12 December 2024, the German Federal Ministry of Finance published updated administrative principles on transfer pricing 2024 (VWG VP 2024). The updates mainly concern the chapter on financial transactions, where paragraphs 3d and 3e have recently been added to the AStG. Paragraph 3d concerns the determination of arm’s length interest rates, group or stand-alone rating and whether capital should be treated as a loan or equity, and paragraph 3e concerns the treatment of financing arrangements, i.e. cash pools, hedging, etc. New guidance is also provided on the application of OECD Pillar 1 – Amount B. Click here for an unofficial English Translation ...

D. Sp. z oo had deducted interest expenses on intra-group loans and expenses related to intra-group services in its taxable income for FY 2015. The loans and services had been provided by a related party in Delaware, USA. Following a inspection, the tax authority issued an assessment where deductions for these costs had been denied resulting in additional taxable income. In regards to the interest expenses the authority held that the circumstances of the transactions indicated that they were made primarily in order to achieve a tax advantage contrary to the object and purpose of the Tax Act (reduction of the tax base by creating a tax cost in the form of interest on loans to finance the purchase of own assets), and the modus operandi of the participating entities was artificial, since under normal trading conditions economic operators, guided primarily by economic objectives and business risk assessment, do not provide financing (by loans or bonds) for the acquisition of their own assets, especially shares in subsidiaries, if these assets generate revenue for them. In regards to support services (management fee) these had been classified by the group as low value-added services. It appeared from the documentation, that services concerned a very large number of areas and events that occurred in the operations of the foreign company and the entire group of related entities. The US company aggregated these expenses and then, according to a key, allocated the costs to – among others – Sp. z o.o. The Polish subsidiary had no influence on the amount of costs allocated or on the verification of such costs. Hence, according to the authorities, requirements for tax deduction of these costs were not met. An appeal was filed by D. Sp. z oo with the Administrative Court requesting that the tax assessment be annulled in its entirety and that the case be remitted for re-examination or that the proceedings in the case be discontinued. The Administrative Court dismissed the complaint of D. Sp. z oo and upheld the assessment issued by the tax authorities. An appeal was then filed with the Supreme Administrative Court where the decision of the Administrative Court and the tax assessment were set aside. Click here for English Translation ...

In 2011, Willink SAS issued two intercompany convertible bonds with a maturity of 10 years and an annual interest rate of 8%. The tax authorities found that the 8% interest rate had not been determined in accordance with the arm’s length principle. Willink appealed, but both the Administrative Court and later the Administrative Court of Appeal sided with the tax authorities. The case was then appealed to the Conseil d’Etat which in December 2022 overturned the decision and ruled predominantly in favour of Willink SAS finding that RiskCalc could be used to determine a company’s credit rating for transfer pricing purposes in a sufficiently reliable manner, notwithstanding its shortcomings and the differences in the business sectors of the comparables. On that basis the case was remanded to the Administrative Court of Appeal. Judgment After re-examination of the case, the Administrative Court of Appeal annulled the tax assessment and ruled in favour of Willink SAS. “12. It follows from the foregoing that SAS Willink provides the evidence incumbent on it that the interest rate applicable to the transactions at issue could not have been lower than that which would have been applicable to borrowing transactions of the same nature entered into by independent undertakings. It is therefore entitled to request the cancellation of the corporation tax adjustments that led to the reduction of its losses carried forward for the 2011, 2012 and 2013 financial years, and the reinstatement of those losses.” Click here for English translation Click here for other translation ...

An intercompany loan was granted within the Apex Tool group at an interest rate of 6%. A tax assessment was issued by the tax authorities contesting the amount of interest deducted. The case ended up at the Conseil d’Etat, where it was referred back to the CAA. Following the referral of the case, Apex Tool Group asked the CAA to refund the amounts of €58,598, €50,099 and €653 corresponding to the excess corporation tax and social security contributions and to increase the balance of the interest deductions carried forward under the French thin cap rules from €1,435,512 to €2,401,651. Judgment of the Court The Court dismissed Apex Tool Group’s application. It found that the company had failed to provide evidence that the 6% interest rate on the loan was at arm’s length. Excerpts (Unofficial English translation) “8. It follows from the foregoing that the applicant company, which does not provide any further evidence enabling it to verify the characteristics and risk profile of Cooper Industrie France, the company to which the loan was granted, at the date on which the loan was granted, cannot be regarded as providing evidence that institutions or organisations would have been likely, given the specific characteristics of ATHF1 and in particular the risk profile it presented on the date the loan was issued, to grant it a loan with the same characteristics in July 2010 on an arm’s length basis. Consequently, the appellant company cannot be deemed to have provided the proof required of it that all of the disputed interest paid at the rate of 6% is deductible, in accordance with the provisions of I of Article 212 of the French General Tax Code referred to above. As a result, it is not entitled to claim repayment of the corporation tax and social security contributions it paid in respect of the 2011 and 2012 financial years. On the claims based on the provisions of II of Article 212 of the French General Tax Code: 9. Under the terms of 1 of II of Article 212 of the General Tax Code: “When the amount of interest paid by a company to all of its directly or indirectly affiliated companies within the meaning of 12 of Article 39 and deductible in accordance with I simultaneously exceeds the following three limits in respect of the same financial year: / a) The product corresponding to the amount of the said interest multiplied by the ratio existing between one and a half times the amount of shareholders’ equity, assessed at the company’s discretion at the beginning or end of the financial year, and the average amount of the sums left or made available by all of the directly or indirectly affiliated companies within the meaning of Article 12 of 39 during the financial year, b) 25% of the current profit before tax previously increased by the said interest, depreciation taken into account in determining that same profit and the share of lease payments taken into account in determining the sale price of the asset at the end of the contract, /c) The amount of interest paid to this company by companies that are directly or indirectly linked within the meaning of Article 12 of 39, / the fraction of interest exceeding the highest of these limits may not be deducted in respect of that financial year, unless that fraction is less than €150,000. / However, this fraction of interest that is not immediately deductible may be deducted in respect of the following financial year up to the amount of the difference calculated in respect of that financial year between the limit mentioned in b and the amount of interest deductible under I. The balance not deducted at the end of this financial year is deductible in respect of subsequent financial years under the same conditions, less a discount of 5% applied at the start of each of these financial years”. 10. It is common ground that SAS Apex Tool Group reported an amount of EUR 1,380,069 in respect of its stock of interest subject to deferred deduction at the close of the 2013 financial year, pursuant to the provisions of II of Article 212 of the General Tax Code, in respect of the loan of EUR 22,656,211.20 owed to the parent company ATG LLC. The applicant, who has requested a recalculation of the excess interest, maintains that it is entitled, firstly, to request that the interest be carried forward pursuant to the provisions of Article 212-I of the French General Tax Code and, secondly, to file an amended tax return showing a balance of interest remaining to be carried forward of 2,401,651 euros as at 31 December 2013. 11 As a result of the investigation, SAS Apex Tool Group, believing that it was entitled to deduct all of the interest on the loan in question from its taxable income on the basis of Article 212(I) of the French Tax Code, consequently recalculated its stock of deferred interest. However, as stated in paragraphs 6 to 8 of this judgment, the applicant did not prove that it met the conditions laid down by the provisions of Article 212-I of the General Tax Code and was therefore able to deduct the loan interest that it had incurred. In these circumstances, the tax authorities were right not to accept the company’s recalculation of its excess interest and the stock of deferred interest. Consequently, the company’s claims in this respect can only be rejected.” Click here for English translation Click here for other translation ...

Following an audit of GEII Rivoli Holding’s accounts for FY 2013 and 2014, the tax authorities questioned the deductibility, beyond what resulted from the application of a “safe harbor” rate of 2,79% corresponding to the value mentioned in 3° of 1 of Article 39 of the French General Tax Code, of the interest paid to its parent company, at a rate of 5.08%, in return for a loan that the latter had granted it with a view to acquiring a building, and subjected it to additional corporate income tax assessments in respect of these two years. To justify the arm’s-length nature of this intragroup interest rate, the company provided two different methods. One method where the borrower’s credit risk (Baa1) was determined using a scoring model developed by Moody’s Analytics (RiskCalc) and another method where the credit risk of the borrower had been determined using based on the corporate bond yield curves provided by the S&P database. Both analyses were rejected by the tax authority and later the Administrative Court and the Administrative Court of Appeal. An appeal was then filed with the Conseil d’Etat. Judgment The Conseil d’Etat rejected the first method but accepted the second method and on that basis set aside the assessment of the tax authority. Excerpt in English “…in order to justify the validity of the rate it had chosen, the company submitted a new evaluation to the court, based on the calculation of two financial ratios, one of which, One of these ratios, known as the “loan-to-value” (LTV) ratio, relates the level of debt to the value of the company’s real estate assets, and in this case, by comparison with the ratios of listed French and European real estate companies, led to the conclusion that the financial rating it could have obtained would not have exceeded BBB. In order to justify that the rate of 5.08% paid to its parent company did not exceed the arm’s length rate, GEII Rivoli Holding argued, on the basis of bond market data taken from the Standard & Poor’s Capital IQ financial database, that at the date when the loan in dispute had been contracted, for euro-denominated transactions, the 10-year market interest rate for BBB-rated non-financial companies was 5.21%.9. In the first place, by rejecting this method, insofar as it made it possible to determine the company’s level of risk, on the sole ground that the LTV ratio in this case had been calculated by taking into account a financial debt corresponding exclusively to the loan whose rate had to be assessed, the court committed a first error of law.10. Secondly, in rejecting the rate resulting from the application of this method, the Court relied on the fact that GEII Rivoli Holding, in comparing its situation with that of larger real estate companies already present on the bond market, did not justify that a bond issue would have constituted a realistic alternative to an intra-group loan. By ruling out on this ground any possibility of comparison based on the rates charged on the bond market, when the size of a company is not in itself such as to hinder access to this market and when the realistic nature, for a company having recourse to an intra-group loan, of the alternative hypothesis of a bond issue can only be assessed in the light of the specific characteristics of the company and the transaction, with the rates observed on this market having to be adjusted where necessary to take account of the specific features of the company in question, the court committed a second error of law.11. Lastly, in rejecting the rate resulting from the application of this method, the court also relied on the fact that it had not been provided with any precisely identified comparables whose relevance it would have been able to assess. In so ruling, despite the fact that the arm’s length rate put forward by GEII Rivoli Holding as corresponding to its level of risk was based on the use of rate curves established on the basis of all the transactions recorded in the Standard & Poor’s Capital IQ financial database for loans of the same duration contracted by companies with the same risk profile, and that it was not argued that the transactions recorded in this database were unreliable, the court committed a final error of law.” Click here for English translation Click here for other translation ...

On 27 March 2024, new paragraphs (3d) and (3e) were added to the German Foreign Tax Act (Außensteuergesetz – AStG) regarding intragroup financing. Paragraph (3d) concerns the determination of arm’s length interest rates, group vs. stand-alone rating and whether capital is treated as a loan or equity. Paragraph (3e) concerns the treatment of financing arrangements, i.e. cash pools, hedging, etc ...

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. Judgment 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 ...

In the course of a customs and tax inspection conducted against C. sp. z o.o., it was established that, despite its obligation, it had failed to calculate, collect and pay withholding tax on the interest paid on loans granted in 2017 – 2018 to C. B.V. in the Netherlands. Due to the Company’s failure to submit a correction to the tax return, the completed customs and tax audit was transformed into tax proceedings. The tax authorities determined the amount due for uncollected withholding tax on interest paid to the Dutch Company for the individual months from January to December 2017 and from February to August and for October 2018. (a total of PLN 3,787,862.00) as well as ruled on the tax liability of the Company, as payer of the withholding tax, for the aforementioned amount of uncollected tax. In the decision in question, it was acknowledged that the funds which were the subject of the loan granted to the Company and allocated by it for the purchase of the real estate, originated from entities related to it from the B. Group with registered offices in the USA and Canada, then through a number of entities registered in France and Luxembourg were transferred in the form of subsequent loans to F. S.a.r.l., then to C. S.a.r.l., and finally to the Dutch Company which finally concluded the loan agreement with C. sp. z o.o.. In view of this, it was assumed that the aforementioned companies only acted as intermediaries in the transfer of funds for the purchase of real estate in Poland by the Company and, consequently, it was concluded that the Dutch Company was not the actual owner of the interest paid and capitalised by the Complainant in 2017 – 2018 on the loan granted and, therefore, the income received by the Dutch Company on this account was not subject to exemption from taxation, pursuant to Art. 21(3) of the Corporate Income Tax Act of 15 February 1992 (Journal of Laws 2016, item 1888, as amended, in the wording relevant to the case, hereinafter as: ‘u.p.d.o.p.”). “C. sp. z o.o.” disagreed and appealed to the Administrative Court, where the court overturned the decision. An appeal was then filed with the Supreme Administrative Court. Judgment The Supreme Administrative Court overturned the decision of the Administrative Court and remanded the case for reconsideration. Excerpts “In the absence of a definition of the term ‘beneficial owner’ in the regulations of the Polish-Dutch Convention, it is reasonable to refer to the interpretative guidance contained in the Organisation for Economic Co-operation and Development Model Convention (hereinafter: the ‘OECD MTC’) and its official commentary approved by the OECD Council. Although the MTC does not constitute a source of law, the views expressed therein are generally accepted in case law, as the OECD MTC constitutes a model for the construction of double taxation treaties, and at the same time, the use of the commentary to it ensures a situation in which the entities which are the addressees of the norms contained in these treaties will interpret them in a similar manner. According to the wording of the above commentary, the term ‘beneficial owner’ is not used in a narrow, technical sense, but should be understood in its context, in light of the object and purposes of the convention, including tax avoidance and tax evasion (circumvention). In 2003, it was supplemented by comments on ‘intermediary companies’, i.e. companies which, although formally owners of income, have in practice only very limited powers, making them mere trustees or administrators acting for the benefit of the parties concerned and therefore cannot be considered as owners of that income. Paragraph 8 of the commentary to Article 11, as it resulted from the 2003 revision, provides in particular that: ‘the term ‘owner’ is not used in a narrow and technical sense, but is to be understood in its context and in the light of the object and purpose of the Convention, in particular to avoid double taxation and to prevent tax evasion and tax fraud’. Paragraph 8.1 of the same version of the Commentary indicates that: ‘it would be contrary (…) to the object and purpose of the Convention for the source State to grant a reduction in or exemption from tax to a resident of a Contracting State who acts, other than in an agency or other representative relationship, as a mere intermediary on behalf of another person who actually benefits from the income in question’, and that “an intermediary company cannot in principle be regarded as a beneficial owner if, although it is formally the owner of the income, in practice it has only very limited powers, making it only a mere fiduciary or manager, acting on behalf of the parties concerned”. Transferring the above considerations to the present case, the allegations of violation of substantive law formulated in point I, sub-points 1, 2 and 3 of the cassation appeal should be considered fully justified. In the opinion of the Supreme Administrative Court, the Court of First Instance, contrary to its claim, did not interpret Article 21(3)(4)(a) of the u.p.d.o.p. taking into account the Directive or the Polish-Dutch Convention, and at the same time erroneously assumed that the decision of the authority was based on the content of the provision in the wording which became effective only as of 1 January 2019, i.e. it applied the Act retrospectively. Meanwhile, the legal basis for the contested decision was the provision of Article 21(3) in conjunction with Article 4a(29) of the u.p.d.o.p., in the wording in force in 2017 and 2018, correctly interpreted taking into account the interpretation of international tax law, including Directive 2003/49/EC, the CJEU judgment of 26 February 2019 ref. C-115/16, C-118/16, C-119/16, C-299/16, as well as the Model Convention of the Organisation for Economic Co-operation and Development and its official commentary. In the opinion of the Supreme Administrative Court, the authority was therefore right to assume that the concept of ‘beneficial owner’ had been operating in various normative systems for ...

“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 ...

A Polish company, “H. spółka z o.o.”, is a member of a group engaged in investment activities in Europe. H had granted loans to related companies and received loans and contributions from the sole shareholder in Luxembourg. H submitted a request to the tax authorities for an opinion on the tax consequences of these financial arrangements. The tax authority denied the request on the basis that the main purpose of the transaction and the manner in which it was carried out were artificial. Dissatisfied, H appealed to the Administrative Court. Judgment of the Administrative Court The Administrative Court dismissed the appeal. Excerpt “In the Court’s view, the above position of the authority is reasonable and is reflected in the evidence presented by the requesting payer. As can be seen from the evidence presented and the findings of fact based on that evidence, R. S.a.r.l. is a passive holding company with its residence in the Principality of Luxembourg and holds and manages only assets in the form of shares in subsidiaries located in Poland. The aforementioned cash flows between the taxpayer, its shareholder and its subsidiaries indicate that it conducts its activity solely as an intermediary, that it is entirely financed by its sole shareholder, the SICAV-RAIF, that it uses the loans obtained from the fund to finance investments in subsidiaries and that it grants loans to such entities – through the intermediary of the payer – and that the payer transfers the recovered capital and interest to its shareholder, the fund, either as repayment of loans granted to it or as an advance on dividends. Contrary to the applicant’s position, the above is illustrated by the data from the financial statements. Indeed, these are not cash flows of any kind, but flows correlated in time and value, which authorised the conclusions set out in the refusal. The taxpayer also has a close property and personal relationship with the fund and its management company. In the case, the taxpayer’s property and personal substrate was not shown to be sufficient in terms of the nature and scope of its business activities. The same applies to the demonstrated costs of the activity and their adequacy to the object and scope of the activity. The allegation of evidentiary deficiencies in this respect is therefore completely unjustified, since the initiating taxpayer did not present the relevant evidence in this respect. In these circumstances, in the Court’s view, the authority’s finding that the taxpayer actually finances its activities with the funds of the sole shareholder is justified. In such a situation, he cannot be regarded as the actual owner of the interest paid by the payer in connection with the loan agreements in question. Therefore, it does not meet the condition for the application of the exemption from flat-rate income tax on interest income provided for in Article 21(3)(4)(a) of the CIT Act, i.e. the condition of being the actual owner of the interest receivable. Taking into account the facts established above and having regard to the understanding of the notion: “actual owner” resulting from Article 4a point 29 of the CIT Act, one should agree with the argumentation of the authority that the taxpayer only formally acts as a lender. Indeed, it is evident from the material on record that it obtains financing primarily intra-group and transfers the funds it receives from interest to its sole shareholder, the fund, within a short period of time. On the other hand, in order to consider a given entity as a real owner of receivables, it would have to be stated, in the light of Article 4a point 29 of the CIT Act, that it receives receivables for its own benefit (including independently deciding on their use and bearing the economic risk related to the loss of the receivables), is not an intermediary, representative, trustee or other entity obliged to transfer all or part of the receivables to another entity and conducts real economic activity in the country of its registered office. This is not, as mentioned above, about a demonstrated entitlement to receive the receivable for oneself by a formal document, but about the absence of an obligation (formal or informal) to transfer the receivable to another entity. For the assessment of the status of the actual owner of the receivable, facts indicating a certain economic reality are relevant. These facts are indicated by the authority in the contested act and their conclusions are logical. The authority was therefore justified in concluding that the taxpayer is not the real owner of the interest, which in fact – as an intermediary – he makes available to his partner. It is also not engaged in a real economic activity and its current participation in the structure of the group is of an artificial nature, aimed at achieving not so much economic and economic as tax objectives. In fact, the authority established that the SICAV-RAIF is not subject to corporate income tax (it is, as the party admitted, a tax transparent entity) and therefore does not meet the condition of taxation of the entire income it earns with CIT regardless of the place where it is earned, as stipulated in Article 21(3)(2) of the CIT Act. Thus, as it was rightly stated in the case, the inclusion of the taxpayer in the group structure was aimed at benefiting an unauthorised entity (the fund) from the exemption of interest paid by subsidiaries, including the payer, from flat-rate corporate income tax. Contrary to the applicant’s position, in a situation where the payment of interest was made bypassing the holding company, directly to the real owner (the fund), the tax exemption could not be used. In the Court’s opinion, the assessment regarding the artificiality of the taxpayer’s construction and its aiming directly at obtaining a tax advantage in the form of taking advantage of the exemption provided for in Article 21(3) of the CIT Act should therefore also be deemed to be confirmed by the evidence. There is therefore also a reasonable presumption of a decision applying Article 22c of the CIT Act, due to the assumption that ...

Following an audit the tax authority issued an assessment where they denied deductions of interest paid on an intra group loan and expenses for  intra-group services. In the opinion of the tax authorities, the loan was an economically irrational transaction that should not be recognised for tax purposes. With regard to the intra-group support services, the tax authority considered that they could not be recognised as a deductible expense because the documents and explanations provided did not support that an independent entity would have purchased and paid for the described services. Not satisfied with the assessment issued by the tax authorities, W.W.P.H. sp. z o.o. appealed to the Administrative Court. Judgment of the Administrative Court The Administrative Court ruled in favour of W.W.P.H. sp. z o.o. and sent the case back to the tax authorities for reconsideration. According to the court, at the time of the transactions in 2017, there was no legal basis for disregarding controlled transactions under Polish arm’s length provisions. A legal basis for disregarding economically irrational transactions was later established for FY 2019 and forward. Excerpts in English “Of key importance for the resolution of the present case is the judgment of the Supreme Administrative Court of 3 August 2023, ref. no. II FSK 181/21 overturning the judgment of the Court herein dated 15 September 2020, ref. no. I SA/Bd 390/19 and the decision of the appellate authority, issued against the applicant in an identical case, albeit concerning corporate income tax for 2014. The arguments contained in the aforementioned judgment of the Supreme Administrative Court are decisive for the correct resolution of the present case. It should be noted that, pursuant to Article 170 of the A.P.S.A., a final judgment binds not only the parties and the court which issued it, but also other courts and other state authorities, and in cases provided for in the law, also other persons.” “It must be emphasised that the provisions of Article 11 of the A.P.C. do not create abuse of rights or anti-avoidance clauses. They only allow a different determination of transaction (transfer) prices. Thus, the essence of the legal institution regulated in Article 11 of the A.l.t.p. is not the omission of the legal effects of legal transactions performed by the taxpayer or a different legal definition of these transactions, but the determination of their economic effect expressed in the transaction price, ignoring the impact of institutional links between counterparties (cf. judgments of the NSA of: 18 November 2020, ref. no. II FSK 1949/18; 9 December 2021, ref. no. II FSK 2360/20). It is, therefore, a legal institution with strictly defined characteristics and capable of exerting only the effects provided for in the provisions defining it. Meanwhile, the application of any provisions allowing the tax authorities to interfere in the legal relations freely shaped by taxpayers must be strictly limited and restricted only to the premises defined in these provisions, as they are of a highly interferential nature. Any broadening interpretation of them, as a result of which legal sanction could be obtained by interference of public administration bodies going further than it results from the grammatical meaning of the words and phrases used in the provisions establishing such powers, is unacceptable.” “Despite the fact that the contracting parties were related to each other, and that the company became a subsidiary of other entities as a result of the disposal of shares in its capital, the tax authorities resolved the case beyond the authority arising from the shaping legal order of Art. 11(1) of the A.p.d.o.p. This provision only authorised them to determine the conditions (prices) of these transactions differently – and thus to replace the prices specified in the parties’ agreements (transactions) with such prices that would correspond to hypothetical conditions (prices) agreed by unrelated entities.” “The reasoning adopted by the authority corresponds to the hypothesis of the norm of Article 11c(4) of the A.P.C., in force since 1 January 2019. This provision provides for the possibility for the authority to determine the taxpayer’s income or loss without taking into account the economically irrational transaction undertaken by related parties. In 2017, the provisions indicated could not be applied. Neither did the then-applicable Article 11 of the A.P.D.O.P. constitute this legal basis. This provision regulated the issue of transfer prices, i.e. transaction prices applied between entities related by capital or personality. In this provision, the legislator highlighted the arm’s length principle (also referred to as the arm’s length principle), requiring that prices in transactions between related parties be determined as if the companies were operating as independent, arm’s length entities and conducting comparable transactions under similar market and factual circumstances. When the transaction under scrutiny deviates from those concluded between independent entities under comparable circumstances, the tax authority may require a profit adjustment if other circumstances indicated in Article 11 of the A.l.p. also occur. Article 11(1) of the A.P.C. cited in the contested decision therefore only entitled the amount of deductible costs to be adjusted, but did not provide a basis for disregarding them. The legal standard deriving from this provision involved an assessment of the terms of the transaction while recognising their validity for the purpose of estimating revenue.” “Reconsidering the case, the tax authority will be obliged to consider, first of all, whether the amount of interest was determined in a manner corresponding to market conditions and to focus its considerations on this circumstance in the context of Article 11(1) et seq. of the A.p.d.o.p. In addition, the authority will be obliged to assume, in the context of the provisions of Art. 14k § 1 and art. 14m § 1 and 2 Op, as well as allegations concerning deprivation of legal protection of the company resulting from the individual interpretation issued on 9 November 2012 by the competent authority, that the occurrence of the circumstances provided for in art. 11 par. 1 of the A.p.d.o.p. did not constitute a premise for assessing the applicability of art. 15 par. 1 of the A.p.d.o.p.” “On the other hand, it ...

SSI Logistics’ transfer pricing documentation for 2012 and 2013 concluded that the interest rates on the loans it received from a related party – Bunge Finance BV – were market rates. Following an audit, the tax authorities issued an assessment denying the deductibility of the interest payments on the loans, as the loans had been taken out on 25 November 2014 but “retroactively” with effect from 1 January 2012. In the assessment, the tax authorities also concluded that the interest rate on the loans was not at arm’s length. SSI Logistics filed an appeal with the Administrative Court, which was later dismissed by a ruling issued in September 2022. An appeal was then filed by SSI Logistics with the Administrative Court of Appeal. Judgment of the Court. The Court dismissed the appeal and upheld the decision of the Administrative Court. Excerpt in English “19. However, it is clear from the investigation that the amount shown in Bunge Finance BV’s accounting document, i.e. EUR 1,271,263.41, presented as corresponding to the interest received from SAS SSI Logistics for 2013, differs from the amount recorded in 2013 in SAS SSI Logistics‘ accounting records, even though the appellant company does not dispute that the opening and closing dates of the two companies’ financial years coincided in 2013 and that it is clear from the documents in the file that the 2013 financial year for both companies closed on 31 December 2013. Furthermore, this accounting document does not mention the origin of the amount booked. In these circumstances, even though SSI Logistics maintains that the tax result of Bunge Finance BV was taken into account within the tax unit that it forms with Koninklijke Bunge BV, for which no tax was ultimately paid due to the existence of tax losses carried forward, and that Koninklijke Bunge BV’s corporation tax settlement statement does not mention any tax due in respect of 2013, it does not follow from the investigation that the amount presented by the appellant company actually corresponded to an expense borne by SAS SSI Logistics. 20. It follows from the foregoing that SAS SSI Logistics does not demonstrate either on appeal or before the Administrative Court that the sum of 1,272,047 euros entered in its accounts was subject to income tax or tax on profits in an amount at least equal to one quarter of the tax on profits determined under the conditions of ordinary law. The tax authorities were therefore right to challenge, on the basis of tax law, the deductibility of the interest borne by SAS SSI Logistics in respect of the 2013 financial year on the basis of the aforementioned provisions of Article 212(1)(b) of the French General Tax Code.“ Click here for English translation Click here for other translation ...

A Polish real estate company, “N. sp. z o.o.”, had asked the tax office for an opinion on the tax treatment of interest paid on a loan received from a related party ‘M’ in Romania. The tax office refused the request. In its view, “M” had received the funds needed to make the loans to N from other group companies and therefore almost all of the interest income earned by “M” was ultimately transferred to “M.C.”, which was based in Malta. On this basis, the ultimate beneficiary of the interest paid by N was not “M” in Romania, but “M.C.” in Malta. “N. sp. z o.o.” disagreed and appealed to the Administrative Court. Decision of the Administrative Court The Court dismissed the appeal. Excerpts “The company has not provided any argumentation to exclude the authority’s finding that the coincidence of dates, juxtaposed with the fact that M. did not, at the date of these agreements, have any funds of its own with which to grant the loan, justifies doubts as to whether M. is the ultimate beneficiary of the payments under Agreements 1 and 2. Thus, M.’s representation that it is the beneficial owner of such interest receivables is questionable. The authority’s conclusion that the Company’s explanation that M.’s source of financing is equity is unreliable must be considered logical. Indeed, the amount of LEI 69,287,400 (EUR 14 million) of M.’s reserve capital comes from a recapitalisation by the shareholders pursuant to a resolution of the taxpayer’s shareholders’ meeting of 14 December 2021, i.e. several months after the conclusion of Agreement 1 with the Company and the assumption of the receivables set out in Agreement 2. In addition, the amount of EUR 14 million would not have allowed for two loans totalling EUR 82,338,755 due to the fact that M. did not have its own capital in such an amount at the time it became a party to the agreements. As can be seen from the Company’s explanations of 17 July 2023, M. used the loans obtained from related parties to finance the employment and social security costs of the employees employed. This circumstance also supports the assessment that M. does not have a real economic activity in Romania, since it covers its costs from the loans. The authority assessed the information contained in the income statement, which is an integral part of M.’s financial statements for 2022. It shows that M. earned interest income of LEI 86,796,104 (2021 – LEI 29,669,077). At the same time, it reported interest-related financial expenses of LEI 80,301,880 (2021 – LEI 29,173,040). This means that M. transferred almost all of the interest income earned on loans concluded with related parties as repayments of loans received from its associates. Under these conditions, it is impossible to question his assessment as to the fact that M. transferred the profit to M. S. , and then to M. P. and then to M. C. based at […]. There is no dispute that M. has premises, employees and two directors, but, as the authority rightly pointed out, these facts in themselves do not prejudge the existence of a real activity. M. is the tenant of the office at the registration address under a sub-lease agreement. The only fixed assets in its possession are four laptops. The company itself explained (letter of 9 May 2023) that prior to 1 March 2022. M. was using the same registered office address free of charge. It was also established that M. leases office space from a P. company related to one of the shareholders of M. P. – P. H. based in the Isle of Man. The issue of the absence of arrangements in the contract for the furnishing of the premises is of no relevance to the assessment of the authority as a whole. It is also significant that two members of M.’s board of directors are not remunerated by virtue of their positions (2022 financial statements, letter of 9 May 2023). The company has not disputed the authority’s finding that the board members are employed by M. P.. Thus, the assessment as to the dependence of the management board in decision-making in the conduct of M.’s affairs, including the granting of loans to related parties, the manner in which the funds received from the interest on the loans are disbursed, as well as the lack of motivation to bear the risks involved or to take responsibility for making such decisions, remains justified. It is further to be noted that the office lease agreement was entered into on 27 May 2022 with effect from 1 March 2022. On 16 May 2022. M. hired two employees and a further two from 20 June 2022. At approximately the same time, on 28 April and 24 May 2022 respectively. M. entered the laptops in the fixed asset register. Thus, the escalation of actions taken is strongly noticeable. When these circumstances are juxtaposed with the filing of the request for an opinion on 13 October 2022 (the attorneys received authority to represent the Company 6 July 2022), indeed, the indicated temporal coincidence of the clustered actions undertaken by M. may indicate the pretence of conducting a real business activity in order to obtain exemption from income tax in Poland. This is all the more so as M. has been registered since 2018, but did not carry out business activities in Romania until 2022. At the same time, the authority rightly pointed out that at the date of the conclusion of the loan agreements, M. did not have any asset-personal substrate, did not employ any employees, did not have any fixed assets and subleased the registration address in Bucharest free of charge from a related party. Instead, it only undertook activities to acquire premises, employees and equipment intensively from March 2022. Contrary to the allegations of the complaint, the authority was correct in considering that M. was merely acting as an intermediary between the Company and the ultimate beneficiary entity. In light of CJEU case law ...

In 2009 the English company EDF Energy UK Ltd (EDFE), a wholly-owned subsidiary of SAS Electricité de France International (SAS EDFI), issued 66,285 bonds convertible into shares (OCAs) for a unit nominal value of EUR 50,000. SAS EDFI subscribed to all of these OCAs for their nominal value, i.e. a total subscription price of EUR 3,314,250,000. The OCAs had a maturity of five years, i.e. until October 16, 2014, and could be converted into new EDFE shares at the instigation of the subscriber at any time after a three-year lock-up period, i.e. from October 16, 2012. Each bond entitled the holder to receive 36,576 EDFE shares after conversion. The annual coupon for the OCAs was set at 1.085%. In this respect, SAS EDFI determined, on the basis of a panel of bond issues of independent comparables, the arm’s length rate that should be applied to conventional bonds, i.e. 4.41% (mid-swap rate and premium of 1.70%), 490 million according to the “Tsiveriotis and Fernandes” model, so that the sum of the present value of the flows of the “debt” component of the bond and the value of the “conversion” option is equal to the subscription price of the OCAs. SAS EDFI recognised the annual interest received at a rate of 1.085% on the bonds as income, thus subject to corporate income tax, i.e. 36 million euros. The tax authorities considered that the “conversion” component had a zero value for SAS EDFI and that, given the terms of the loan – in this case, via the OCA mechanism – and the context of the issuance transaction, the reduction in the interest rate applied compared with the arm’s length rate of 4.41% to which SAS EDFI was entitled, made it possible to achieve a transfer of profits, In the case of SAS EDFI, the difference between the interest rate of 4.41% and the rate corresponding to the actual remuneration recorded had to be reintegrated in order to determine its taxable income. Before the appeal judge, the Minister of Action and Public Accounts contested any value to the “conversion” component on the double ground, on the one hand, that the OCAs issued by EDFE having been subscribed by its sole shareholder, the financial profit that SAS EDFI can hope to make by subscribing and then converting the OCAs into new shares mechanically has a value of zero, since it would be offset by a loss of the same amount on the value of the EDFE shares held prior to this conversion, and on the other hand, that since the OCAs issued by EDFE were subscribed by its sole shareholder, the financial benefit that SAS EDFI can hope to make by subscribing and then converting the OCAs into new shares has a value of zero, since it would be offset by a loss of the same amount on the value of the EDFE shares held before this conversion, on the other hand, since the objective sought by SAS EDFI was not that of a “classic” financial investor and the decision to convert or not the OCAs into new shares will not be taken solely in the interest of the subscriber with a view to maximising his profit, the valuation of the “conversion” component of the OCAs based solely on such an interest is not relevant and, since the financial impact of a conversion was then random, this component must necessarily be given a value close to zero. Not satisfied with the assessment, Electricité de France brought the case to court. The Court of first instance held in favour of the tax authorities. An appeal was then filed by Electricité de France with the Administrative Court of Appeal (CAA). In a decision issued 25 January 2022 the Administrative Court of Appeal overturned the decision from the court of first instance and found in favor of Electricité de France. “…since the Minister for Public Action and Accounts does not justify the zero value of the ‘conversion’ component he refers to, SA EDF and SAS EDFI are entitled to maintain that he was wrong to consider that, by subscribing to the OCAs issued by EDFE, for which the interest rate applied was 1.085% and not the borrowing rate for traditional bonds of 4, 41%, SAS EDFI had transferred profits to its subsidiary under abnormal management conditions, and the amounts corresponding to this difference in rates had to be reintegrated to determine its taxable results pursuant to Article 57 of the General Tax Code and, for EDFE, represented hidden distributions within the meaning of c. of article 111 of the same code which must be subject to the withholding tax mentioned in 2. of article 119 bis of the same code” An appeal was then filed by the tax authorities with the Conseil d’État, which in November 2022 annulled the decision from the CAA and found in favor of tax authorities and remanded the case to the Administrative Court of Appeal. Judgment of the Administrative Court of Appeal In accordance with the guidance provided in the 2022 Judgment of the Conseil d’État, the Court decided in favor the tax authorities. Excerpt (English translation) “On the existence of an indirect transfer of profits: Regarding the application of tax law: 2. On the one hand, under the terms of the first paragraph of article 57 of the general tax code, applicable to corporate tax matters under article 209 of the same code : ” For the establishment of the income tax due by companies which are dependent on or which have control of companies located outside France, the profits indirectly transferred to the latter, either by increase or decrease in purchase or sale prices, or by any other means, are incorporated into the results recorded by the accounts (…) “. It follows from these provisions that, when it notes that the prices invoiced by a company established in France to a foreign company linked to it – or those invoiced to it by this foreign company – are lower – or ...

“Group Rating SA” was subject to an assessment in relation to intra-group loans. The tax authorities found that the method used to determine the arm’s length interest rate was reasonable, but that the credit rating was incorrect as it did not take into account that “Group Rating SA” was part of a larger group. According to the tax authorities, group membership may have an impact on the credit rating of the members of the group, see section 7.13 of the 2010 TPG and chapter X, paragraphs 10.81 and 10.82 of the 2022 TPG. In the appeal, “Group Rating SA” argued that the tax authorities’ interpretation was incorrect. Judgment of the court The TEAC dismissed the appeal and ruled in favour of the tax authorities. The court concluded that it was reasonable to assume that “Group Rating SA” would receive financial support from other members of the group, and that this was in fact the case. In the present case, there was no doubt as to the significance of the group membership and it was therefore appropriate to apply the credit rating of the group as a whole when determining the interest rate on the loans in question. Click here for English translation Click here for other translation ...

“TW XZ SA” was subject to an assessment in relation to intra-group loans and cash pools for Fiscal Year 2013 – 2016. The tax authorities found that the credit rating used by the company (BBB) in determining the interest rate was incorrect as it did not take into account that “TW XZ SA” was part of a larger group. The credit rating of the company was instead determined to be (A). Furthermore the tax authorities found that the remuneration of a group cash pool leader could be determined as 5% of its cost base by reference to guidance on low value adding intra-group services. A complaint was filed by “TW XZ SA”. Judgment of the court The Court dismissed the complaint and ruled in favour of the tax authorities. Click here for English translation Click here for other translation ...

In 2003, Watsons Personal Care Stores Holding Limited borrowed USD 36,842,335.00 from Watson Labuan in order to acquire a substantial number of shares in Watson Malaysia and in 2012, the Company borrowed another USD 1,276,000.00 from Watson Labuan to finance the acquisition of shares. According to the loan agreement the annual interest rate was 3% plus the London Interbank Offered Rate (LIBOR) and the principal amount was to be paid on demand by Watson Labuan. In 2013 the tax authorities (DGIR) requested information from Watsons Personal Care Stores Holding Limited relating to cross border transactions for transfer pricing risk assessment purposes and following an audit for FY 2010-2012 the tax authorities informed the Company that the interest would be adjusted under section 140A of the ITA (Malaysian arm’s length provision). Furthermore, the interest expenses paid would not be allowed as a deduction because the transaction as a whole would not have been entered into between unrelated parties. Watsons Personal Care Stores Holding Limited filed a complaint against the assessment and in a decision handed down in 2020 the Special Commissioners of Income Tax (SCIT) allowed the appeal and set aside the assessment of the tax authorities. The tax authorities then filed a Notice of Appeal against the decision with the High Court. Judgment of the Court The Court upheld the decision of the Special Commissioners of Income Tax and set aside the assessment issued by the tax authorities. Excerpts “20. Having read Rule 8 (1) and 8(2) of the TP Rules together, it is clear that while the DGIR has the power to disregard structures that differ from those which would have been adopted by independent persons behaving in a commercially rational manner and the actual structure impedes the DGIR from determining an appropriate transfer price, if DGIR so chooses to disregard the structure under Rule 8(1), Rule 8(2) requires the DGIR to make the adjustment as it thinks fit to reflect the structure that would have been adopted by an independent person dealing at arm’s length.” (…) “36. In contrast I find that the DGIR has not put forward any evidence to refute the Company’s TP analysis, and there is no basis on which the DGIR would have concluded that the interest charged is higher than what would have been agreed between independent persons. Therefore, I view that the DGIR’s rejection of the comparables amounts to a bare denial, lacking in any evidence or basis as the SCIT had correctly held in its Grounds of Decision. 37. In the circumstances, the DGIR did not substantiate its allegations in any documentary form to show that the interest rate is not at arm’s length. What is available is only the TP Documentation prepared by the Company, which was entirely disregarded by the DGIR in coming to its Decisions. 38. I view that the SCIT’s decision is founded on a correct application of the law and inference of facts that are consistent with the primary facts and evidence of the case as the SCIT had set out in its Grounds of Decision dated 19.5.2021. 39. This court is of the view that the DGIR is utilizing section 140A of the ITA to disregard the transactions undertaken. Thus, the DGIR did not act within the powers conferred to it under the said section. 40. It is to be noted that section 140A of the ITA does not give the DGIR the power to disregard/ignore any transactions. Instead, section 140A clearly requires the DGIR to substitute the price in respect of the transaction to reflect an arm’s length price for the transaction where it has reasons to believe that the transactions were not carried out at arm’s length. 41. Therefore, I view that the SCIT correctly held that the DGIR’s failure to make any adjustments to the Loans or substitute an arm’s length rate is contrary to section 140A of the ITA: – [14] The Respondent also did not make any adjustments to the structure of the loan transactions or substitute the interest rate that would have been expected between an independent persons to the loan transaction between the Appellant and Watson Labuan as stipulated in Section 140A of the ITA and Rule 8(1) and (2) of the Income Tax TPR. The Respondent merely substituted the interest rate with 0% on the basis that no independent party would carry out such transaction. (See: page 11 of the Additional Record of Appeal (Enclosure 29)) 42. I find that the DGIR’s insistence that it can substitute a price with zero is misconceived and in effect, disregarding the transaction without substituting an arm’s length price. This shows that the DGIR failed to read Rule 8 of the TP Rules in its entirety. The DGIR only chose to apply Rule 8(1) of the TP Rules but failed to consider Rule 8(2). For ease of convenience Rules 8(2) is reproduced below: – “(2) Where the Director General disregards any structure adopted by a person in entering into a controlled transaction under subrule (1), the Director General shall make adjustment to the structure of that transaction as he thinks fit to reflect the structure that would have been adopted by an independent person dealing at arm’s length having regards to the economic and commercial reality” (emphasis added) 43. The DGIR in its submissions attempts to argue that it ‘substituted’ the interest with 0% because no independent person or Company would enter into similar transaction. Therefore, the interest rate ought to be 0%. 44. I find that the DGIR’s arguments is devoid of merits for the following reasons: – 44.1 The test under Rule 8(2) is not whether an independent person would enter into a similar transaction. The test is a price which “… would have been adopted by an independent person dealing at arm’s length… ” The DGIR’s argument is legally inconsistent with the language of Rule 8(2); and 44.2 The language in Rule 8(2) notwithstanding, the DGIR has not provided any evidence to support its allegations that no commercial ...

Bunge Iberica SA participates in the Group’s cash pooling system, both as a borrower and as a provider of funds. The tax authorities had issued a notice of assessment in which the interest rates on deposits and withdrawals were adjusted and determined on the basis of a group credit rating. Bunge Iberica SA filed a complaint with the Tax Court, which was rejected in a decision issued in October 2019, and an appeal was then filed with the National Court. Decision of the Court. The National Court rejected the appeal of Bunge Iberica SA and confirmed the tax assessment. Excerpt “As the ONFI report states, and the Board agrees, the management and administration functions performed are not comparable to those performed by a financial institution, “which borrows money in order to invest it for its own account, either through loans or any other operation, the interest spread being its financial margin. This margin does not justify [see the Reports transcribed on pp. 6 et seq. of the ONFI report] the remuneration of the functions carried out by the leading entities…which should be remunerated as befits a provider of low value-added services, applying a margin on their costs”. It should also be noted that the assets belong to the contributors and that BUNGE FINANCE BV has no staff of its own. The risks are assumed by BUNGE SPAIN, in fact, when it acts as borrower, the risk of non-payment is borne by the contributing or lending entities and when it acts as depositary or contributor, BUNGE SPAIN assumes the risk of insolvency of the borrowers, in the event that they do not repay what they have received. In other words, the leading entity “does not assume any risk of non-payment as it does not have the control or financial capacity that lies with the participating entities”. As explained on p. 29, “in the cash pooling system of which BUNGE IBERICA is a part, the leading entity does not assume the same position as a bank, but simply administrative and management tasks, but does not assume the risk of non-payment either from the economic or contractual point of view (in fact in the report of BUNGE FINANCE BV there is no mention of this question, nor is it included in the current account contract), but this risk is assumed by all the participating entities. The leading entity centralises the cash and grants financing to cash pooling entities, but on behalf of the contributing entities, which are the ones that actually have the funds to lend and assume the risk of default”. D.- As explained on p. 31, it is logical that cash pooling produces a “mutual” advantage. Indeed, “the advantages must be shared among all the participants in the operation: just as all the members of the cash pooling bring solvency to the group as a whole, the overall savings must also be shared. This is not the case here, in which the benefit is located in the …leading entity, without it having been proven throughout the verification period that it was deserving of such benefit”. And he adds, which seems to us to be very relevant, it is true that the interest rate is based on the risk assumed by the lender – as stated in the expert report provided – and that, in a context in which two parties intervene, the solvency and liquidity of the borrower will be decisive; but in ‘a cash pooling system involving many more participants – usually all the companies in the group – and all of them holding debtor and creditor positions without distinction, this mutual design generates synergies which should be to the benefit of the whole group’. It is therefore logical to start from the rating of the group, in fact “the role played by the so-called “The Bunge Master Trust” in the material execution of the cash pooling operations has been highlighted, as the sole interlocutor with third party entities for the purpose of obtaining for the group the financing that it cannot obtain via the cash pooling operations of the different entities that make up the group. Likewise, it has been indicated that when the group turns to third parties the credential it displays is the group’s credit ratio, to which the credit ratio of the different entities that make up the group contributes. This is the reason why, in the determination of the interest rate, the Inspectorates have taken the group ratio as a reference”. As argued on p. 33, if the asymmetry criterion were to be applied “there could be a perverse effect for the member entities. [It is possible that in a certain period in which the amounts withdrawn from the pool by an entity were lower than those contributed, the overall result for this entity, in net terms, would result in a financial expense, precisely because of this asymmetrical remuneration”, so that the entity would obtain disadvantages. As stated on pp. 34 and 35 of the ONFI report, “from an operational point of view, given the spirit of improvement of the group as a whole, an element present in any commercial transaction, it would make no sense to obtain financing at a higher price than that which could result from acting as a whole. Nor would it make any particular sense to resort to external financing when cash requirements can easily be met with that which derives from the activity itself, even when it comes from other entities. Both considerations lead to the conclusion that taking into account the qualification of the group is the most approximate way of reconstructing the comparability of operations such as those under study and that this also implies a certain degree of prudence. On the basis of the above premises, which the Board considers to be correct, the Administration explains the specific methodology applied – the comparable free price method” Click here for English translation Click here for other translation ...

In 2011, Willink SAS issued two intercompany convertible bonds with a maturity of 10 years and an annual interest rate of 8%. The tax authorities found that the 8% interest rate had not been determined in accordance with the arm’s length principle. Willink appealed, but both the Administrative Court and later the Administrative Court of Appeal sided with the tax authorities. Judgment of the Supreme Court The Conseil d’Etat overturned the decision and ruled in favour of Willink SAS. The court found that RiskCalc could be used to determine a company’s credit rating for transfer pricing purposes in a sufficiently reliable manner, notwithstanding its shortcomings and the differences in the business sectors of the comparables. Click here for English translation Click here for other translation ...

In 2009 the English company EDF Energy UK Ltd (EDFE), a wholly-owned subsidiary of SAS Electricité de France International (SAS EDFI), issued 66,285 bonds convertible into shares (OCAs) for a unit nominal value of EUR 50,000. SAS EDFI subscribed to all of these OCAs for their nominal value, i.e. a total subscription price of EUR 3,314,250,000. The OCAs had a maturity of five years, i.e. until October 16, 2014, and could be converted into new EDFE shares at the instigation of the subscriber at any time after a three-year lock-up period, i.e. from October 16, 2012. Each bond entitled the holder to receive 36,576 EDFE shares after conversion. The annual coupon for the OCAs was set at 1.085%. In this respect, SAS EDFI determined, on the basis of a panel of bond issues of independent comparables, the arm’s length rate that should be applied to conventional bonds, i.e. 4.41% (mid-swap rate and premium of 1.70%), 490 million according to the “Tsiveriotis and Fernandes” model, so that the sum of the present value of the flows of the “debt” component of the bond and the value of the “conversion” option is equal to the subscription price of the OCAs. SAS EDFI recognised the annual interest received at a rate of 1.085% on the bonds as income, thus subject to corporate income tax, i.e. 36 million euros.. The tax authorities considered that the “conversion” component had a zero value for SAS EDFI and that, given the terms of the loan – in this case, via the OCA mechanism – and the context of the issuance transaction, the reduction in the interest rate applied compared with the arm’s length rate of 4.41% to which SAS EDFI was entitled, made it possible to achieve a transfer of profits, In the case of SAS EDFI, the difference between the interest rate of 4.41% and the rate corresponding to the actual remuneration recorded had to be reintegrated in order to determine its taxable income. Before the appeal judge, the Minister of Action and Public Accounts contested any value to the “conversion” component on the double ground, on the one hand, that the OCAs issued by EDFE having been subscribed by its sole shareholder, the financial profit that SAS EDFI can hope to make by subscribing and then converting the OCAs into new shares mechanically has a value of zero, since it would be offset by a loss of the same amount on the value of the EDFE shares held prior to this conversion, and on the other hand, that since the OCAs issued by EDFE were subscribed by its sole shareholder, the financial benefit that SAS EDFI can hope to make by subscribing and then converting the OCAs into new shares has a value of zero, since it would be offset by a loss of the same amount on the value of the EDFE shares held before this conversion, on the other hand, since the objective sought by SAS EDFI was not that of a “classic” financial investor and the decision to convert or not the OCAs into new shares will not be taken solely in the interest of the subscriber with a view to maximising his profit, the valuation of the “conversion” component of the OCAs based solely on such an interest is not relevant and, since the financial impact of a conversion was then random, this component must necessarily be given a value close to zero. Not satisfied with the assessment, Electricité de France brought the case to court. The Court of first instance held in favour of the tax authorities. An appeal was then filed by Electricité de France with the Administrative Court of Appeal (CAA). In a decision issued 25 January 2022 the Administrative Court of Appeal overturned the decision from the court of first instance and found in favor of Electricité de France. “…since the Minister for Public Action and Accounts does not justify the zero value of the ‘conversion’ component he refers to, SA EDF and SAS EDFI are entitled to maintain that he was wrong to consider that, by subscribing to the OCAs issued by EDFE, for which the interest rate applied was 1.085% and not the borrowing rate for traditional bonds of 4, 41%, SAS EDFI had transferred profits to its subsidiary under abnormal management conditions, and the amounts corresponding to this difference in rates had to be reintegrated to determine its taxable results pursuant to Article 57 of the General Tax Code and, for EDFE, represented hidden distributions within the meaning of c. of article 111 of the same code which must be subject to the withholding tax mentioned in 2. of article 119 bis of the same code” An appeal was then filed by the tax authorities with the Conseil d’État Judgment of the Supreme Administrative Court The Supreme Administrative Court annulled the decision from the CAA and found in favor of tax authorities. Excerpts “(…) 4. It follows from the statements in the judgment under appeal that the court first found that the interest rate agreed between EDFI and its subsidiary in 2009 was lower than the rate that would remunerate bond financing in an arm’s length situation. Secondly, it considered that the granting to EDFI of an option to convert its shares into shares of the financed company could be valued in the same way as the granting of the same option in the context of a transaction between companies with no capital ties. The court deduced that the interest rate in dispute, including the value of this option, did not constitute an indirect transfer of profits abroad. 5. However, the situation arising from the grant to the sole shareholder of the company financed of an option to convert the bonds he has subscribed to into shares of the company is, by its very nature, not comparable to an arm’s length situation, since the value of this option, consisting exclusively in the opening of an option to acquire a fraction of the company’s capital ...

“Gas-Trader KtF” – a subsidiary in the E.ON group – had entered into loan agreements with other group companies and the related parties had determined the interest rate by application of the CUP method using the Thomson Reuters LoanConnector database. Comparable transactions was extracted from the database by searching for credit rating, type of debtor party, date of loan, maturity, transactions with completed status, and spread/provision fee. An audit was conducted by the tax authorities for FY 2012-2013 and the interest rate determined by the group was found to be incompliant with the arm’s length principle. The tax authorities applied the same method as Gas-Trader but added further search criteria in the selection of comparable transactions – credit purpose and insurance coverage. This resulted in a different range and an assessment of additional taxable income was issued. An appeal was filed by Gas-Trader KtF with the National Tax and Customs Board of Appeal where a judgment in favor of the tax authorities was issued. Then an appeal was then filed with the courts where the decision was annulled and the Board of Appeal ordered to initiate new proceedings. During these proceedings, an expert opinion was obtained which was in favor of Gas-Trader. However following objections from the tax authorities, the Board of Appeal dismissed the expert opinion and decided predominantly in favor of the tax authorities. An appeal was then filed with Supreme Administrative Court. Judgment of the Court The Supreme Administrative Court set aside the decision and issued a judgment in favor of Gas-Trader. In its judgment, the Court states “[26] A large amount of data is needed to determine the transfer price. However, the available information may be incomplete, difficult to interpret, difficult to obtain for reasons of confidentiality, or may not exist at all, or the relevant independent enterprise itself may be missing. In the practical application of the arm’s length principle, the objective is always to determine an acceptable estimate of arm’s length profit based on reliable data. The ‘estimated’ nature of the transfer price means that it is never an exact tax act, but requires both the taxpayer and the tax authorities to subsequently take evidence that is clearly identifiable and realistic. The Curia has stated in its judgment Kfv.I.35.550/2018/12 that the question of transfer pricing can be a technical question or a purely legal question depending on the underlying facts. In the case at hand, the defendant transformed the decision into a question of law by basing its decision not on an examination of the transfer pricing method, but on a different classification of the underlying legal relationship from that of the plaintiff in that case. In the present case, the Curia adds that, in the event of a substantive examination of the transfer pricing method by the tax authorities, the applicant may also submit a request for evidence on a technical point in the course of the judicial review. [27] Among the methods of transfer pricing, both the Directives and the Tao [Corporate Tax and Dividend Tax] Law recognise the method of comparative independent prices. Pursuant to Section 18(2)(a) of the Tao Law, the arm’s length price is to be determined by one of the following methods: the arm’s length price method, whereby the arm’s length price is the price that independent parties would apply for the sale of a comparable asset or service in an economically comparable market. The problem in applying this method is the identification of the ‘economically comparable market’, which is ultimately achieved by applying the correction/constraint criteria within the scope of the method. Indeed, an independent transaction can only be compared with a controlled transaction using the method of comparable independent prices if one of the following two conditions is met: (a) none of the differences, if any, between the transactions to be compared or between the undertakings entering into those transactions can materially affect the free market price, or (b) relatively accurate adjustments can be made to eliminate the distortive effect of such differences. Therefore, where distorting differences exist between controlled and unrelated transactions, adjustments should be made to at least broadly eliminate price influencing factors and enhance comparability. Each of the narrowing methods should be assessed for their relative accuracy and only those adjustments should be made that are likely to improve comparability. [28] In the case at bar, it is a fact that the defendant did not make a finding with respect to the plaintiff’s records that the plaintiff had developed what it considered to be an appropriate transfer price, that the defendant agreed to the use of the comparative independent pricing method. The court’s remedy resulted from a difference in the criteria considered by the parties to eliminate the distorting effect of the differences. It may also be noted that in the decision of the Court of Appeal ordering a new trial in the main proceedings, the defendant excluded the application of the interquartile range correction criterion of narrowing the range around the midpoint. [29] Defendant used the data extracted by the plaintiff from the LoanConnector database to verify the transfer pricing. In its procedure, it considered the relevant aspects of the Directives to be relevant, according to the review request: in the expected audit practice, tax auditors should be flexible in their approach, take into account the business considerations of taxpayers and start their analysis from the perspective of the pricing method chosen by the taxpayer. If the taxpayer’s screening strategy is reproducible and the screening steps are suitable to produce a suitable sample for the transaction under consideration, the tax administration will use the taxpayer’s database screening as a basis. If, for any reason, the tax administration disputes the screening steps, it will attempt to make the necessary adjustments based on the taxpayer’s research to ensure that the results calculated from the improved sample are consistent with the market price principle. As a starting point, the tax administration does not therefore seek to determine the price or range of prices applicable to ...

The Swedish group TELE2, one of Europe’s largest telecommunications operators, had invested in an entity in Kazakhstan, MTS, that was owned via a joint venture together with an external party. Tele2 owned 51% of the Joint venture and MTS was financed by Tele2’s financing entity, Tele2 Treasury AB, which, during 2011-2015, had issued multiple loans to MTS. In September 2015, the currency on the existing internal loans to MTS was changed from dollars to KZT. At the same time a ‘Form of Selection Note’ was signed according to which Tele2 Treasury AB could recall the currency denomination within six months. A new loan agreement denominated in KZT, replacing the existing agreements, was then signed between Tele2 Treasury AB and MTS. In the new agreement the interest rate was also changed from LIBOR + 4.6% to a fixed rate of 11.5%. As a result of these contractual changes to the loan agreements with MTS, Tele2 Treasury AB in its tax filing deducted a total currency loss of SEK 1 840 960 000 million for FY 2015. Following an audit, the Swedish tax authorities issued an assessment where the tax deduction for the full amount had been disallowed. However, during the proceedings at Court the authorities acknowledged deductions for part of the currency loss – SEK 745 196 000 – related to the period between 22 October to 31 December 2015. Hence, at issue before the Court was disallowed deductions of the remaining amount of SEK 1 095 794 000. In a decision issued in 2021 the administrative court decided in favor of the tax authorities. “…there have been no reasons to assume that MTS has risked bankruptcy, and that the company’s right to interest and repayments would thus have been in jeopardy. Thus, MTS’s financial position cannot be a reason to believe that the currency conversion would have been commercially justified. With regard to commerciality, the court considers it strange that an independent lender would take great risks to secure the financing when the borrower and another external player are to carry out a merger. That the company assumed responsibility for getting MTS financing in place speak instead of that it was the financial interests of the common interests that prompted the decision to conduct currency conversion. The court thus considers that the company cannot be considered to have any significant interest in securing MTS financing. In this context, the company has stated that other companies within the Tele2 Group’s financial interests must be taken into account when assessing the current issue. However, as stated by the Administrative Court above, the relationship with any other companies in a partnership with the trader shall not be taken into account. In this context, the company has referred to the Court of Appeal in Gothenburg’s judgment of 30 September 2011 in case no. 5854-10. However, the Administrative Court cannot, based on the circumstances and reasoning in the judgment, read out any general conclusions that could provide support for the company’s view in the current cases. The Administrative Court therefore considers that the company’s reasons for the conversion cannot be considered to be any other than reasons attributable to the common interest with MTS.” An appeal was then filed by Tele2 with the Court of Appeal Decision of the Court of Appeal The Court set aside the decision of the administrative court and ruled in favor of the Tele2 Treasury AB. Excerpts: ” Although it may be considered somewhat remarkable that the revocation clause in the Form of Selection Note does not more clearly reflect the party intent and purpose that the company claims the clause has, the Court of Appeal considers that the company has provided a reasonable and probable explanation in this respect. The company’s evidence is also further strengthened by the evidence provided by Torkel Sigurd, who was involved in the business arrangement in question as a project manager. The Court of Appeal also considers that the alleged intention of the parties and the purpose of the withdrawal clause are supported by the chronology of events leading up to the buy-out of Asianet from MTS. When it became clear that the transaction would go ahead, the withdrawal clause was removed, moreover without changing the market interest rate on the loans to MTS. In addition, the Court of Appeal considers that there is some ambiguity in how the revocation clause should be read with regard to the possibility of revoking the conversion retroactively, i.e. with effect from 1 September 2015. In conclusion, the Court of Appeal considers that it is not clear that it has been a realistic option for the company to withdraw the conversion on the basis of the withdrawal clause. The fact that the company did not revoke the conversion cannot therefore be used as a basis for denying the company a deduction for the remaining exchange rate loss of SEK 1 095 764 000 after tax on the basis of the adjustment rule.” “The Administrative Court of Appeal considers that the company incurred a risk of foreign exchange losses through the conversion on 1 September 2015 due to the decoupling of the KZT from the USD. However, the decoupling took place on 20 August 2015, at which time the KZT exchange rate fell by approximately 30%. Subsequently, the exchange rate recovered and at the time of the conversion, according to the company’s report, which was not challenged by the Swedish Tax Agency, it was slightly higher than at the time of the decoupling from the USD. Although there must have been a significant risk of a further fall in the exchange rate, the Court of Appeal considers that KZT could not be considered to be in free fall at the time of conversion. Nor can it be considered that it was clear that it was highly unlikely that the conversion would not result in an exchange rate loss for the company. It also appears that a functioning banking and foreign exchange market existed in Kazakhstan after the KZT was ...

Assume that A and B are commonly controlled taxpayers and that the applicable Federal rate is 10 percent, compounded semiannually. On June 30, 1986, A sells property to B and receives in exchange B’s purchase-money note in the amount of $2,000,000. The stated interest rate on the note is 9%, compounded semiannually, and the stated redemption price at maturity on the note is $2,000,000. Assume that the other applicable Code section to this transaction is section 1274. As provided in section 1274A(a) and (b), the discount rate for purposes of section 1274 will be nine percent, compounded semiannually, because the stated principal amount of B’s note does not exceed $2,800,000. Section 1274 does not apply to this transaction because there is adequate stated interest on the debt instrument using a discount rate equal to 9%, compounded semiannually, and the stated redemption price at maturity does not exceed the stated principal amount. Under paragraph (a)(3)(iii) of this section, the district director may apply section 482 and paragraph (a) of this section to this $2,000,000 note to determine whether the 9% rate of interest charged is less than an arm’s length rate of interest, and if so, to make appropriate allocations to reflect an arm’s length rate of interest ...

X and Y are commonly controlled taxpayers. At a time when the applicable Federal rate is 12 percent, compounded semiannually, X sells property to Y in exchange for a note with a stated rate of interest of 18 percent, compounded semiannually. Assume that the other applicable Code section to the transaction is section 483. Section 483 does not apply to this transaction because, under section 483(d), there is no total unstated interest under the contract using the test rate of interest equal to 100 percent of the applicable Federal rate. Under paragraph (a)(3)(iii) of this section, section 482 and paragraph (a) of this section may be applied by the district director to determine whether the rate of interest under the note is excessive, that is, to determine whether the 18 percent stated interest rate under the note exceeds an arm’s length rate of interest ...

The facts are the same as in Example 2 except that the amount lent by Z to B is $9,000, and that amount is the aggregate outstanding amount of loans between Z and B. Under the $10,000 de minimis exception of section 7872(c)(3), no adjustment for interest will be made to this $9,000 loan under section 7872. Under paragraph (a)(3)(iii) of this section, the district director may apply section 482 and paragraph (a) of this section to this $9,000 loan to determine whether the rate of interest charged is less than an arm’s length rate of interest, and if so, to make appropriate allocations to reflect an arm’s length rate of interest ...

B, an individual, is an employee of Z corporation, and is also the controlling shareholder of Z. Z makes a term loan of $15,000 to B at a rate of interest that is less than the applicable Federal rate. In this instance the other operative Code section is section 7872. Under section 7872(b), the difference between the amount loaned and the present value of all payments due under the loan using a discount rate equal to 100 percent of the applicable Federal rate is treated as an amount of cash transferred from the corporation to B and the loan is treated as having original issue discount equal to such amount. Under paragraph (a)(3)(iii) of this section, section 482 and paragraph (a) of this section may also be applied by the district director to determine if the rate of interest charged on this $15,000 loan (100 percent of the AFR, compounded semiannually, as adjusted by section 7872) is an arm’s length rate of interest. Because the rate of interest on the loan, as adjusted by section 7872, is within the safe haven range of 100-130 percent of the AFR, compounded semiannually, no further interest rate adjustments under section 482 and paragraph (a) of this section will be made to this loan ...

An individual, A, transfers $20,000 to a corporation controlled by A in exchange for the corporation’s note which bears adequate stated interest. The district director recharacterizes the transaction as a contribution to the capital of the corporation in exchange for preferred stock. Under paragraph (a)(3)(i) of this section, section 1.482-2(a) does not apply to the transaction because there is no bona fide indebtedness ...

The principles of paragraph (a)(3) of this section may be illustrated by the following examples: ...

If the stated rate of interest on the stated principal amount of a loan or advance between controlled entities is subject to adjustment under section 482 and is also subject to adjustment under any other section of the Internal Revenue Code (for example, section 467, 483, 1274 or 7872), section 482 and paragraph (a) of this section may be applied to such loan or advance in addition to such other Internal Revenue Code section. After the enactment of the Tax Reform Act of 1964, Pub. L. 98-369, and the enactment of Pub. L. 99-121, such other Internal Revenue Code sections include sections 467, 483, 1274 and 7872. The order in which the different provisions shall be applied is as follows – (i) First, the substance of the transaction shall be determined; for this purpose, all the relevant facts and circumstances shall be considered and any law or rule of law (assignment of income, step transaction, etc.) may apply. Only the rate of interest with respect to the stated principal amount of the bona fide indebtedness (within the meaning of paragraph (a)(1) of this section), if any, shall be subject to adjustment under section 482, paragraph (a) of this section, and any other Internal Revenue Code section. (ii) Second, the other Internal Revenue Code section shall be applied to the loan or advance to determine whether any amount other than stated interest is to be treated as interest, and if so, to determine such amount according to the provisions of such other Internal Revenue Code section. (iii) Third, whether or not the other Internal Revenue Code section applies to adjust the amounts treated as interest under such loan or advance, section 482 and paragraph (a) of this section may then be applied by the district director to determine whether the rate of interest charged on the loan or advance, as adjusted by any other Code section, is greater or less than an arm’s length rate of interest, and if so, to make appropriate allocations to reflect an arm’s length rate of interest. (iv) Fourth, section 482 and paragraphs (b) through (d) of this section and §§ 1.482-3 through 1.482-7, if applicable, may be applied by the district director to make any appropriate allocations, other than an interest rate adjustment, to reflect an arm’s length transaction based upon the principal amount of the loan or advance and the interest rate as adjusted under paragraph (a)(3) (i), (ii) or (iii) of this section. For example, assume that two commonly controlled taxpayers enter into a deferred payment sale of tangible property and no interest is provided, and assume also that section 483 is applied to treat a portion of the stated sales price as interest, thereby reducing the stated sales price. If after this recharacterization of a portion of the stated sales price as interest, the recomputed sales price does not reflect an arm’s length sales price under the principles of § 1.482-3, the district director may make other appropriate allocations (other than an interest rate adjustment) to reflect an arm’s length sales price ...

The safe haven interest rates prescribed in paragraph (a)(2)(iii)(B) of this section do not apply to any loan or advance the principal or interest of which is expressed in a currency other than U.S. dollars ...

If the lender in a loan or advance transaction to which paragraph (a)(2) of this section applies is regularly engaged in the trade or business of making loans or advances to unrelated parties, the safe haven rates prescribed in paragraph (a)(2)(iii)(B) of this section shall not apply, and the arm’s length interest rate to be used shall be determined under the standards described in paragraph (a)(2)(i) of this section, including reference to the interest rates charged in such trade or business by the lender on loans or advances of a similar type made to unrelated parties at and about the time the loan or advance to which paragraph (a)(2) of this section applies was made ...

For purposes of paragraph (a)(2)(iii)(B) of this section, the term applicable Federal rate means, in the case of a loan or advance to which this section applies and having a term of – (1) Not over 3 years, the Federal short-term rate; (2) Over 3 years but not over 9 years, the Federal mid-term rate; or (3) Over 9 years, the Federal long-term rate, as determined under section 1274(d) in effect on the date such loan or advance is made. In the case of any sale or exchange between controlled entities, the lower limit shall be the lowest of the applicable Federal rates in effect for any month in the 3-calendar- month period ending with the first calendar month in which there is a binding written contract in effect for such sale or exchange (lowest 3-month rate, as defined in section 1274(d)(2)). In the case of a demand loan or advance to which this section applies, the applicable Federal rate means the Federal short-term rate determined under section 1274(d) (determined without regard to the lowest 3-month short term rate determined under section 1274(d)(2)) in effect for each day on which any amount of such loan or advance (including unpaid accrued interest determined under paragraph (a)(2) of this section) is outstanding ...

Except as otherwise provided in this paragraph (a)(2), in the case of a loan or advance between members of a group of controlled entities, an arm’s length rate of interest referred to in paragraph (a)(2)(i) of this section shall be for purposes of chapter 1 of the Internal Revenue Code – (1) The rate of interest actually charged if that rate is – (i) Not less than 100 percent of the applicable Federal rate (lower limit); and (ii) Not greater than 130 percent of the applicable Federal rate (upper limit); or (2) If either no interest is charged or if the rate of interest charged is less than the lower limit, then an arm’s length rate of interest shall be equal to the lower limit, compounded semiannually; or (3) If the rate of interest charged is greater than the upper limit, then an arm’s length rate of interest shall be equal to the upper limit, compounded semiannually, unless the taxpayer establishes a more appropriate compound rate of interest under paragraph (a)(2)(i) of this section. However, if the compound rate of interest actually charged is greater than the upper limit and less than the rate determined under paragraph (a)(2)(i) of this section, or if the compound rate actually charged is less than the lower limit and greater than the rate determined under paragraph (a)(2)(i) of this section, then the compound rate actually charged shall be deemed to be an arm’s length rate under paragraph (a)(2)(i). In the case of any sale-leaseback described in section 1274(e), the lower limit shall be 110 percent of the applicable Federal rate, compounded semiannually ...

The safe haven rates prescribed in paragraph (a)(2)(iii)(B) of this section shall not apply, and the safe haven rates prescribed in § 1.482-2(a)(2)(iii) (26 CFR part 1 edition revised as of April 1, 1985), shall apply to – (i) Term loans or advances made before May 9, 1986; and (ii) Term loans or advances made before August 7, 1986, pursuant to a binding written contract entered into before May 9, 1986 ...

Except as otherwise provided in paragraph (a)(2) of this section, paragraph (a)(2)(iii)(B) applies with respect to the rate of interest charged and to the amount of interest paid or accrued in any taxable year – (i) Under a term loan or advance between members of a group of controlled entities where (except as provided in paragraph (a)(2)(iii)(A)(2)(ii) of this section) the loan or advance is entered into after May 8, 1986; and (ii) After May 8, 1986 under a demand loan or advance between such controlled entities ...

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Notwithstanding the other provisions of paragraph (a)(2) of this section, if the loan or advance represents the proceeds of a loan obtained by the lender at the situs of the borrower, the arm’s length rate for any taxable year shall be equal to the rate actually paid by the lender increased by an amount which reflects the costs or deductions incurred by the lender in borrowing such amounts and making such loans, unless the taxpayer establishes a more appropriate rate under the standards set forth in paragraph (a)(2)(i) of this section ...

For purposes of section 482 and paragraph (a) of this section, an arm’s length rate of interest shall be a rate of interest which was charged, or would have been charged, at the time the indebtedness arose, in independent transactions with or between unrelated parties under similar circumstances. All relevant factors shall be considered, including the principal amount and duration of the loan, the security involved, the credit standing of the borrower, and the interest rate prevailing at the situs of the lender or creditor for comparable loans between unrelated parties ...

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This paragraph (a) does not apply to so much of an alleged indebtedness which is not in fact a bona fide indebtedness, even if the stated rate of interest thereon would be within the safe haven rates prescribed in paragraph (a)(2)(iii) of this section. For example, paragraph (a) of this section does not apply to payments with respect to all or a portion of such alleged indebtedness where in fact all or a portion of an alleged indebtedness is a contribution to the capital of a corporation or a distribution by a corporation with respect to its shares. Similarly, this paragraph (a) does not apply to payments with respect to an alleged purchase-money debt instrument given in consideration for an alleged sale of property between two controlled entities where in fact the transaction constitutes a lease of the property. Payments made with respect to alleged indebtedness (including alleged stated interest thereon) shall be treated according to their substance. See § 1.482-2(a)(3)(i) ...

Paragraph (a) of this section applies only to determine the appropriateness of the rate of interest charged on the principal amount of a bona fide indebtedness between members of a group of controlled entities, including – (1) Loans or advances of money or other consideration (whether or not evidenced by a written instrument); and (2) Indebtedness arising in the ordinary course of business from sales, leases, or the rendition of services by or between members of the group, or any other similar extension of credit ...

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Where one member of a group of controlled entities makes a loan or advance directly or indirectly to, or otherwise becomes a creditor of, another member of such group and either charges no interest, or charges interest at a rate which is not equal to an arm’s length rate of interest (as defined in paragraph (a)(2) of this section) with respect to such loan or advance, the district director may make appropriate allocations to reflect an arm’s length rate of interest for the use of such loan or advance ...

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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. Judgment 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 Polish company, “Shopping Centre Lender sp.k.”, had been granted three intra group loans in FY 2013 for a maximum amount of EUR 2 million, EUR 115 million and EUR 43.5 million. The interest rate on the loans had been set at 9%. The tax authorities found that the 9% interest rate was higher than the arm’s length rate, and issued an assessment where the interest rate had been lowered to 3.667%, resulting in lower interest expenses and thus additional taxable income. “Shopping Centre Lender sp.k.” filed an appeal with the Administrative Court claiming that the procedure for estimating income – determining the arm’s length interest rate – had not been conducted correctly by the tax authority. In a judgment issued in May 2019 (no. III SA/Wa 1777/18) the Administrative Court issued a judgment in favour of the company. An appeal was then filed by the tax authorities with the Supreme Administrative Court. Judgment of the Supreme Administrative Court The Supreme Administrative Court upheld the decision of the Administrative Court and dismissed the appeal of the tax authorities. Excerpts “In the opinion of the Supreme Administrative Court, the Court of First Instance made a proper assessment of the case submitted to its review. In the justification of the contested judgment, it presented the legal basis for the decision and its explanation, and within this framework it diagnosed the infringements committed by the authority and assessed their impact on the results of the case. It did so in a clear manner which makes it possible to review the grounds on which it was based. The conclusions formulated, as well as the objections to the proceedings conducted and the content of the decision concluding them, were presented in a reliable and comprehensive manner, in mutual confrontation of the state of the case, applicable legal norms and case-law. It indicated which provisions had been violated, which allegations of the complaint it considered justified and why. In the present case, the essence of the dispute essentially boiled down to determining whether the interest rate (9% p.a.) of the three loans concluded in 2013 for a maximum amount of EUR 2 million, EUR 115 million and EUR 43.5 million (in respect of which the total balance of liabilities as at 30 September 2014 amounted to almost PLN 623 million), which were granted to the Applicant by a related entity, was in line with market conditions, i.e. whether independent, rational entities would have agreed on an interest rate of that amount under comparable conditions. More generally, however, the issue in the case oscillated around so-called transfer pricing and generally – in view of the arguments now raised by the parties – boiled down to an assessment of whether, in fact, the procedure for estimating income [art. 11 of the AOP] had been conducted correctly, as the authority argued, or, as the Appellant and the Court argued, in breach of the provisions of the Act and the Ordinance.” “Referring in turn to the individual problems diagnosed by the WSA, it should be pointed out that this Court, taking into account the disposition arising from the content of Article 11(1) of the A.p.d.o.p., rightly emphasised that its application (in order to determine the income of a given entity and the tax due) requires a prior analysis of comparability. In order to determine what conditions would be set between independent entities, it is necessary to determine what transactions concluded by independent entities are comparable to the transaction assessed from the point of view of Article 11(1) of the A.l.t.d.o.p., which requires a prior comparability analysis. Such an analysis is always conducted, as it serves the purpose of determining whether the prerequisite for estimating income (and the tax due) under Article 11(1) of the A.l.t.c. has been fulfilled. This conclusion is also confirmed by the above-mentioned § 6(1) of the Ordinance, The comparability analysis precedes the assessment, regardless of the method of assessment that would ultimately be applied. On the other hand, § 21 of the Ordinance (Chapter 5) indicates how to estimate income in the case of the specific benefits specified therein (loan or credit). One must agree with the Court of First Instance that the application of Article 11(1) of the A.P.C. requires a prior comparability analysis in respect of the loans in question. A properly conducted comparability analysis should consist of the steps listed in § 6(4) of the Ordinance and establish the relevant comparability factors (§ 21(3) of the Ordinance, which uses the term “relevant circumstances relating to a particular case”) arising from § 6(3) and § 21(3) of the Ordinance.” “The point is that it is not a matter of carrying out any comparability analysis, but rather one consisting precisely of the steps listed in § 6(4) of the Ordinance and establishing the relevant comparability factors arising from § 6(3) and § 21(3) of the Ordinance. As the Court of First Instance aptly pointed out, § 6(4) lists the consecutive stages comprising the comparability analysis, of which the first two in particular include – a general analysis of information concerning the taxpayer and its economic environment (stage one) and an analysis of the terms and conditions established or imposed between related parties, in particular on the basis of the functions they perform, the assets involved and the risks incurred, as a result of which economically relevant factors in the circumstances of the case under review should be identified (stage two). In the realities of this case, the Court of First Instance correctly held that the authority, in its decision issued pursuant to Article 11(1) of the A.p.d.o.p. – taking into account the aforementioned provisions of the Ordinance – in carrying out the comparability analysis was obliged to carry out the individual stages and identify the relevant comparability factors, and this should have been appropriately reflected in the wording of the decision. And although one has to agree with the authority that the Regulation does not indicate the necessity of drawing up the analysis in the ...

D. Sp. z oo had deducted interest expenses on intra-group loans and expenses related to intra-group services in its taxable income for FY 2015. The loans and services had been provided by a related party in Delaware, USA. Following a inspection, the tax authority issued an assessment where deductions for these costs had been denied resulting in additional taxable income. In regards to the interest expenses the authority held that the circumstances of the transactions indicated that they were made primarily in order to achieve a tax advantage contrary to the object and purpose of the Tax Act (reduction of the tax base by creating a tax cost in the form of interest on loans to finance the purchase of own assets), and the modus operandi of the participating entities was artificial, since under normal trading conditions economic operators, guided primarily by economic objectives and business risk assessment, do not provide financing (by loans or bonds) for the acquisition of their own assets, especially shares in subsidiaries, if these assets generate revenue for them. In regards to support services (management fee) these had been classified by the group as low value-added services. It appeared from the documentation, that services concerned a very large number of areas and events that occurred in the operations of the foreign company and the entire group of related entities. The US company aggregated these expenses and then, according to a key, allocated the costs to – among others – Sp. z o.o. The Polish subsidiary had no influence on the amount of costs allocated or on the verification of such costs. Hence, according to the authorities, requirements for tax deduction of these costs were not met. An appeal was filed by D. Sp. z oo with the Administrative Court requesting that the tax assessment be annulled in its entirety and that the case be remitted for re-examination or that the proceedings in the case be discontinued. Judgment of the Administrative Court The Court dismissed the complaint of D. Sp. z oo and upheld the assessment issued by the tax authorities. Excerpt in regards of interest on intra-group loans “The authorities substantively, with reference to specific evidence and figures, demonstrated that an independent entity would not have agreed to such interest charges without obtaining significant economic benefits, and that the terms of the economic transactions adopted by the related parties in the case at hand differ from the economic relations that would have been entered into by independent and market-driven entities, rather than the links existing between them. One must agree with the authority that a loan granted to finance its own assets is free from the effects of the borrower’s insolvency, the lender does not bear the risk of loss of capital in relation to the subject matter of the loan agreement, since, in principle, it becomes the beneficiary of the agreement. This in turn demonstrates the non-market nature of the transactions concluded. The lack of market character of the transactions demonstrated by the authorities cannot be justified by the argumentation about leveraged buyout transactions presented in the complaint (page 9). This is because the tax authorities are obliged to apply the provisions of tax law, which in Article 15(1) of the A.l.p. outline the limits within which a given expense constitutes a tax deductible cost. In turn, Article 11 of the A.l.t.d.o.p. specifies premises, the occurrence of which does not allow a given expense to be included in tax deductible costs. This is the situation in the present case. Therefore, questioning the inclusion of the above-mentioned interest as a tax deductible cost, the authorities referred to Article 11(1), (2), (4) and (9) of the A.p.d.o.p. and § 12(1) and (2) of the Ordinance of the Minister of Finance of 10 September 2009 and the findings of the OECD contained in para. 1.65 and 1.66 of the “Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations” (the Guidelines were adopted by the OECD Committee on Fiscal Affairs on […] and approved for publication by the OECD Council on […]). According to these guidelines: 1.65. – However, there are two specific situations where, exceptionally, it may be appropriate and justified for a tax administration to consider ignoring the construction adopted by the taxpayer when entering into a transaction between associated enterprises. The first arises when the economic substance of the transaction differs from its form. In this case, the tax administration may reject the parties’ qualification of the transaction and redefine it in a manner consistent with its substance. An example could be an investment in a related company in the form of interest-bearing debt, and according to the principle of the free market and taking into account the economic situation of the borrowing company, such a form of investment would not be expected. In this case, it might be appropriate to define the investment according to its economic substance – the loan could be treated as a subscription to capital. Another situation arises where the substance and form of the transaction are consistent with each other, but the arrangements made in connection with the transaction, taken as a whole, differ from those that would have been adopted by commercially rational independent companies, and the actual structure of the transaction interferes with the tax administration’s ability to determine the appropriate transfer price; 1.66. – In both of the situations described above, the nature of the transaction may derive from the relationship between the parties rather than be determined by normal commercial terms, or it may be so structured by the taxpayer to avoid or minimise tax. In such cases, the terms of the transaction would be unacceptable if the parties were transacting on a free market basis. Article 9 of the OECD Model Convention, allows the terms and conditions to be adjusted in such a way that the transaction is structured in accordance with the economic and commercial realities of the parties operating under the free market principle. Bearing in mind the aforementioned guidelines, in the ...

“XZ SA” is a Spanish parent of a tax consolidation group which is part of a multinational group. The Spanish group participates in the group’s cash pooling system, both as a borrower and as a provider of funds. The objective of cash pooling agreements is to manage the cash positions of the participating entities, optimising the group’s financial results by channelling the excess liquidity of the group companies that generate it to the group companies that need financing, resorting to third-party financing when the group itself is not able to finance itself. This achieves greater efficiency in the use of the group’s funds, as well as improving their profitability and reducing the administrative and general financial costs of the entities participating in the agreement. The tax authorities issued an assessment in which the interest rates on deposits and withdraws had been aligned and determined based on a group credit rating. A complaint was filed with the TEAC by XZ SA. Judgment of the TEAC The TEAC dismissed the complaint and upheld the tax assessment. The asymmetry in the treatment given by the taxpayer to credit and debit transactions in cash pooling is not admissible: As this system is configured, both types of transactions should have the same treatment; The analysis of the logic and philosophy that exists in transactions with financial institutions is not transferable to the cash pooling transactions involved here; in this, transactions that are channelled through the leading entity of the cash pooling, it follows from the functional analysis that it acts as a service provider managing and administering the cash pooling, but not as a credit institution that would assume the consequences of the contributions and drawdowns to/from the cash pool. And all the companies that are part of the cash pooling can be either contributors or receivers of funds, without it being generally known a priori what the debit or credit position of each of them will be. Reference is made to previous case law – TEAC, Case Rec. 6537/2017 and Supreme Court ruling of 5 November 2020 (appeal 3000/2018). Click here for English translation Click here for other translation ...

Following an audit, Mauser S.p.A. received four notices of assessment relating to the tax periods from 2004 to 2007. These notices contested, in relation to all tax periods, the elusive purpose of a financing operation of Mauser S.p.A. by the non-resident parent company, as it was aimed at circumventing the non-deductibility of interest expense pursuant to Article 98 pro tempore of Presidential Decree No. 917 of 22 December 1986 (TUIR) on the subject of thin capitalisation. The loan, which began in 2004, had resulted in the recognition of €25,599,000.00 among other reserves, indicated as a payment on account of a future capital increase, as well as €55,040,474.29 as an interest-bearing shareholder loan, the latter of which was subsequently partly waived and also transferred to reserves. The loan had also contributed to the generation of losses in the years in question, which had been covered through the use of the aforementioned reserve (as a reserve), whose interest paid to the parent company had then been deducted from taxable income. According to the tax authorities the payment on account of a future capital increase constituted a financial debt towards the sole shareholder and not (as indicated by the taxpayer) a capital contribution, which therefore would not have contributed to the determination of the relevant net equity pursuant to Article 98 TUIR; as a result, the equity imbalance between loans and adjusted net equity pursuant to Article 98, paragraphs 1 and 2, letter a) TUIR pro tempore (net equity increased by the capital contributions made by the shareholder) would have been configured. Consequently, the tax authorities had concluded that the financing transaction as a whole was elusive in nature, as it was of a financial nature and aimed at circumventing the prohibition of the remuneration of the shareholders’ loan in the presence of the thin capitalisation requirements. With the notice relating to the 2006 tax year, Mauser S.p.A. was also charged with a second finding, relating to the infringement of the transfer pricing provisions pursuant to Article 110, paragraph 7 in relation to transactions involving the sale of intra-group assets. The tax authorities, while noting that Mauser S.p.A. had used the cost-plus computation method for the purpose of the correct application of the OECD rules on transfer pricing, had observed that following the merger of Gruppo Maschio SPA – for whose acquisition the above mentioned financing was intended – a merger deficit had resulted, partly allocated to goodwill of the target company. The tax authorities considered that the portion of goodwill amortisable for the year 2006 should be included in the cost base, increasing the percentage of overhead costs as a percentage of production costs, contributing to increase the total cost for the purpose of determining the arm’s length remuneration. Mauser S.p.A. raised preliminary issues relating to the breach of the preventive cross-examination procedure and the forfeiture of the power of assessment, considering the provision of Article 37-bis of Presidential Decree No. 600 of 29 September 1973 to be inapplicable to the case at hand, and also considering the existence of valid economic reasons consisting in the purpose of the acquisition of the company, which was then effectively merged. He then deduced that the method of calculating the transfer prices was erroneous insofar as the Office had included the amortisation quota of the goodwill allocated to the merger deficit. The C.T.P. of Milan upheld the merits of the joined appeals of Mauser S.p.A. An appeal was then filed by the tax authorities and in a ruling dated 19 May 2015, the Lombardy Regional Administrative Court decided in favour of the tax authorities, holding that the loans “were not used in accordance with the rules envisaged in such cases, but were instead used to cover the company’s losses”, and then held that the transfer price recovery was also correct, on the assumption that the amortisation of goodwill was legitimate. Mauser S.p.A. then filed an appeal with the Supreme Court, relying on six grounds. In the first ground of appeal Mauser S.p.A. points out that the grounds of the judgment do not contain adequate evidence of the logical path followed, also in view of the failure to transcribe the judgment at first instance and the arguments of the parties, as well as the statement of the facts of the case. Mauser S.p.A. observes that the confirmation of the finding as to the evasive nature of the financing transaction shows mere adherence to the position of one of the parties to the proceedings without any statement of reasons, nor does it consider what the regulatory provisions subject to assessment would be in relation to both profiles. It also observes how the reasoning relating to the confirmation of the transfer pricing relief refers to facts other than those alleged by the Office. Judgment of the Supreme Court The Supreme Court upheld the first ground of appeal and declared the other grounds of appeal to be absorbed; set aside the judgment under appeal and refered the case back to the Lombardy Regional Administrative Court, in a different composition. Excerpts “The first ground is well founded, agreeing with the conclusions of the Public Prosecutor. The two recoveries made by the Office presuppose – the first – the qualification (for the purposes of the financial imbalance referred to in Art. The two recoveries made by the Office presuppose – the first – the classification (for the purposes of the financial imbalance referred to in Article 98 TUIR pro tempore) of the future capital contribution made by the sole shareholder of the taxpayer company as a debt item and not as a capital reserve item (entered among the other reserves), a fundamental circumstance for the purposes of considering whether or not it contributes to the portion of adjusted shareholders’ equity ‘increased by the capital contributions made by the same shareholder’, capable of constituting the financial imbalance referred to in Article 98 TUIR cited above. Similarly (considering that the Office has moved in the direction of an overall elusive activity), proof is ...

In 2009 the English company EDF Energy UK Ltd (EDFE), a wholly-owned subsidiary of SAS Electricité de France International (SAS EDFI), issued 66,285 bonds convertible into shares (OCAs) for a unit nominal value of EUR 50,000. SAS EDFI subscribed to all of these OCAs for their nominal value, i.e. a total subscription price of EUR 3,314,250,000. The OCAs had a maturity of five years, i.e. until October 16, 2014, and could be converted into new EDFE shares at the instigation of the subscriber at any time after a three-year lock-up period, i.e. from October 16, 2012. Each bond entitled the holder to receive 36,576 EDFE shares after conversion. The annual coupon for the OCAs was set at 1.085%. In this respect, SAS EDFI determined, on the basis of a panel of bond issues of independent comparables, the arm’s length rate that should be applied to conventional bonds, i.e. 4.41% (mid-swap rate and premium of 1.70%), 490 million according to the “Tsiveriotis and Fernandes” model, so that the sum of the present value of the flows of the “debt” component of the bond and the value of the “conversion” option is equal to the subscription price of the OCAs. SAS EDFI recognised the annual interest received at a rate of 1.085% on the bonds as income, thus subject to corporate income tax, i.e. 36 million euros.. The tax authorities considered that the “conversion” component had a zero value for SAS EDFI and that, given the terms of the loan – in this case, via the OCA mechanism – and the context of the issuance transaction, the reduction in the interest rate applied compared with the arm’s length rate of 4.41% to which SAS EDFI was entitled, made it possible to achieve a transfer of profits, In the case of SAS EDFI, the difference between the interest rate of 4.41% and the rate corresponding to the actual remuneration recorded had to be reintegrated in order to determine its taxable income. Before the appeal judge, the Minister of Action and Public Accounts contested any value to the “conversion” component on the double ground, on the one hand, that the OCAs issued by EDFE having been subscribed by its sole shareholder, the financial profit that SAS EDFI can hope to make by subscribing and then converting the OCAs into new shares mechanically has a value of zero, since it would be offset by a loss of the same amount on the value of the EDFE shares held prior to this conversion, and on the other hand, that since the OCAs issued by EDFE were subscribed by its sole shareholder, the financial benefit that SAS EDFI can hope to make by subscribing and then converting the OCAs into new shares has a value of zero, since it would be offset by a loss of the same amount on the value of the EDFE shares held before this conversion, on the other hand, since the objective sought by SAS EDFI was not that of a “classic” financial investor and the decision to convert or not the OCAs into new shares will not be taken solely in the interest of the subscriber with a view to maximising his profit, the valuation of the “conversion” component of the OCAs based solely on such an interest is not relevant and, since the financial impact of a conversion was then random, this component must necessarily be given a value close to zero. Not satisfied with the assessment, Electricité de France brought the case to court. The Court of first instance held in favour of the tax authorities. An appeal was then filed by Electricité de France with the CAA. Decision of the Court of Appeal The Court overturned the decision from the court of first instance and found in favor of Electricité de France. “…since the Minister for Public Action and Accounts does not justify the zero value of the ‘conversion’ component he refers to, SA EDF and SAS EDFI are entitled to maintain that he was wrong to consider that, by subscribing to the OCAs issued by EDFE, for which the interest rate applied was 1.085% and not the borrowing rate for traditional bonds of 4, 41%, SAS EDFI had transferred profits to its subsidiary under abnormal management conditions, and the amounts corresponding to this difference in rates had to be reintegrated to determine its taxable results pursuant to Article 57 of the General Tax Code and, for EDFE, represented hidden distributions within the meaning of c. of article 111 of the same code which must be subject to the withholding tax mentioned in 2. of article 119 bis of the same code” Click here for English translation Click here for other translation ...

Such an approach would represent a departure from an arm’s length approach based on comparability since it is not based on comparison of actual transactions. Furthermore, it is also important to bear in mind the fact that such letters do not constitute an actual offer to lend. Before proceeding to make a loan, a commercial lender will undertake the relevant due diligence and approval processes that would precede a formal loan offer. Such letters would not therefore generally be regarded as providing evidence of arm’s length terms and conditions ...

In some circumstances taxpayers may seek to evidence the arm’s length rate of interest on an intra-group loan by producing written opinions from independent banks, sometimes referred to as a “bankability” opinion, stating what interest rate the bank would apply were it to make a comparable loan to that particular enterprise ...

The reliability of economic models’ outcomes depends upon the parameters factored into the specific model and the underlying assumptions adopted. In evaluating the reliability of economic models as an approach to pricing intra-group loans it is important to note that economic models’ outcomes do not represent actual transactions between independent parties and that, therefore, comparability adjustments would be likely required. However, in situations where reliable comparable uncontrolled transactions cannot be identified, economic models may represent tools that can be usefully applied in identifying an arm’s length price for intra-group loans, subject to the same constraints regarding market conditions discussed in paragraph 10.98 ...

In their most common variation, economic models calculate an interest rate through a combination of a risk-free interest rate and a number of premiums associated with different aspects of the loan – e.g. default risk, liquidity risk, expected inflation or maturity. In some instances, economic models would also include elements to compensate the lender’s operational expenses ...

Certain industries rely on economic models to price intra-group loans by constructing an interest rate as a proxy to an arm’s length interest rate ...

Accordingly, the use of credit default swaps to approximate the risk premium associated to intra- group loans will require careful consideration of the above-mentioned circumstances to arrive at an arm’s length interest rate ...

As financial instruments traded in the market, credit default swaps may be subject to a high degree of volatility. This volatility may affect the reliability of credit default swaps as proxies to measure the credit risk associated to a particular investment in isolation, since the credit default spreads may reflect not only the risk of default but also other non-related factors such as the liquidity of the credit default swaps contracts or the volume of contracts negotiated. Those circumstances could lead to situations where, for instance, the same instrument may have different credit default swaps spreads ...

Credit default swaps reflect the credit risk linked to an underlying financial asset. In the absence of information regarding the underlying asset that could be used as a comparable transaction, taxpayers and tax administrations may use the spreads of credit default swaps to calculate the risk premium associated to intra-group loans ...

In some intra-group transactions, the cost of funds approach may be used to price loans where capital is borrowed from an unrelated party which passes from the original borrower through one or more associated intermediary enterprises, as a series of loans, until it reaches the ultimate borrower. In such cases, where only agency or intermediary functions are being performed, as noted at paragraph 7.34, “it may not be appropriate to determine the arm’s length pricing as a mark-up on the costs of the services but rather on the costs of the agency function itself.” ...

The application of the cost of funds approach requires consideration of the options realistically available to the borrower. On prevailing facts and circumstances, a borrowing MNE would not enter into a transaction priced under the cost of funds approach if it could obtain the funding under better conditions by entering into an alternative transaction ...

One consideration to be kept in mind with the cost of funds approach is that it should be applied by considering the lender’s cost of funds relative to other lenders operating in the market. The cost of funds can vary between different prospective lenders, so the lender cannot simply charge based on its cost of funds, particularly if there is a potential competitor who can obtain funds more cheaply. A lender in a competitive market may seek to price at the lowest possible rate in order to win business. In the commercial environment, this will mean that lenders drive operating costs as low as possible and seek to minimise the cost of obtaining funds to lend ...

In the absence of comparable uncontrolled transactions, the cost of funds approach could be used as an alternative to price intra-group loans in some circumstances. The cost of funds will reflect the borrowing costs incurred by the lender in raising the funds to lend. To this would be added the expenses of arranging the loan and the relevant costs incurred in servicing the loan, a risk premium to reflect the various economic factors inherent in the proposed loan, plus a profit margin, which will generally include the lender’s incremental cost of the equity required to support the loan ...

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 ...

Whereas it is unlikely that an MNE group’s average interest rate paid on its external debt meets the comparability requirements to be considered as an internal CUP, it may be possible to identify potential comparable loans within the borrower’s or its MNE group’s financing with an independent lender as the counterparty. As with external CUPs, it may be necessary to make appropriate adjustments to improve comparability. See Example 1 at 1.164 – 1.166 ...

When considering issues of comparability, the possibility of internal CUPs should not be overlooked ...

Arm’s length interest rates can also be based on the return of realistic alternative transactions with comparable economic characteristics. Depending on the facts and circumstances, realistic alternatives to intra-group loans could be, for instance, bond issuances, loans which are uncontrolled transactions, deposits, convertible debentures, commercial papers, etc. In the evaluation of those alternatives as potential comparables it is important to bear in mind that, based on facts and circumstances, comparability adjustments may be required to eliminate the material effects of differences between the controlled intra-group loan and the selected alternative in terms of, for instance, liquidity, maturity, existence of collateral or currency ...

In the search for comparability data, a comparable is not necessarily restricted to a stand-alone entity. In examining commercial loans, where the potentially comparable borrower is a member of an MNE group and has borrowed from an independent lender, provided all other economically relevant conditions are sufficiently similar, a loan to a member of a different MNE group or between members of different MNE groups could be a valid comparable ...

The arm’s length interest rate for a tested loan can be benchmarked against publicly available data for other borrowers with the same credit rating for loans with sufficiently similar terms and conditions and other comparability factors. With the extent of competition often present within lending markets, it might be expected that, given the characteristics of the loan (amount, maturity, currency, etc.) and the credit rating of the borrower or the rating of the specific issuance (see Section C.1.1.2.), there would be a single rate at which the borrower could obtain funds and a single rate at which a lender could invest funds to obtain an appropriate reward. In practice, however, there is unlikely to be a single “market rate” but a range of rates although competition between lenders and the availability of pricing information will tend to narrow the range ...

The widespread existence of markets for borrowing and lending money and the frequency of such transactions between independent borrowers and lenders, coupled with the widespread availability of information and analysis of loan markets may make it easier to apply the CUP method to financial transactions than may be the case for other types of transactions. Information available often includes details on the characteristics of the loan and the credit rating of the borrower or the rating of the specific issuance. Characteristics which will usually increase the risk for the lender, such as long maturity dates, absence of security, subordination, or application of the loan to a risky project, will tend to increase the interest rate. Characteristics which limit the lender’s risk, such as strong collateral, a high quality guarantee, or restrictions on future behaviour of the borrower, will tend to result in a lower interest rate ...

Once the actual transaction has been accurately delineated, arm’s length interest rates can be sought based on consideration of the credit rating of the borrower or the rating of the specific issuance taking into account all of the terms and conditions of the loan and comparability factors ...

The following paragraphs present different approaches to pricing intra-group loans. As in any other transfer pricing situation, the selection of the most appropriate method should be consistent with the actual transaction as accurately delineated, in particular, through a functional analysis (see Chapter II) ...

Under these circumstances the interest rate charged on the loan by T to S is an arm’s length interest rate because (i) it is the same rate charged to S by an independent lender in a comparable transaction; and (ii) no payment or comparability adjustment is required for the group synergy benefit that gives rise to the ability of S to borrow from independent enterprises at an interest rate lower than it could were it not a member of the group because the synergistic benefit of being able to borrow arises from S’s group membership alone and not from any deliberate concerted action of members of the MNE group ...

Assume that S borrows EUR 50 million from an independent lender at the market rate of interest for borrowers with an A credit rating. Assume further that S simultaneously borrows EUR 50 million from T, another subsidiary of P, with similar characteristics as the independent lender, on the same terms and conditions and at the same interest rate charged by the independent lender (i.e. an interest rate premised on the existence of an A credit rating). Assume further that the independent lender, in setting its terms and conditions, was aware of S’s other borrowings including the simultaneous loan to S from T ...

P is the parent company of an MNE group engaging in a financial services business. The strength of the group’s consolidated balance sheet makes it possible for P to maintain an AAA credit rating on a consistent basis. S is a member of the MNE group engaged in providing the same type of financial services as other group members and does so on a large scale in an important market. On a stand-alone basis, however, the strength of S’s balance sheet would support a credit rating of only Baa. Nevertheless, because of S’s membership in the P group, large independent lenders are willing to lend to it at interest rates that would be charged to independent borrowers with an A rating, i.e. a lower interest rate than would be charged if S were an independent entity with its same balance sheet, but a higher interest rate than would be available to the parent company of the MNE group ...

Apex Tool Holding France acquired all the shares of Cooper Industrie France, which has since become Apex Tool France. This transaction was financed by a ten-year vendor loan at a rate of 6%. This claim on Apex Tool Holding France was transferred on the same day by the seller to the parent company of this company, which is the head of a global group specialising in tool manufacturing and thus, from that date, the creditor of its subsidiary. Apex Tool Holding France reintegrated the fraction of interest relating to this intra-group loan exceeding the average annual effective rate charged by credit institutions for variable-rate loans granted to companies into its income for the years 2011 to 2013. Apex considered that an interest rate of 6 % was in line with that which it could have obtained from independent financial institutions or organisations under similar conditions. The analysis was set aside by the tax authorities and an assessment was issued where the deduction of interest had been reduced. Apex filed an appeal with the Administrative Court of Appeal. The Court found in favor of the tax authorities in a decision issued in March 2020. An appeal was then filed by Apex with the Supreme Court. Judgment of the Court The Supreme Court set aside the decision of the Court of Appeal and issued a decision in favor of Apex Tool Group. Excerpts (Unofficial English translation) “3. It is clear from the documents in the file submitted to the trial judges that in order to establish that the rate of 6% at which ATFH1 had paid the loan granted to it by its parent company, which was higher than the rate provided for in the first paragraph of 3° of 1 of Article 39 of the General Tax Code, was not higher than the rate that this company would have obtained from an independent financial institution, the applicant company relied on an initial study drawn up by its counsel. In the absence of previous loans obtained by ATFH1 in 2010, this study first determined the credit rating of the intra-group loan in dispute according to the methodology published by the rating agency Moody’s for the analysis of industrial companies, which took into account the company’s profile, in particular with regard to market data, its size, its profitability, the leverage effect and its financial policy. The rating was set at “BB+”. The study then compared ATHF’s interest rate of 6% with the rates of bond issues over the same period with comparable credit ratings, using data available in the Bloomberg database. The company also relied on an additional study that analysed the arm’s length rate in a sample of bank loans to companies in the non-financial sector with credit ratings ranging from ‘BBB-‘ to ‘BB’. 4. Firstly, in holding that the credit rating assigned to the intra-group loan granted to ATFH1 by the first study in accordance with the methodology set out in point 3 did not reflect the intrinsic situation of that company on the grounds that it had been determined by taking into account the aggregate financial statements of the group that ATHF1 formed with its subsidiaries and sub-subsidiaries whereas, as stated in point 2, for the application of the provisions of Articles 39 and 212 of the General Tax Code, the profile of the borrowing company must in principle be assessed in the light of the financial and economic situation of the group that this company forms with its subsidiaries, the Court erred in law. 5. Secondly, it is clear from the documents in the file submitted to the court that the sample of comparable companies used in the supplementary study, the relevance of which had not been contested by the administration, concerned companies in the non-financial sector such as ATFH1 and which had obtained credit ratings ranging from “BBB-” to “BB”, i.e. one notch above and below the “BB+” credit rating determined for the loan in question in the first study. In dismissing this additional study on the sole ground that the companies in the sample belonged to heterogeneous sectors of activity and that, consequently, it was not established that, for a banker, they would have presented the same level of risk as that of ATFH1, whereas the credit rating systems developed by the rating agencies aim to compare the credit risks of the rated companies after taking into account, in particular, their sector of activity, the Court erred in law. “ Click here for English translation Click here for other translation ...

In 2009, 2010 and 2011 BSA Finances received a total of five loans granted by the Luxembourg company Nethuns, which belongs to the same group (the “Lactalis group”). Depending on the date on which the loans were granted, they carried interest rates of respectively 6.196%, 3.98% and 4.52%. Following an audit covering the FY 2009 to 2011, the tax authorities considered that BSA Finances did not justify that the interest rates thus charged should exceed the average effective rates charged by credit institutions for variable-rate loans to companies with an initial term of more than two years. Hence, the portion of interest exceeding these rates was considered non-deductible pursuant to the provisions of Article 212(I) of the General Tax Code. In 2017, the  Administrative Court ruled in favor of BSA Finances and discharged the additional corporate tax. But this decision was appealed by the authorities to the Administrative Court of Appeal which in  June 2019 overturned the decision of the lower court. The Judgment from the Administrative court of Appels was then appealed by BSA Finances to the French Supreme Administrative Court. The Supreme Administrative Court overturned the decision from the Court of Appeal and remanded the case to the Court of Appeal. “In considering that the company had not established that the margin rates applied were in line with market rates for loans made under the same conditions, whereas the Riskcalc application, which it was not disputed was fed from the company’s balance sheets and profit and loss accounts over several years, had classified its level of risk as “BBB/BBB-” on the basis of comparative ratios established by Moody’s, that the refinancing contracts produced, which made it possible to determine the actual margin rate of the loans taken out by the applicant company itself, were accompanied by details making it possible to compare the main specific conditions with the clauses of the loans in dispute and that, lastly, the combination of these elements was such as to justify, in the absence of any element to the contrary, that the credit margins applied by Nethuns were in line with market practices, the Court distorted the documents in the file submitted for its assessment.” Judgment of the Court of Appeal The court ruled in favor of BSA stating that a scoring obtained by using automated tools such as RiskCalc is inherently less accurate than the actual rating a proper rating agency the fact such a scoring is less accurate does not mean that it can be disregarded systematically. in the absence of any valid criticism of the scoring by the tax authorities, it was an acceptable proof “10. After the Conseil d’Etat, in its decision of 11 December 2020, annulled the judgment of the Court of Appeal of 25 June 2019 on the grounds that the combination of elements attesting to a rating of the company’s risk by means of a publicly accessible financial tool, namely the RiskCalc software developed by the rating agency Moody’s, which it was not disputed was fed from the company’s balance sheets and profit and loss accounts over several years, and the syndicated contracts entered into with the company, which were not the subject of a complaint, was not sufficient to justify the decision, and the syndicated contracts concluded with financial organisations in 2010 and 2011 were such as to justify, in the absence of any evidence to the contrary, that the credit margins applied by Nethuns were in line with market practices, the Minister for Economic Affairs, The Minister of the Economy, Finance and Recovery reiterated his criticism of the RiskCalc software, arguing that it covers only a small fraction of the methodology used by the rating agencies, so that it provides only a measure of the probability of default that is meaningful only in relation to the scale of default probabilities created by the software itself. It questions the relevance of the model for entities such as SNC BSA Finances insofar as it is based on data from companies with gross assets of less than EUR 10 million, and is therefore not relevant to global groups. It also stresses the inadequacy of the information provided by the methodologies published by Moody’s regarding the adjustments allowed by the software and their potential impact on the rating, even though these adjustments may be significant, particularly in terms of taking into account the support of the parent company or the special treatment of shareholder loans. 11. However, on the one hand, SA BSA argues, without being challenged, that the ‘BBB/BBB-‘ ratings used correspond to a ‘conservative’ analysis based on ratings that are less downgraded than those of SNC BSA Finances with regard to the rating of its main partner, known as a corroborative economic analysis, so that, having itself made the necessary adjustments, the argument based on the failure to take account of the group’s support in determining the rating is, in any event, lacking in fact. The Minister does not mention, in detail, any other form of data restatement, in particular as regards a possible ‘special treatment of shareholder loans’, which would have been necessary in this case. On the other hand, SA BSA argues, again without being challenged, that if the model is established with regard to a sample drawn up by Moody’s showing the balance between small and large companies, it does not lead to an under-representation of the latter given their economic weight. Finally, in a more general way, it is certainly constant that the ratings obtained from tools of the trade make it possible to attribute a rating to a specific loan that is more approximate than a credit rating that could be carried out by a rating agency for a given borrower. Nevertheless, while SA BSA argues without being challenged that the use of a rating agency is not intended to apply, given its cost, in an intra-group transaction, the rating provided in this case by RiskCalc can be considered sufficiently reliable to justify the profile of SNC BSA Finances and ...

An assessment was issued for FY 2017, whereby additional income tax was imposed on “GSS Ltd” in the amount of 843.344,38 €, plus a fine of 421.672,19 €, i.e. a total amount of 1.265.016,57 €. Various adjustments had been made and among them interest rates on intra group loans, royalty payments, management fees, and losses related to disposal of shares. Not satisfied with the assessment, an appeal was filed by “GSS Ltd.” Judgment of the Tax Court The court dismissed the appeal of “GSS Ltd.” and upheld the assessment of the tax authorities Excerpts “Because only a few days after the entry of the holdings in its books, it sold them at a price below the nominal value of the companies’ shares, which lacks commercial substance and is not consistent with normal business behaviour. Since it is hereby held that, by means of the specific transactions, the applicant indirectly wrote off its unsecured claims without having previously taken appropriate steps to ensure its right to recover them, in accordance with the provisions of para. 4 of Article 26 of Law 4172/2013 and POL 1056/2015. Because even if the specific actions were suggested by the lending bank Eurobank, the applicant remains an independent entity, responsible for its actions vis-à-vis the Tax Administration. In the absence of that arrangement, that is to say, in the event that the applicant directly recognised a loss from the write-off of bad debts, it would not be tax deductible, since the appropriate steps had not been taken to ensure the right to recover them. Because on the basis of the above, the audit correctly did not recognise the loss on sale of shareholdings in question. The applicant’s claim is therefore rejected as unfounded.” “Since, as is apparent from the Audit Opinion Report on the present appeal to our Office, the audit examined the existence or otherwise of comparable internal data and, in particular, examined in detail all the loan agreements submitted by the applicant, which showed that the interest rates charged to the applicant by the banks could not constitute appropriate internal comparative data for the purpose of substantiating the respective intra-group transactions, since the two individual stages of lending differ as to the nature of the transactions. (a) the existence of contracts (the bank loans were obtained on the basis of lengthy contracts, unlike the loans provided by the applicant for which no documents were drawn up, approved by the Board of Directors or general meetings), (b) the duration of the credit (bank loans specify precisely the time and the repayment instalments, unlike the applicant’s loans which were granted without a specific repayment schedule), (c) the interest rate (bank loans specify precisely the interest rate on the loan and all cases where it changes, unlike the applicant’s loans, (d) the existence of collateral (the bank loans were granted with mortgages on all the company’s real estate, with rental assignment contracts in the case of leasing and with assignment contracts for receivables from foreign customers (agencies), unlike the applicant’s loans which were granted without any collateral), (e) the size of the lending (the loans under comparison do not involve similar funds), (f) security conditions in the event of non-payment (the bank loans specified precisely the measures to be taken in the event of non-payment, unlike the applicant’s loans, for which nothing at all was specified), (g) the creditworthiness of the borrower (the banks lent to the applicant, which had a turnover, profits and real estate, unlike the related companies, most of which had no turnover, high losses and negative equity), (h) the purpose of the loan (83 % of the applicant’s total lending was granted to cover long-term investment projects as opposed to loans to related parties which were granted for cash facilities and working capital). Since, in the event that the applicant’s affiliated companies had made a short-term loan from an entity other than the applicant (unaffiliated), then the interest rate for loans to non-financial undertakings is deemed to be a reasonable interest rate for loans on mutual accounts, as stated in the statistical bulletin of the Bank of Greece for the nearest period of time before the date of the loan (www.bankofgreece.gr/ekdoseis-ereyna/ekdoseis/anazhthsh- ekdosewn?types=9e8736f4-8146-4dbb-8c07-d73d3f49cdf0). Because the work of this audit is considered to be well documented and fully justified. Therefore, the applicant’s claim is rejected as unfounded.” Click here for English translation Click here for other translation ...

This case deals with a non-interest bearing intragroup loan granted by Pompea S.p.A. to a foreign subsidiary and deductibility of interest expenses incurred by Pompea S.p.A. to obtain the funding needed to grant this loan to the subsidiary. The company was of the opinion that interest free inter-company loans were not covered by the Italien arm’s length provision at the time where the loan in question was established. The Italien tax authorities claimed that the arrangement was covered by the transfer pricing regulations art. 110 paragraph 7, and that an arm’s length interest had to be paid on the loan. They also found that interest on the bank loan was not deductible. Judgment of the Supreme Court The Court found that non-interest-bearing loan, was covered by the rules laid down in Article 110(7) of the TUIR (the Italien arm’s length provisions). Furthermore, the court found that the OECD 2010 TP Guidelines were unambiguous in clarifying (Chapter VII of the 2010 Guidelines, paras. 7.14 and 7.15 with respect to the identification and remuneration of loans as intragroup services, and 7.19, 7.29 and 7.31 with respect to the determination of the payment), that the remuneration of an intragroup loan must normally take the form of the payment of an interest rate corresponding to that which would have been expected between independent enterprises in comparable circumstances’. With regard to the deductibility of interest expense deriving from the bank loan, the Court found that these were related to the entire business activity carried out by the group and therefor deductible. Click here for English translation Click here for other translation ...

A Oyj was the parent company of the A-group, and responsible for the group’s centralised financial activities. It owned the entire share capital of D Oy and B Oy. D Oy in turn owned the entire share capital of ZAO C, a Russian company. A Oyj had raised funds from outside the group and lent these funds to its Finnish subsidiary B Oy, which in turn had provided a loan to ZAO C. The interest charged by B Oy on the loans to ZAO C was based on the cost of A Oyj’s external financing. The interest rate also included a margin of 0,55 % in tax year 2009, 0,58 % in tax year 2010 and 0,54 % in tax year 2011. The margins had been based on the average margin of A Oyj’s external financing plus 10 %. The Tax Administration had considered that the level of interest to be charged to ZAO C should have been determined taking into account the separate entity principle and ZAO C’s credit rating. In order to calculate the arm’s length interest rate, the synthetic credit rating of ZAO C had been determined and a search of comparable loans in the Thomson Reuters DealScan database had been carried out. On the basis of this approach, the Tax Administration had considered the market interest margin to be 2 % for the tax year 2009 and 3,75 % for the tax years 2010 and 2011. In the tax adjustments the difference between the interest calculated based on the adjusted rates and the interest actually charged to ZAO C had been added to A Oyj’s taxable income. Judgment of the Supreme Administrative Court The court overturned an earlier decision handed down by the Administrative Court of Helsinki and ruled in favour of A Oyj. The Supreme Administrative Court held that ZAO C had received an intra-group service in the form of financing provided by A Oyj through B Oy. The Court also considered that the cost-plus pricing method referred to in the OECD Transfer Pricing Guidelines was the most appropriate method for assessing the pricing of intra-group services. Thus, the amount of interest to be charged to ZAO C could have been determined on the basis of the costs incurred by the Finnish companies of the group in obtaining the financing, i.e. the cost of external financing plus a mark-up on costs, and ZAO C could have benefited from the better creditworthiness of the parent company of the group. Consequently the Supreme Administrative Court annulled the previous decisions of the Administrative Court and set aside the tax adjustments. Excerpts “B Oy has been responsible for financing ZAO C and certain other group companies with funds received from the parent company. The company is a so-called ‘shell company’ which has had no other activity since 2009 than to act as a company through which intra-group financing formally flows.” “The question is whether the tax assessments of A Oyj for the tax years 2009 to 2011 could be adjusted to the detriment of the taxpayer and the taxable income of the company increased pursuant to Article 31 of the Tax Procedure Act, because the level of the interest margin paid by ZAO C to the Finnish group companies was below the level which ZAO C would have had to pay if it had obtained financing from an independent party. The Supreme Administrative Court’s decision KHO 2010:73 concerns a situation where a new owner had refinanced a Finnish OY after a takeover. The interest rate paid by the Finnish Oy on the new intra-group debt was substantially higher than the interest rate previously paid by the company to an external party, which the Supreme Administrative Court did not consider to be at arm’s length. The present case does not concern such a situation, but whether ZAO C was able to benefit financially from the financing obtained through the Finnish companies of the group. In its previous case law, the Supreme Administrative Court has stated that the methods for assessing market conformity under the OECD Transfer Pricing Guidelines are to be regarded as an important source of interpretation when examining the market conformity of the terms of a transaction (KHO 2013:36, KHO 2014:119, KHO 2017:146, KHO 2018:173, KHO 2020:34 and KHO 2020:35). As explained above, the transfer pricing guidelines published by the OECD in 1995 and 2010 are essentially the same in substance for the present case. It is therefore not necessary to assess whether the company’s tax assessment for the tax year 2009 could have been adjusted to the detriment of the taxpayer on the basis of the 2010 OECD transfer pricing guidelines. According to the OECD transfer pricing guidelines described above, when examining the arm’s length nature of intra-group charges, a functional analysis must first be carried out, in particular to determine the legal capacity in which the taxpayer carries out its activities. The guidelines further state that almost all multinational groups need to organise specifically financial services for their members. Such services generally include cash flow and solvency management, capital injections, loan agreements, interest rate and currency risk management and refinancing. In assessing whether a group company has provided financial services, the relevant factor is whether the activity provides economic or commercial value to another group member which enhances the commercial position of that member. In contrast, a parent company is not considered to receive an internal service when it receives an incidental benefit that is merely the result of the parent company being part of a larger group and is not the result of any particular activity. For example, no service is received when the interest-earning enterprise has a better credit rating than it would have had independently, simply because it is part of a group. The financial activities of the A group are centralised in A Oyj. The group’s external and internal loan agreements have prohibited A Oyj subsidiaries from obtaining external financing in their own name. Where necessary, the subsidiaries have provided collateral for ...

“WHT Ltd” had requested a refund of withholding tax on interest paid to a related company in the Netherlands. The tax authority determined that the contractual interest rate of 2.05% exceeded the officially recognized interest rate of 1.226% at the time the loan was granted. Under Article 72 of the Corporate Income Tax Act, tax benefits apply only if the interest rate charged is not higher than what would have been paid to an unrelated lender. The dispute thus centered on whether the interest rate applied to the loan was at arm’s length. “WHT Ltd” attempted to demonstrate compliance by submitting a non-binding refinancing offer from a third-party bank, internal calculations of creditworthiness, comparisons to previous bank loans, and statistical data from the Bank of Slovenia. However, the tax authority deemed this evidence insufficient to prove that an independent lender would have charged a comparable interest rate. The Ministry of Finance, acting as the appellate authority, had upheld the tax authority’s decision, concluding that “WHT Ltd” failed to meet the burden of proof required for an exception under Article 19(2) of the Corporate Income Tax Act. An appeal was then filed by “WHT Ltd” with the Administrative Court. Judgment The Administrative Court dismissed the appeal, finding that the evidence submitted by “WHT Ltd” did not sufficiently demonstrate that a comparable independent loan would have been available at the interest rate. The court emphasised that transfer pricing assessments require direct comparability, which had not been established. Click here for English translation Click here for other translation ...

A non-interest-bearing loan had been granted by GI Group S.p.A., to a related company – Goldfinger Limited – in Hong Kong, in order to acquire a 56% shareholding in the Chinese company Ningbo Gi Human Resources Co. Limited. The Italien tax authorities had issued an assessment, where an interest rate on the loan had been determined and an amount equal to the interest calculated on that basis had been added to the taxable income of GI Group S.p.A. GI Group brought this assessment to the Regional Tax Commission where a decision was rendered setting aside the assessment. This decision was appealed to the Supreme Court by the tax authorities. Judgment of the Supreme Court The Supreme court upheld the appeal of the tax authorities and referred the case back to the Regional Tax Commission. According to the Supreme Court, the decision of the Tax Commission dit not comply with the principles of law concerning the subject matter of evidence and the burden of proof on tax authorities and the taxpayer. Excerpts: “…In conclusion, according to the Court, “such discipline, being aimed at repressing the economic phenomenon of transfer pricing, i.e. the shifting of taxable income as a result of transactions between companies belonging to the same group and subject to different national laws, does not require the administration to prove the avoidance function, but only the existence of “transactions” between related companies at a price apparently lower than the normal one” “according to the application practice of the Italian Revenue Agency (Circular No. 6/E of 30 March 2016 on leveraged buy-outs), the reclassification of debt (or part of it) as a capital contribution should represent an “exceptional measure”. Moreover, it is not excluded that free intra-group financing may have a place in the legal system where it can be demonstrated that the deviation from the arm’s length principle is due to “commercial reasons” within the group, related to the role that the parent company assumes in supporting the other companies of the group; “ “…the Regional Commission did not comply with the (aforementioned) principles of law concerning the subject-matter of the evidence and the criterion for sharing the burden of proof, between the tax authorities and the taxpayer, on the subject of international transfer pricing. In essence, the examination of the trial judge had to be oriented along two lines: first, it had to verify whether or not the tax office had provided the evidence, to which it was entitled, that the Italian parent company had carried out a financing transaction in favour of the foreign subsidiary, as a legitimate condition 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 with sufficiently “comparable” characteristics and provided to entities with the same credit rating as the associated debtor company (see the OECD Report 2020), the determination of which is quaestio facti referred to the judge of merit; secondly, once this preliminary profile had been established, also on the basis of the principle of non-contestation, it had to be verified whether, for its part, the company had demonstrated that the non-interest-bearing loan was due to commercial reasons within the group, or in any event was consistent with normal market conditions or whether, on the contrary, it appeared that that type of transaction (i.e. the loan of money) between independent companies operating in the free market would have taken place under different conditions. Instead, as stated above (see p. 2 of the “Findings”), the C.T.R. required the Office to demonstrate facts and circumstances extraneous to the onus pro bandi of the Administration, such as the existence of an interest of Goldfinger Ltd in obtaining and remunerating the loan and, again, that there had been other similar onerous intra-group loans; Click here for English translation Click here for other translation ...

In 2008 “Lender Kft.” entered into a loan agreement with its Brazilian affiliate, S.B.S.C. Ltda. (Kft 1) According to the terms of the contract, the loan amounted to 53,174,516, the maturity date of the loan was 31 January 2013 and the interest was paid semi-annually at the semi-annual CDI rate fixed in the contract plus 200 basis points per annum. In the years 2009-2011, Kft 1 paid 15 % of the interest as withholding tax, and Lender Kft. received 85 % of the interest. In its books, Lender Kft. entered 100 % of the interest as income, while the 15 % withholding tax was recorded as other expenses. According to Lender Kft’s transfer pricing records, the normal market interest rate range was 8,703 % to 10,821 % in FY 2009, 10,704 % to 12,598 % in the FY 2010 and 10,704 % to 12,598 % in FY 2001, and the interest rates applied in the loan transaction were 10,701 % to 12,529 %, 12,517 % to 14,600 % and 12,517 % to 14,600 % in the same years. In other words, according to the records, the interest rates applied to the transaction were partly within and partly above the market price range. “Lender Kft” used the CUP method to determine the transfer price, taking into account external and internal comparables. As an external comparison, it used a so-called risk premium model based on the rating of the debtor party and the terms and conditions of the loan, taking into account publicly available data. For the credit rating of the related company, it used the risk model of the name, on the basis of which it classified the company between A1 and A3. It defined the range of interest rates to be applied in the loan terms and conditions, then the default rate and the rate of return, and finally, by substituting these data into the risk premium model formula, it defined the risk premium rates for each risk rating. In doing so, it used subordinated bonds. The benchmark interest rate range was defined as the sum of the risk-free rate and the risk premium. As an internal comparison, the applicant requested quotations from various commercial banks, as independent parties, before granting the loan, as to the amount of profit it could expect to obtain if it deposited its money with them (Bank1, Bank2) The Tax tax authorities carried out an audit of Lender Kft for FY 2009, 2010 and 2011. In the view of the tax authority at first instance, the CUP method, although appropriate for determining the arm’s length price, was not the method used by the applicant. According to the tax authorities the rating of a debtor using public rating models may differ greatly from the rating carried out by the rating agency which created the model, which results in a high degree of uncertainty as to the method used by the applicant. A further problem was that Lender Kft had based its pricing on a rate for subordinated bonds, whereas a bank loan and a bond are two different financial instruments and cannot be compared. In this context, it was stated that the transaction under examination was a loan contract and not a bond issue. The tax authorities explained that the unit operating costs are the lowest in the banking market and that it had not been demonstrated that the cost of the applicant’s lending was lower than that of a bank loan. It also stated that the mere existence of information through a relationship does not imply a lower risk exposure. In relation to the internal comparables, it stressed that the loan granted by Lender Kft could not be classified as a deposit transaction and that the comparison with the deposit rate was therefore incorrect. According to the tax authority, for the purposes of determining the normal market price, the … banking market best reflects the conditions under which the related undertaking would obtain a loan under market conditions, and therefore the so-called “prime rate” interest rate statistics calculated by the Central Bank of the country in question are the most appropriate for its calculation. This statistic shows the average interest rate at which commercial banks lend to their best customers. Accordingly, the tax authority at first instance took this rate as the basis for determining the difference between the interest rate applied to the transaction at issue and the normal market rate. As a result, the applicant’s corporate tax base was increased by HUF 233,135,000.00 in the financial year 2009, HUF 198,638,000.00 in the financial year 2010 and HUF 208,017,000.00 in the financial year 2011, pursuant to Article 18(1) of Act LXXXI of 1996 on Corporate Tax and Dividend Tax (‘Tao Law’). Lender Kft. filed a complaint against the decision and requested that the decision be altered or annulled and that the defendant be ordered to commence new proceedings. In the complaint it stated that the method used by the tax authorities did not comply with points 1.33, 1.35 and 2.14 of the OECD TPG, nor with Article 7(d) of the PM Regulation. By judgment of 20 April 2018, the Court of First Instance annulled the tax authorities first assessment and ordered the authority to initiate new proceedings in that regard. The court stated that the tax authority must determine whether the pricing of the loan at issue in the case was in line with the arm’s length price, taking into account the OECD Transfer Pricing Guidelines and the expert’s opinion in this context. Under the revised audit process the tax authorities found other issued which were added to the new assessment. “Lender Kft” then filed an appeal with the Administrative Court, which found the appeal well founded in regards of the new issues that had been added to the assessment by the tax authorities but upheld the decision in regards of the original issues. An appeal was then filed with the Supreme Administrative court, which found that the court of first instance had erred ...

“H Borrower and Lender A/S”, a Danish subsidiary in the H Group, had placed deposits at and received loans from a group treasury company, H4, where the interest rate paid on the loans was substantially higher than the interest rate received on the deposits. Due to insufficient transfer pricing documentation, the tax authorities (SKAT) issued a discretionary assessment of taxable income where the interest rate on the loans had been adjusted based on the rate received on the deposits. Decision of the Court The National Tax Tribunal stated that the documentation was deficient to such an extent that it could be equated with a lack of documentation. The tax authorities had therefore been entitled to make a discretionary assessment. The National Tax Court referred, among other things, to the fact that the company’s transfer pricing documentation lacked a basic functional analysis of the group treasury company with which the company had controlled transactions. “The National Tax Tribunal finds that the company has not proved that SKAT’s estimates are not in accordance with the arm’s length principle. It is hereby emphasized that the company has received a loan from H4, where the interest rate is based on a base interest rate plus a risk margin of 130 bps. Thus, the interest paid on these loans has been higher than the interest received by placing liquidity with H4. The National Tax Tribunal does not find it proved by the company that these two cash flows should constitute different financing instruments with different risks, and that the interest rates must therefore be different. The lack of functional analysis for H4 in the TP documentation means, in the opinion of the National Tax Tribunal, that it cannot be considered to be in accordance with the arm’s length principle, that H4 must receive a proportionately higher interest payment from the company than what is paid to the company. In this connection, it is taken into account that H4 has no employees and thus cannot be considered to have control over the risks associated with the various controlled transactions. The fact that the company has entered into different contractual obligations for the two cash flows is given less weight due to the lack of a functional analysis for H4. The company’s argument that the interest rate for deposits with H4 according to the National Tax Court’s previous decision, published by SKM2014.53.LSR, must be determined without risk margin, as there is a full set-off against the company’s loan from H4, can not either taken into account, as the interest rates for the two cash flows in this way would be different. The National Tax Tribunal finds that the decision in SKM2014.53.LSR must be interpreted as meaning that the interest rates for comparable cash flows that are fully hedged between two group parties must bear interest at the same rate, as the cash flows in this way cancel out each other.” Click here for translation ...

The Swedish group TELE2, one of Europe’s largest telecommunications operators, had invested in an entity in Kazakhstan, MTS, that was owned via a joint venture together with an external party. Tele2 owned 51% of the Joint venture and MTS was financed by Tele2’s financing entity, Tele2 Treasury AB, which, during 2011-2015, had issued multiple loans to MTS. In September 2015, the currency on the existing internal loans to MTS was changed from dollars to KZT. At the same time a ‘Form of Selection Note’ was signed according to which Tele2 Treasury AB could recall the currency denomination within six months. A new loan agreement denominated in KZT, replacing the existing agreements, was then signed between Tele2 Treasury AB and MTS. In the new agreement the interest rate was also changed from LIBOR + 4.6% to a fixed rate of 11.5%. As a result of these contractual changes to the loan agreements with MTS, Tele2 Treasury AB in its tax filing deducted a total currency loss of SEK 1 840 960 000 million for FY 2015. Following an audit, the Swedish tax authorities issued an assessment where the tax deduction for the full amount had been disallowed. However, during the proceedings at Court the authorities acknowledged deductions for part of the currency loss – SEK 745 196 000 – related to the period between 22 October to 31 December 2015. Hence, at issue before the Court was disallowed deductions of the remaining amount of SEK 1 095 794 000. Decision of the Court The Administrative Court ruled in favor of the tax authorities. Tele2 Treasury AB could not deduct exchange rate losses resulting from the loan arrangements with MTS related to the period between 1 September and 21 October 2015. “…there have been no reasons to assume that MTS has risked bankruptcy, and that the company’s right to interest and repayments would thus have been in jeopardy. Thus, MTS’s financial position cannot be a reason to believe that the currency conversion would have been commercially justified. With regard to commerciality, the court considers it strange that an independent lender would take great risks to secure the financing when the borrower and another external player are to carry out a merger. That the company assumed responsibility for getting MTS financing in place speak instead of that it was the financial interests of the common interests that prompted the decision to conduct currency conversion. The court thus considers that the company cannot be considered to have any significant interest in securing MTS financing. In this context, the company has stated that other companies within the Tele2 Group’s financial interests must be taken into account when assessing the current issue. However, as stated by the Administrative Court above, the relationship with any other companies in a partnership with the trader shall not be taken into account. In this context, the company has referred to the Court of Appeal in Gothenburg’s judgment of 30 September 2011 in case no. 5854-10. However, the Administrative Court cannot, based on the circumstances and reasoning in the judgment, read out any general conclusions that could provide support for the company’s view in the current cases. The Administrative Court therefore considers that the company’s reasons for the conversion cannot be considered to be any other than reasons attributable to the common interest with MTS.” According to a press release from TELE2 the decision will be appealed. Click here for translation ...

“Cosmetics Corp” is active in wholesale of medicinal products, cosmetics, perfumery and cleaning products. Following an audit the tax authorities issued an assessment regarding the interest rate on loans granted to the related parties domiciled in Cayman Islands and Luxembourg. An appeal was filed by the company. Judgment of the Tax Court The court partially upheld the assessment. Excerpt “In this sense, it is essential to create a law that contains the guidelines that the OECD has established to guarantee the principle of full competition in transactions carried out between national taxpayers with related companies, for the purpose of applying the technical methods and procedures that they provide; The express reference made by Article 62-A of the TC cannot be considered as a dimension of the principle of relative legal reserve, insofar as there is no full development of the methods or procedures contained therein, nor a reference to an infra-legal rule containing them, but rather a reference that does not have a legal status, i.e. they are not legally binding, but only optional and enunciative to be incorporated into the legal system of each country. Hence, at no time is the legality of the powers of the Directorate General to determine the market price being questioned, since, as has been indicated, the law itself grants it this power, what is being questioned in the present case is the failure of the Directorate General to observe the procedures and forms determined by law to proceed to establish the market price, by using the OECD Guidelines, which, it is reiterated, for the fiscal year audited, did not have a legal status, nor were they binding, since they were not contained in a formal law; Therefore, even if the appellant itself used them, this situation constitutes a choice of the company itself, for the purpose of carrying out an analysis of its transfer prices, but in no way implies that this mechanism is endorsed by law, the Directorate General being obliged to lead or guide the taxpayer in the application of the regulations in force and adjust its operations to the provisions thereof, and if it considered that there was indeed an impediment to determine the market price, it should have documented it and proceeded in accordance with the provisions of the aforementioned legal provisions, which it did not do. Finally, it should be clarified that article 192-A of the Tax Code, cited by the DGII at folios 737 of the administrative file, as grounds that the interest rates applied by the appellant were not agreed at market price, is not applicable to the case at hand, inasmuch as it regulates a legal presumption of obtaining income (income) from interest – which admits proof to the contrary – in all money loan contracts of any nature and denomination, in those cases in which this has not been agreed, which shall be calculated by applying the average active interest rate in force on credits or loans to companies applied by the Financial System and published by the ————— on the total amount of the loan; on the other hand, in the present case, as has been shown above, the determination made by the DGII has been through the application of the transfer prices regulated in article 62-A of the TC, which is completely different from the said presumption; in addition to the fact that, as evidenced in folios 82 to 93 and 309 to 314 of the administrative file, the Revolving Credit Line contracts presented by the appellant, entered into with the companies ————— and — ———— contain the clause “Interest Rate”, in which it is established that the interest rate of each loan will be the market rate agreed by the parties, which was 3% for the first company and 1% for the second, which was effectively verified by the DGII both in the accounting records of the appellant, in the loan amortisation tables, as well as in the referred Transfer Pricing Study, as mentioned above. Consequently, this Court considers that in the present case there has been a violation of the Principles of Legality and Reservation of Law, by virtue of the fact that in the instant case the Directorate General did not follow the procedure established by the legal system in force, and therefore, in issuing the contested act, it acted outside the legally established procedures, and consequently, the decision under appeal, with respect to this point, is not in accordance with the law; it is unnecessary to rule on the other grievances invoked by the appellant in its appeal brief. The aforementioned is in accordance, as pertinent, with precedents issued by this Tribunal with references R1810029TM, of the eleventh hour of September fourth, two thousand and twenty; R1505018TM, of the thirteenth hour and two minutes of May twenty-seventh, two thousand and nineteen; R1511005TM, dated ten o’clock ten minutes past ten on the thirty-first day of August two thousand and eighteen; R1405013T, dated eleven o’clock five minutes past five on the twentieth day of April of the same year; R1405007TM, dated eleven o’clock five minutes past five on the twenty-seventh day of the same month and year; and, R1704001T, dated eleven o’clock five minutes past five on the twenty-ninth day of May of the aforementioned year.” Click here for English translation Click here for other translation ...

Redington India Limited (RIL) established a wholly-owned subsidiary Redington Gulf (RG) in the Jebel Ali Free Zone of the UAE in 2004. The subsidiary was responsible for the Redington group’s business in the Middle East and Africa. Four years later in July 2008, RIL set up a wholly-owned subsidiary company in Mauritius, RM. In turn, this company set up its wholly-owned subsidiary in the Cayman Islands (RC) – a step-down subsidiary of RIL. On 13 November 2008, RIL transferred its entire shareholding in RG to RC without consideration, and within a week after the transfer, a 27% shareholding in RC was sold by RG to a private equity fund Investcorp, headquartered in Cayman Islands for a price of Rs.325.78 Crores. RIL claimed that the transfer of its shares in RG to RC was a gift and therefore, exempt from capital gains taxation in India. It was also claimed that transfer pricing provisions were not applicable as income was exempt from tax. The Indian tax authorities disagreed and found that the transfer of shares was a taxable transaction, as the three defining requirements of a gift were not met – that the transfer should be (i) voluntary, (ii) without consideration and that (iii) the property so transferred should be accepted by the donee. The tax authorities also relied on the documents for the transfer of shares, the CFO statement, and the law dealing with the transfer of property. The arm’s length price was determined by the tax authorities using the comparable uncontrolled price method – referring to the pricing of the shares transferred to Investcorp. In the tax assessment, the authorities had also denied deductions for trademark fees paid by RIL to a Singapore subsidiary for the use of the “Redington” name. The tax authorities had also imputed a fee for RIL providing guarantees in favour of its subsidiaries. RIL disagreed with the assessment and brought the case before the Dispute Resolution Panel (DRP) who ruled in favour of the tax authorities. The case was then brought before the Income Tax Appellate Tribunal (ITAT) who ruled in favour of RIL. ITAT’s ruling was then brought before the High Court by the tax authorities. The decision of the High Court The High Court ruled that transfer of shares in RG by RIL to its step-down subsidiary (RC) as part of corporate restructuring could not be qualified as a gift. Extraneous considerations had compelled RIL to make the transfer of shares, thereby rendering the transfer involuntary. The entire transaction was structured to accommodate a third party-investor, who had put certain conditions even prior to effecting the transfer. According to the court, the transfer of shares was a circular transaction put in place to avoid payment of taxes. “Thus, if the chain of events is considered, it is evidently clear that the incorporation of the company in Mauritius and Cayman Islands just before the transfer of shares is undoubtedly a means to avoid taxation in India and the said two companies have been used as conduits to avoid income tax” observed the Court. The High Court also disallowed deductions for trademark fees paid by RIL to a Singapore subsidiary. The court stated it was illogical for a subsidiary company to claim Trademark fee from its parent company (RIL), especially when there was no documentation to show that the subsidiary was the owner of the trademark. It was also noted that RIL had been using the trademark in question since 1993 – long before the subsidiary in Singapore was established in 2005. Regarding the guarantees, the Court concluded these were financial services provided by RIL to it’s subsidiaries for which a remuneration (fee/commission) was required ...

WB Ambassador, took out two loans with its Luxembourg parent company and another group company, each bearing an annual interest rate of 7%. Following an audit, the tax authorities, considering that the company did not justify that the 7% interest rate of the above-mentioned intra-group loans corresponded to the rate it could have obtained from independent financial institutions or organisations under similar conditions and partially disallowed deductions of the interest incurred. Supreme Administrative Court The Supreme Administrative Court overturned the decision of the Administrative court of Appeal and ruled in favor of the WB Ambassador. It stated that the Lower Court had erred in law in ruling out the possibility that a company, in order to justify the rate it could have obtained from independent financial institutions for a loan granted under similar conditions, could rely, in order to assess that rate, on the yield of bond issues granted by undertakings in comparable economic conditions. Consequently, WB Ambassador was entitled, without needing to examine the other pleas in law of its appeal, to seek the annulment of the judgment which it is challenging. “The borrowing company, which has the burden of proving the rate it could have obtained from independent financial institutions or organisations for a loan granted under similar conditions, may provide this proof by any means. In this respect, in order to evaluate this rate, it may, where appropriate, take account of the yield on bonds issued by undertakings in comparable economic conditions, where such bonds constitute, in the circumstances under consideration, a realistic alternative to an intra-group loan.” Click here for English translation Click here for other translation ...

P.T. Sanken Indonesia Ltd. – an Indonesian subsidiary of Sanken Electric Co., Ltd. Japan – paid royalties to its Japanese parent for use of IP. The royalty payment was calculated based on external sales and therefore did not include sales of products to group companies. The royalty payments were deducted for tax purposes. Following an audit, the tax authorities issued an assessment where deductions for the royalty payments were denied. According to the authorities the license agreement had not been registrered in Indonesia. Furthermore, the royalty payment was found not to have been determined in accordance with the arm’s length principle. P.T. Sanken issued a complaint over the decision with the Tax Court, where the assessment later was set aside. This decision was then appealed to the Supreme Court by the tax authorities. Judgment of the Supreme Court The Supreme Court dismissed the appeal of the tax authorities and upheld the decision of the Tax Court. The OECD Transfer Pricing Guidelines states that to test the existence of transactions to royalty payments on intangible between related parties, four tests/considerations must be performed: a) Willing to pay test (Par 6.14); b) Economic benefit test (Par 6.15); c) Product life cycle considerations (Par 1.50); d) Identify contractual and arrangement for transfer of IP (Par 6.16-6.19 ); To obtain a comparison that is reliable the level of comparability between the transactions must be determined. The degree of comparability must be measured accurately and precisely because it would be “the core” in the accuracy of the results of the selected method . Although the characteristics of products and the provision in the contract on the sale to related parties and independent was comparable, it was not sufficient to justify the conditions of the transactions are  sufficiently comparable; Based on the OECD Guidelines there are five factors of comparability, namely : ( i ) the terms and conditions in the contract ; (ii) FAR analysis ( function , asset and risk ); (iii) the product or service being transacted ; (iv) business strategy ; and (v) economic situation ; In the application of the arm’s length principle, the OECD TP Guidenline provide guidance as follows: 6.23 “In establishing arm’s length pricing in the case of a sale or license of intangible property, it is possible to use the CUP method where the same owner has transferred or licensed comparable intangible property under comparable circumstances to independent enterprises. The amount of consideration charged in comparable trnsaction between independent enterprises in the same industry can also be guide, where this information is available, and a range of pricing may be Appropriate. “That the provisions mentioned in the above , the Panel of Judges Court believes that the payment of royalties can be financed due to meet the requirements that have been set out in the OECD TP Guidenline and have a relationship with 3M ( Getting , Charge and Maintain ) income and therefore on the correction compa ( now Applicant Review Back) in the case a quo not be maintained because it is not in accordance with the provisions of regulatory legislation which applies as stipulated in Article 29, the following explanation of Article 29 paragraph (2) Paragraph Third Act Provisions General and Tata How Taxation in conjunction with Article 4 paragraph (1), Article 6 paragraph (1) and Article 9 paragraph (1) and Article 18 paragraph (3) of Law – Income Tax Law in conjunction with Article 69 paragraph (1) letter e and Article 78 of the Tax Court Law ; Click here for translation ...

Between the end of 2008 and the end of 2012 Studialis had issued bonds subscribed by British funds, partners of a Luxembourg company, itself a majority partner of Studialis, carrying an interest rate of 10%. The Tax authorities considered that the interest rate on the bonds was higher than the limit provided for by Article 212, I of the CGI (at the time between 2.8% and 4.1%). According to the authorities only an effective loan offer contemporaneous with the transactions and taking into account the specific characteristics of the borrowing company could establish with certainty the rate it would have received from a independent credit institution, and rejected all the evidence in support of the pricing presented by the company. Decision of the Administrative Court of Appeal The Court ruled in favor of Studialis. It considered that the evidence provided by Studialis – loan offers and certificates from independent banks combined with and a comparability study on rates of bonds using “Riskcalc” – sufficiently justified the 10% interest rate on the bonds issued by Studialis. Click here for English translation Click here for other translation ...

A Regional Court of Romania requested a preliminary ruling from the European Court of Justice in the Case of Impresa Pizzarotti. Impresa Pizzarotti is the Romanian branch of SC Impresa Pizzarotti & C SPA Italia (‘Pizzarotti Italia’), established in Italy. In 2017, the Romanian tax authorities conducted an audit of an branch of Impresa Pizzarotti. The audit revealed that the branch had concluded, as lender, two loan agreements with its parent company, Pizzarotti Italia: one dated 6 February 2012 for EUR 11 400 000 and another dated 9 March 2012 for EUR 2 300 000. Those sums had been borrowed for an initial period of one year, which could be extended by way of addendum, that the loan agreements did not contain any clause concerning the charging of interest by Impresa Pizzarotti, and that although the outstanding amount as of 1 January 2013 was EUR 11 250 000, both loans had been repaid in full by 9 April 2014. Transactions between Romanian persons and non-resident related persons are subject to the rules on transfer pricing. The concept of ‘Romanian persons’ covers a branch which is the permanent establishment of a non-resident person The tax authorities held that the local branch of Impresa Pizzarotti, was to be treated as a person related to Pizzarotti Italia and that the interest rate on those loans should have been set at market price, in accordance with the rules on transfer pricing. Consequently, a tax assessment was issued based on the tax audit report of the same date imposing on Impresa Pizzarotti a tax increase of 297 141.92 Romanian lei (RON) (approximately EUR 72 400) and an additional taxable amount of RON 1 857 137 (approximately EUR 452 595). Impresa Pizzarotti subsequently brought the case before the Romanian national court, the Tribunalul Cluj (Regional Court, Cluj, Romania), seeking annulment of the tax assessment. Impresa Pizzarotti held that the national provisions relied on by the tax office infringe Articles 49 and 63 TFEU, in so far as they provide that transfers of money between a branch established in one Member State and its parent company established in another Member State constitute transactions which may be subject to the rules on transfer pricing, whereas those rules do not apply where the branch and its parent company are established in the territory of the same Member State. The Romanian Court decided to stay the proceedings and to refer the following question to the Court of Justice for a preliminary ruling: “>‘Do Articles 49 and 63 [TFEU] preclude national legislation such as [Articles 11(2) and 29(3) of the Tax Code], which provides that a transfer of money from a company branch resident in one Member State to the parent company resident in another Member State may be reclassified as a revenue-generating transaction, with the consequent obligation to apply the rules on transfer pricing, whereas, if the same transaction had been effected between a company branch and a parent company, both of which were resident in the same Member State, that transaction could not have been reclassified in the same way and the rules on transfer pricing would not have been applied?’ Judgment of the Court The Court concluded that Romanian transfer pricing regulations were not in breach with the EU Fredoms of Establishment, cf. Article 49 TFEU. “By taxing the permanent establishment on the basis of the presumed amount of the remuneration for the advantage granted gratuitously to the parent company, in order to take account of the amount which that permanent establishment would have had to declare in respect of its profits if the transaction had been concluded in accordance with market conditions, the legislation at issue in the main proceedings thus allows Romania to exercise its power to tax in relation to activities carried out in its territory.” “…national legislation…, which seeks to prevent profits generated in the Member State concerned from being transferred outside the tax jurisdiction of that Member State via transactions that are not in accordance with market conditions, without being taxed, is appropriate for ensuring the preservation of the allocation of the power to tax between Member States.” “…national legislation which provides for a consideration of objective and verifiable elements in order to determine whether a transaction represents an artificial arrangement, entered into for tax reasons, is to be regarded as not going beyond what is necessary to attain the objectives relating to the need to maintain the balanced allocation of the power to tax between Member States and to prevent tax avoidance where, first, on each occasion on which there is a suspicion that a transaction goes beyond what the companies concerned would have agreed under fully competitive conditions, the taxpayer is given an opportunity, without being subject to undue administrative constraints, to provide evidence of any commercial justification that there may have been for that transaction…” “…, it appears that the Romanian legislation at issue in the main proceedings does not go beyond what is necessary to attain the legitimate objective underlying that legislation.” “…, the answer to the question referred is that Article 49 TFEU must be interpreted as not precluding, in principle, legislation of a Member State under which a transfer of money from a resident branch to its parent company established in another Member State may be reclassified as a ‘revenue-generating transaction’, with the consequent obligation to apply the rules on transfer pricing, whereas, if the same transaction had been effected between a company branch and a parent company, both of which were established in the same Member State, that transaction would not have been classified in the same way and the rules on transfer pricing would not have been applied.” Article 49 TFEU must be interpreted as not precluding, in principle, legislation of a Member State under which a transfer of money from a resident branch to its parent company established in another Member State may be reclassified as a ‘revenue-generating transaction’, with the consequent obligation to apply the rules on transfer pricing, whereas, if the same transaction had been effected between a company branch and a parent company, both of which were established ...

In 2011, Willink SAS issued two intercompany convertible bonds with a maturity of 10 years and an annual interest rate of 8%. The tax authorities found that the 8% interest rate had not been determined in accordance with the arm’s length principle. Willink appealed, but in a decision issued in 2019 the Administrative Court sided with the tax authorities. An appeal was then filed with the Court of Appeal. Judgment of the Supreme Court The Court of Appeal dismissed the appeal of Willink and upheld the decision of the Administrative Court. Excerpt “7. It is common ground that the funds Apax France VIII-A, Apax France VIII-B and the companies MidInvest and Telecom Online are linked to the company Willink, of which they are all partners, and that the rate of 8% exceeds the rate provided for in the first paragraph of 3° of 1 of Article 39 of the General Tax Code. To justify that this rate was not higher than the one it could have obtained from independent financial institutions or organisations under similar conditions, SAS Willink produced before the Court a comparative rate study carried out in 2020 using the Riskcalc software developed by Moody’s Analytics, a subsidiary of the rating agency Moody’s. This study is based on a model calculating the probability of default in the short term (one year) and the long term (five years) and then associates an implicit scoring. In order to select the most reliable and consistent scoring possible, this was determined on the basis of the applicant’s financial statements for the years 2011, 2012 and 2013. A search for comparable transactions on the open market was then carried out using the SetP Capital IQ database. Transactions were selected for which the issuing companies had a score comparable to Willink, issued by public or private companies across a range of industries during the relevant period. The sample was then refined, including transactions with a maturity close to each of the bonds to be compared. An interquartile range of arm’s length interest rates was then constructed on the basis of the bonds identified as comparables and used to identify median rates. 8. Although it is possible to assess the arm’s length rates by taking into account the yield on bonds, it is only on condition that, even if the loan is a realistic alternative to an intra-group loan, the reference companies are in comparable economic conditions. In the present case, this condition cannot be considered to be met for the companies selected in the sample of the report mentioned above. The level of risk used as a basis for comparison is based on a statistical model derived from historical quantitative data for companies that are not representative of the market, since defaulting companies are over-represented, and was determined on the basis of some ten financial data provided by the company itself. There is nothing to establish that this risk rating adequately takes into account all the factors recognised as forward-looking, and in particular the characteristics specific to the sector of activity concerned, even though this sector of activity is provided for the implementation of the model. Nor is it established that the so-called comparable companies in the study sample, which belonged to heterogeneous sectors of activity, would have presented the same level of risk for a banker as that with which the interested party was confronted at the same time. It follows that SAS Willink, which cannot usefully argue in these circumstances that the service cannot require a rating from a rating agency for each of the intra-group financing operations, cannot be regarded as providing the proof, which is incumbent on it, that it could have obtained a rate of 8 % from independent financial institutions or organisations under similar conditions. 9. It follows from all the foregoing that SAS Willink is not entitled to maintain that it was wrongly dismissed by the contested judgment of the Paris Administrative Court. Consequently, its claims for the application of Article L 761-1 of the Code of Administrative Justice can only be rejected.” Click here for English translation Click here for other translation ...

A intercompany loan had been granted within the Apex Tool group at an interest rate of 6 percent and to demonstrate the arm’s length nature of the interest rate the borrowing company provided a comparability analyses. The analysis was set aside by the tax authorities and an assessment was issued where the deduction of interest had been reduced. Apex then filed an appeal with the Administrative Court of Appeal. Judgment of the Court The Court dismissed the analyses provided by Apex and upheld the assessment of the tax authorities. Excerpts (Unofficial English translation) “9. The investigation shows that the credit rating assigned to the loan in question by Baker and McKenzie, after several adjustments, was not based on the intrinsic situation of ATHF1, particularly with regard to its lending activity and its development prospects. On the contrary, it was allocated on the basis of the aggregate financial statements of the sub-group it formed with four of its subsidiaries and sub-subsidiaries, only one of which, in any event, carried out the industrial activity that Apex Tool Group claims was the only relevant basis for comparison, in the absence of a basis for holding companies other than investment companies and conglomerates. Furthermore, although it is not excluded that the arm’s length rates can be evaluated by taking into account the yield of bond loans, this is only on condition, even supposing that the loan taken out constitutes a realistic alternative to an intra-group loan, that the companies serving as references are in comparable economic conditions. In the case in point, this condition cannot be considered to have been met for the companies in the Baker and McKenzie sample, for which it is only argued, firstly, that they have credit ratings close to that attributed to the ATHF1 loan and, secondly, that they had recourse to the bond market for transactions of the same duration and maturity. Lastly, although the additional study produced by Apex Tool Group shows arm’s length rates close to those obtained by ATHF1 from its parent company, it has not been established that the so-called comparable companies in the study sample, belonging to heterogeneous sectors of activity, would have presented the same level of risk for a banker as that which ATHF1 faced at the same time. Under these conditions, Apex Tool Group, which did not submit to the judge any offer of a loan from a banking establishment, does not provide the proof that ATHF1 was entitled to deduct the interest on the disputed loan up to the rate of 6% that it had actually paid.” “10. Under the terms of 1. of II of Article 212 of the General Tax Code: “When the amount of interest paid by a company to all directly or indirectly related companies within the meaning of Article 39(12) and deductible in accordance with I simultaneously exceeds the following three limits in respect of the same financial year: / a) The product corresponding to the amount of the said interest multiplied by the ratio existing between one and a half times the amount of the equity capital, assessed at the choice of the company at the opening or at the closing of the financial year and the average amount of the sums left or made available by all of the companies directly or indirectly linked within the meaning of Article 12 of Article 39 during the course of the financial year, b) 25% of the current result before tax previously increased by the said interest, the depreciation taken into account for the determination of this same result and the share of leasing rentals taken into account for the determination of the sale price of the asset at the end of the contract, /c) The amount of interest paid to this company by companies directly or indirectly linked within the meaning of Article 12 of Article 39, / the fraction of interest exceeding the highest of these limits cannot be deducted in respect of this financial year, unless this fraction is less than 150,000 . / However, this fraction of interest which is not immediately deductible may be deducted in respect of the following financial year up to the amount of the difference calculated in respect of that financial year between the limit mentioned in b and the amount of interest allowed for deduction under I. The balance not deducted at the end of this financial year is deductible in respect of subsequent financial years under the same conditions, subject to a discount of 5% applied at the beginning of each of these financial years. 11. Since ATHF1 was unable to benefit from the deductibility of the financial expenses arising from the loan taken out on 4 July 2010 beyond the rates of 3.91% and 3.39% set for the financial years ending in 2011 and 2012 respectively, it was not eligible for the extension of the deductibility limits set by II of Article 212 of the General Tax Code. Consequently, Apex Tool Group’s request that the calculation of ATHF1’s thin capitalisation interest be adjusted so that the balance of its interest subsequently carried forward at 31 December 2013 is increased from EUR 1,435,512 to EUR 2,401,651 can only be rejected. 12. It follows from all the foregoing that Apex Tool Group SAS is not entitled to argue that the Administrative Court of Melun wrongly rejected the remainder of its claim. Consequently, its claims for the application of Article L 761-1 of the Code of Administrative Justice can only be rejected.” Click here for English translation Click here for other translation ...

In 2008 Lender Kft. entered into a loan agreement with its foreign domiciled affiliated company Kft. 1. According to the terms of the contract, the loan amounted to 53,174,516, the maturity date of the loan was 31 January 2013 and the interest was paid semi-annually at the semi-annual CDI rate fixed in the contract plus 200 basis points per annum. In the years 2009-2011, Kft. 1 paid 15 % of the interest as withholding tax, and Lender Kft. received 85 % of the interest. In its books, Lender Kft. entered 100 % of the interest as income, while the 15 % withholding tax was recorded as other expenses. According to Lender Kft’s transfer pricing records, the normal market interest rate range was 8,703 % to 10,821 % in FY 2009, 10,704 % to 12,598 % in the FY 2010 and 10,704 % to 12,598 % in FY 2001, and the interest rates applied in the loan transaction were 10,701 % to 12,529 %, 12,517 % to 14,600 % and 12,517 % to 14,600 % in the same years. In other words, according to the records, the interest rates applied to the transaction were partly within and partly above the market price range. Lender Kft. used the CUP method to determine the transfer price, taking into account external and internal comparables. As an external comparison, it used a so-called risk premium model based on the rating of the debtor party and the terms and conditions of the loan, taking into account publicly available data. For the credit rating of the related company, it used the risk model of the name, on the basis of which it classified the company between A1 and A3. It defined the range of interest rates to be applied in the loan terms and conditions, then the default rate and the rate of return, and finally, by substituting these data into the risk premium model formula, it defined the risk premium rates for each risk rating. In doing so, it used subordinated bonds. The benchmark interest rate range was defined as the sum of the risk-free rate and the risk premium. As an internal comparison, the applicant requested quotations from various commercial banks, as independent parties, before granting the loan, as to the amount of profit it could expect to obtain if it deposited its money with them (Bank1, Bank2) The Tax tax authorities carried out an audit of Lender Kft for FY 2009, 2010 and 2011. In the view of the tax authority at first instance, the CUP method, although appropriate for determining the arm’s length price, was not the method used by the applicant. According to the tax authorities the rating of a debtor using public rating models may differ greatly from the rating carried out by the rating agency which created the model, which results in a high degree of uncertainty as to the method used by the applicant. A further problem was that Lender Kft had based its pricing on a rate for subordinated bonds, whereas a bank loan and a bond are two different financial instruments and cannot be compared. In this context, it was stated that the transaction under examination was a loan contract and not a bond issue. The tax authorities explained that the unit operating costs are the lowest in the banking market and that it had not been demonstrated that the cost of the applicant’s lending was lower than that of a bank loan. It also stated that the mere existence of information through a relationship does not imply a lower risk exposure. In relation to the internal comparables, it stressed that the loan granted by Lender Kft could not be classified as a deposit transaction and that the comparison with the deposit rate was therefore incorrect. According to the tax authority, for the purposes of determining the normal market price, the … banking market best reflects the conditions under which the related undertaking would obtain a loan under market conditions, and therefore the so-called “prime rate” interest rate statistics calculated by the Central Bank of the country in question are the most appropriate for its calculation. This statistic shows the average interest rate at which commercial banks lend to their best customers. Accordingly, the tax authority at first instance took this rate as the basis for determining the difference between the interest rate applied to the transaction at issue and the normal market rate. As a result, the applicant’s corporate tax base was increased by HUF 233,135,000.00 in the financial year 2009, HUF 198,638,000.00 in the financial year 2010 and HUF 208,017,000.00 in the financial year 2011, pursuant to Article 18(1) of Act LXXXI of 1996 on Corporate Tax and Dividend Tax (‘Tao Law’). Lender Kft. filed a complaint against the decision and requested that the decision be altered or annulled and that the defendant be ordered to commence new proceedings. In the complaint it stated that the method used by the tax authorities did not comply with points 1.33, 1.35 and 2.14 of the OECD TPG, nor with Article 7(d) of the PM Regulation. By judgment of 20 April 2018, the Court of First Instance annulled the tax authorities first assessment and ordered the authority to initiate new proceedings in that regard. The court stated that the tax authority must determine whether the pricing of the loan at issue in the case was in line with the arm’s length price, taking into account the OECD Transfer Pricing Guidelines and the expert’s opinion in this context. Under the revised audit process the tax authorities found other issued which were added to the new assessment. Lender Kft. then filed an appeal with the Administrative Court. Judgment of the Administrative Court The Administrative court found the appeal well founded. Excerpts “The tax authority was only legally able to implement the judgment of the court in the retrial ordered by the court. The subject-matter of the action was the finding of the tax authority as a result of the audit ...

Such an approach would represent a departure from an arm’s length approach based on comparability since it is not based on comparison of actual transactions. Furthermore, it is also important to bear in mind the fact that such letters do not constitute an actual offer to lend. Before proceeding to make a loan, a commercial lender will undertake the relevant due diligence and approval processes that would precede a formal loan offer. Such letters would not therefore generally be regarded as providing evidence of arm’s length terms and conditions ...

In some circumstances taxpayers may seek to evidence the arm’s length rate of interest on an intra-group loan by producing written opinions from independent banks, sometimes referred to as a “bankability” opinion, stating what interest rate the bank would apply were it to make a comparable loan to that particular enterprise ...

The reliability of economic models’ outcomes depends upon the parameters factored into the specific model and the underlying assumptions adopted. In evaluating the reliability of economic models as an approach to pricing intra-group loans it is important to note that economic models’ outcomes do not represent actual transactions between independent parties and that, therefore, comparability adjustments would be likely required. However, in situations where reliable comparable uncontrolled transactions cannot be identified, economic models may represent tools that can be usefully applied in identifying an arm’s length price for intra-group loans, subject to the same constraints regarding market conditions discussed in paragraph 10.98 ...

In their most common variation, economic models calculate an interest rate through a combination of a risk-free interest rate and a number of premiums associated with different aspects of the loan – e.g. default risk, liquidity risk, expected inflation or maturity. In some instances, economic models would also include elements to compensate the lender’s operational expenses ...

Certain industries rely on economic models to price intra-group loans by constructing an interest rate as a proxy to an arm’s length interest rate ...

Accordingly, the use of credit default swaps to approximate the risk premium associated to intra- group loans will require careful consideration of the above-mentioned circumstances to arrive at an arm’s length interest rate ...

As financial instruments traded in the market, credit default swaps may be subject to a high degree of volatility. This volatility may affect the reliability of credit default swaps as proxies to measure the credit risk associated to a particular investment in isolation, since the credit default spreads may reflect not only the risk of default but also other non-related factors such as the liquidity of the credit default swaps contracts or the volume of contracts negotiated. Those circumstances could lead to situations where, for instance, the same instrument may have different credit default swaps spreads ...

Credit default swaps reflect the credit risk linked to an underlying financial asset. In the absence of information regarding the underlying asset that could be used as a comparable transaction, taxpayers and tax administrations may use the spreads of credit default swaps to calculate the risk premium associated to intra-group loans ...

In some intra-group transactions, the cost of funds approach may be used to price loans where capital is borrowed from an unrelated party which passes from the original borrower through one or more associated intermediary enterprises, as a series of loans, until it reaches the ultimate borrower. In such cases, where only agency or intermediary functions are being performed, as noted at paragraph 7.34, “it may not be appropriate to determine the arm’s length pricing as a mark-up on the costs of the services but rather on the costs of the agency function itself.” ...

The application of the cost of funds approach requires consideration of the options realistically available to the borrower. On prevailing facts and circumstances, a borrowing MNE would not enter into a transaction priced under the cost of funds approach if it could obtain the funding under better conditions by entering into an alternative transaction ...

One consideration to be kept in mind with the cost of funds approach is that it should be applied by considering the lender’s cost of funds relative to other lenders operating in the market. The cost of funds can vary between different prospective lenders, so the lender cannot simply charge based on its cost of funds, particularly if there is a potential competitor who can obtain funds more cheaply. A lender in a competitive market may seek to price at the lowest possible rate in order to win business. In the commercial environment, this will mean that lenders drive operating costs as low as possible and seek to minimise the cost of obtaining funds to lend ...

In the absence of comparable uncontrolled transactions, the cost of funds approach could be used as an alternative to price intra-group loans in some circumstances. The cost of funds will reflect the borrowing costs incurred by the lender in raising the funds to lend. To this would be added the expenses of arranging the loan and the relevant costs incurred in servicing the loan, a risk premium to reflect the various economic factors inherent in the proposed loan, plus a profit margin, which will generally include the lender’s incremental cost of the equity required to support the loan ...

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 ...

Whereas it is unlikely that an MNE group’s average interest rate paid on its external debt meets the comparability requirements to be considered as an internal CUP, it may be possible to identify potential comparable loans within the borrower’s or its MNE group’s financing with an independent lender as the counterparty. As with external CUPs, it may be necessary to make appropriate adjustments to improve comparability. See Example 1 at 1.164 – 1.166 ...

When considering issues of comparability, the possibility of internal CUPs should not be overlooked ...

Arm’s length interest rates can also be based on the return of realistic alternative transactions with comparable economic characteristics. Depending on the facts and circumstances, realistic alternatives to intra-group loans could be, for instance, bond issuances, loans which are uncontrolled transactions, deposits, convertible debentures, commercial papers, etc. In the evaluation of those alternatives as potential comparables it is important to bear in mind that, based on facts and circumstances, comparability adjustments may be required to eliminate the material effects of differences between the controlled intra-group loan and the selected alternative in terms of, for instance, liquidity, maturity, existence of collateral or currency ...

In the search for comparability data, a comparable is not necessarily restricted to a stand-alone entity. In examining commercial loans, where the potentially comparable borrower is a member of an MNE group and has borrowed from an independent lender, provided all other economically relevant conditions are sufficiently similar, a loan to a member of a different MNE group or between members of different MNE groups could be a valid comparable ...

The arm’s length interest rate for a tested loan can be benchmarked against publicly available data for other borrowers with the same credit rating for loans with sufficiently similar terms and conditions and other comparability factors. With the extent of competition often present within lending markets, it might be expected that, given the characteristics of the loan (amount, maturity, currency, etc.) and the credit rating of the borrower or the rating of the specific issuance (see Section C.1.1.2.), there would be a single rate at which the borrower could obtain funds and a single rate at which a lender could invest funds to obtain an appropriate reward. In practice, however, there is unlikely to be a single “market rate” but a range of rates although competition between lenders and the availability of pricing information will tend to narrow the range ...

The widespread existence of markets for borrowing and lending money and the frequency of such transactions between independent borrowers and lenders, coupled with the widespread availability of information and analysis of loan markets may make it easier to apply the CUP method to financial transactions than may be the case for other types of transactions. Information available often includes details on the characteristics of the loan and the credit rating of the borrower or the rating of the specific issuance. Characteristics which will usually increase the risk for the lender, such as long maturity dates, absence of security, subordination, or application of the loan to a risky project, will tend to increase the interest rate. Characteristics which limit the lender’s risk, such as strong collateral, a high quality guarantee, or restrictions on future behaviour of the borrower, will tend to result in a lower interest rate ...

Once the actual transaction has been accurately delineated, arm’s length interest rates can be sought based on consideration of the credit rating of the borrower or the rating of the specific issuance taking into account all of the terms and conditions of the loan and comparability factors ...

The following paragraphs present different approaches to pricing intra-group loans. As in any other transfer pricing situation, the selection of the most appropriate method should be consistent with the actual transaction as accurately delineated, in particular, through a functional analysis (see Chapter II) ...

“X Iberica SA” is a Spanish subsidiary of a multinational group and also a participant in the group’s cash pooling system, both as a borrower and as a provider of funds. When the group is not able to finance itself, the vehicle called THE X TES US comes into play, which raises these funds from outside the group as a group and on the basis of the group’s credit quality. The objective of cash pooling agreements is to manage the cash positions of the participating entities, optimising the group’s financial results by channelling the excess liquidity of the group companies that generate it to the group companies that need financing, resorting to third-party financing when the group itself is not able to finance itself. This achieves greater efficiency in the use of the group’s funds, as well as improving their profitability and reducing the administrative and general financial costs of the entities participating in the agreement. The tax authorities issued an assessment in which the interest rates on deposits and withdraws had been aligned and determined based on a group credit rating. A complaint was filed with the TEAC by X Iberica SA. Judgment of the TEAC The TEAC dismissed the complaint and upheld the tax assessment. The asymmetry in the treatment given by the taxpayer to credit and debit transactions in cash pooling is not admissible: As this system is configured, both types of transactions should have the same treatment; The analysis of the logic and philosophy that exists in transactions with financial institutions is not transferable to the cash pooling transactions involved here; in this, transactions that are channelled through the cash pooling lead entity, it follows from the functional analysis that it acts as a service provider managing and administering the cash pooling, but not as a credit institution that would assume the consequences of the contributions and drawdowns to/from the cash pool. And all the companies that form part of the cash pooling can be either contributors or receivers of funds, without it being generally known a priori what the debtor or creditor position of each of them will be. For the determination of the arm’s length price, in the selection of the type of transaction used as comparable, it is not appropriate to start from the stand alone credit rating of the operating entities or economic beneficiaries of the financing, in this case, the Spanish subsidiary X IBERICA SA, but instead what is appropriate is the credit rating of the group. Excerpts “In the cash pooling system to which X Iberica SA belongs, the cash pool leader does not assume the same position as a bank, but merely administrative and management tasks, but does not assume the risk of default either from the economic or contractual point of view (in fact, there is no mention of this issue in XF BV’s annual report, nor is it mentioned in the current account agreement), but rather this risk is assumed by all the participating entities. The lead institution centralises the cash and grants financing to cash pooling institutions, but on behalf of the contributing institutions, which are the ones that actually have the funds to lend and assume the risk of default. In the context of the functional analysis referred to in the previous legal basis of this resolution, we must reiterate that the benefits of the operation accrue to all participants, and it would therefore be inconsistent to assign the functions of a financial institution to the centralised cash pooling system’s management entity, or the benefit that would accrue to it if we assign a higher rate to the loans than that applied to fund-raising. The functions that the claimant defends in its allegations as being assigned to the system’s managing entity are clearly limited, especially as regards decisions regarding the entities that use this system, which are the group entities according to their funding needs or surpluses. In this respect, we saw that the Guidelines link a greater risk assumed by the parties to a transaction with the assumptions of greater control over the activity we are analysing, which in this case is certainly scarce. We must therefore uphold the settlement arrangements and dismiss the claimant’s claims on this point as well.” Click here for English translation Click here for other translation ...

In an Opinion issued on 10 July 2019 on request from the Administrative Court of Versailles, the Conseil d’Etat states as a principle that the arm’s length nature of intra-group interest rate can be demonstrated by reference to comparable unrelated transactions, when these loans constitutes realistic alternatives to the intra-group loan. Excerpt from the Opinion “… 5. The rate that the borrowing enterprise could have obtained from independent financial establishments or organizations under similar conditions means, for the purposes of these provisions, the rate that such establishments or organizations would have been susceptible, account given its own characteristics, in particular its risk profile, to grant it for a loan with the same characteristics under arm’s length conditions. 6. This rate cannot, having regard to the difference in nature between a loan from a financial institution or body and financing by bond issue, be that which this enterprise would itself have been able to serve for subscribers if it had chosen to finance itself by issuing bonds rather than taking out a loan. 7. The borrowing enterprise, which bears the burden of proving the rate that it could have obtained from independent financial institutions or organizations for a loan granted under similar conditions, has the option of providing this proof by any way. As such, to assess this rate, it may if necessary take into account the yield on bond loans issued by companies in comparable economic conditions, when these loans constitute, in the hypothesis considered, a realistic alternative to a intra-group loan. 8. This notice will be notified to the Versailles Administrative Court, to the simplified joint stock company Wheelabrator Group and to the Minister for Public Action and Accounts. It will be published in the Official Journal of the French Republic.” Click here for translation ...

A Polish company, “Shopping Centre Lender sp.k.”, had been granted three intra group loans in FY 2013 for EUR 2 million, EUR 115 million and EUR 43.5 million. The interest rate on the loans had been set at 9%. The tax authorities found that the 9% interest rate was higher than the arm’s length rate and carried out its own analysis on the basis of the comparative data from 66 transactions. In addition, data posted on the internet on the website of the National Bank of Poland was consulted. The summary showed that in the aforementioned period, the average interest rates applied by Polish financial institutions for loans granted to enterprises in EUR ranged from 2.4% to 3.6%. Furthermore, by letters in April 2017 the tax authorities requested information from domestic financial institutions regarding the interest rates and commission rates for loans granted to commercial companies in the period from June 2013 to September 2014. The information received showed that the interest rates applied by the banks were set as the sum of: the EURIBOR base rate (usually three months) and the bank’s margin. Between June 2013 and September 2014, interest rates varied and ranged from 0.515% to 6.50%. On the basis of the information received an assessment was issued where the interest rate on the three inter group loans had been lowered from 9% to 3.667% resulting in lower interest expenses and thus additional taxable income. Shopping Centre Lender sp.k. filed an appeal with the Administrative Court claiming that the procedure for estimating income – determining the arm’s length interest rate – had not been followed correctly by the tax authority. Judgment of the Administrative Court The Administrative Court issued a judgment in favour of Shopping Centre Lender sp.k. The Court found that the tax authorities procedure for estimating income had been in breach of the provisions of the Act and the Ordinance on transfer pricing adjustments. Click here for English Translation Click here for other translation ...

A GmbH, based in Zurich, was a subsidiary of the D group operating mainly in the field of consumer electronics worldwide, headquartered in country E. A GmbH was primarily responsible for acquiring exploitation rights to … and other related activities. The D Group also owned company F in Land H, which was responsible for the global treasury and cash pooling of the Group. On December 1 2008 A GmbH had entered into an agreement with Company F for the short-term deposit of excess capital and short-term borrowing. Under the terms of the agreement, if the balance was in A GmbH’s favor, A GmbH would be credited interest based on the one-month London Interbank Bid Rate (LIBID) minus 6.25 basis points, but not less than 0.05%. Following an audit in relation to the tax periods of 1.4.2009-31.3.2010 and 1.4.2010-31.3.2011, the tax authorities took the view that the cash pool credit contains a proportion of long-term loans to company F and insofar as the interest rate (determined on the terms of short-term deposits ) was too low compared to third-party terms. In the two financial years a minimum balance of Fr. … resp . … had never fallen below the base amount as a long-term loan. An assessment was issued on May 26, 2014 as a result of insufficient interest resulting in a hidden profit distributions based on the LIBOR interest rates. The appeal against the decision was dismissed by the Tax Appeals Court on 25 November 2016 with regard to the direct federal tax of the 2009/10 tax period and was partially approved with regard to the federal tax period 2010/11. The partial approval was made because the court of appeal reduced the applicable interest rate for 2011 from 2.25% to 2.0%, resulting in a reduction of the hidden profit distribution. A GmbH was charged for the direct federal tax of 1.4.2009-31.3.2010 with a taxable net profit of Fr. … and for the period from 1.4.2010-31.3.2011 with a taxable net profit of Fr. …. The Administrative Court partially upheld the complaint filed by A GmbH against the decision of the Tax Appeals Court by judgment of 7 December 2016 (SB.2016.00008) and dismissed the case for further investigation and for a new decision to the Tax Appeals Tribunal. It considered that the deposit in the cash pool that qualifies as a longer-term credit must be recalculated in the light of the considerations. On the basis of the facts presented by A GmbH and the evidence submitted, the administrative court concluded that the interest rates applicable in the D Group for longer-term loans to company F were in line with market conditions and, in the specific case, for the longer-term interest rates qualifying assets are decisive. The tax recourse court partially upheld the complaint in the second case by decision of 25 July 2017 and assessed the complainant for the direct federal tax of 1.4.2009-31.3.2010 with a taxable net profit of Fr. … and for the period of 1.4.2010- 31.3.2011 with a taxable net profit of Fr. …. The case was appealed to the Administrative Court on 29 August 2017, by the Swiss Federal Tax Administration (FTA). The Federal Tax Administration requested that the decision of the Tax Appeals Tribunal should be set aside and the taxable net profit with regard to the direct federal tax of 1.4.2009-31.3.2010 be set at CHF. … and for the tax period from 1.4.2010-31.3.2011 to Fri …. In a statement of objection dated 21 September 2017, A GmbH requested the dismissal of the complaint under costs and repercussions Click here for translation ...

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 ...

A complaint was filed by a “Medic-distributor” regarding a tax assessment issued by the tax authorities for FY2009 and FY2010 concerning the arm’s length price of pharmaceutical products purchased from related parties for distribution and a loan granted to a related party at an interest rate below the market interest rate. The case was dismissed by the court of first instance and was subsequently appealed to the Supreme Administrative Court. Judgment The Supreme Administrative Court dismissed the appeal and upheld the assessment issued by the tax authorities. Excerpts “The medicinal products subject to the assessment were sold to the related party at prices more than twice lower than the acquisition prices, and the cassator has not proved its claims that the reason for this was expiry of the expiry date, therefore, the tax authorities correctly assessed that there was a tax evasion (and not a tax evasion – as stated throughout the first instance judgment) within the meaning of Article 16(1)(a) of the Tax Code. 1 and Article 15 of the VAT Act. The expert in the court proceedings, unlike that in the audit proceedings, did not collect information on comparable product transactions with independent persons. The allegations in the appeal that the expert who prepared the valuation expert report in the audit proceedings did not indicate the valuation method used – the same is indicated on page 20 of the expert report and is also the method of comparable uncontrolled prices between independent traders, using data obtained from hospitals for the wholesale purchase of the same medicinal products as those at issue – are not true. (…) The court of first instance correctly held that under the CCCT the receipt or granting of loans at an interest rate different from the market interest rate at the time of conclusion of the transaction, including in the case of interest-free loans or other temporary financial assistance, is considered a tax evasion, and under Art. Under Article 16(1) of the Law, where one or more transactions are entered into under conditions the performance of which results in a tax evasion, the tax financial result shall be determined without taking into account those transactions, certain of their terms or their legal form, but shall take into account the tax financial result which would have been obtained if an ordinary transaction of the relevant type had been carried out at market prices and aimed at achieving the same economic result, but which does not result in a tax evasion. The court of first instance was also correct in not relying on the conclusion of the forensic valuation expert in the part concerning the determination of market interest on loans granted to related parties, since the expert determined average interest rates on bank term deposits, which are not comparable transactions with company loans. Both experts – in the audit proceedings and in the court proceedings – used the statistical data of the Bulgarian National Bank for the relevant period as the basis for their assessment, and the auditing authorities took the market interest rate determined by the expert to be the minimum of the range indicated by the expert as the relevant one for determining the tax liabilities of [company]. In accordance with the requirements of § 1 , item 10 of the Tax Code, in conjunction with Regulation No N-9/14.08.2006 and the legal definitions of ‘market interest’ in the Tax Code, the expert’s conclusion in the audit proceedings on the method of comparable uncontrolled prices used by him is more in line with the regulatory requirements and the concept of ‘market interest’ used therein. The taxpayer’s argument that there is no tax evasion because the interest on loans to related parties yields a higher income than the cash deposited in a bank has no legal support in the legislation. Concluding on the legality of the adjustments made to the financial result for 2009 and 2010 in increase on the basis of Art. 16 para. 1 and Article 15 of the Income Tax Act in relation to sales of medicinal products and medical devices made by [company] to [company] and on the basis of Article 16(2)(3) of the Income Tax Act in relation to loan agreements concluded by [company], the Court of First Instance has given a correct judgment, which this Court of Cassation must uphold.” Click here for English translation Click here for other translation ...

An assessment was issued by the Norwegian tax authorities for years 2009 2010 and 2011 concerning the interest on a loan between Exxonmobil Production Norway Inc. (EPNI) as the lender and Exxon Mobile Delaware Holdings Inc. (EMDHI) as the borrower. Both EPNI and EMDHI are subsidiaries in the Exxon Group, where the parent company is domiciled in the United States. The loan agreement between EPNI and EMDHI was entered into in 2009. The loan had a drawing facility of NOK 20 billion. The agreed maturity was 2019, and the interest rate was fixed at 3 months NIBOR plus a margin of 30 basis points. The agreement also contained provisions on quarterly interest rate regulation and a interest adjustment clause allowing the lender to adjust the interest rate on changes in the borrower’s creditworthiness. The dispute concerns the margin of 30 basis points and the importance of the adjustment clause, also referred to as the step-up clause. The Oil Tax office and the Appeals Board for Oil Tax found that the agreed interest rate was not at arm’s length and taxable income for the three relevant years was increased by a total of NOK 95 525 000. EPNI filed an appeal to Oslo District Court. In 2016 the District Court ruled in favor of the tax authorities. EPNI then filed an appeal to the National Court of Appeal. The National Court of Appeal concluded that the interest payments had not been at arm’s length and dismissed the appeal. In the decision, reference is made to the Norwegian Supreme Court decision in the Statoil Angola case from 2007. Click here for translation ...

In 2014, the tax authorities issued the Italien Bank a notice of assessment with which it reclaimed for taxation IRAP for 2009 part of the interest expense paid by the bank to a company incorporated under Irish law, belonging to the same group which, according to the tax authorities, it also controlled. In particular, the tax authorities noted that the spread on the bond was two points higher than the normal market spread. The Bank appealed the assessment, arguing that there was no subjective requirement, because at the time of the issue of the debenture loan it had not yet become part of the group of which the company that had subscribed to the loan belonged. It also pleaded that the assessment was unlawful because it applied a provision, Article 11(7) TUIR, provided for IRES purposes, the extension of which to IRAP purposes was provided for by Article 1(281) of Law 147/13, a provision, however, of an innovative nature, the retroactivity of which was considered to be in conflict with the Community principles of legitimate expectations and with Articles 23, 41, 42 and 53 of the Italian Constitution. Decision of the Court The Court dismissed the appeal and decided in favor of the tax authorities. Click her for English translation Click here for other translation ...

Under these circumstances the interest rate charged on the loan by T to S is an arm’s length interest rate because (i) it is the same rate charged to S by an independent lender in a comparable transaction; and (ii) no payment or comparability adjustment is required for the group synergy benefit that gives rise to the ability of S to borrow from independent enterprises at an interest rate lower than it could were it not a member of the group because the synergistic benefit of being able to borrow arises from S’s group membership alone and not from any deliberate concerted action of members of the MNE group ...

Assume that S borrows EUR 50 million from an independent lender at the market rate of interest for borrowers with an A credit rating. Assume further that S simultaneously borrows EUR 50 million from T, another subsidiary of P, with similar characteristics as the independent lender, on the same terms and conditions and at the same interest rate charged by the independent lender (i.e. an interest rate premised on the existence of an A credit rating). Assume further that the independent lender, in setting its terms and conditions, was aware of S’s other borrowings including the simultaneous loan to S from T ...

P is the parent company of an MNE group engaging in a financial services business. The strength of the group’s consolidated balance sheet makes it possible for P to maintain an AAA credit rating on a consistent basis. S is a member of the MNE group engaged in providing the same type of financial services as other group members and does so on a large scale in an important market. On a stand-alone basis, however, the strength of S’s balance sheet would support a credit rating of only Baa. Nevertheless, because of S’s membership in the P group, large independent lenders are willing to lend to it at interest rates that would be charged to independent borrowers with an A rating, i.e. a lower interest rate than would be charged if S were an independent entity with its same balance sheet, but a higher interest rate than would be available to the parent company of the MNE group ...

Following an audit the tax authorities issued an assessment, where the interest rate on a loan had been changed based on application of transfer pricing rules. An appeal was filed by “Holding S.A.” arguing that the transfer pricing rules do not apply to the loan operations observed, since there has not been a lower payment of income tax as required by paragraph a) of article 32-A of the aforementioned tax law, This is also not verified by having obtained losses in the years 2000 to 2005, since being a holding company and only receiving income from dividends, such losses cannot be carried forward, in addition to the fact that the only effect of the objection formulated is to reduce the loss and not to determine a higher tax payable. Judgment of the Tax Court The Tax Court sets aside the assessment and decided in favour Holding S.A. Excerpts “In this sense, it has not been proven that the Administration had carried out a due comparison of the same or similar transactions in order to correctly establish the market value of the transactions analysed in application of the transfer pricing rules, specifically, in accordance with the provisions of paragraph d) of article 32°-A of the Income Tax Law. Consequently, the objection raised by the Administration should be lifted, and the appealed decision should be revoked and the contested resolutions of determination should be annulled, as well as the fines applied. Click here for English Translation Click here for other translation ...

A Norwegian subsidiary of an international group (Hess Oil), refinanced an intra-group USD loan two years prior to the loans maturity date. The new loan was denominated in Norwegian kroner and had a significantly higher interest rate. The tax authorities reduced the interest payments of the Norwegian subsidiary pursuant to section 13-1 of the Tax Act for fiscal years 2009 – 2011, thereby increasing taxable income for years in question with a total of kroner 262 million. The Court of Appeal found for the most part in favor of the tax administraion. Under the circumstances of the case, neither the claimed refinancing risk nor the currency risk could sufficiently support it being commercially rational for the subsidiary to enter into the new loan agreement two years prior to the maturity date of the original USD loan. When applying the arm’s length principle, the company’s refinancing risk had to be based on the Norwegian company’s actual situation as a subsidiary in the Hess Oil group. Click here for translation ...

An adjustments had been made by the tax authorities to a series of loans granted by GOLDEN ARCHES OF SPAIN SA (GAOS), domiciled in Ireland, to RESTAURANTES MC DONALDS, S.A. (RMSA), throughout the period 2000/2004 for amounts ranging between 10,000,000 and 86,650,000 €, at interest rates between 3,450% and 6,020%. The tax administration held that GAOS “has no structure or means to grant the loan and monitor compliance with its conditions … it does not have its own funds to lend, it receives them from other companies in the group”. The Administration refers to a loan received by GAOS from the parent company at a rate of 0%, which is paid in advance to receive another with an interest rate of 3.3%. The Administration indicates that “nobody, under normal market conditions, cancels a loan to constitute another one under clearly worse conditions”. The arm’s length interest rate was determined by reference to the interest rate RMSA would have paid to an independent bank. In 2005 there were external bank loans in the same company for more than 100,000,000 euros at an average interest rates of 2.57%. Judgment of the Court: “As regards the valuation at market price of the interest rate on the loans or lines of financing …, it has already been shown above that the loans were granted throughout the period 2000/2004 for amounts between 10,000,000 and 86,650,000 euros, with different interest rates ranging between 3.450% and 6.020%. These rates are notably higher than those demanded from RMSA by the banks – independent third parties – that granted it loans, so that in the financial year 2005 there are credit lines of more than 100,000,000 euros at average rates of 2.57% (credit lines for one year and renewable). “This being so, the reasonableness of the judgment cannot be disputed in appealing to the credit obtained by RMSA from independent entities, even though the conditions were different in some of their distinctive features to those of the loans received from GAOS, especially when the Court of First Instance rightly expresses the reasons why such alleged differences are irrelevant.” “…As regards the OECD Guidelines cited as infringed in the plea, this Court has already held that they are not sources of law and therefore cannot be relied on in cassation. Moreover, the reference in Article 16 TRLIS to them as rules inspiring application was introduced in Law 36/2006, which is not applicable ratione temporis to this case. Indeed, as we have recently stated (judgment of 19 October 2016, handed down in appeal no. 2558/2015), article 88.1.d) of the Law of this Jurisdiction allows for the complaint of defects in iudicando in which the contested judgment may have incurred, stating that “1. The appeal must be based on one or some of the following grounds: …d) Infringement of the rules of the legal system or case law that were applicable to resolve the issues under debate”. The infringement invoked in cassation, therefore, must refer precisely to the rules of the legal system, that is to say, to the formal sources which comprise it and which are set out in Article 1.1 of the Civil Code, which establishes that “…the sources of the Spanish legal system are the law, custom and the general principles of law”. Within the material concept of law expressed in the precept, it is possible to include the different manifestations, hierarchically ordered, of normative power (Constitution, international treaties, organic law, ordinary law, regulations, etc.). ), but it is not possible to base a ground of appeal on the infringement of the aforementioned OECD Guidelines, given their lack of normative value, that is to say, of a binding legal source for the Courts of Justice that can be predicated on them, and which this Supreme Court had already declared previously (thus, the Judgment of 18 July 2012, handed down in appeal no. 3779/2009 ), in which such guidelines are considered as mere recommendations to the States and, elsewhere in that judgment, it assigns them an interpretative value. Such a function, that of interpreting legal rules, derives, moreover, from the very role assigned to them by the Explanatory Memorandum to Law 36/2006, of 29 November, on measures for the prevention of tax fraud, which states the following: “…As far as direct taxation is concerned, this reform has two objectives. The first refers to the valuation of these operations according to market prices, thus linking them to the existing accounting criteria applicable to the recording in individual annual accounts of the operations regulated in article 16 of the Consolidated Text of the Corporate Income Tax Law, approved by Royal Legislative Decree 4/2004, of 5 March. In this respect, the acquisition price at which these transactions must be recorded for accounting purposes must correspond to the amount that would be agreed by independent persons or entities under conditions of free competition, understood as the market value, if there is a representative market or, failing that, the amount derived from applying certain generally accepted models and techniques and in harmony with the principle of prudence. In short, the tax regime for related-party transactions is based on the same valuation criterion as that established in the accounting field. In this sense, the tax administration could correct the book value when it determines that the normal market value differs from that agreed by the related persons or entities, with regulation of the tax consequences of the possible difference between the two values. The second objective is to adapt Spanish transfer pricing legislation to the international context, in particular to the OECD guidelines on the subject and to the European Transfer Pricing Forum, in the light of which the amended legislation must be interpreted. In this way, the actions of the Spanish tax authorities are brought into line with those of other countries in the region, while at the same time providing greater security for verification procedures by regulating the obligation of the taxpayer to document the determination of the market value agreed in the related-party transactions ...

The distinction between cash pool receivables and long-term loans. A GmbH is a group company of the global A-group. The A Group also includes company F Ltd, which is responsible for the global treasury and cash pooling of the A Group. In 2008, A GmbH entered into an agreement with F Ltd on the short-term deposit of excess liquidity and short-term borrowing (cash pool). Under the terms of the agreement, if the balance were in A GmbH’s favor, recievables would be credited interest based on the one-month London Interbank Bid Rate (LIBID) less 6 , 25 basis points, but at least 0.05%. The Swiss tax administration argued that a portion of the cash pool receivable had to be treated as a long-term loan bearing higher interest rates. The long-term loan was set to the minimum cash pool receivable balance of each fiscal year. The interest rate on the long-term loan was set to the Swiss „Safe Habor Rates“ according to the annual circular letters published by the Swiss Federal Tax Administration. The Tax Appeal Court largely confirmed the decision of the tax administration. However, it reduced the applicable interest rate for the calendar year 2011 from 2.25% to 2.00%. The Tax Appeal Court argued that the tax administration had unreasonably deviated from its longstanding method when determining the 2011 safe haven interest rate, so that the 2.25% mentioned in the circular letter were too high. A GmbH. appealed the decision to the Administrative Court. Based on the overall circumstances, the amount of the assets invested in the cash pool did not comply with the arm’s length principle according to the Administrative Court. In this respect, it was correct to qualify a portion of the cash pool receivable into a mid- or long-term loan. Concerning the size of the long term loan, the simple average of the cash pool receivable balance at the beginning and closing of the fiscal year could be taken as a starting point according to the Administrative Court. This question was referred back to the tax administration. Concerning the applicable interest rate on the long-term loan, the Administrative Court stated, that the tax authorities cannot in every case refer to the Swiss “Safe Habor Rates”. The Court concluded that the interest rates offered by F Ltd. for long-term intra-group loans were in line with the arm’s length principle. Click here for other translation ...

The Tax Agency had issued some notices of assessment against “Lender SpA” that had provided non-interest bearing loans to two Serbian companies, of which it owned respectively 70 and 80 per cent of the share capital, because it had decided not to recognise such loans, hypothesising a violation of Article 110, paragraph 7 of the Italian Income Tax Code (Tuir), on the subject of transfer pricing. An appeal was filed by Lender SpA with the Provincial Tax Commission where the assessment was set aside. An appeal was then filed by the tax authorities with the Regional Tax Commission. Decision of the Regional Tax Commission The Court, upheld the first instance ruling and affirmed that the non-interest bearing loan cannot be considered an income component, but must be considered a type of financing between affiliated companies. Excerpt “The Office’s appeal is unfounded and the judgment under appeal must therefore be upheld. With a decision that stands out for its clarity and legal rigour, the first judges unequivocally indicated that the transfer pricing rules are contained in the combined provisions of Article 110, paragraph seven, and Article 9, paragraph three, of the TUIR, which provide that the price at which commercial transactions take place between companies resident in different States that are linked by controlling relationships must be assessed at normal value. These must then be exchanges between companies resident in Italy and companies tax resident abroad linked by direct or indirect control relationships, exchanges – in the final analysis – carried out on the basis of so-called market value. The non-interest-bearing loan, which is the subject of the relief, cannot therefore be considered a component of income, as the Office seeks to corroborate, it must instead be considered a type of financing between contiguous parties: relatives, friends, or companies belonging to the same group. Lawful transactions carried out not for avoidance purposes.” Click her for English translation Click here for other translation ...

K-Bul is a Bulgarian subsidiary in the K Group. In the years 2007 to 2013 certain financial intra-group contracts were entered (Two financial service contract – concluded on 02.10.2007 and a Loan agreement concluded on 26.01.2010). Following an audit, the market interest rate was determined by the tax authorities on the basis of the Bulgarian National Bank (BNB)’s interest rate statistics published on the Bank’s website, and for the first two contracts a market interest rate of 8.22% was adopted, as reported by the BNB for October 2007 for euro loans to non-financial corporations for a period of one to five years. The loan agreement concluded on 26.01.2010 has a market interest rate of 6,88 %, which corresponds to the BNB interest rate statistics for January 2010 for euro loans to non-financial corporations for a period of up to one year. On that basis the taxable income of K-Bul was restated by amounts representing the difference between the interest charged by the company for the relevant year and the market interest determined in the course of the audit proceedings. K-Bul then filed a complaint with the Administrative Court. The court held that the statistical data of the BNB used in the course of the audit did not constitute a proper method for establishing the market interest on the loans in question. The court held that the interest statistics maintained by the BNB cannot take into account the quantitative and qualitative characteristics of the specific transaction, which is an essential feature of market interest. An appeal was then filed by the tax authorities with the Supreme Administrative Court. Judgment of the Supreme Administrative Court The Supreme Administrative Court set aside the decision of the Administrative Court and remanded the case for a new trial. Excerpts “”In the light of that procedural conduct of the parties, it may be assumed that the court referred to the evidence adduced in the course of the appeal, but, as stated above, that evidence was not discussed. Further, the appellant’s argument in the appeal that the judgment is devoid of reasons as to why the court found it lawful to determine the interest rates under the contracts at issue and why those interest rates should be determined by applying LIBID and EURIBOR, given the undisputed fact that the Bulgarian company carries on its business in Bulgaria, is well founded. The above-mentioned infringements of the rules of reasoning are of a fundamental nature, since they lead to the conclusion that the disputed relations may have developed in a different manner from that accepted by the court. The Court of First Instance should not consider for the first time the evidence admitted in the case and should not establish new facts, since the right of the parties to two-instance proceedings would be infringed. On a retrial, the nature of the contractual relationship between the parties must be determined, taking into account the finding in the course of the audit that the provision of the funds took the form of a deduction of part of the sums owed by customers of the K. group to the Bulgarian company for sales of products made by the latter to them. The rest of the sales amounts were remitted to the LPF and were accounted for as repayment on credit granted, i.e. it has to be considered whether there is a K. Pooling Agreement in this case, taking into account also the manner of accounting of the amounts in question, namely, synthetic accounting of the long-term loans granted in foreign currency in account 226, as well as the description of the activity /page 12 of the evidence book admitted in the course of the proceedings/. If such an arrangement is established, then to the extent that each Participant in the K. Pooling will be able to both provide funds to the Leader and to use the other Participants’ funds through the Leader, any benefits that the individual Participant derives from its presence in this construct should be taken into account in determining whether the prices at which these transactions occur are market-based, and, if necessary, special knowledge should be used to determine the interest that the Participant receives for the funds provided” Click here for English Translation Click here for other translation ...

A AG granted loans to group companies as part of a cash pooling system via the parent company. The Swiss tax administration found the interest insufficient, resulting in a hidden profit distribution. According to the Swiss rules and doctrine, transactions between related parties must be consistent with the arm’s length principle. For the third-party comparison, the Court relied on the long-term interest rates, even if the cash pool balances were correctly accounted for as short-term loans. The basis for the third-party comparison for the cash pool interest rate was determined to be the market interest rate measured on the 5-year SWAP rate. The Court decision was partial approval of A AG and refusal to the Tax administration. Click here for English translation. Click here for other translation ...

Following an audit, the tax authorities issued an assessment of additional taxable income to Rimi Baltic for FY 2009. According to the tax authorities Rimi Baltic had not included interest on deposits placed at the disposal of a related Swedish company, ICA Finans AB, in its taxable income. An appeal was filed with the Regional Administrative Court and in a decision issued in February 2014 the court ruled in favour of Rimi Baltic and set aside the assessment of the tax authorities. An appeal was then filed by the tax authorities with the Supreme Administrative Court. Judgment of the Supreme Court The Supreme Court set aside the decision of the Court of Appeal and remanded the case for reconsideration. Excerpts “It should be noted that any money lending/depositing transaction can be viewed as constituting a loan on the one hand and a borrowing on the other. In the case of credit institutions, it is customary to use terms that reflect the nature of the credit institution as a provider of financial services. However, such a comparison becomes inherently meaningless when the two parties to the transaction are similar businesses (neither is a credit institution) and the transaction is similarly beneficial and necessary for both parties. In the present case (as far as can be seen from the District Court’s judgment), even if ICA Finans AB is the financial centre of the group of companies, it must be taken into account that it is not an independent activity with an independent profit objective, but an instrument for the financial optimisation of all the companies in the group.” “The decision of the Director General of the State Revenue Service of 18 August 2011 states that credit institutions, when granting loans, assess the risks depending on the type of collateral, the amount of the loan and the interest rate. Lending practice shows that secured loans have lower interest rates, and larger loans provide higher returns but involve higher risks. The decision then goes on to assess the circumstances found and states that the applicant has not provided information on the facts which would be necessary for the Authority to make a more precise assessment. That is why the Authority applied data from the Central Statistical Office. In such circumstances, in order to establish the validity of the decision of the State Revenue Service, the Court had to determine whether the State Revenue Service, taking into account also the applicant’s duty to cooperate and the completeness of the information provided by the applicant (Article 59(4) of the Law on Administrative Procedure, Article 38 of the Law on Taxes and Fees), had determined the transaction price in accordance with the economic substance of the transactions. It was therefore necessary to take into account, on the one hand, the above-mentioned considerations concerning the regularity of the formation of interest rates on loans/deposits (drawing, where necessary, in this respect on economic and legal knowledge and, possibly, the opinions of experts) and, on the other hand, the completeness of the information provided by the applicant.” “Since the assessment contained in the judgment of the Regional Court is not sufficient to draw reasonable conclusions as to whether the conduct of the service complies with the Article 23(2) of the Law on Taxes and Duties, Article 12(2) of the Law on Corporate Income Tax and paragraphs 84, 91 and 92 of Regulation No 556, the judgment must be set aside and the case must be referred back for reconsideration” Click here for English translation Click here for other translation ...

A Swiss company, Hôtel X. SA operates a hotel in Geneva. It is 50% owned by Y. (Suisse) SA. In its 2009 tax return, the Company declared a taxable profit of CHF 685,413. It specified that the amount of CHF 653,478 in advances to shareholder companies represented a loan granted to Y. (Suisse) SA and that the interest of CHF 17,471 recorded on this loan had been calculated on the basis of the average receivable for the 2008 and 2009 financial years, at a rate of 2.5%. The Company also stated that it had paid CHF 57,802 in interest on its bank mortgages. Following an audit, the tax authorities issued an assessment of additional taxable income CHF 5,850. According to the tax authorities, the Company should have applied an interest rate of 3.941% on the loan granted to Y. (Suisse) SA. Calculated on an average receivable of CHF 591,743, interest of CHF 23,321 should therefore have been taken into account. Consequently, the difference between this amount and the interest booked by the Company (CHF 17,471), i.e. CHF 5,850, had to be added to its taxable profit for the 2009 tax year. The Company unsuccessfully challenged the assessment by lodging a complaint and then an appeal with the Administrative Court. An appeal was then filed against the Administrative Court’s ruling with the Court of Justice of the Canton of Geneva. The Court of Justice dismissed the appeal by judgment of 19 February 2013. Hôtel X. SA then lodged an appeal with the Federal Court. Decision of the Court The Federal Administrative Court upheld the decision of the Court of Justice and dismissed the appeal of Hôtel X. SA. Excerpt in English “6.1 The Swiss Federal Supreme Court has on several occasions ruled on interest rates on loans between companies and shareholders or their close relations. In an earlier ruling, which concerned a loan that a company had granted without interest to its main shareholder, it held that the interest rate of 4% used by the Federal Tax Administration as the interest rate that the company should have applied to the loan was appropriate, as it was close to the interest rate charged by Swiss banks for loans granted without security during the period in question (Archives 19 p. 403). In another early ruling, which also concerned a loan that a company had granted to its main shareholder without interest, it confirmed the interest rate of 5% adopted by the Federal Tax Administration as the interest rate that should have been applied by the lending company, specifying that this was a “normal” rate, which was provided for in particular in art. 73 of the Swiss Code of Obligations (Archives 26 p. 137, para. 3). More recently, the Federal Supreme Court confirmed the method applied by the Federal Tax Administration to determine the arm’s length interest rate in the case of a loan granted in US dollars by a company to its US parent company, which had consisted in comparing the interest rates actually applied with the average US bond rates during the periods in question. According to the Federal Supreme Court, this comparison was justified since loans between associated companies must be qualified as long-term loans from a tax point of view (ruling 2A.355 /2004 of 20 June 2005, recitals 3.3 and 3.4, in RF 60/2005 p. 963, commented by PETER GURTNER, Archives 76 p. 53). In its case law, the Federal Court thus tends to apply the method of comparison with a comparable transaction (cf. recital 4.2) to determine the interest rate that would have been applied to a loan between independent third parties. This method is also recommended by the OECD when the transfer pricing issue concerns a loan of money, on the grounds that it is easy to apply in this context (OECD, op. cit., § 1.9; see also OECD Secretariat, Transfer Pricing Methodologies, July 2010, § 7). 6.2 Determining the interest rate on an arm’s length loan depends on a number of factors, including the amount and term of the loan (see in this respect judgment 2A.355/2004 of 20 June 2005, recital 3.3, in RF 60/2005 p. 963), its nature, its purpose (commercial credit, general purpose loan, mortgage loan, etc.), the collateral to which the loan may or may not be linked and the financial strength of the borrower. The financial situation of the lending company and the source of funding for the loan are also factors that must be taken into consideration. In its case law, however, the Federal Supreme Court has not addressed the question of the financial situation of the lending company or the source of financing for the loan when determining the arm’s length interest rate. Yet these factors are important, given that a company that is itself in debt has no economic reason to lend funds to its shareholder or partner rather than use those funds to repay its debt, unless the transaction proves profitable. Section 1.2 of the 2009 circular letter makes it possible to verify that the transaction allows the company to generate a profit margin, since the minimum interest rate on the loan granted to the shareholder or partner must be 0.25% or 0.5% higher than the interest rate paid by the company on its own interest expenses. 6.3 Section 1.2 assumes that there is an economic connection between the company’s own debt and the loan to the shareholder. This solution is admittedly very schematic. However, such a schematic approach is acceptable in this case, insofar as the method is provided for in an administrative directive and not in a standard that would have binding effect. Indeed, failure to comply with the rate resulting from the application of point 1.2 merely creates an indication of the existence of an appreciable benefit in money, since the taxpayer always retains the possibility of proving that the lower rate he has applied nevertheless complies with the arm’s length principle (see on this point below, recital 7).” “7.1.2 In the present case, the appellant ...

At issue in this case is the choice of method for determening interest rates on an intra group loan – More precisely whether or not internal comparables existed that were in fact independent. It is also discussed whether a intra group loan is comparable to a bank loan or not. Click here for translation ...

The issue in the case was whether the applicable rates under the cash pool arrangement were on arm’s length, i.e. in accordance with the transfer pricing requirements. The Administrative Tax Court upheld most of the conclusions of the tax authorities. First, the Court found that the tax authorities were allowed to assess an arm’s length rate due to the lack of transfer pricing documentation. Second, the financial service fee of 0.25% was upheld. Third, the Court concluded that the rate on the short-term deposits and the corresponding loans (borrowed due to insufficient liquidity management) should be the same. The Administrative Tax Court observed that there was very little or no creditor risk on these gross corresponding loans/deposits because of the possibility of offsetting the balance. Hence, according to the Court, there was no basis for a spread on the gross balance. However, the rate spread on the net balance of the deposits was lowered from +1.18% to + 1.15%, equal to the borrowing rate spread. The Administrative Tax Court reasoned that the tax authorities had accepted the 1.15% rate spread as the market rate on loans made by the Danish subsidiary and that there were no facts indicating that the deposit rate should be different. The Administrative Tax Court also remarked that the adjustment made by the tax authorities was not a recharacterization, but rather a price adjustment. Click here for translation ...

In the France Immobilier Group decision, the Court found that the interest rate should be based on the financing conditions the lender could have obtained from a third-party bank. Click here for translation ...

A Turkish company located in a tax free zone had obtained interest income based on the interest rate applied to foreign currency loans, although the company had lent money to its partner in Turkish Lira. Normally interest income is considered taxable, but within the tax free zone, income from listed activities is exempt. Click here for translation ...

At issue in this case is the determination of arm’s length interest rates. Click here for translation ...

A company, which belonged to a Nordic group, had until August 2005, two loans with an independent party outside the group. The interest of the loans was 3.135 to 3.25 percent. The company’s long-term loans amounted to over EUR 36 million and the guarantees granted by the Company for its loans amounted to about 41 million. In August 2005 the financing of the entire group was re organised. A Ltd paid off old bank loans and took up a new loan from the Swedish company B AB, which belonged to the group. For loans between the group companies was 9.5 percent interest rate. The interest rate had been affected by interest rate percentages on unrelated loans , risk loans and loans from shareholders. After the change in funding A Ltd’s long-term debt totaled just over EUR 38 million and the guarantees granted by the Company for the group was around 300 million euros. A Ltd’s capital structure was not affected significantly by the change. The interest rates that A Ltd had paid to B AB had clearly exceeded the amount that two independent companies would have paid. The average external financing rate for the entire group, which was 7.04 percent, could not be used as the basis for deductible interest into a situation where the company’s own credit condition and other circumstances, would have made it possible for the Company to obtain financing at considerably more favorable conditions. To A Ltd’s taxable income for 2005 would thus non-deductible interest added 845,354 euros, corresponding to the difference between an interest rate of 9.5 percent and an interest rate of 3.25 percent. The law on the taxation of business income § 18 subsection 1. 2 point Click here for translation he ...

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. Judgment 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 ...

In the Société d’acquisitions immobilières case the interest rate charged to a subsidiary was considered comparable with the interest rate the French entity would receive from a third party bank for an investment similar in terms and risk. The Court decided that the cash advance granted by a sub-subsidiary to its ultimate parent with which it had no business relations could constitute an “abnormal act of management” if the amount lent is clearly disproportionate to the creditworthiness of the borrowing company. Click here for translation ...

In this case the French Supreme Court states that the provisions of article 57 of the general tax code (arm’s length principle) do not have the object or effect of authorising the tax authorities to assess the normal nature of the choice made by a foreign company to finance by granting a loan, in preference to a contribution of own funds, the activity of a French company that it owns or controls and to draw, if necessary, any tax consequences from this. Excerpt “Considering, secondly, that the Minister for the Economy, Finance and Industry maintains, in the last part of his pleadings, that the disputed taxes can be legally based on the provisions of the first paragraph of Article 57 of the General Tax Code, under the terms of which : For the purpose of determining the income tax due by companies which 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 with regard to undertakings which are dependent on an undertaking or a group which also controls undertakings located outside France; that the Minister merely alleges, in support of this last plea, that the purpose of the advances granted by the Austrian parent company to its French subsidiary was to compensate for the shortfall in the share capital with which the parent company had endowed its subsidiary and to allow the latter to deduct from its taxable profits the remuneration of the additional funds thus made available to it, by way of interest due on account of these advances and in preference to non-deductible dividends remunerating the contribution of the shareholders; that this resulted in a transfer of profits to the parent company within the meaning of Article 57 of the General Tax Code; But whereas the above-mentioned provisions of Article 57 of the General Tax Code do not have, any more than the stipulations of the above-mentioned Article 6 § 5 of the Franco-Austrian Convention, the object or effect of authorising the tax authorities to assess the normal nature of the choice made by a foreign company to finance by granting a loan, in preference to a contribution of own funds, the activity of a French company that it owns or controls and to draw, if necessary, any tax consequences from it; It follows that the plea put forward by the Minister of the Economy, Finance and Industry to the effect that a new legal basis could be substituted for that initially adopted by the tax authorities cannot, in any event, be accepted; Considering that it follows from the foregoing that the Minister for the Economy, Finance and Industry has no grounds for complaining that, by its judgment of 6 May 1997, the Administrative Court of Orléans granted SA ANDRITZ, as successor in title to Andritz Sprout Bauer, discharge from the supplementary corporation tax, with interest for late payment, for the reintegration in its taxable profits of the aforementioned interest relating to the fraction of the current account advances granted to it by the company Maschinen Fabrik Andritz A. G. in excess of a sum equal to one and a half times its share capital;” Click here for English translation Click here for other translation ...

This case concerns a Dutch treasury company with a low risk intra-group borrowing and on-lending activity. The interested party was incorporated on 5 August 1995 by a legal person named V Limited, under Canadian law. Its subscribed and paid-up capital amounted to NLG 40,000 in the years under review. The claimant is part of the V group. Its actual activities are described in its “Declaration of data on business start-ups” submitted to the tax authorities as “intra-group financing”. It maintained a bank account with the Bank of Montreal. In the financial years in question, the interested party lent substantial amounts of pounds sterling to its sister company Y Plc, incorporated under the laws of the United Kingdom, in the form of promissory notes and a revolving credit facility with effect from 31 January and 1 February 1996 respectively. The stakeholder obtained the necessary pounds by way of a loan from its sister company Z B.V. The funds borrowed and lent by the stakeholder were transferred to its bank account with the Bank of Montreal. The loan conditions in the relationship between the interested party (lender) and Y (borrower) ran completely parallel to the conditions under which the interested party borrowed the relevant funds from Z. The money flows – such as repayment and interest payments – also ran completely parallel. The interested party did not therefore run any interest or exchange rate risk. It did not carry out any other activities. Before the interested party became active as such – on 31 January 1996 – loans to Y were provided by Z, which borrowed funds for that purpose within the V-group. Z has a very large own capital. For its holding and financing activities, Z concluded a ruling; with regard to the financing activities this ruling implied that there would be fees determined at arm’s length if it would declare a gross margin of at least 1% of the borrowed and on-lent funds as a contribution to its taxable profit. In the current financial years Z has lent out the funds to the interested party at its subsidiary D N.V. established in the Netherlands Antilles. In dispute is the manner in which the profits of the interested party should be determined. – Does the interested party act as a finance company, and if so, should its profit, as the tax inspector primarily argues, be set at 1/8% of the borrowed and on-lent amounts, in accordance with the so-called ruling policy, or should the interest paid by it be excluded from deduction pursuant to Article 9(1)(b) of the Corporation Tax Act 1969 (the Act), as the tax inspector alternatively argues? – If the interested party is not a finance company in the strict sense of the word, can the interested party’s profit be determined in accordance with the tax return, as the interested party primarily maintains, or at least can its profit be determined in accordance with the cost-plus method, as the interested party maintains in the alternative and the Inspector maintains in the further alternative? – If none of the aforementioned profit determination methods is correct, is it then possible, as the interested party argues in the alternative, to use the advice of two trust offices which it obtained to determine its profit? Judgment of the Court According to the court, a cost-plus surcharge of 10% was appropriate in this case. “Based on the facts established – including the circumstance that its risk-bearing capital did not exceed NLG 40,000 – the Court deems it sufficiently plausible that the interested party in fact acted as an intermediary between Z and Y, that it borrowed and lent money and received and passed on interest in this context almost without any risk, and that as such it essentially only fulfilled a cashier’s function for the benefit of Z. The applicant cannot therefore be regarded as a finance company in the proper sense of the term. The primary and subsidiary arguments of the Inspector are therefore rejected by the Court. The reason(s) why the interested party was thus engaged and the question whether the loans and interest are rightly included in its balance sheet or profit and loss account, respectively, can be left open in the context of the present dispute. It is part of the economic function performed by the interested party – see 5.1 – that the interested party passes on its costs to Z with a profit surcharge. Since the interested party’s profit must be determined according to the cost-plus method, the Court agrees with the parties’ arguments – shared in so far as they are not unreasonable – that a mark-up of 10% must be applied, so that the taxable amount for the 1995/1996 financial year is NLG 2,350 and for the 1996/1997 financial year NLG 26,693. The Court will rule accordingly.” Click here for English translation Click here for other translation ...

In the case of Montlaur Sakakini the tax authorities had issued an adjustment where the arm’s length interest rate on deposits had been determined to be between 10-12%. The company held that the interest rate should be 4.5%. Judgment of the Court The court decided in favour of the company as no proof of the validity of an interest rate higher than the 4.5% had been provided by the authorities. Excerpt “…in order to justify the interest rates of 12.5%, 12.5%, 11.79% and 10.63% which the tax authorities retained, respectively for the financial years …, 1984 and 1985 respectively on the advances still in dispute with the MONTLAUR company, the Minister of the Economy and Finance refers to the rates at which certain financial establishments would have remunerated twelve-month deposits of more than 500,000 francs and three-month deposits of 100,000 francs, as well as to the average rates charged on the interbank market ; that none of these investments is directly comparable by its nature and duration to the advances granted by MONTLAUR SAKAKINI; that, in so doing, the Minister does not provide proof of the validity of an interest rate higher than the 4.5% admitted by MONTLAUR SAKAKINI; that, as a result, and without it being necessary to rule on the other pleas in law of the application, the MONTLAUR SAKAKINI company is entitled to maintain that it is wrongly that, by the contested judgment, the administrative court of Marseille rejected its application in its entirety…” Click here for English translation Click here for translation . . . Click here for translation ...

To sum up briefly, before the appropriate level for interest rates charged on intra-group loans is considered, there are two points to be cleared: first whether or not a particular transaction should be treated as a loan, and second whether interest should be paid. On the first point, the main problem is to distinguish between, on the one hand, what may properly be described as loans and, on the other, contributions to equity capital. Whilst there are a variety of possible methods of doing this, general preference is expressed for a flexible approach related to the particular circumstances of each individual case. On the second point, it is considered that in general it would be right to expect interest to be paid on any loan but it may be accepted that if it could be shown that a lender who was at arm’s length from the borrower might agree to waive or defer the payment of interest, then it would be reasonable to agree that associated enterprises might act in this same way. Finally, the main factors which, it seems, need to be taken into account in arriving at an arm’s length rate of interest, have been listed above, and some of the difficulties in giving these factors their proper weight are noted ...

Special difficulties may arise when money is lent for long periods. Capital market conditions change, and it may be necessary for independent parties, either at the outset or later, to agree that the interest rate may be varied. If an unrelated lender (or borrower) were allowed to revise the rate of interest, then it would be reasonable to require, or to allow, such a revision in intra-group loans ...

Further complications arise from the difference which may exist between conditions in financial markets in the country of the lender and those in the country of the borrower. It may be clear that in a specific arm’s length situation, the rate of int rest would be governed by conditions on either one or the other market. There may, for example, be effectively no market for a particular type of loan in one or other of the countries. There is also the case where the country of the borrower may insist, for balance of payments reasons, on capital being raised abroad. MNEs, like other large borrowers, frequently have the option of borrowing funds on the international capital market at rates which may be more favourable than at home. In most cases such as these, there may be no real difficulty in finding an arm’s length rate for similar loans. Sometimes it is not clear which market rate should prevail, and the question arises whether the rate of interest in the lender’s or the borrower’s country should be accepted as the appropriate rate. However, no straightforward principle presents itself which would win general acceptance, and it would depend on the facts of the particular case ...

Ideally, in each case, the interest rate to be determined for tax purposes should be set according to the conditions in financial markets for similar loans. In deciding what is a comparable or similar loan, it is necessary to take into account: amounts and maturities; the nature or purpose of the loan (trade credit, general purpose loan, real estate credit, etc.); the currency or currencies involved (strong or weak currencies); the exchange risks of the taxpayer lending or borrowing in a particular currency; the security involved and the credit standing of the borrower. The Central Bank rate, or the prime rate, may offer a starting point, but a mechanical rule based on either of these rates is not recommended, since it would not necessarily take into account the factors referred to above, and is ‘therefore unlikely in many cases to reflect the arm’s length rate of interest ...

The arm’s length interest rate is the rate of interest which is charged, or would have been charged at the time the indebtedness arose, in transactions with, or between, unrelated parties under simi lar circumstances. The concern of tax authorities in this area of trans fer prices is to prevent profit shifting through lenders and borrowers agreeing on interest rates which do not correspond to arm’s length rates in similar transactions between unrelated parties. As to the level of the rate of interest, it can be expected that tax authorities will insist on adjustment only if this rate significantly deviates from the market rate, or if the amounts concerned are substantial. It should be recalled that, as was stated in paragraph 181, loans by banks or financial institutions are not being considered here ...

Cases may arise where one enterprise within a group, usually the parent company, makes a loan to another in order to help in overcoming financial difficulties and where from the start the lender waives, or defers, interest. Similarly, a parent company may agree to waive or defer interest on an outstanding loan in cases where a subsidiary has fallen into financial difficulties. If, in such circumstances, an unrelated lender would have been-led to act in -the same manner and such cases can arise – it could be generally accepted that interest on loans made in similar circumstances between associated enterprises could be waived or deferred ...

During its start-up years, an enterprise will frequently be in need of financial support, for example, from a parent company. Nevertheless, applying the arm’s length principle, most countries would not accept that an intra-group loan could be interest-free simply because the enterprise was in its start-up phase. It was concluded that, for tax purposes, interest should always be regarded as charged (even though eventually deferred) unless an unrelated lender would have waived the payment of the interest in the same circumstances ...

It is suggested that the concept of normal trade practice could be generally adopted as regards delays in making settlements. If under given circumstances, an unrelated party would not have charged interest on balances outstanding, an associated enterprise need not be required to charge interest either. Similarly, an associated borrower would not be regarded as paying interest if, in regular trade practice, no interest would have been paid. In looking at particular transactions it has to be borne in mind, however, that prices for goods or services may contain an implicit interest element. If an implicit element of interest is recognised and this is at an arm’s length rate, there would be no grounds for requiring additional interest. Due to different trade practices in the countries concerned, the possibility cannot be overlooked that two tax administrations may reach different conclusions when looking at the same transaction from two different angles although acceptance of the general arm’s length approach should make it possible to avoid extreme cases of divergent interpretation ...

In most countries, and in most trades, there are likely to be established norms of practice with regard to interest charges on trade credits. The existence of such norms provides in each case a point of reference for trade credits between associated enterprises. Where the tax authorities do have more precise rules, it is desirable that these rules should approximately represent a codification of business practices ...

The parent company will usually be the lender, but it may also happen that it has borrowed money from a subsidiary abroad. In both cases interest would normally have to be charged. The following paragraphs discuss the application of ·the arm’s length principle in some special situations. As regards such circumstances, the burden of proof would ordinarily lie with the taxpayer ...

Once it has been established that an intra-group loan exists the general principle to be followed is that the loan should bear interest if interest would have been charged in similar circumstances in a transaction between unrelated parties ...