The owner of a buy sell distributor in the pharmaceutical sector had entered into a total return swap with the company and on that basis the company had deducted a commission corresponding to 85% of net profits from its taxable income. The tax authorities disallowed the deduction claiming the swap-arrangement was not at arm’s length. The commission-payments received by the owner was instead considered a non-deductible hidden distribution of profits (dividend) and a withholding tax of 15% was applied. An appeal was filed with the Administrative Tribunal. Judgement of the Administrative Tribunal The Tribunal found the appeal of “TR Swap SARL” unfounded and decided in favor of the tax authorities. Excerpt “However, the court is obliged to note that the commissions paid to Mr … on the basis of the … and corresponding to 85% of the net profits of the company … amount to … euros, … euros, … euros and … euros during the disputed tax years 2014 to 2017, i.e. a total of … euros, as shown in the management decision of 7 June 2019, these amounts not being contested by the claimant. However, the amounts made available to the companies …, respectively … by Mr … correspond, on the one hand, to a maximum annual amount of … euros, in respect of the administrative operating costs of the company … as well as, on the other hand, as it appears from the documents entitled “Margin Calculation Sheet” from April 2013 to March 2018 issued by the plaintiff, to an amount of …, within the framework of the line of credit, an amount that does not bear interest and that should be subject, according to the terms agreed between the parties concerned, to reimbursement so as to constitute only a loan. Thus, Mr …, by paying annually a maximum amount of … euros, i.e. a total maximum of … euros during the disputed years from 2014 to 2017, received, by way of commission and after the repayment of the credit line granted, a total amount of … euros, elements which allow the court to hold that the tax authorities have provided sufficient elements to hold that Mr … … was granted an advantage that exceeds a priori the market conditions between third parties, so as to cast doubt on the transactions currently at issue and reversing the burden of proof. It should then be noted that in order to establish the economically justified nature of the distribution of the net profits of the company … between Mr … and itself, the plaintiff only relied on a document describing “the method used to determine the transfer price, as well as all the data selected to calculate the transfer price over the period 2014-2018″, which however only contains interest rates provided without any other explanation and whose author is not known, so that it is devoid of any evidential value. Furthermore, in the face of the state party’s challenges, the plaintiff failed to submit to the court any element that would make it possible to establish the existence and reality of the risks allegedly weighing on Mr. … and justifying the payment of commissions to the latter according to the terms and conditions set out in the …. The Director [of the Tax Administration] was therefore right to hold that the tax office could legitimately consider that the disputed amounts paid to Mr … in the context of the … concluded with the plaintiff during the tax years 2014 to 2017 did not comply with the usual market conditions between third parties and that it thus concluded that there was a hidden distribution of profits. It follows from all of the above considerations and in the absence of any other pleas that the appeal under review must be dismissed as unfounded.” Click here for English translation Click here for other translation ...

Union Castle Ltd. claimed a tax deduction of £ 39 million related to losses on derivative contracts. After acquiring derivative contracts, Union Castle issued bonus A shares to it’s parent company, Caledonia, which carried a dividend equal to 95% of the cash-flows arising on the close-out of the contracts. Therefore Union Castle had written off 39 million of the value of the contracts in it’s accounts. The tax authorities disagreed that a tax loss had been suffered and issued an assessment disallowing the loss. The Tribunal found in favor of the tax authorities. Capital transactions are subject of the UK transfer pricing rules. Issuing of shares meets the requirements of “making or imposing conditions in commercial and financial relations” as required by Article 9 of the OECD Model Convention. OECD TPG apply to debt financing. Share transactions, which have an effect on income taxation, must be within the UK transfer pricing rules. The Cases was then brought before the Court of Appeal where the appeals were dismissed. “The overall result, if my Lords agree, is that both appeals are dismissed. In the case of Union Castle’s appeal, I agree with the UT’s conclusions on the “loss” and “arise from” issues, but I have come to a different conclusion on the “fairly represent” issue and I would dismiss the appeal on that ground as well as on the “arise from” issue.” ...

In this case, Union Castle Ltd. calimed a tax deduction of £ 39 million related to losses on derivative contracts. After acquiring derivative contracts, Union Castle issued bonus A shares to it’s parent company, Caledonia, which carried a dividend equal to 95% of the cash-flows arising on the close-out of the contracts. Therefore Union Castle had written off 39 million of the value of the contracts in it’s accounts. The tax authorities disagreed that a tax loss had been suffered and issued an assesment disallowing the loss. The Tribunal found in favor of the tax authorities. Capital transactions are subject of the UK transfer pricing rules. Issuing of shares meets the requirements of “making or imposing conditions in commercial and financial relations” as required by Article 9 of the OECD Model Convention. OECD TPG apply to debt financing. Share transactions, which have an effect on income taxation, must be within the UK transfer pricing rules. Click here for translation ...