At issue was an intra-group loan that arose out of a reorganisation designed to accelerate the utilisation of tax losses and thereby generate tax savings for the Kwik-Fit group. According to the tax authorities the loan had an unallowable purpose under the rule in section 441 CTA 2009 and, on this basis, interest deductions on the loan were disallowed. Kwik-Fit´s appeals to the First-tier Tribunal and the Upper Tribunal were unsuccessful and an appeal was then filed with the Court of Appeal. Judgment The Court found that the unallowable purpose rule in section 441 CTA 2009 applied to the interest deductions and upheld the decisions of the First-tier and Upper Tribunals. Excerpt 35. The FTT then made the following findings: “101. We find, based on the evidence of Mr Ogura,that: (1)   the decision to implement the reorganisation was made as a whole group; the Appellants were part of that group so they understood and cooperated in that decision; (2)   the June 2013 Memorandum sets out what the directors of each company wanted to achieve, both for themselves and for the other members of the Kwik-Fit Group. That group purpose (as set out in that memorandum) was to create net receivables within Speedy 1, to enable utilisation of the losses in Speedy 1, and tax deductions for the interest expense of each debtor. That outcome was considered to be good for the whole group; (3)   an additional group purpose of thereorganisation was to simplify the intercompany balances within the Kwik-Fit Group; (4)   each of the Appellants knew the full details of the reorganisation which was being implemented, the steps they were required to take to implement that reorganisation, whether for themselves or as shareholder of another company involved in the reorganisation and understood as a matter of fact that the reorganisation had the effect of assigning the receivables under the Pre-existing Loans to Speedy 1. They understood that this was “for the benefit of the whole group”; and (5)   each of the Appellants had a choice as to whether or not to participate in the reorganisation, and if they had decided not to do so then the Pre-existing Loans to which they were party would have been left out of the reorganisation. The only potential reason for not participating given by Mr Ogura was if they had not wanted to pay the increased interest rate on those loans. (…) “88. In this case, the FTT’s conclusions were based on very particular factual features: a)The “group purpose” of the reorganisation, which the Appellants willingly adopted, was to achieve the tax benefits that I have already described: para. 101 of the FTT Decision, set out at [] above. b)There was an additional group purpose of simplifying intercompany balances (para. 101(3)), but that was clearly not considered by the FTT to be material. Further, the long-term aim of reducing the number of dormant companies was “merely part of the background noise”: para. 104 ([] above). c)The Appellants had a choice as to whether or not to participate in the reorganisation, the only reason given for not doing so being if they had not wanted to pay the increased rate of interest (para. 101(5)). d)The Pre-existing Loans were repayable on demand and the Appellants had little capacity to repay them, but there was no threat to call for their repayment. Instead, the Appellants understood that the increased interest rate “directly fed into the tax benefit for the group”. (See para. 102, set out above; the points are reiterated at para. 112.) In other words, the Appellants willingly agreed to take on the obligation to pay significant additional interest without any non-tax reason to do so. In contrast, if payment of interest at a commercial rate on a loan is the alternative to being required to repay it in circumstances where funds are still required, then that may well provide a commercial explanation for the borrower’s agreement to the revised rate. e)The increase in rate also had nothing to do with any recognition on the part of the Kwik-Fit group that it needed to make the change to avoid falling foul of the transfer pricing rules. There was no such recognition. The interest rate on the relevant loans was not set at LIBOR plus 5% because of a concern that the transfer pricing rules would otherwise be applied to adjust the rate upwards. Rather, the rate was set at LIBOR plus 5% to maximise the savings available while aiming to ensure that it was not objected to by HMRC as being excessive because it was above an arm’s length rate. Setting the rate at a level that sought to ensure that it did not exceed what would be charged at arm’s length i) meant that it could be accepted by the borrowers and ii) reduced the risk that the rate would be adjusted downwards for tax purposes, which would reduce the benefits available. The assumption was that the transfer pricing rules would not otherwise be applied to increase the interest rate. f)Mr Ghosh frankly acknowledged that the transfer pricing rules did not motivate the increase in rate, but the point is also made very starkly by the FTT’s findings that the Appellants could have chosen not to participate and that the interest rate would not have been increased on the Pre-existing Loans if they had not done so (paras. 101(5) and 102(4)), and by the group’s decision not to increase the rate of interest on other intra-group debt, including the Detailagent Loan (paras. 30 and 115; see [] and [32.] above). g)The result was that, although the commercial purpose for the Pre-existing Loans remained, the only reason for incurring the additional interest cost on the Pre-existing Loans was to secure tax advantages: para. 113 ([] above). The new rate was “integral” to the steps taken: para. 116 ([37.] above). h)As to the New Loans, the FTT found at paras. 103 and 117 that KF Finance and Stapleton’s did not have their own commercial purpose in taking them on and that the intended tax advantages were the main purpose for which KF Finance and Stapleton’s were party to them ([] and [37.] above).” Click here for translation ...

In 2009 the BlackRock Group acquired Barclays Global Investors for a total sum of $13,5bn. The price was paid in part by shares ($6.9bn) and in part by cash ($6.6bn). The cash payment was paid by BlackRock Holdco 5 LLC – a US Delaware Company tax resident in the UK – but funded by the parent company by issuing $4bn loan notes to the LLC. In the years following the acquisition Blackrock Holdco 5 LLC claimed tax deductions in the UK for interest payments on the intra-group loans. The tax authorities (HMRC) denied tax deductions for the interest costs on two grounds: (1) HMRC claimed that no loans would have been made between parties acting at arm’s length, so that relief should be denied under the transfer pricing rules in Part 4 of the Taxation (International and Other Provisions) Act 2010. (2) HMRC also maintained that relief should be denied under the unallowable purpose rule in section 441 of the Corporation Tax Act 2009, on the basis that securing a tax advantage was the only purpose of the relevant loans. An appeal was filed by the BlackRock Group with the First Tier Tribunal, which in a decision issued in November 2020 found that an independent lender acting at arm’s length would have made loans to LLC5 in the same amount and on the same terms as to interest as were actually made by LLC4 (the “Transfer Pricing Issue”). The FTT further found that the Loans had both a commercial purpose and a tax advantage purpose but that it would be just and reasonable to apportion all the debits to the commercial purpose and so they were fully deductible by LLC5 (the “Unallowable Purpose Issue”). An appeal was then filed with the Upper Tribunal by the tax authorities. According to the judgment issued in 2022, the Upper Tribunal found that the First Tier Tribunal had erred in law and therefore allowed HMRC’s appeal on both the transfer pricing issue and the unallowable purpose issue. The First Tier Tribunal’s Decision was set aside and the tax authorities amendments to LLC5’s tax returns were confirmed. An appeal was then filed by BlackRock with the Court of Appeal. Judgment The Court of Appeal found that tax deductions for the interest on the Loans were not restricted under the transfer pricing rules (cf. ground 1 above) but instead disallowed under the unallowable purpose rule in section 441 of the Corporation Tax Act 2009 (cf. ground 2 above). Excerpt regarding application of transfer pricing rules “34. Paragraph 1.6 of both the 1995 and 2010 versions of the OECD guidelines explains that what Article 9 of the model convention seeks to do is to adjust profits by reference to “the conditions which would have obtained between independent enterprises in comparable transactions and comparable circumstances” (a comparable “uncontrolled transaction”, as opposed to the actual “controlled transaction”). The 2010 version adds that this comparability analysis is at the “heart of the application of the arm’s length principle”, while explaining at para. 1.9 that there are cases, for example involving specialised goods or services or unique intangibles, where a comparability analysis is difficult or complicated to apply. 35. In its discussion of comparability analysis, para. 1.15 of the 1995 version states: “Application of the arm’s length principle is generally based on a comparison of the conditions in a controlled transaction with the conditions in transactions between independent enterprises. In order for such comparisons to be useful, the economically relevant characteristics of the situations being compared must be sufficiently comparable. To be comparable means that none of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or that reasonably accurate adjustments can be made to eliminate the effect of any such differences. In determining the degree of comparability, including what adjustments are necessary to establish it, an understanding of how unrelated companies evaluate potential transactions is required. Independent enterprises, when evaluating the terms of a potential transaction, will compare the transaction to the other options realistically available to them, and they will only enter into the transaction if they see no alternative that is clearly more attractive. For example, one enterprise is unlikely to accept a price offered for its product by an independent enterprise if it knows that other potential customers are willing to pay more under similar conditions. This point is relevant to the question of comparability, since independent enterprises would generally take into account any economically relevant differences between the options realistically available to them (such as differences in the level of risk or other comparability factors discussed below) when valuing those options. Therefore, when making the comparisons entailed by application of the arm’s length principle, tax administrations should also take these differences into account when establishing whether there is comparability between the situations being compared and what adjustments may be necessary to achieve comparability.” Similar text appears at paras. 1.33 and 1.34 of the 2010 version. 36. As can be seen from this, it is essential that the “economically relevant characteristics” are “sufficiently comparable”, in the sense of any differences either not having a material effect on the relevant condition (term) of the transaction, or being capable of being adjusted for with reasonable accuracy so as to eliminate their effect. 37. Paragraph 1.17 of the 1995 version expands on the concept of differences as follows: “… In order to establish the degree of actual comparability and then to make appropriate adjustments to establish arm’s length conditions (or a range thereof), it is necessary to compare attributes of the transactions or enterprises that would affect conditions in arm’s length dealings. Attributes that may be important include the characteristics of the property or services transferred, the functions performed by the parties (taking into account assets used and risks assumed), the contractual terms, the economic circumstances of the parties, and the business strategies pursued by the parties…” Again, this is reflected in the 2010 version, at ...

The case concerned interest payments of €15,636,270 on loans granted to finance the acquisition of shares in X-Group. In its corporate income tax return for FY2011, “Holding B.V.” had deducted an interest expense of €2,478,638 from its taxable profit, considering that the remaining part of its interest expenses were excluded from tax deductions under the interest limitation rule in Article 10a of the Corporate Income Tax Act. The tax authority disallowed tax deductions for the full amount refering to both local interest limitation rules and general anti-avoidance principles. It found that the main motive of the complex financial arrangement that had been set up to finance the acquisition of shares in the X-Group was to obtain tax benefits. An appeal was filed in which “Holding B.V.” now argued that the full amount of interest on the loans could be deducted from its taxable profits. It also argued that a loan fee could be deducted from its taxable profits in a lump sum. The District Court and the Court of Appeal largely ruled in favour of the tax authorities. An appeal and cross-appeal was then filed with the Supreme Court. Judgement of the Supreme Court. The Supreme Court found the principal appeal by “Holding B.V.” well-founded and partially reversed the judgment of the Court of Appeal. Excerpts in English “4.3.3 Article 10a(1) opening words and (c) of the Act aims to prevent the Dutch tax base from being eroded by the deduction of interest due on a debt incurred arbitrarily and without business reasons. This is the case if, within a group of affiliated entities, the method of financing a business-based transaction is prompted to such an extent by tax motives – erosion of the Dutch tax base – that it includes legal acts that are not necessary for the realisation of those business-based objectives and that would not have been carried out without those tax motives (profit drain). 4.3.4 In the genesis history of section 10a of the Act, it has been noted that the scope of this section is limited to cases of group profit drainage. Here, it must be assumed that an entity does not belong to the taxpayer’s group if that entity is not considered to be an associated entity under section 10a(4) of the Act.8 This means that Article 10a(1) chapeau and (c) of the Act lacks application in the case where, although the debt incurred by the taxpayer is related to the acquisition or expansion of an interest in an entity subsequently related to him (the taxpayer), that debt was incurred with another entity not related to him (the taxpayer). This is therefore the case even if this other entity has a direct or indirect interest in the taxpayer, or if this other entity is otherwise related to the taxpayer. This applies even if, in that case, the debt is not predominantly based on business considerations. As a rule, this situation does not fall within the scope of Section 10a(1) opening words and (c) of the Act. 4.3.5 The circumstance that, in the case referred to above in 4.3.4, Article 10a(1) opening words and (c) of the Act does not, as a rule, prevent interest from being eligible for deduction when determining profit, does not, however, mean that such deduction can then be accepted in all cases. Deduction of interest, as far as relevant here, cannot be accepted if (a) the incurring of the debt with the entity not related to the taxpayer is part of a set of legal transactions between affiliated entities, and (b) this set of legal transactions has been brought about with the decisive purpose of thwarting affiliation within the meaning of Section 10a(4) of the Act. Having regard to what has been considered above in 4.3.3 and 4.3.4 regarding the purpose of Section 10a(1) opening words and (c) of the Act, the purpose and purport of that provision would be thwarted if such a combination of legal acts could result in the deduction of that interest not being able to be refused under that provision when determining profits. 4.4 With regard to part A of plea II, the following is considered. 4.4.1 Also in view of what has been set out above in 4.3.1 to 4.3.5, the circumstances relevant in this case can be summarised as follows. (i) The loans referred to above in 2.5.3 are in connection with the acquisition of an interest in an entity that is subsequently a related entity to the interested party (the top holder). (ii) Sub-Fund I is a related entity to interested party within the meaning of section 10a(4) of the Act (see above in 2.3.1). (iii) Sub-Fund V is not such a related entity (see above in 2.3.2 and 2.3.5). (iv) All investors who participate as limited partners in LP 1 also and only participate as limited partners in LP 1A, so that sub-fund I and sub-fund V are indirectly held by the same group of investors. (v) In relation to both sub-funds I and V, the Court held – uncontested in cassation – that they are subject to corporation tax in Guernsey at a rate of nil. 4.4.2 The circumstances described above in 4.4.1 mean that the part of each of the loans granted by sub-fund V to the interested party does not, in principle, fall within the scope of section 10a(1)(c) of the Act. However, based on the same circumstances, no other inference is possible than that, if this part of each of the loans had been provided by sub-fund I and not by sub-fund V, this part would unquestionably fall within the purview of Section 10a(1)(c) of the Act, and the interested party would not have been able to successfully invoke the rebuttal mechanism of Section 10a(3)(b) of the Act in respect of the interest payable in respect of that part. 4.4.3 As reflected above in 3.2.2, the Court held that, in view of the contrived insertion of LP 1A into the structure, the overriding motive for the allocation ...

Singapore Telecom Australia Investments Pty Ltd entered into a loan note issuance agreement (the LNIA) with a company (the subscriber) that was resident in Singapore. Singapore Telecom Australia and the subscriber were ultimately 100% owned by the same company. The total amount of loan notes issued to the Participant was approximately USD 5.2 billion. The terms of the LNIA have been amended on three occasions, the first and second amendments being effective from the date the LNIA was originally entered into. The interest rate under the LNIA as amended by the third amendment was 13.2575%. Following an audit, the tax authorities issued an assessment under the transfer pricing provisions and disallowed interest deductions totalling approximately USD 894 million in respect of four years of income. In the view of the tax authorities, the terms agreed between the parties deviated from the arm’s length principle. Singapore Telecom Australia appealed to the Federal Court, which in a judgment published on 17 December 2021 upheld the assessment and dismissed the appeal. An appeal was then made to the Full Federal Court which, in a judgment published on 8 March 2024, dismissed the appeal and upheld the previous decision. Click here for translation ...

“Caixa… S.A.” received an assessment of additional taxable income in which, among other things, the (lack of) interest on a loan granted to a subsidiary had been adjusted by the tax authorities. Caixa S.A. lodged an appeal with the Tribunal Central Administrativo Sul. Judgment of the Tribunal The Tribunal dismissed the appeal as regards the transfer pricing adjustment and upheld that part of the tax authorities’ assessment. Expert “It goes on to say that the discussion of the nature of the operation is innocuous in the context of the specific case. The fact is that “[t]here are various techniques by which practices can be employed to artificially increase interest expenses, so that they benefit from tax treatment that may be more favourable when compared to that of distributed profits. The first consists of checking the “reasonableness” of the amount of interest, refusing to deduct the excess against the objective criterion of at arm’s length interest. This is the technique used in Article 58 of the CIRC and Article 9 of the OECD Model Convention. A second technique operates at the level of the “qualification” of the underlying operation as credit or capital, given the circumstances of the specific case and is applied, for example, to “hybrid financial instruments” which have both credit and capital aspects, as is the case with profit-sharing bonds. In these circumstances, the authorities can, as part of their interpretation of treaties, laws and facts, ‘reclassify’ an apparently credit agreement as a capital contribution” [or vice versa] (9). This is what happened in this case, in which profits made by the applicant were artificially allocated to a subsidiary. The characteristic feature of indirect profit distribution is that an abnormal advantage is obtained. This presupposes, firstly, that an operation has been carried out which gives rise to an advantage and, secondly, that the advantage can be considered abnormal. “The operations do not translate into a direct, visible, apparent distribution of profits, but rather into operations that contribute to the formation of the company’s profit.” The advantage can be attributed either by the subsidiary company to another, which participates in its profits – in which case there is a hidden distribution of profits – or “be attributed, in the opposite direction, by the parent company to its subsidiary, in which case there is a hidden contribution, or it can be attributed to a third entity, linked by a triangular link”. The advantage can take two forms: it can translate into an expense or loss, or it can translate into an “unrealised gain”. The abnormal advantage of the indirect distribution of profits is “that which has no objectively equivalent counterpart”, which is measured by “comparing it with the hypothetical behaviour of two independent companies, dealing at arm’s length, i.e. with the competitive price – the open market price that would be charged, in a specific, equal or similar transaction” (10). The appellant maintains that the method adopted is not suitable for assessing transfer prices in the situation in question, given the risk involved and the specific nature of the inter-bank credit market. In this regard, it should be noted that “when analysing the transfer price of an intra-group loan, it is essential to first analyse the characteristics of the borrower in order to assess whether this entity could obtain an equal or similar level of debt from an independent creditor (e.g. bank), under the same terms and conditions as an independent entity would, given the performance of its business. In other words, the aim here is to assess and support the substance and economic rationale of the transaction, as well as its fit with the taxable person’s business purpose. Essentially, this analysis focuses on assessing the borrower’s credit risk, i.e. the risk that the borrower will not fulfil its commitments (debt) on the agreed date and whether the default requires a guarantee to be provided. // Given that credit risk is one of the main elements to be considered when determining the cost of financing (the greater the risk, the greater the cost to be borne), it may be asked to what extent a given interest rate, close to benchmarks such as Euribor, may be appropriate when there is an expectation that the debtor would not obtain that remuneration in market operations. The determination of the arm’s length remuneration for the operation in question must take into account all its specific characteristics. In particular, the date (in order to select operations with a similar context in terms of expectations and financial situation), the amount, the repayment term (longer terms imply greater uncertainty), the borrower’s credit risk (rating) and its level of indebtedness, the associated guarantees (they significantly influence credit risk), the interest rate applied (fixed or variable rate), the debtor’s sector of activity (relevant for assessing the ability to generate cash flows), the currency in which the operation was agreed and the markets involved…”. In this case, however, there is no evidence that the inspection report failed to take account of the factors in question when determining the transfer pricing method. It states that: In accordance with paragraph 199 of the 1979 OECD Committee on Fiscal Affairs Report “Transfer Pricing and Multinational Enterprises”, when determining what is meant by a comparable or similar loan, it will be necessary to take into account the following factors: the amount and duration of the loan, its nature or purpose, the currency in which it is specified, and the financial situation of the borrower. Now, as already mentioned, C…. is an eminently banking organisation, and given its importance in the national and international banking market, it is one of the financial institutions that make up the panel of institutions that contribute to setting the Euribor rate, which corresponds to the average interest rate at which European banks in the Eurozone lend funds to each other. This rate is one of the reference rates for economic agents in Europe, and is considered a risk-free rate of return, given the profile of the institutions that contribute ...

JTI Acquisitions Company Ltd was a UK holding company, part of a US group, used as an acquisition vehicle to acquire another US group. The acquisition was partly financed by intercompany borrowings at an arm’s length interest rate. The tax authorities disallowed the interest expense on the basis that the loan was taken out for a unallowable purpose. Judgement of the Upper Tribunal The Court upheld the decision and dismissed JTI Acquisitions Company Ltd’s appeal. According to the Court, a main purpose of the arrangement was to secure a tax advantage for the UK members of the group. The fact that the loans were at arm’s length was relevant but not determinative ...

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 ...

“A…, Sociedade Unipessoal LDA” had taken out two intra group loans with the purpose of acquiring 70% of the shares in a holding company within the group. The tax authorities disallowed the resulting interest expenses claiming that the loan transactions lacked a business purpose. The assessment was later upheld by the tax court in decision no. 827/2019-T. An appeal was then filed by “A…, Sociedade Unipessoal LDA” with the Supreme Administrative Court. Judgement of Supreme Administrative Court The Court dismissed the appeal and upheld the decision of the tax court and the assessment issued by the tax authorities. Experts “35. In general, a transaction is considered to have economic substance when it significantly alters the taxpayer’s economic situation beyond the tax advantage it may generate. Now, the analysis of the relevant facts leads to the conclusion that neither A… nor the financial position of the Group’s creditors knew any significant economic change, nor any other economic consequence resulted or was reasonably expected to result beyond the additional increase in interest payable on intra-group loans, certainly with a view to increasing deductions and reducing the taxable profit. Even if there is a business purpose in the transaction – which is not certain in view of the permanence of the underlying economic reality – the objective of reducing the tax exposure, with the consequent reduction of the tax base, appears manifestly preponderant (principal purpose test). 36. Despite the existence of a general clause and special anti-abuse clauses, as well as specific rules on transfer pricing, earnings stripping or thin capitalization, all tax legislation must be interpreted and applied, in its systemic unity, so as to curb the erosion of the tax base and the transfer of profits. This involves a teleological interpretation that is attentive to the object, purpose and spirit of the tax rules, preventing their manifestly abusive use through sophisticated and aggressive tax planning operations. This can only be the case with rules on deductible expenses, as in the case of article 23 of the CIRC, which must be interpreted and applied in accordance with the anti-avoidance objectives that govern the entire national, European and international legal system, in order to prevent the erosion of the tax base. 37. On the other hand, where the deductibility of expenses and losses is concerned, the burden of proof lies with the taxpayer, as this is a fact constituting the claimed deduction (Art. 74, 1 of the LGT). Therefore, the accounting expenses groundedly questioned by the AT, in order to be tax deductible, would have to be objectively proven by the taxpayer who accounted for them. The excessive interest expenses are not objectively in line with the criteria of reasonableness, habituality, adequacy and economic and commercial necessity underlying the letter and spirit of Article 23(1) and (2)(c) of the CIRC, against the backdrop of business normality, economic rationality and corporate scope. We are clearly faced with a form of interest stripping, in fact one of the typical forms of profit transfer and erosion of the tax base. The excessive interest generated and paid in the framework of the financing operations analysed must be considered as “disqualified interest” (disallowed interest). 38. 38. The setting up of credit operations within a group in order to finance an acquisition of shareholdings already belonging to the group, sometimes with interest rates higher than market values and generating chronic problems of lack of liquidity in the sphere of the taxpayer, can hardly be regarded as a business activity subject to generally acceptable standards of economic rationality, and as such worthy of consideration under tax law. The possibility of deducting the respective financial costs was or could never have been conceived and admitted by the tax legislator when it chiselled the current wording of Article 23 of the CIRC. Legal-tax concepts should always be understood by reference to the constitutionally structuring principles of the legal-tax system, to all relevant facts and circumstances in the transactions carried out and to the substantial economic effects produced by them on taxpayers, unless the law refers expressly and exclusively to legal form. In the interpretation and application of tax law the principle of the primacy of substance over form shall apply. 39. The AT is entrusted with the important public interest function of protecting the State’s tax base and preventing profit shifting. In interpreting and applying tax rules, it should seek to strike a reasonable, fair and well-founded balance between the principles of tax law and legal certainty and the protection of legitimate expectations, on the one hand, and, on the other, the constitutional and European requirements of administrative and tax responsiveness in view of the updating and deepening of understanding and knowledge of tax problems, on a global scale, due to the latest theoretical, evaluative and principal developments which, particularly in the last decade, have been occurring in the issue of tax avoidance. 40. 40. The facts in the case records do not allow for the demonstration of the existence of a (current or potential) economic causal connection between the assumption of the financial burdens at stake and their performance in A…’s own interest, of obtaining profit, given the respective object. Hence, the non-tax deductibility of the interest incurred in 2015 and 2016 should be considered duly grounded by the AT, as the requirements of article 23, no. 1, of the CIRC were not met, as this is the only legal basis on which the AT supports the correction resulting from the non-acceptance of the deductibility of financial costs for tax purposes, and it is only in light of this legal provision that the legality of the correction and consequent assessment in question should be assessed. A careful reading of both decisions clearly shows that the fact that different wordings of Article 23 of the CIRC were taken into consideration was not decisive for the different legal solutions reached in both decisions. In both decisions the freedom of management of the corporate bodies of the companies is accepted, and it is certain ...

Frucor Suntory (FHNZ) had deducted purported interest expenses that had arisen in the context of a tax scheme involving, among other steps, its issue of a Convertible Note to Deutsche Bank, New Zealand Branch (DBNZ), and a forward purchase of the shares DBNZ could call for under the Note by FHNZ’s Singapore based parent Danone Asia Pte Ltd (DAP). The Convertible Note had a face value of $204,421,565 and carried interest at a rate of 6.5 per cent per annum. Over its five-year life, FHNZ paid DBNZ approximately $66 million which FHNZ characterised as interest and deducted for income tax purposes. The tax authorities issued an assessment where deductions of interest expenses in the amount of $10,827,606 and $11,665,323 were disallowed in FY 2006 and 2007 under New Zealand´s general anti-avoidance rule in s BG 1 of the Income Tax Act 2004. In addition, penalties of $1,786,555 and $1,924,779 for those years were imposed. The tax authorities found that, although such deductions complied with the “black letter” of the Act, $55 million of the $66 million paid was in fact a non- deductible repayment of principal. Hence only interest deduction of $11 million over the life of the Arrangement was allowed. These figures represent the deduction disallowed by the Commissioner, as compared to the deductions claimed by the taxpayer: $13,250,998 in 2006 and $13,323,806 in 2007. Based on an allegedly abusive tax position but mitigated by the taxpayer’s prior compliance history. In so doing, avoiding any exposure to shortfall penalties for the 2008 and 2009 years in the event it is unsuccessful in the present proceedings. The income years 2004 and 2005, in which interest deductions were also claimed under the relevant transaction are time barred. Which I will refer to hereafter as $204 million without derogating from the Commissioner’s argument that the precise amount of the Note is itself evidence of artifice in the transaction. As the parties did in both the evidence and the argument, I use the $55 million figure for illustrative purposes. In fact, as recorded in fn 3 above, the Commissioner is time barred from reassessing two of FHNZ’s relevant income tax returns. The issues The primary issue is whether s BG 1 of the Act applies to the Arrangement. Two further issues arise if s BG 1 is held to apply: (a) whether the Commissioner’s reconstruction of the Arrangement pursuant to s GB 1 of the Act is correct or whether it is, as FHNZ submits, “incorrect and excessive”; and (b) whether the shortfall penalties in ss 141B (unacceptable tax position) or 141D (abusive tax position) of the Tax Administration Act 1994 (TAA) have application. In 2018 the High Court decided in favor of Frucor Suntory This decision was appealed to the Court of Appeal, where in 2020 a decision was issued in favor of the tax authorities. The Court of Appeal set aside the decision of the High Court in regards of the tax adjustment, but dismissed the appeal in regards of shortfall penalties. “We have already concluded that the principal driver of the funding arrangement was the availability of tax relief to Frucor in New Zealand through deductions it would claim on the coupon payments. The benefit it obtained under the arrangement was the ability to claim payments totaling $66 million as a fully deductible expense when, as a matter of commercial and economic reality, only $11 million of this sum comprised interest and the balance of $55 million represented the repayment of principal. The tax advantage gained under the arrangement was therefore not the whole of the interest deductions, only those that were effectively principal repayments. We consider the Commissioner was entitled to reconstruct by allowing the base level deductions totaling $11 million but disallowing the balance. The tax benefit Frucor obtained “from or under” the arrangement comprised the deductions claimed for interest on the balance of $149 million which, as a matter of commercial reality, represented the repayment of principal of $55 million.” This decision was then appealed to the Supreme Court. Judgement of the Supreme Court The Supreme Court dismissed the appeal of Frucor and ruled in favor of the tax authorities both in regards of the tax adjustment and in regards of shortfall penalties. Excerpt “[80] The picture which emerges from the planning documents which we have reviewed is clear. The whole purpose of the arrangement was to secure tax benefits in New Zealand. References to tax efficiency in those planning documents are entirely focused on the advantage to DHNZ of being able to offset repayments of principal against its revenue. The anticipated financial benefits of this are calculated solely by reference to New Zealand tax rates. The only relevance of the absence of a capital gains liability in Singapore was that this tax efficiency would not be cancelled out by capital gains on the contrived “gain” of DAP under the forward purchase agreement. [81] There were many elements of artificiality about the funding arrangement. Of these, the most significant is in relation to the note itself. [82] Orthodox convertible notes offer the investor the opportunity to receive both interest and the benefit of any increases in the value of the shares over the term of the note. For this reason, the issuer of a convertible note can expect to receive finance at a rate lower than would be the case for an orthodox loan. [83] The purpose of the convertible note issued by DHNZ was not to enable it to receive finance from an outside investor willing to lend at a lower rate because of the opportunity to take advantage of an increase in the value of the shares. The shares were to wind up with DAP which already had complete ownership of DHNZ. As well, Deutsche Bank had no interest in acquiring shares in DHNZ. Instead, it had structured a transaction that generated tax benefits for DHNZ in return for a fee. Leaving aside the purpose of obtaining tax advantages in New Zealand, the convertible note ...

In 2009 the BlackRock Group acquired Barclays Global Investors for a total sum of $13,5bn. The price was paid in part by shares ($6.9bn) and in part by cash ($6.6bn). The cash payment was paid by BlackRock Holdco 5 LLC – a US Delaware Company tax resident in the UK – but funded by the parent company by issuing $4bn loan notes to the LLC. In the years following the acquisition Blackrock Holdco 5 LLC claimed tax deductions in the UK for interest payments on the intra-group loans. Following an audit in the UK the tax authorities disallowed the interest deductions. The tax authorities held that the transaction would not have happened between independent parties. They also found that the loans were entered into for an unallowable tax avoidance purpose. A UK taxpayer can be denied a deduction for interest where a loan has an unallowable purpose i.e, where a tax advantage is the company’s main purpose for entering into the loan relationship (section 441 of the Corporation Tax Act 2009). If there is such an unallowable purpose, the company may not bring into account for that period ….so much of any debit in respect of that relationship as is attributable to the unallowable purpose. An appeal was filed by the BlackRock Group. In November 2020 the First Tier Tribunal found that an independent lender acting at arm’s length would have made loans to LLC5 in the same amount and on the same terms as to interest as were actually made by LLC4 (the “Transfer Pricing Issue”). The FTT further found that the Loans had both a commercial purpose and a tax advantage purpose but that it would be just and reasonable to apportion all the debits to the commercial purpose and so they were fully deductible by LLC5 (the “Unallowable Purpose Issue”). An appeal was then filed with the Upper Tribunal by the tax authorities. Judgement of the Upper Tribunal The Upper Tribunal found that the First Tier Tribunal had erred in law and therefore allowed HMRC’s appeal on both the transfer pricing issue and the unallowable purpose issue. The First Tier Tribunal’s Decision was set aside and the tax authorities amendments to LLC5’s tax returns were confirmed. Transfer Pricing “The actual provision of the loans from LLC4 to LLC5 differed from any arm’s length provision in that the loans would not have been made as between independent enterprises. The actual provision conferred a potential advantage in relation to United Kingdom taxation. The profits and losses of LLC5, including the allowing of debits for the interest and other expenses payable on the Loans, are to be calculated for tax purposes as if the arm’s length provision had been made or imposed instead of the actual provision. In this case, no arm’s length loan for $4 billion would have been made in the form that LLC4 made to LLC5 and hence HMRC’s amendments to the relevant returns should be upheld and confirmed.” Unallowable Purpose “The FTT did not err in finding that LLC5 had both a commercial purpose and an unallowable tax advantage main purpose in entering into the Loans. However, it was wrong to decide that the just and reasonable apportionment was solely to the commercial purpose. But for the tax advantage purpose there would have been no commercial purpose to the Loans and all the relevant facts and circumstances lead inexorably to the conclusion that the loan relationship debits should be wholly attributed to the unallowable tax purpose and so disallowed.” ...

“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 ...

The German BASF group is active in the chemical industry and has subsidiaries all over the world including Italy. In FY 2006 BASF Italia s.p.a. was served with two notices of assessment by the tax authorities. The tax assessments formulated three findings. 1. non-deductibility of the cancellation deficit – arising from the merger by incorporation of Basf Agro s.p.a. into Basf Italia s.p.a., resolved on 27 April 2004 – which the acquiring company had allocated to goodwill, the amortisation portions of which had been deducted in tenths and then, from 2005, in eighteenths. The Office had denied the deductibility on the ground that the company, in the declaration submitted electronically, had not expressly requested, as required by Article 6(4) of Legislative Decree No. 358 of 8 October 1997, the tax recognition of the greater value of goodwill recorded in the balance sheet to offset the loss from cancellation, as allowed by paragraphs 1 and 2 of the same provision. Moreover, as a subordinate ground of non-deductibility, the assessment alleged the unenforceability to the Administration of the same merger pursuant to Article 37-bis of Presidential Decree No 600 of 29 September 1973, assuming its elusive nature. 2. non-deductibility of the annulment deficit – arising from the merger by incorporation of Basf Espansi s.p.a. into Basf Italia s.p.a., resolved in 1998 – which the acquiring company had allocated partly to goodwill and partly to the revaluation of tangible fixed assets, the depreciation portions of which had been deducted annually. The Office, also in this case, had denied the deductibility due to the failure to express the relative option, pursuant to Article 6(4) of Legislative Decree No. 358 of 1997, in the company’s declaration. 3. non-deductibility of interest expenses arising from a loan obtained by the taxpayer to carry out the transactions above. The Provincial Tax Commission of Milan partially upheld BASF’s appeals against the tax assessments, upholding the latter limited to the finding referred to in the second finding, concerning the non-deductibility of the cancellation deficit arising from the merger by incorporation of Basf Espansi s.p.a.. The Lombardy CTR, accepted the first and rejected the second, therefore, in substance, fully confirming the tax assessments. BASF then filed an appeal with the Supreme Court against the judgment, relying on seven pleas. The sixth plea related to lack of reasoning in the CTR judgement in regards of non-deductibility for interest expenses arising from the intra group loan. Judgement of the Supreme Court The Supreme Court found that the (first and) sixth plea was well founded and remanded the judgement to the CTR, in a different composition. Excerpts “7. The sixth plea in law criticises, pursuant to Article 360(1)(3) of the Code of Civil Procedure, the judgment under appeal for breach of Article 110(7) of Presidential Decree No 917 of 1986, in so far as the CTR held that the interest expense incurred by the appellant in connection with the loan obtained from another intra-group company for the purchase of the share package of Basf Agro s.p.a. was not deductible. The plea is well founded. In fact, the CTR reasoned on this point solely by stating that the deduction was ‘held to be inadmissible on the basis of the thesis underlying the contested assessment, that is, the intention to evade tax’. Such ratio decidendi is limited to the uncritical mention of the Administration’s thesis, which, however, as far as can be understood from the concise wording used by the CTR, does not relate to the financing in itself, but to the transaction, referred to in the first relief, in which it was included. A transaction whose evasive nature was not even appreciated by the CTR, the question having been absorbed by the non-deductibility, for other reasons, of the negative component arising from the merger by incorporation of Basf Agro.” Click here for English translation Click here for other translation ...

An intercompany loan in the form of a so-called international debt pushdown had been issued to Universal Music Japan to acquire the shares of another Japanese group company. The tax authority found that the loan transaction had been entered for the principal purpose of reducing the tax burden in Japan and issued an assessment where deductions of the interest payments on the loan had been disallowed for tax purposes. The Tokyo District Court decided in favour of Universal Music Japan and set aside the assessment. The Court held that the loan did not have the principle purpose of reducing taxes because the overall restructuring was conducted for valid business purposes. Therefore, the tax authorities could not invoke the Japanese anti-avoidance provisions to deny the interest deductions. In 2020 the decision of the district court was upheld by the Tokyo High Court. The tax authorities then filed an appeal with the Supreme Court Decision of the Court The Supreme Court dismissed the appeal and set aside the assessment of the tax authorities. “The term “economic rationality” is used to refer to the economic rationality of a series of transactions. In examining whether or not the entire series of transactions lacks economic rationality, it is necessary to consider (i) whether the series of transactions is unnatural, such as being based on procedures or methods that are not normally assumed or creating a form that deviates from the actual situation, and (ii) whether there are other rational reasons for such a reorganisation other than a decrease in tax burden. (iii) Whether there are any business objectives or other reasons other than a reduction in the tax burden that would constitute a rational reason for such a reorganisation.” “However, the borrowings in question were made under an agreement to be used solely for the purchase price of the shares of the domestic corporations in question and related costs, and in fact the appellant acquired the shares and brought the domestic corporations under its control, and there is no indication that the amount borrowed was unreasonably high in relation to its intended use. In addition, the interest and repayment period of the loan were determined based on the expected profit of the appellant, and there is no evidence that the appellant is currently experiencing any difficulty in paying the interest on the loan. It is therefore difficult to say that the above points make the borrowing unnatural or unreasonable. (d) Considering the above circumstances as a whole, the borrowing in question cannot be said to be unnatural or unreasonable from an economic and substantive standpoint, i.e. to lack economic rationality. Therefore, the borrowing in question does not fall within the scope of Article 132(1) of the Corporate Tax Act, which states that “the borrowing is deemed to result in an unreasonable decrease in the corporate tax burden if it is permitted”.” Click here for English Translation Click here for other translation ...

“ACQ-Group” had acquired the shares in foreign subsidiaries and financed the acquisition partially by intra group loans. Furthermore, in the years following the acquisition, goodwill amortisations were deducted for tax purposes. The tax authorities issued an assessment where the interest rate on the loans had been reduced, and where costs related to external financing and amortisations of acquired goodwill had been denied. An appeal was filed by “ACQ”. Decision of the Federal Tax Court Before the judgment was delivered the appeal filed by “ACQ” in regards of the interest rate on the intra group loans was withdrawn. “***Firma*** Services GmbH pays interest of a non-variable 9% p.a. to the affiliated (grandparent) company ***6*** for an intercompany loan (“Intercompany Loan”). As stated in the statement of facts in the enclosure, the high difference between the intercompany loan interest rate and the arm’s length interest rate is a clear violation of the arm’s length principle as defined in the OECD Transfer Pricing Guidelines and the current case law of the Administrative Court. The payments exceeding the arm’s length interest rates constitute a hidden distribution.” The Court partially upheld the appeal and amended the assessment in regards of goodwill amortisations and financing costs. Goodwill amortisation within the meaning of section 9(7) KStG 1988 and the deduction of interest on borrowed capital in the case of acquisitions of shareholdings pursuant to section 11(1)(4) KStG 1988 were introduced with the 2005 Tax Reform Act in order to make Austria more attractive as a business location. § Section 9 (7) KStG 1988 contained a “group barrier” from the beginning in order to prevent arrangements within the group or within the group of companies. Thus, goodwill amortisation is not available if the participation is acquired by a company belonging to the group or by a shareholder exercising a controlling influence. The Budget Accompanying Act 2011 restricted the deductibility of interest on borrowed capital to the extent that debt-financed group acquisitions should no longer lead to a deduction of operating costs. The explanatory notes justified this change in the law by stating that undesirable arrangements in the group, which led to an artificial generation of operating expenses, should be prevented. Click here for English translation Click here for other translation ...

Singapore Telecom Australia Investments Pty Ltd entered into a loan note issuance agreement (the LNIA) with a company (the subscriber) that was resident in Singapore. Singapore Telecom Australia and the subscriber were ultimately 100% owned by the same company. The loan notes issued totalled approximately $5.2 billion to the subscriber. The terms of the LNIA was amendet on three occasions – the first amendment and the second amendment were expressed to have effect as from the date when the LNIA was originally entered into. The interest rate under the LNIA as amended by the third amendment was 13.2575% Following an audit the tax authorities issued an amended assessment under the transfer pricing provisions and denied interest deductions totalling approximately $894 million in respect of four years of income. According to the tax authorities the conditions agreed between the parties differed from the arm’s length principle. Singapore Telecom Australia appealed the assessment to the Federal Court. Judgement of the Federal Court The court upheld the the assessment issued by the tax authorities and dismissed the appeal of Singapore Telecom Australia. Click here for translation ...

A Portuguese subsidiary – A SA – had received intra group loans in foreign currency and had various other transactions with foreign group companies. The tax authorities claimed that the pricing of the transactions had not been at arm’s length and that the interest payment and exchange losses on the loans were not tax deductible. Decision of CAAD The CAAD set aside the assessment and decided in favour of “Welding Mesh SA” Click here for English translation ...

In 2001, Singtel, through its wholly owned Australian subsidiary, Singapore Telecom Australia Investments Pty Limited (Singtel Au), acquired the majority of the shares in Cable & Wireless Optus for $17.2 billion. The tax consequences of this acqusition was decided by the Federal Court in Cable & Wireless Australia & Pacific Holding BV (in liquiatie) v Commissioner of Taxation [2017] FCAFC 71. Cable & Wireless argued that part of the price paid under a share buy-back was not dividends and that withholding tax should therefor be refunded. The ATO and the Court disagreed. ATO and Singtel is now in a new dispute  – this time over tax consequences associated with the intra-group financing of the takeover. This case was heard in the Federal Court in August 2021. At issue is a tax assessments for FY 2011, 2012 and 2013 resulting in additional taxes in an amount $268 million. In the assessment interest deductions claimed in Australia on notes issued under a Loan Note Issuance Agreement (LNIA) has been disallowed by the ATO ...

In 2011 a Dutch group “Hunkemöller BV” acquired “Target BV” for EUR 135 million. The acquisition was financed by four French affiliates “FCPRs” in the Dutch Group – EUR 60,345,000 in the form of convertible instruments (intercompany debt) and the remainder in the form of equity. The convertible instruments carried an interest rates of 13 percent. The four French FCPRs were considered transparent for French tax purposes, but non-transparent for Dutch tax purposes. Hence the interest payments were deducted from the taxable income reported by the Group in the Netherlands, but the interest income was not taxed in France – the structure thus resulted in a tax mismatch. The Dutch tax authorities argued that the interest payments should not be deductible as the setup of the financing structure constituted abuse of law; the financing structure was set up in this particular manner to get around a Dutch anti-abuse rule which limits interest deduction on loans from affiliated entities in respect of certain “abusive transactions”. See the preliminary AG Opinion here Decision of the Supreme Court The Supreme Court ruled in favor of the tax authority. The aim and purpose of the law is to prevent the levy of corporate income tax becoming arbitrarily and continuously obstructed through bringing together the profits of a business on the one hand (i.e. through forming a CIT fiscal unity) and artificially creating interest charges on the other (profit-drainage), by using legal acts which are not necessary to the achievement of the commercial objectives of the taxpayer and which can only attributed to the overriding motive of producing the intended tax benefits. Click here for English translation Click here for other translation ...

X B.V., a private limited company established in the Netherlands, is part of a globally operating group (hereafter: the Group). In the years under review, the head office, which was also the top holding company, was located in the USA. Until 1 February 2008, the X B.V. was, together with BV 1 and BV 2, included in a fiscal unity for corporate income tax with the Interested Party as the parent company. As of 1 February 2008, a number of companies were added to the fiscal unity, including BV 3 and BV 4. X B.V. is considered transparent for tax purposes according to US standards. Its parent company is a company domiciled in the USA, as further described in 2.1.8 below. In 2006, BV 1 borrowed € 195,000,000 under a Euro Credit Facility (ECF), a head office guaranteed credit facility with a syndicate of sixteen banks. BV 1 contributed this amount in 2007 as share premium to BV 2. BV 2 paid the larger part of this amount as capital into BV 3. BV 2 and BV 3 have jointly paid the amount of (rounded off) € 195.000.000 into a newly established Irish holding company, Ltd 1. Ltd 1 used the capital contribution to purchase a company established in Ireland, Ltd 2 from a group company established in the United Kingdom for an amount of (rounded off) GBP 130.000.000. BV 3 (for 99 per cent) and BV 4 (for 1 per cent) jointly formed a French entity, SNC, on 28 November 2007. SNC is transparent for tax purposes under Dutch standards. For French tax purposes, SNC is a non-transparent group company. BV 3 sold its subsidiary, SA 1, on 6 December 2007 to SNC for €550,000,000, with SNC acknowledging the purchase price. On 12 December 2007, that claim against SNC was converted into capital. SA 1 merged with SNC on 15 January 2008, with SNC as the surviving legal entity. SNC acquired through the merger, inter alia, a bank debt of €45,000,000 to the Group cash pool managed by BV 2 with a bank (the Pool). This debt is the remainder of a loan taken out by SA 1 in 1998 for external acquisitions and which was refinanced from the Pool in 2004. BV 3 borrowed € 65,000,000 under the ECF on 6 February 2008 and on-lent this amount to SNC. SNC borrowed on the same day a total of € 240,000,000 under the ECF of which one loan of € 195,000,000 and one loan of € 45,000,000. SNC repaid the bank debt from the Pool with the loan of € 45,000,000. On 7 February 2008 it purchased Ltd 1, [F] NV and [G] from BV 3 for rounded € 255,000,000, financed by € 195,000,000 in ECF loans and the aforementioned loan from BV 3 of € 65,000,000, and further purchased an additional participation for rounded € 5,000,000. With the received € 255,000,000, BV 3 repaid its ECF debt of € 60,000,000. On 7 February 2008 it lent the remaining € 195,000,000 to BV 1, which repaid its ECF debt in February 2008. BV 2 sold the shares in a Moroccan and a Tunisian entity to SNC on 7 February 2008 against payment of € 5,088,000. BV 2 borrowed € 191,000,000 under the ECF to finance capital contributions in subsidiaries in Norway, Singapore and Switzerland, for external and internal purchase of shares in companies and for the expansion on 10 December 2008 with 8.71 percent (€ 12,115,000) of its 86.96 percent interest in [M] SpA indirectly held through a transparent Spanish SC of the English group companies [LTD 4] and [LTD 5] . On 29 May 2009, Luxco SA borrowed an amount of € 291,000,000 under the ECF. Luxco is a Luxembourg-based finance company that belongs to the Concern. Luxco on-lent that amount to BV 3 under the same conditions. In turn, BV 3 on-lent the same amount under the same conditions to SNC. With that loan, SNC repaid its ECF debt of € 240,000,000. It lent the remainder to its subsidiary [SA 2] in connection with the acquisition by SA 2 of [SA 3]. That acquisition took place on 25 May 2009 against acknowledgment of debt. SA2 repaid part of the loan from SNC with funds obtained from SA3. The remainder of the loan was converted into capital. On 24 June 2009, Luxco placed a public bond loan of € 500,000,000. Luxco used the net proceeds to provide a US dollar loan of € 482,000,000 to its US sister company [US] Inc (hereinafter: US Inc). US Inc is the parent company of the interested party. The currency risk has been hedged by Luxco with an external hedge. US Inc converted the funds from the Luxco loan into euros and subsequently granted a loan of € 482,000,000 to interested party on 1 July 2009. Interested party paid this amount into new shares in its indirect and affiliated subsidiary BV 5, as a result of which interested party obtained a direct interest of 99.996 percent in BV 5. From the paid-up funds, BV 5 provided two loans within the fiscal unity: a loan of € 191,000,000 to BV 2 and a loan of € 291,000,000 to BV 3. BV 2 and BV 3 used the funds obtained from these loans to pay off the ECF debt and the debt to Luxco, respectively. Luxco repaid its ECF debt on 1 July 2009. On 13 and 14 December 2010, BV 2 and BV 3 took out loans under the ECF amounting to € 197,000,000 and € 300,000,000 respectively. These amounts were equal to the principal and outstanding interest of their debts to BV 5. With the proceeds of these loans, BV 2 and BV 3 repaid their debts to BV 5. BV 5 distributed the net interest income as dividend and repaid € 482,000,000 of capital to interested party. Interested party repaid its debt to US Inc on 14 December 2010 (including outstanding interest). US Inc repaid its debt to Luxco on 14 ...

“M Fastfood S.A” was incorporated as a subsidiary company of an entity not resident in Portuguese territory, M Inc., a company with registered office in the United States. “M Fastfood S.A” had obtained financing from M Inc. for investment in its commercial activity, which resulted in indebtedness totalling EUR 74,000,000.00. The activity of “M Fastfood S.A” is “the opening, assembling, promotion, management, administration, purchase, sale, rental, leasing and cession of exploration of restaurants, for which purpose it may acquire or grant licenses or sub-licenses and enter into franchise contracts. It also includes the purchase, sale, rental, administration and ownership of urban buildings and the acquisition, transfer, exploitation and licensing of copyrights, trademarks, patents and industrial and commercial secrets and, in general, any industrial property rights”. “M Fastfood S.A” was in a situation of excessive indebtedness towards that entity, in light of the average equity capital presented by it in 2004, on 27 January 2005 it submitted a request to the tax authorities for the purposes of demonstrating the equivalence of indebtedness towards an independent entity. Following a tax audit concerning FY 2004 the authorities considered that the interest limitation rule should be applied, which resulted in corrections to the taxable amount in respect of excess interest paid. “M Fastfood S.A” presented a report, which intended to demonstrate that the level and conditions of indebtedness towards M Inc. were similar to those that could be obtained if it had chosen to obtain financing from an independent financial institution. According to the report “M Fastfood S.A.” was, at the time, in a period of strong expansion, which resulted in the opening of 118 fast-food outlets in recent years. That within the scope of its implementation strategy in the national market, the location of the restaurants plays a fundamental role and constitutes a decisive factor for the success of the business. That the ideal or optimum location of the establishments is very costly and therefore substantial investment has become necessary. According to “M Fastfood S.A.”, the conditions obtained were favourable, in particular the interest rates agreed with M Inc., which were lower than those that would be charged by an independent financial institution, presenting as proof financing proposals issued by B… Bank. Based on the report M Fastfood concludes are sufficient to constitute proof that the conditions of the financing considered excessive are similar, or even more favourable, to the conditions practiced by independent entities, the reason why no. 1 of article 61 of the Corporate Income Tax Code is applicable”. The tax authorities found that, the evidence submitted by “M Fastfood S.A.” was insufficient to demonstrate that the debt obtained from M Inc. is at least as advantageous as it would have been had they used an independent financial institution. Decision of Supreme Administrative Court The Supreme Administrative Court set aside the the assessment issued by the tax authorities and decided in favour of “M Fastfood S.A.”. Experts ” … Article 56 EC must be interpreted as meaning that the scope of that legislation is not sufficiently precise. Article 56 EC must be interpreted as precluding legislation of a Member State which, for the purposes of determining taxable profits, does not allow for the deduction as an expense of interest paid in respect of that part of the debt which is classified as excessive, paid by a resident company to a lending company established in a non-member country with which it has special relations, but allows such interest paid to a resident lending company with which the borrowing company has such relations, where, if the lending company established in a third country does not have a holding in the capital of the resident borrowing company, that legislation nevertheless presumes that any indebtedness of the latter company is in the nature of an arrangement intended to avoid tax normally due or where it is not possible under that legislation to determine its scope of application with sufficient precision in advance. As it is up to the national judge faced with such an interpretation to decide on its application to the specific case, it is important to mention that the situation which this review intends to decide on is identical in its contours to the one assessed by the CJEU. In fact, it is clear that the situation at issue in this review falls within the scope of the free movement of capital, and that it translates into less favourable tax treatment of a resident company that incurs indebtedness exceeding a certain level towards a company based in a third country than the treatment reserved for a resident company that incurs the same indebtedness towards a company based in the national territory or in another Member State. What is at issue is deciding whether such discrimination may be justified as a means of avoiding practices the sole purpose of which is to avoid the tax normally payable on profits generated by activities carried on within the national territory. However, although we agree with the CJEU that the provisions in question – Articles 61 and 58 of the CIRC – are appropriate as a means of preventing tax avoidance and evasion, we must agree with the Court that such a restriction is disproportionate to the intended aim. As the court in question correctly states “as article 58 of the CIRC covers situations which do not necessarily imply a participation by a third country lending company in the capital of the resident borrowing company and as it can be seen that the absence of such a participation results from the company’s being a resident borrower”, the Court agrees with the Court. in the absence of such participation, it results from the method of calculation of the excess debt provided for in Article 61(3) that any debt existing between these two companies should be considered excessive, Article 61 consecrates a discriminatory measure which limits the free movement of capital as only non-resident entities are subject to the regime of Article 61 of the CIRC when IRC tax ...

In 2005 an agreement was entered between the UK tax authority and GE Capital, whereby GE Capital was able to obtain significant tax benefits by routing billions of dollars through Australia, the UK and the US. HMRC later claimed, that GE Capital had failed to disclose all relevant information to HMRC prior to the agreement and therefore asked the High Court to annul the agreement. In December 2020 the High Court decided in favour of HMRC. GE Capital then filed an appeal with the Court of Appeal. Judgement of the Court of Appeal The Court of Appeal overturned the judgement of the High Court and ruled in favour of GE Capital ...

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 ...

“A…, Sociedade Unipessoal LDA” had taken out two intra group loans with the purpose of acquiring 70% of the shares in a holding company within the group. The tax authorities disallowed the resulting interest expenses claiming that the loan transactions lacked a business purpose. A complaint was filed with the Tax Court (CAAD). Decision of the Court The Court decided in favour of the tax authorities and upheld the assessment. Click here for English translation Click here for other translation ...

In 2005 “B Lender S.A” transferred a supplementary capital contributions to company C. The capital was to be paid back in 31 October 2009 and was provided interest-free. Tax Authorities adjusted the taxable income of “B Lender S.A” with an amount of EUR 1,586,272.23, of which EUR 1,575,958.86 was attributable to interest on capital transactions, which it reclassified as interest-bearing loan under the arm’s length provisions of article 58 of the CIRC. The assessment of additional income was upheld by a decision from the tax court. An appeal was then filed by “B Lender S.A.” Decision of Supreme Administrative Court The Supreme Administrative Court set aside the decision of the tax court and decided in favour of A “B Lender S.A.” Experts “The question translates, in short, into knowing whether the arm’s length principle requires or imposes that a transaction of performance of ancillary services, within the scope of a group of companies be taxed as if it earned interest, even if, in fact, it has been agreed that it does not earn interest. This is not a simple matter to be clarified and requires a prior conceptual and legal framework, which it is important to follow. … It is clear from the above that the tax authorities will act in accordance with the general rule allowing the reclassification of the transaction carried out by the parties, under the terms of the provisions of the above-mentioned rule. The defendant’s action, on the specific point of the material reclassification of the transaction in question, is not only not illegal, but is also anchored in this basic parameter of action, permitted and imposed by the law “which sets out and defines the general principles governing Portuguese tax law and the powers of the tax authorities and guarantees of taxpayers” [see LGT, preamble]. On the other hand, what the appellant foresees as a requalification of the transaction is nothing more than the association of the transaction to the typical contract in which it may be subsumed, in accordance with the command contained in the legal rule which regulates the figure of accessory payments (cf. the said Art 287(1) of the CSC). The classification of the “transfer of funds” operation, through the provision of ancillary services, as a loan therefore appears legitimate and the tax facts at issue herein do not involve any error of factual or legal assumptions. Going forward, what is important to decipher at this point is whether s 58 is such as to require or impose that the transaction in question be interest-bearing for tax purposes. … In the section dedicated to “guidance on the application of the arm’s length principle” (“C.”), one can read, with relevance to the solution of the present case: “The application of the arm’s length principle is generally based on a comparison between the conditions applied in a linked transaction and the conditions applied in a transaction between independent enterprises. For that comparison to be meaningful, the economic characteristics of the situations considered must be sufficiently comparable. (…) In order to determine the degree of comparability, and in particular the adjustments to be made in order to achieve that comparability, it is necessary to understand the way in which independent companies assess the terms of possible transactions. When weighing the terms of a possible transaction, independent companies will compare it with other options realistically available to them and will only conclude the transaction if they have no other clearly more advantageous alternative. For example, a company is unlikely to accept a price offered for one of its products by an independent company if it knows that other potential customers are willing to pay more under similar conditions. This element is relevant to the issue of comparability since independent firms generally take into account all economically significant differences between the options realistically available to them (…) when considering those options. Consequently, when making comparisons arising from the application of the arm’s length principle, the tax administration must also take such differences into account when defining whether the situations considered are comparable and what adjustments may be necessary for the purposes of such comparability.” [paragraph 1.15 of the document]. The same summary of the OECD guidelines on the matter reveals, in paragraph 1.36, as to the recognition of transactions actually carried out (ii.), and with particular acuity for the issue we are dealing with: “1.36.. The identification by the Tax Administration of a connected transaction should be based on the transaction that has actually taken place between the parties and on the way it has been structured by the parties, in accordance with the methods used by the taxpayer insofar as they are consistent with the methods set out in Chapters II and III. Save in exceptional cases, the tax administration shall not abstract from or substitute other transactions for the actual transactions. Restructuring legitimate business operations would amount to a wholly arbitrary procedure, the iniquity of which would be further aggravated by double taxation if the other tax administration involved took a different view on how the operation should be structured. 1.37. There are, however, two specific cases where, exceptionally, the tax authorities may be justified in disregarding the structure adopted by a taxpayer to carry out the linked transaction. The first case arises where there is a disagreement between the form of the transaction and its economic substance. The tax authorities may then disregard the qualification made by the parties and reclassify it according to its substance. This first case can be illustrated by the example of a company investing in an associated company in the form of an interest-bearing loan when, at arm’s length, given the economic situation of the borrowing company, the investment would not normally take that form. The tax authorities will then be entitled to qualify the investment by reference to its economic substance and to treat the loan as a capital subscription”. From the excerpts transcribed it is clear the guideline to be adopted in the treatment of the issue ...

In 2005 an agreement was entered between the UK tax authority and GE Capital, whereby GE Capital was able to obtain significant tax benefits by routing billions of dollars through Australia, the UK and the US. HMRC later claimed, that GE Capital had failed to disclose all relevant information to HMRC prior to the agreement and therefore asked the High Court to annul the agreement. The High Court ruled that HMRC could pursue the claim against GE in July 2020. Judgement of the High Court The High Court ruled in favour of the tax authorities ...

In 2009 the BlackRock Group acquired Barclays Global Investors for a total sum of $13,5bn . The price was paid in part by shares ($6.9bn) and in part by cash ($6.6bn). The cash payment was paid by BlackRock Holdco 5 LLC – a US Delaware Company tax resident in the UK – but funded by the parent company by issuing $4bn loan notes to the LLC. In the years following the acquisition Blackrock Holdco 5 LLC claimed tax deductions in the UK for interest payments on the intra-group loans. Following an audit in the UK the tax authorities disallowed the interest deductions. The tax authorities held that the transaction would not have happened between independent parties. They also found that the loans were entered into for an unallowable tax avoidance purpose. A UK taxpayer can be denied a deduction for interest where a loan has an unallowable purpose i.e, where a tax advantage is the company’s main purpose for entering into the loan relationship (section 441 of the Corporation Tax Act 2009). If there is such an unallowable purpose, the company may not bring into account for that period ….so much of any debit in respect of that relationship as is attributable to the unallowable purpose. The Court ruled in favor of BlackRock and allowed tax deduction for the full interest payments. According to the Court it was clear that the transaction would not have taken place in an arm’s length transaction between independent parties. However there was evidence to establish that there could have been a similar transaction in which an independent lender. Hence, the court concluded that BlackRock Holdco 5 LLC could have borrowed $4bn from an independent lender at similar terms and conditions. In regards to the issue of “unallowable purposes” the court found that securing a tax advantage was a consequence of the loan. However,  Blackrock LLC 5 also entered into the transactions with the commercial purpose of acquiring Barclays Global Investors. The Court considered that both reasons were “main purposes” and apportioned all of the debits (interest payments) to the commercial purpose ...

This case concerns application of the New Zealand´s general anti-avoidance rule in s BG 1 of the Income Tax Act 2004. The tax authorities issued an assessment to Frucor Suntory NZ Ltd where deductions of interest expenses in the amount of $10,827,606 and $11,665,323 were disallowed in FY 2006 and 2007. In addition, penalties of $1,786,555 and $1,924,779 for those years were imposed. The claimed deductions arose in the context of an arrangement entered into by Frucor Holdings Ltd (FHNZ) involving, among other steps, its issue of a Convertible Note to Deutsche Bank, New Zealand Branch (DBNZ) and a forward purchase of the shares DBNZ could call for under the Note by FHNZ’s Singapore based parent Danone Asia Pte Ltd (DAP). The Note had a face value of $204,421,5654 and carried interest at a rate of 6.5 per cent per annum. Over its five-year life, FHNZ paid DBNZ approximately $66 million which FHNZ characterised as interest and deducted for income tax purposes. The tax authorities found that, although such deductions complied with the “black letter” of the Act, $55 million of the $66 million paid was in fact a non- deductible repayment of principal. Hence only interest deduction of $11 million over the life of the Arrangement was allowed. These figures represent the deduction disallowed by the Commissioner, as compared to the deductions claimed by the taxpayer: $13,250,998 in 2006 and $13,323,806 in 2007. Based on an allegedly abusive tax position but mitigated by the taxpayer’s prior compliance history. In so doing, avoiding any exposure to shortfall penalties for the 2008 and 2009 years in the event it is unsuccessful in the present proceedings. The income years 2004 and 2005, in which interest deductions were also claimed under the relevant transaction are time barred. Which I will refer to hereafter as $204 million without derogating from the Commissioner’s argument that the precise amount of the Note is itself evidence of artifice in the transaction. As the parties did in both the evidence and the argument, I use the $55 million figure for illustrative purposes. In fact, as recorded in fn 3 above, the Commissioner is time barred from reassessing two of FHNZ’s relevant income tax returns. The issues The primary issue in the proceedings is whether s BG 1 of the Act applies to the Arrangement. Two further issues arise if s BG 1 is held to apply: (a) whether the Commissioner’s reconstruction of the Arrangement pursuant to s GB 1 of the Act is correct or whether it is, as FHNZ submits, “incorrect and excessive”; and (b) whether the shortfall penalties in ss 141B (unacceptable tax position) or 141D (abusive tax position) of the Tax Administration Act 1994 (TAA) have application. The key parties The High Court decided in favor of Frucor Suntory The decision was appealed to the Court of Appeal, where a decision in favor of the tax authorities has now been issued. The Court of Appeal set aside the decision of the High Court in regards of the tax adjustment, but dismissed the appeal in regards of shortfall penalties. “We have already concluded that the principal driver of the funding arrangement was the availability of tax relief to Frucor in New Zealand through deductions it would claim on the coupon payments. The benefit it obtained under the arrangement was the ability to claim payments totalling $66 million as a fully deductible expense when, as a matter of commercial and economic reality, only $11 million of this sum comprised interest and the balance of $55 million represented the repayment of principal. The tax advantage gained under the arrangement was therefore not the whole of the interest deductions, only those that were effectively principal repayments. We consider the Commissioner was entitled to reconstruct by allowing the base level deductions totalling $11 million but disallowing the balance. The tax benefit Frucor obtained “from or under” the arrangement comprised the deductions claimed for interest on the balance of $149 million which, as a matter of commercial reality, represented the repayment of principal of $55 million.” ...

This case concerned deductibility of notional interest paid in 2003-7 by two permanent establishments in the UK to their Irish HQs. The loans – and thus interest expenses – had been allocated to the PEs as if they were separate entities. The UK tax authorities held that interest deductibility was restricted by UK tax law, which prescribed that PE’s has such equity and loan capital as it could reasonably be expected to have as a separate entity. The UK taxpayers, refered to  Article 8 of the UK-Ireland tax treaty. Article 8 applied the “distinct and separate enterprise” principle found in Article 7 of the 1963 OECD Model Tax Convention, which used the language used in section 11AA(2). Yet nothing was said in the treaty about assumed levels of equity and debt funding for the PE. In 2017, the First-tier Tribunal found in favour of the tax authority, and in October 2019 the Upper Tribunal also dismissed the taxpayers’ appeals. Judgement of the UK Court of Appeal The Court of Appeal upheld the decision of the Upper Tribunal and dismissed the appeal of Irish Bank Resolution Corporation and and Irish Nationwide Building Society. Click here for other translation ...

General Electric (GE) have been routing financial transactions (AUS $ 5 billion) related to GE companies in Australia via the UK in order to gain a tax advantage – by “triple dipping” in regards to interest deductions, thus saving billions of dollars in tax in Australia, the UK and the US. Before entering into these transactions, GE obtained clearance from HMRC that UK tax rules were met, in particular new “Anti-Arbitrage Rules” introduced in the UK in 2005, specifically designed to prevent tax avoidance through the exploitation of the tax treatment of ‘hybrid’ entities in different jurisdictions. The clearance was granted by the tax authorities in 2005 based on the understanding that the funds would be used to invest in businesses operating in Australia. In total, GE’s clearance application concerned 107 cross-border loans amounting to debt financing of approximately £21.2 billion. The Australian Transaction was one part of the application. After digging into the financing structure and receiving documents from the Australian authorities, HMRC now claims that GE fraudulently obtained a tax advantage in the UK worth US$1 billion by failing to disclose information and documents relating to the group’s financing arrangements. According to the HMRC, GE provided UK tax officers with a doctored board minute, and misleading and incomplete documents. The documents from Australia shows that the transactions were not related to investments in Australian businesses, but part of a complex and contrived tax avoidance scheme that would circulate money between the US, Luxembourg, the UK and Australia before being sent back to the US just days later. These transactions had no commercial purpose other than to create a “triple dip” tax advantage in the UK, the US and Australia. HMRC are now seeking to annul the 2005 clearance agreement and then issue a claim for back taxes in the amount of $ 1 billion before interest and penalties. From GE’s 10 K filing “As previously disclosed, the United Kingdom tax authorities disallowed interest deductions claimed by GE Capital for the years 2007-2015 that could result in a potential impact of approximately $1 billion, which includes a possible assessment of tax and reduction of deferred tax assets, not including interest and penalties. We are contesting the disallowance. We comply with all applicable tax laws and judicial doctrines of the United Kingdom and believe that the entire benefit is more likely than not to be sustained on its technical merits. We believe that there are no other jurisdictions in which the outcome of unresolved issues or claims is likely to be material to our results of operations, financial position or cash flows. We further believe that we have made adequate provision for all income tax uncertainties.” The English High Court decision on whether the case has sufficient merit to proceed to trial: “150. For the above reasons, I refuse the application to amend in respect of paragraphs 38(b) and 38(e) of APOC and I will strike out the existing pleading in paragraph 38(e) of APOC. I will otherwise permit the amendments sought by HMRC insofar as they are not already agreed between the parties. Specifically, the permitted amendments include those in which HMRC seeks to introduce allegations of deliberate non-disclosure, fraud in respect of the Full Disclosure Representation, a claim that the Settlement Agreement is a contract of utmost good faith (paragraphs 49B and 53(ca) of APOC) and the claim for breach of an implied term (paragraphs 48 and 49 of APOC). 151. As to paragraph 68(b) of the Reply, I refuse the application to strike it out. To a large extent this follows from my conclusion in relation to the amendments to the APOC to add allegations of deliberate failure to disclose material information. In GE’s skeleton argument, a separate point is taken that paragraph 68(b) of the Reply is a free-standing plea that is lacking in sufficient particulars. I do not accept this: there can be no real doubt as to which parts of the APOC are being referred to by the cross-reference made in paragraph 68(b)(ii). 152. The overall result is that, while I have rejected the attempts to infer many years after the event that specific positive representations could be implied from limited references in the contemporaneous documents, the essential allegation which lay at the heart of Mr Jones QC’s submissions – that GE failed to disclose the complete picture, and that it did so deliberately – will be permitted to go to trial on the various alternative legal bases asserted by HMRC. I stress that, beyond the conclusion that there is a sufficient pleading for this purpose, and that the prospects of success cannot be shown to be fanciful on an interlocutory application such as this, I say nothing about the merits of the claims of deliberate non-disclosure or fraud.” ...

The Italian Tax Authorities held that the withholding tax exemption under the European Interest and Royalty Directive did not apply to interest paid by Stiga s.p.a. to it’s parent company in Luxembourg. The interest was paid on a loan established in connection with a merger leverage buy out transaction. According to the Tax Authorities the parent company in Luxembourg was a mere conduit and could not be considered as the beneficial owner of the Italian income since the interest payments was passed on to another group entity. The Court rejected the arguments of the Italian Tax Authorities and recognized the parent company in Luxembourg as the beneficial owner of the interest income. In the decision, reference was made to the Danish Beneficial Owner Cases from the EU Court of Justice to clarify the conditions for application of the withholding tax exemption under the EU Interest and Royalty Directive and for determination of beneficial owner status. The Court also found that no tax abuse could be assessed. In this regard the court pointet out that the parent company in Luxembourg performed financial and treasury functions for other group entities and made independent decisions related to these activities. Click here for Translation ...

“Lender Corp” had received a loan from a related party for repayment of outstanding dividends to its shareholders. The tax authority disallowed Lender Corp’s interest expenses on the loan. They found that the receipt of the loan was not in compliance with the provisions of paragraph a of Article 22 of Law No. 4172/2013, since the loan capital was not used in the interest of the company. Although the funds were made available for the fulfilment of obligations, they did not contribute to the generation of income or the development of the company’s business. Hence interest on the loan was considered as a non-deductible business expense. Lender Corp then filed an appeal. Judgement of the Court The court dismissed the appeal of Lender Corp and upheld the decision of the tax authorities. “As is evident from the information in the file of the present appeal, on 25.06.2015 the General Meeting of the shareholders of the company ” ” decided to distribute a first dividend and an additional dividend from the profits of the fiscal year 2014 and previous ones, totalling € 39,600,000. However, due to a lack of cash to cover the related obligation, the Company obtained loans of €12,300,000 and $23,200,000 during the 2015 tax year from the affiliated company ” ” at interest rates of 3.4% and 4.8%, respectively. The loan amounts were paid on behalf of the Company, by the lending company, directly into the bank accounts of its shareholders in repayment of dividends due to the borrowing company. Because it follows from the above that the interest paid by the company ” ” on a loan received from a foreign affiliated company to cover the dividend (first and additional) distributed to its shareholders is not deductible from its gross income, since paragraph (a) of Article 22 of Law 4172 is not fulfilled. /2013, since the loan amounts received were not used by the company in its interest, since although they were made available for the fulfilment of the company’s relevant obligation, they did not contribute to the creation of income or the development of its business and, therefore, the applicant’s claim is rejected as unfounded. “ Click here for English translation Click here for other translation ...

To acquire companies and resell them with capital gains a French Investment Fund distributed the capital of its investors (€ 5.4 billion in equity) between a French Fund Commun de Placement à Risques (FCPRs) and British Ltds managed by the French Investment Fund. For the purpose of acquiring the [X] group (the target), the French Investment Fund set up three legal entities in the Netherlands, [Y] UA, [B] BV, and [C] BV (the acquisition holding company). These three joint taxed entities are shown as Fiscal unit [A] below. The capital to be used for the acquisition of [X] group was divided into four FCPRs that held 30%, 30%, 30% and 10% in [Y] respectively. To get the full amount needed for the acquisition, [Y] members provided from their equity to [Y]: (i) member capital (€ 74.69 million by the FCPRs, € 1.96 million by the Fund Management, € 1.38 million by [D]) and (ii) investment in convertible instruments (hybrid loan at 13% per annum that is not paid, but added interest-bearing: € 60.4 million from the FCPRs and € 1.1 million from [D]). Within Fiscal unit [A], all amounts were paid in [B], which provided the acquisition holding company [C] with € 72.64 million as capital and € 62.36 million as loan. [C] also took out loans from third parties: (i) a senior facility of € 113.75 million from a bank syndicate and (ii) a mezzanine facility of € 35 million in total from [D] and [E]. On November 22, 2010, the French [F] Sàrl controlled by the French Investment Fund agreed on the acquisition with the owners of the target. “Before closing”, [F] transferred its rights and obligations under this agreement to [C], which purchased the target shares on January 21, 2011 for € 265 million, which were delivered and paid on January 31, 2011. As a result, the target was removed from the fiscal unit of the sellers [G] as of 31 January 2011 and was immediately included in the fiscal unit [A]. [C] on that day granted a loan of € 25 million at 9% to its German subsidiary [I] GmbH. Prior to the transaction the sellers and the target company had agreed that upon sale certain employees of the target would receive a bonus. The dispute is (i) whether the convertibles are a sham loan; (ii) if not, whether they actually function as equity under art. 10 (1) (d) Wet Vpb; (iii) if not, whether their interest charges are partly or fully deductible business expenses; (iv) if not, or art. 10a Wet Vpb stands in the way of deduction, and (v) if not, whether fraus legis stands in the way of interest deduction. Also in dispute is (vi) whether tax on the interest received on the loan to [I] GmbH violates EU freedom of establishment and (viii) whether the bonuses are deducted from the interested party or from [G]. Amsterdam Court of Appeal: The Court ruled that (i) it is a civil law loan that (ii) is not a participant loan and (iii) is not inconsistent or carries an arm’s length interest and that (iv) art. 10a Wet Vpb does not prevent interest deduction because the commitment requirement of paragraph 4 is not met, but (v) that the financing structure is set up in fraud legislation, which prevents interest deduction. The Court derived the motive from the artificiality and commercial futility of the financing scheme and the struggle with the aim and intent of the law from the (i) the norm of art. 10a Corporate Income Tax Act by avoiding its criteria artificially and (ii) the norm that an (interest) charge must have a non-fiscal cause in order to be recognized as a business expense for tax purposes. Re (vi), the Court holds that the difference in treatment between interest on a loan to a joined tax domestic subsidiary and interest on a loan to an non-joined tax German subsidiary is part of fiscal consolidation and therefore does not infringe the freedom of establishment. Contrary to the Rechtbank, the Court ruled ad (viii) that on the basis of the total profit concept, at least the realization principle, the bonuses are not borne by the interested party but by the sellers. Excerpts regarding the arm’s length principle “In principle, the assessment of transfer prices as agreed upon between affiliated parties will be based on the allocation of functions and risks as chosen by the parties. Any price adjustment by the Tax and Customs Administration will therefore be based on this allocation of functions and risks. In this respect it is not important whether comparable contracts would have been agreed between independent parties. For example, if a group decides to transfer the intangible assets to one group entity, it will not be objected that such a transaction would never have been agreed between independent third parties. However, it may happen that the contractual terms do not reflect economic reality. If this is the case, the economic reality will be taken into account, not the contractual stipulation. In addition, some risks cannot be separated from certain functions. After all, in independent relationships, a party will only be willing to take on a certain risk if it can manage and bear that risk.” “The arm’s-length principle implies that the conditions applicable to transactions between related parties are compared with the conditions agreed upon in similar situations between independent third parties. In very rare cases, similar situations between independent parties will result in a specific price. In the majority of cases, however, similar situations between independent third parties may result in a price within certain ranges. The final price agreed will depend on the circumstances, such as the bargaining power of each of the parties involved. It follows from the application of the arm’s-length principle that any price within those ranges will be considered an acceptable transfer price. Only if the price moves outside these margins, is there no longer talk of an arm’s-length price since a third party acting in ...

This case concerned deductibility of notional interest paid in 2003-7 by two permanent establishments in the UK to their Irish HQs. The loans – and thus interest expenses – had been allocated to the PEs as if they were separate entities. The UK tax authorities held that interest deductibility was restricted by UK tax law, which prescribed that PE’s has such equity and loan capital as it could reasonably be expected to have as a separate entity. The UK taxpayers, refered to  Article 8 of the UK-Ireland tax treaty. Article 8 applied the “distinct and separate enterprise” principle found in Article 7 of the 1963 OECD Model Tax Convention, which used the language used in section 11AA(2). Yet nothing was said in the treaty about assumed levels of equity and debt funding for the PE. In 2017, the First-tier Tribunal found in favour of the tax authority, and in October 2019 the Upper Tribunal also dismissed the taxpayers’ appeals ...

In a public statement the French General Directorate of Public Finance clarified that tax treatment of interest deductions taken by a French company on interest payments to a related Belgian company that benefits from the Belgian notional interest rate scheme. According to French Law, interest paid to foreign group companies is only deductible if a minimum rate of tax applies to the relevant income abroad. Click here for translation ...

The Portuguese Tribunal Arbitral Tributário (Centro de Arbitragem Administrativa) requested a preliminary ruling from the European Court of Justice. The request related to the common system of taxation applicable to mergers, divisions, partial divisions, transfers of assets and exchanges of shares concerning companies of different Member States — Directive 90/434/EEC — Articles 4 and 11 — Directive 2009/133/EC — Articles 4 and 15 — So-called ‘reverse’ merger In the event of a ‘reverse’ merger, costs which are incurred by the parent company relating to a loan taken out by that parent company for the purchase of shares of the subsidiary and which are deductible for that parent company, are considered non-deductible for that subsidiary. Click here for translation ...

An intercompany loan in the form of a so-called international debt pushdown had been issued to Universal Music Japan to acquire the shares of another Japanese group company. The tax authority found that the loan transaction had been entered for the principal purpose of reducing the tax burden in Japan and issued an assessment where deductions of the interest payments on the loan had been disallowed for tax purposes. Decision of the Court The Tokyo District Court decided in favour of Universal Music Japan and set aside the assessment. The Court held that the loan did not have the principle purpose of reducing taxes because the overall restructuring was conducted for valid business purposes. Therefore, the tax authorities could not invoke the Japanese anti-avoidance provisions to deny the interest deductions. The case is now pending at the Tokyo High Court awaiting a final decision. Click here for English Translation ...

“SH Loan Ltd” had provided a loan to its shareholder/manager and claimed that it did not expect any profit (interest) from this transaction, since it was not a bank. The tax authorities issued an assessment where additional interest income was added to the income of the company due to a loan granted to its sole shareholder. The additional interest income for the company was determined based on the relevant interest rates from the Bank of Greece’s Financial Situation Statistics. SH Loan Ltd filed an appeal. Judgement of the Court The court dismissed the appeal and upheld the decision of the tax authorities. “Because Mr. , is a person related to the applicant, in accordance with the provisions of Article 2(g) of Law No. 4172/2013, since he is a shareholder (100%), legal representative and member of the Board of Directors. (Chairman and Managing Director), and the granting of the loans in question to the related person was made on economic terms different from those that would apply between unrelated persons, whereas if the loan had been granted to an unrelated person, it would have earned interest income, as calculated in detail on pages 38 to 50 of the relevant audit report, in the total amount of € 22,372.58 for the three years under audit, in accordance with the provisions of Article 50 of Law No. 4172/2013. Because, contrary to the applicant’s claims, in order to find the interest rates, the audit did not act arbitrarily, but referred to the Bank of Greece’s Statistical Bulletins of Economic Trends, issues 160 (January – February 2015), 166 (January – February 2016) and 172 (January – February 2017). Since the findings of the audit, as recorded in the audit report of 13/12/2018 by the auditor of the C.E.M.E.P. on which the contested acts are based, are considered to be valid, acceptable and fully reasoned, the Head of the above audit centre was right to issue the contested acts and the present appeal must be dismissed.” Click here for English translation Click here for other translation ...

This case concerns application of the general anti-avoidance rule in s BG 1 of the Income Tax Act 2004. The tax authorities issued an assessment where deductions of $10,827,606 and $11,665,323 were disallowed in the 2006 and 2007 income tax years respectively. In addition, penalties of $1,786,555 and $1,924,779 for those years were imposed. The claimed deductions arose in the context of an arrangement entered into by Frucor Holdings Ltd (FHNZ) involving, among other steps, its issue of a Convertible Note to Deutsche Bank, New Zealand Branch (DBNZ) and a forward purchase of the shares DBNZ could call for under the Note by FHNZ’s Singapore based parent Danone Asia Pte Ltd (DAP). The Note had a face value of $204,421,5654 and carried interest at a rate of 6.5 per cent per annum. Over its five-year life, FHNZ paid DBNZ approximately $66 million which FHNZ characterised as interest and deducted for income tax purposes. The tax authorities said that, although such deduction complied with the “black letter” of the Act, $55 million of the $66 million paid was in fact a non- deductible repayment of principal. Hence only interest deduction of $11 million only over the life of the Arrangement was allowed. These figures represent the deduction disallowed by the Commissioner, as compared to the deductions claimed by the taxpayer: $13,250,998 in 2006 and $13,323,806 in 2007. Based on an allegedly abusive tax position but mitigated by the taxpayer’s prior compliance history. In so doing, avoiding any exposure to shortfall penalties for the 2008 and 2009 years in the event it is unsuccessful in the present proceedings. The income years 2004 and 2005, in which interest deductions were also claimed under the relevant transaction are time barred. Which I will refer to hereafter as $204 million without derogating from the Commissioner’s argument that the precise amount of the Note is itself evidence of artifice in the transaction. As the parties did in both the evidence and the argument, I use the $55 million figure for illustrative purposes. In fact, as recorded in fn 3 above, the Commissioner is time barred from reassessing two of FHNZ’s relevant income tax returns. The issues The primary issue in the proceedings is whether s BG 1 of the Act applies to the Arrangement. Two further issues arise if s BG 1 is held to apply: (a) whether the Commissioner’s reconstruction of the Arrangement pursuant to s GB 1 of the Act is correct or whether it is, as FHNZ submits, “incorrect and excessive”; and (b) whether the shortfall penalties in ss 141B (unacceptable tax position) or 141D (abusive tax position) of the Tax Administration Act 1994 (TAA) have application. The key parties The Court found in favor of Frucor Suntory ...

S BV was not granted deductions in its Swedish PE for interest on debt relating to the acquisition of subsidiaries. The Court of Appeal considers that it is clear that key personnel regarding acquisition, financing and divestment of the shares in the subsidiary and the associated risks have not existed in the PE. It is also very likely that the holding of the shares has not been necessary for and conditioned by the PE’s operations. Therefore, there is no support for allocating the shares and the related debt to the PE. Click here for translation ...

In 2007, IKEA reorganised its property portfolio in Norway so that the properties were demerged from the Norwegian parent company and placed in new, separate companies. The shares in these companies were placed in a newly established property company, and the shares in this company were in turn sold to the original parent company, which then became an indirect owner of the same properties. The last acquisition was funded through an inter-company loan. Based on the non-statutory anti-avoidance rule in Norwegian Tax Law, the Supreme Court concluded that the parent company could not be allowed to deduct the interest on the inter-company loan, as the main purpose of the reorganisation was considered to be to save tax. The anti-avoidance rule in section 13-1 of the Tax Act did not apply in this circumstance. Click here for translation ...

There are a number of exceptions to the German interest limitation rule essentially limiting the annual interest deduction to 30% of EBITDA as shown in the accounts. One of these is the equity ratio rule exempting a subsidiary company from the interest limitation provided its equity ratio (ratio of shareholder’s equity to the balance sheet total) is no more than two percentage points lower than that of the group and no more than 10% of its net interest cost was paid to any one significant shareholder (a shareholder owning more than 25% of the share capital). A loss-making company paying slightly less than 10% of its total net interest cost to each of two significant shareholders claimed exemption from the interest limitation as its equity ratio was better than that of the group. The tax office applied the limitation as the two significant shareholders together received more than 10% of the net interest cost. The finance ministry decree on the application of the interest limitation supports this view. The Supreme Tax Court decided in favour of the taxpayer. The interest limitation is an exception to the general principle of taxing the net profit of a company and, as an exception, it must be clearly formulated. Given this demand for clarity, suggestions that applying the 10% limit to all significant shareholders collectively might better reflect the legislative intention have no relevance in the face of the clear wording of the statute – “one shareholder”. Similarly, the same wording also excludes suggestions that each significant shareholder is a related party to all others, since the wording clearly treats each shareholder separately. Click here for English translation Click here for other translation ...

Hero Cycles had advanced a sum of Rs.1,16,26,128/- to its subsidiary, Hero Fibers Limited, and this advance did not carry any interest. According to the tax authorities, Hero Cycles had borrowed the money from a banks and paid interest thereupon, and on that basis an assessment was issued where the interest paid to the bank had been disallowed. Judgement of the Supreme Court The Supreme court set aside the assessment of the tax authorities. “…once it is established that there is nexus between the expenditure and the purpose of business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. It further held that no businessman can be compelled to maximize his profit and that the income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. Applying the aforesaid ratio to the facts of this case as already noted above, it is manifest that the advance to M/s. Hero Fibres Limited became imperative as a business expediency in view of the undertaking given to the financial institutions by the assessee to the effect that it would provide additional margin to M/s. Hero Fibres Limited to meet the working capital for meeting any cash loses. (…)” ...

The Supreme Tax Court has requested the Constitutional Court to rule on the conformity of the interest limitation with the constitutional requirement to tax like circumstances alike. The interest limitation disallows net interest expense in excess of 30% of EBITDA. However, the rule does not apply to companies with a total net annual interest cost of no more than €3 m or to those that are not part of a group. There are also a number of other exemptions, but the overall effect is to render the actual impact somewhat arbitrary. In particular, the asserted purpose of the rule – prevention of profit shifts abroad through deliberate under-capitalisation of the German operation – seemed somewhat illusory to the Supreme Tax Court in the light of the relatively high threshold and of the indiscriminate application to cases without foreign connotations. The court also pointed out that interest, as such, is a legitimate business expense and that the limitation rule can penalise financing arrangements generally seen as reasonable. Start-ups and crisis management were quoted as examples. Overall, the court found that the interest limitation rule does not meet the constitutional requirements of equal treatment and consistency of application. It has laid the question before the Constitutional Court for a ruling, together with a detailed explanation of its objections. These are a mixture of doubts on the legitimacy of some of the stated aims of the rule and on its suitability as an instrument in meeting others that are legitimate. Click here for English translation Click here for other translation ...

The issue before the Supreme Court of Appeal was whether a tax assessment issued by the Commissioner for the South African Revenue Service (SARS), in terms of the Income Tax Act 58 of 1962, for the year 2006 were to be set aside. MTN International Ltd had claimed interest deductions on loans it had incurred as expenditure against its gross income for the year of assessment. On 31 March 2011, which was the last day before the original assessment by SARS was due to prescribe, SARS issued a revised assessment, disallowing deduction of the interest expenditure. The tax assessment resulted in an income tax liability of R 73.476.101 of MTN International Ltd. When issuing the tax assessment the officer at SARS manually fixed the ‘due date’ as 30 March 2011, being one day prior to the day on which the assessment was actually issued. MTN International Ltd applied the High Court to have the tax assessment set aside, on the basis that the ‘manipulation of dates’ was irregular and unlawful. SARS, however, contended that the ‘backdating’ was of no consequence and thus did not affect the validity of the assessment. The High Court held that the tax assessment should not be set aside, but granted leave to MTN International Ltd to appeal the decision to the Supreme Court. The Supreme Court of Appeal noted that it is not a requirement that an assessment must be dated. Consequently, the failure to specify a ‘due date’ did not have the effect of invalidating the assessment. Likewise, inadvertently fixing an incorrect date – for example, by way of a clerical error – does not affect the validity of the assessment. Accordingly, the fact that a ‘due date’ may have been incorrectly fixed was not a ground for the setting aside the tax assessment. The appeal was dismissed with costs ...

Over a period of five years, from 1999 to 2003, the respondent, NWK Ltd, claimed deductions from income tax in respect of interest paid on a loan to it by Slab Trading Company (Pty) Ltd (Slab), a subsidiary of First National Bank (FNB), in the sum of R 96.415.776. The deductions were allowed. But in 2003 the appellant, the Commissioner for the South African Revenue Service, issued new assessments disallowing the deductions and refusing to remit any part of the interest on the amounts assessed. He also imposed additional tax and interest in terms of ss 76 and 89quat of the Income Tax Act 58 of 1962. The amount claimed pursuant to the additional assessments, including additional tax, was R 47.360.583. The basis of the revised assessments by the Commissioner was that the loan was not a genuine contract: it was part of a series of transactions entered into between NWK and FNB and its subsidiaries, all designed to disguise the true nature of the transaction between NWK and FNB, with the intention of NWK avoiding or reducing its liability for tax. NWK appealed against the assessments and the imposition of additional interest and penalties. Boruchowitz J and two assessors in the Tax Court held at Johannesburg upheld the appeal. It is against the order of the Tax Court that the Commissioner appeals. The basis of the Commissioner‟s argument on appeal is that the loan was simulated: that it had to be viewed in the light of several other agreements concluded between NWK and FNB, and FNB and its subsidiaries, which together showed that a sum of only R50m was lent by FNB to NWK, and that the transactions were devised to increase the ostensible amount lent so that deductions of interest on a greater amount could be claimed. NWK argued, on the other hand, that there was an honest intention on the part of NWK, represented by Mr E Barnard, its financial director, to execute the contracts in accordance with their tenor, and the claims for deductions were valid. The Tax Court accepted this contention and upheld the appeal to the Tax Court on this basis. The Supreme Court of Appeal ruled in favor of the Revenue Service (a) The objection to the assessments is dismissed and the additional assessments are upheld. (b) The objection to the imposition of additional tax of 200 per cent is upheld. (c) Additional tax of 100 per cent of the total amount of the additional assessments is imposed in terms of s 76 of the Income Tax Act 58 of 1962 ...

The question in this case, was whether EU community law precluded Belgien statutory rules under which interest payments were reclassified as dividends, and thus taxable, if made to a foreign shareholder company. A Belgian subsidiary was established and the two shareholders of the Belgian subsidiary and the parent company, established in the Netherlands, were appointed as directors. The subsidiary paid interest to the parent which was considered by the Belgian tax authorities in part to be dividends and was assessed as such. The European Court of Justice was asked to rule on the compatibility of these Belgien statutory rules with EU Community law The Court ruled that art. 43 and 48 EC precluded national legislation under which interest payments made by a company resident in a member state to a director which was a company established in another member state were reclassified as taxable dividends, where, at the beginning of the taxable period, the total of the interest-bearing loans was higher than the paid-up capital plus taxed reserves, whereas, in the same circumstances, interest payments made to a director which was a company established in the same member state were not reclassified and so were not taxable. National legislation introduced, as regards the taxation of interest paid by a resident company in respect of a claim to a director which was a company, a difference in treatment according to whether or not the latter company had its seat in Belgium. Companies managed by a director which was a non resident company were subject to tax treatment which was less advantageous than that accorded to companies managed by a director which was a resident company. Similarly, in relation to groups of companies within which a parent company took on management tasks in one of its subsidiaries, such legislation introduced a difference in treatment between resident subsidiaries according to whether or not their parent company had its seat in Belgium, thereby making subsidiaries of a non resident parent company subject to treatment which was less favourable than that accorded to the subsidiaries of a resident parent company. A difference in treatment between resident companies according to the place of establishment of the company which, as director, had granted them a loan constituted an obstacle to the freedom of establishment if it made it less attractive for companies established in other member states to exercise that freedom and they might, in consequence, refrain from managing a company in the member state which enacted that measure, or even refrain from acquiring, creating or maintaining a subsidiary in that member state. The difference in treatment amounted to a restriction on freedom of establishment which was prohibited, in principle, by art. 43 and 48 EC. Such a restriction was permissible only if it pursued a legitimate objective which was compatible with the Treaty and was justified by overriding reasons of public interest. It was further necessary, in such a case, that its application was appropriate to ensuring the attainment of the objective thus pursued and did not go beyond what was necessary to attain it. “In order for a restriction on the freedom of establishment to be justified on the ground of prevention of abusive practices, the specific objective of such a restriction must be to prevent conduct involving the creation of wholly artificial arrangements which do not reflect economic reality, with a view to escaping the tax normally due on the profits generated by activities carried out on national territory (Test Claimants in the Thin Cap Group Litigation, paragraph 74 and the case‑law cited” Even if the Belgian application of such a statutory limit sought to combat abusive practices, it went beyond what was necessary to attain that objective ...

The CRA had issued a six assessments for fiscal years 1995-1999 based on the principle purpose of Univar's acquisition of shares of Van Waters & Rogers (Barbadosco) Ltd. being to permit Univar to avoid, reduce or defer the payment of tax that would otherwise be payable under the Act within the meaning of paragraph 95(6), and thus deemed not to have been acquired . "ITA 95(6) Where rights or shares issued, acquired or disposed of to avoid tax – For the purposes of this subdivision (other than section 90), (b) where a person or partnership acquires or disposes of shares of the capital stock of a corporation, either directly or indirectly, and it can reasonably be considered that the principal purpose for the acquisition or disposition of the shares is to permit a person to avoid, reduce or defer the payment of tax or any other amount that would otherwise be payable under this Act, those shares shall be deemed not to have been acquired or disposed of, as the case may be, and where the shares were unissued by the corporation immediately prior to the acquisition, those shares shall be deemed not to have been issued." The Amended Judgement from the Court The appeal from the six reassessments made under Part I of  the Income Tax Act with respect to the following taxation years is allowed and the reassessments are referred back to the Minister  of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment: With respect to the six reassessments, it cannot, under paragraph 95(6)reasonably be considered that the principal purpose for the acquisition of the shares of Barbadosco was to permit the Appellant to avoid, reduce or defer the payment of tax or any other amount that would otherwise be payable under the Act ...

X BV, is member of the English XX-group. One of X’s parents is XX Ltd., based in the United Kingdom. In 1992, X BV acquired licensing rights relating to the trade name J from J Ltd. Their value was determined to be GBP 19.2 million. According to the agreement, X BV paid GBP 19 million for the ten-year economic ownership of the licensing rights. J Ltd. sold the legal ownership to W BV for GBP 200,000 in which X BV owned all shares. In 1996, X BV sells the ten-year economic ownership to W BV for GBP 2 million. To support the GBP 19 million price for the economic ownership, a valuation report is drawn up in 1992. The valuation is based on “projected royalty streams” which showed increasing royalty streams over the ten-year period 1992-2002. The tax authorities disagrees with the price of GBP 19 mio. and argue that the total value of the brand was GBP 43 mio. bases on a continued royalty stream. According to the authorities, GBP 19 million was attributable to the economic ownership and GBP 24 million should be attributed to the legal ownership. In court X BV provided an opinion on the value of the legal and economic ownership of the brand in 1992. In the report it is concluded that the projected income streams did not take into account the Product Life Cycle of the brand. The report states, that to support the brand and to keep the income streams at a high level, investments in the brand will have to be made. No such expenses had been planned and it was very unlikely that there would have been significant income streams after the ten-year period. The Court find there was no evidence that X BV had planned to invest in further support the brand. Hence, at the time of the purchase – the parties did not expect the brand to produce royalty streams after the ten year period. The Court also emphasises that as the royalty stream was in fact in decline in 1994. Click here for translation ...

Bosal is a company which carries on holding, financing and licensing/royalty related activities and which, as a taxpayer, is subject to corporation tax in the Netherlands. For the 1993 financial year, it declared costs amounting to NLG 3 969 339 in relation to the financing of its holdings in companies established in nine other Member States. In an annex to its declaration concerning that financial year, Bosal claimed that those costs should be deducted from its own profits. The inspector refused to allow the deduction sought, and the Gerechtshof te Arnhem (Netherlands), before which Bosal brought an action against the dismissal of its claim, confirmed the inspector’s position. It is in those circumstances that Bosal appealed on a point of law to the referring court. Taking the view that an interpretation of Community law was necessary in order to resolve the dispute before it, the Hoge Raad der Nederlanden decided to stay the proceedings and refer the following questions to the Court for a preliminary ruling: 1. Does Article 52 of the EC Treaty, read in conjunction with Article 58 thereof …, or any other rule of EC law, preclude a Member State from granting a parent company subject to tax in that Member State a deduction on costs relating to a holding owned by it only if the relevant subsidiary makes profits which are subject to tax in the Member State in which the parent company is established? 2. Does it make any difference to the answer to Question 1 whether, where the subsidiary is subject to tax based on its profits in the Member State concerned but the parent company is not, the relevant Member State takes account of the abovementioned costs in levying tax on the subsidiary? Judgement of the Court The court ruled in favor of Bosal. Not allowing deductions of costs related to participations in foreign subsidiaries is contrary to EC law. “Council Directive 90-435-EEC of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, interpreted in the light of Article 52 of the EC Treaty (now, after amendment, Article 43 EC) precludes a national provision which, when determining the tax on the profits of a parent company established in one Member State, makes the deductibility of costs in connection with that company’s holding in the capital of a subsidiary established in another Member State subject to the condition that such costs be indirectly instrumental in making profits which are taxable in the Member State where the parent company is established.” Click here for text version ...