SAS Itron France (a manufacturer and distributor of water, electricity and gas meters) was the subject of a tax audit for the financial years 2012 and 2013, which resulted in an assessment. The tax authorities considered that the transfer pricing applied by the group had resulted in an understatement of taxable income in France and a transfer of profits to a Hong Kong-based distributor of the group. An appeal was filed by SAS Itron France and in a ruling handed down on 2 December 2021, the Administrative Court annulled the assessment. The tax authorities filed an appeal against this ruling. Judgement of the Court The Administrative Court of Appeal dismissed the appeal and decided in favor of SAS Itron France. Excerpt in English “…In order to calculate the transfer price to be set by SAS Itron France in its relations as a producer with its group distributors, the tax authorities followed the profit-sharing method defined at group level, applicable to relations between its various entities, and, after a functional analysis of the company and taking into account the respective contribution of the producer and distributor to the costs and risks for each of the eight functions defined and for each of the three main product lines (water-gas-electricity), it finally retained a distribution of the margin between producers and distributors of 53% and 47% respectively for the “gas” product line and 51% and 49% for the other two lines. By comparing the respective turnover of SAS Itron France as a producer and that of the group’s foreign distributors relating to sales of SAS Itron France products, it estimated that the respondent’s turnover as a producer, determined by applying a cost-plus method with margin rates differentiated according to product category, ranging from 14% to 35%, showed that SAS Itron France’s profit was insufficient in relation to the overall margin sharing targets (producer and seller) mentioned of 51% or 53%, constituting an advantage within the meaning of Article 57 of the General Tax Code. It also noted that no correction, as provided for by the transfer pricing method at group level, had been implemented. In the absence of any alleged quid pro quo, and despite the adjustments determined on appeal in respect of the benefits granted to SAS Itron France by certain group companies and the neutralisation of benefits granted to distributors in an amount of less than 30,000 euros, the tax authorities consider that they have demonstrated the undervaluation of transfer prices to the detriment of the company as a producer, and the undue reduction in its tax base. 5. However, it appears from the investigation that, in order to reconstitute the transfer prices between SAS Itron France as a producer and its other partners, distributors, in the Itron group, the tax authorities used, on the one hand, the margin of the distributing entities after deducting the sale price of SAS Itron France’s products, without taking into account the distributor’s own operating expenses (cost of discounting ; commissions paid to agents; rebates and discounts; product shipping costs; insurance costs incurred in transporting products; customs duties; product packaging costs), even though these expenses contribute to the distributors’ share of the Group’s net margin to which they should be entitled. On the other hand, it deducted their direct expenses from the margin of the manufacturing entities, including SAS Itron France, to which the gross margin rates mentioned in the previous point apply under the cost plus method. Without calling into question the parameters used by SAS Itron France to determine its transfer prices as a producer (costs used and margin rates mentioned, determined within an arm’s length interval), it thus carried out a comparison of different margins, gross for the distributing entities and net for the producing entities. If, as stated in point 3 of this judgment, the existence of a shortfall in the net margin accruing to the producer, compared with the net margin target assigned to it under the profit split method defined at group level, is likely to give rise to a presumption of the existence of an advantage granted by the producer to the distributors within the meaning of Article 57 of the General Tax Code; in the present case, as its criticism of the calculation of the net margins of SAS Itron France was unfounded, the administration did not establish the existence of such an advantage. 6. Furthermore, although the tax authorities maintain that SAS Itron France’s documentation setting out the group’s transfer pricing policy requires adjustments to be made in the event of a significant difference between the transfer price resulting from this method and the economic reality, such adjustments, as the respondent points out, are provided for only in exceptional circumstances and under a procedure that derogates from the cost-plus method. According to appendix 5 of the document on the group’s transfer pricing method provided by SAS Itron France, they are lawful only in the presence of an exceptional flow of a regular amount, i.e. over a period of time, and if three conditions are met: existence of new markets or invitations to tender; existence of a turnover exceeding 10% of the distributor’s revenue; existence of a variation in the distributor’s turnover of at least 500,000 euros. In this respect, it is not clear from the investigation that exceptional circumstances of the kind mentioned above arose during the period in dispute, requiring an adjustment to the margin charged by Itron France. Consequently, the tax authorities have not provided any evidence that the adjustments should have been made in order to justify the appropriateness of the method used and the resulting transfer prices. 7. In view of the foregoing, the plea that the pricing method defined at group level was wrongly disregarded in favour of the cost-plus method applied by SAS Itron France has no bearing on the outcome of the present dispute.” Click here for English translation Click here for other translation ...

Since 2012, the French company SASU Alchimedics has been owned by Sinomed Holding Ltd, the holding company of a group of the same name set up by a Chinese resident domiciled in the British Virgin Islands. SASU Alchimedics was engaged in the manufacture and marketing of products using electro-grafting technology for biomedical applications and the licensing and assignment of patents in the field of electro-grafting technologies. SASU Alchimedics was subject to an audit for the financial years 2014 and 2015, as a result of which the tax authorities increased its income for the financial years ended 31 December 2013, 2014 and 2015 by the price of services not invoiced to Sinomed Holding Ltd. In addition, the non-invoicing of these services was considered to be a transfer of profits abroad within the meaning of Article 57 of the French General Tax Code and the amounts were therefore also subject to withholding tax. The tax authorities considered that SASU Alchimedics had committed an abnormal act of management by not re-invoicing to its parent company the services provided in connection with the “development and defence of patents”. The price of the services reintegrated as an indirect transfer of profits was determined by applying to the amount of the expenses recorded a cost plus 5%, considered to be a normal margin. These amounts were used as the basis for calculating the withholding tax, which is the only issue in this case. SASU Alchimedics appealed against the assessment and, by judgment of 2 December 2002, the Administrative Court rejected its application for a refund of the withholding tax. An appeal was then lodged with the Administrative Court of Appeal. Judgement of the Court The Administratibe Court of Appeal set aside the decision of the Administrative Court and decided in favor of SASU Alchimedics. Excerpts in English “… 6. In order to justify the existence of an advantage to the company, constituting an indirect transfer of profits, granted to Sinomed Holding Ltd, the tax authorities note that SASU Alchimedics is the owner of patents attached to a business acquired in 2007, and of an exclusive licence on patents and other intangible rights acquired, the same year, from the French Atomic Energy Commission (CEA) and that it entered into an agreement, on 1 June 2007, with Sinomed Holding Ltd, which will become its parent company, and Beijing Sun Technologie Inc, a company incorporated under Chinese law, owned by Sinomed Holding Ltd, which will become its sister company, a patent licence and sub-licence agreement granting them a perpetual licence for the techniques developed by Sinomed Holding Ltd in return for a one-off payment of 9,530,000 euros. The French tax authorities argued that it was not normal for SASU Alchimedics, following the technology transfer agreement of 1 April 2007, to bear the cost of registering and maintaining the patents and licences alone, without any “financial guarantee in the event of successful marketing of the related products, particularly on the European and American markets”, whereas Sinomed Holding Ltd, which now controls the strategy of the companies it owns, stands to benefit from any future successes and is in a position to prevent it from transferring its assets to a third party. It deduced that by not re-invoicing its parent company, Sinomed Holding Ltd, for services provided in relation to “the development and defence of patents”, despite the fact that it had always been in a loss-making position, SASU Alchimedics had granted an undue advantage to its parent company, constituting an abnormal management practice and an indirect transfer of profits abroad. 7. However, the tax authorities do not dispute that, as SASU Alchimedics points out on appeal, the costs of maintaining and protecting the patents, which were expensed, were its responsibility under the terms of the contract entered into in 2007, which it does not claim was no longer in force. Nor does it dispute that the research expenses invoiced by Beyond and Université Paris-Diderot, and the overheads deducted as expenses, were incurred in the interests of SASU Alchimedics. The fact that this company has a chronic deficit does not, in itself, justify the increase in operating income, nor does the fact that an asset is insufficiently profitable constitute, in itself, an abnormal act of management. The tax authorities have failed to identify the “patent valuation and defence” service that they claim to have identified for the benefit of Sinomed Holding Ltd and the exact nature of the advantage that they intend to impose, and have failed to demonstrate under what obligation SASU Alchimedics should have re-invoiced this company for these expenses. The fact that SASU Alchimedics does not have control over its strategy is not, in itself, a decisive argument proving the reality of services provided for the benefit of Sinomed Holding Ltd. Moreover, the contract concluded with this company and with the company that was to become its sister company was signed in 2007 at a time when it is not alleged that SASU Alchimedics was dependent on Sinomed Holding Ltd, and the investigation shows that SASU Alchimedics did in fact benefit from the patent concessions and sub-concessions, which were remunerated in the form of a single payment in 2007. Lastly, although the French tax authorities invoke the prospect of marketing in Europe and the United States the products already developed by the Sinomed group, and in particular by the Chinese company Sino Medical, under the contract concluded in 2007, during the period in dispute there was nothing to require SASU Alchimedics to have signed a contract with its parent company to have the latter bear the costs of maintaining, registering and defending the patents and licences of which it remained the owner and which are not yet used on its continents, where they were not registered. 8. In these circumstances, the French tax authorities have not established the existence of an advantage granted by SASU Alchimedics to Sinomed Holding Ltd and, consequently, of a practice falling within the scope of Article 57 of the French General Tax Code ...

A Swiss company, A AG, paid two related parties, B AG and C AG, for services in the financial years 2015 and 2016. These services had been priced using the internal CUP method based on the pricing of services provided by B Ltd to unrelated parties. Following an audit, the tax authorities concluded that the payments made by A AG for the intra-group services were above the arm’s length price and issued a notice of assessment where the price was instead determined using the cost-plus method. According to the tax authorities, the CUP method could not be applied due to a lack of reliable data. Following an appeal the court of first instance ruled mostly in favor of the tax authorities. A AG then appealed to the Federal Administrative Court. Decision of the Court The Federal Administrative Court ruled in favour of A AG. According to the Court, the CUP method is preferred to other methods and other transfer pricing methods should not be applied in cases where data on comparable uncontrolled prices are available. Therefore, the tax authorities had not complied with the OECD transfer pricing guidelines. Click here for English translation Click here for other translation ...

ST Dupont is a French luxury manufacturer of lighters, pens and leather goods. It is majority-owned by the Dutch company D&D International, which is wholly-owned by Broad Gain Investments Ltd, based in Hong Kong. ST Dupont is the sole shareholder of the distribution subsidiaries located abroad, in particular ST Dupont Marketing, based in Hong Kong. Following an audit, an adjustment was issued where the tax administration considered that the prices at which ST Dupont sold its products to ST Dupont Marketing (Hong Kong) were lower than the arm’s length prices. “The investigation revealed that the administration found that ST Dupont was making significant and persistent losses, with an operating loss of between EUR 7,260,086 and EUR 32,408,032 for the financial years from 2003 to 2009. It also noted that its marketing subsidiary in Hong Kong, ST Dupont Marketing, in which it held the entire capital, was making a profit, with results ranging from EUR 920,739 to EUR 3,828,051 for the same years.” Applying a CUP method the tax administration corrected the losses declared by ST Dupont in terms of corporation tax for the financial years ending in 2009, 2010 and 2011. Not satisfied with the adjustment ST Dupont filed an appeal with the Paris administrative Court where parts of the tax assessment in a decision issued in 2019 were set aside by the court (royalty payments and resulting adjustments to loss carry forward) An appeal was then filed with the CAA of Paris, where in April 2022 the Court dismissed the appeal and upheld the decision of the court of first instance. Finally an appeal was filed with the Conseil d’État. Judgement of the Conseil d’État The Conseil d’État dismissed the appeal of ST Dupont and upheld the decision of the Court of Appeal. Excerpt “ 15. It is clear from the documents in the file submitted to the lower courts that, in order to assess whether the prices at which ST Dupont sold its finished products to its distribution subsidiary ST Dupont Marketing constituted a transfer of profits abroad, it compared them to the prices at which the same products were sold to the independent South Korean company SJ Duko Co and to a network of duty-free sellers in South-East Asia. It considered that this comparison revealed the existence of an advantage granted by ST Dupont to its subsidiary, which it reintegrated into the parent company’s profits. However, in its response to the taxpayer’s comments, this adjustment was reduced by a “reduction” in the arm’s length prices used by the tax authorities, which consisted of aligning the margin on transactions with duty free shops with the margin on sales to SJ Duko, and then, in accordance with the opinion issued by the departmental commission for direct taxes and turnover taxes, by a further reduction of 50% of the amounts reintegrated into the company’s results. 16. In the first place, the company criticised the method used by the tax authorities on the grounds that ST Dupont Marketing and the Korean company SJ Duko Co were not comparable, since the former operated as a wholesaler and retailer while the latter only operated as a wholesaler. In rejecting this criticism on the grounds, firstly, that SJ Duko’s wholesale activity had been supplemented by that of exclusive sales agent and retailer and, secondly, that the applicant had not provided any evidence making it possible to assess the nature and cost of the differences in functions between ST Dupont Marketing and SJ Duko Co, taking into account in particular the assets used and the risks borne, and consequently to assess the existence, if any, of differences such that they would render the comparison irrelevant if they could not be appropriately corrected, the Court did not err in law. Although the company also argued that the differences in the functions performed by ST Dupont and the duty free shops prevented the duty free shops from being considered comparable, this criticism is new in the appeal and is therefore inoperative. 17. Secondly, in order to dismiss the criticism of the administration’s method based on the failure to take account of the difference in the geographical markets in which ST Dupont Marketing and SJ Duko Co operated, respectively, the Court was able, without committing an error of law, by disregarding the rules governing the allocation of the burden of proof or distorting the documents in the file submitted to it, to rely on the fact that ST Dupont’s transfer pricing documentation itself specified that retail prices were set uniformly by continental zone. 18. Thirdly, the Court noted, in a sovereign assessment not vitiated by distortion, on the one hand, that it did not follow either from the tables attached to the rectification proposal, or from the method of determining the selling prices of finished products to the various Asian subsidiaries, that the prices charged by ST Dupont to its customers depended on the quantities sold and, secondly, that the document produced by ST Dupont showing an overall statistical correlation between volume sold and unit price, which did not guarantee that the products compared were homogeneous, did not make it possible to establish this either. In relying on these factors to dismiss the company’s criticism based on the difference in the volume of transactions with ST Dupont Marketing and SJ Duko Co respectively, the Court did not err in law. 19. Fourthly, although the company criticises the grounds of the judgment in which the Court rejected its argument that the alignment of the mark-up applied to sales to duty-free shops with that applied to sales to SJ Duko Co meant that only one term of comparison was used, it is clear from other statements in the judgment, not criticised by the appeal, that the court also based itself on the fact that the tax authorities had, as an alternative, in their response to the taxpayer’s observations, applied a 27% reduction to the prices granted to duty-free shops in order to take account of the fact that these were ...

SA Saint Louis Sucre, whose main activity is the production of beet-based sugar and which is a member of the Südzucker group, was the subject of an accounting audit covering the period from 1 March 2010 to 28 February 2013, at the end of which the tax authorities notified it of, on the one hand, additional corporation tax and social security contributions, as well as default interest, in respect of the financial year ended 28 February 2011 in the amount of EUR 1,801,398, resulting from a transfer pricing reassessment and, secondly, additional corporate income tax, social security contributions and exceptional contributions, as well as penalties for deliberate non-compliance, in respect of the financial year ended 28 February 2013 in the amount of 4,908,559 euros, arising from the reconsideration of an extra-accounting deduction of an indemnity from the Belgian intervention and restitution office received following a court decision. In a judgment of 17 July 2020, the Montreuil Administrative Court ruled that there was no need to adjudicate in respect of the disgorgement that had occurred in the course of the proceedings, corresponding to late payment interest in respect of that allowance, that the additional corporation tax, social security contribution and exceptional contribution should be discharged, and that the penalty for wilful misconduct in respect of that allowance should be waived, and dismissed the remainder of the claim. SA Saint Louis Sucre asked the Court to set aside that judgment insofar as it dismissed the remainder of its claim. In its application, the authorities appealed against the same judgment and asked the Court to reinstate the taxes at issue, the discharge for which was wrongly granted by the first judges. Judgement of the Court of Appeal In regards of the transfer pricing adjustment, the Court of Appeal dismissed the appeal of Saint Louis Sucre. Excerpt “10. In order to contest the existence of a tariff advantage granted to its parent company Südzucker AG, and therefore of an indirect transfer of profits within the meaning of the aforementioned provisions of Article 57 of the General Tax Code, Saint Louis Sucre maintains that the price of EUR 427.20 per tonne, determined using the alternative method, corresponds to the arm’s length price. To justify the use of this method, it produced a methodology sheet provided for in the transfer pricing documentation, entitled “Swap SZAG-) SLS: Derivation transfer price 2009/10”. This sheet mentions a resale price of EUR 495 per tonne, to which the applicant company deducted an amount of EUR 70 corresponding to logistical costs, on the grounds that the transfer prices did not take them into account, and then added an amount of EUR 2.70 per tonne, corresponding to the profit margin granted to it by Südzucker AG. To justify the resale price of EUR 495 per tonne, however, it merely took into account the sole reference sales contract between Südzucker AG and its Italian customer Maxi, i.e. EUR 510 per tonne, after deducting Maxi’s profit margin of EUR 15 per tonne. Although Südzucker AG also produced a table to justify the amount of the logistical costs, it does not make it possible to establish the reality of the figures put forward by the company. Moreover, as the Minister maintains in his defence, Annex 5 to the applicant company’s application states that average sugar prices on the European market are determined ‘ex works’, i.e. at the factory gate, without taking logistics costs into account. From 2010 to 2011, the average price of sugar varied between €476 and €654 per tonne. Accordingly, the applicant company does not substantiate, on the basis of the documents produced, the sales price of EUR 427.70 per tonne to its parent company resulting from its application of the alternative method. 11. Saint Louis Sucre also points to the lack of outlets following the fall in the price of quota sugar in 2009/2010. It maintains that its parent company could not have purchased it at the UPC price of EUR 472.80 per tonne, given the transport costs generated by deliveries to southern Europe. Without this sale at the price of 427.20 euros per tonne, it would have had to either store its goods with a view to selling them in the following marketing year, incurring significant storage costs, or sell them in the European Union on loss-making markets, in particular the Spanish market, at a lower price than that negotiated with its parent company. However, it does not provide any evidence in support of its allegations, merely producing two invoices with the Spanish company Südzucker Iberica SLU, showing a selling price of EUR 446 on 15 July 2010 and EUR 471 on 23 August 2010, even though prices fluctuated widely over those few weeks. Furthermore, the applicant company did not demonstrate that its “quota sugar” could only be sold in Spain. 12. Consequently, in light of all of these elements, the alternative method relied on by Saint Louis Sucre was insufficiently documented, and the tax authorities could dismiss it as irrelevant for determining the transfer price in light of the arm’s length principle and rely on the comparable price method. Although the applicant company maintains that the tax authorities did not provide any comparables for determining the transfer price using this method, it is clear from the investigation that they used the price of €472.84 defined by the Südzucker group itself and based on the prices charged to customers Barry Callebaut, Ferrero, Kraft Foods, Coca-Cola and Maxi in October 2009. This price corresponds to the estimated market price at the beginning of the period on the basis of contracts currently being signed. By simply maintaining that the price of EUR 427.20 per tonne, determined using the alternative method, corresponds to the arm’s length price, Saint Louis Sucre is not contesting that the UPC method used by the department could be applied to establish the arm’s length price. The tax authorities could therefore consider that the price of EUR 427.20, which was lower than the average for comparable contracts using the UPC ...

SAS Blue Solutions manufactures electric batteries and accumulators for electric and hybrid vehicles and car-sharing systems. In FY 2012-2014 it granted a related party – Blue Solutions Canada – non-interest-bearing current account advances of EUR 42.9 million, EUR 43 million, and EUR 39 million. The French tax authorities considered that the failure to charge the interest on these advances was an indirect transfer of profit subject to withholding taxes and reintegrated the interest into the taxable income of Blue Solutions in France. Not satisfied with the resulting assessment an appeal was filed where SAS Blue Solutions. The company argued that the loans was granted interest free due to industrial and technological dependence on its Canadian subsidiary and that the distribution of profits was not hidden. Finally it argued that the treatment of the transactions in question was contrary to the freedom of movement of capital guaranteed by Article 63 of the Treaty on the Functioning of the European Union. Judgement of the Court The court dismissed the appeal of SAS Blue Solutions and upheld the assessment issued by tax authorities. Excerpts: “7. The applicant company maintains that it was in a situation of industrial and technological dependence on its Canadian subsidiary, its sole supplier of LMP (lithium metal polymer) batteries, without which it would not have been able to meet its own contractual commitments to its main customers. However, it has not been established, as the Minister maintains, that Blue Solutions was unable to obtain supplies from other companies and that its Canadian subsidiary held patents relating to the type of batteries marketed. Nor is it established that the Canadian company was not in a position to remunerate the advances granted, although it is not disputed that it paid interest in return for the advances granted by its former shareholder, SA Bolloré, before the tax years in dispute, a period during which its situation was even less favourable, and that it is clear from the opinion of the National Commission on Direct Taxes and Turnover Taxes that its turnover had been growing since 2011. Furthermore, SAS Blue Solutions was in a more fragile situation than its Canadian subsidiary, which was exacerbated by the waiver of interest on the advances granted to its subsidiary. Under these conditions, it did not establish that the advantages it had granted were justified by obtaining the necessary consideration. The administration was therefore justified in reintegrating the interest that should have paid for these advances into Blue Solutions’ taxable income in France.” “8. Finally, even though the waiver of interest was expressly stipulated by the parties in the current account advance agreement, it does not follow from the investigation that this benefit was recorded by Blue Solution in the accounts in a manner that made it possible to identify the purpose of the expenditure and its beneficiary, nor that this recording in itself reveals the liberality in question. This advantage was therefore of a hidden nature within the meaning of c. of Article 111 of the General Tax Code. 9. Thus, the administration was able to consider that the absence of invoicing of this interest constituted an indirect transfer of profits abroad within the meaning of the aforementioned provisions of Article 57 of the General Tax Code and that the interest that should have been paid fell into the category of hidden remuneration and benefits within the meaning of c. of Article 111 of the General Tax Code, which were liable to be subject to the withholding tax referred to in 2 of Article 119 bis of the same code.” “13. However, in the present case, the remuneration and benefits are subject to withholding tax in accordance with Article 111(c) of the General Tax Code, corresponding to the interest that should have been paid by Blue Solutions Canada in respect of the advances granted by Blue Solutions. The income of the non-resident company thus taxed in France does not correspond to that of an investment made in that country by the taxpayer in the context of the exercise of the freedom of movement of capital. The applicant company cannot therefore usefully argue that the legislative provisions applied to it in its capacity as debtor of the withholding tax levied on the income deemed to have been distributed to its subsidiary are contrary to the aforementioned provisions of Article 63(1) of the Treaty on the Functioning of the European Union since they cannot be regarded, in this case, as being such as to dissuade non-residents from making investments in a Member State or to dissuade residents of that Member State from making such investments in other States.” Click here for English translation Click here for other translation ...

ST Dupont is a French luxury manufacturer of lighters, pens and leather goods. It is majority-owned by the Dutch company D&D International, which is wholly-owned by Broad Gain Investments Ltd, based in Hong Kong. ST Dupont is the sole shareholder of distribution subsidiaries located abroad, in particular ST Dupont Marketing, based in Hong Kong. Following an audit, an adjustment was issued where the tax administration considered that the prices at which ST Dupont sold its products to ST Dupont Marketing (Hong Kong) were lower than the arm’s length prices. “The investigation revealed that the administration found that ST Dupont was making significant and persistent losses, with an operating loss of between EUR 7,260,086 and EUR 32,408,032 for the financial years from 2003 to 2009. It also noted that its marketing subsidiary in Hong Kong, ST Dupont Marketing, in which it held the entire capital, was making a profit, with results ranging from EUR 920,739 to EUR 3,828,051 for the same years.” Applying a CUP method the tax administration corrected the losses declared by ST Dupont in terms of corporation tax for the financial years ending in 2009, 2010 and 2011. Not satisfied with the adjustment ST Dupont filed an appeal with the Paris administrative Court where parts of the tax assessment in a decision issued in 2019 were set aside by the court (royalty payments and resulting adjustments to loss carry forward) Still not satisfied with the result, an appeal was filed by ST Dupont with the CAA of Paris. Judgement of the CAA The Court of appeal dismissed the appeal of ST Dupont and upheld the decision of the court of first instance. Excerpt “It follows from the above that the administration provides proof of the existence and amount of an advantage granted to ST Dupont Marketing that it was entitled to reintegrate into ST Dupont’s results, pursuant to the provisions of Article 57 of the General Tax Code, before drawing the consequences on the amount of the deficits declared by this company in terms of corporation tax, on the liability of the sums thus distributed to the withholding tax and on the integration in the base of the minimum contribution of professional tax and the contribution on the added value of companies. 29. It follows from all the foregoing that ST Dupont is not entitled to maintain that it was wrongly that, by the contested judgment, the Paris Administrative Court rejected the remainder of its claim. Its claims for the annulment of Article 4 of that judgment, for the discharge of the taxes remaining in dispute and for the restoration of its declared carry-over deficit in its entirety must therefore be rejected.” Click here for English translation Click here for other translation ...

A AG, which was founded in 2000 by researchers from the University of Applied Sciences D, has as its object the development and distribution of …, in particular in the areas of ….. It had its registered office in Zurich until the transfer of its registered office to Zug in 2021. By contract dated 16 June 2011, it was taken over by Group E, Country Q, or by an acquisition company founded by it for this purpose, for a share purchase price of EUR …. On the same day, it concluded two contracts with E-Schweiz AG, which was in the process of being founded (entered in the Commercial Register on 7 September 2011), in which it undertook to provide general and administrative services on the one hand and research and development on the other. As of 30 September 2011, A AG sold all ”Intellectual Property Rights” (IPR) and ”Non-Viral Contracts” to E-Company, a company in U with tax domicile on the island of V, for a price of EUR … for the IPR and EUR … for the ”Non-Viral Contracts”. A AG had neither identifiable operating activities nor personnel substance in the financial year from 01.10.2011-30.09.2012 following the shareholding transaction. The transfer of the tangible and intangible business assets and the personnel of A AG to other companies of the E group corresponded to an integration plan that had already been set out in a draft power point presentation of the E group prior to the acquisition of the shares. Following an audit the tax authorities issued an assessment for additional taxable net profit for the tax period 01.01.-30.09.2011 for state and communal taxes and direct federal tax, as well as taxable equity of CHF … for state and communal taxes. The assessed taxable net profit included a hidden profit distribution from the sale of the IPR and customer relationships to the E-Company. The calculations of profits was made as a discretionary estimate. An appeal was filed by A AG with the tax court which was dismissed with respect to the calculations of profits due to the sale of intangible assets at a lower price, but were upheld with respect to the transfer of functions. An appeal was then filed with the administrative court by both A AG and the tax authorities. A AG requested that the assessment of the Tax Office be dismissed with costs and compensation. The Tax Office requested the dismissal of the complaints of the obligated party and the annulment of the decision of the Tax Appeal Court and confirmation of the objection decisions with costs to be borne by the obligated party. Judgement of the Administrative Court The court ruled in favour of the tax authorities and remanded the case to the court of first instance for recalculation. Excerpts “The subject matter of the proceedings are reorganisation measures carried out after the change of shareholders, which were connected with the sale of assets of the obligated party to other group companies and the abandonment of traditional operating activities. The dispute revolves around the question of whether the obligated party provided services to related companies under conditions that do not comply with the principles of tax law regarding the appropriateness of performance and consideration between related parties and whether it therefore provided non-cash benefits or hidden profit distributions that are subject to profit tax.” “According to the correct findings of the Tax Appeals Court, to which reference can be made, the large discrepancy between the values according to the transfer price study of company I and the share purchase price and the result of the PPA was suitable to cast doubt on the correctness of the transfer price study. Even if the objections to the comparability with the PPA were true, the relevance of the PPA (wrongly disputed by the obligated party) could not be verified without the data used in its preparation. The share purchase price was agreed among independent third parties and therefore corresponded to the enterprise value at the time of the acquisition of the shareholding. According to the findings of the lower court, the transfer price study was only subsequently prepared in 2012 and is incomplete in various respects, which was not refuted by the obligated party. The Tax Appeals Court therefore concluded that the requirement had not been fulfilled and that the facts of the case had remained unclear. In particular, there had been uncertainty about the actual value of the intangible rights sold after the investigation had been completed. The Cantonal Tax Office’s assertion that the agreed purchase price for the intangible rights was too low had not been refuted and, based on the comparison with the PPA and the share purchase price, this assertion appeared very likely. The Cantonal Tax Office had therefore provided the main evidence incumbent upon it. Because the cantonal tax office had not been able to carry out its own valuation due to the lack of data, it had rightly proceeded to an estimate. According to the decision of the lower court, the discretionary assessments regarding the profit from the sale of the intangible assets were rightly made.” “Moreover, the burden of proving the obvious incorrectness of the discretionary assessment is placed on the taxpayer, which is not to be equated with a “reversal of the burden of proof” (on the whole Zweifel/Hunziker, Kommentar StHG, Art. 48 N. 44; diesel, Kommentar DBG, Art. 132 N. 37; Zweifel et al., Schweizerisches Steuerverfahrensrecht, § 20 Rz. 22).” “An estimate is “obviously incorrect” if it cannot be objectively justified, in particular if it is recognisably motivated by penalties or fiscal considerations, if it is based on improper bases, methods or aids for estimation or if it cannot otherwise be reasonably reconciled with the circumstances of the individual case as known from the experience of life. Obviously incorrect is therefore an estimate that is based on an abusive use of the estimation discretion, i.e. is arbitrary (Zweifel/Hunziker, Kommentar StHG, Art. 48 N. 59; dieselben, Kommentar DBG, Art. 132 N ...

By judgment of 19 January 2021, the Administrative Court upheld an assessment for FY 2012-2017 issued by the tax authorities on the determination of the arm’s length income resulting from related party transactions. The tax assessment resulted from disallowed deductions for Intra group services provided under a general administrative, legal and financial assistance contract of 22 October 2012 Costs invoiced for the preparation of consolidated accounts Expenses related to “Technical services” for which no explanations had been provided An appeal was filed by Central Hydroelectric de Bulgari EOOD with the Supreme Administrative Court in which the company stated that the decision of the Administrative Court was incorrect. Judgement of the Supreme Administrative Court The Supreme Administrative Court partially upheld the decision of the Administrative Court. Excerpts “The present Court of Cassation finds the judgment of the ACGC valid and admissible. The argument of the applicant that the same is inadmissible is unfounded in the part in which the RA was confirmed concerning the increase of its financial result for 2012 by an expense of BGN 188 924.92 for the reason “MECAMIDES technical services”, as well as by an expense of BGN 19 724.92 for a technical expertise under invoice No 13519637/12.04.2012 issued by EDF, France. By its appeal to the ACGC, CENTRAL HYDROELECTRIC DE BULGARI EOOD has appealed against the RA in the part confirmed by the decision of the adjudicating authority. Since the act was confirmed in its entirety in the part of the established corporate tax and interest liabilities for 2012 by the decision No 367/09.03.2020 of the Director of the EITD Directorate – Sofia, the first instance court correctly held that the appeal was also lodged against this part of the RA. The appellant has not explicitly specified the amount of the corporate tax liability and interest established by the RA as a result of the above-mentioned increases in the financial result for 2012 and has not stated that it does not contest the act in this part. The arguments in the cassation appeal that the administrative court committed material breaches of the rules of court procedure, consisting, according to the appellant, in the absence of its own reasoning and failure to consider the material breaches of the administrative procedure rules in the audit proceedings alleged in the appeal, are also unfounded.“ “The decision of the ACCC contains sufficiently substantial and detailed grounds to ensure effective cassation review and to enable the party adversely affected by it to defend itself. The fact that the court considered the defendant’s legal conclusions to be correct does not mean that it did not state its own reasons.” Click here for English Translation Click here for other translation ...

Bluestar Silicones France (BSF), now Elkem Silicones France SAS (ESF), produces silicones and various products that it sells to other companies belonging to the Bluestar Silicones International group. The company was audited for the financial years 2007 – 2008 and an assessment was issued. According to the tax authorities, the selling prices of the silicone products had been below the arm’s length price and the company had refrained from invoicing of management exepences and cost of secondment of employees . In the course of the proceedings agreement had been reached on the pricing of products. Hence, in dispute before the court was the issue of lacking invoicing of management exepences and cost of secondment of employees for the benefit of the Chinese and Brazilian subsidiaries of the Group. According to the company there had been no hidden transfer of profits; its method of constructing the group’s prices has not changed and compliance with the arm’s length principle has been demonstrated by a study by the firm Taj using the transactional net margin method and the criticisms of its prices are unfounded. The results must be analyzed in the context of heavy investments made by the Bluestar Silicones International sub-group, 80% of which it financed, and which are at the root of the heavy losses recorded in the sub-group’s first fiscal years for the years 2007 to 2009. Furthermore, the business tax adjustments was considered unjustified by the company since, the transfer prices charged did not constitute transfers of profits; Decision of the Court No charge of management fees from Brazil and Hong Kong: “Under these conditions, the administration was justified in considering that BSF’s renunciation to invoice management fees to the Chinese and Brazilian companies of the Bluestar Silicones International group constituted an abnormal act of management. It was thus entitled to correct the company’s profit and also to correct the company’s added value for the determination of its business tax.” No charge of cost of provision of employees in China: “While BSF claims that it derived a direct benefit from the provision of these three expatriates through the development of sales by the Chinese subsidiary, it does not establish this, even though it has been shown that the project manager and the two technicians worked at the Jiangxi site, which was acquiring the technology needed to manufacture products similar to those previously purchased by the Chinese subsidiary from BSF and therefore potentially competing with it. The impossibility of charging such fees due to Chinese legislation has also not been demonstrated, nor has any compensation resulting from insufficient transfer pricing. Under these conditions, the applicant company does not demonstrate that the advantage granted to the Chinese company had sufficient consideration in the interest of its operations and, consequently, was justified by normal management of its own interests.” Additional withholding tax and business tax However, the Court did find that the company was “entitled to argue that the Montreuil Administrative Court wrongly refused to discharge it from the additional withholding tax contributions charged to it for the financial year ended in 2007 and the additional business tax contributions for the year 2007 resulting from the correction made by the tax authorities of its transfer prices practiced with the company BSI Hong Kong.” Click here for English Translation Click here for other translation ...

Société Générale S.A. had paid for costs from which its subsidiaries had benefited. The costs in question was not deducted by Société Générale in its tax return, but nor had they been considered distribution of profits subject to withholding tax. Following an audit for FY 2008 – 2011 a tax assessment was issued by the tax authorities according to which the hidden distribution of profits from which the subsidiaries benefited should have been subject to withholding tax in France Société Générale held that the advantage granted by the parent company in not recharging costs to the subsidiaries resulted in an increase in the valuation of the subsidiaries. It also argued that the advantages in question were not “hidden” since they were explicitly mentioned in the documents annexed to the tax return By judgment of 11 October 2018, the court of first instance discharged the withholding taxes as regards the absence of re-invoicing of costs incurred on behalf of the subsidiaries located in Mauritania, Burkina Faso and Benin. Judgement of the Court The Administrative Court of Appeal decided partially in favour of the tax authorities and partially in favour of Société Générale. It discharged Société Générale from withholding taxes relating to non-deductible expenses called “remuneration of DeltaCrédit’s managers” and to the costs incurred on behalf of its Moldovan and Georgian subsidiaries based on an interpretation of the articles on dividends in the relevant tax treaties. Excerpts “…Société Générale did not re-invoice “expenses borne by the head office for the subsidiaries”, expressly mentioned as such in the tables No. 2058 A of non-deductible expenses appended to its returns. Société Générale also assumed the costs of “personnel seconded to foreign subsidiaries”, the “remuneration of the managers of [its Russian subsidiary] Deltacrédit”, and, as mentioned in the previous point, “ITEC transfer prices”, which it spontaneously reintegrated into its taxable income, thus acknowledging the non-deductibility of these expenses. These facts reveal that Société Générale has incurred costs that are normally borne by its foreign subsidiaries. As a result, Société Générale is presumed to have made a transfer of profits to a company located outside France, within the meaning of the aforementioned provisions of Article 57 of the General Tax Code. It is therefore incumbent on it to prove that this transfer involved sufficient consideration for it and thus had the character of an act of normal commercial management.” “In this case, with regard to the “expenses borne by the head office for foreign subsidiaries”, the cost of “personnel seconded to foreign subsidiaries”, and “ITEC transfer prices”, the entries in the tables of non-deductible expenses, which do not specify the precise nature of the benefits granted, nor the beneficiary companies, do not in themselves reveal the existence of the gifts granted. On the other hand, the non-accounting mention made by Société Générale, in Table 2058 A of its income tax return, of the benefit granted to its Russian subsidiary DeltaCrédit by paying the remuneration of its managers, reveals both the purpose of the expense and its beneficiary. This advantage could not therefore be considered as a hidden advantage within the meaning of the provisions of Article 111c of the General Tax Code.” “Lastly, even though no financial transfer was made, the costs unduly borne lead to disinvestment for the company which bore them and to distributed income for the company which benefited from them. It follows that, in terms of French tax law, Société Générale is only entitled to argue that the Montreuil Administrative Court was wrong to reject its request for a discharge in respect of the non-deductible charges referred to as “remuneration of DeltaCrédit’s directors” ” Under Article 7 of the Convention between France and the former USSR, applicable to the income at issue: “1. Dividends paid by a resident of a State to a resident of the other State may be taxed in the first State. However, the tax so charged shall not exceed 15 per cent of the gross amount of such dividends. 2. The term “dividends” as used in this Article means income from shares as well as other income which is subjected to the treatment of income from shares by the laws of the State of which the person making the distribution is a resident. “These stipulations do not cover income deemed to be distributed by virtue of the provisions of Article 111 c) of the General Tax Code which is not subject to the same regime as income from shares. Société Générale is therefore entitled to argue that this income was not taxable in France, pursuant to Article 12 of the same agreement, which provides that “income not listed in the preceding articles (…) received by a resident of a State and arising from sources in the other State shall not be taxable in that other State. “.” “Under the terms of Article 13 of the Franco-Mauritanian, Franco-Beninese and Franco-Burkinabe tax treaties: “income from securities and similar income (income from shares, founders’ shares, interest and limited partnership shares, interest from bonds or any other negotiable debt securities) paid by companies (…) having their tax domicile in the territory of one of the Contracting States may be taxed in that State”. These stipulations, which refer only to the income from securities and similar income they list, do not concern income deemed to be distributed within the meaning of Article 111 c) of the General Tax Code. The Minister is therefore not entitled to argue that the first judges wrongly discharged Société Générale from the withholding taxes applied to the benefits granted to its subsidiaries located in Mauritania, Benin and Burkina Faso, which were not taxable in France.” Click here for English translation Click here for other translation ...

Montupet EOOD is a Bulgarian subsidiary in the French Montupet Group which specializes in the production of aluminum components for the automotive industry. In February 2016, the French Group became part of the Canadian LINAMAR Group, which specializes in the manufacture and assembly of components for the automotive industry. The French group and its production facilities (plants in France, Bulgaria, Northern Ireland, Mexico and Spain) retained their core business as part of one of LINAMAR’s five main business areas – light metal casting. Effective 01.01.2017, Montupet SAS and Montupet EOOD entered into a Services Agreement, which canceled a previous agreement of 21.12.2009 in the part concerning the corporate and management services provided. Pursuant to the new agreement, Montupet SAS undertakes to provide Montupet EOOD with business advisory services in various areas such as business strategy and development advice; financial strategy advice; legal advice; human resources strategy advice; pricing advice and price negotiations with global customers; supply chain management assistance and advice; marketing strategy advice; engineering and methods assistance and advice; technical advice; customer contact development. According to the new contract, the pricing mechanism for the services is based on a cost allocation key for the services provided. The revenue authority formed the conclusion that the majority of the services provided by the French company after 01.01.2017 were of a general administrative nature and did not differ significantly in their nature and/or volumes from the services provided to Montupet EOOD under the previous agreement of 21.12.2009. On the basis of the evidence available, no specific additional benefits for the Bulgarian company resulting from the services received in 2017 an going forward could be identified. Furthermore some of the services were not related to the activities of Montupet EOOD, but instead categorized as “shareholder activities” carried out wholly for the benefit of the parent company or other members of the group, which should not be recognised as intra-group services. The tax authorities also disregarded the evidence submitted concerning the market nature of the price of the services in question. An assessment was issued where the deductions for payments under the new service contract had been adjusted based on the arm’s length provisions. Montupet filed an appeal with the Administrative court which was dismissed. An appeal was then filed with the Supreme Administrative Court Judgement of the Supreme Administrative Court The Supreme Administrative Court set aside the decision of the Administrative Court. Excerpts “In the light of the evidence in the case, it is established that the performance of services was agreed between Montupet SAS and Montupet EOOD The NRA Transfer Pricing Manual (fiche 12) states that intra-group services in practice refers to the centralisation of a number of administrative and management services in a single company (often the parent company), which serves the activities of all or a number of enterprises of a group of related parties selected on a regional or functional basis. The provision of such services is common in multinational companies. The concept of intra-group services covers services provided between members of the same group, in particular technical, administrative, financial, logistical, human resource management (HRM) and any other services. According to paragraph 7.5 of the OECD Transfer Pricing Manual for Multinational Enterprises and Tax Administrations (the “OECD Manual”), the analysis of intra-group services involves the examination of two key questions: 1/ whether the intra-group services are actually performed and 2/ what the remuneration within the group for those services should be for tax purposes. Paragraph 7.6 of the OECD Guidance states that, under the arm’s length principle, whether an intra-group service is effectively performed where an activity is carried out for one or more group members by another group member will depend on whether the activity provides the group member concerned with an economic or commercial benefit to improve its trading position. This can be determined by analysing whether an independent undertaking on comparable terms would have been willing to pay for the activity if it had been carried out for it by an independent undertaking or whether it would only have carried it out with its own funds. In the instant case, it is apparent from the reasoning of the opinion rendered by the revenue authorities and the ultimate conclusion of the trial court that part of the income paid for the services constituted a disguised distribution of profits within the meaning of § 1(5)(b). “a” of the Tax Code and as such subject to taxation under the Tax Code. However, the contested decision does not set out any specific considerations in this respect, and there is no analysis of the type of services performed, the actual performance of those services, and the manner in which the remuneration for the services was priced. On the other hand, the conclusion of the revenue administration, which is fully accepted by the national court, that part of the income is not taxable under Article 195(1)(b) of the Code of Conduct. 1 of the Income Tax Act, as well as the impossibility of determining the exact amount of the income falling within the scope of Article 12 of the Income Tax Act is unjustified, as it remains unclear what part of the income earned should not be taxed under Article 195(1) of the Income Tax Act. 1 of the Income Tax Act, respectively do not fall within the scope of the DTT. In the course of the administrative appeal, as well as in the course of the court proceedings, the foreign company submitted evidence, including a list of corporate services for 2017, documentation of Linamar’s transfer pricing for fiscal 2017, a cost allocation statement, evidence of specific benefits received in relation to the services provided, as well as a statement of business trips made by employees of other companies in the Montupet Group in the city of Montupet. Ruse for 2017. Thus, the documents listed were not discussed by the first instance court, leaving unclarified the circumstances concerning the actual performance of the intra-group services, their direct and long-term effect and, accordingly, ...

C. SA provides “services, in particular in the areas of communication, management, accounting, management and budget control, sales development monitoring and employee training for the group to which it belongs, active in particular in the field of “F”. C. SA is part of an international group of companies, G. group, whose ultimate owner is A. The G group includes H. Ltd, based in the British Virgin Islands, I. Ltd, based in Guernsey and J. Ltd, also based in Guernsey. In 2005, K. was a director of C. SA. On December 21 and December 31, 2004, an exclusive agreement for distribution of “F” was entered into between L. Ltd, on the one hand, and C. SA , H. Ltd and J. Ltd, on the other hand. Under the terms of this distribution agreement, L. Ltd. undertook to supply “F” to the three companies as of January 1, 2005 and for a period of at least ten years, in return for payment. Under a supply agreement C. SA agreed to sell clearly defined quantities of “F” to M for the period from January 1, 2005 to December 31, 2014. In the course of 2005, 56 invoices relating to sales transactions of “F” to M. were drawn up and sent to the latter, on the letterhead of C. SA. According to these documents, M. had to pay the sale price directly into two accounts – one held by H. Ltd and the other by J. Ltd. Part of this money was then reallocated to the supply of “F”, while the balance was transferred to an account in Guernsey held by J. Ltd. The result was, that income from C. SA’s sale of “F” to M was not recognized in C. SA but instead in the two off-shore companies H. Ltd and J. Ltd. Following an audit, the Swiss tax authorities issued an assessment where C. SA and A were held liable for withholding taxes on a hidden distribution of profits. A and C. SA brought this assessment to Court. Decision of the Court The Court decided – in accordance with the 2020 judgment of the Federal Administrative Court – in favor of the tax authorities and the appeal of C. SA and A was dismissed. Click here for English translation Click here for other translation ...

C. SA provides “services, in particular in the areas of communication, management, accounting, management and budget control, sales development monitoring and employee training for the group to which it belongs, active in particular in the field of “F”. C. SA is part of an international group of companies, G. group, whose ultimate owner is A. The G group includes H. Ltd, based in the British Virgin Islands, I. Ltd, based in Guernsey and J. Ltd, also based in Guernsey. In 2005, K. was a director of C. SA. On December 21 and December 31, 2004, an exclusive agreement for distribution of “F” was entered into between L. Ltd, on the one hand, and C. SA , H. Ltd and J. Ltd, on the other hand. Under the terms of this distribution agreement, L. Ltd. undertook to supply “F” to the three companies as of January 1, 2005 and for a period of at least ten years, in return for payment. Under a supply agreement C. SA agreed to sell clearly defined quantities of “F” to M for the period from January 1, 2005 to December 31, 2014. In the course of 2005, 56 invoices relating to sales transactions of “F” to M. were drawn up and sent to the latter, on the letterhead of C. SA. According to these documents, M. had to pay the sale price directly into two accounts – one held by H. Ltd and the other by J. Ltd. Part of this money was then reallocated to the supply of “F”, while the balance was transferred to an account in Guernsey held by J. Ltd. The result was, that income from C. SA’s sale of “F” to M was not recognized in C. SA but instead in the two off-shore companies H. Ltd and J. Ltd. Following an audit, the Swiss tax authorities issued an assessment where C. SA and A were held liable for withholding taxes on a hidden distribution of profits. A and C. SA brought this assessment to Court. Decision of the Court The Court decided in favor of the tax authorities. “The above elements relied on by the appellants in no way provide proof that the appellant carried out the said transactions on behalf of the other companies in the [G]B group. Moreover, they do not in themselves allow the conclusion that the appellant acted through the other companies in its group, as the appellants maintain. Insofar as, as has been seen (see recital 5.1 above), the contract for the sale of *** was concluded and the relevant invoices issued in the name of the appellant, which is moreover designated as the seller in the sales contract (see heading and point 9. 2(a) of that contract), and that the other companies in the group are never mentioned in the context of the transactions at issue, it is much more appropriate to hold that they were carried out, admittedly for the benefit of the appellant, but through the appellant acting in its name and on its behalf. Therefore, by renouncing the resulting proceeds to the appellant, the appellant did indeed make concealed distributions of profits, i.e. appreciable cash benefits subject to withholding tax” “In these circumstances and insofar as the proceeds from the sale of *** were paid directly by [C. SA.] O. to the companies [H Ltd and J Ltd.] Y. and X.     – which must undoubtedly be regarded as persons closely related to the appellant within the meaning of the case-law (cf. recital 3.2.1 above) -, without any equivalent consideration in favour of the appellant, and that part of those proceeds was reallocated to the supply of *** (cf. d above), the lower authority was right to find that there was a taxable supply of money (see recitals 3.2.1 and 3.2.2 above) and to calculate this on the basis of an estimate of the profit resulting from the purchase and resale of *** (see decision under point 4.3, pp. 10 et seq.)” “In the absence of any document attesting to an assignment to the appellant of the claims arising from the purchase contract with [L] M. and the supply agreements of November 2004 with [M] O.     In addition, there is no reason to consider that the allocation of the profit resulting from the purchase and resale of *** to the companies of the group based abroad constitutes the remuneration granted to the latter for the takeover of the two contracts (purchase and sale), nor is there any justification for deducting the value of those contracts from the amount retained by the lower authority. The appellant’s submissions to this effect (see the memorandum of 12 May 2015, pp. 22 et seq. [under para. 6]) must therefore be rejected. Accordingly, the court of appeal refrains from carrying out the expert assessment requested by the appellant in order to estimate that value (see the memorandum of 12 May 2015, p. 25 [under section V]; see also section 2.2.1 above).” “… it should be noted that, in view of the foregoing and the size of the amounts waived by the appellant, the taxable cash benefit was easily recognisable as such by all the participants. Consequently, and insofar as the appellant did not declare or pay the relevant withholding tax spontaneously, the probable existence of tax evasion must be accepted, without it being necessary to determine whether or not it was committed intentionally (see recitals 4.1 and 4.2 above). Accordingly, there can be no criticism of the lower authority’s application of the provisions of the DPA and, since a contribution was wrongly not collected, of Article 12 paras. 1 and 2 of that Act in particular.” “The contested decision must therefore also be confirmed in this respect. Finally, as the case file is complete, the facts sufficiently established and the court is convinced, the court may also dispense with further investigative measures (see section 2.2.1 above). It is therefore also appropriate to reject the appellant’s subsidiary claim that he should be required, by all legal means, to provide ...

The tax authority erred in considering that the owners obtained the economic benefit of lower prices than comparable market prices indirectly through the ownership of the related company, which is not apparent from the facts established in the present case. As a result of an error of substantive law, the tax authority did not make a finding of fact in that regard. However, if the substantive law is correctly applied, it will be necessary to establish whether the natural persons, the qualified owners (CC., D.D. and E.E.), had an actual economic advantage or whether they actually benefited from the advantages arising from the applicant’s dealings with the related company A. at prices below the comparable market prices. Click here for English translation Click here for other translation ...

Lender Societe had acquired real estate in 2008 for EUR 26 million. The acquisition had been financed by a bank loan of EUR 20 million and a shareholder loan of EUR 6 million. The interest rate on the shareholder loan was set at 12%. The Tax Authorities found that the “excessive” part of the interest paid on the shareholder loan was as a hidden distribution of profit subject to dividend withholding tax. The hidden profit distribution was calculated as the difference between an arm’s length interest rate set at approximately 3% and the interest rate according to the loan agreement of 12%. Lender Societe disagreed with the assessment and brought the case before the Tribunal Administratif. The Tribunal agreed with the Tax Authorities and qualified the excessive interest payments as a hidden profit distribution subject to a 15% dividend withholding tax. The decision of the Tax Tribunal is affirmed by the Cour Administratif. Click here for translation ...

“HDP Lux SA acquired a building in France and financed the acquisition with a shareholder loan at an interest rate of 12%. The tax authorities issued a tax assessment for FY 2011 and 2012 in which the market interest rate was set at 3.57% and 2.52% respectively and the excess payments were considered as hidden distribution of profit on which withholding tax was applied. Decision of the Administrative Court The court upheld the tax authorities adjustment of the interest paid on the loan and the qualification of the excess payment as a hidden distribution of profits subject to a withholding tax of 15%. In addition, the court held that the OECD Guidelines could not influence the interpretation of the provision on hidden profit distributions, as the domestic provision had been adopted long before the OECD Guidelines, while at the same time recognising that the OECD Guidelines could be used as an “element of appreciation”. Click here for English translation Click here for other translation ...

ST Dupont is a French luxury manufacturer of lighters, pens and leather goods. It is majority-owned by the Dutch company, D&D International, which is wholly-owned by Broad Gain Investments Ltd, based in Hong Kong. ST Dupont is the sole shareholder of distribution subsidiaries located abroad, in particular ST Dupont Marketing, based in Hong Kong. Following an audit, an adjustment was issued for FY 2009, 2010 and 2011 where the tax administration considered that the prices at which ST Dupont sold its products to ST Dupont Marketing (Hong Kong) were lower than the arm’s length prices, that royalty rates had not been at arm’s length. Furthermore adjustments had been made to losses carried forward. Not satisfied with the adjustment ST Dupont filed an appeal with the Paris administrative Court. Judgement of the Administrative Court The Court set aside the tax assessment in regards to license payments and resulting adjustments to loss carry forward but upheld in regards of pricing of the products sold to ST Dupont Marketing (Hong Kong). Click here for English translation Click here for other translation ...

CCompany A was active in the management and administration of trusts and companies; related advice and services. A held 99% of the shares in E, a Seychelles-based company. This subsidiary acted as a sub-contractor for company registrations and corporate affairs in the Seychelles. A and E had entered into a service contract dated 6 February 2009 under which the subsidiary provided these services to A. Following an audit, tax assessments were issued for the tax years 2009 – 2012, in which the tax authorities (AFC-GE) had attributed a percentage of 5% of E’s expenses as the maximum allowable remuneration for the activities of the subsidiary. The remainder was added back to A’s taxable income. An administrative appeal was lodged against these tax assessments, but the appeal was later dismissed in 2016. A then appealed to the Administrative Court (TPAI), which, by judgment of 18 December 2017, upheld A’s appeal and annulled the assessments and fines. The tax authorities appealed to the Court of Justice. Judgment of the Court The Court of Justice overturned the decision of the Administrative Court and ruled in favour of the tax authorities. Excerpt “6. a. Implementation of the arm’s length principle presupposes identification of the market value of the asset transferred or the service rendered. Where there is an open market, the prices on that market are decisive and allow for an effective comparison with the prices applied between associated companies (ATF 140 II 88 recital 4.2 and the references cited therein). b. If there is no free market allowing an effective comparison, then the method of comparison with a comparable transaction (or comparable price method) should be used, which consists of making a comparison with the price applied between third parties in a transaction with the same characteristics, i.e. taking into account all the decisive circumstances (BGE 140 II 88 recital 4.2; 138 II 57 recital 2.2; Federal Court ruling 2C_674/2015 of 26 October 2017 recital 7.2). This method corresponds to the comparable open market price method presented in the OECD principles (n. 2.13 et seq.). For this method to be applicable, the transaction with a third party or between third parties must be similar to the transaction under review, i.e. it must have been entered into in circumstances comparable to those of the transaction under review. However, the notion of “comparable transaction” is not easy to define. The relevance of the comparison with transactions concluded with third parties presupposes that the determining economic circumstances of these transactions are similar to those of the transaction under review (OECD principles, n. 1.33 et seq.). The comparability of transactions is determined according to their nature and in the light of all the circumstances of the particular case. If the relevant economic conditions differ from those of the transaction under review, adjustments must be made to eliminate the effects of these differences (OECD principles, 1.33 et seq.). However, it cannot be entirely ruled out that a comparable transaction would not have been concluded at the market price, since the formation of the price may be influenced by several factors, such as market conditions, contractual terms (for example, the existence of secondary services, the quantity of goods sold, payment terms), the commercial strategy pursued by the third-party purchaser or the economic functions of the parties. Nevertheless, the price charged in a comparable transaction is presumed to correspond to the market price; in the event of a dispute, the burden of proof to the contrary lies with the company (Federal Court ruling 2C_1082/2013 of 14 January 2015, para. 5.2 and the references cited). c. In the absence of a comparable transaction, the arm’s length price is determined using other methods, such as the cost plus method. This method consists in determining the costs incurred by the company providing the service, to which an appropriate margin is added in order to obtain an appropriate profit taking into account the functions performed and the market conditions (ATF 140 II 88 rec. 4.2 p. 94; judgment of the Federal Court 2C_11/2018 of 10 December 2018 recital 7.4). d. A concealed distribution of profits also presupposes that the unusual nature of the benefit was recognisable by the company’s governing bodies. This condition is presumed to have been met if the disproportion was clearly recognisable. In this respect, reference should be made to the case law and doctrine developed in private law concerning the imputation of knowledge of the corporate bodies to the legal person, which holds that this imputation does not apply in an absolute manner, but that it must only come into play for what is known to the body that is at least seized of the matter, or else when the information acquired by one body has not been passed on to another body, due to a defect in the organisation of the company (Federal Court ruling 2C_1082/2013 cited above, rec. 6.1 and references cited). 7. It is up to the taxing authority to establish the facts on which the tax claim is based or which increase it, whereas the taxpayer must allege and prove the facts which eliminate or reduce this claim, these rules also applying to proceedings before the appeal authorities (ATF 140 II 248 recital 3.5). In tax reminder and fine proceedings, the tax authority must prove that the assessment is incomplete (Federal Court ruling 2C_342/2017 of 12 April 2018, recital 4.1). In the area of services that can be valued in money, the tax authorities must prove that the company has provided a service and that it has not received any consideration or has received insufficient consideration. If the evidence gathered by the tax authorities provides sufficient indications of the existence of such a disproportion, it is then up to the taxpayer to establish the accuracy of his allegations to the contrary (ATF 138 II 57 rec. 7.1 p. 66; Federal Court ruling 2C_814/2017 cited above, para. 8.1.3). Moreover, once a fact is considered to be established, the question of the burden of proof no longer arises ...

In a case on hidden distribution of profits, the Luxembourg tax authorities stated the following on the issue of valuation methods for intangible assets (a patent): “…the evaluation of an intellectual property right is a rather complex subject; that evaluation reports from “independent” experts in this field are often rather subjective; whereas, therefore, reference should be made to a neutral and recognized body for the evaluation of patents, in this case WIPO, which proposes three different methods of valuation, including (a) the cost method, (b) the revenue method, as well as (c) the market method; that the first method of evaluation is to be dismissed from the outset in view of the absence of research and development expenses reported by the Claimant; that the second method is based on the future revenues of the patent invention; therefore, there must be a large enough amount of data to predict future revenues over the life of the patent, which is not the case here, as the tax dispute has only the royalties collected for the years 2013 and 2014; that, finally, the market method consists in the search for a similar patent whose price is known because it has already been the subject of a transaction; whereas, however, this method raises two major problems, on the one hand, the collection of data on patents already having a price because they have been the subject of a transaction, and, on the other hand, the uniqueness and the rarity of each patent that has at least a small similarity; that in view of this finding, a precise and fair evaluation proving impossible, the present instance sets the operating value of the patent of invention on January 1 , 2014 to 1.000.000 euros under § 217 AO…“ Click here for translation ...

Lender Societe had acquired real estate in 2008 for EUR 26 million. The acquisition had been financed by a bank loan of EUR 20 million and a shareholder loan of EUR 6 million. The interest rate on the shareholder loan was set at 12%. The Tax Authorities found that the “excessive” part of the interest paid on the shareholder loan was as a hidden distribution of profit subject to dividend withholding tax. The hidden profit distribution was calculated as the difference between an arm’s length interest rate set at approximately 3% and the interest rate according to the loan agreement of 12%. Lender Societe disagreed with the assessment and brought the case before the Tribunal Administratif. The Tribunal agreed with the Tax Authorities and qualified the excessive interest payments as a hidden profit distribution subject to a 15% dividend withholding tax. Click here for translation ...

The Bundesfinanzhof confirmed prior case law according to which the provisions on hidden deposits and hidden profit distributions must be observed in the context of the additional taxation. On the question of economic activity of the controlled foreign company, the Bundesfinanzhof refers to the ruling of the European Court of Justice concerning Cadbury-Schweppes from 2006. According to paragraphs §§ 7 to 14 in the Außensteuergesetz (AStG) profits from controlled foreign companies without business activity can be taxed in Germany. In the case at hand the subsidiary was located in a rented office in Cyprus and employed a resident managing director. Her job was to handle correspondence with clients, to carry out and supervise payment transactions, manage business records and keep records. She was also entrusted with obtaining book licenses to order these sub-licenses for the benefit of three of Russia’s and Ukraine’s affiliates, which distributed the books in the Russian-speaking market. The license income earned by subsidiary was taxed at 10 percent in Cyprus. The Income was considered ‘passive’ as the subsidiary lacked the necessary ‘actual economic activity’. On that basis the Bundesfinanzhof rejected the appeal of the taxpayer. Click here for English translation Click here for other translation ...

The court ruled that, based on all the findings in the proceedings (the plaintiff did not provide documentation, did not follow the tax authority’s instructions), the tax authority had the possibility to establish the tax base by assessment pursuant to Article 68 of ZDATP-2. The tax authority concluded that the application of the cost plus method was not applicable in the specific case and decided to apply the transactional net margin method. The so-called primary adjustment still did not restore the situation as it would have been if the transactions had been carried out on an arm’s length basis. Therefore, the tax authority correctly made a secondary adjustment in the form of a disguised profit payment Click here for English translation Click here for other translation ...

“B-Production” is a subsidiary in a US multinational group and engaged in production and sales. “B-Production” pays services fees and royalties to its US parent. Following an audit, the tax authorities issued an assessment where deductions for these costs had been reduced which in turn resulted in additional taxabel income. An appeal was filed by “B-Production” with the Administrative court which in a judgement of June 2015 was rejected. An appeal was then filed by “B-Production” with the Supreme Administrative Court. In the appeal “B-Production” contested the findings of the Administrative Court that there was a hidden distribution of profits by means of the payment of management fees and duplication (overlapping) of the services at issue under the management contract and the other two agreements between the B-Production and the parent company. B-Production further argued that the evidence in the case refutes the conclusions in the tax assessment and the contested decision that the services rendered did not confer an economic benefit and in addition argues that the costs of royalties and the costs of engineering and control services under the other two contracts are not a formative element of the invoices for management services, a fact which was not considered by the court. Judgement of the Supreme Administrative Court The Supreme Administrative Court decided in favour of the tax authorities and dismissed the appeal of B-Production as unfounded. Excerpts “The dispute in the case concerned the recognition of expenses for intra-group services. The NRA Transfer Pricing Manual (Fact Sheet 12) states that intra-group services in practice refers to the centralisation of a number of administrative and management services in a single company (often the parent company), which serves the activities of all or a number of enterprises of a group of related parties selected on a regional or functional basis. The provision of such services is common in multinational companies. The concept of intra-group services covers services provided between members of the same group, in particular technical, administrative, financial, logistical, human resource management (HRM) and any other services. In the present case, the costs in question relate to a contract for the provision of management services dated 26.11.2002, paid by the subsidiary [company], registered in the Republic of Bulgaria, to the parent company, [company], registered in the USA. The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (‘the OECD Guidelines’) should therefore be taken into account in the analysis of those costs and, accordingly, in the interpretation and application of the substantive law. According to paragraph 7.5 of the OECD Guidelines, the analysis of intra-group services involves the examination of two key questions: 1/ whether the intra-group services are actually performed and 2/ what the remuneration within the group for those services should be for tax purposes. In the present case, the dispute in the case relates to the answer to the first question, since it is apparent from the reasoning of the audit report, the revenue authorities and the ultimate conclusion of the court of first instance that the services did not confer an economic benefit on the domestic company and constituted a disguised distribution of profits within the meaning of section 1(5)(b) of the Act. “a” of the Tax Code. Therefore, the arguments in the cassation appeal for material breaches of the rules of court procedure – lack of instructions concerning the collection of evidence related to the amount of the price of the intra-group service and the allocation of the burden of proof to establish this fact – are irrelevant to the subject matter of the dispute. Paragraph 7.6 of the OECD Guidelines states that, according to the arm’s length principle, whether an intra-group service is actually performed when an activity is carried out for one or more group members by another group member will depend on whether the activity provides the group member concerned with an economic or commercial advantage to improve its commercial position. This can be determined by analysing whether an independent undertaking would, on comparable terms, be willing to pay for the activity if it were carried out for it by an independent undertaking or whether it would only have carried it out with its own funds. It is correct in principle, as stated in the appeal in cassation, that the analysis of intra-group services and their recognition for tax purposes is based on the facts and circumstances of each particular case. For example, the OECD Guidelines lists activities which, according to the criterion in point 7.6, constitute shareholding activities. According to paragraph 7.10, b. “b” of the OECD Guidance, expenses related to the accounting requirements of the parent company, including consolidation for financial statements, are defined as such. The evidence in this case established beyond a reasonable doubt that the management services covered by the contract at issue in this case included the compensation of a responsible financial and accounting manager, including cash flow planning and reporting, preparation of monthly, quarterly and annual reports (American Accounting Standards accounting. These activities, which there is no dispute that they were performed, fall within the definition of Section 7.10 for “shareholder activities.” The remaining activities included in management services, including the costs associated with the use of the software programs referred to in the expert report, are imposed by the parent company’s requirements for control and accountability of the subsidiary under the three sets of activities – managing director, production and finance. There is no merit in the objection in the cassation appeal that the management contract services do not duplicate the costs of the other two contracts. It is established from the conclusion of the FTSE that the costs of engineering and control services and royalties (know-how and patent) are not a formative element of the invoices for management services. The conclusion of the experts was based only on the fact that separate contracts had been concluded for the individual costs and not on an analysis of the elements that formed the fees. According to Annex 6 to the expert report, ...

A Investment GmbH, acquired all shares of B in May 2012. To finance the acquisition, A Investment GmbH took up a bank loan with a interest rate of 4.78%, a vendor loan with an interest rate of 10% and a shareholder loan with an interest rate 8% from its parent company, Capital B.V. The 8 % interest rate on the shareholder loan was determined by A Investment GmbH by applying the CUP method based on external comparables. The German tax authority, found that the interest rate of 8 % did not comply with the arm’s length principle. An assessment was issued where the interest rate was set to 5% based on the interest rate on the bank loan (internal CUP). A Investment GmbH filed an appeal to Cologne Fiscal Court. The court ruled that the interest rate of the bank loan, 4.78%, was a reliable CUP for setting the arm’s length interest rate of the controlled loan. The vendor loan was considered irrelevant as the 10 % interests could have been influenced by other factors. With regard to the subordination of claims on the loan from Capital B.V., pursuant to Section 39 (1) (5) of the German Insolvency Act, neither the non-provision of collateral nor the subordination of the loans could justify a risk premium in the determination of the arm’s length interest. Implicit support within the group – at least for the loans from Capital B.V – was considered by the Court in this respect. The appeal of A Investment GmbH was dismissed by the Court. This decision is now appealed by A Investment GmbH to the Supreme Tax Court under file I R 62/17 and is pending. Click here for English translation Click here for other translation ...

LuxCo TM sold trademarks to a newly established sister company. The price had been set at €975,000. The tax authorities issued an assessment where the price had been set at €6,475,000 and the difference was considered to be hidden profit distribution. The Administrative court ruled in favor of the tax authorities. LuxCo TM’s valuation had been based on wrong facts and assumptions. Click here for translation ...

The German subsidiary of a Canadian group lent significant sums to its under-capitalised UK subsidiary. The debt proved irrecoverable and was written off in 2002 when the UK company ceased trading. At the time, such write-offs were permitted subject to adherence to the principle of dealing at arm’s length. In its determination of profits on October 31, 2002, the German GmbH made a partial write-off of the repayment claim against J Ltd. in the amount of 717.700 €. The tax authorities objected that the unsecured loans were not at arm’s length. The tax authorities subjected the write-down of the claims from the loan, which the authorities considered to be equity-replacing, to the deduction prohibition of the Corporation Tax Act. The authorities further argued that if this was not the case, then, due to the lack of loan collateral, there would be a profit adjustment pursuant to § 1 of the Foreign Taxation Act. Irrespective of this, the unsecured loans had not been seriously intended from the outset and should therefore be considered as deposits. In general, the so-called partial depreciation is not justified because of the so-called back-up within the group. The Supreme Tax Court has held that a write-off of an irrecoverable related-party loan is not subject to income adjustment under the arm’s length rules, although the interest rate should reflect the bad debt risk. The Supreme Tax Court has now held that the lack of security does not invalidate the write-off. The lender was entitled to rely on the solidarity of the group, rather than demanding specific security from its subsidiary as debtor. In any case the arm’s length income adjustment provision of the Foreign Tax Act applied to trading transactions and relationships, but not to those entered into as a shareholder. The loans in question substituted share capital and their write-off was not subject to income adjustment on the grounds that a third party would not have suffered the loss. However, the interest rate charged should reflect the credit risk actually borne. In the meantime, there have been several changes to the relevant statutes. In particular, related-party loan losses can only be deducted if a third party creditor would have granted the finance (or allowed it to remain outstanding) under otherwise similar conditions. Also the Foreign Tax Act definition of “trading” has changed somewhat to bring certain aspects of intercompany finance into the scope of arm’s length adjustments. However, the general conclusion of the court that an arm’s length interest rate must reflect the degree of risk borne by the creditor remains valid In its judgment of 24 June 2015, the Supreme Tax Court made reference to this case-law in relation to Article IV of the DTT United Kingdom 1964, which corresponds in substance to Article 9 (1) of the OECD MA. Accordingly, the reversal of a write-down of an unsecured loan by a domestic parent company to its foreign subsidiary in accordance with Section 1 (1) of the AStG is not lawful. For the fact that § 1 exp. 1 AStG would be overriding agreement, nothing is evident. The wording of the law and also the will of the contracting parties of the DTTA do not permit the interpretation on which the BFH bases its judgments. Thus, according to Article 9 (1) of the DBA-USA 1989 and Article IV of the DTT-UK 1964, which correspond in substance to Article 9 (1) of the OECD-MA, according to their wording as a prerequisite for the correction of “profits” of affiliated companies, that “Are bound in their commercial or financial relations to agreed or imposed conditions other than those which would be mutually agreed by independent companies”. In this case, “the profits which one of the undertakings without these conditions has made, but has not achieved because of these conditions, must be attributed to the profits of that undertaking and taxed accordingly.” On 30 March 2016, the Federal Ministry of Finance issued a non-application decree stating that Article 9 of the OECD Model Tax Convention does not refer to a transfer price adjustment but to a profit adjustment. According to the decree the principles of these two decisions are not to be applied beyond the decided individual cases insofar as the BFH has a blocking effect of DTT standards, which correspond in substance to Art. 9 (1) OECD-MA. The exclusive limitation of the correction on prices or transfer prices postulated by the BFH can not be inferred either from the wording of Article 9 DTT-USA 1989, Article IV DTT-UK 1964 or Article 9 (1) OECD-MA. The OECD Commentary on the OECD MA explicitly refers to the arm’s length terms and states that Article 9 (1) of the OECD-MA is concerned with adjustments to profits and not a price adjustment. If in the audit practice a situation is to be examined which corresponds to the facts of the cases of judgment, it must first be ascertained whether the loan relationship is to be recognized for tax purposes (eg no hidden distribution of profits) and whether the conditions are met pursuant to Section 6 (1) 2 sentence 2 EStG for recognizing a write-down on the loan receivable. If there is a loan relationship to be recognized and a partial depreciation should be carried out on the loan receivable pursuant to § 6 (1) (2) sentence 2 EStG , it must be examined whether the application of § 1 AStG in accordance with the BMF letter of 29 March 2011 (BStBl I S 277) means that the taxable person’s income is to be increased by the amount of the depreciation. Click here for English translation Click here for other translation ...

C-GmbH was the sole shareholder of I-GmbH. In 2000, I-GmbH, together with another company, set up a US company for the development of the US market, H-Inc., in which the I-GmbH held 60 per cent of the shares. H-Inc. received equity from the two shareholders and also received a bank loan of approx. $ 1.5 million (USD), which the shareholders secured through guarantees. As of December 31, 2003, the balance sheet of H-Inc. showed a deficit not covered by equity of approx. 950,000 USD. On June 30 , 2004,  I-GmbH became the sole shareholder of H-Inc. Then the bank put the H-Inc. granted loans due. Since H-Inc. was not able to serve the bank loan, C-GmbH paid the bank. As of December 31, 2004, the balance sheet of H-Inc. showed a deficit not covered by equity of approx. $ 450,000 , which at December 31 , 2005 amounted to approx. $ 1.6 million, as at 31 December 2006 $ 2.5 million and at December 31, 2007 USD 3.5 million. During the years 2004 to 2007, the I-GmbH granted its US subsidiary 5% interest-bearing, unsecured loans of € 261,756.22 (2004), € 1,103,140 (2005), € 158,553.39 (2006) and € 75,000 (2007) resulting from the liquidity of future profits of H-Inc. should be repaid. Loan receivables were subject to individual value adjustments already in the respective year of their commitment (2004: € 261,052, 2005: € 1,103,140, ​​2006: € 158,000, 2007: € 75,000). In judgment of 17 December 2014, the German Tax Court stated, with reference to its judgment of 11 October 2012, IR 75/11, that the treaty principle of “dealing At arm’s length ” have a blocking effect on the so-called special conditions. The relevant test according to Article 9 (1) of the DTC-USA 1989, which corresponds in substance to Article 9 (1) of the OECD Model Agreement, could only include those circumstances that have an effect on agreed prices. The concept of agreed conditions in Article 9 (1) of the OECD-Model Agreement should, in principle, include everything which is the subject of commercial and financial relations and therefore the subject of contractual exchange between affiliated undertakings, so that both the price and all other terms and conditions should be included. Following these decisions, on 30 March 2016, the Federal Ministry of Finance issued a non-application decree stating that Article 9 of the OECD Model Tax Convention does not refer to a transfer price adjustment but to a profit adjustment. According to the decree the principles of the above decisions are not to be applied beyond the decided individual cases. Se also the later decision from the German Tax Court I R 29/14. Click here for English translation Click here for other translation ...

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

A loan was granted from a swiss company to its shareholder. The interest rate was fixed at 2,5%. This was found to be a hidden distribution of profit to the shareholder, cf Art. 58 al. 1 letter. b LIFD. Click here for english translation ...

X was the principal shareholder and Chairman in the Insurance Agency, Y AG. In 2003, the company went bankrupt, with the bankruptcy proceedings suspended for lack of assets and the company was removed from the commercial register in September 2003. On 12 March 2007, the tax administration initiated a subsequent taxation proceedings against X concerning monetary benefits which it was supposed to have received from Y AG in the years 1997 to 2000. On 2 May 2012, the tax administration imposed an additional tax in the amount of CHF 39’056.20 including default interest. The appeal against this decision was rejected by the Tax Appeals Commission. Before the Federal Supreme Court, X appealed the decision. Excerp from the Federal Supreme Court ruling: “3.1 According to Art. 20 para. 1 lit.c DBG Income from movable assets, in particular dividends, profit shares, liquidation surpluses and non-cash benefits arising from participations of all kinds. In the relevant economic view, this includes all payments, transfers, credits, clearings or other services that can be measured and measured in cash Holders of social participation rights under any title on the basis of that holding receive from the Company and which do not constitute repayment of the existing capital. Specifically, so-called hidden profit distributions within the meaning of Art. 58 para. 1 lit. b DBG, ie contributions by the Company, which are not offset by any or no sufficient consideration by the Shareholder and which would not have been provided to a third party not involved in the Company or only to a significantly lesser extent. This is to be determined by a third-party comparison (the so-called “dealing at arm’s length” principle), in which all concrete circumstances of the concluded transaction must be taken into account. Non-cash benefits include a waiver of earnings for the benefit of the shareholder or a related party, which results in a corresponding reduction in the profit reported in the income statement. Such income waivers exist when the Company waives all or part of the income due to it for the benefit of the shareholder or related parties or if they do not provide the consideration which the Company would require from a non-participating third party. 3.2 In the area of non-cash benefits, the basic rule is that the tax authority bears the burden of proof for tax-increasing and increasing facts, whereas the taxable person is the one who repeals or reduces the tax. In particular, the authority is responsible for proving that the company has rendered a service and that it has no or no reasonable consideration in return. If the authority has established such a mismatch between performance and consideration, it is for the taxable person to rebut the presumption founded on it. If it fails to do so, it will bear the consequences of lack of evidence. It should also be noted that the taxpayer is obliged to cooperate in the mixed assessment system. Anyone making payments that are neither accounted for nor documented is to bear the consequences of such evidential proof, ie his payments are regarded as monetary benefits.” The Federal Supreme Court rules that the appeal was unfounded and therefore dismissed. Click here for translation ...

Spedition Gmbh entered a written agreement – at year-end – to pay management fees to its Dutch parent for services received during the year. The legal question was the relationship between arm’s-length principle as included in double tax treaties and the norms for income assessments in German tax law. The assessment of the tax office claiming a hidden distribution of profits because of the “retrospective” effect of the written agreement, was rejected by the Court. According to the Court the double tax treaty provisions bases the arm’s length standard on amount, rather than on the reason for, or documentation, of a transaction. Click here for English translation Click here for other translation ...

Wx-Distributor (a subsidiary of the Wx-group i.d.F. Bw.) is responsible for the distribution of household appliances in Austria. It is wholly owned by Z. Deliveries to Wx-Distributor are made by production companies of the Group located in Germany, Italy, France, Slovakia, Poland and Sweden with which it has concluded distribution agreements to determine transfer prices. On average Wx-Distributor had been loss-making in FY 2001-2005. Following an tax audit, the intra-group transfer prices were re-determined for the years 2001 to 2004 by the tax authorities. It was determined that the transfer prices in two years were not within the arm’s length range. The review of the tax authorities had revealed a median EBIT margin of 1.53% and on that basis the operating margin for 2001 were set at 1.5%. For the following years the margin was set at 0.9% due to changed functions (outsourcing of accounts receivable, closure of half the IT department). The resulting adjustments were treated as hidden distribution of profits to the parent company. An appeal was filed by Wx-Distributor. Judgement of the Court The Court decided predominantly in favour of the tax authorities. Excerpts “The functions and risks described above do not justify distribution agreements that do not ensure that the applicant, as a limited risk distributor, will not be able to achieve an overall (cumulative) positive operating result over a reasonable (foreseeable) period of time. This is also the case if this would be associated with higher losses for the independent production companies.” “In the view of the UFS, the use of the median in the event that the EBIT margin achieved is outside the range is to be applied in the present case because, according to the study, there is no ‘highly reliable’ range (cf. Loukota/Jirousek comments on the criticism of the Transfer Pricing Guidelines 2010 ÖStZ 2011) due to comparability deficiencies. Insofar as the applicant assumes that the correction of the EBIT margin to the median value constitutes an impermissible punitive taxation and possibly seeks an adjustment to the lower bandwidth value, whereby it recognisably refers to a decision of the BFH of 17 October 2001 I R 103/00, according to which an estimate is based on the upper or lower value of the bandwidth of arm’s length transfer prices, which is more favourable for the taxpayer. In addition to the existing comparability deficiencies, which in themselves justify an adjustment to the median, reference should also be made to the transfer pricing study by Baker&McKenzie from 2005, which was also submitted by the applicant. It may be true that transfer prices have to be fixed in advance, but in the case at hand no transfer prices were fixed per transaction carried out; instead, distribution agreements had been concluded in unchanged form since 1999 and the arm’s length nature of these agreements was justified by the results of comparative company studies. From the above point of view, it is permissible to use a study (Baker&McKenzie) for the further assessment of the arm’s length nature of the EBIT margin, which was prepared at a time (here 31 December 2005) that follows the period in which the net returns to be assessed were generated (2001 to 2005), but which refers to data material that originates from this period (2002 to 2004). This is because a comparison of the net returns achieved in the period under review (2001 to 2005) with comparable enterprises based on data from the years 1996 to 1999 can at best be used for planning purposes, but subsequent significant developments in the period under review (e.g. economic downturns…) are not (or cannot be) taken into account. According to Baker&McKenzie, the data material used in this process led to the result of comparable net yields with a median of 2.3% and a quartile range between 1.3% and 3.9%. An appendix to this study, which was prepared especially for the company and deals with the special features of inventory adjustment, accounts receivable and accounts payable, shows a comparable median EBIT return for the company of 2.6% with a quartile range of 1.5% to 4.1%. The values shown were achieved by comparable companies in the audit period and are consistently above the adapted median according to the transfer pricing study by Ernst & Young, which is why the adjustment to the lower range requested by the applicant is also unjustified for this reason. If the UFS bases its assessment of the arm’s length transfer price on the Ernst & Young study and uses the median achieved there, this is because it follows the applicant’s argumentation regarding the price determination required in advance and for this reason bases its considerations regarding comparable net returns on the modified Ernst & Young transfer price study. There are no other particular influencing factors that would make an adjustment of this study necessary. In view of the above considerations, the UFS assumes that the median net return of 1.49% determined in the modified comparative study by Ernst & Young submitted by the applicant is appropriate and should be applied for the audit period.” Click here for English translation Click here for other 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 ...

A Turkish company located in a tax free zone had obtained interest income based on the interest rate applied to foreign currency loans, although the company had lent money to its partner in Turkish Lira. Normally interest income is considered taxable, but within the tax free zone, income from listed activities is exempt. Click here for translation ...

A Turkeys Pharma Company carried out drug production, import and sales operations, and had purchased different active ingredients from foreign group companies. Following an audit the tax office found that the prices paid by the Pharma Company for six ingredients had been above the market price resulting in a hidden distribution of profits. A price study was performed for similar active ingredients suggesting price deviations ranging from 167 – 975 % Table 2: Price deviation from market price Theophylline 167.26%ibuprofen 478.34%Fluoxetine 975.15%Hyoscine-N-Butilbrüm 150.13%Povidone Iodine 176.83%metamizolesodi 260.05% An assessment was issued where the cost of the ingredients – and thus taxable income of the Pharma company – was adjusted based on the price paid for similar active ingredients between unrelated parties. The Pharma Company disagreed with the assessment and brought the case before the tax court. The Tax Court issued a decision in favor of the Pharma company. In a study from the Turkish Pharmaceutical Association it was stated that active ingredients could have different prices due to reasons such as using original methods, impurities, crystal structure and polymorphism, mesh size, batch size, certificate differences etc. Based on this study the Tax Court found, that although it had been determined that the Pharma Company had purchased active ingredients at higher prices compared to other companies, there was no clear information about the characteristics of the active substance, production factors, or other factors that will cause price differentiation. This decision was appealed by the tax authorities. The Court of Appeal approved of the decision issued by the tax court and dismissed the appeal. Click here for translation ...

No-banker Corp had issued an interest free loan to a related party. The Turkish tax office held that the lack of interest on the loan constituted a hidden distribution of profits and issued an assessment where additional income tax and a tax deficiency penalty was added and also banking and insurance transactions tax (BITT). The company filed a lawsuit based on the assessment. The tax court examined the case and determined that the loan to the partner had been used in the business of the company. Therefore, it was decided that the interest-free loan did not constitute a hidden distribution of profit. Hence, the tax court decided in favor of No-Banker Corp. The tax office then filed an appeal with Administrative Court. In a majority vote decision the Administrative Court rejected the appeal of the tax office and the decision of the tax court was upheld. It was emphasized that No-Banker Corp was not involved in bank or insurance business within the definition of BITT, and that the transaction in question did not aim to gain a benefit in the commercial and industrial business field. In order to be considered a banker based on the law, two conditions must be met; The first is that the subject matter of the legal person’s transaction has the nature of debt, and the second is that transactions in the nature of debt are carried out continuously. Click here for translation ...

Headquarter Corp had transaction with it’s branch in the Turkish Mersin Free Zone. The branch imported the goods subject to the transaction from abroad for $ 2,298,137.79 and these goods were then transferred from the branch to the Headquarter Corps for US $ 3,214,135.00 without any special processing, production process or added value by the branch. The tax office issued an assessment where the price of the controlled transactions were adjusted based on the import price (internal CUP). Headquarter Corp brought the assessment to court. The tax court stated, that because the branch does not have a separate legal entity from the company, profits were not transferred out of the company as a result of the high-priced transaction. Therefor there was no hidden distribution of income. However, it was also concluded that the reason behind the sale of the goods sold to the Headquarter from the branch in the free zone of Mersin, at a price that was above market prices for comparable transactions, was an attempt to transfer profits to the tax free zone and excluding those profits from the tax declaration of the headquarter Corp. Headquarter Corp argued that the value of the goods purchased from the importer is evaluated according to the Free on Board (FOB) in the claims in the tax inspection report. Hence, an evaluation was made based on the method in which the seller, who sells the goods to the branch in the free zone, is liable for costs and damages until the goods in question are loaded on the ship, and it was emphasized that the insurance, freight and other costs incurred afterwards were not taken into account by the examiners. On that basis, Headquarter Corp filed an appeal to the Administrative Court. The Administrative concluded that the price difference of $ 915.997.21 between the seller in the free zone importing the said good and selling the goods to the Headquarter Corp did not reflect the economic and commercial realities without adding any added value to the product. The appeal request was overturned for a new decision. Click here for translation ...

A German company on behalf of its Austrian Parent X-GmbH distributed products manufactured by the Austrian X-KG. By a contract of 28 May 1992, X-GmbH granted the German company the right to use the trade mark ‘X’ registered in Austria. According to the agreement the German company paid a license fee for the right to use the trade mark. In 1991, X-GmbH had also granted X-KG a corresponding right. By a contract dated 1 July 1992, X-KG was granted exclusive distribution rights for the German market. In the meantime, the mark ‘X’ had been registered as a Community trade mark in the Internal Market. The tax authorities dealt with the payment of royalties to X-GmbH for the years in question as vGA (hidden profit distribution). Click here for English translation Click here for other translation ...

A German GmbH distributed clothing for its Italian parent. The German tax authorities issued a tax assessment based on hidden profit distribution from the German GmbH in favor of its Italien parent as a result of excessive purchase prices, which led to high and continuous losses in Germany. The tax authorities determined the arm’s length price based on purchase prices, which the German GmbH had paid to external suppliers. However, these purchases accounted for only 5% of the turnover. The German Tax Court affirmed in substance a vGA (hidden profit distribution) as the tax authorities had provided no proff of deviation from arm’s length prices. If a hidden profit distribution is to be accepted, the profit shall be increased by the difference between the actually agreed price and the price agreed by independent contractual parties under similar circumstances – the arm’s length price. Where a range of arm’s length prices is produced, there are no legal basis for adjustment to the median value. The assessment must instead be based on the best value for the taxpayer. Distributors incurring losses for more than three years: The Senate understands its ruling in BFHE 170, 550, BStBl II 1993, 457 to say that whenever a distribution company sells products of an affiliate company and suffers significant losses for more than three years, a rebuttable presumption is triggered that the agreed transfer price has not been at arm’s length. The assumption of a rebuttable presumption means that the taxpayer can explain and prove why the actually agreed transfer price is nevertheless appropriate. This applies if the articles purchased exceeds 95% of the total turnover. The taxpayer may, For example, explain why the actual development is either due to mismanagement or other reasons that were not foreseen and, above all, that timely adaptation measures have been taken. Losses can be accepted over a period of more than three years if the corresponding proof is provided. It may be necessary to extend the period within which profit must be achieved. If proof is not provided and the taxpayer does not take any adaptive measures, a reasonable profit can be estimated and spread over the years. Click here for English translation Click here for other translation ...

The sales company … – (GmbH) was the managing general partner of the plaintiff and defendant, a limited partnership – “Sales KG” – in the years in dispute. The GmbH had a 10/11 share in the capital of “Sales KG”. The limited partner was the Dutchman G. Shareholders of the GmbH with a share of 99% were the … NV (NV) and the … in The Hague (NV L-V). “Sales KG” engaged in wholesale trade in …, which it purchased almost exclusively from NV. It granted its customers rebates, bonuses and discounts in the years in dispute (1962 – 1964). According to the findings of the tax authorities (FA), “Sales KG” had to pay interest on its goods liabilities after 90 days from 1963. It did not charge its customers corresponding interest. The tax authorities increased the profit of “Sales KG” mainly by adding profits allegedly transferred to the Netherlands. In the absence of suitable documentation, the profit shifting was to be estimated at 3% per annum of the purchase of goods from NV. The tax authorities relied on Article 6 of the Agreement between the Federal Republic of Germany and the Kingdom of the Netherlands for the Avoidance of Double Taxation with respect to Taxes on Income and on Capital and Miscellaneous Taxes and for the Settlement of Other Questions in the Field of Taxation of 16 June 1959 – DBA-Netherlands – (BGBl II 1960, 1782, BStBl I 1960, 382), § 217 of the Reich Tax Code (AO) and § 19 No. 6 of the Regulation for the Implementation of the Corporation Tax Act (KStDV). “Sales KG” filed an action against the notices and the Fiscal Court (Finanzgericht, FG) amended the challenged notices and partly reassessed the profits of “Sales KG” and the profit shares of the partners. For the rest, it dismissed the action. The tax authorities lodged an appeal against this decision. Judgement of the Court The Court found that the tax court had correctly refused to increase the profit shares (§ 215.2 AO) of “Sales KG” by the profits allegedly transferred to the NV, as the conditions for a hidden distribution of profits (§ 6.1 sentence 2 of the Corporation Tax Act – KStG -, § 19 no. 6 KStDV) between the GmbH and its shareholder, NV in Holland, were not met. Excerpts “The requirements for a hidden profit distribution between the GmbH and the NV are not fulfilled. Although the FG did not have to decide on this question from its point of view, its findings are sufficient to exclude a hidden profit distribution in the case in dispute. According to the established case law of the Federal Fiscal Court (Bundesfinanzhof, BFH), a hidden profit distribution requires that a corporation grants its shareholders pecuniary advantages and that this benefit has its cause in the corporate relationship. The causality of the corporate relationship is given if the corporation would not grant the advantages to a non-shareholder if it exercised the due care of a prudent and conscientious manager (§ 43, paragraph 1 of the Limited Liability Companies Act) (cf. BFH judgements of 30 July 1975, I R 110/72, BFHE 117, 36, BStBl II 1976, 74, and of 3 February 1977, IV R 122/73, BFHE 121, 327, BStBl II 1977, 346, with further references). N.). The GmbH allegedly benefited the NV by causing it, as managing director and majority shareholder of the KG, to make payments (excessive prices for goods and interest payments) and to waive the passing-on of costs (cf. II 1 a above). Just as a pecuniary advantage can also be granted directly to a third party and indirectly to the shareholder instead of directly to the shareholder, the person directly granting the advantage does not have to be the GmbH itself; it can also be a third party who grants an advantage to the shareholder at the expense of his own profit. This advantage is granted indirectly by the GmbH to the extent that the reduction in profit of the third party affects its own profit (share), provided that the conditions for a hidden profit distribution are otherwise met. In principle, 10/11 of the KG’s loss of profit affects the GmbH’s profit; for the rest, the limited partner G bears the KG’s loss of profit. The Senate does not need to decide whether the possible loss of profits at the limited partnership is only fully attributable to the limited liability company because it alone caused it. In the case in dispute, there is already a lack of the fundamental prerequisite of a benefit which has its cause in the partnership relationship. It is not evident, nor has it been shown by the tax authorities, that the prices for the goods purchased by NV were higher than the usual prices for goods … Similarly, there are no indications that NV would have waived the default interest on the goods and would have partly supported the rebates, discounts and bonuses if it had not been a shareholder in the GmbH …” “If a transaction, in this case e.g. a possible transfer of profits (cf. German Memorandum on the DTA-Netherlands of 16 June 1959 on Article 6, printed in Handbooks on Double Taxation Agreements, Explanatory Notes on the German-Dutch DTA, text part), cannot already be covered under the domestic tax laws, then the direct application of Article 6 of the DTA-Netherlands would amount to an impermissible extension of the tax liability. The BFH rulings on the progression proviso do not contradict this. The progression proviso does not require a domestic statutory provision for its implementation (apart from the consent law pursuant to Article 59, paragraph 2, sentence 1 of the Basic Law – GG), because it does not create a tax liability, but maintains the existing one (BFH ruling of 9 November 1966 I 29/65, BFH ruling of 9 November 1966 I 29/65, BFH ruling of 9 November 1966 I 29/65, BFH ruling of 9 November 1966 I 29/65, BFH ruling of 9 November 1966 I 29/65) ...

A hidden distribution of profit presupposes that a corporation grants its shareholder a pecuniary advantage outside the distribution of profits under company law which it would not have granted to a non-shareholder — under otherwise identical circumstances — if the diligence of a prudent and conscientious manager had been applied. It should be noted that a director must be allowed a certain degree of commercial discretion. 1) As was stated in the judgment of the Senate in Case I R 21/68, a hidden profit distribution presupposes that a corporation grants its shareholder a pecuniary advantage outside the distribution of profits under company law which it would not have granted to a non-shareholder — under otherwise identical circumstances — if the diligence of a prudent and conscientious manager had been applied. This means that it is not the diligence of the managing director in the event of a dispute but the diligence of a prudent and conscientious manager that is the yardstick. For this reason, neither the intention of the corporation to distribute the profit in a hidden manner nor the agreement of the parties that the allocation is made with due regard to the corporate relationship is necessary (BFH judgement of 3 December 1969 I R 107/69, BFHE 97, 524, BStBl II 1970, 229). On the other hand, in the case of a transaction between the company and the shareholder, the disproportion between performance and consideration is not in itself sufficient for a hidden profit distribution to be assumed. In addition, a prudent and conscientious manager would have recognised this mismatch and would not have seen any legal or operational reason to conclude the transaction nevertheless. It must not be overlooked that a manager must be granted a certain degree of commercial discretion. His actions must, of course, be geared to the circumstances of the company. Click here for translation ...