In 2016 Fertilizer BV had been issued a tax assessment for FY 2012 in which the tax authorities had imposed additional taxable income of €133,076,615. In November 2019 the district court ruled predominantly in favor of the tax authorities but reduced the adjustment to €78.294.312. An appel was filed by Fertilizer BV with the Court of Appeal. Judgement of the Court of Appeal Various issues related to the assessment was disputed before the Court. Dispute 1: Allocation of debt and equity capital to a permanent establishment in Libya in connection with the application of the object exemption. More specifically, the dispute is whether the creditworthiness of the head office was correctly taken as a starting point and a sufficient adjustment was made for the increased risk profile of the permanent establishment. The Court of Appeal answered this question in the affirmative, referring to the capital allocation approach that is regarded as the preferred method for the application of Article 7 of the OECD Model Convention. Dispute 2: Should all claims and liabilities denominated in dollars be valued in conjunction? The mere fact that claims and debts are denominated in the same currency is insufficient to conclude that there is cohesion. The court takes into account the nature of the contracts in the light of the risks present and whether hedging of risks is intended. The Court shall make a separate assessment for each risk to be identified. The Court values the forward exchange contracts USD 200,000,000 and USD 225,000,000 in connection with USD debt I and USD debt II, and the claim of [N SA] in connection with the forward exchange contract USD 60,000,000. Dispute 3: Was the profit of a subsidiary of interested party, [E BV], (deliberately) set too high? Interested party wants to deviate from its own tax return and internal transfer pricing documentation and refers to a report prepared by [W]. The Court of Appeal places the burden of proof on the interested party. In the opinion of the Court of Appeal, it does not follow from the aforementioned report that there is no trade at arm’s length within the group. The Court of Appeal also pointed to the global character of the report, which means that it is not a transfer pricing report. Furthermore, it has not become plausible that the companies with which [E BV] is compared in the report are sufficiently comparable. The interested party has not made it plausible that the profit has been set at a prohibitively high level. Dispute 4: Did the tax inspector rightly make an adjustment of € 42,843,146 in connection with the Supply Agreement concluded between [E BV] and an affiliated company of the interested party and [E BV], [J Ltd]? The Supply Agreement states that [J Ltd] is obliged to purchase the surplus produced by [E BV] with a new factory at cost price plus a mark-up of 5%. For the remaining goods, transfer prices are used which are based on the [concern Transfer Pricing Master File]. The Court of Appeal placed the burden of proof that the transfer price applied to the surplus was at arm’s length on the interested party. In the opinion of the Court of Appeal, the interested party has not provided this evidence. The Court of Appeal ignored the Supply Agreement. This agreement does not reflect the economic reality, since [E BV] is also a ‘fully fledged’ producer with regard to the surplus. The Court of Appeal derives this from the transfer price documentation and the fact that after the conclusion of the Supply Agreement, the functions performed, the investments made and the capital utilisation have (practically) not changed. The transfer price report from [Y] submitted by the interested party does not lead to a different opinion. There is no breach of the principle of equality since the interested party does not substantiate, or substantiates in too general a manner, that its case is comparable to the Starbucks, Nike and Apple cases and the other examples mentioned by it. The fact that the [group] also concluded agreements with third parties that are (somewhat) similar to the Supply Agreement does not lead to a different opinion either. It cannot be determined whether the functions performed, risks run and assets used by these third parties are comparable to the functions performed, risks run and assets used by [E BV]. Finally, the Court of Appeal ruled that the taxation of a possible profit transfer should not be taken in 2011, the year in which the Supply Agreement was agreed upon, but from month to month (year to year) in which the non-business conduct took place. In all, the Judgement of the Court of Appeal resulted in the additional taxable income of Fertilizer BV being reduced to € 65.609.318. Click here for English Translation Click here for other translation ...

The following examples illustrate an important element of the definition of low value-adding intra-group services, namely, that they should not include services which are part of the MNE’s core business. Services that may seem superficially similar in nature (in the example, credit risk analysis) may or may not be low value-adding intra-group services depending on the specific context and circumstances. The examples also illustrate the point that services may not qualify as low value-adding intra group services because in their specific context they create significant risk or unique and valuable intangibles. a) Company A, situated in country A, is a shoe manufacturer and wholesale distributor of shoes in the North-West region. Its wholly-owned subsidiary B, situated in country B, is a wholesale distributor in the South-East region of the shoes manufactured by A. As part of its operations, A routinely performs a credit risk analysis on its customers on the basis of reports purchased from a credit reporting agency. A performs, on behalf of B, the same credit risk analysis with respect to B’s customers, using the same methods and approaches. Under the facts and circumstances, it could be reasonably concluded that the service A performs for B is a low value-adding intra-group service. b) Company X is a subsidiary of a worldwide investment banking group. Company X performs credit risk analysis with respect to potential counterparties for transactions involving financial derivatives contracts and prepares credit reports for the worldwide investment banking group. The credit analyses performed by Company X are utilised by the group in establishing the prices of financial derivatives for the group’s clients. The personnel of Company X have developed special expertise and make use of internally developed, confidential credit risk analysis models, algorithms and software. Under the facts and circumstances of this case, it could not be concluded that the service Company X performs for the worldwide investment banking group is a low value-adding intra-group service ...

Lender GmbH acquired all shares in T GmbH from T in 2012 (year in dispute) for a purchase price of … €. To finance the purchase price of the shares, Lender GmbH took out a loan from its sole shareholder, D GmbH, a loan in the amount of … €, which bore interest at 8% p.a. (shareholder loan). The interest was not to be paid on an ongoing basis, but only on expiry of the loan agreement on 31.12.2021. No collateral was agreed. D GmbH, for its part, borrowed funds in the same amount and under identical terms and conditions from its shareholders, among others from its Dutch shareholder N U.A. In addition Lender GmbH received a bank loan in the amount of … €, which had an average interest rate of 4.78% p.a. and was fully secured. Finally Lender GmbH also received a vendor loan from the vendor T in the amount of … €, which bore an interest of 10 % p.a. and was not secured. The shareholder loan was subordinated to all other liabilities. The tax office issued a tax assessment in 2016 with regard to interest payments on the shareholder loan. According to the tax authorities an interest rate of of 5 % would have been agreed between independent parties. The difference up to the actual interest rate of 8% was therefore considered a hidden profit distribution(vGA) and added to the income of Lender GmbH. A complaint filed by Lender GmbH against the tax assessment was unsuccessful (Cologne Fiscal Court, Judgment of 29.06.2017 – 10 K 771/16.) The appeal before the Bundesfinanzhof was directed against this judgment. Lender GmbH claims that there has been an infringement of substantive law and requests that the contested judgment be set aside and that the the 2012 corporate income tax assessment be annulled. The tax authorities requests that the appeal be rejected. Judgment of the Court (Bundesfinanzhof) When determining the arm’s length loan interest rate for an unsecured shareholder loan, the statutory subordination of shareholder loans (section 39(1)(5) InsO) does not preclude a risk premium when determining the interest rate to compensate for the lack of loan collateralisation. It is contrary to general principles of practice if the court assumes without factual findings that a third party would agree on the same interest rate for a subordinated and unsecured loan as for a secured and senior loan. The judgment of the Cologne Fiscal Court of 29 June 2017 – 10 K 771/16 is set aside and the case is referred back to the Cologne Fiscal Court for a different hearing and decision. Click here for English translation Click here for other translation ...

In 2016 Fertilizer BV had been issued a tax assessment for FY 2012 in which the tax authorities had imposed additional taxable income of €162,506,660. Fertilizer BV is the parent company of a fiscal unity for corporation tax (hereinafter: FU). It is a limited partner in a limited partnership under Dutch law, which operates a factory in [Country 1]. The interested party borrowed the money for the capital contribution to the limited partnership from a wholly-owned subsidiary. The share in profits from the limited partnership was expressed as profit from a permanent establishment. In dispute was the amount of interest attributable to the permanent establishment. The court followed the inspector in allocating – in connection with the [circumstances] in [Country 1] – 75% equity and 25% loan capital to the PE. Furthermore, the FU had deposits and loans in USD. These positions were partly hedged by forward exchange contracts. Fertilizer BV valued these deposits and loans at the historical acquisition price or lower value in use. In dispute between the parties was whether and to what extent the positions should be valued as connected. In the opinion of the court, the mere fact that deposits and loans were denominated in USD did not mean that they should be valued as connected. The court considered part of it to be connected. Fertilizer BV is a production company. It sells its products to affiliated sales organisations at prices derived from market prices. After the commissioning of a new factory, Fertilizer BV produced more than before (hereinafter: the surplus). On the basis of two agreements, Fertilizer BV sold the surplus, at cost price with a surcharge of 5%, to a subsidiary established abroad. In the opinion of the court, no real commercial risk had been transferred to the subsidiary and the inspector rightly corrected the taxable amount. Click here for English Translation Click here for other translation ...

The following examples illustrate an important element of the definition of low value-adding intra-group services, namely, that they should not include services which are part of the MNE’s core business. Services that may seem superficially similar in nature (in the example, credit risk analysis) may or may not be low value-adding intra-group services depending on the specific context and circumstances. The examples also illustrate the point that services may not qualify as low value-adding intra group services because in their specific context they create significant risk or unique and valuable intangibles. a) Company A, situated in country A, is a shoe manufacturer and wholesale distributor of shoes in the North-West region. Its wholly-owned subsidiary B, situated in country B, is a wholesale distributor in the South-East region of the shoes manufactured by A. As part of its operations, A routinely performs a credit risk analysis on its customers on the basis of reports purchased from a credit reporting agency. A performs, on behalf of B, the same credit risk analysis with respect to B’s customers, using the same methods and approaches. Under the facts and circumstances, it could be reasonably concluded that the service A performs for B is a low value-adding intra-group service. b) Company X is a subsidiary of a worldwide investment banking group. Company X performs credit risk analysis with respect to potential counterparties for transactions involving financial derivatives contracts and prepares credit reports for the worldwide investment banking group. The credit analyses performed by Company X are utilised by the group in establishing the prices of financial derivatives for the group’s clients. The personnel of Company X have developed special expertise and make use of internally developed, confidential credit risk analysis models, algorithms and software. Under the facts and circumstances of this case, it could not be concluded that the service Company X performs for the worldwide investment banking group is a low value-adding intra-group service ...