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

G.K. Ktf was a subsidiary of a company registered in the United Kingdom. On 29 December 2010 G.K. Ktf entered into a loan agreement with a Dutch affiliate, G.B. BV, under which G.B. BV, as lender, granted a subordinated unsecured loan of HUF 3 billion to G.K. Ktf. Interest was set at a fixed annual rate of 11.32%, but interest was only payable when G.K. Ktf earned a ‘net income’ from its activities. The maturity date of the loan was 2060. The loan was used by G.K. Ktf to repay a debt under a loan agreement concluded with a Dutch bank in 2006. The bank loan was repaid in 2017/2018. The interest paid by G.K. Ktf under the contract was deducted as an expense of HUF 347,146,667 in 2011 and HUF 345,260,000 in 2012. But, in accordance with Dutch tax law – the so called participation exemption – G.B BV did not include the interest as taxable income in its tax return. The tax authorities carried out an audit for FY 2011-2012 and by decision of 17 January 2018 an assessment was issued. According to the assessment G.K. Ktf had underpaid taxes in an amount of HUF 88,014,000. A penalty of HUF 43,419,000 and a late payment penalty of HUF 5,979,000 had been added. According to the tax authorities, a contract concluded by a member of a group of companies for a term of more than 50 years, with an interest payment condition other than that of a normal loan and without capitalisation of interest in the event of default, does not constitute a loan but a capital contribution for tax purposes. This is indicated by the fact that it is subordinated to all other creditors, that the payment of interest is conditional on the debtor’s business performance and that no security is required. The Dutch tax authorities have confirmed that in the Netherlands the transaction is an informal capital injection and that the interest paid to the lender is tax exempt income under the ‘participation exemption’. Hence the interest paid cannot be deducted from the tax base. The parties intended the transaction to achieve a tax advantage. Not agreeing with the decision G.K. Ktf took the case to court. The Court of first instance upheld the decision of the tax authorities. The case was then appealed to the Court of Appeal which resulted in the case being remanded to the court of first instance for reconsideration. After reconsidering the case, a new decision was issued in 2019 where the disallowed deduction of interest was upheld with reference to TPG 1995 para. 1.64, 1.65 and 1.66. The Court of first instance also found that the interest rate on the loan from BV was several times higher than the arm’s length interest rate. G.K Ktf then filed a new appeal with the Court of appeal. Judgment of the Court of Appeal. The Court held that the contested part of the tax authority’s decision and the final judgment of the court of first instance were unlawful and decided in favor of G.K. Ktf. For the years in question, legislation allowing for recharacterisation had still not been enacted in Hungary, and the conditions for applying the “abuse of rights” provision that was in force, was not established by the tax authorities. Click here for English translation Click here for other translation ...

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

The Court found that section 245 (GAAR) of the Canadian Income Tax Act did not apply to the transactions in question. Subsection 245(1) defines a “tax benefit” as a reduction, avoidance or deferral of tax. The Respondent says that the tax benefit BMO received was the reduction in its tax payable as a result of subsection 112(3.1) not applying to reduce its share of the capital loss on the disposition of the common shares of NSULC. In 2005, the Bank of Montreal (“BMO”) wanted to lend a total of $1.4 billion USD to a number of its US subsidiaries referred to as the Harris Group. BMO chose to borrow those funds from third parties. Tower Structure It would not have been tax efficient for BMO to simply borrow the funds and lend them to the Harris Group. Such a structure would have resulted in BMO having to pay US withholding tax on the interest payments it received from the Harris Group. As a result, BMO implemented what is commonly referred to as a “tower structure”. A tower structure is a complicated structure often used by Canadian companies to finance US subsidiaries in a tax efficient manner. It allows the deduction of interest costs by the Canadian company for Canadian tax purposes and the deduction of the corresponding interest costs by the US subsidiary for US tax purposes without having to pay withholding tax to the US on the repatriation of the funds. The tower structure implemented by BMO consisted of the following entities: (a) a Nevada limited partnership named BMO Funding L.P. (“Funding LP”) in which BMO had a 99.9% interest and a wholly owned subsidiary of BMO named BMO G.P. Inc. (“BMO GP”) had a 0.1% interest; (b) a Nova Scotia unlimited liability company named BMO (NS) Investment Company (“NSULC”) that was wholly owned by Funding LP; and (c) a Delaware limited liability company named BMO (US) Funding LLC (“LLC”) that was wholly owned by NSULC. BMO borrowed $150 million USD from a third party. It invested those funds in Funding LP. Funding LP, in turn, used those funds to acquire shares of NSULC which, in turn, used those funds to acquire shares in LLC. LLC then took the funds that it had received and lent them to the Harris Group. The balance of the required $1.4 billion USD came from a $1.25 billion USD loan obtained by Funding LP from a third party. Again, Funding LP used those funds to acquire shares of NSULC which, in turn, used those funds to acquire shares in LLC. LLC then took the funds that it had received and lent them to the Harris Group. Interest payments and dividends flowed through the tower structure at the end of each fiscal quarter. The Harris Group would pay interest to LLC. LLC would then use the money to pay dividends to NSULC. NSULC would pay corresponding dividends to Funding LP. Funding LP would use the funds it received to pay interest on the $1.25 billion USD that it had borrowed and would distribute the balance to BMO and BMO GP. BMO would, in turn, use the funds it received from Funding LP to pay interest on the $150 million USD that it had borrowed. The dividends received by BMO from NSULC (indirectly through Funding LP) were taxable dividends. BMO benefited from a subsection 112(1) deduction in respect of those dividends. From a business point of view, by borrowing US dollars to make an investment in a US asset, BMO effectively hedged its foreign exchange risk. If the Canadian dollar decreased in value against the US dollar between 2005 and 2010, then the increase in value (in Canadian dollars) of BMO’s indirect US dollar investment in the Harris Group would be matched by the increased cost (in Canadian dollars) of repaying the $1.4 billion USD in borrowed funds. Conversely, if the Canadian dollar increased in value against the US dollar between 2005 and 2010, then the decrease in value (in Canadian dollars) of BMO’s indirect US dollar investment in the Harris Group would be matched by the decreased cost (in Canadian dollars) of repaying the $1.4 billion USD in borrowed funds. However, from a tax point of view, BMO faced a potential problem with hedging its foreign exchange risk. There would not be any problem if the Canadian dollar decreased in value. Any increase in the value of the NSULC shares held by Funding LP that arose from a decrease in the value of the Canadian dollar would be taxable as a capital gain. That capital gain would be offset by the corresponding capital loss that would arise on the repayment of the $1.4 billion USD in borrowed funds. On the other hand, BMO would have a problem if the Canadian dollar increased in value. The resulting decrease in the value of the NSULC shares held by Funding LP would give rise to a capital loss. However, the stop-loss rule in subsection 112(3.1) would reduce that capital loss by an amount equal to the value of any non-taxable dividends that Funding LP had received from NSULC. As a result, the reduced capital loss would not be sufficient to fully offset the capital gain that would arise on the repayment of the $1.4 billion USD in borrowed funds. To avoid this potential mismatch of the capital gain and capital loss, BMO implemented a modification to the tower structure. Subsection 112(3.1) applies separately to each class of shares. Therefore, BMO decided to create a structure whereby NSULC had two classes of shares. When the first set of quarterly dividends was being paid, instead of paying a cash dividend, NSULC paid a stock dividend consisting of preferred shares. This resulted in Funding LP holding two classes of shares of NSULC: common shares with a high cost base and preferred shares with a low cost base. From that point forward, all quarterly dividends were paid on the preferred shares. By isolating the dividends in this manner, BMO ensured that, ...

A new 2017 edition of the OECD Model Tax Convention has been released, incorporating significant changes developed under the OECD/G20 project to address base erosion and profit (BEPS). The OECD Model Tax Convention, a model for countries concluding bilateral tax conventions, plays a crucial role in removing tax related barriers to cross border trade and investment. It is the basis for negotiation and application of bilateral tax treaties between countries, designed to assist business while helping to prevent tax evasion and avoidance. The OECD Model also provides a means for settling on a uniform basis the most common problems that arise in the field of international double taxation. The 2017 edition of the OECD Model mainly reflects a consolidation of the treaty-related measures resulting from the work on the OECD/G20 BEPS Project under Action 2 (Neutralising the Effects of Hybrid Mismatch Arrangements), Action 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances), Action 7 (Preventing the Artificial Avoidance of Permanent Establishment Status) and Action 14 (Making Dispute Resolution More Effective). See the also the Commentary on article 9 concerning the taxation of associated enterprises, and Commentary on article 7 concerning the taxation of business profits. The New Model Tax Convention ...

PepsiCo had devised hybrid securities, which were treated as debt in the Netherlands and equity in the United States. Hence, the payments were treated as tax deductible interest expenses in the Netherlands but as tax free dividend income on equity in the US. The IRS held that the payments received from PepsiCo in the Netherlands should also be characterised as taxable interest payments for federal income tax purposes and issued an assessment for FY 1998 to 2002. PepsiCo brought the assessment before the US Tax Court. Based on a 13 factors-analysis the Court concluded that the payments made to PepsiCo were best characterised as nontaxable returns on capital investment and set aside the assessment. Factors considered were: (1) names or labels given to the instruments; (2) presence or absence of a fixed maturity date; (3) source of payments; (4) right to enforce payments; (5) participation in management as a result of the advances; (6) status of the advances in relation to regular corporate creditors; (7) intent of the parties; (8) identity of interest between creditor and stockholder; (9) “thinness” of capital structure in relation to debt; (10) ability of the corporation to obtain credit from outside sources; (11) use to which advances were put; (12) failure of debtor to repay; and (13) risk involved in making advances. “And, perhaps most convincingly, the “independent creditor test” underscores that a commercial bank or third party lender would not have engaged in transactions of comparable risk.” “However, after consideration of all the facts and circumstances, we believe that the advance agreements exhibited more qualitative and quantitative indicia of equity than debt.” “We hold that the advance agreements are more appropriately characterized as equity for Federal income tax purposes.” ...