SAP AG (now SAP SE) is a German multinational software corporation that develops enterprise software to manage business operations and customer relations. The company is especially known for its ERP software. SAP France, a 98% subsidiary of SA SAP France Holding, itself wholly owned by the German group, had deposited funds under a Cash Management Agreement as sight deposits carrying an interest of 0%. Following an audit for the financial years 2012 and 2013, two assessment proposals were issued in December 2015 and November 2016, relating in particular to the 0% interest rate charged on the cash deposits. The tax authorities had added interest to SA SAP France’s taxable income calculated by reference to the rate of remuneration on sight deposits. SAP France contested the adjustments and furthermore requested the benefit of the reduced rate of corporation tax on income from industrial property, pursuant to Article 39 of the French General Tax Code, with regard to the royalties from the licensing agreements relating to Business Object products and Cartesis solutions. In regards to added interest on the deposited funds under a Cash Management Agreement the Court of Appeal decided in favor of the tax authorities. An appeal was then filed by SAP France with the Supreme Court, which by decision no. 461642 of 20 September 2022 set aside the decision and referred the case back to the Court of Appeal. Judgment The Court of Appeal ruled in favour of the tax authorities. Excerpts – English translation. “4. The investigation has shown that SA SAP France has made its surplus cash available to the German company SAP SE, which indirectly holds it as described above, in very large amounts ranging from €132 million to €432 million, under a cash management agreement entered into on 17 December 2009. Under the terms of the agreement, these sums were remunerated on the basis of an interest rate equal to the Euro OverNight Index Average (EONIA) interbank reference rate less 0.15 points. The French tax authorities do not dispute the normal nature of the agreement when it was entered into in 2009, or the rate that was thus defined between the parties. During 2012 and 2013, despite the application of this formula, which resulted in negative remuneration due to changes in the EONIA, the parties agreed to set the rate at 0%. As a result, there was no remuneration at all on the sums made available to the cash centre by SAP France from August 2012. The tax authorities compared this lack of remuneration to the remuneration that SA SAP France could have received by investing its money in financial institutions, based on the average rate of remuneration on sight deposits over the period. It then considered that the difference between the two sums constituted a transfer of profits within the meaning of the aforementioned provisions. Contrary to what the company maintains, such an absence of remuneration makes it possible to establish a presumption of transfer of profits for the transactions in question. 5. The company argues that the investment of the funds with SAP SE is particularly secure and that it enables its subsidiary to obtain immediate and unconditional financing from the central treasury. However, it does not deny, as the French tax authorities point out, that its subsidiary’s software marketing business generates structural cash surpluses and that the subsidiary has never had recourse to financing from the central treasury since its inception. Nor does it report any difficulty in investing surplus cash in secure financial products. In addition, it appears from the investigation that the cash flow agreement does not provide for a defined term and stipulates, in paragraph 2 of section IX, that, subject to compliance with a one-month time limit, the parties may terminate the agreement, without condition or penalty. Section XII of the same agreement also states that it has no effect on the independence of each of its co-contractors or on their autonomy of management and administration. SA SAP France therefore had no contractual obligation to remain in the central cash pool beyond a period of one month. Furthermore, the company does not dispute that the rate of interest on advances, which results from the terms of the agreement, is not fixed, even if the aforementioned 2009 agreement does not contain a review clause, and that the parties may agree on a different rate, as they did in 2012. In addition, by simply arguing that the comparable rate used by the authorities is not relevant, when sight deposits, contrary to what it claims, do not exclude any immediate withdrawal of funds, the company, which does not offer any other comparable rate, does not seriously criticise the rates used by the authorities, between 0.15% and 0.18% over the period, which correspond to the remuneration that SA SAP France could have obtained from a financial institution and which, contrary to what it claims, are not negligible, given the amounts of cash surpluses made available. Lastly, although the company argues that the rates used by the authorities could, in any event, only be reduced by 0.15%, which corresponds to the margin of the central treasury that was applied in the 2009 agreement, this discount cannot be accepted since the comparables used by the authorities necessarily include the margin of the financial institutions. The fact that this rate has never been questioned by the authorities since the agreement was signed in 2009 has no bearing on the present analysis, which relates to different years in dispute. In these circumstances, and while SA SAP France persisted in investing its cash, without remuneration, with an affiliated company, the applicant company did not establish that the advantages it granted to the German company SAP SE were justified by the obtaining of quid pro quos favourable to its business or, at the very least, by quid pro quos at least equivalent to the revenue forgone granted. It follows that the tax authorities were right to reinstate in the results of SA SAP France the advantage granted to ...

Following an audit of Sadepan Chimica S.R.L., the Italian tax authorities issued an assessment of additional taxable income relating to non-interest bearing loans and bonds granted by Sadepan Chimica S.R.L. to its subsidiaries. The tax authorities considered that, in the financing relationship between the subsidiaries and the foreign associates – Polena S.A., based in Luxembourg, and Sadepan Chimica N.V., based in Belgium – the former had applied interest rates that did not correspond to the arm’s length value referred to in Article 9, paragraph 3, of the Italian Income Tax Code. U.I.R. As a result, the authorities issued separate tax assessments for the year 2013 claiming the higher amounts of interest income, calculated by applying an average rate of 3.83% for loans and 5.32% for bonds. Not satisfied with the assessment, Sadepan Chimica S.R.L. filed an appeal. The Regional Tax Commission (C.t.r.) confirmed the assessments and Sadepan Chimica S.R.L. filed an appeal with the Supreme Court. In the appeal Sadepan Chimica S.R.L. and its subsidiaries stated that the C.t.r. judgment were ‘irrelevant’ for not having analysed the general and specific conditions in relation to which the loans had been granted, and in so far as it held that it was for the taxpayer to provide evidence that the agreed consideration corresponded ‘to the economic values that the market attributes to such transactions. First of all, they claimed that the rules on the allocation of the burden of proof have been infringed; secondly, they complained of the failure to assess the evidence; they also claimed that the Office had used as a reference a market rate extraneous to the case at hand in that it was applicable to the different case of loans from financial institutions to industrial companies whereas it should have sought a benchmark relating to intra-group loans of industrial companies. They added that they had submitted to the judge of the merits, in order to determine in concrete terms the conditions of the financing, a number of elements capable of justifying the deviation from the normal value and, precisely a) the legal subordination of the financing b) the duration, c) the absence of creditworthiness, d) the indirect exercise of the activity through the subsidiaries; that, nevertheless, the C.t.r. had not assessed the economic and commercial reasons deduced. Judgement of the Supreme Court The Court ruled in favour of Sadepan Chimica S.R.L. and annulled the judgment under appeal on the grounds that it had failed to take account of the specific circumstances (solvency problems of the subsidiaries) relating to the transactions carried out by the related parties. Excerpts (English translation) “In fact, it still remains that a non-interest-bearing financing, or financing at a non-market rate, cannot be criticised per se, since it is possible for the taxpayer to prove the economic reasons that led it to finance its investee in the specific manner adopted. The rationale of the legislation is to be found in the arm’s length principle set forth in Article 9 of the OECD Model Convention, which provides for the possibility of taxing profits arising from intra-group transactions that have been governed by terms different from those that would have been agreed upon between independent companies in comparable transactions carried out in the free market. It follows from this conceptual core that “the valuation ‘at arm’s length’ disregards the original capacity of the transaction to produce income and, therefore, any negotiating obligation of the parties relating to the payment of consideration (see OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, paragraph 1.2). It is, in fact, a matter of examining the economic substance of the transaction that has taken place and comparing it with similar transactions carried out, in comparable circumstances, in free market conditions between independent parties and assessing its compliance with these (Cass. 20/05/2021, no. 13850 Cass. 15/04/2016, no. 749) Moreover, it is not excluded that intra-group gratuitous financing may have legal standing where it can be demonstrated that the deviation from the arm’s length principle was due to commercial reasons within the group, connected to the role that the parent company assumes in support of the other companies in the group (Court of Cassation 20/05/2021, no. 13850).” “In the OECD report published on 11/02/2020, on financial transactions, it is reiterated (as already stated in the OECD Commentary to Article 9 of the Model Convention) that, in intercompany financing transactions, the proper application of the arm’s length principle is relevant not only in determining the market value of the interest rates applied, but also in assessing whether a financing transaction is actually to be considered a loan or, alternatively, an equity contribution. It is also emphasised that, in order to distinguish a loan from an equity injection, among other useful indicators, the obligation to pay interest is of independent relevance. With reference to Italy, however, based on the application practice of the Agenzia delle Entrate (Circular No. 6/E of 30 March 2016 on leveraged buy-outs), the requalification of debt (or part thereof) into an equity contribution should represent an exceptional measure. Moreover, it is not ruled out that intra-group free financing may have legal standing where it can be demonstrated that the deviation from the arm’s length principle was due to commercial reasons within the group, related to the role that the parent company plays in supporting the other group companies. The Revenue Agency itself, already in Circular No. 42/IIDD/1981, had specified that the appropriateness of a transfer pricing method must be assessed on a case-by-case basis. “9.6. That being stated, this Court has clarified that, the examination by the court of merit must be directed along two lines: first, it must verify whether or not the office has provided the proof, which is due to it, that the Italian parent company has carried out a financing transaction in favour of the foreign subsidiary, as a legitimate prerequisite for the recovery of the taxation of the interest income on the loan, on the basis of the market rate observable in relation to loans ...

“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 ...

“LLC AB” had received an interest free “credit line” by a related party which it considered a loan and on that basis notional interest was deducted for tax purposes. The tax authorities disagreed with the qualification of the “credit line” and considered the capital similar to equity. On that basis the notional interest deductions was disallowed, which resulted in additional taxable income. An appeal was filed by “LLC AB” which was dismissed by the Administrative Tribunal in September 2022. An appeal was then filed by “LLC AB” with the Administrative Court. Judgment of the Court The Administrative Court ruled in favor of “LLC AB” and overturned the decision of the Administrative Tribunal and set aside the assessment of the tax authorities. Excerpt (in English) “However, as a last important element, the Court must reiterate the finding already made above that the appellant made only very limited use of the credit line opened to it and that the loan was indeed repaid on December 31, 2018. However, neither the state party nor the first judges questioned this repayment. Therefore, in accordance with the principle of substance over form, and with the hindsight inherent in the analysis carried out at the litigation level after the end of the relevant transactions, the IFL was indeed executed by the parties as a loan that was repaid even well before the contractually agreed maturity date. As a result, the Court concludes that the majority of the relevant points analysed above in the IFL clauses, as well as the performance of the parties involved, confirm the classification of the said contract as a debt instrument which does not form part of the appellant’s equity capital, and which is therefore liable to give rise to the payment and tax deduction of debit interest due to the temporary availability of the stipulated capital. However, the IFL has expressly stipulated that the appellant has no obligation to pay interest, and the appellant has used the notional interest mechanism to record such interest as an operating expense in the amount of … euros, in accordance with the results of the transfer pricing report, in order to comply with the arm’s length principle. The appellant also states, without being contradicted, that its shareholder recorded the same amount as notional interest income for tax purposes. The Court is obliged to note that the appellant puts forward the principle of such notional interest on account of the IFL and the amount retained by it on this account on the basis of the aforementioned report of the limited liability company (CD), and that the State has not formulated any plea in the appeal proceedings seeking to have the principle of such interest rejected or the arm’s length nature of the amount concretely retained by the appellant. As the Court is limited by the grounds on which it has been seized, it cannot itself review the principle of notional interest and the arm’s length nature of the notional interest rate declared by the appellant. Under these conditions, it is led to hold that the tax office, followed by the Director and the first judges, was wrong to reclassify the loan between the appellant and its shareholder as equity capital and to refuse to admit the amount put forward by the appellant as notional interest. It follows from all the foregoing developments that the appeal under review is justified and that, by reversal of the judgment under review, the management decision of January 23, 2020 should be reversed in the sense that the non-accounting adjustment of notional interest in respect of the IFL in the amount of … euros is deductible as an operating expense from the profit generated by the appellant in respect of the 2016 financial year.” Click here for English translation Click here for other translation ...

A S.A. had transferred a dividend receivable to an indirect shareholder for the purpose of acquiring other companies. The tax authorities considered the transfer to be a loan, for which A S.A should have received arm’s length interest and issued an assessment on that basis. A complaint was filed by A S.A. with the tax Court, which ruled in favour of A S.A. and dismissed the assessmemt in 2021 An appeal was then filed by the tax authorities with the Supreme Administrative Court. Judgement of the Court The Supreme Administrative Court upheld the decission of the tax court and dismissed the appeal of the tax authorities. According to the Court the local transfer pricing in article 58 of the CIRC, in the wording in force at the time of the facts did not allow for a recharacterization of a transaction, only for a re-quantification. A recharacterization of the transaction would at the time of the facts only be possible under the Portuguese general anti-abuse clause, which required the tax authorities to prove that the arrangement had been put in place for securing a tax advantage. Such evidence had not been presented. Excerpt “In other words, the fact that the transfer of credits arising from ancillary benefits to non-shareholders is not common is not enough to destroy the characteristics of the ancillary obligation set out in the articles of association, which, as is well known, can be transferred – see art. Furthermore, the Tax Authority’s reasoning reveals a total disregard for the rest of the applicable legal regime, namely the restitution regime provided for in Article 213 of the CSC, which gives them the unquestionable character of quasi-equity benefits. In fact, since the admissibility of supplementary capital contributions in public limited companies has been debated for a long time, but with the majority of legal scholars being in favor of such contributions, the enshrinement in the articles of association of the figure of accessory obligations following the supplementary contributions regime appeared as a solution to the possibility of internal financing of the public limited company, (See, for example, Paulo Olavo Cunha in Direito das Sociedades Comerciais, 3rd edition, Almedina, 2007, pages 441 and 442 (in a contemporary annotation with the legal framework in force at the time). ) . Furthermore, as pointed out by the Deputy Attorney General, whose reasoning, due to its assertiveness, we do not hesitate to refer to again, “This situation is not unrelated to the fact that, in the corporate structure in question, the company “D… ” has a majority stake in the company “A…”, and there is even doctrine that defends “the possibility of transferring the credits resulting from the supplementary installments autonomously from the status of partner” – in an explicit allusion to the view taken by Rui Pinto Duarte (Author cited, “Escritos sobre Direito das Sociedades”, Coimbra Editora, 2008). In conclusion: if the Tax Administration believed that the evidence it had found, to which we have already referred, strongly indicated that the transaction in question was really about the parties providing financing to the company “D…, S.A. “, it was imperative that it had made use of the anti-abuse clause (although there are legal scholars who also include article 58 of the CIRC in the special anti-abuse rules – see Rui Duarte Morais, “Sobre a Notção de “cláusulas antiabusos”, Direito Fiscal, Estudos Jurídicos e Económicos em Homenagem ao Prof. Dr. António Sousa Franco III 2006, p.879 /894) and use the procedure laid down in Article 63 of the CPPT, as the Appellant claims. What is not legitimate, however, in these circumstances, “in view of the letter of the law and the teleology of the transfer pricing system as enshrined in the IRC Code and developed in Ministerial Order 1446-C/2001, is to use this system to carry out a sort of half-correction and, in the other half, i.e., For cases of this nature, there is a specific legal instrument in the legal system – the CGAA – specially designed and aimed at combating this type of practice (Bruno Santiago & António Queiroz Martins, “Os preços de transferência na compra e venda de participações sociais entre entidades relacionadas”, Cadernos Preços de Transferência, Almedina, 2013, Coordenação João Taborda Gama). …” Click here for English translation. Click here for other translation ...

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

“A Corporation” had granted various loans, firstly to a French subsidiary and secondly to the Liechtenstein sister company, B Corporation. The latter essentially passed on these loans to its German subsidiary C GmbH. A Corporation and B Corporation are each wholly owned by Mr D, who is resident in Liechtenstein. B Corporation has a 94% shareholding in C GmbH and D has a 6% shareholding. The loans granted by A Corporation did not bear interest The tax authorities issued an assessment for FY 2013 – 2017 where interest income from these loans had been added to the taxable income of A Corporation in accordance with the safe harbour rates applicable in Liechtenstein. Furthermore, the tax authorities had not fully allowed the equity capital interest deduction claimed by A Corporation in its tax returns An appeal was filed by A Corporation with the Administrative Court. Judgement of the Court The Court dismissed the appeal against the decision and upheld the assessment of the tax authorities. Excerpts “…, it is irrelevant for what motives a loan was granted to a related party and whether there is a case of abuse. If the lender achieves other advantages through its granting of a loan than the achievement of an interest on the loan, this may be taken into account in the third-party comparison, but the complainant has not proven in the present case that a third party would have granted an interest-free loan in the amount of many millions of euros to B Corporation under the concrete circumstances or that a borrower independent of the complainant would not have been willing to pay an interest on the loan under the concrete circumstances. Due to the duty to cooperate (Art. 97 para. 1 SteG), the burden of proof in this regard lies with the taxpayer and not with the tax administration, because the taxpayer is closer to the facts to be proven than the tax administration.” “It is evident from these statements by the government that the legislator was aware of the connection between the arm’s length principle under Art. 49 SteG and the regulations on the equity capital interest deduction, including the provision of Art. 54 para. 3 sentence 1 SteG, and that it thus allowed for a twofold correction when granting loans to related parties, which is why – contrary to the complainant’s submission in its statement of 23 January 2023 – there is no need to speak of an “excessive correction”. The legislator also determined that both corrections are also permissible if no abuse must be assumed. At the same time, this means that the legislator has not left open the possibility of deviating from the provisions of Art. 49 and 54 SteG in individual cases.” “The legislator has a great deal of leeway, especially in tax law (decision-making prerogative of the legislator) (StGH 2010/70 E. 3.1; StGH 2010/82; VGH 2021/002 E. 3. and in addition CJEU 2021/052; CJEU 2021/094 E. 2.6, 3.4, 7). Insofar as the legislator intended to implement certain principles when creating the 2009 Tax Act, these principles are only legally significant to the extent that they were actually implemented in the Act (VGH 2021/002 E. 3.). In addition, the Tax Act by no means guarantees that every path chosen by a taxpayer to achieve a goal must lead to the same tax burden (VGH 2020/107 recital D; VGH 2021/085 E. 7). It is the decision of each taxpayer whether or not to make use of certain tax options (CST 2021/051 E. 4.4). In the present case, as the complainant itself states, it could have distributed the amounts it granted as loans to its sister company B Corporation as dividends to its sole shareholder, and the latter could have passed on the amounts as loans to B Corporation. The fact that such a course of action would have led to a lower tax burden when viewed as a whole does not justify qualifying the offsetting carried out by the tax administration in the proceedings as unlawful and impermissible. 4. For all these reasons, the appeal of 6 December 2022 is not justified.” Click here for English translation Click here for other translation ...

Innodis granted loans to five wholly-owned subsidiaries between 2002 and 2004. The loans were unsecured, interest-free and had a grace period of one year. The subsidiaries to which the loans were granted were either start-up companies with no assets or companies in financial difficulties. The tax authorities (MRA) had carried out an assessment of the tax liability of Innodis Ltd in respect of the assessment years 2002 – 2003 and 2003 – 2004. In the course of the exercise, a number of items were added to the taxable income, including income from interest-free loans to subsidiaries and overseas passage allowances to eligible employees, which had been earmarked but not paid. The tax authorities were of the opinion that the grant of the interest-free loans was not on arm’s length terms in accordance with section 75 of the Income Tax Act 1995 (ITA) and was clearly preferential treatment of the subsidiaries. An assumed interest rate of 13% was applied to the loans, based on the market rate for loans made to Innodis for other purposes around the same time. Innodis Ltd appealed against the decision of the tax authorities to the Assessment Review Committee where all issues raised in the appeal were settled by agreement between the parties except those relating to the items of interest-free loans to subsidiaries and overseas passage allowances to employees. Innodis Ltd subsequently appealed to the Supreme Court. Judgement of the Supreme Court The Court dismissed the appeal of Innodis and upheld the decision of the Assessment Review Committee. Excerpt “With regard to the complaint of the appellant that the ARC wrongly accepted the application of “deemed interest” to assess the liability to tax as such notion has no legal basis, we note that the ARC clearly explained the expression “deemed interest” and its application. In that respect, the ARC observed that “deemed interest” is an expression commonly used in practice by the tax authorities and accountants to denote interest which a party should have claimed from another party if there had been no relationship between them. It also explained that the use of the expression of “deemed interest” was relevant since in the present case, in effect, the Appellant has been assessed on interest income, which it should have derived if it had been at arm’s length with its subsidiaries regarding the loans. It further observed that it is not correct to say that the assessment has no legal basis because it has always been the case for the MRA that this assessment is based on section 75 Income Tax Act 1995 and the term “deemed interest” was used in the heading to designate the nature of the amount assessed under section 75. We find no fault in the above reasoning of the ARC. As a matter of fact, we agree that, as found by the ARC, the assessment itself had a legal basis by virtue section 75, which empowers the Director General to do so if he is of the opinion that the transaction in question was not at “arm’s length.” Once this is done, it was necessary for the Director General to designate by an appropriate term the income that would have been derived if the transactions had been at “arm’s length.” Since the transactions targeted were loans, which in practice generate interests as income, there can be no wrong in designating the income that the applicant ought to have derived from them as “deemed interest”. Furthermore, as observed by the ARC, the concept of “deemed interest” is neither one invented by it or the respondent nor blatantly inappropriate since it is an expression used by the tax authorities and accountants to denote interest which a party should have claimed from another party if there had been no relationship between them. With regard to the application of the provisions under Part Vll of the Income Tax Act, particularly those under section 90, we note that in brushing aside the contentions of the appellant in that respect, the ARC made the following observations, with which we agree. Part VII concerns anti-avoidance provisions and section 90 relates to transactions designed to avoid liability to Income Tax. The MRA had decided to base its case on section 75 or the Income Tax Act as it was entitled to and to the extent that section 75 imposes on domestic companies an obligation to deal with subsidiaries at arm’s length, it is irrelevant whether section 90 could also have been applicable. It is therefore correct to say, as the ARC observed, that even if section 90 would have been applicable, it does not mean that the Director General was bound to apply section 90 or that section 75 was wrongly relied upon. Therefore, there is no substance in the appellant’s contention that the ARC was wrong to have discarded and failed to properly address its mind to the application of section 90 of the Income Tax Act 1995 and the arm’s length principle which is enunciated therein. For all the above reasons, the present appeal cannot succeed. We accordingly dismiss it with costs.” Click here for other translation ...

Fibusa SAS is a holding company with holdings in four Romanian companies whose purpose is to develop wind power stations in Romania. In 2011, 2012, In 2011, 2012, 2013 and 2014, Fibusa granted these companies interest-free loans for a period of less than one year, renewable for the same period, with the possibility of repaying these loans at any time, for a total amount of almost 26 million euros in 2011, more than 33 million euros in 2012 and more than 35.5 million euros in 2013 and 2014, which were financed mainly by loans taken out by it. 2,086,730 for the year ended 2013 and €2,385,774 for the year ended 2014. Following an audit, an assessment of additional corporate income tax and corresponding penalties for the financial years 2011 – 2014 was issued by the tax authorities. The lack of interest on the loans was considered indirect transfers of profits abroad. Not satisfied with the assessment Fibusa filed an complaint which was rejected by the Administrative Court in December 2020. An appeal was then filed by Fibusa with the Administrative Court of Appeal. Judgement of the Court The court upheld the assessment but made adjustments to the applicable interest rate on the loans and thus the amounts of additional taxable income calculated by the tax authorities. Excerpts (Unofficial English translation) “8. Under the terms of Article 57 of the General Tax Code, which is applicable to corporation tax by virtue of Article 209 of the same Code: “For the purposes of calculating the income tax due by companies that are dependent on or control companies located outside France, profits indirectly transferred to the latter, either by way of an increase or decrease in purchase or sale prices, or by any other means, are incorporated into the results shown in the accounts (…)”. 9. These provisions establish, as soon as the administration establishes the existence of a link of dependence and a practice falling within the provisions of Article 57 of the General Tax Code, a presumption of indirect transfer of profits which can only be usefully challenged by the company liable to tax in France if it provides proof that the advantages it granted were justified by the obtaining of consideration.” “11. As the court held, in view of the relationship of dependence between the applicant company and its subsidiaries and its waiver of the right to receive interest in return for the advances granted, the presumption of indirect transfer of profits established by the provisions of Article 57 of the General Tax Code can be rebutted by Fibusa only if it proves that the advantages thus granted were justified by the obtaining of consideration.” “Although the applicant company refers to the situation of financial difficulty in which these companies found themselves, there is no evidence in the investigation to confirm the reality of these difficulties before 2014, the year in which the companies were admitted to insolvency proceedings under Romanian law. Furthermore, the accounting information produced by the applicant company, while showing investments made by those subsidiaries, also shows that they did not achieve any turnover and the information provided by the Romanian authorities indicates that the investments made are, for the most part, not related to wind farm projects and that the companies do not have any of the administrative authorisations required for such installations. In those circumstances, in the absence of any evidence to corroborate the reality of the activity of the beneficiary companies or of financial difficulties as from 2011, the applicant company, which invoked at first instance the financial difficulties of the subsidiaries and invokes on appeal the prospects of dividends which it expected to receive by granting the loans granted, does not justify any consideration for those interest-free loans. Thus, the administration was right to consider that the advantages granted by the applicant company to its subsidiaries constituted indirect transfers of profits.” “14. With regard to the sums borrowed by Fibusa to finance the advances granted to its subsidiaries, i.e. EUR 21 004 750 in 2011, EUR 26 309 187 in 2012, EUR 24 047 500 in 2013 and EUR 27 257 711 in 2014, it follows from what has been said above that it is appropriate to retain 1,188,828 in 2011, EUR 2,036,937 in 2012, EUR 2,418,713 in 2013 and EUR 1,594,425 in 2014, corresponding to the interest actually borne by Fibusa during each financial year in respect of the loans it took out. 15. With regard to the sums made available to Fibusa’s subsidiaries but not borrowed by it, namely EUR 4 981 250 in 2011, EUR 6 813 313 in 2012, EUR 11 487 500 in 2013 and EUR 8 332 789 in 2014, the applicant company relied at first instance on the rates of 4.25%, 3.75%, 3% and 2.4%, corresponding to the average interest rates for advances on securities applied by the Banque de France. It is not contested by the administration and there is nothing in the investigation to show that the rates of remuneration that the company could have obtained from a financial institution or similar body with which it would have placed sums of an equivalent amount under similar conditions would have been higher. In these circumstances, these rates should be retained and the company should be relieved of the amount of the taxes in dispute corresponding to the difference between the taxes to which it was subject and those resulting from the application of these rates to the sums of EUR 4,981,250 in 2011, EUR 6,813,313 in 2012, EUR 11,487,500 in 2013 and EUR 8,332,789 in 2014.” Click here for English translation Click here for other translation ...

SAP AG (now SAP SE) is a German multinational software corporation that develops enterprise software to manage business operations and customer relations. The company is especially known for its ERP software. SAP France, a 98% subsidiary of SA SAP France Holding, itself wholly owned by the German group, had deposited funds under a Cash Management Agreement as sight deposits carrying an interest of 0%. Following an audit for the financial years 2012 and 2013, two assessment proposals were issued in December 2015 and November 2016, relating in particular to the 0% interest rate charged on the cash deposits. The tax authorities had added interest to SA SAP France’s taxable income calculated by reference to the rate of remuneration on sight deposits. SAP France contested the adjustments and furthermore requested the benefit of the reduced rate of corporation tax on income from industrial property, pursuant to Article 39 of the French General Tax Code, with regard to the royalties from the licensing agreements relating to Business Object products and Cartesis solutions. SAP France Holding, the head of the group is appealing against the ruling of 30 January 2020 by which the Montreuil Administrative Court rejected its requests for the reconstitution of its overall tax loss carry-forward in the amount of EUR 171,373 for 2012, 314,395 in duties for 2013 and the additional contribution to corporate income tax on the amounts distributed for 2012 and 2013, for amounts of €5,141 and €14,550 respectively, and, in application of the reduced tax rate, the refund of an overpayment of corporate income tax and additional contributions for €27,461,913 for the years 2012 to 2015. In regards to added interest on the deposited funds under a Cash Management Agreement the Court of Appeal decided in favor of the tax authorities. An appeal was filed by SAP France with the Supreme Court. Judgement of the Conseil d’État The Supreme Court set aside the decision of the Court of Appeal. Excerpt “2. Under the terms of Article 57 of the same code: “For the purposes of determining the income tax due by companies that are dependent on or control companies located outside France, the profits indirectly transferred to the latter, either by way of an increase or decrease in purchase or sale prices, or by any other means, are incorporated into the results shown in the accounts. The same procedure shall be followed in respect of undertakings which are dependent on an undertaking or a group which also controls undertakings situated outside France (…) In the absence of precise information for making the adjustments provided for in the first, second and third paragraphs, the taxable income shall be determined by comparison with that of similar undertakings normally operated. It follows from these provisions that, when it finds that the prices charged by an enterprise established in France to a foreign enterprise which is related to it – or those charged to it by this foreign enterprise – are lower – or higher – than those charged by similar enterprises normally operated, In the event that the charges levied in France by a related foreign company – or those invoiced to it by that foreign company – are lower – or higher – than those levied by similar companies operating normally, i.e. at arm’s length, the administration must be considered to have established the existence of an advantage which it is entitled to reintegrate into the results of the French company, unless the latter can prove that this advantage had at least equivalent counterparts for it. In the absence of such a comparison, the department is not, on the other hand, entitled to invoke the presumption of transfers of profits thus instituted but must, in order to demonstrate that an enterprise has granted a liberality by invoicing services at an insufficient price – or by paying them at an excessive price – establish the existence of an unjustified difference between the agreed price and the market value of the property transferred or the service provided 3. In order to judge that SAP France had granted SAP AG a advantage by renouncing, for the years 2012 and 2013, to receive a remuneration in return for the deposit of its cash surpluses with the latter, the administrative court of appeal ruled that the administrative court of appeal based its decision on the fact that this zero remuneration was unrelated to the remuneration to which the company would have been entitled if it had placed its cash surpluses with a financial institution on that date, without this absence of remuneration finding its counterpart in the possibility of financing cash requirements, which were non-existent for the years in question. In holding, however, that the fact that the rate of remuneration of the sums thus deposited with SAP AG resulted from the application of the rate formula provided for in the cash management agreement, which the parties chose to limit to a non-negative result during the performance of that agreement, is irrelevant in this respect, without investigating whether SAP France had acted in accordance with its interest in concluding the agreement in these terms on 17 December 2009, or what obligations it had during the years in dispute, the Administrative Court of Appeal erred in law. 4. It follows from the foregoing, without it being necessary to rule on the other grounds of appeal, that the company SAP France Holding is entitled to request the annulment of Article 3 of the judgment which it is challenging. In the circumstances of the case, it is appropriate to charge the State with the sum of 3,000 euros to be paid to the company SAP France Holding under Article L. 761-1 of the Administrative Justice Code.” Click here for English translation Click here for other translation ...

At issue was an interest free loan granted by “L…. Engenharia e Construções, S.A.” to a related party. The loan had been granted before the parties became related following an acquisition in 2007. The tax authorities had issued an assessment where the interest had been determined to 1.4% based on the interest rate that would later apply to the loan according to the agreement. An appeal was filed by “L…. Engenharia e Construções, S.A.” with the Administrative Court, where the assessment was later set aside. An appeal was then filed by the tax authorities with the Administrative Court of Appeal. Judgement of the Court The Administrative Court of Appeal upheld the decision of the administrative court, dismissed the appeal of the tax authorities and annulled the assessment. Excerpt “In this regard, it cannot be ignored that the contract entered into by the Claimant with the company Construtora do L…. SGPS, SA, on 21 September 2004, is not a true shareholder loan contract, as understood by the Tax Inspection Services (see points 1 to 3 and 6 of the list of proven facts). This is because that type of contract presupposes that it is the partner who lends the company money or another fungible item, the latter being obliged to return it another of the same type and quality, and not the reverse, under the terms of Article 243(1) of the Commercial Companies Code (CSC) (see points 1 to 3 and 6 of the list of proven facts). Therefore, as the company Construtora do L…. SGPS, SA, holder of 94.72% of the share capital of the Disputant Company on 31 December 2007, and as the Disputant Company did not hold any shareholding in that company until that date, it follows that the Disputant Company could not make shareholder loans to the said company, under penalty of breach of the said legal provision (see points 1 to 3 and 42 of the list of proven facts). Therefore, it is necessary to qualify both contracts at issue in the present proceedings as loan contracts, whose regime is legally foreseen in Articles 1142 and following of the Civil Code (see points 1 to 6 and 42 of the list of proven facts). In addition, these are onerous loan agreements, since they provide not only for the repayment of the capital lent, but also for the payment of interest to the Impugner, increased by a percentage of 1.5% (see points 1 to 3, 6 and 7 of the list of proven facts). “The correction of transfer prices cannot be based solely on the appeal to the general principle that a loan between related entities should bear interest, but rather involves demonstrating that transactions of the same or similar nature performed between independent entities in similar circumstances involve the requirement of interest, and it is not arguable in the case law of the Supreme Administrative Court that the determination of arm’s length conditions is a burden that the law places on the Tax Administration. As stated in the doctrinal summary of the Supreme Administrative Court ruling of 11/10/2021, in case no. 01209/11.7BELRS, “The AT has the burden of proving the existence of special relations, as well as the terms under which operations of the same nature normally take place between independent persons and under identical circumstances. This means that the correction referred to in Article 58 of the CIRC cannot, therefore, be based on indications or presumptions, and the AT is obliged to prove the abovementioned legal requirements in order to be able to correct the taxpayer’s taxable income under this regime”. Having decided in this line, the sentence did not incur in the pointed errors of judgment, deserving to be fully confirmed.” Click here for English translation. Click here for other translation ...

A SGPS S.A. is the parent company of Group A. In 2016, a subsidiary, B S.A., took a loan in a bank, amounting to 1,950,000.00 Euros, and incurred interest costs and Stamp Tax. However, the majority of the loan, an amount of €1,716,256.60, was transferred as an interest free loan to A SGPS S.A. The tax authorities issued an assessment related to costs incurred on the loan and deducted by B S.A. The tax authorities disallowed B S.A.’s deduction of the costs as they were not intended to protect or obtain income, and therefore did not meet the requirements for deductibility under the general provisions of the Tax Code; A complaint was filed by A SGPS S.A. with the Administrative Tribunal. According to A SGPS SA the tax authorities did not justify why it considered that the expenses incurred by B S.A. to an independent bank for a loan that was passed on to the parent company were not deductible. According to A SGPS SA, this was not an issue of requirements for deductibility , but rather a question of transfer pricing. Hence, the correct framework for an adjustment would be that of article 63 regarding pricing of controlled transactions and not the general provisions in Article 23 of the Tax Code. Therefore the tax authorities had erred in law. Judgement of the CAAD In regards of B S.A.s deductions of loan expenses, the complaint of A SGPS S.A was dismissed and the assessment upheld. According to the tribunal, expenses held by a subsidiary to grant a loan to a parent company could not be said to “protect or obtain income” of the subsidiary since it did not own the parent company. “…the basic rule of deductibility of expenses is stated in article 23, no. 1 of the IRC Code, which, in its normative hypothesis, contains the respective constitutive assumptions, of a substantive nature, requiring a connection between the expenses and the activity generating income subject to IRC. Note that this is not a requirement of a direct causal relation between expenses and income (see Judgments of the Supreme Administrative Court of 24 September 2014, Case No. 0779/12; of 15 November 2017, Case No. 372/16; and of 28 June 2017, Case No. 0627/16, of 28 June 2017 ). The latter judgement considers “definitively ruled out a finalistic view of indispensability (as a requirement for costs to be accepted as tax costs), according to which a cause-effect relation, of the type conditio sine qua non, between costs and income would be required, so that only costs for which it is possible to establish an objective connection with the income may be considered deductible”. The causal connection should be made between the expenses and the activity globally considered (going beyond the strict expense-income nexus), and the Administration cannot assess the correctness, convenience or opportunity of the business and management decisions of the corporate entities. As highlighted by the Judgment of the Supreme Administrative Court of 21 September 2016, Case No. 0571/13 “[t]he concept of indispensability of costs, to which article 23 of the CIRC refers, refers to the costs incurred in the interest of the company or supported within the scope of the activities arising from its corporate scope”. On the other hand, this construction requires a link of subjective imputation that is implicit in the relationship required between the expense and the activity. This link must be made with the specific activity of the taxpayer and not with any other activity, namely that of its partners or third parties. It is in this framework that the corrections under analysis are based and not on the transfer pricing regime (see article 63 of the IRC Code), or on the “anti-abuse” regime, for which reason the assessment of the latter does not belong here. The Court is limited to the knowledge of the reasons expressed in the contemporaneous grounds of the tax act and if a correction has several valid grounds, only those that have been invoked as grounds for the contested act may be assessed. In this case, the only basis of the addition to the taxable amount of the deducted financial costs respects to the non-compliance of the assumptions of article 23, no. 1 of the Corporate Income Tax Code. As the conditions that integrate the normative hypothesis are not met, one cannot but validly conclude, together with the Defendant, that the deduction is not admissible. This, without prejudice to the fact that the factual situation may possibly be subject to a concurrent framework in other rules, which, as said, it is not for us to assess if they are not part of the foundations of the tax acts. The point is that the legal-tax regime effectively applied is based on correct legal and factual assumptions. … Taking into account the criterion described, the granting of free loans by B…, S.A. to the parent company [the Claimant] does not appear susceptible of being regarded as an activity of management of a financial asset by the former, since it is not the latter that holds shares in the parent company, but the opposite. In effect, there is no asset of which B…, S.A. is the holder that underlies this financing operation to the parent company. Nor can the argument regarding the exercise of significant influence over management, usually measured (in relation to subsidiary companies) by a percentage holding of at least 20%, be invoked in these circumstances to judge that the interest in the investment has been verified. Here, the significant influence is exercised in the opposite direction, since the parent company holds 92% of the capital of the Claimant. Therefore, it is concluded that the non-interest bearing financing granted by B…, S.A. to the Claimant are not carried out within the scope of the activity of the former and in its economic interest, so, in agreement with the Defendant, the financial costs incurred do not pass the test of the necessary causal relation between the expenses incurred and the activity of ...

C is the parent company of the C-group which is involved in the construction business. C is part of a joint venture and for the expansion of these activities a framework agreement on shareholder loans was concluded. Under the agreement two shareholder loans were granted: ***loan*** II totalling 212,935,716.33 euros and ***loan*** III totalling 446,000,000 euros. At issue is whether (***loan*** II and ***loan*** III) are to be regarded as hidden equity capital or debt capital. In regards of loan II a binding ruling had previously been issued stating that the loan was hidden equity. C took the position that both loan II and loan III were to be treated for tax purposes as equity capital. Following an audit the tax authorities assessed both shareholder loans as debt capital and added interest income to the taxable income of C. In regards of the binding ruling previously issued, the authorities stated that the underlying facts had changed to such an extend that the ruling was no longer binding. The court of first instance held in favour of C, and an appeal was then filed by the tax authorities. Judgement of the Court The court upheld the decision of the court of first instance and found that the shareholder loans should be treated as hidden equity capital. Excerpts Loan II “Pursuant to § 118 (7) BAO, there is a legal claim that the assessment under tax law made in the information notice is used as a basis for the levying of the tax if the actual facts do not or only insignificantly deviate from those on which the information notice was based. It is certain that the complainant was issued a legally binding information notice in connection with the interest on the shareholder loan ***loan*** II. This information notice confirms that the loan granted has the character of hidden equity capital; an interest calculation for income tax purposes can therefore be omitted. It is also clear that the facts on which the tax office based the information notice have not changed. However, the tax authority now assumes that the factual elements on which the legal assessment of the information notice was based, and which were actually realised, were irrelevant for the assessment of the hidden equity in the present case.” Loan III “The separation principle is derived from the legal personality of a corporation, which allows for tax-effective service relationships between the shareholder and the corporation (cf. e.g. VwGH 28.04.2011, 2007/15/0031). The limit of the separation principle is the arm’s length principle (cf. Raab/Renner in Lachmayer/Strimitzer/Vock (eds.), Die Körperschaftsteuer (KStG 1988) (32nd ed. 2019) § 8 marginal no. 146). In connection with the granting of shareholder loans, conditions that are not arm’s length speaks in favour of hidden equity (cf. e.g. Ressler/Stürzlinger in Lang/Rust/Schuch/Staringer (eds.) KStG2 (2016) § 8 marginal no. 47). Conditions that are not customary for third parties speak against the existence of a genuine or serious shareholder loan (cf. e.g. VwGH 14.12.2000, 95/15/0127; 26.07.2006, 2004/14/0151). In the opinion of the authority concerned, only the lack of interest speaks in favour of the shareholder loan not being customary for third parties. A single indication was not sufficient to reclassify a shareholder loan as hidden equity. On the other hand, the subjective intention to repay the loan was to be regarded as the basis for the assumption that the loan was in fact debt and not equity. The fact that subjectively there was already an intention to repay at the time the shareholder loan was granted is not questioned in principle by the complainant, who himself points out in justification of the chosen model that a greater flexibility for a possible later repayment should be ensured. In addition, the chosen construction can also be explained on the basis of the company law legislation of ***Land***, according to which a repayment of equity capital is only possible in the context of a capital reduction or in the event of liquidation (cf. the legal opinion submitted on 22 February 2022). For the Federal Supreme Finance Court it is clear that the shareholder loan ***loan*** III was not granted at arm’s length (see in detail the explanations and assessment of the circumstantial evidence as part of the evaluation of the evidence). Thus, in the opinion of the Federal Fiscal Court, there is no shareholder loan to be recognised for tax purposes, but hidden equity. Since no interest is to be paid on equity capital (for tax purposes), the appeal is to be upheld on this point and the interest payment made by the authorities is to be reversed.” Click here for English translation Click here for other translation ...

SAP AG (now SAP SE) is a German multinational software corporation that develops enterprise software to manage business operations and customer relations. The company is especially known for its ERP software. SA SAP France, a 98% subsidiary of SA SAP France Holding, itself wholly owned by the German group, had deposited funds under a Cash Management Agreement as sight deposits carrying an interest of 0%. Following an audit for the financial years 2012 and 2013, two assessment proposals were issued in December 2015 and November 2016, relating in particular to the 0% interest rate charged on the cash deposits. The tax authorities had added interest to SA SAP France’s taxable income calculated by reference to the rate of remuneration on sight deposits. SA SAP France contested the adjustments and furthermore requested the benefit of the reduced rate of corporation tax on income from industrial property, pursuant to Article 39 of the French General Tax Code, with regard to the royalties from the licensing agreements relating to Business Object products and Cartesis solutions. SA SAP France Holding, the head of the group is appealing against the ruling of 30 January 2020 by which the Montreuil Administrative Court rejected its requests for the reconstitution of its overall tax loss carry-forward in the amount of EUR 171,373 for 2012, 314,395 in duties for 2013 and the additional contribution to corporate income tax on the amounts distributed for 2012 and 2013, for amounts of €5,141 and €14,550 respectively, and, in application of the reduced tax rate, the refund of an overpayment of corporate income tax and additional contributions for €27,461,913 for the years 2012 to 2015. Judgement of the Court of Appeal In regards of the added interest on the deposited funds under a Cash Management Agreement the Court decided in favor of the tax authorities. Excerpt “In order to reintegrate into the taxable results of SA SAP France the interest at the monthly rate for sight deposits on the sums it made available to SAP AG under a cash management agreement concluded on 17 December 2009 between the parties, the department noted that SAP AG, now SAP SE, a company under German law, held 100% of SA SAP France Holding, SA SAP France’s parent company, and that the EONIA rate for interbank relations, reduced by 0.15% stipulated in the agreement, had led to a total absence of remuneration for the sums made available to the central treasury by SA SAP France as of August 2012, for very significant amounts ranging from 132 to 432 million euros. In these circumstances, the administration establishes the existence of an advantage consisting of the granting of interest-free advances by SA SAP France to the company SAP AG, located outside France, which controls it through SA SAP France Holding. If the latter argues that the rate stipulated is a market rate whose evolution is independent of the control of the parties, and that it was capped at 0 % whereas a strict application of the agreement would have led to a negative rate, these circumstances are inoperative, since this rate is unrelated to the remuneration to which SA SAP France could have claimed if it had placed its cash surpluses with a financial institution. Furthermore, by maintaining that the investment of its funds with SAP AG is particularly secure and that it enables it to obtain immediate and unconditional financing from the central treasury at the rate of EONIA + 30%, the applicant company does not justify an interest of its own which can be regarded as a consideration, since it is common ground that its situation vis-à-vis the central treasury was constantly in credit for very substantial amounts which greatly exceeded its working capital requirements. Finally, the monthly rate for sight deposits of between 0.15 and 0.18% applied by the department corresponds to the interest rate which SA SAP France could have obtained from a financial institution and the applicant does not propose a more relevant comparable. It follows that the administration establishes the existence during 2012 and 2013 of a transfer of profit, within the meaning of the provisions of Article 57 of the General Tax Code, from SA SAP France to the company SAP AG located outside France, for the amounts of EUR 171 373 in 2012 and EUR 484 986 in 2013, which the administration reintegrated into the results of SA SAP France.” Click here for English translation Click here for other translation ...

Dominion Petroleum Dkenya’s principal activity was exploration of oil and gas. The tax authorities carried out an in-depth audit of Dominion’s operations and tax affairs for the years of income 2011 to 2016, which resulted in the following taxes being raised: Withholding Income Tax (WHT) on imported services – KES 114,993,666.00; WHT on deemed interest – KES 504,643,172.00 and; Reverse Value Added Tax(VAT) on imported services– KES 714,258,472.00 all totaling KES 1,333,895,311.00. An appeal was filed by Dominion with the Tax Appeals Tribunal where, in a judgment dated 24th July 2020, the Tribunal set aside the Commissioner’s Objection decision on Reverse VAT and WHT on Deemed Interest to the extent of the period prior to 1st January 2014. Further, it upheld the Commissioner’s Objection Decision on WHT on local services on condition that the amount of KES 656,892,892.00 paid by Dominion Petroleum to Apache Kenya Limited for seismic data be excluded from the assessment as it was not subject to WHT. In addition, it directed Dominion Petroleum to provide the Commissioner with documentation in support of the errors occasioned by the migration from its Pronto to SUN systems within thirty (30) days of the Tribunal’s ruling to facilitate computation of the WHT payable. The tax authorities was not satisfied with the decision in regards to VAT and withholding tax on deemed interest and filed an appeal with the High Court. Judgement of the High Court The High Court decided partially in favour of the tax authorities and partially in favour of Dominion Petroleum. Excerpts “WHT on deemed interest 23. WHT is a method of tax collection whereby the payer is responsible for deducting tax at source from payments due to the payee and remitting the tax so deducted to the Commissioner. Under section 10(1) of the ITA, the resident company paying interest and deemed interest is required to pay WHT to the Commissioner as follows: 10. Income from management or professional fees, royalties, interest and rents (1) For the purposes of this Act, where a resident person or a person having a permanent establishment in Kenya makes a payment to any other person in respect of- (c) interest and deemed interest 24. Under section 16(3) of the ITA “Deemed Interest” is defined as “….an amount of interest equal to the average ninety-one day Treasury Bill rate, deemed to be payable by a resident person in respect of any outstanding loan provided or secured by the non-resident, where such loans have been provided free of interest.” In essence, it is applicable on interest free borrowing and loans received from foreign-controlled entities in Kenya. Further by section 35(1) of the ITA, a person upon payment of a non-resident person not having a permanent establishment in Kenya in respect of interest which is chargeable to tax is required to deduct withholding tax at the appropriate non-resident rate which is provided for in the Third Schedule to the ITA. 25. Resolution of this issue involves around the nature of financial agreements entered into by the Respondent and its affiliate companies. The Commissioner contends that the agreement between the Respondent and its related companies were interest free outright loan agreements and any payments made to them by the Respondent thereunder fell within the definition of “Deemed Interest”. It observes that all of the Respondent’s related party lenders disclosed in their audited financial statements that the loans were interest free and that the Respondent attempted to introduce a 0.1% rate on one of the loans with Dominion Petroleum Acquisition Limited through contracts dated 5th February 2015 and 10th February 2015 respectively which were backdated to an effective date of 1st January 2014. The Commissioner thus accuses the Respondent of attempting to circumvent provisions of the ITA regarding treatment of interest free loans. 26. The Commissioner faults the Tribunal for holding that the “inter-company loans” do not fit the description of a loan as defined under section 16(3) of the ITA when the parties themselves had decided to call those arrangements ‘loans’ and that there is no such thing as “quasi-equity” from the definition in section 16(3) aforesaid which provides that, ‘’“all loans” means loans, overdrafts, ordinary trade debts, overdrawn current accounts or any other form of indebtedness for which the company is paying a financial charge, interest, discount or premium.” The Commissioner urges the court to take cognizance of the fact that this very chicanery called tax planning is the reason we have an entire body of practice called Transfer Pricing to ensure that related-parties transact at arm’s length as though they are related. (…) 34. I hold that the main factor of consideration is whether there was any interest provided for in the financing agreements amounted to a loan; if there was no interest, then WHT on ‘Deemed Interest’ would apply at the 91-day Treasury Bill rate; if there was interest, WHT would still apply at the rate provided for in the Third Schedule of the ITA. What should be noted is that whichever the case, WHT would still apply. 35. In its judgment, at para. 110, the Tribunal observed that the said agreements were “…all unsecured, interest-free and have no definitive repayment plan…”. Further, at Para. 115, the Tribunal noted that the agreements in question dated 28th March and 24th September 2014 both provided for an earlier effective date and had no interest clause. These agreements were later amended by the contracts dated 5th February 2015 and 10th February 2015 respectively to include an interest clause at the rate of 0.1% with an effective date of 1st January 2014. 36. I am in agreement with the Tribunal that in the absence of any demonstrable fraud or illegality, the parties are free to make amendments to their agreements. I also note that the parties may make an agreement that includes equity and borrowing. In this case, there was clearly a lending transaction and the inclusion of the 0.1% interest rate means that “Deemed Interest” could no longer apply at least from 1st January 2014. However, ...

Times Infotainment Media Ltd (TIML India), is in the entertainment business, including running an FM Broadcasting channel in India. It successfully participated in the auction of the radio business of Virgin radio in March 2008 in the United Kingdom. To complete the acquisition, it acquired two SPV companies, namely TML Golden Square Limited and TIML Global Limited. TIML India wholly held TIML Global which in turn wholly held TIML Golden. TIML India received funding from its parent Bennet Coleman & Co. Limited and remitted money primarily as an interest-free loan to TIML Global on 27 June 2008. TIML Global, on behalf of TIL Golden, paid UKP 53.51 million for the acquisition of Virgin Radio Shares. The acquisition of shares in Virgin Radios by TIML Golden was completed on 30 June 2008. TIML India booked the transaction in its accounts as a loan to TIML Global Limited, but the arm’s length interest rate on the loan was claimed at zero percent. The tax authorities computed the arm’s length interest rate of the loan transaction using the CUP method. A Dispute Resolution Panel later determined the arm’s length rate of interest on the intercompany loan based on the State Bank of India’s Prime Lending Rate. Not satisfied TIML India brought the case to the Indian Tax Tribunal. Here they reiterated claims made before lower authorities that the loan was given to acquiring a controlling stake in the company outside India in the same business of the taxpayer. Hence, the transaction was akin to stewardship activity and did not require any benchmarking analysis. It was also argued that the loan was entered purely out of commercial expediency, and the intent of giving the loan should be considered. The funds provided were quasi-equity in nature. Decision of the Income Tax Appellate Tribunal The Tribunal decided in favor of TIML India and set aside the tax assessment. The Tribunal noted that the transaction was remittance to a wholly-owned subsidiary for making further payment of the cost of acquisition of a target company. The SPV was formed primarily to acquire Virgin Radios and was entirely funded from the internal resources of the taxpayer and Indian parent company. The agreement to acquire the Virgin Radios was reached long before the subsidiaries came into existence. It is not a loan simpliciter to TIML Global but in the nature of an advance to TIML-Global with a corresponding obligation to use the funds advanced in the specified manner. The end-use of funds to acquire Virgin Radios was essentially an integral part of the entire transaction. The Tribunal noted that the remittance of funds to TIML Global was for this limited and controlled purpose of acquiring the target companies, and the sequence of events and the material on record unambiguously confirm this factual situation. On that basis the remittance transaction to TIML Global cannot be considered on a standalone basis and can only be viewed in conjunction with the restricted use of these funds, for the strictly limited purpose, by TIML Global. The Tribunal noted that the funding transaction in the case at hand differs from transactions between typical lenders and borrowers and as such is not comparable to a loan transaction. The essence of the transaction is targeted acquisition and providing enabling funds for that purpose. Such a transaction cannot be a loan simpliciter on a commercial basis, which essentially implies that such a borrower can use the funds so received in such manner, even if subject to broad guidelines for purpose test, in furtherance of the borrower’s business interests. The Tribunal observed that a transaction between an SPV and the entity creating such an SPV – as long as it is for a specific transaction structured by the owner entity –  is inherently incapable of taking place between independent enterprises. When a strict condition about end-use, and that end-use is being decided by the owner of the SPV in advance that the SPV was not even in existence, is an inherent part of the transaction of funds being remitted is anything and could not be an uncontrolled condition. The Tribunal held that requirement of arm’s length standards could never be met under the CUP Method, so far as the nature of the present transaction is concerned and observed that when the borrower has no discretion of using the funds gainfully, the commercial interest rates do not come into play at all. The Tribunal ruled that the arm’s length price of the transaction by using the CUP method is NIL ...

Sapio Industrie Srl had granted an interest-free loan to its German subsidiary, which was in financial difficulties. The tax authorities issued an assessment in which an arm’s length interest rate was determined and added to Sapio Industrie’s taxable income on the basis of the Italian arm’s length principle. Sapio Industrie appealed and both the District Court and later the Regional Court (CTR) ruled in favour of the company and annulled the assessment. The tax authorities then appealed to the Supreme Court. Judgement of the Supreme Court The Supreme Court ruled in favour of the tax authorities, overturning the contested judgment of the Regional Court (CTR) and referring the case back to the Regional Court, in a different composition. Excerpts “(…)the ‘rationale’ of the legislation in question is to be found in the arm’s length principle set out in paragraph 1 of Art. 9 of the OECD Model Tax Convention, where it is provided that “(Where) the two (associated) enterprises, in their commercial or financial relations, are bound by conditions accepted or imposed other than those which would be agreed upon between independent companies, profits which, but for those conditions, would have been made by one of the enterprises, but which, by reason of those conditions, have not been made, may be included in the profits of that enterprise and taxed accordingly”; the tax authorities may therefore review the appropriateness – in line with the normal market value – of the transactions put in place potentially generating income components, regardless of the negotiating autonomy of the parties and of the contractual agreements established by the economic entities concerned; the possible unsuccessfulness of the financing agreed upon by the parties does not, per se, exclude the application of the provisions on the correct determination of intercompany transfer prices; In essence, in attempting to adjust profits by reference to the conditions that would have occurred between independent companies in comparable transactions and in comparable circumstances (i.e. in ‘comparable transactions between independent parties’), the arm’s length principle adopts an approach of treating the entities of a multinational group as operating as separate entities and not as indissociable subsets of a single group. Since, under the separate entity approach, the entities of a multinational group are treated as independent entities, the focus is on the nature of the transactions entered into between these entities and on whether the terms of these transactions differ from the terms that would have occurred in comparable transactions between independent parties” (thus “OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations”, paragraph B.l, n 1.6); Click here for English translation Click here for other translation ...

An Italian parent company “Lender SpA” had granted interest free loans to foreign subsidiaries. Lender SpA had also paid subsidiaries for services rendered. The Italian tax authorities held that interest should be paid on the loans and that the company had not sufficiently demonstrated the conditions to justify the deductibility of costs of services. The regional Court found in favor of the tax authorities and dismissed the appeal of Lender SpA. “For these loans, which took place on the initiative of the Managing Director and in the absence of a resolution of the Shareholders’ Meeting, the Company partly used its available liquidity and partly resorted to the credit market. In this situation, contrary to what was claimed by the company xxxxx, the principle established by the aforementioned art. 110, paragraph 7 of the Consolidated Income Tax Act should have been applied and, therefore, the Italian company should have valued the financing services provided to its foreign subsidiaries at the same price it would have charged to independent companies for similar transactions carried out under similar conditions in a free market. The arm’s length principle, established by the OECD treaties, applies to intra-group services, which also include loan agreements (see OECD transfer pricing Guidelines for Multinational Enterprises and Tax Administrations of 22 July 2010, paragraphs 7.14 and 7.15 of Chapter VII). According to the above mentioned guidelines, ‘payment for intra-group services should be that which would have been made and accepted between independent enterprises, in comparable circumstances’ and, in the case of financing, as in the present case, a remuneration must be present, through the provision of an interest rate.” “the provisions of Article 110 of the Consolidated Income Tax Law apply “not only when the prices or consideration agreed upon are lower than the average prices in the economic sector of reference, but also when a zero consideration has been agreed upon for the sale of the asset (in this case, a certain amount of money). The Inland Revenue Office, already in 1980, with Circular No. 32, had clarified that intra-group transactions, including loans, are subject to transfer pricing rules.” “the provisions of Article 110 of the Consolidated Income Tax Law apply “not only when the prices or consideration agreed upon are lower than the average prices in the economic sector of reference, but also when a zero consideration has been agreed upon for the sale of the asset (in this case, a certain amount of money).” “With regard to the deduction of costs for the provision of intra-group services (concerning administrative, tax, legal, commercial, financial, etc.), this T.R.C., agreeing with the decision appealed, notes that the taxpayer has not sufficiently demonstrated the conditions to justify the deductibility of the costs invoiced by the parent company xxxxx towards the subsidiary xxxxx, merely recalling an agreement between the aforementioned companies. In addition, the assessment activity revealed that, in the year under dispute: the xxxxx company increased the number of staff assigned to carry out the services invoiced by the parent company, hiring another four administrative employees (which were added to another four hired in 2012); it incurred significant costs for professional fees (equal to 949 euros).073, 19) and for legal expenses (equal to € 174,616.32); she availed herself of a tax consultant, to whom she paid about € 150,000.00 in 2013; for the preparation of the financial statements she was assisted by the xxxxx auditing firm; for legal affairs she availed herself of xxxxx. These circumstances are suitable to demonstrate that the company carries out independent and relevant administrative activities xxxxx.” Click here for English translation Click here for other translation ...

A taxpayer with a 98% shareholding in a joint stock company, CH AG, based in Switzerland had provided EUR 30 million as an interest-free shareholder loan to the company. There was no written agreement. CH AG used this capital to provide loans to two affiliated companies in Austria and Germany, each with an interest rate of 2%. The tax authorities added a 2% interest to the the shareholder loans – based on the interest on the loans passed on by CH AG to its affiliated companies. EXCURSION: In the present case, the argumentation of the taxpayer or the tax representative against interest on the loan was also interesting: In the complaint – with reference to the so-called “relatives’ case law” – it was stated that due to a lack of sufficiently clear agreements, lack of collateral, etc., not at all a “loan” in the tax sense is to be assumed, but that the financing in question is rather a question of equity-replacing grants ( hidden deposits ) and therefore no interest rate is justified. In the preliminary appeal decision, the tax authorities replied that the nature of the loan could very well be derived from various documents and information (probate proceedings and accounting treatment at CH AG). OneIn addition, reclassification of the loans in question as hidden contributions or hidden share capital is only permissible under “ special circumstances ”, with reference to the relevant case law. In the opinion of the tax authorities, this question did not arise in the present case because CH AG did not have any financial difficulties at the time the funds were injected and had sufficient equity capital. Judgement of the Court The court found that the shareholder loan was not covered by the scope of the Austrian arm’s length provision which requires the existence of a domestic company or a domestic permanent establishment and is therefore only relevant when determining business income. If no interest has actually accrued, no fictitious interest can be subject to taxation for such an interest-free shareholder loan. The question of whether the amounts given were actually loans or (hidden) equity was left undecided by the court. Click here for English translation Click here for other translation ...

The European Commission has now opened an in-depth investigation to examine whether tax rulings granted by Luxembourg to Finnish food and drink packaging company Huhtamäki may have given the company an unfair advantage over its competitors, in breach of EU State Aid rules. Margrethe Vestager, Commissioner in charge of competition policy, said: “Member States should not allow companies to set up arrangements that unduly reduce their taxable profits and give them an unfair advantage over their competitors. The Commission will carefully investigate Huhtamäki’s tax treatment in Luxembourg to assess whether it is in line with EU State aid rules.” The Commission’s formal investigation concerns three tax rulings issued by Luxembourg to the Luxembourg-based company Huhtalux S.à.r.l. in 2009, 2012 and 2013. The 2009 tax ruling was disclosed as part of the “Luxleaks” investigation led by the International Consortium of Investigative Journalists in 2014. Huhtalux is part of the Huhtamäki group, which is headquartered in Finland. Huhtamäki is a company active in consumer packaging, notably in food and food service packaging in Europe, Asia and Australia. Huhtalux carries out intra-group financing activities. It receives interest-free loans from another company of the Huhtamäki group based in Ireland. These funds are then used by Huhtalux to finance other Huhtamäki group companies through interest-bearing loans. The three tax rulings issued by Luxembourg allow Huhtalux to unilaterally deductfrom its taxable base fictitious interest payments for the interest-free loans it receives. According to Luxembourg, these fictitious expenses correspond to interest payments that an independent third party in the market would have demanded for the loans that Huhtalux receives. However, Huhtalux does not pay any such interest. These deductions reduce Huhtalux’s taxable base and, as a result, the company is taxed on a substantially smaller profit. The Commission is concerned that Luxembourg has accepted a unilateral downward adjustment of Huhtalux’s taxable base that may grant the company a selective advantage. This is because it would allow the group to pay less tax than other stand-alone or group companies whose transactions are priced in accordance with market terms. If confirmed, this would amount to illegal State aid ...

In this case Aegis Ltd had advanced money to an assosiated enterprice (AE)  and recived preference shares carrying no dividend in return. The Indian Transfer Pricing Officer (TPO) held that the “acqusition of preference shares” were in fact equivalent to an interest free loan advanced by Aegis Ltd to the assosiated enterprice and accordingly re-characterised the transaction and issued an assessment for 2009 and 2010 where interest was charged on notional basis. Aegis Ltd disagreed with the assessment of the TPO and brought the case before the Tax Tribunal. The Tribunal did not accept the conclusions of the TPO. “The TPO cannot disregard the apparent transaction and substitute the same without any material of exceptional circumstances pointing out that the assessee had tried to conceal the real transaction or that the transaction in question was sham. The Tribunal observed that the TPO cannot question the commercial expediency of the assessee entered into such transaction.” The Indian Revenue Service then filed an appeal to the High Court of Bombay challenging the dicision of the Tax Tribunal. The High Court of Bombay dismissed the appeal. According to the High Court “The facts on record would suggest that the assessee had entered into a transaction of purchase and sale of shares of an AE. Nothing is brought on record by the Revenue to suggest that the transaction was sham. In absence of any material on record, the TPO could not have treated such transaction as a loan and charged interest thereon on notional basis.” ...

A Dutch company, Lender BV, provided loans to an affiliated Russian company on which interest was paid. The Dispute was (1) whether the full amount of interest should be included in the taxable income in the Netherlands, or if part of the “interest payment” was subject to the participation exemption or (2) whether the Netherlands was required to provide relief from double taxation for the Russian dividend tax and, if so, to what amount. The Tax court found it to be a loan and the payments therefor qualified as interest and not dividend. The participation exemption does not apply to interest. In addition, the court ruled that the Russian thin-capitalization rules did not have an effect on the Netherlands through Article 9 of the Convention for the avoidance of double taxation between the Netherlands and Russia. Application of the participation exemption was not an issue. In the opinion of the court, a (re) qualification of interest as a dividend on the basis of the thin capitalization rules in Russia cannot be based on Article 10 of the Treaty. This has not been explicitly included in the text of the treaty and, in the opinion of the court, could not have been the intention of the countries in the absence of a concrete substantiation with facts and / or circumstances. Since the income on the basis of Article 11 of the Treaty cannot be taxed in Russia, the Netherlands is not required to provide relief from double taxation for the Russian dividend tax deducted therefrom. The appeal is unfounded. Click here for other translation ...

A South African parent company, Crookes Brothers Ltd, owned 99% of the shares in a subsidiary in Mozambique, MML. Crookes Brothers and MML entred into a loan agreement. According to the agreements MML would not be obliged to repay the loan in full within 30 years. Furthermore, repayment of the loan would not take place if the market value of the assets of MML were less than the market value of its liabilities as of the date of the payment, and no interest would accrue or be payable. According to clause 7 of the loan agreement, in the event of liquidation or bankruptcy of MML, the loan would immediately become due and payable to Crookes Brothers. At the time of submitting the 2015 income tax return, Crookes Brothers made an adjustment to its taxable income in terms of section 31(2) and (3) on the basis that an arms-length interest rate should apply. Later, Crookes Brothers requested a reduced assessment on the basis that the loan met the requirements contained in section 31(7) and was excluded from normal arm’s length interest requirement. The “arm’s length interest rate exclution” in section 31 of the Income Tax Act, No 58 of 1962 (Act) containing South Africa’s transfer pricing provision applies where a controlled foreign company is not obliged to redeem the debt in full within 30 years from the date it is incurred. The tax authorities rejected the request on the basis that according to clause 7 of the agreement the loans would become immediately due and payable in the event of liquidation or bankruptcy of MML. Therefore the requirements of section 31(7) were not met. This decision was appealed by Crookes Brothers to the South African High Court. The Court agreed with the tax authorities, ...

The Tax authorities considered that the financial loans made by YPF S.A. to the controlled companies YPF Gas S.A.; Maleic S.A. and Operadora de Estaciones de Servicio constituted a “disposition of income in favor of third parties”, since in the first two cases (loans granted to YPF Gas S.A. and Maleic S.A.) the agreed interest was lower than that provided for in the aforementioned regulations, while in the last case (operation carried out with OPESSA) no interest payment had even been stipulated. Likewise, it estimated that the transfer prices corresponding to gas oil, propane butane exports made to Repsol YPF Trading and Transport S.A. were below the first quartile. Consequently, it made an adjustment to the taxable income. Furthermore, a fine equivalent to 70% of the allegedly omitted tax was issued. At issue before the Supreme Court was only the fine which was set aside. Click here for English Translation ...

In this case, the tax authorities had issued an assessment to Yi Wine Club, Inc. where interest on an interest free loan extended to its affiliates had been imputed and added to the taxable income, pursuant to Section 50 of the National Internal Revenue Code. Judgement of the Tax Court The Court decided in favour of Yi Wine Club and set aside the tax assessment. The court referred to the previous Supreme Court case of Commissioner of Internal Revenue vs. Filinvest Development Corporation. Excerpts from the Filinvest case: “Indeed, in the afore-cited Filinvest case, the Supreme Court ruled with finality that the CIR’s powers of distribution, apportionment or allocation of gross income and deductions under Section 43 of the 1993 NIRC and Section 179 of Revenue Regulations No. 2 do not include the power to impute ‘theoretical interests’ to the controlled taxpayer’s transactions.” More so, when it is borne in mind that, pursuant to Article 1956 of the Civil Code of the Philippines, no interest shall be due unless it has been expressly stipulated in writing. Considering that taxes, being burdens, are not to be presumed beyond what the applicable statute expressly and clearly declares, the rule is likewise settled that tax statutes must be construed strictly against the government and liberally in favor of the taxpayer. Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication. While it is true that taxes are the lifeblood of the government, it has been held that their assessment and collection should be in accordance with law as any arbitrariness will negate the very reason for government itself.‘ In the present case, there was no evidence on record showing any agreement on interest between Yi Wine Club, Inc. and its affiliates as to the former’s loans or advances to the latter. Neither did the tax authorities show that Yi Wine Club, Inc. had received cash from the alleged interest as it merely based its assessment on the account description and amount presented in Yi Wine Club, Inc.’s audited balance sheet and nothing else. On that basis the Court found that the imputation of interest income on Yi Wine Club, Inc.’s non-interest bearing loans to affiliates lacked legal and factual bases and must be removed from the tax assessment ...

The Italien Supreme Court held that intra-group interest-free loans violates article 110(7); the Italien arm’s length provisions. Excerpt from the Judgement “…of the facts contained in the judgment under appeal, that the payments made by the parent company Edison spa to the foreign subsidiary Tanti Investimentos S.A, even though entitled ‘payments on account of future capital increases’, were not used for the declared purpose Instead, they were used for financial investments (which provided Edison with dividends subject to the reduced taxation provided for in Article 96 bis of Presidential Decree No. 917 of 22 December 1986 in force at the time), with the subsequent return of the capital to the company that paid Edison. Once it has been established that the reconstruction of the facts excludes the reason for the non-interest-bearing payment on account of a future capital increase and that the transfer of the sums of money must be attributed to the case of a loan (pursuant to Article 43 of Presidential Decree No. 917 of 22 December 1986 in force ratione temporis, now Article 46), the assessment carried out by the court of merit to identify the “business logic” pursued and to support the non-simulated but effective nature of the free loan contract becomes irrelevant. Since these are transactions with a foreign company controlled by the resident company, the rule on international “transfer pricing” established by the former Article 76, paragraph 5 of Presidential Decree No. 917 of 22 December 1986 (now Article 110, paragraph 7), according to which the amount of the loan is calculated on the basis of the taxable income, must be applied. In any event, the rule on international “transfer pricing” established by Article 76, paragraph 5, of Presidential Decree No. 917 of 22 December 1986 (now Article 110, paragraph 7), according to which the quantification of the income components must not be made on the basis of the ordinary parameter of the agreed consideration, but according to the derogatory criterion of the “normal value” of the goods sold or services rendered, defined by Article 9, paragraph 3, as the average price and consideration for the same goods or services sold or exchanged at the same time and place. In the specific case of sums given as a loan, which ordinarily bear interest unless expressly agreed otherwise (Art. 1815(1) of the Civil Code), the “normal value” is the average market interest charged at the time the money is given.” Click here for English translation Click here for other translation ...

The Italien company had qualified a funding arrangement in an amount of Lira 500 billion classified by the parties as a non-interest-bearing contribution reserved for a future capital increase. Judgement of the Supreme Court The Italian Supreme Court found that intra-group financing agreements are subject to transfer pricing legislation and that non-interest-bearing financing is generally not consistent with the arm’s-length principle. The court remanded the case to the lower court for further consideration. “”In conclusion, with regard to appeal r.g. no. 12882/2008, the first plea should be upheld, the second absorbed, and the third and fourth declared inadmissible; the judgment under appeal should be set aside in relation to the upheld plea and the case referred to another section of the Regional Tax Commission of Lombardy, which will comply with the principle of law set out in paragraph 3.5…” In regards to the non-interest-bearing financing the Court states in paragraph 3.5: “35… It follows that the valuation “at arm’s length” is irrespective of the original ability of the transaction to generate income and, therefore, of any negotiated obligation of the parties relating to the payment of the consideration (see OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, paragraph 1.2). In fact, it is a matter of examining the economic substance of the transaction that has taken place and comparing it with similar transactions carried out, in comparable circumstances, in free market conditions between independent parties and assessing its conformity with these (cf, on the criteria for determining normal value, Court of Cassation no. 9709 of 2015): therefore, the qualification of the non-interest-bearing financing, possibly made by the parties (on whom the relevant burden of proof is incumbent, given the normally onerous nature of the loan agreement, pursuant to article 1815 of the Italian Civil Code), proves to be irrelevant, as it is in itself incapable of excluding the application of the criterion of valuation based on normal value. It should be added that it would be clearly unreasonable, and a source of conduct easily aimed at evading the legislation in question, to consider that the administration can exercise this power of adjustment in the case of transactions with a consideration lower than the normal value and even derisory, while it is precluded from doing so in the case of no consideration.” Click her for English translation Click here for other translation ...

In this case company A had received an interest-free loan in the amount of EUR 1,000,000 from an associated Belgian company B. The Tax Administration regarded the exemption of interests as an “abnormal and voluntary advantage”. It considered that there was a question of a current account receivable and assessed the amount in light of the average interest rates published by the National Bank. The amount of the abnormal advantage received amounted to 50,000 EUR per year (notional interest rate of 5% * 1,000,000 EUR) for the taxable years in question 2006, 2007 and 2008. As regards the 2006 tax year, the result of company A was profitable, but less than the amount of the abnormal benefit; as for the 2007 and 2008 taxation years, the result of A was in deficit. The administration has, in application of article 207 of the CIR, reinstated the amount of this abnormal benefit (interest unduly abandoned) in the taxable income of company A, for the tax years 2006, 2007 and 2008. The abnormal advantage received (50,000 EUR) was actually subject to corporate tax, even though the result of the business of A was less than the amount of the advantage (in 2006), or even loss-making (in 2007 and 2008). Decision of the CourtRelying on the preparatory work of the law, the court considers that the part of the result which results from abnormal benefits received from a related company cannot be eliminated by the loss of the taxable period, so that the result taxable is at least equal to the abnormal or voluntary advantage, whether the result is positive or negative. The abnormal advantage will be considered “the minimum taxable base of the taxable period, whatever the result”. Click here for translation ...

In this decision, the Conseil d’État confirms that Article 57 of the General Tax Code is applicable to any company taxable in France, including a French branch of a foreign company. Under Article 57, where the tax authorities establish the existence of a relationship of dependence and a practice falling within its scope, the presumption of an indirect transfer of profits can only be effectively rebutted by the company liable to tax in France if it proves that the advantages granted by it were justified by the receipt of a benefit. Excerpts “….4. Considering, firstly, that if the applicant company mentions supplier debts of its branch towards the head office, such debts, in normal relations between independent companies, do not generate interest, so that this circumstance has no bearing on the absence of interest stipulations on the advances granted to the head office; 5. Considering, secondly, that under the first paragraph of Article 57 of the General Tax Code, applicable to corporation tax by virtue of Article 209 of the same code: “For the purposes of determining the income tax due by companies which are dependent on or which have control over companies located outside France, the profits indirectly transferred to the latter, either by way of an increase or decrease in purchase or sale prices, or by any other means, are incorporated into the results shown in the accounts (…)”; that these provisions institute the principle of the taxable income of companies located outside France. )”; that these provisions establish, as soon as the administration establishes the existence of a link of dependence and a practice falling within their provisions, a presumption of indirect transfer of profits which can only be usefully combated by the company liable to tax in France if it provides proof that the advantages it has granted were justified by the obtaining of compensation; that, on the one hand, these provisions are applicable to any company taxable in France, including a French branch of a company whose registered office is abroad, without the circumstance that the branch does not have legal personality being an obstacle to this; that, on the other hand, the advantages granted by a company taxable in France to a company located outside France in the form of interest-free loans constitute one of the means of indirect transfer of profits abroad; The tax authorities may therefore reinstate in the results of a permanent establishment, taxable in France, the interest which was not invoiced because of the recording of advances granted to the head office located outside France, provided that these advances do not correspond to after-tax profits and that the company does not establish the existence of counterparts for the development of the activity of the French branch; 6. Considering that, in its accounting records drawn up for the purposes of its taxation in France, the permanent establishment of Sodirep Textiles SA-NV recorded advances of funds granted to the Belgian headquarters of this company; that it follows from the above that, in the circumstances of the case, the administration is justified in reintegrating, in the taxable results in France of this permanent establishment, the interest which should have remunerated the advances of funds thus granted, insofar as the absence of invoicing of this interest constitutes an indirect transfer of profits within the meaning of Article 57 of the general tax code, in the absence of proof provided by the applicant company that the advantages in question had at least equivalent counterparts for its branch; 7. Considering, thirdly, that Article 5(4) of the Franco-Belgian Tax Convention of 10 March 1964 stipulates, in the version applicable to the facts of the case: “Where an enterprise carried on by a resident of one of the two Contracting States is dependent on or has control over an enterprise carried on by a resident of the other Contracting State, (…) and where one of these enterprises is dependent on or has control over the other enterprise, (…) and where the other enterprise is dependent on or has control over the other enterprise, (…) and where the other enterprise is dependent on or has control over the other enterprise, (…) ) and one of those enterprises grants or imposes conditions to the other enterprise which differ from those which would normally be accorded to effectively independent enterprises, any profits which would normally have accrued to one of those enterprises but which have thereby been transferred, directly or indirectly, to the other enterprise may be included in the taxable profits of the first enterprise. In that event, double taxation of the profits so transferred shall be avoided in accordance with the spirit of the Convention and the competent authorities of the Contracting States shall agree, if necessary, on the amount of the profits transferred. ” ; 8. Considering that the permanent establishment operated in France by the company Sodirep Textiles SA-NV is, as has been said, a branch without legal personality under the control of this Belgian company; that in the light of the above-mentioned provisions, the profits transferred by the branch to the Belgian company may be taxed in France if the branch has granted the head office interest-free cash advances under conditions different from those which would normally be made to genuinely independent enterprises; that there is no need, in order to interpret these provisions, to refer to the comments formulated by the Tax Committee of the Organisation for Economic Co-operation and Development (OECD) on Article 7 of the model convention drawn up by this organisation, since these comments were made after the adoption of the provisions in question;…” 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. (…)” ...

SGL CARBON SPA paid interest on loans received from the German parent of the SGL Group. The tax authorities considered, that the interest rate applied to the intra-group loan was significantly higher than the average interest rate applied in the German market. SGL disagreed and brought the case before the Italien Courts. The Court of first instance ruled in favor of SGL but this decision was set aside by the second instance court. SGL then filed an appeal to the Supreme Court. Judgement of the Supreme Court The Supreme Court dismissed SGL’s appeal. “In view of the above, it is – therefore – quite clear that in the application of the method of “price comparison” preference should be given to the so-called internal comparison, based on the price lists and tariffs of the entity that has supplied the goods or services in the relationship between such entity and an independent company, given that it is to the above-mentioned documentary elements of comparison that the Administration must first of all refer, “as far as possible”, and taking into account any “customary discounts”. Secondly, the Administration will have to refer to the price lists and price lists of the chambers of commerce, or to professional tariffs, when examining comparable transactions between independent companies (so-called external comparison) belonging to the same market, i.e. that of the supplier of the goods or services. Finally, and in a completely subsidiary and supplementary way, the Office may have recourse – pursuant to the first part of paragraph 3 of the aforementioned Article 9 – to the “average price” and in “conditions of free competition” for similar goods or services, “in the time and place where the goods or services were acquired or provided, and, failing that, in the nearest time and place”.” All this being said, it is – consequently – quite clear that, in the concrete case, the Financial Administration has correctly applied the above criteria On the basis of such data, therefore, the Office has ascertained that the average interest rate practised on the German financial-credit market, i.e. in the State of residence of the lender, “is lower than that adopted for the financing operation in question”. This leads to the conclusion – entirely correct, as explained above – of the fiscal non-deductibility, from the corporate income relevant for IRES purposes, of the costs represented by said interest, clearly increased in order to increase the profits of the German parent company, reducing those of the Italian subsidiary in order to avoid national taxation, in clear violation of Article 110, paragraph 7 of the CIT decree.” Click here for English translation Click here for other translation ...

The application of the WEV (waarde in het economische verkeer) rule is particularly relevant if the non-corporate loan is interest-free or the agreed interest is owed. The interest to be taken into account for tax purposes is then determined on the market value of each interest period at the time it falls due. The assessment of the business nature of the money supply can take place both at the time of supply and during the term. This test must be carried out on both sides, from the perspective of the lending and borrowing company. Referring to what has been said above with regard to the perspective of the entities involved, a situation of an affiliated lender granting a loan to the borrowing group entity that subsequently is insufficiently creditworthy may also constitute a ‘non-business loan’ in the approach of the aforementioned judgment. In my opinion, the same applies to the borrower who, as a result of the linked intra-group loan, sees his creditworthiness drop to a level below BBB-. The Supreme Court considered that the level of interest on a ‘non-bankrupt loan’, a loan with a non-bankrupt default risk, should be determined by reference to the creditworthiness of the lending entity. The Supreme Court did not explain in its judgment how to deal with the creditworthiness of the lending group entity compared to the creditworthiness of the borrowing entity. In case of a higher creditworthiness of the lender compared to the creditworthiness of the borrowing entity, the interest rate that would be charged by the lending group entity itself will be considered as the appropriate interest rate to be taken into account for tax purposes. If the lending group entity does not have a better credit rating than the borrowing group entity, i.e. if it is not itself investment grade, the notional guarantee does not, in principle, add anything. In that case, no more than the risk-free interest rate on the loan can be taken into account. English translation of the opinion issued by the Attorney General – I recommend that the appeal in cassation is declared to be unfounded Judgement of the Supreme Court The Supreme court decided against the opinion of the Attorney General and concluded that the appeal of X B.V was well founded. Click here for English translation Click here for other translation ...

In the Filinvest case an assessment had been issued where the tax authorities had imputed interest on an interest free loan. Judgement of the Tax Court The Court set aside the assessment. The tax authorities power to allocate gross income does not include the power to impute ‘theoretical interest’ because there must be actual or, at the very least, probable receipt or realisation by the taxpayer of the income that is being allocated ...

The tax authorities had increased the amount of the tax due to a change in the calculation of interest on loans granted by DATON technology to its partners (managing directors). At issue was whether the amount of the normal interest on loans granted by DATON technology to its managing directors should be determined on the basis of a fixed interest rate for the entire period of the loan or whether changes in the interest rate should be taken into account when calculating the interest as a monetary benefit – income from employment. Judgement of the Court The Supreme Administrative Court did not find that the pleaded ground of appeal was met and therefore dismissed the appeal. In failing to take account of changes in interest rates in 1998, the year for which it imposed the tax, when calculating the interest on the interest-free loan granted by the applicant (in its capacity as ’employer’) to the managing directors (in their capacity as ’employees’), the applicant acted contrary to established administrative practice. Excerpts “However, equal treatment in terms of uniform administrative practice must be maintained in relation to taxpayers. The key to resolving the question of whether the amount of interest normally payable on loans granted by the taxpayer to its managing directors should be fixed at the date on which the loan was granted or whether changes in the interest rate over time should be taken into account in calculating the interest is precisely that administrative practice. As already indicated above, an administrative practice is an activity which is generally accepted and followed, its permanence depending on the frequency and duration of its use. It is possible to deviate from an established administrative practice ‘in principle only in the future, for rational reasons and for all cases which are affected by the administrative authority’s practice’ (cited from the judgment of the Supreme Administrative Court of 28 April 2005, No 2 Ans 1/2005-55). Thus, although the statutory provision allows for a dual interpretation (both approaches are defensible), what is decisive in the present case is that there is an established administrative practice which is not contra legem. [24] At the same time, the Supreme Administrative Court also considered the objection of the complainant as an administrative authority that the tax administrators in similar cases acted identically throughout the territory of the Czech Republic. This objection would imply that, despite the existence of a methodology, the tax administrators are governed by different rules, i.e. In particular, the phrase: ‘This calculation shall be carried out at least once per tax period for the purposes of taxation.’).” “The tax authorities must apply a level playing field in relation to taxpayers. If taxpayers can have a legitimate expectation of a certain administrative practice on the basis of generally available information (about the tax authorities’ internal procedures), it is not possible to reasonably argue that the tax authorities have changed their administrative practice without actually demonstrating that that practice meets the required criteria (see paragraph 18); those criteria may in principle also include the criterion of publication in the sense of the objective possibility for taxpayers to learn about that administrative practice. [28] In so far as the complainant considers that the reference to the Ministry of Finance’s methodological guidelines does not apply to it, since ‘the tax administrator in the present case is in a different position from the employer in granting employee loans’, this is not a relevant argument. As stated above, the administrative authorities are obliged to follow the methodological guidelines in their practice. The determination of the method of calculating interest for income tax purposes in a methodological guideline is a guideline for a uniform approach, in particular by the administrative authorities (tax administrations). In addition, the tax subjects (here employers) are assured that if they follow these rules, the tax authorities should not reproach them for incorrect practice in the event of an audit. [29] However, the Supreme Administrative Court agrees with the complainant’s objection concerning the irrelevance of the applicant’s argument that the Czech National Bank reduced interest rates in 1998. In so far as that bank did not at all grant loans similar to the loan granted by the applicant to the managing directors, it is not possible to include that bank in the group of financial institutions granting such loans (similar in time and place) on the basis of which the complainant calculated the normal interest rate. If, during 1998, the Czech National Bank reduced interest rates, that does not mean that the individual financial institutions which behave in a market-oriented manner must also have reduced their interest rates.” As regards the binding nature of the Guidelines, the Supreme Administrative Court has expressed itself as follows: “The Supreme Administrative Court has already dealt with the nature of methodological guidelines and the binding nature of administrative practice of administrative authorities in several of its decisions, on the basis of which it is possible to define binding administrative practice briefly by means of 1. the criterion of legality – it must be exclusively a practice (action or inaction) which is established in accordance with the law, or created on the basis of the authority conferred by law, while it must not interfere with the legally guaranteed rights of private persons, and 2. predictability – the practice is generally accepted and followed by the relevant administrative authorities, one can legitimately expect the same practice in similar cases. 2-Afs-53-2010-–-63 ENG Click here for English Translation Click here for other translation ...

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

Two inter-company loans were provided to Statoil Angola by it’s Norwegian parent company, Statoil Norway ASA, and a Belgian sister company, Statoil Belgium (SCC). Statoil Angola only had the financial capacity to borrow an amount equal to the loan from Statoil Belgium. Hence, no interest was paid on the loan from Statoil Norway. The tax authorities divided Statoil Angola’s borrowing capacity between the two loans and imputed interest payments on part of the loan from Statoil Norway in an assessment for the years 2000 and 2001. The Supreme Court, in a split 3/2 decision, found that Statoil’s allocation of the full borrowing capacity of Statoil Angola to the loan from the sister company in Belgium was based on commercial reasoning and in accordance with the arm’s length principle. The Court majority argued that Statoil Norway – unlike Statoil Belgium – had a 100% ownership of Statoil Angola, and the lack of interest income would therefore be compensated by an increased value of it’s equity holding in Statoil Angola. Click here for translation ...

In Baker International the court concluded that if interest is not charged in respect of deferrals of payments granted to a related company, it is considered either an abnormal act of management or is subject to Section 57 of the tax code. Excerpt “…it is clear from the investigation that the share of the applicant company’s turnover corresponding to sales of equipment to its subsidiary decreased significantly during the years under investigation, as did sales to Elf; whereas, on the other hand, the above-mentioned provisions of Article 57 prevented S.A. BAKER INTERNATIONAL FRANCE from charging its subsidiary sales prices that differed from the public prices; finally, neither the operating conditions decided by the company “Bi-Gabon” with regard to stocks and the taking back of equipment, nor the fact that the financial health of this subsidiary was able to provide it with income, can suffice to justify the interest that S. A. would have had in this matter. A. BAKER INTERNATIONAL FRANCE to grant interest-free payment deadlines; that, consequently, the administration, and then the first judges, were right to consider that the disputed payment terms constituted, regardless of how they were financed by the applicant company, a financial advantage granted without consideration to the “Bi-Gabon” subsidiary and, consequently, a transfer of profits within the meaning of the provisions of Article 57 of the General Tax Code;” Click here for English translation Click here for other translation ...