Mylan Australia Holding is a subsidiary of the multinational pharmaceutical company Mylan Group. Mylan Australia Holding is the head of the Australian tax consolidated group, which includes its subsidiary Mylan Australia Pty. In 2007, Mylan Australia Pty acquired the shares of Alphapharm Pty Ltd and a substantial loan (A$923,205,336) was provided by a group company in Luxembourg to finance the acquisition. In subsequent years the interest expense was deducted from the taxable income of Mylan’s Australian tax group. The Australian Taxation Office (ATO) issued amended assessments to Mylan Australia Holding disallowing approximately AUD 589 million of interest deductions claimed for the 2007 to 2017 tax years. The ATO had initially pursued the structure as a transfer pricing issue, but ultimately argued that the deductions should be disallowed under the general anti-avoidance rule. Mylan Australia Holding appealed to the Federal Court. Judgment of the Court The Federal Court decided in favour of Mylan Australia Holding and set aside the amended assessment issued by the tax office. Excerpts “The conclusions I have reached on the principal issues are as follows: (a) MAHPL did not obtain a tax benefit in connection with the primary scheme that may be calculated by reference to the primary counterfactual; (b) had none of the schemes been entered into or carried out, the most reliable — and a sufficiently reliable — prediction of what would have occurred is what I have termed the “preferred counterfactual”; (c) the principal integers of the preferred counterfactual are as follows: (i) MAPL would have borrowed the equivalent of AUD 785,329,802.60 on 7 year terms under the SCA (specifically the term applying to Tranche B), at a floating rate consistent with the rates specified in the SCA; (ii) MAPL would otherwise have been equity funded to the extent necessary to fund the initial purchase of Alphapharm and to stay within the thin capitalisation safe harbour ratio from time to time; (iii) Mylan would have guaranteed MAPL’s borrowing under the SCA; (iv) Mylan would not have charged MAPL a guarantee fee; (v) interest on the borrowing would not have been capitalised; (vi) MAPL would have been required to pay down the principal on a schedule consistent with that specified in the SCA and would have made voluntary repayments to reduce its debt as necessary to stay within the thin capitalisation safe harbour, from time to time; (vii) MAPL would not have taken out hedges to fix some or all of its interest rate expense; (viii) MAPL would have taken out cross-currency swaps into AUD at an annual cost of 3.81% per annum over AUD 3 month BBSW; and (ix) if MAPL’s cashflow was insufficient to meet its interest or principal repayment obligations, Mylan would have had another group company loan MAPL the funds necessary to avoid it defaulting on its obligations, resulting in MAPL owing those funds to that related company lender by way of an intercompany loan, accruing interest at an arm’s length rate; (d) MAHPL did (subject to matters of calculation) obtain a tax benefit in connection with the schemes, being the difference between the deductions for interest obtained in fact, and the deductions for interest that would be expected to be allowed on the preferred counterfactual; and (e) MAHPL has discharged its onus in relation to the dominant purpose enquiry specified by s 177D of the ITAA36 and so has established that the assessments issued to it were excessive.” “Conclusions on dominant purpose I do not consider that, having regard to the eight matters in s 177D(b), it would be concluded that Mylan or any other of the persons who entered into or caried out the schemes or any part of the schemes did so for the purpose of enabling MAHPL to obtain a tax benefit in connection with the schemes. Of the numerous topics addressed above in relation to those eight matters, only one supports a contrary conclusion: the failure to refinance PN A2 or otherwise revisit the interest rate paid on PN A2. Nevertheless, the authorities recognise that not all matters need to point in one direction, whether the conclusion is that that there was the requisite dominant purpose, or the converse: see, eg, Sleight at [67] (Hill J). Other matters addressed are neutral, or point to purposes other than obtaining a tax benefit in connection with the schemes. It must be recalled that merely obtaining a tax benefit does not satisfy s 177D: Guardian at [207] (Hespe J, Perry and Derrington JJ agreeing). Nor does selecting, from alternative transaction forms, one that has a lower tax cost of itself necessarily take the case within s 177D. It is, as the plurality explained in Spotless Services (at 416), only where the purpose of enabling the obtaining of a tax benefit is the “ruling, prevailing, or most influential purpose” that the requisite conclusion will be reached. In my assessment, MAHPL has established that, assessed objectively (and keeping in mind that the question is not what Mylan’s actual, subjective purpose was), the facts of this case do not attract that conclusion.” Click here for translation ...

A AB is part of an international group. The group was planning a reorganisation involving a number of intra-group transactions. As part of this reorganisation, A AB would acquire all the shares in B from the group company C. The acquisition would mainly be financed by A AB taking a loan from group company D, which is domiciled in another EU country. The terms of the loan, including the interest rate, would be at market terms. A AB requested an advance ruling to know whether the deduction of the interest expenses on the debt to D could be denied on the grounds that the debt relationship had been incurred exclusively or almost exclusively for the purpose of obtaining a significant tax advantage or because the acquisition of B was not essentially commercially motivated. If the interest was subject to non-deductibility, A AB wanted to know whether this would constitute an unauthorised restriction of the freedom of establishment under the EC Treaty. The Board of Advance Tax Rulings concluded that deductions for interest expenses could not be denied. Not agreeing with this ruling the tax authority filed an appeal with the Supreme Administrative Court. Judgment of the Court The Supreme Administrative Court upheld the decision of the Board of Advance Tax Rulings. Although the interest expenses were covered by the Acquisition Rule, it would be in breach of Article 49 TFEU (freedom of establishment) to deny the interest deductions. Excerpt “16. In the case HFD 2021 ref. 68, the Supreme Administrative Court found, with reference to the judgment of the Court of Justice of the European Union in Lexel (C-484/19, EU:C:2021:34), that the provision in Chapter 24, Section 18, second paragraph, of the Tax Code constitutes a restriction of the freedom of establishment which cannot be justified if it is applied to interest payments to companies in other Member States in situations where the companies involved would have been subject to the provisions on group contributions if both companies had been Swedish (paragraph 37). 17. According to the second paragraph of Section 18, interest expenses may not be deducted if the debt relationship has arisen exclusively or almost exclusively in order to obtain a significant tax advantage for the community of interest. According to its wording, the provision makes no distinction between interest paid to Swedish and foreign recipients. The reason why the provision is nevertheless considered to constitute a restriction on the freedom of establishment is that, as stated in the preparatory works, it is not intended to cover interest payments between companies covered by the provisions on group contributions. Such an interest payment is not considered to give rise to any tax advantage since the same result can be achieved with group contributions (Proposition 2012/13:1, pp. 254 and 334, and HFD 2021 ref. 68, paragraph 29, with reference to Lexel, paragraphs 35-44). 18. The question is whether there is reason to assess the provision in Chapter 24, section 19, first paragraph, of the Tax Code differently. According to that provision, interest expenses relating to an intra-group loan to finance an intra-group acquisition of participatory rights are not deductible if the acquisition is not essentially motivated by commercial considerations. Nor does that provision, according to its wording, make any distinction between interest paid to Swedish and foreign recipients. 19. In the first paragraph of Section 19, the prohibition of deduction has not, as in the second paragraph of Section 18, been made dependent on the existence of a possible tax advantage, but on what the borrowed capital has been used for, namely an intra-group acquisition of shareholding rights which is not essentially commercially motivated. Although the provision does not expressly state anything about tax benefits, in the opinion of the Supreme Administrative Court, it cannot be ignored that it is part of a system of rules whose overall purpose is to counteract tax planning with interest deductions. It is clear from the travaux préparatoires that the provision in Section 19, first paragraph also has this purpose (Government Bill 2017/18:245, pp. 193 and 366 et seq.). 20. It can thus be concluded from the travaux préparatoires that the provision in Section 19, first paragraph, is not intended to cover interest payments that do not entail any tax benefit, which is the case when the companies involved are covered by the provisions on group contributions. The refusal of a deduction for interest paid to companies in other Member States on the basis of the first paragraph of Section 19 may therefore, in the same way as when a deduction is refused on the basis of the second paragraph of Section 18, be regarded as entailing a difference in the treatment of domestic and cross-border situations which is, in principle, impermissible. 21. In HFD 2021 ref. 68, the Supreme Administrative Court held that the difference in treatment resulting from the provision in Chapter 24, Section 18, second paragraph, of the Income Tax Code cannot be justified by overriding reasons of public interest (paragraphs 30-36). As has been shown, the provisions in Section 18, second paragraph, and Section 19, first paragraph, have the same purpose, namely to counteract tax planning with interest deductions. Furthermore, both provisions cover transactions carried out under market conditions and are not limited to purely fictitious or artificial arrangements. The reasoning of the Court in the case is therefore equally relevant to the provision in Section 19(1). Thus, the difference in treatment resulting from that provision cannot be justified either. 22. It follows from the above that the provision in Chapter 24, Section 19, first paragraph, of the Tax Code also constitutes an unauthorised restriction of the freedom of establishment if it is applied to interest payments to companies in other Member States and the companies involved would have been subject to the provisions on group contributions if they had been Swedish. 23. It follows from the conditions submitted that A and D would have been subject to the provisions on group contributions if both companies had been Swedish. The ...

Mylan Australia Holding is a subsidiary of the multinational Mylan Group, which is active in the pharmaceutical industry. Mylan Australia Holding is the head of the Australian tax consolidated group, which includes its subsidiary Mylan Australia Pty. In 2007, Mylan Australia Pty acquired the shares of Alphapharm Pty Ltd. and to finance the acquisition, a substantial loan (A$923,205,336) was provided by a group company in Luxembourg. In the following years interest expenses was deducted from the taxable income of Mylan’s Australian tax group. The tax authorities issued a notice of assessment for the years 2009 to 2020 disallowing the deduction of excessive interest expense incurred as a result of the financing arrangement. Initially the tax authorities relied on both transfer pricing provisions and the general anti-avoidance provision (Pt IVA), but subsequently they relied only on the latter as the basis for the assessment. Mylan Australia Holding filed appeals on 4 June 2021 in respect of the 2009-2019 assessment and on 6 April 2022 in respect of the 2020 assessment. During the subsequent proceedings, the tax authorities requested Mylan to provide certain documents (including a PwC email of 2 October 2008 referring to a “financial model which we modified continuously … to evaluate the US tax effectiveness …”) related to the financial arrangement. Mylan however, refused to do so claiming that the documents were protected by Legal Professional privilege. Order of the Federal Court The Federal Court ordered Mylan Australia Holding to obtain and provide the requested documents. Excerpts “THE COURT ORDERS THAT: 1. By 14 July 2023, the Applicant take all reasonable steps available to it to obtain the documents, or copies thereof, which fall within the categories set out in Schedule 1, which are in the power, custody or control of Viatris Inc and/or Mylan Inc and/or Mylan Laboratories Inc. 2. Pursuant to r 20.15(1) of the Federal Court Rules 2011 (Cth), the Applicant give non-standard discovery of the categories of documents in Schedule 1 by 28 July 2023. 3. By 28 July 2023, the Applicant file and serve an affidavit as to the Applicant’s efforts made pursuant to order 1 and the nature of the searches made to locate documents responsive to the categories of documents in Schedule 1. …” Click here for translation ...

After the case was remanded by the Supreme Court in 2022, the Court of Appeal classified a Luxembourg company’s shareholder loan to “X Shareholder Loan B.V.” of €57,237,500 as an ‘imprudent loan’, with the result that the interest due on that loan was only tax deductible to a limited extent. The remaining interest was non-deductible because of fraus legis (evasion of the law). Allowing the interest due on the shareholder loan to be deductible would result in an evasion of tax, contrary to the purpose and purport of the 1969 Corporation Tax Act as a whole. The purpose and purport of this Act oppose the avoidance of the levying of corporate income tax, by bringing together, on the one hand, the profits of a company and, on the other hand, artificially created interest charges (profit drainage), in an arbitrary and continuous manner by employing – for the achievement of in itself considered business objectives – legal acts which are not necessary for the achievement of those objectives and which can only be traced back to the overriding motive of bringing about the intended tax consequence (cf. HR 16 July 2021, ECLI:NL:HR:2021:1152). Click here for English translation Click here for other translation ...

As a general rule interest expenses are deductible for the purposes of income taxation of a business activity. However, for companies in a group, e.g. companies in the same group, certain restrictions on the deductibility of interest can apply. In Sweden one of these limitations is that if the debt relates to the acquisition of a participation right from another enterprise in the partnership, the deduction can only be made if the acquisition is substantially justified by business considerations, cf. Chapter 24, Sections 16-20 of the Swedish Income Tax Act. A AB is part of the international X group, which is active in the manufacturing industry. A restructuring is planned within the group which will result in A becoming the group’s Swedish parent company. As part of the restructuring, A will acquire all the shares in B AB, which is currently the parent company of the Swedish part of the group, from group company C, which is resident in another EU country. Payment for the shares will be made partly by a contribution in kind equivalent to at least 75 % of the purchase price and partly by A issuing an interest-bearing promissory note on the remaining amount. A AB requested a preliminary ruling from the Tax Board on whether the rules limiting the right to deduct interest would result in interest expenses incurred as a result of the intra-group acquisition of the shares in B AB not being deductible. The Board found that the restructuring is justified for organisational reasons and that it follows from the preparatory works and previous practice that the acquisition is therefore not commercially justified within the meaning of the legislation in question. According to the Board, the application of Swedish domestic law therefore means that no deduction should be allowed. However, the Board found that it would be contrary to the freedom of establishment under the TFEU to deny A AB deduction for the interest expenses. An appeal was filed by the tax authorities with the Supreme Administrative Court in which they requested that the preliminary ruling from the tax board be amended and answer the question by denying A AB a deduction for interest expenses. Judgement of the Court The Court upheld the decision of the Tax Board and allowed deductions for the interest expenses in question. Not for the Swedish rules being contrary to the freedom of establishment under the TFEU but by reason of the interest expenses being justified by business considerations. Excerpts ”15. The interest relates to a debt owed to C which is situated in another EU country. It is clear from the conditions provided that it is only C who is actually entitled to the interest income. Furthermore, the description of the circumstances of, and reasons for, the planned restructuring provided in the application do not constitute grounds for considering that the debt relationship must be created exclusively or almost exclusively in order for the community of interest to obtain a significant tax benefit. Deduction of the interest expenditure should therefore not be refused on the basis of Chapter 24, Section 18. 16. The question is then whether the deduction should be refused on the basis of Chapter 24, Section 19.” … ”26. In this case, a relatively long period of time has elapsed between the external acquisitions of the shares in Y Group’s Parent B – which were completed in 2015 – and the intragroup acquisition of the shares in that company that is now under consideration. However, the acquisition of B has been part of a larger process that has also involved the incorporation of Z Group and eventually W Group into X Group. As this is a process which is typically extensive and complex and which has resulted in the merger of several large manufacturing groups into one, the time lag should not lead to the conclusion that the intra-group acquisition is not substantially justified from a commercial point of view. Furthermore, it appears that the acquisition of the shares in B under consideration would not have taken place if the external acquisitions had not taken place. 27. Since the external acquisitions were made for commercial reasons and the acquisition under consideration in the context of the present restructuring is prompted by the external acquisitions, the acquisition can be considered to be substantially justified on commercial grounds. Accordingly, the deduction of interest expenses should not be denied under Chapter 24, Section 19. 28. The preliminary assessment is therefore confirmed.” Click here for English Translation Click here for other translation ...

“X Shareholder Loan B.V.” and its subsidiaries had been set up in connection with a private equity acquisition structure. In 2011, one of “X Shareholder Loan B.V.”‘s subsidiaries bought the shares of the Dutch holding company. This purchase was partly financed by a loan X bv had obtained from its Luxembourg parent company. The Luxembourg parent company had obtained the the funds by issuing ‘preferred equity certificates’ (PECs) to its shareholders. These shareholders were sub-funds of a private equity fund, none of which held a direct or indirect interest in “X Shareholder Loan B.V.” of more than one-third. The tax authorities found, that deductibility of the interest paid by “X Shareholder Loan B.V.” to its Luxembourg parent was limited under Section 10a Vpb 1969 Act. The Court of Appeal upheld the assessment. According to the Court, whether there is an intra-group rerouting does not depend on whether the parties involved are related entities within the meaning of section 10a, i.e. whether they hold an interest of at least one-third. Instead, it should be assessed whether all the entities involved belong to the same group or concern. This does not necessarily require an interest of at least one-third. No satisfied with the decision “X Shareholder Loan B.V.” filed an appeal with the Supreme Court. Judgement of the Supreme Court The Supreme Court declared the appeal well-founded and remanded the case to Court of Appeal for further consideration of the issues that had not addressed by the court in its previous decision. Click here for English translation Click here for other translation ...

Accordingly, this guidance is not intended to prevent countries from implementing approaches to address the balance of debt and equity funding of an entity and interest deductibility under domestic legislation, nor does it seek to mandate accurate delineation under Chapter I as the only approach for determining whether purported debt should be respected as debt ...

Mining Corp had deducted interest payments on an intra-group syndicated loan of $200.000.000 of which it stated an amount of $94,500,000.00, had been used, that is, a part of the syndicate $200,000,000.00, which was the subject of the loan, had been used to prepay the same loan for $65,000,000.00 and $29,500,000.00. Following an audit the tax authorities issued an assessment where, among other issued, deductions of interest payment on the loan had been adjusted. According to the tax authorities the accounting record of the credit or income from financing or the Cash Flow Statement was not sufficient to support the financial expenditure, especially if this does not demonstrate the movement of the money and its use in acquisitions, payments to third parties and other activities related to the line of business. In order to prove the use of the resources obtained, it was necessary to have the supporting documentation to prove the use of the resources obtained, and verify the link of the financing with the obtaining of taxable income or the maintenance of the source, such as a permanent control of fixed assets that would allow to verify the investments made in such item, investment plans and/or projects, contracts that accredit the investments made or loans made to its related parties, sample analyses documented with payment vouchers that support such acquisitions, among others, which has not occurred in the present case. In the audit of the current financial year 2009, the company had indicated that the loan was used for: (i) loans to subsidiaries and related parties for $149 379 000.00, (ii) time deposits for $33 753 884.00, and (iii) prepayments of the principal debt for $100 000 000.00 totalling $283 132 884.00; however, in this regard the Administration left the following observations: The earmarked amount of $283 132 884.00 exceeds the loan amount of $200 000 000.00. Despite the fact that this is the same loan is observed in the audit of the 2008 financial year, the purposes supported by the appellant are different. According to the tax authorities The loans to subsidiaries and related parties are only supported by the audited financial statements for 2009; however, no documents are presented to prove that the transfers were made to the aforementioned companies during the 2008 financial year, nor have the contracts for the loans with related parties been presented, nor have the reasons for these loans been indicated. For the fixed-term deposits, it shows a table of the deposits made, indicating the balances at the end of 2009; however, the balance of the statement of account sent by magnetic media does not coincide with this balance; furthermore, it did not document the link between the loan received and the deposit received in the bank. For the prepayments to the principal debt made on June 2, 2009, he did not document that after almost one (1) year of having received the loan, it is the same money that was indebted, which serves for the prepayment of the same. That for this reason, the Administration observed the amount of S/8,718,744.83 as it considered that the financial expenses generated by the loan received were not deductible, as there was no documentary evidence of their use for the company’s investments. An appeal was filed by Mining Corp. Judgement of the Tax Court The Tax Court revoked the appealed decision and order the Administration to recognise the deduction of the expenses for non-domiciled withholdings related to the financial charges related to the amount of S/428,298.27 and the proportional part of the $100,000,000.00, as established in the resolution, confirming it in the rest of the points of the present objection.. Excerpts “That, as stated by this Court in Resolutions No. 10813-3-2010 and 13080-9-201O, among others, the so-called “causality principle” is the relationship between the expenditure and the generation of taxable income or the maintenance of the producing source, i.e., all expenses must be necessary and linked to the activity carried out, a notion that must be analysed considering the criteria of reasonableness and proportionality, according to the nature of the operations carried out by each taxpayer. In accordance with the criteria adopted by this Court in Resolutions Nº 02607-5-2003 and 08318-3-2004, for an expense to be considered necessary there must be a causal relationship between the expenses incurred and the income generated, and therefore the necessity of the expense must be assessed in each case and, likewise, in Resolution Nº 06072-5-2003 it was established that it is necessary to analyse whether the expense is duly supported by the corresponding documentation and whether its use is accredited. That in the present case, it can be seen that the Administration has concluded that the non-domiciled Income Tax that the appellant assumed is not deductible, inasmuch as it did not support the causality of the financial expenses that originated the payment of said tax, according to the principle of causality contained in article 37 of the Income Tax Law. It is clear from the foregoing that the Administration refused the deduction made by the appellant on the grounds that the latter had not substantiated the causality of the financial charges repaired in the proceedings; However, this instance has concluded that the assessment for financial charges related to the syndicated loan for $30,000,000.00 is not in accordance with the law, and that the financial expenses related to the amortisation of $100,000,000.00 are only partially deductible; consequently, the position put forward by the Administration to maintain this assessment is unfounded and, consequently, it is appropriate to lift this assessment. As for the non-domiciled income tax that the appellant assumed in relation to the syndicated loan obtained of $200,000,000.00, in the part whose causality was not supported, it should be noted that the appellant alleges that it was directly liable for the payment of the interest, under Article 47 of the Income Tax Law, and that therefore the tax assumed corresponding to third parties was deductible as an expense. In this regard, article 47 of the Income Tax Law regulates ...

At issue was whether interest expenses incurred as a result of intra-group liabilities related to the acquisition of shares were tax deductible. In August 2010, the Swedish companies H AB and B AB had agreed, among other things, to sell E Oy’s shares to B AB and to allow B AB to transfer its rights and obligations to purchase the said shares directly or indirectly to its own subsidiary. B AB’s subsidiary had established D Oy in August 2010. In September 2010, before the completion of the acquisition, B AB had transferred its rights and obligations to purchase E Oy’s shares to D Oy. Ownership of E Oy’s shares had been transferred to D Oy at the end of September 2010. D Oy had financed the acquisition of E Oy’s shares mainly with a debt it had taken from B AB, from which D Oy had deducted the interest expenses incurred in its annual taxation. The tax audit report considered that no business-independent business grounds had been presented for the transfer of the loan liability of the acquisition to D Oy in a multi-stage ownership and financing arrangement and that the arrangement had been implemented solely to benefit from the Finnish group grant scheme and interest deduction. On this basis, the interest expenses on the debt related to the acquisition of E Oy’s shares had been added to D Oy’s taxable income in the tax adjustments submitted for the tax years 2012–2015 to the detriment of the taxpayer and when the tax for 2016 was delivered. In addition, the Taxpayers’ Law Enforcement Unit had stated that the actions in question were entirely artificial in a way that was proportional to the Supreme Administrative Court’s yearbook decision in the Supreme Administrative Court 2016: The Administrative Court held that the arrangement as a whole had to be regarded as artificial. Hence, deductibility of the interest paid to the foreign group company could be denied on the basis of the tax avoidance provision. This decision was appealed to the Supreme Administrative Court by the company. Judgement of the Supreme Administrative Court The Court set aside the decision of the administrative court and ruled in favor of D Oy. The Court held that the establishment of an auxiliary company as a company acquiring shares in an acquisition between independent parties and the financing of the company partly with equity and partly with intra-group debt could not be considered as artificial transactions. In such a situation, the deductibility of interest could not be denied under the tax avoidance provision. D Oy had acquired E Oy’s shares from an independent party. Based on the preliminary work of the Business Income Tax Act, the legislator’s starting point was that in share transactions between independent parties, the tax benefits related to the use of holding companies are limited by amending the law. Therefore, and taking into account that the premise of the Business Income Tax Act was that interest expenses accrued in business activities are deductible, the establishment of a holding company as an acquiring company and the financing of a holding company as an artificial act. Nor did such a situation have to be equated with the situation presented in the Supreme Administrative Court’s yearbook decision KHO 2016: 72. D Oy was thus entitled to deduct the interest expenses of the debt related to the acquisition of E Oy in its taxation for the tax years 2012 and 2013 as provided in section 7 and section 18 (1) (2) of the Business Income Tax Act and section 7 of the same law in its taxation for 2014–2016. as provided for in Article 18 (1) (2) and Article 18a. Tax years 2012–2016. in the manner provided for in subsection 1 (2) and section 18 a. Tax years 2012–2016. in the manner provided for in subsection 1 (2) and section 18 a. Tax years 2012–2016. Click here for English translation Click here for other translation ...

At issue was whether interest expenses incurred as a result of intra-group liabilities related to the acquisition of shares were tax deductible. In 2005, CA / S, indirectly owned by private equity investors A and B, had purchased a listed share in DA / S. DA / S’s subsidiary EA / S had established H AB in July 2008. On 25 August 2008, EA / S had transferred approximately 83.8 per cent of F Oy’s shares in kind to H AB and sold the remaining approximately 16.2 per cent at the remaining purchase price. On August 26, 2008, EA / S had subscribed for new shares in G Oy and paid the share subscription price in kind, transferring 56 percent of H AB’s shares. On August 27, 2008, G Oy had purchased the remaining 44 percent of H AB’s shares. EA / S had granted G Oy a loan corresponding to the purchase price, the interest expenses of which the company had deducted annually in its taxation. The share transfers in 2008 had been reported to be related to the 2005 acquisition and In the share transfers carried out in 2008, EA / S’s direct holding in F Oy had been changed to indirect. The change in ownership structure was implemented within a short period of time as a series of share transfers. With the help of the share transfers, new debt relationships had been created in the Group, with the aim of transferring the interest burden on EA / S to G Oy corresponding to the purchase price of H AB’s shares. When the share transfers were considered as a whole, their purpose was to seek a tax advantage in the form of interest deductions. The share transfers had therefore not corresponded to the real nature or purpose of the case and were artificial in nature. The Administrative Court held that when the share transfers were considered as a whole, their purpose was to seek a tax advantage in the form of interest deductions. The share transfers had therefore not corresponded to the real nature or purpose of the case and were artificial in nature. Hence, deductibility of the interest paid to the foreign group company could be denied on the basis of the tax avoidance provision. This decision was appealed to the Supreme Administrative Court by the company. Judgement of the Supreme Administrative Court The Court dismissed the appeal and upheld the decision of the administrative court. It stated that the subsidiary had been used in a multi-stage arrangement within the group as a company acquiring shares and that the arrangement as a whole had to be considered wholly artificial. According to the settled case law of the Court of Justice of the European Union, national measures restricting the right to deduct interest do not infringe the freedom of establishment within the meaning of Article 49 TFEU if they deal only with purely artificial arrangements. The judgment of the Court of Justice in Case C-484/19, Lexel, does not have to be considered as a change in this settled case law. In the light of these factors and the artificial nature of the present share transfers, the Supreme Administrative Court held that the denial of the right to deduct interest expenses accrued to G Oy under section 28 of the Tax Procedure Act was not contrary to Article 49 TFEU in the present case. The denial of the right to deduct interest expenses was also not contrary to the prohibition of discrimination in the Nordic tax treaty. KHO 2021 178 Click here for English translation Click here for other translation ...

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. Judgement 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 ...

A Dutch company, Lender B.V., had acquired companies through a private equity structure. The Dutch company that had been set up for the purpose of the acquisition was financed by subordinated loans payable to related parties established on the island of Guernsey. In the tax return for the Dutch company interest in the amount of € 13,157,632 was deducted in the taxable income based on an interest rate of 11,5 – 14 percent. The tax authorities denied the deduction, as the financing arrangement was considered abusive. Decision of the Supreme Court The Court decided in favor of the tax authorities. The interest on the loans was determined to 2.5% (instead of the agreed 11.5 – 14%). This interest was not deductible, because granting of the loans was considered as abusive. Furthermore, an Arrangement Fee of € 8.4 mio. could not be charged at once, but had to be capitalised. Click here for English translation Click here for other translation ...

In February 2020, OECD released the report Transfer Pricing Guidance on Financial Transactions. The guidance in the report describes the transfer pricing aspects of financial transactions and includes a number of examples to illustrate the principles discussed in the report. Section B provides guidance on the application of the principles contained in Section D.1 of Chapter I of the OECD Transfer Pricing Guidelines to financial transactions. In particular, Section B.1 of this report elaborates on how the accurate delineation analysis under Chapter I applies to the capital structure of an MNE within an MNE group. It also clarifies that the guidance included in that section does not prevent countries from implementing approaches to address capital structure and interest deductibility under their domestic legislation. Section B.2 outlines the economically relevant characteristics that inform the analysis of the terms and conditions of financial transactions. Sections C, D and E address specific issues related to the pricing of financial transactions (e.g. treasury functions, intra-group loans, cash pooling, hedging, guarantees and captive insurance). This analysis elaborates on both the accurate delineation and the pricing of the controlled financial transactions. Finally, Section F provides guidance on how to determine a risk-free rate of return and a risk-adjusted rate of return. Sections A to E of this report are included in the OECD Transfer Pricing Guidelines as Chapter X. Section F is added to Section D.1.2.1 in Chapter I of the Guidelines, immediately following paragraph 1.106 ...

Accordingly, this guidance is not intended to prevent countries from implementing approaches to address the balance of debt and equity funding of an entity and interest deductibility under domestic legislation, nor does it seek to mandate accurate delineation under Chapter I as the only approach for determining whether purported debt should be respected as debt ...