disallows transfer of tax losses where the absorbed subsidiary is an empty shell. The question addressed is whether the subsidiary, at the time of its absorption, was still engaged in active contract R&D. Only if this this was the case, the deduction of losses at the level of the absorbing parent company was permissible. Click here for translation ...

This case was about the qualification of capital transfers to a US subsidiary – whether the capital should be qualified as a loan (as done by the company) or as a equity contribution (as agrued by the tax administration). The Supreme Court concluded that the capital transfers to the subsidiary as a whole should be classified as loans. The form chosen by the company (loan) had an independent commercial rationale and Section 13-1 of the Tax Code did not allow for reclassification of the capital transfer The Supreme Court ruled in favor of Telecomputing AS. Click here for translation ...

“X Beheer B.V.” was founded in 1992 and has been part of the A-group as a holding company ever since. The shares of “X Beheer B.V.” were transferred against the issue of depositary receipts to a trust office foundation. The depository receipt holders of “X Beheer B.V.” were also holders of the depository receipts of shares of F B.V. (hereinafter: F), formerly the holding company of the A-group. In 1995, a reorganisation took place as a result of the wish of a number of depositary receipt holders to dispose of their interests in F and “X Beheer B.V.”. However, the remaining group of depositary receipt holders did not have the financial means to buy out those depositary receipt holders, after which it was decided to establish the (take-over) holding company G Holding B.V. (hereinafter: Holding). The intention was that G Holding B.V. would gradually buy up packages of depositary receipts from depositary receipt holders who wished to sell. After four transactions, at the end of 1997 G Holding B.V. held 278 depositary receipts for shares in “X Beheer B.V.” (23.16%) and 38 depositary receipts for shares in F B.V. (7.3%). The purchases of these depositary receipts involved a total amount of Fl. 10,235,760. The purchase price was fully financed by a loan from “X Beheer B.V.” to G Holding B.V. It was intended that G Holding B.V., which had no other assets or financing, would repay the loan from “X Beheer B.V.” from a dividend stream to be generated from “X Beheer B.V.” and F B.V. The loan from “X Beheer B.V.” to G Holding B.V. was classified by “X Beheer B.V.” as a current account, to which the interest due was credited annually. The interest rate was 4.7% in 1996, 4.96% in 1997, 5.25% in 1998 and 5.63% in 2000. The balance of this loan rose from Fl. 4,526,692 at the end of 1995, through Fl. 10,717,470 at the end of 1997 and Fl. 12,509,550 at the end of 1999 to Fl. 13,213,837 at the end of 2000. During the term, a total amount of NLG 115,030 (in three different tranches) was repaid on the loan, which amount came from dividends paid by F B.V. A written loan agreement was never drawn up and a repayment schedule for the loan was never established. Collateral for the loan was neither requested nor provided. A Group’s results had been under pressure since the loan was taken out, partly due to changed market conditions, different production techniques and increasing competition. Losses were incurred in all financial years from 1996 to 2000. The total loss in these five years (commercial) amounted to Fl. 24,619,216. “X Beheer B.V.”‘s equity was negative since 1997. Partly as a result of these losses and this equity position, no dividend was ever paid from the A-group to G Holding B.V. In February 2001 “X Beheer B.V.” transferred its claim on G Holding B.V., with a nominal value of NLG 13,198,000, to F for the fair value of NLG 6,205,400. The G Holding B.V. shares were also sold for Fl. In “X Beheer B.V.”s corporation tax return for 2000, an additional provision of NLG 2,000,000 was made in respect of the loan to G Holding B.V., after a provision of NLG 5,000,000 had already been made in 1999. The tax authorities did not accept the 2,000,000 write off on the loan and disallowed the deduction. A complaint was filed by “X Beheer B.V.” which was later dismissed by the Court of Appeal. An appeal was then filed with the Supreme Court. Judgement of the Supreme Court The Supreme Court upheld the decision of the Court of Appeal and dismissed the appeal filed by “X Beheer B.V.”. Excerpt “3.5. The Court’s opinion that an independent third party would not have taken out the money loan under the circumstances outlined by the Court is of a factual nature, and not incomprehensible in the light of the circumstances taken into account by the Court – in particular the fact that no security was requested and provided – and in view of the circumstance that Holding, which did not have any other assets or any other financing, would have had to repay the loan from the interested party from a dividend flow to be generated from the interested party, among others. It follows from the Court’s judgment that – barring special circumstances – it must be assumed that the interested party accepted the full debtor risk with the intention of serving the interest of Holding in its capacity as shareholder. The mere fact that Holding was not a majority shareholder of the interested party does not alter this. Neither the Court’s ruling nor the documents in the case reveal that any facts or circumstances have been established or put forward to justify the conclusion that special circumstances as referred to above apply in this case. 3.6. It follows from the above that the Court of Appeal has correctly concluded that the interested party may not charge the Dfl 2,000,000 write-down on its loan to Holding to its result in the year under review. The complaints directed against the opinion of the Court of Appeal mentioned above in 3.3 and its conclusion cannot therefore lead to cassation. 3.7. It follows from the above that the remaining complaints directed against the opinion of the Court of Appeal – and the further grounds given – that the provision of money by the interested party to Holding should not be regarded as a business loan, fail for lack of interest.” Click here for English translation Click here for translation ...