Nutreco España, S.A. had taken on significant debt to finance an acquisition of shares by other foreign group companies. Its role in the acquisition was limited to the channelling of funds. The debt consisted of an intercompany loan of 240 million euros granted by Nutreco Nederland B.V. and an amount of 100 million euros from a centralised treasury system (cash pool) within the Group. Interest payments on these loans totalled more than 30 million euros for the years 2011-2013, which Nutreco España, S.A. deducted from its taxable income. The tax authorities found that the financial arrangement was artificial and put in place only for the purpose of obtaining tax benefits. Deductions of expenses related to the debt was therefore denied and an assessment of additional taxable income issued. An appeal was filed Nutreco España, S.A. that ultimately ended up in the Supreme Court after being dismissed by the National High Court. Judgment The Supreme Court dismissed the appeal filed by Nutreco España, S.A., and upheld the prior judgment by the National High Court that denied the company’s deduction of financial expenses related to a complex cross-border financing structure used to acquire assets in Canada and the United States. The Court concluded that the presence of a cross-border element was not sufficient, in itself, to declare a transaction artificial. The artificiality of the transaction will be determined by analyzing whether the disputed transaction allows the taxable event to be totally or partially avoided or the tax base or debt to be reduced through acts or transactions from which no extra-tax benefits are derived. The financial structure in question—where Nutreco España assumed a debt to fund the acquisition made by other group entities abroad—had no relevant economic or legal effects beyond achieving tax savings. Since it did not generate additional benefits beyond the tax benefits, the operation was artificial, and the taxpayer must regularize the payment of the corresponding taxes. The court affirmed that national anti-abuse rules must be applied in line with EU principles, and that artificial arrangements designed to erode tax bases may be denied tax benefits. Excerpts in English “In short, the artificiality of the operation is constituted by the pursuit exclusively of a tax advantage, and not by the presence of a cross-border element, as the appellant repeatedly argues. 7. The tax administration has correctly identified the tax advantage sought, which consists of Nutreco España S.A. deducting the financial expenses of the loan used to make the aforementioned acquisition, thus eroding the tax base. Likewise, these financial expenses were also deducted in the tax jurisdictions where the group companies that made the acquisition are based. In this way, the Nutreco Group, with the operation designed in terms of how the funds were channelled, achieved a double deduction of the same financial expenses: in Spain and in the countries that finally made the acquisition from the Maple Group, Canada and the USA. It is true that the CJEU judgment of 20 January 2020, C-484/19, Lexel, states that ‘transactions carried out at arm’s length do not constitute purely artificial or fictitious arrangements carried out for the purpose of avoiding the tax normally due on profits generated by activities carried out in the national territory’, although this doctrine does not prevent the application of a national anti-abuse clause, article 15 LGT, provided that, as the court of first instance has done, said clause is interpreted in accordance with EU law to prevent the creation of purely artificial arrangements. Consequently, and in accordance with the case law of the CJEU, the Court of First Instance has found the existence of an abusive practice, consisting of creating a purely artificial arrangement, devoid of economic reality, with the sole purpose of obtaining a tax advantage. (…) In addition to the above, the national anti-abuse clause, article 15 of the General Taxation Law, is applied without distinction as to whether or not the group of companies is cross-border, it only requires that the requirements of the law be met which, in the case under examination, as has been pointed out, are concurrent. In accordance with the case law of the CJEU, the Court of First Instance has found the existence of an abusive practice, consisting of creating a purely artificial arrangement, devoid of economic reality, with the sole objective of obtaining a tax advantage.” Click here for English translation Click here for other translation Link to original Supreme Court Judgment No. 904/2025 ...

“Eswatini Distributor Ltd. is a wholly owned subsidiary of a South African multinational. It had paid its South African parent for various intra-group services – management fees – and deducted these payments from its taxable income. According to Eswatini Distributor Ltd, these costs were legitimately claimed and provided and invoiced by its parent company on arm’s length terms. Following an audit, the tax authorities disallowed part of the tax deduction for the payments and issued an assessment. The main reasons for the assessment were that there was no evidence that the costs had actually been incurred some of the costs were duplicative in nature, and some fell into the category of shareholder activity, and finally that Distributor Ltd. used inappropriate allocation keys for some of the fees. The tax authorities also claimed that the payments constituted tax avoidance and were therefore disallowed under the anti-avoidance provisions (Section 65 of the ITO). Dissatisfied with the assessment, Eswatini Distributor Ltd. filed an appeal with the Revenue Appeals Tribunal, arguing that the mere absence of a service contract on which the services were based (evidence) should not automatically lead to the conclusion that the said services were not provided. It also submitted that the decision of the tax authorities to disallow the deduction of those costs on the ground that they met the requirements of Section 65 of the ITO, namely that they “have the effect of avoiding or deferring liability to any tax, duty, levy or income”, was incorrect and that, on the contrary, the deductions were perfectly legitimate as costs incurred by the Appellant as a result of the services provided to it by its parent company. Judgment  The Tribunal dismissed the appeal and upheld the tax authorities’ assessment. Extracts “The Appellants’ closest attempt to detailing the benefit that the services provide can be found in paragraph 6.2 of the objection letter and paragraph 5(b) of their Appeal letter, where they state that; “…note that the profits made by the subsidiary prior to management fees, was approximately SZL28,5 million (which represents a margin on sales of 29%. This margin is inordinately high, and certainly would not have been achieved by the subsidiary on its own if it was a standalone, business operating independently. more specifically, this margin does not consider all the processes performed and costs incurred by the head office in South Africa that gave rise to RATE/IT012/23 achieving the sales value and profits that it actually achieved.” “…a distinguishing factor that identifies a shareholder activity is that the activity should be in “pursuit” of the ownership interest. This means that the activity must have the overall aim to further that interest. Such furtherance could be the protection of that interest, developments of that interest etc. The ultimate outcome therefore of the service must be one that benefits that interest.” “Noteworthy in this regard is, unlike most jurisdictions of the world Eswatini has not developed a comprehensive General Anti-Avoidance Rule (“GAAR”) which is a rule developed to better decode and guide a countries anti-avoidance enquiry. Further, there is barely any jurisprudential guidance in this regard for Eswatini.” ...

Howmet, a société par actions simplifiée (SAS), is the head of a tax group in which its subsidiary, Alcoa Holding France, now Arconic Holding France (AHF), is integrated. Following an audit of the accounts of these two companies, the tax authorities corrected their taxable profits for the 2011 and 2012 financial years  by disregarding the consequences of a contribution made to the Belgian company Alcoa Wheels Product Belgium (AWPB), now Alcoa Finance and Services Belgium (AFSB), of sums borrowed from the Swiss permanent establishment of a Luxembourg company belonging to the same economic group. It also reinstated the management fees paid by AHF to the group’s American parent company, Alcoa Inc., in AHF’s profits for the 2010 and 2011 financial years. In a ruling handed down on 19 November 2020, the Montreuil Administrative Court upheld Howmet’s claim for discharge of the additional corporate tax resulting from the adjustments based on abuse of rights and the corresponding surcharges, and dismissed the remainder of its claim. In a judgment of 31 March 2023 the Paris Administrative Court of Appeal, on appeal by the tax authorities set aside Articles 1 and 2 of that judgment and ordered Howmet to pay the tax, and dismissed its cross-appeal. An appeal was then filed by Howmet to annul this Judgment. Judgment The Conseil d’Etat rejected the appeal and upheld the decision of the Court of Appeal, ruling that this was an artificial arrangement whose sole purpose was to allow the deduction of interest in taxable income and thereby avoid taxation. Excerpt in English “9. In deducing from all of these circumstances the existence of an artificial arrangement whose sole purpose, by financing the Belgian company through a capital increase rather than through a loan, was to exempt AHF from having to record, as compensation for the interest deducted, income corresponding to interest from the Belgian company, thereby constituting an abuse of rights, the Court, which gave sufficient reasons for its judgment, neither erred in law nor incorrectly characterised the facts of the case. It was therefore able to deduce that the tax authorities were right to add back to the taxable profits of Howmet and AHF interest equivalent to the amounts deducted. 10. Finally, it follows from the foregoing that the Court was also able, without giving insufficient reasons for its judgment or committing an error of law, to reject the argument raised before it to the effect that the tax authorities could, without rejecting the acts described above, have made the same reassessment on the basis that the interest rate on the loans taken out was excessive, in the light of normal commercial management, in order to call into question in part the deductibility of the related interest. In addition, the applicants’ argument that, in the absence of an increase in the capital of the Belgian company AFSB, the main shareholder of the French companies had demanded the distribution of the unused cash which they had allegedly had at their disposal, and which was in any event unjustified, was in any event inoperative, as the disputed rectification stemmed from the fact that, once the acts constituting abuse of rights had been set aside, these sums had to be regarded as having directly financed the Spanish company AIESL.” Click here for English translation Click here for other translation ...

A S.A. had transferred a dividend receivable to an indirect shareholder for the purpose of acquiring other companies. The tax authorities considered the transfer to be a loan, for which A S.A should have received arm’s length interest and issued an assessment on that basis. A complaint was filed by A S.A. with the tax Court, which ruled in favour of A S.A. and dismissed the assessmemt in 2021 An appeal was then filed by the tax authorities with the Supreme Administrative Court. Judgment of the Court The Supreme Administrative Court upheld the decission of the tax court and dismissed the appeal of the tax authorities. According to the Court the local transfer pricing in article 58 of the CIRC, in the wording in force at the time of the facts did not allow for a recharacterization of a transaction, only for a re-quantification. A recharacterization of the transaction would at the time of the facts only be possible under the Portuguese general anti-abuse clause, which required the tax authorities to prove that the arrangement had been put in place for securing a tax advantage. Such evidence had not been presented. Excerpt “In other words, the fact that the transfer of credits arising from ancillary benefits to non-shareholders is not common is not enough to destroy the characteristics of the ancillary obligation set out in the articles of association, which, as is well known, can be transferred – see art. Furthermore, the Tax Authority’s reasoning reveals a total disregard for the rest of the applicable legal regime, namely the restitution regime provided for in Article 213 of the CSC, which gives them the unquestionable character of quasi-equity benefits. In fact, since the admissibility of supplementary capital contributions in public limited companies has been debated for a long time, but with the majority of legal scholars being in favor of such contributions, the enshrinement in the articles of association of the figure of accessory obligations following the supplementary contributions regime appeared as a solution to the possibility of internal financing of the public limited company, (See, for example, Paulo Olavo Cunha in Direito das Sociedades Comerciais, 3rd edition, Almedina, 2007, pages 441 and 442 (in a contemporary annotation with the legal framework in force at the time). ) . Furthermore, as pointed out by the Deputy Attorney General, whose reasoning, due to its assertiveness, we do not hesitate to refer to again, “This situation is not unrelated to the fact that, in the corporate structure in question, the company “D… ” has a majority stake in the company “A…”, and there is even doctrine that defends “the possibility of transferring the credits resulting from the supplementary installments autonomously from the status of partner” – in an explicit allusion to the view taken by Rui Pinto Duarte (Author cited, “Escritos sobre Direito das Sociedades”, Coimbra Editora, 2008). In conclusion: if the Tax Administration believed that the evidence it had found, to which we have already referred, strongly indicated that the transaction in question was really about the parties providing financing to the company “D…, S.A. “, it was imperative that it had made use of the anti-abuse clause (although there are legal scholars who also include article 58 of the CIRC in the special anti-abuse rules – see Rui Duarte Morais, “Sobre a Notção de “cláusulas antiabusos”, Direito Fiscal, Estudos Jurídicos e Económicos em Homenagem ao Prof. Dr. António Sousa Franco III 2006, p.879 /894) and use the procedure laid down in Article 63 of the CPPT, as the Appellant claims. What is not legitimate, however, in these circumstances, “in view of the letter of the law and the teleology of the transfer pricing system as enshrined in the IRC Code and developed in Ministerial Order 1446-C/2001, is to use this system to carry out a sort of half-correction and, in the other half, i.e., For cases of this nature, there is a specific legal instrument in the legal system – the CGAA – specially designed and aimed at combating this type of practice (Bruno Santiago & António Queiroz Martins, “Os preços de transferência na compra e venda de participações sociais entre entidades relacionadas”, Cadernos Preços de Transferência, Almedina, 2013, Coordenação João Taborda Gama). …” Click here for English translation. Click here for other translation ...

The tax authorities had notified the companies GKN Driveline Firenze s.p.a. and GKN Italia s.p.a. of four notices of assessment, relating to the tax periods from 2002 to 2005, as well as 2011. The assessments related to the signing of a leasing contract, concerning a real estate complex, between GKN Driveline Firenze s.p.a. and the company TA. p.a. and the company TAU s.r.l.. A property complex was owned by the company GKN-Birfield s.p.a. of Brunico and was leased on an ordinary lease basis by the company GKN Driveline Firenze s.p.a. Both companies belonged to a multinational group headed by the company GKN-PLC, the parent company of the finance company GKN Finance LTD and the Italian parent company GKN-Birfield s.p.a., which in turn controlled GKN Driveline Firenze s.p.a. and TAU s.r.l. GKN Driveline Firenze s.p.a. expressed interest in acquiring ownership of the real estate complex; the real estate complex, however, was first sold to TAU s. s.r.l. and, on the same date, the latter granted it to the aforesaid company by means of a transfer lease. Further negotiated agreements were also entered into within the corporate group, as the purchase of the company TAU s.r.l. was financed by the company GKN Finance LTD, at the instruction of GKN- PLC, for an amount which, added to its own capital, corresponded to the purchase price of the property complex. The choice of entering into the transferable leasing contract, instead of its immediate purchase, had led the tax authorities to suggest that this different negotiation had had, as its sole motivation, the aim of unduly obtaining the tax advantage of being able to deduct the lease payments for the nine years of the contract while, if the property complex had been purchased, the longer and more onerous deduction of the depreciation allowances would have been required. The office had therefore suggested that the transaction had been carried out with abuse of law, given that the transfer leasing contract had to be considered simulated, with fictitious interposition of TAU s.r.l. in the actual sale and purchase that took place between GKN Driveline Firenze s.p.a. and GKN Birfield s.p.a. The companies filed appeals against the aforesaid tax assessments, which, after being joined, had been accepted by the Provincial Tax Commission of Florence. The tax authorities then appealed against the Provincial Tax Commission’s ruling. The Regional Tax Commission of Tuscany upheld the appeal of the tax authorities, finding the grounds of appeal well-founded. The appeal judge pointed out that the principle of the prohibition of abuse of rights, applicable also beyond the specific hypotheses set forth in Art. 37bis, Presidential Decree no. 600/1973, presupposes the competition of three characterising elements, such as the distorted use of legal instruments, the absence of valid autonomous economic reasons and the undue tax advantage. In the case at hand, the distorted use of the negotiation acts was reflected in the fact that the leasing contract had been implemented in a parallel and coordinated manner with a plurality of functionally relevant negotiation acts in a context of group corporate connection in which each of these negotiation acts had contributed a concausal element for the purposes of obtaining the desired result. In this context, it was presumable that the company TAU s.r.l., which had been dormant for a long time and had largely insufficient capital, had been appropriately regenerated and purposely financed within the same group to an extent corresponding to the cost of the deal and that, therefore, the leasing contract had been made to allow GKN Driveline Firenze s.p.a. to obtain the resulting tax benefits. The appeal court nevertheless held that the penalties were not applicable. GKN Driveline Firenze s.p.a. and GKN Italia s.p.a. filed an appeal with the Supreme Court. Judgment of the Supreme Court The Supreme Court set aside the decision of the Regional Tax Commission and refered the case back to the Regional Tax Commission, in a different composition. Excerpts “The judgment of the judge of appeal moves promiscuously along the lines of the relative simulation of the agreements entered into within the corporate group and the abuse of rights, with overlapping of factual and legal arguments, while it is up to the judge of merit to select the evidentiary material and from it to derive, with logically and legally correct motivation, the exact qualification of the tax case. In the case in point, the trial judge reasoned in terms of abuse of rights, assuming that the leasing transaction was carried out in place of the less advantageous direct sale, in terms of depreciation charges, but, in this context, he also introduced the figure of relative simulation, which entails a different underlying assumption: that is, that the leasing transaction was not carried out, since the parties actually wanted to enter into a direct sale. Also in this case, no specification is made, at the logical argumentative level, of the assumptions on the basis of which the above-mentioned relative simulation was deemed to have to be configured. Having thus identified the legal terms of the question, the reasoning of the judgment does not fully develop any of the topics of investigation that are instead required for the purposes of ascertaining the abuse of rights, both from the point of view of the anomaly of the negotiating instruments implemented within the corporate group and of the undue tax advantage pursued, while, on the other hand, it appears to be affected by intrinsic contradiction, because it is based simultaneously on both categories, abuse of rights and relative simulation, so that it is not clear whether, in the view of the appeal court, the tax recovery is to be regarded as legitimate because the leasing transaction was aimed exclusively at the pursuit of a tax saving or because that undue tax advantage was achieved through the conclusion of a series of fictitious transactions, both in relation to the financing and to the aforementioned leasing transaction in the absence of any real transfer of immovable property. In conclusion, the sixth plea in law ...

GSS Holdings had claimed a loss of USD 22.54 million which the IRS disallowed. In disallowing the loss, the IRS claimed that the loss was not an ordinary business loss, but was incurred as part of a series of transactions that resulted in the sale of capital assets between related parties. The trial court upheld the IRS’s adjustment and GSS Holdings appealed to the Court of Federal Claims. The Court of Federal Claims applied a combination of substance over form and step transaction doctrines to combine two transactions and dismissed GSS Holdings’ claims on that basis. GSS Holdings then appealed to the US Court of Appeals. Opinion of the Court The Court of Appeals found that the Federal Claims Court had misapplied the step transaction doctrine and remanded the case for reconsideration under the correct legal standard. Excerpt “As part of this examination, the Claims Court must determine the outset of the series of transactions, keeping in mind that the series of transactions should be considered as a whole. Comm’r v. Clark, 489 U.S. 726, 738 (1989); see also True, 190 F.3d at 1177; Brown v. United States, 868 F.2d 859, 862 (6th Cir. 1989). The parties dispute the timeframe for the outset, with GSS advocating for the 2006 and 2007 timeframe when the Aaardvark LAPA and First Loss Note agreement were negotiated and entered, and the government advocating for the 2011 timeframe when the Aaardvark LAPA was renewed6 and exercised and when the First Loss Note Account payment was made to BNS. See Appellant’s Br. 33, 44–45; Appellee’s Br. 30–31. Once the outset’s timeframe has been assessed, the Claims Court must determine the intent from the outset, which is an- other disputed issue between the parties. See Falconwood, 422 F.3d at 1349; Appellant’s Br. 46–48; Appellee’s Br. 30–37. If the Claims Court does conclude that the separate transactions were “really component parts of a single transaction intended from the outset to be taken for the purpose of reaching the ultimate result,” then the step transaction doctrine applies. See Falconwood, 422 F.3d at 1349 (citation omitted). The Claims Court should conduct this analysis on remand. We are not suggesting any particular outcome; we are simply instructing the Claims Court to apply the correct legal standard. Even if the Claims Court applied an erroneous legal standard, the government contends that the intent was the same regardless of the timeframe, and that the Claims Court agreed. See Appellee’s Br. 37 (first citing Decision at 489 (“A payment from the First Loss Note [A]ccount was always anticipated to be at least a partial offset of losses resulting from the sale of a distressed asset.”); and then citing Decision at 489 n.22 (“The First Loss Note was always intended to absorb the first loss stemming out of a decline in Liberty[] [Street]’s investments.”)); see also Appellee’s Br. 30–34. In other words, the government con- tends that the same outcome would be reached under the correct legal standard. GSS disagrees, contending that the intent differed at various timeframes. See Appellant’s Br. 46–48; Appellant’s Reply Br. 11–15. Since the Claims Court applied an incorrect legal standard, the Claims Court “should make a new determination under the correct standard in the first instance.” Walther, 485 F.3d at 1152 (declining to reach the merits of a similar argument). To the extent any finding of the Claims Court “is derived from the application of an improper legal standard to the facts, it cannot be allowed to stand.” Id. (citations omitted). “In such a circumstance, this court must remand for new factual findings in light of the correct legal standard.” Id. GSS contends that under the correct legal standard, the step transaction doctrine would not operate to collapse the individual steps into a single integrated transaction for tax purposes. See Appellant’s Br. 44–52. In other words, GSS urges this court to reach a determination under the correct legal standard in the first instance. But just as we will not do so at the government’s request, we will not do so at GSS’s request.” Click here for translation ...

In 2007, Forbes Medi-Tech Inc. (now Deans Knight Income Corporation) was a British Columbia-based drug research and nutritional food additive business in financial difficulty. It had accumulated approximately $90 million of unclaimed non-capital losses and other tax credits. Non-capital losses are financial losses resulting from carrying on a business that spends more than it makes in a given year. Under the Income Tax Act (the Act), a taxpayer can reduce their income tax by deducting non-capital losses from its taxable income. If the taxpayer does not use all, or a portion, of the loss in the year it incurred it, they may carry the loss back three years, or forward 20 years. However, under section 111(5) of the Act, when another entity acquires control of the company, the new owners may not carry over those non-capital losses and deduct them from its future taxes, unless the company continues to operate the same or a similar business. Deans Knight wanted to use its non-capital losses but did not have sufficient income against which to offset them. In early 2008, it entered into a complex investment agreement with venture capital firm Matco Capital Ltd, to help it become profitable. The agreement was drafted in a way that ensured Matco did not acquire control of Deans Knight by becoming the majority shareholder because that would trigger the restriction on carrying over losses under section 111(5) of the Act. However, in effect, Matco gained considerable influence over Deans Knight’s business affairs. It found a separate mutual fund management company that would use Deans Knight as a corporate vehicle to raise money through an initial public offering. That money would then be used to transform Deans Knight into an investment business. This was attractive to Deans Knight because it could make use of its non-capital losses to shelter most of the new business’ portfolio income and capital gains. When Deans Knight filed its tax returns for 2009 to 2012, it claimed nearly $65 million in non-capital losses and other tax credits, thereby reducing its tax liability. The tax authorities reassessed Deans Knight’s tax returns and denied the deductions. The company appealed that decision to the Tax Court of Canada. The Tax Court found that Deans Knight gained a tax benefit through a series of transactions that it concluded primarily for tax avoidance purposes, but that the transactions did not amount to an abuse of the Act, namely section 111(5). The tax authorities appealed to the Federal Court of Appeal, which held that the transactions were abusive. It applied the “general anti-avoidance rule” (GAAR) under the Act to deny Deans Knight’s tax deductions. The GAAR operates to deny tax benefits flowing from transactions that comply with the literal text of the Act, but that nevertheless constitute abusive tax avoidance. Deans Knight appealed to the Supreme Court. Judgment of the Supreme Court The Court dismissed the appeal of Deans Knight and upheld the decision from the Court of Appeal. It found the transactions were abusive and the GAAR applied to deny the tax benefits. Despite complying with the literal text of a provision in the Act, a transaction is abusive if it frustrates its rationale. The rationale behind section 111(5) of the Act is to prevent corporations from being acquired by unrelated parties in order to deduct their unused losses against income from another business for the benefit of new shareholders. Deans Knight was fundamentally transformed through a series of transactions that achieved the outcome that the Act sought to prevent, while narrowly circumventing the restriction in section 111(5). Excerpt “the appellant was gutted of any vestiges from its prior corporate ‘life’ and became an empty vessel with [unused deductions]”.  ...

Howmet, a société par actions simplifiée (SAS), is the head of a tax group in which its subsidiary, Alcoa Holding France, now Arconic Holding France (AHF), is integrated. Following an audit of the accounts of these two companies, the tax authorities corrected their taxable profits for the 2011 and 2012 financial years by disregarding the consequences of a contribution made to the Belgian company Alcoa Wheels Product Belgium (AWPB), now Alcoa Finance and Services Belgium (AFSB), of sums borrowed from the Swiss permanent establishment of a Luxembourg company belonging to the same economic group. It also reinstated the management fees paid by AHF to the group’s American parent company, Alcoa Inc., in AHF’s profits for the 2010 and 2011 financial years. In a ruling handed down on 19 November 2020, the Montreuil Administrative Court upheld Howmet’s claim for discharge of the additional corporate tax resulting from the adjustments based on abuse of rights and the corresponding surcharges, and dismissed the remainder of its claim. An appeal was then filed by the tax authorities to annul this Judgment. Judgment The Paris Administrative Court of Appeal, on appeal by the tax authorities set aside Articles 1 and 2 of the judgment of the Administrative Court and ordered Howmet to pay the tax, and dismissed its cross-appeal. Click here for English translation Click here for other translation ...

According to the Canadian Budget 2023 the government will release for consultation draft legislative proposals to amend the general anti avoidance rule (GAAR) which was added to the Canadian Income Tax Act in section 245 back in 1988. If abusive tax avoidance is established, the GAAR applies to deny the tax benefit that was unfairly created. The GAAR has helped to tackle abusive tax avoidance in Canada but it requires modernizing to ensure its continued effectiveness. The following amendments to the GAAR is proposed: introducing a preamble (containing interpretive rules and statements of purpose); changing the avoidance transaction standard (from a “primary purpose” test to a “one of the main purposes” test); introducing an economic substance rule (indicators for lack in economic substance); introducing a penalty (25% of the amount of the tax benefit); and extending the reassessment period in certain circumstances (three-year extension to the normal reassessment period). The revised GAAR is expected to come into force as of 1 January 2024. See the relevant sections of the Canadian Budget 2023 below ...

3 February 2023 the Inland Revenue of New Zealand issued an interpretation statement explaining the Commissioner’s view of the law on tax avoidance in New Zealand. It sets out the approach the Commissioner will take to the general anti-avoidance provisions in the Income Tax Act 2007 – ss BG 1 and s GA 1. Where s BG 1 applies, s GA 1 enables the Commissioner to make an adjustment to counteract a tax advantage obtained from or under a tax avoidance arrangement. The Supreme Court in Ben Nevis considered it desirable to settle the approach to the relationship between s BG 1 and the specific provisions in the rest of the Act. This approach is referred to as the Parliamentary contemplation test. The Parliamentary contemplation test was confirmed as the proper and authoritative approach to applying s BG 1 by the Supreme Court in Penny and Frucor. The statement is based on and reflects the view of the Supreme Court as set out in Ben Nevis, and applied in Penny and Frucor ...

It is disputed between the parties whether the A Corp. resident in the USA – a so-called S corporation – or its shareholders are entitled to full exemption and reimbursement of the capital gains tax with regard to a profit distribution by a domestic subsidiary of A Corp. (S-Corporation). A Corp. (S-Corporation) is a corporation under US law with its registered office in the United States of America (USA). It has opted for taxation as an “S corporation” under US tax law and is therefore not subject to corporate income tax in the USA; instead, its income is taxed directly to the shareholders resident in the USA (Subchapter S, §§ 1361 to 1378 of the Internal Revenue Code (IRC)). The shareholders of A Corp. (S-Corporation) are exclusively natural persons resident in the USA as well as trusts established under US law and resident in the USA, the beneficiaries of which are in turn exclusively natural persons resident in the USA. For several years, the A Corp. (S-Corporation) has held a 100% share in A Deutschland Holding GmbH. On the basis of a resolution on the appropriation of profits dated November 2013, A Deutschland Holding GmbH distributed a dividend in the amount of € (gross) to A Corp. (S-Corporation) on … December 2013. Of this, after deduction of the share for which amounts from the tax contribution account are deemed to have been used within the meaning of section 27 KStG (section 20 (1) no. 1 sentence 3 EStG), an amount of € …. € to the income from capital assets. A Deutschland Holding GmbH retained capital gains tax on this amount in the amount of 25% plus solidarity surcharge and thus a total of € … (capital gains tax in the amount of € … plus solidarity surcharge in the amount of €) and paid this to the tax office B. In a letter dated 14 March 2014, A Corp. (S-Corporation) informally applied for a full refund of the withheld capital gains tax plus solidarity surcharge. By letter of 21 May 2014, referring to this application, the company submitted, among other things, a completed application form “Application for refund of German withholding tax on investment income”, in which it had entered “A Corp. (S-Corporation) for its shareholders” as the person entitled to a refund . The shareholders were identified from an attached document. By decision of 4 September 2014, the tax authorites set the amount to be refunded to A Corp. (S-Corporation) as the person entitled to a refund at … (capital gains tax in the amount of … € as well as solidarity surcharge in the amount of €). This corresponds to a withholding tax reduction to 15 %. The tax authorities refused a further refund on the grounds that, due to the introduction of § 50d, para. 1, sentence 11 EStG in the version applicable at the time (EStG old version), the concession under Article 10, para. 2, letter a) DTT-USA could not be claimed. The residual tax was 15%, since the eligibility of the partners of A Corp. (S-Corporation) for the agreement had to be taken into account. This decision also took into account a further profit distribution by the A Deutschland Holding GmbH to the A Corp. (S-Corporation) from … December 2012 in the amount of …. €, for which a refund of capital gains tax in the amount of …. € and solidarity surcharge in the amount of …. € was granted. In this respect, the tax authorities already granted the request during the complaint proceedings by means of a (partial) remedy notice of 8 May 2015 and increased the capital gains tax to be refunded from € … to € … as requested. (cf. p. 70 ff. VA). The tax treatment of the 2012 profit distribution is therefore not a matter of dispute. Judgment of the Tax Court The Court decided in favour of A Corp. (S-Corporation) and its shareholders. Excerpt “125 An application to this effect has been made in favour of plaintiffs 2) to 17). The defendant correctly interpreted the application received by it on 22 May 2014, which expressly identifies the first plaintiff on behalf of its partners as being entitled to reimbursement, as such. Similar to a litigation status in the proceedings before the fiscal court, the discerning senate considers the filing of an application by a company “on behalf of its shareholders” to be effective, especially since the second to seventeenth plaintiffs promptly confirmed that the claim (of the first plaintiff) for a reduction of the withholding taxes to zero had been asserted by them or in their interest via the first plaintiff (cf. letter of 15 June 2015 as well as the attached confirmations of all shareholders, pp. 85 et seq. VA). The fact that the first plaintiff did not explicitly refer to this in the first informal application letter of 14 March 2014 (see file, pp. 1 f. VA) as well as in the letter of 21 May 2014 (see file, pp. 6 f. VA) is irrelevant. This is because the addition of the application “for its shareholders” can be found on the formal application both under point I “person entitled to reimbursement” and in the heading of the second page of the application, which is the relevant point. The fact that item IV of the application for the granting of the nesting privilege provides for an American corporation as the person entitled to a refund is harmless in this context. As a result of the provision of § 50d, para. 1, sentence 11 EStG, old version, which had only been introduced shortly before, there was not yet a different application form. In addition, the application of this provision was associated with considerable uncertainties, as its effect was disputed from the beginning. Finally, point IV of the application also states that the intercompany privilege under treaty law (in this case Article 10, para. 3 DTT-USA) is to be claimed on the merits. Moreover, the letter of 14 ...

The issue was whether the benefits provided by the Argentina-Spain DTC were available to Empresa Distribuidora La Plata S.A., which was owned by two Spanish holding companies, Inversora AES Holding and Zargas Participaciones SL, whose shareholders were Uruguayan holding companies. The Argentine Personal Assets Tax provided that participations in Argentine companies held by non-resident aliens were generally subject to an annual tax of 0.5% or 0.25% on the net equity value of their participation. However, under the Argentina-Spain DTC, article 22.4, only the treaty state where the shareholders were located (Spain) had the right to tax the assets. On this basis, Empresa Distribuidora La Plata S.A. considered that its shares held by Spanish holding companies were not subject to the Personal Assets Tax. The tax authorities disagreed, finding that the Spanish holding companies lacked substance and that the benefits of the Argentina-Spain DTC were therefore not applicable. Judgment of the Tax Court The Tax Court ruled in favour of the tax authorities. The Court held that the treaty benefits did not apply. The Court agreed with the findings of the tax authorities that the Spanish companies had been set up for the sole purpose of benefiting from the Spain-Argentina DTC and therefore violated Argentina’s general anti-avoidance rule. Excerpt “According to the administrative proceedings, based on the background information requested from the International Taxation Directorate of the Spanish Tax Agency and other elements collected by the audit, it appears that: a) the company Inversora AES Americas Holding S.L., is made up as partners by AES Argentina Holdings S.C.A. and AES Platense Investrnents Uruguay S.C.A., both Uruguayan companies; b) the company Zargas Participaciones S.L., has as its sole partner ISKARY S.A., also a Uruguayan company. The purpose of the former is the management and administration of securities representing the equity of companies and other entities, whether or not they are resident in Spanish territory, investment in companies and other entities, whether or not they are resident in Spanish territory, and it has only three employees (one administrative and two in charge of technical areas) and has opted for the Foreign Securities Holding Entities Regime (ETVE). The second company, whose purpose is the management and administration of securities representing the equity of non-resident entities in Spanish territory, has had no employees on its payroll since its incorporation, and has also opted for the ETVE regime. Neither of the two companies is subject to taxation in their own country similar to that in the present case. According to the information provided by the Spanish Tax Agency (see fs. 34 of the Background Zargas Participaciones SL), there is no record that it has any shareholdings in the share capital of other companies. The evidence and circumstances of the case show that the Spanish companies lack genuine economic substance, with the companies AES Argentina Holdings S.C.A. and AES Platense Investments Uruguay S.C.A. (both Uruguayan) holding the shares of Inversora AES Americas Holding S.L. and the company ISKARY S.A. (also Uruguayan) holding 100% of the shares of Zargas Participaciones S.L. Thus, it is reasonable to conclude that the main purpose of their incorporation was to obtain the benefits granted by the Convention by foreign companies from a third country outside the scope of application of the treaty, without the plaintiff having been able to prove with the evidence produced in the proceedings that the Spanish companies carried out a genuine economic activity and that, therefore, they were not mere legal structures without economic substance (in the same sense CNCAF, Chamber I, in re “FIRST DATA CONO SUR S.R.L.” judgment of 3/12/2019). Consequently, the tax criterion should be upheld. With costs.” Click here for English Translation Click here for other translation ...

The Spanish tax authorities have published a report on the applicability of their domestic General Anti-Abuse Rule (GAAR). In the report, a conduit arrangement aimed at benefiting from an exemption at source on the payment of interest to EU residents is described. Click here for English translation ...

Anti Tax Avoidance measures are now beeing implemented across the EU with effect as of 1 January 2019. The EU Anti Tax Avoidance Package (ATAP) was issued by the European Commission in 2016 to counter tax avoidance behavior of MNEs in the EU and to align tax payments with value creation. The package includes the Anti-Tax Avoidance Directive, an amending Directive as regards hybrid mismatches with third countries, and four Other measures. The Anti-Tax Avoidance Directive (ATAD), COUNCIL DIRECTIVE (EU) 2016/1164 of 12 July 2016, introduces five anti-abuse measures, against tax avoidance practices that directly affect the functioning of the internal market. 1) Interest Limitation Rule  – Reduce profitshifting via exessive interest payments (Article 4) 2) Exit Taxation – Prevent tax motivated movement of valuable business assets (eg. intangibles) across borders (Article 5) 3) General Anti-Avoidance Rule (GAAR) – Discourage Artificial Arrangements (Article 6) 4) Controlled Foreign Company (CFC) – Reduce profits shifting to low tax jurisdictions (Article 7, 8) 5) Hybrid Mismatch Rule – Reduce Hybrid Mismatch Possibilities (Article 9 + ATAD II) The first measure, interest limitation rule aims to prevent profitshifting activities that take place via exessive interest payments . This rule restricts deductibility of interest expenses and similar payments from the tax base. The second measure, exit taxation, deals with cases where the tax base (eg. valuable intangible assets) is moved across borders. The third measure is the general antiavoidance rule (GAAR) which allows countries to tackle artificial tax arrangements not govened by rational economic reasons. The fourth measure is the controlled foreign company (CFC) rule, which is designed to deter profit-shifting to low-tax countries. The fifth measure, the rule on hybrid mismatches, aims to limit cases of double non-taxation and assymetric deductions resulting from discrepancies between different tax systems. ATAD II, COUNCIL DIRECTIVE (EU) 2017/952) of 29 May 2017, an amending Directive as regards hybrid mismatches with third countries, contains a set of additional rules to neutralize hybrid mismatches where at least one of the parties is a corporate taxpayer in an EU Member State, thus expanding the application to Non-EU countries. The second directive also addresses hybrid permanent establishment (PE) mismatches, hybrid transfers, imported mismatches, reverse hybrid mismatches and dual resident mismatches. (Article 9, 9a and 9b) Other measures included in the Anti Tax Avoidance Package Package are mainly aimed at sharing information and improving knowledge among EU Member States. 1) Country-by-Country Reporting (CbCR) – Improve Transparency (EU Directives on Administrative cooporation in the field of taxation) 2) Recommendation on Tax Treaties – Address Treaty Abuses 3) External Strategy – More Coherent Dealing with Third Countries 4) Study on Aggressive Tax Planning – Improve Knowledge (2015 Report on Structures of Aggressive Tax Planning and Indicators and 2017 Report on Aggressive Tax Planning Indicators)   The Country-by-Country Reporting (CbCR) requirement introduces a reporting requirement on global income allocations of MNEs to increase transparency and provide Member States with information to detect and prevent tax avoidance schemes. The Recommendation on Tax Treaties provides Member States with information on how to design their tax treaties in order to minimise aggressive tax-planning in ways that are in line with EU laws. The External Strategy provides a coherent way for EU Member States to work with third countries, for instance by creating a common EU black list of Low Tax Jurisdictions . The Study on Aggressive Tax Planning investigates corporate tax rules in Member States that are or may be used in aggressive tax-planning strategies. Most of the measures introduced in ATAD I are now implemented and in effect as of 1 January 2019. ATAD II, addressing hybrid mismatches with Non-EU countries, is also being implemented and will be in effect as of 1 January 2020. A Non official version of the 2016 EU Anti Tax Avoidance Directive with the 2017 Amendments ...

IKEA Handel og Eiendom AS had deducted from its taxable income interest on an inter-company loan that had been established as the result of an intricate restructuring. The tax authorities issued a notice of assessment denying tax deduction of the interest payments based on the Norwegian non-statutory anti-avoidance rule. Appeals were filed by IKEA Handel og Eiendom AS and the cases ended up before the Supreme Court. Judgment. The Supreme Court ruled in favour of the tax authorities and upheld the assessment. According to the court, IKEA Handel og Eiendom AS was not entitled to a tax deduction for the interest paid on the loan. The Norwegian non-statutory anti-avoidance rule applied to the combined transactions as their main purpose was tax avoidance. The court clarified that the statutory anti-avoidance rule in section §13-1 is limited to transfer pricing and thin capitalisation cases and does not apply to equity transactions that are lawfully made under Norwegian company law. Excerpts in English “(81) In my view, section 13-1 does not apply where the series of dispositions includes actual equity dispositions that are lawfully made under Norwegian company law. The assessment themes contained in the non-statutory cut-through rule are suitable for assessing such cases. This also limits the challenges of drawing the line between the scope of application of the statutory and the non-statutory rule. For the sake of clarity, I add that section 13-1 can of course be applied to the parts of such a series of transactions that the provision covers, such as transfer pricing and thin capitalisation. However, as I have mentioned, the borrowing and interest expenses in our case are not affected by section 13-1. (82) I have therefore concluded that there is no authority in section 13-1 of the Taxation Act to deny Ikea Handel og Eiendom AS the right to the disputed deduction in the company’s income that section 6-40 basically provides.” …. (93) In my view, it is clear that this standard must also be applied to unnecessary methods of carrying out an otherwise necessary step in the transaction. The State has argued that the company itself could have established the property group, which would not have created the need for a loan-financed repurchase. It can also be questioned whether, in order to achieve the commercial purpose, it was necessary to transfer the shares in the property group Ikea Eiendom Holding AS to the company through a loan-financed purchase at fair value instead of the company acquiring them as a contribution in kind. (94) In my view, there is no doubt that tax savings were the main – perhaps the only – motivating factor in the choice of procedure. The procedure resulted in Ikea Handel og Eiendom AS incurring large costs in connection with the acquisition of properties that the company had just disposed of free of charge. These costs far exceeded the tax savings the company achieved through the interest deduction. The way in which the series of transactions were made can therefore have had no other purpose than to create a debt burden in Ikea Handel og Eiendom AS that provided a basis for a tax deduction in Norway, which overall was favourable for the Ikea group as such. I cannot see that the company has rebutted this. (95) I have therefore concluded that the main purpose of the way in which the series of transactions was carried out was to save tax. The basic condition is then fulfilled.” Click here for English translation Click here for other translation ...

On 13 June 2013, a Statement was released by New Zealand’s Inland Revenue Service on the interpretation of Tax Avoidance provisions. This statement outlines the Commissioner’s view of the law on tax avoidance in New Zealand and sets out the approach the Commissioner will take to application of the general anti-avoidance provision, based on the three-stage test for assessing whether an arrangement is tax avoidance as provided by the Supreme Court Judgment in the Ben Nevis case. In Ben Nevis case the Supreme Court indicated it intended to settle the approach regarding the relationship between s BG 1 and the rest of the Income Tax Act. This has been acknowledged in all relevant judicial decisions released since Ben Nevis. Accordingly, the Commissioner considers that the statement is based upon and reflects the view of the court in Ben Nevis ...

A Holding ApS is the owner of all shares in F. AG, domiciled in G. (Canton of Schaffhausen), which it acquired in December 1999 for a total price of Fr. 1. F. AG produces consumer goods. In accordance with the resolution of the general meeting of F. AG on 30 November 2000, a dividend of Fr. 5,500,000 was distributed. Of this amount, F. Ltd paid Fr. 1,925,000 as withholding tax to the Swiss Federal Tax Administration and the remaining amount of Fr. 3,575,000 to Holding ApS. On 15 December 2000, the latter in turn decided to distribute a dividend of 26,882,350 Danish kroner to C. Ltd. On 19 December 2000, A Holding ApS submitted an application to the competent Danish authority for a refund of the withholding tax in the amount of Fr. 1,925,000. The Danish authority confirmed the application and forwarded it to the Federal Tax Administration. By decision of 3 April 2003, the Federal Tax Administration rejected the application for a refund of the withholding tax. The reason given was that A Holding ApS was not engaged in any real economic activity in Denmark; it had been established solely for the purpose of availing itself of the benefits of the Agreement of 23 November 1973 between the Swiss Confederation and the Kingdom of Denmark for the Avoidance of Double Taxation in respect of Taxes on Income and on Capital. The appeals filed by A Holding ApS against this decision were dismissed by the Federal Tax Administration in its objection decision of 4 September 2003 and subsequently by the Federal Tax Appeals Commission in its decision of 3 March 2005. The A Holding ApS filed an administrative appeal with the Federal Administrative Court on 18 April 2005. It requested that the decision of the Federal Tax Appeals Commission be annulled and that the Federal Tax Administration be ordered to pay it the amount of CHF 1,925,000 plus 5% interest thereon since 29 January 2001. Judgment of the Court of Appeal The Court found that the Appeals Commission was correct in refusing to refund the withholding tax claimed by A Holding ApS on the grounds of abuse of the agreement. The appeal therefore proves to be unfounded and must be dismissed. Exceerpt “3.6.4 The complainant does not meet any of the conditions just mentioned. As the lower court found binding for the Federal Supreme Court (cf. Art. 105 para. 2 OG), it has neither its own office premises nor its own staff in Denmark. Accordingly, it did not record any fixed assets or any rental or personnel expenses. The “director” of the complainant, E. who apparently controls the entire group and is resident in Bermuda, performs all management functions according to the complainant’s own statement of facts and does not receive any compensation for this. Thus, the complainant itself does not carry out any effective business activity in Denmark; administration, management of current business and corporate management are not carried out there. It only has a formal seat in Denmark. Significantly, the complainant also immediately forwarded the dividends to its parent company. The complainant’s arguments that it also intends to hold other European shareholdings of the entire group are irrelevant. What is decisive is that, according to the above, the complainant ultimately proves to be a letterbox company and that, apart from tax considerations, no economically significant reasons for its presence in Denmark are apparent. The complainant’s objection that, in view of its detailed statements in the proceedings before the court, it is untenable for the Appeals Commission to claim that it [the complainant] “undisputedly” has no facilities and activities at all, does not lead to a different conclusion. The statements in question before the Appeals Commission do not contradict the above findings. The complainant has failed to show what significant activities it carries out in Denmark itself. If, on the one hand, it is established that the person resident in Bermuda carries out all management activities for the holding company and that there are no other staff, it is not sufficient for the complainant to merely allege, in an unsubstantiated manner, that it works with external resources as far as necessary and that the Danish company H. (as the complainant’s auditors) carries out such outsourced functions in a professional manner. 3.6.5 Other reasons that would justify the granting of the advantages of the agreement (cf. n. 19 and 21 of the OECD Commentary on Art. 1 OECD-MA 2003 and 1995 respectively) are also not given here. Even if the aforementioned circular letter 1999 of the Swiss Federal Tax Administration is used for comparison, no contradiction can be ascertained with regard to point 3 (critical with regard to the decision challenged here: Markus Reich/Michael Beusch, Entwicklungen im Steuerrecht, SJZ 101/2005 p. 266). According to that point 3, holding companies that exclusively or almost exclusively manage and finance participations may use more than 50 per cent of the income eligible for treaty relief to meet the claims of persons not entitled to treaty relief, provided that these expenses are justified on business grounds and can be substantiated; holding companies that engage in other activities in addition to managing and financing participations may not use more than 50 per cent of the income eligible for treaty relief (critically: Silvia Zimmermann, Kreisschreiben vom 17. 12.1998 on the abuse decision, StR 54/1999 p. 157 f.). The regulation in the circular presupposes that the company domiciled in Switzerland actually manages and finances the participations from here. From a mirror image perspective – insofar as such a mirror image may be possible at all – this requirement would not be met by the complainant, which is domiciled in Denmark and is a letterbox company, as explained above (E. 3.6.4). 3.6.6 Finally, the model clause listed in point 21.4 of the OECD Commentary on the OECD-MA 2003 would not lead to any other conclusion. According to this clause, the provisions of Art. 10 DTA (dividends) “shall not apply” if “the principal intention or one of the principal ...

The first rulings where the IRS proposed recharacterizing transactions that could be considered abusive through use of transfer pricing provisions. Judgment of the Supreme Court The court instead applied the general anti-abuse doctrine. “It is earnestly contended on behalf of the taxpayer that, since every element required by the foregoing subdivision (B) is to be found in what was done, a statutory reorganization was effected, and that the motive of the taxpayer thereby to escape payment of a tax will not alter the result or make unlawful what the statute allows. It is quite true that, if a reorganization in reality was effected within the meaning of subdivision (B), the ulterior purpose mentioned will be disregarded. The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted. United States v. Isham, 17 Wall. 496, 84 U. S. 506; Superior Oil Co. v. Mississippi, 280 U. S. 390, 280 U. S. 395-396; Jones v. Helvering, 63 App.D.C. 204, 71 F.2d 214, 217. But the question for determination is whether what was done, apart from the tax motive, was the thing which the statute intended. The reasoning of the court below in justification of a negative answer leaves little to be said. When subdivision (B) speaks of a transfer of assets by one corporation to another, it means a transfer made “in pursuance of a plan of reorganization” [§ 112(g)] of corporate business, and not a transfer of assets by one corporation to another in pursuance of a plan having no relation to the business of either, as plainly is the case here. Putting aside, then, the question of motive in respect of taxation altogether, and fixing the character of the proceeding by what actually occurred, what do we find? Simply an operation having no business or corporate purpose — a mere device which put on the form of a corporate reorganization as a disguise for concealing its real character, and the sole object and accomplishment of which was the consummation of a preconceived plan, not to reorganize a business or any part of a business, but to transfer a parcel of corporate shares to the petitioner. No doubt, a new and valid corporation was created. But that corporation was nothing more than a contrivance to the end last described. It was brought into existence for no other purpose; it performed, as it was intended from the beginning it should perform, no other function. When that limited function had been exercised, it immediately was put to death. In these circumstances, the facts speak for themselves, and are susceptible of but one interpretation. The whole undertaking, though conducted according to the terms of subdivision (B), was in fact an elaborate and devious form of conveyance masquerading as a corporate reorganization, and nothing else. The rule which excludes from consideration the motive of tax avoidance is not pertinent to the situation, because the transaction, upon its face, lies outside the plain intent of the statute. To hold otherwise would be to exalt artifice above reality and to deprive the statutory provision in question of all serious purpose.” Click here for translation ...