YOLT Services s.r.o. is active in distribution of TV programmes and paid royalties/license for use of these programmes to its parent company in Romania and subsidiaries in Hungary and Slovakia. These companies were contractually obliged to pay royalties received on to the producers of the programmes. According to the tax authorites, the beneficial owners of the royalties were not the group companies, but rather the producers of the programmes. On that basis the royalty payments were not excempt from withholding taxes. An assessment of additional taxes was issued where withholding taxes had been calculated as 15% of the royalties paid by YOLT services. Judgement of the Regional Court The court upheld the decision of the tax authorities in regards of the producers – and not the group companies – beeing the beneficial owners of the royalties. But the court referred the case back to the to the tax authorities in regards of the withholding tax percentages applied, as these followed from the Double Tax Treaties entered with the relevant jurisdictions of the producers. Excerpt “It follows from the above that the mere forwarding of royalties through an intermediary entity does not imply the impossibility of applying the FTAA concluded by the Czech Republic with the country of tax residence of the beneficial owner of the income. Provided that other conditions are met, the tax authorities may not only apply the international treaty to the matter covered by the treaty, but are obliged to apply such treaty (Article 37 of the Tax Code in the relevant wording; see also the judgment of the Supreme Administrative Court of 25 May 2013, No. 9 Afs 38/2012-40).” Click here for English Translation Click here for other translation Czech vs 29 Af 62-2018 ...

This case concerns the application of the beneficial ownership rule to dividends paid by a French corporation to its Luxembourg parent. The Luxembourg parent company was not considered to be the beneficial owner of the dividends because it did not carry out any activity other than the receipt and further distribution of dividends, and it distributed the full amount of the dividend to its Luxembourg parent one day after receipt; all entities in the chain of ownership were wholly owned; and the two Luxembourg entities had common directors. Click here for English translation Click here for other translation CAA de PARIS 2ème chambre, 07-12-2022 No 21PA05986 ...

In view of its purpose and the comments made on Article 12 of the OECD Model Convention, the Conseil d’État found that Article 12(2) of the Franco-New Zealand tax treaty was applicable to French source royalties whose beneficial owner resided in New Zealand, even if the royalties had been paid to an intermediary company established in a third country. The Supreme Court thus set aside the previous 2020 Judgement of the Administrative Court of Appeal. The question of whether the company in New Zealand actually qualified as the beneficial owner of the royalties for the years in question was referred to the Court of Appeal. Excerpt “1. It is clear from the documents in the file submitted to the judges of the court of first instance that the company Planet, which carries on the business of distributing sports programmes to fitness clubs, was subject to reminders of withholding tax in respect of sums described as royalties paid to the companies Les Mills Belgium SPRL and Les Mills Euromed Limited, established in Belgium and Malta respectively, in respect of the financial years 2011 to 2014 in consideration of the sub-distribution of collective fitness programmes developed by the company Les Mills International LTD, established in New Zealand. The Planet company is appealing to the Court of Cassation against the judgment of 15 July 2020 by which the Marseille Administrative Court of Appeal, on appeal by the Minister for Public Action and Accounts, annulled the judgment of 18 May 2018 of the Marseille Administrative Court insofar as it had discharged it from these reminders and reinstated these taxes. 2. If a bilateral agreement concluded with a view to avoiding double taxation can, by virtue of Article 55 of the Constitution, lead to the setting aside, on such and such a point, of national tax law, it cannot, by itself, directly serve as a legal basis for a decision relating to taxation. Consequently, it is up to the tax judge, when he is seized of a challenge relating to such a convention, to look first at the national tax law in order to determine whether, on this basis, the challenged taxation has been validly established and, if so, on the basis of what qualification. It is then up to the court, if necessary, by comparing this classification with the provisions of the convention, to determine – on the basis of the arguments put forward before it or even, if it is a question of determining the scope of the law, of its own motion – whether or not this convention is an obstacle to the application of the tax law. 3. Under Article 12 of the Convention of 30 November 1979 between France and New Zealand for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income: “1. Royalties arising in a State and paid to a resident of the other State may be taxed in that other State / 2. However, such royalties may also be taxed in the State in which they arise and according to the laws of that State, but if the person receiving the royalties is the beneficial owner the tax so charged shall not exceed 10 per cent of the gross amount of the royalties / 3. The term “royalties” as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematograph films and works recorded for radio or television broadcasting, any patent a trademark, a design or model, a secret plan, formula or process, as well as for the use of or the right to use industrial, commercial or scientific equipment and for information concerning industrial, commercial or scientific experience. In view of their purpose, and as clarified by the comments of the Tax Committee of the Organisation for Economic Co-operation and Development (OECD) on Article 12 of the Model Convention drawn up by that organisation, published on 11 April 1977, and as is also clear from the same comments published on 23 October 1997, 28 January 2003 and 15 July 2014 and most recently on 21 November 2017, the provisions of Article 12(2) of the Franco-New Zealand tax treaty are applicable to French source royalties whose beneficial owner resides in New Zealand, even if they have been paid to an intermediary established in a third country. 4. It is clear from the statements in the judgment under appeal that, in order to determine whether the sums in question constituted royalties, the court examined the classification of the sums paid by the company Planet to the Belgian company Les Mills Belgium SPRL in 2011 and to the Maltese company Les Mills Euromed Limited from 2012 to 2014, in the light of the stipulations of the Franco-New Zealand tax convention of 30 November 1979 alone. In limiting itself, in holding that this agreement was applicable to the dispute, to noting that the tax authorities maintained that the New Zealand company Les Mills International LTD should, pursuant to an agency agreement signed on 2 December 1998 between that company and the company Planet, be regarded as the actual beneficiary of the sums in dispute paid by the French company to the Belgian and Maltese companies, without itself ruling on its status as the actual beneficiary of the said sums for the four years in dispute, the court erred in law.” Click here for English translation Click here for other translation France vs Planet - Conseil d'État, 20_05_2022, 444451 ...

By judgment of 22 May 2020, the Administrative Court set aside a tax assessment in which CBS International Netherlands B.V. had been denied reimbursement of withholding tax in the amount of BGN 156 830,27 related to royalties and license payments. An appeal was filed by the tax authorities with the Supreme Administrative Court. In the appeal the tax authorities held that the beneficial owner of the licence and royalty payments was not CBS International Netherlands B.V. but instead CBS CORPORATION, a company incorporated and domiciled in New York, USA. According to the tax authorities the main function of CBS International Netherlands B.V. was that of an intermediary between the end customers and the beneficial owner. This was further supported by the transfer pricing documentation, according to which the US company that bears the risk of the development activity, the market risk is borne equally by the two companies, and the only risks borne by the Dutch company are the currency, operational and credit risks, which in turn are not directly related to the development activity. Judgement of the Supreme Administrative Court The court upheld the decision of the court of first instance and decided in favour of CBS International Netherlands B.V. Excerpt “The activity from which the income is derived is that of granting rights under underlying television licence contracts. Corresponding to this activity is the risk identified in the transfer pricing documentation – development risk, market risk, currency risk, operational risk, credit risk. Neither CBS International Netherlands B.V. nor the Administration have alleged that the Dutch company was involved in the creation of the rights from the grant of which the income arose. Nor did the tax authorities deny that company’s right to grant the Bulgarian company the use of the copyright objects in return for consideration constituting the income on which the withholding tax was levied. To the contrary, there would be an assertion that there was no basis for the exchange of property and, accordingly, no object of taxation. “CBS International Netherlands B.V. is not a company for the purpose of channelisation of income under section 136A(2) of the ITA. It has not been shown to be controlled by a person not entitled to the same type or amount of relief on direct receipt of income. Control of CBS International Netherlands B.V. is exercised by another Dutch company which is within the personal scope of the Netherlands DTT. There are no sources of information that control is exercised by the ultimate parent company, CBS Corporation, based in New York, USA. The trial court was correct in finding that C.B.S. International Netherlands B.V. had assets, capital, and its own specialized personnel, and a comparison of the 2016 and 2017 C.B.S. figures showed that the company’s employees, offices, and profits were increasing, and therefore it was not a company that did not have assets, capital, and personnel consistent with its business. The existence of control over the use of the rights from which the income was earned is indicated by the content of the underlying contracts, which provide for penalties for non-performance and Fox Networks’ obligation to submit monthly reports. Insofar as the grounds under Article 136 of the VAT Code for the application of the Netherlands DTT are met, CBS International Netherlands B.V. is also entitled to the relief under Article 12(1) of the Netherlands DTT. 1 of the Royalty Income Tax Treaty in its country of residence. There is therefore also a right to a refund of the withholding tax under Art. 195 para. In concluding that the refusal to refund the tax withheld and paid by the contested APV was unlawful, the first instance court made a correct decision which should be upheld.” Click here for English Translation Click here for other translation Bulgaria vs CBS March 2022 SAC 3012 ...

By judgment of 22 May 2020, the Administrative Court set aside a tax assessment in which CBS International Netherlands B.V. had been denied reimbursement of withholding tax related to royalties and license payments. An appeal was filed by the tax authorities with the Supreme Administrative Court. In the appeal the tax authorities held that the beneficial owner of the licence and royalty payments was not CBS International Netherlands B.V. but instead CBS CORPORATION, a company incorporated and domiciled in New York, USA. According to the tax authorities the main function of CBS International Netherlands B.V. was that of an intermediary between the end customers and the beneficial owner. This was further supported by the transfer pricing documentation, according to which the US company that bears the risk of the development activity, the market risk is borne equally by the two companies, and the only risks borne by the Dutch company are the currency, operational and credit risks, which in turn are not directly related to the development activity. Judgement of the Supreme Administrative Court The court canceled the 2019 tax assessment and returns the case to the competent authority to issue decision in accordance with the instructions on the interpretation and application of the law given by this decision. Excerpt “There is no information source for the fact that CBS International Netherlands B.V. has no right to dispose of the income and to assess its use. Conversely, according to article 13 of the company’s articles of association, the decision to distribute the result for the year is to be made by the general meeting of shareholders. This disqualifies the company as the nominee instead of the owner of the income /refer to the Commentary to Article 12 of the Organisation for Economic Co-operation and Development Model DTT/. The Dutch company does not have the limited powers of a formal owner – it does not direct the income to another person who actually receives the benefit; it does not act as a fiduciary or administrator on behalf of the stakeholders /see Commentary/. The activity from which the income is derived is that of granting rights under underlying television licence contracts. Corresponding to this activity is the risk identified in the transfer pricing documentation – development risk, market risk, currency risk, operational risk, credit risk. Neither the applicant nor the administration have alleged that the Dutch company was involved in the creation of the rights from the grant of which the income arose. Nor did the tax authorities deny that company’s right to grant the Bulgarian company the use of the copyright objects in return for consideration constituting the income on which the withholding tax was levied. To the contrary, there would be an assertion that there was no basis for the exchange of property and, accordingly, no object of taxation. The appellant is not an income directing company under Section 136A(2) of the Income-tax Act. It has not been shown to be controlled by a person not entitled to the same type or amount of relief on direct receipt of income. The control of CBS International Netherlands B.V. is exercised by another Dutch company which is within the personal scope of the Netherlands DTT. There are no sources of information that control is exercised by the “ultimate parent company” CBS Corporation based in New York, USA. It is unclear what type and amount of assets the Dutch company is expected to own beyond the USD 72,000 in property, plant and equipment listed in the APA and with a staff of 22 employees given the intellectual property rights management activities carried out. The existence of control over the use of the rights from which the income was earned is indicated by the content of the underlying contracts, which provide for penalties for non-performance and Fox Networks’ obligation to submit monthly reports. In so far as the grounds laid down in Article 136 of the VAT Code for the application of the Netherlands DTT are met, the applicant is also entitled to the relief provided for in Article 12(1) of the VAT Code. 1 of the Royalty Income Tax Treaty in the country of residence. There is therefore also a right to a refund of the withholding tax under Article 195(1) of the Treaty. The refusal to refund the tax withheld and deposited as provided for in the APA challenged before the ACCA is unlawful and the dismissal of the challenge to the refusal is incorrect. The first instance decision and the APV must be annulled in accordance with the rule of Article 160 para. 3 of the Code of Administrative Offences, the case file should be returned to the competent revenue authority at the Directorate General of the National Revenue Service, GDO, Sofia. Sofia to issue an APV in accordance with the instructions on the interpretation and application of the law given by this decision.” Click here for English Translation Click here for other translation Bulgaria vs CBS 2020 №12349 ...

The Administrative Court of Appeal (CAA) set aside a judgement of the administrative court and upheld the tax authorities claims of withholding taxes on royalties paid by Société Planet to companies in Belgium and Malta irrespective of the beneficial owner of those royalties being a company in New Zealand. Hence, Article 12(2) of the Franco-New Zealand tax treaty was not considered applicable to French source royalties whose beneficial owner resided in New Zealand, where they had been paid to an intermediary company established in a third country. Click here for English translation Click here for other translation France vs Planet July 2020 CAA 18MA04302 ...

ViciunaiRus LLC was engaged in production and wholesale distribution of its products. During the inspection, the inspection concluded that the chain of contractual relations between the Company and its sole official distributor in the Russian Federation artificially had established intermediates that do not have assets and personnel. At the same time, the price of products increased by more than 20% in the course of movement along the chain of counter parties. During the period from 2012 to 2014, the tax authorities considered the inclusion of intermediaries in the sales structure to be of a artificial nature and aimed at understating the sales revenue. The taxpayer was additionally charged profit tax and VAT, and the additional tax was calculated based on the resale price at which the goods were received by the distributor. In 2012 and 2013 the transactions between the taxpayer and distributor were controlled. In 2014 they were not. The taxpayer objected to the tax authority’s decision; among other things, the taxpayer argued that the tax authority was obliged to apply the methods of determining market prices set forth in Section V.1 of the Tax Code when making additional accruals, but applied a different method (took the last link price). The court of first instance and the court of appeal concluded that the tax authority had exceeded its authority to make transfer pricing adjustments during the tax periods under review for controlled transactions between related parties. With regard to the amount of additional accruals for the period of 2014, the court rejected the taxpayer’s argument that the tax authority was obliged to follow the methods of transfer formation when calculating the tax liability. The applied method of additional accrual – the use of the price of the last link in the chain of intermediates – was recognized by the court as lawful. The Supreme Court cancelled the decision of the lower courts and sent the case back for re-consideration. The conclusion of the lower courts that in the period 2012-2013 the Inspectorate carried out price control for compliance with the market prices was erroneous. The price control was not carried out, but a set of circumstances was established, testifying to the coherence of actions of interdependent persons in order to obtain unjustified tax benefit. Taking into account the proof of the fact that the Company received an unjustified tax benefit, the tax authority correctly calculated the income that the Company should have received when selling goods directly to an interdependent person without using intermediary firms. Click here for translation A21-133-2018_20200414_SC ...

Goodland Taiwan had sold 7 machines to a local buyer via a related party in Hongkong thus avoiding taxes on sales profits. The transaction had been audited by the Taiwanese tax administration and an assessment issued. Goodland brought the case to court. The Supreme Administrative court dismissed the appeal and upheld the assessment. “The appeal alleges that the original judgment failed to conduct an investigation, but does not specify what the original judgment found to be wrong or what specific legal norm was violated. In fact, Article 2 of the Regulations Governing the Recognition of Income from Controlled Foreign Enterprises by Profit-making Enterprises, as cited in the appeal, states that Article 3 and Article 4, paragraph 2, of the Regulations Governing the Recognition of Income from Controlled Foreign Enterprises and the Unusual Transfer Pricing Check for Business Enterprises, as cited in the appeal, are all specific to the income tax law and may not be consistent with the judgment of related parties under the business tax law. In addition, in this case, the U.S. and local companies are at least covered by the fact that the income tax of the business is not in compliance with the requirements of Article 3 and Article 4(2) of the regular transfer pricing audit. The method of recognizing the income of a controlled foreign enterprise is based on the premise that there is a difference between domestic and foreign income tax liabilities, and is not related to the determination of related parties under business tax law. It is difficult to argue that the original decision did not apply these provisions and that the application of the law was incorrect or that the reasons for the decision were inadequate.As to the statement in the appeal that “the factual findings of the original judgment are contrary to the law of civil contracts”, the reasoning of the appeal is that “the original judgment is contrary to the law of civil contracts”.It is not clear what the specific breach of the law is, as the argument is brief and vague and lacks a complete legal reasoning.3. In conclusion, the original decision is clear and detailed and there is nothing that can be said to be unlawful. The grounds of appeal, as set forth in the original judgment, are only general allegations of the application of the law, but not specific allegations of “inapplicability of the law”, “improper application of the law”, or “the circumstances listed in Article 243, Paragraph 2 of the Administrative Procedure Law”. In accordance with the preceding provisions and explanations, the appeal should be considered unlawful.” Click here for English Translation 最高行政法院109年裁字第147號裁定 ...

Garnet-SPb was the exclusive representative of a German manufacturing company in Russia. Following introduction of restrictions on the supply of certain categories of goods to Russia by the European Union in 2014, the Company had used the services of an intermediary trading company. The intermediary offered the Company to purchase products previously purchased directly from the manufacturer. The difference between the export price of goods according to the manufacturer’s data and the price at which the goods were now purchased by the Company – through the intermediate – was over 40%. During the audit, the tax authority considered that the Company was able and actually exported the goods itself, the transition to the new delivery scheme was aimed at obtaining unjustified tax benefits in the form of overstatement of VAT deductions. The amount of additional income tax and VAT was calculated by the tax authority on the basis of the export value of these goods. The court of first instance ruled in favor of the taxpayer. The court did not see an unjustified tax benefit in the acquisition of goods from abroad through a chain of intermediaries due to the existence of restrictions due to EU sanctions. The new setup of supply was due to objective factors, and the tax authority unreasonably failed to take into account the Company’s arguments that under the EU restrictive measures the Company had grounds to engage intermediaries to guarantee the supply of equipment within the time agreed with its further customers. The tax authority has not proved, multiple deviation from market prices. The tax authorities had not established the market price of identical goods in Russia – taking into account its uniqueness and the current regime of measures limiting the turnover of such goods. The Court of Appeal overturned the decision of the Court of first instance and ruled in favor of the tax authorities. “On the basis of the investigation of the case materials the court of appeal concluded that in the case under consideration the tax authority rightfully proceeded from the established circumstances of artificial inclusion of disputed counter parties into the supply chain as intermediaries for the purpose of unjustified increase of the value of goods in order to overestimate the tax deductible expenses, therefore, it reasonably established the amount of expenses incurred by the taxpayer, taken into account for the purposes of taxation, based on the value of the equipment specified by the manufacturer” Click here for translation A56-113775-2017 ...

Bulatovskiy Basalt LLC extracted and sold basalt rubble. The rubble was sold to three related intermediaries, whom in turn, resold the rubble to the final buyers. The resale price was on average double the transfer price. The tax authorities considered that the sole purpose of incorporating intermediaries into the sales structure was to obtain an unreasonable tax benefit in the form of underestimation of the profits from the sale of rubble and the tax base. According to the tax authorities, Bulatovskiy Basalt LLC could instead have enter into contracts with the final buyers directly. The tax authorities issued an assessment of income based on the resale of the rubble to the final Consumers. Bulatovskiy Basalt LLC brought the case to Court. The courts of the first and second instance ruled in favor of Bulatovskiy Basalt LLC. The courts took into account the existence of reasonable reasons for the involvement of intermediaries, including the presence of real functions.The first instance court considered the method used by the tax authority to calculate the amount of the additional charge to be the price of subsequent sale (Article 105.10 of the Tax Code).The courts indicated that the subsequent sale price method should not have been applied in this case, since the method of comparable market prices has priority.The tax authority did not substantiate the use of the subsequent sale price method actually applied and did not refer to the provisions of Chapter 14.3 of the Russian TC.The tax authority incorrectly applied the subsequent sale price method. The gross profit margin of comparable companies was not calculated. Click here for translation A05-5548-2018_20181123_Postanovlenie_apelljacionnoj_instancii ...

OJSC Mostovsky was engaged in the extraction of sand for construction. The sand was sold to related parties who then resold the sand to final customers. The price paid by the final customers was significantly higher than price paid to Mostovsky by the related intermediaries. Following an audit for 2012-2013, the tax authority held that the setup using intermediate re-sellers was artificial and constructed to obtain an unjustified tax benefit. An assessment was issued based on the “subsequent sale price-method”. Mostovsky disapproved of the assessment and brought the case to court. In their court filing they proposed use of the CUP method. The court found that Mostovsky’s transfer prices had not being arm’s length and that an unjustified tax benefit had been obtained, but disagreed with the method chosen by the tax authority. The “Subsequent Selling Price-method” had not been applied correctly by the tax authority, since: – the inapplicability of the CUP method had not been properly justified; – the gross margin had not been calculated for the tested transaction; – the market interval of gross profitability was determined based on incomparable activities. On that basis, the court considered that the CUP method should be applied based on comparable internal and external transactions. Click here for translation A23-5278-2016 ...

K-steel S.A. purchased steel from its parent company which again purchased steel from unrelated steel mills. The tax authorities found that prices paid to the parent company by “K-steel S.A.” were not arm’s-length. The arm’s length price was established based on the prices paid for similar steel products by unrelated companies active in similar business activities. According to the tax authorities, purchasing steel directly from manufacturers would be a better alternative in terms of prices. Judgement of the Court The Court found that the authorities correctly established that arm’s-length prices were not applied and dismissed the appeal of “K-steel S.A.”. According to the court, a option realistically available for the taxpayer, and at the same time cheaper, would be to purchase the goods in question directly from steel mills, without the participation of the parent. Click here for English translation Click here for other translation II FSK 1882_10 - Wyrok NSA z 2012-03-27 ...