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

The Supreme Court in the Netherlands requested a preliminary ruling from the European Court of Justice to clarify its case-law on, inter alia, the freedom of establishment laid down in Article 49 TFEU, specifically whether it is compatible with that freedom for the tax authorities of a Member State to refuse to a company belonging to a cross-border group the right to deduct from its taxable profits the interest it pays on such a loan debt.  The anti-avoidance rule in question is contained in Article 10a of the Wet op de vennootschapsbelasting 1969. The rule is specifically designed to tackle tax avoidance practices related to intra-group acquisition loans. Under that legislation, the contracting of a loan debt by a taxable person with a related entity – for the purposes of acquiring or extending an interest in another entity – is, in certain circumstances, presumed to be an artificial arrangement, designed to erode the Netherlands tax base. Consequently, that person is precluded from deducting the interest on the debt from its taxable profits unless it can rebut that presumption. The Dutch Supreme Court (Hoge Raad) asked the European Court of Justice to clarify its findings in its judgment in Lexel, on whether such intra-group loans may be, for that purpose, regarded as wholly artificial arrangements, even if carried out on an arm’s length basis, and the interest set at the usual market rate. “(1)      Are Articles 49 TFEU, 56 TFEU and/or 63 TFEU to be interpreted as precluding national legislation under which the interest on a loan debt contracted with an entity related to the taxable person, being a debt connected with the acquisition or extension of an interest in an entity which, following that acquisition or extension, is a related entity, is not deductible when determining the profits of the taxable person because the debt concerned must be categorised as (part of) a wholly artificial arrangement, regardless of whether the debt concerned, viewed in isolation, was contracted at arm’s length? (2)      If the answer to Question 1 is in the negative, must Articles 49 TFEU, 56 TFEU and/or 63 TFEU be interpreted as precluding national legislation under which the deduction of  the interest on a loan debt contracted with an entity related to the taxable person and regarded as (part of) a wholly artificial arrangement, being a debt connected with the acquisition or extension of an interest in an entity which, following that acquisition or extension, is a related entity, is disallowed in full  when determining the profits of the taxable person, even where that interest in itself does not exceed the amount that would have been agreed upon between companies which are independent of one another? (3)      For the purpose of answering Questions 1 and/or 2, does it make any difference whether the relevant acquisition or extension of the interest relates (a) to an entity that was already an entity related to the taxable person prior to that acquisition or extension, or (b) to an entity that becomes an entity related to the taxpayer only after such acquisition or extension?” Opinion of the Advocate General The Advocate General found that the Dutch anti-avoidance rule in Article 10a was both justified, appropriate and necessary – and therefore not in conflict with Article 49 of the TFEU – irrespective of the Court’s earlier judgment in the Swedish Lexel Case. Excerpts “(…) 71. In my view, the approach suggested by the intervening governments and the Commission is the correct one. Consequently, I urge the Court to revisit the approach it took in the judgment in Lexel on the matter at issue. 72. Freedom of establishment, as guaranteed by Article 49 TFEU, offers quite a wide opportunity for tax ‘optimisation’. The Court has repeatedly held that European groups of companies can legitimately use that freedom to establish subsidiaries in Member States for the purpose of benefiting from a favourable tax regime. (30) Thus, as X submits, A could legitimately choose to establish the internal bank of its group, C, in Belgium for that very purpose. Similarly, C may well grant loans to other companies of the group established in other Member States, like X in the Netherlands. Cross-border intra-group loans are not, per se, objectionable. (31) Certainly, such a loan may entail a reduction of the corporate tax base of the borrowing company in the Member State where it is established. Indeed, by deducting the interest on that loan from its taxable profits, that company reduces its tax liability with respect to that Member State. In effect, some of the profits made by the borrowing company are shifted, in the form of interest charges, from the Member State where it is established to the Member State where the lender company has its seat. However, that is something that the Member States must, in principle, accept in an integrated, single market such as the internal market of the European Union. 73. Nevertheless, the Court recognised a clear limit in that regard. It is a general legal principle that EU law, including freedom of establishment, cannot be relied on for abusive ends. The concept of ‘wholly artificial arrangements’ must be read in that light. Pursuant to the settled case-law of the Court, it is abusive for economic operators established in different Member States to carry out ‘artificial transactions devoid of economic and commercial justification’ (or, stated differently, ‘which do not reflect economic reality’), thus fulfilling the conditions to benefit from a tax advantage only formally, ‘with the essential aim of benefiting from [that] advantage’.(32) 74. Furthermore, in its judgment in X (Controlled companies established in third countries), (33) the Court has specified, with respect to the free movement of capital guaranteed by Article 63 TFEU, that ‘the artificial creation of the conditions required in order to escape taxation in a Member State improperly or enjoy a tax advantage in that Member State improperly can take several forms as regards cross-border movements of capital’. In that context, it held that the concept of ‘wholly artificial arrangement’ is capable of covering ‘any ...

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

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

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

As part of a multinational tax integrity package aimed to address the tax avoidance practices of multinational enterprises (MNEs) and improve transparency through better public reporting of MNEs’ tax information, the Australian Treasury issued a Consultation Paper in August 2022. This paper seeks to consult on the implementation of proposals to: amend Australia’s existing thin capitalisation rules to limit interest deductions for MNEs in line with the Organisation for Economic Cooperation and Development (OECD)’s recommended approach under Action 4 of the Base Erosion and Profit Shifting (BEPS) program (Part 1); introduce a new rule limiting MNEs’ ability to claim tax deductions for payments relating to intangibles and royalties that lead to insufficient tax paid (Part 2); and ensure enhanced tax transparency by MNEs (Part 3), through measures such as public reporting of certain tax information on a country‑by‑country basis; mandatory reporting of material tax risks to shareholders; and requiring tenderers for Australian government contracts to disclose their country of tax domicile. The changes contemplated seek to target activities deliberately designed to minimise tax, while also considering the need to attract and retain foreign capital and investment in Australia, limit potential additional compliance cost considerations for business, and continue to support genuine commercial activity ...

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

In 2011, Petrolia SE established a wholly owned subsidiary in Norway – Petrolia Noco AS – to conduct oil exploration activities on the Norwegian shelf. From the outset, Petrolia Noco AS received a loan from the parent company Petrolia SE. The written loan agreement was first signed later on 15 May 2012. The loan limit was originally MNOK 100 with an agreed interest rate of 3 months NIBOR with the addition of a margin of 2.25 percentage points. When the loan agreement was formalized in writing in 2012, the agreed interest rate was changed to 3 months NIBOR with the addition of an interest margin of 10 percentage points. The loan limit was increased to MNOK 150 in September 2012, and then to MNOK 330 in April 2013. In the tax return for 2012 and 2013, Petrolia Noco AS demanded a full deduction for actual interest costs on the intra-group loan to the parent company Petrolia SE. An assessment was issued by the tax authorities for these years, where the interest deductions had been partially disallowed. The assessment for these years was later upheld in court. For FY 2014, 2015 and 2016, Petrolia Noco AS had also claimed a full deduction for actual interest costs on the entire intra-group loan to the parent company. It is the assessment for these years that is the subject of dispute in this case. The assessment was first brought to the Court of Oslo where a decision in favour of the tax authorities was issued in November 2021. This decision was appealed by Petrolia Noco AS to the Court of Appeal. Judgement of the Court The Court of Appeal dismissed the appeal and decided in favour of the Norwegian tax authorities. Excerpts “The Court of Appeal also agrees with the state that neither the cost plus method nor a rationality analysis can be considered applicable in this case. With the result the Court of Appeal has reached so far, the CUP method should be preferred – in line with the OECD guidelines. After this, in summary, it appears clear that the interest margin on the intra-group loan is significantly higher than in a comparable and independent market and thus not an arm’s length price. The higher interest implies a reduction in the appellant’s income, cf. Tax Act section 13-1 first paragraph. The Court of Appeal cannot see that the adjustments claimed by the appellant change this. In the Court of Appeal’s view, it is also clear that the reduction in income has its cause in the community of interest. Whether adjustments should be made to the basis of comparison at the time of the price change, the Court of Appeal comes back to when assessing the exercise of discretion. Consequently, there was access to a discretionary determination of the appellant’s income according to Section 13-1 first paragraph of the Tax Act, also with regard to the interest margin.” “In the Court of Appeal’s view, additional costs that would have been incurred by independent parties, but which are not relevant in the controlled transaction, must be disregarded. Reference is made to the OECD guidelines (2020) point C.1.2.2, section 10.96: In considering arm’s length pricing of loans, the issue of fees and charges in relation to the loan may arise. Independent commercial lenders will sometimes charge fees as part of the terms and conditions of the loan, for example arrangement fees or commitment fees in relation to an undrawn facility. If such charges are seen in a loan between associated enterprises, they should be evaluated in the same way as any other intra-group transaction. In doing so, it must be borne in mind that independent lenders’ charges will in part reflect costs incurred in the process of raising capital and in satisfying regulatory requirements, which associated enterprises might not incur. The decisive factor is whether the costs or rights that the effective interest margin in the observed exploration loans between independent parties is an expression of, are also relevant in the intra-group loan. As far as the Court of Appeal understands, the appellant does not claim that various fees or costs incurred in exploration loans from a bank have been incurred in the intra-group loan, and in any case no evidence has been provided for this. In the Court of Appeal’s view, such costs and fees are therefore not relevant in the comparison. The appellant, on the other hand, has stated that the loan limit that Petrolia SE had made available, and the fact that the loan limit was increased if necessary, means that a so-called “commitment fee”, which accrues in loans between independent parties where an unused credit facility is provided, must be considered built into the agreed interest rate. In the Court of Appeal’s view, Petrolia SE cannot be considered to have had any obligation to make a loan limit available or to increase the loan limit if necessary. It appears from the loan agreement point 3.2 that the lender could demand repayment of the loan at its own discretion. The appellant has stated that this did not entail any real risk for the borrower. It is probably conceivable that Petrolia SE did not intend for this clause to be used, and that the appellant had an expectation of this. In this sense, it was a reality in the loan framework. However, it is clear, and acknowledged by the appellant, that the point of financing the appellant through loans rather than higher equity was Petrolia SE’s need for flexibility. Thus, it appears to the Court of Appeal that it is clear that the appellant had no unconditional right to the unused part of the loan limit. The Court of Appeal therefore believes that the Board of Appeal has not made any mistakes by comparing with nominal interest margins. On this basis, the Court of Appeal can also see no reason why it should have been compared with the upper tier of the observed nominal interest margins in the exploration loans between independent parties. In ...

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

In 2011, Petrolia SE established a wholly owned subsidiary in Norway – Petrolia Noco AS – to conduct oil exploration activities on the Norwegian shelf. From the outset, Petrolia Noco AS received a loan from the parent company Petrolia SE. The written loan agreement was first signed later on 15 May 2012. The loan limit was originally MNOK 100 with an agreed interest rate of 3 months NIBOR with the addition of a margin of 2.25 percentage points. When the loan agreement was formalized in writing in 2012, the agreed interest rate was changed to 3 months NIBOR with the addition of an interest margin of 10 percentage points. The loan limit was increased to MNOK 150 in September 2012, and then to MNOK 330 in April 2013. In the tax return for 2012 and 2013, Petrolia Noco AS demanded a full deduction for actual interest costs on the intra-group loan to the parent company Petrolia SE. Following an audit for FY 2012 and 2013, the tax authorities concluded that parts of the intra-group loan should be reclassified from loan to equity due to thin capitalization. Thus, only a deduction was granted for part of the interest costs. Furthermore, the authorities reduced the interest rate from 10 per cent to 5 per cent. For the income years 2012 and 2013, this meant that the company’s interest costs for distribution between the continental shelf and land were reduced by NOK 2,499,551 and NOK 6,482,459, respectively, and financial expenses by NOK 1,925,963 and NOK 10,188,587,respectively. The assessment was first brought to the Court of Oslo where a decision in favour of the tax authorities was issued in November 2019. This decision was appealed by Petrolia Noco AS to the Court of Appeal. Judgement of the Court The Court of Appeal also decided in favour of the Norwegian tax authorities. Excerpts “The Court adds for this reason that the appellant had higher debt ratio than the company could have had if the loan should have been taken up from an independent lender. In the Court of Appeal’s view, the fact that the appellant actually took out such a high loan as the intra-group loan is solely due to the fact that the lender was the company’s parent company. For this reason, there was a ” reduction ” in the appellant income ” due to” the community of interest. There is thus access to discretion in accordance with the Tax Act § 13-1 first paragraph.” “Thus, there is no basis for the allegation that the Appeals Board’s decision is based on an incorrect fact on this point, and in any case not a fact to the detriment of the appellant. Following this, the Court of Appeal finds that there are no errors in the Appeals Board’s exercise of discretion with regard to the determination of the company’s borrowing capacity. The decision is therefore valid with regard to the thin capitalization.” “The Court of Appeal otherwise agrees with the respondent that the cost- plus method cannot be considered applicable in this case. Reference is made to LB-2016-160306, where it is stated : For loans, however, there is a market, and the comparable prices are margins on loans with similar risk factors at the same time of lending . The cost- plus method provides no guidance for pricing an individual loan. An lender will, regardless of its own costs , not achieve a better interest rate on lending than what is possible to achieve in the market. The Court of Appeal agrees with this, and further points out that the risk picture for Petrolia Noco AS and Petrolia SE was fundamentally different. The financing costs of Petrolia SE therefore do not provide a reliable basis for assessing the arm’s length interest rate on the loan to Petrolia Noco AS.” “…the Court of Appeal can also see no reason why it should have been compared with the upper tier of the observed nominal interest margins in the exploration loans between independent parties. In general, an average such as the Appeals Board has been built on must be assumed to take into account both positive and negative possible variables in the uncontrolled exploration loans in a responsible manner. The Court of Appeal cannot otherwise see that the discretion is arbitrary or highly unreasonable. The decision is therefore also valid with regard to the price adjustment.” Click here for translation ...

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

In 2011, Petrolia SE established a wholly owned subsidiary in Norway – Petrolia Noco AS – to conduct oil exploration activities on the Norwegian shelf. From the outset Petrolia Noco AS received a loan from the parent company Petrolia SE. The written loan agreement was first signed later on 15 May 2012. The loan limit was originally MNOK 100 with an agreed interest rate of 3 months NIBOR with the addition of a margin of 2.25 percentage points. When the loan agreement was formalized in writing in 2012, the agreed interest rate was changed to 3 months NIBOR with the addition of an interest margin of 10 percentage points. The loan limit was increased to MNOK 150 in September 2012, and then to MNOK 330 in April 2013. In the tax return for 2012 and 2013, Petrolia Noco AS demanded a full deduction for actual interest costs on the intra-group loan to the parent company Petrolia SE. Following an audit for FY 2012 and 2013, the tax authorities concluded that parts of the intra-group loan should be reclassified from loan to equity due to thin capitalization. Thus, only a deduction was granted for part of the interest costs. Furthermore, the authorities reduced the interest rate from 10 per cent to 5 per cent. For the income years 2012 and 2013, this meant that the company’s interest costs for distribution between the continental shelf and land were reduced by NOK 2,499,551 and NOK 6,482,459, respectively, and financial expenses by NOK 1,925,963 and NOK 10,188,587,respectively. The Court decided in favor of the Norwegian tax authorities. Click here for translation ...

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

The OECD’s final report on interest limitation rules notes that thin capitalisation rules are vulnerable to loans with excessive interest rates and many transfer pricing practitioners finds that transfer pricing may not the most effective way to prevent profit-shifting using high-priced related party debt. Related-party transactions are fundamentally different to third-party transactions. Factors that increase the riskiness of a loan between unrelated-parties (such as whether the debt can be converted into shares or the total indebtedness of the borrower) are less relevant in a related-party context. In New Zealand new rules on pricing of cross-border borrowing and debt has been implemented according to which interest deductions can be restricted. Questions asked under the new rules: Draft guidance on these rules was issued by the New Zealands Inland Revenue in August 2018 ...

In cases where a domestic corporation that operates a financial business (including a domestic place of business of a foreign corporation) borrowed money from a foreign controlling shareholder and such borrowed amount exceeds six times the amount invested in shares or equity interests by the foreign controlling shareholder, a certain amount of the interest paid in relation to the exceeding amount shall be excluded from deductible expenses of the domestic corporation and subsequently deemed to have been disposed of as a dividend of the domestic corporation pursuant to Article 67 of the Corporate Tax Act. In that sense, the interest paid in relation to the exceeding amount borrowed is regarded as a domestic source income of a foreign corporation, which is a foreign controlling shareholder. The Convention between the Republic of Korea and the Republic of Singapore for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, which allows dividend income and interest income to be taxed by both a residence country and a source country, defines the meaning of dividend income in Article 10(4) and the meaning of interest income in Article 11(5). Moreover, Article 28 of the former Adjustment of International Taxes Act stipulates that the relevant tax treaty preferentially applies to the classification of a domestic source income of a foreign corporation, notwithstanding Article 93 of the Corporate Tax Act. In view of the contents, structure, etc. of the pertinent statutory provisions, where a domestic corporation, including a domestic place of business of a foreign corporation, borrowed money from a foreign controlling shareholder, the interest paid in relation to the exceeding amount borrowed is regarded as a dividend and consequentially deemed a domestic source income of a foreign controlling shareholder, thereby falling under a dividend income in principle. However, the matter of whether to acknowledge a source country’s right to tax, as dividend income, the interest paid in relation to the exceeding amount borrowed under the applicable tax treaty ought to be determined depending on the tax treaty that the Republic of Korea concluded with the country where the relevant foreign corporation (foreign controlling shareholder) is a residence. In such a case where the interest paid constitutes another type of income (e.g., interest income), rather than dividend income, under the relevant tax treaty, then that classification should be the basis for either acknowledging the source country’s right to tax or setting the applicable limited tax rate. Click here for translation ...

At issue was interest in relation to loans between related parties. Pursuant to Article 32(1) ZDDPO-2, interest on loans, except in the case of borrowers from banks and insurance companies, received from a shareholder or partner who, at any time during the tax period, directly or indirectly owns at least 25% of the shares or interests in the capital or voting rights of the taxable person, is not recognised as an expense if, at any time during the tax period, such loans exceed four times (in accordance with the transitional provision 81. The excess of loans is determined by reference to the amount and duration of the excess of loans during the tax period, unless the taxpayer proves that the excess of loans could have been obtained from a lender who is an unrelated person. The claimant argued in the proceedings that it could also have obtained the excess loans from an unrelated person, but failed to prove this. Click here for English translation Click here for other translation ...

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

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