ERT Automotive Bohemia s.r.o. is active in the automotive industry. From 1 January 2013 to 30 November 2013, it provided the manufacture and repair of upholstery products for the automotive industry for its ‘sister’ company, Reiner Lasertec GmbH, established in Germany (both companies were owned at the time by the parent company Notos Beteiligungen GmbH, also established in Germany). ERT Automotive Bohemia s.r.o. provided ‘wage labour’ for Reiner Lasertec at a price of EUR 0,15 per minute of work. In December 2013, ERT Automotive Bohemia s.r.o. changed this business model. It no longer simply processed materials for Reiner Lasertec, but instead took over its former role. It was thus responsible for the production of the entire specific automotive part, which it then supplied as an independent manufacturer and final supplier. The Tax Office suspected that ERT Automotive Bohemia s.r.o. had supplied services to a related party from January to November 2013 at a lower price than would have been agreed between independent parties pursuant to section 23(7) of the Income Tax Act. Following a tax audit, it therefore assessed ERT Automotive Bohemia s.r.o. by way of an additional assessment for corporate income tax for FY 2013. ERT Automotive Bohemia s.r.o. criticised the tax authorities for ‘comparing incomparables’ – that is to say, for comparing the activities and costs as a subcontractor and of Reiner Lasertec as the final supplier. However, Reiner Lasertec, as the final supplier, was, unlike ERT Automotive Bohemia s.r.o., in charge of, for example, negotiations with customers. ERT Automotive Bohemia s.r.o. also pointed out that, according to the tax authorities’ calculations, as a mere manufacturer, it should be making unprecedented profits (for that position in the production chain) in terms of wages. ERT Automotive Bohemia s.r.o. succeeded in an appeal to the Regional Court, which referred the case back for further proceedings. According to the Regional Court, the tax authorities did not bear the burden of proof or the burden of proof as regards the determination of the reference price and the difference between the agreed price and the reference price. Nor did they deal with the argument that the agreed price for the services provided to Reiner Lasertec covered all its costs as well as a reasonable profit. They did not take sufficient account of the fact that ERT Automotive Bohemia s.r.o. acted as a subcontractor in the controlled transaction, whereas in the independent transaction it was already acting as an independent manufacturer. Judgement of the Supreme Administrative Court The Supreme Administrative Court upheld the decision of the Regional Court and ruled in favour of ERT Automotive Bohemia s.r.o. Excerpts “[15] However, the tax authorities suspected that until November 2013 the applicant had provided its services ‘below cost’. The tax authorities first intended to adjust the applicant’s tax base by approximately CZK 7,5 million, based on the reference price determined by the TNMM (net margin method). However, he subsequently (also following the applicant’s objections) proceeded to establish a new reference price using the CUP (comparable independent prices) method. In determining the second reference price, the administrator compared the original transaction between the applicant and Rainer Lasertec (or the provision of services by the applicant from January to November 2013) with the subsequent transaction between the applicant and Boshoku Automotive. He then attempted to ‘clean up’ the independent transaction with Boshoku Automotive so as to compare only comparable activities, i.e. the part of the production that the applicant was also providing before December 2013 (the essential part of the dispute being whether the complainant succeeded in doing so). And it concluded that the applicant had indeed provided its services to Reiner Lasertec until November 2013 ‘below cost’, i.e. at a lower price than would have been agreed under similar conditions between independent persons…” “[21] First of all, the selection of the independent transactions with which the tax authority wants to compare the controlled transaction is already under scrutiny: ‘the selection of independent transactions and, if they are not fully comparable, the appropriate method of their adjustment must be made on the basis of objective, fair and reviewable criteria’ (8 Afs 80/2007). When determining the reference price, the tax authorities must primarily base themselves on existing independent transactions which are at least at their core comparable to the controlled transaction.” “[29] At the most general level, the SAC recognises that a transaction which is broader in scope than the controlled transaction and which incorporates the subject matter of the controlled transaction (i.e., for example, the present independent transaction) may also serve as an independent transaction in determining the reference price. As the SAC has already stated above, the range of transactions that can be used for comparison is wide (cf. paragraph [21]). After all, the SAC has even gone so far in the past as to allow the tax authorities to use a transaction between related parties as an independent transaction, but with a price determined by an expert opinion (cf. cases 1 Afs 143/2017, cited above, paragraph 26, and 3 Afs 105/2017, paragraph 22). [30] However, even such an independent transaction must be comparable, at least in substance, to a controlled transaction. It must at least be eligible for subsequent correction. What comparability means, at least at its core, is of course to be determined on a case-by-case basis. In general, however, the subject matter of the controlled transaction must form an essential part of the wider arm’s length transaction – so that the arm’s length price is agreed with respect to it. If the subject matter of the controlled transaction were only a marginal, insignificant part of the wider arm’s length transaction, it would become unworkable. Similarly, it is important that the position of the parties to the broader arm’s length transaction, in particular that corresponding to the position of the taxpayer in the controlled transaction, should not differ substantially. It is only if these conditions are met that the adjustment of the arm’s length transaction will make any sense – otherwise the tax authorities would ...

ESAB CZ was a contract manufacturer for ESAB Europe. The contract set ESAB CZ’s target profit margin for 2014 and 2015 at between 2,5 % and 3,5 %, with an adjustment to 3 % if the actual profit margin achieved was outside that range. Those values were determined on the basis of a benchmarking analysis which produced a minimum profit margin of 0,41 % and an interquartile range of profit margins between 2,14 % and 5,17 %. The benchmarking analysis were not disputed, but the tax authorities held that the cost base on which the markup was calculated should have included annual amortisations/depreciations. ESAB CZ disagreed and filed a complaint with the Regional Court. Judgement of the Court The court ruled in favour of the tax authorities. Excerpts “51. Furthermore, it should be emphasised that the applicant has not demonstrated that the asset allowance does not relate to the applicant’s contract manufacturing and has not demonstrated that it relates to any other activity, failing to identify any other specific activity relating to the allowance and the income generated from it. Nor is any such thing apparent from the applicant’s accounts, where the write-down of the impairment is booked in the area of contract manufacturing for a ‘related party’. The tax authorities and, consequently, the defendant, therefore, reached the lawful conclusion that the cost item of the asset impairment charge in the tax years under review was related to the applicant’s contract manufacturing activities and that there was therefore no objective reason for excluding it from the cost base when calculating the profitability indicator. The applicant did not incur any real expenditure either on the valuation difference or on the assets as such. It merely took over the assets from its predecessor and included the depreciation of the remaining assets in the calculation of its profitability, so that it acquired assets for which it would have had to pay the purchase price if it had bought them. There is no doubt that those assets generate income for the applicant and that, if sold, their residual value will be an expense and the sale itself will generate income. Therefore, the applicant’s argument that the amortisation of the valuation difference does not constitute, by its very nature, a real cost incurred in the transaction under assessment and is an exceptional item caused by the conversion carried out cannot be upheld. 52. The Regional Court agrees with the defendant’s views and considers it beyond doubt that the depreciation relates to the revaluation of assets whose transfer resulted from the project and was the substance of the spin-off and those assets are related to the contractual production. Thus, the revaluation of the assets was the result of the project and the difference in the revaluation of the assets and the subsequent depreciation of the revaluation of those assets could not have been influenced by the applicant. Nor did it determine its position as a manufacturer or that this activity was its only source of profit. The defendant’s view that the consequences of decisions taken by another company in the group cannot be passed on to the applicant and thereby reduce its profits by those items excluded from the cost base is lawful. In those circumstances, the costs in the form of depreciation on the difference in the revaluation of assets should be included in the calculation of the applicant’s profitability because of the relationship of that depreciation to assets related to the applicant’s production activities.” (…) “…The TNMM method was chosen as the profitability indicator and the net operating cost margin (NCPM) as the indicator. The resulting interquartile range, which the applicant considered to be market normal and to which it referred, was set between 2,14 % and 5,17 %. This analysis was accepted and relied upon by the tax authority, which concluded that the data obtained in the comparative analysis were sufficiently reliable and that the difference between the negotiated price and the normal price within the meaning of Article 23(7) of the ITA was demonstrated by the tax authority…. (…) 57. As is apparent from the foregoing, the defendant assumed that the sufficiently large sample of 56 comparable companies identified included companies with revalued assets. In the present case, the Benchmarking Analysis took into account a multi-year sample (2013 to 2015) of data on independent companies. The independent companies reflect the development of the market, whereby they register their assets in both historical and real valuation, acquire new technologies or technically upgrade their assets, etc. The defendant thus concludes that the data obtained in the Benchmarking Study is sufficiently reliable and that the difference between the agreed price and the normal price within the meaning of Art. § The tax administration fulfilled its burden of proof with regard to all the relevant facts (there is no dispute as to the proof of the transaction between the related parties) and by the Call for Evidence it shifted the burden of proof to the claimant, who did not satisfactorily prove the price difference in relation to the item of the write-down of the valuation difference, although it had sufficient time to do so. 58. The Regional Court agrees with the defendant’s conclusions thus expressed. The defendant has commented in detail on the comparative analysis submitted by the applicant and has given proper reasons why it considers it sufficiently reliable. The defendant has also dealt properly with the question of why it is necessary to determine a value at the mid-point between two extreme values in order to guarantee the best possible comparability, when it is appropriate to base the value on a mean trend in order to eliminate outliers or inaccuracies. The Regional Court was therefore unable to uphold the applicant’s plea that the defendant acted unlawfully by applying a profit margin at the level of the bottom quartile rather than at the level of the minimum resulting from the comparative analysis, that minimum being only 0.41 %. The applicant supports that argument by citing ...

By a notice of December 2020, the Court of Appeal of Brussels referred the following question for a preliminary ruling by the Constitutional Court : “ Does article 207, second paragraph, ITC (1992), as it applies, read together with article 79 ITC (1992), in the interpretation that it also applies to abnormal or gratuitous advantages obtained by a Belgian company from a foreign company, violate articles 10, 11 and 172 of the Constitution? “. The Belgian company “D.W.B.”, of which Y.S. and R.W. were the managers, was set up on 4 October 2006 by the Dutch company “W.”. On 25 October 2006, the latter also set up the Dutch company “D.W.” On 9 November 2006, bv “W.” sold its shareholdings in a number of subsidiaries of the D.W. group to its subsidiary nv ” D.W. “. It was agreed that 20 % of the selling price would be contributed by e.g. “W.” to the capital of the latter and that 80 % would be converted into a five-year interest-bearing loan between e.g. “W.” and “D.W.”. On 16 March 2007 the capital of “D.W.B.” was increased. This increase in capital was achieved by a contribution in kind by “W.”. of its claim against nv “D.W.” by virtue of the aforementioned loan. The contribution of the claim was partly booked in the account “Kapital” and partly on the account “Issuance premiums”, which were not available. On 17 March 2007, “W.” sold all its shares in ” D.W.B. ” to the “D.W.” On 31 August 2009, “D.W.B.” was put into liquidation and the liquidation was completed. Y.S. and R.W. were the liquidators. Pursuant to the loan agreement, the interest from “D.W.” to “D.W.B.” was not to be paid until 8 November 2011. In accordance with the accounting principle of accrual, according to which costs and revenues must be allocated to the period to which they relate, “D.W.B.” added the annual interest, due by the ” D.W. ” on 31 December 2007, 31 December 2008 and 31 August 2009, to its profit and loss account and to its amounts receivable after more than one year in its accounts on 31 December 2007, 31 December 2008 and 31 August 2009. It declared the amounts of interest in its returns for the assessment years 2008, 2009 and 2009 special, in which it then applied the deduction for risk capital (code 103). The tax administration rejected the aforementioned deductions for risk capital with application of Article 207(2) of the Income Tax Code 1992 (hereinafter: CIR 1992), as applicable for the assessment years 2008 and 2009. According to the administration, the capital on which “D.W.B.” wanted to make the deduction for risk capital comes from a transaction obtained under abnormal circumstances and which is not justified by economic objectives, but only by tax objectives. A tax increase of 10 pct. was applied. Y.S. and R.W. lodged an administrative appeal against that decision, but it was rejected by the regional director. Thereupon, Y.S. and R.W. filed a claim with the Dutch-speaking Court of First Instance in Brussels. By judgment of 18 November 2014, the Court dismissed the claim as unfounded. Y.S. and R.W. subsequently lodged an appeal with the Court of Appeal of Brussels. The court ruled that the interest on the intra-group loan was at arm’s length and that the contribution in kind to “D.W.B.” constituted a transaction with an actual quid pro quo, but that it was acquired in the context of transactions which cannot be explained by reference to economic objectives, but only by reference to the fiscal purpose of the deduction for risk capital. However, Y.S. and R.W. argue that the application of Article 207(2) (now Article 207(7)) of the CIR 1992 to the benefits obtained from a foreign company is contrary to the constitutional principle of equality. The Court of Appeal of Brussels therefore decided to raise of its own motion the above question. Judgement of the Constitutional Court The Constitutionals Court’s answer to the question is that “Article 207 of the Income Tax Code 1992, read in conjunction with Article 79 of that Code, as applicable for the assessment years 2008 and 2009, does not violate Articles 10, 11 and 172 of the Constitution.” Click Here for English Translation Click here for other translation ...