Tag: Interpretation of international treaties

Ukraine vs Slobozhanshchyna Agro, September 2023, Supreme Court, Case No. 480/5366/22 (K/990/22197/23)

An Ukrainian company, Slobozhanshchyna Agro, paid dividends to a Cypriot company, Unigrain Holding Limited, which held 25% of the shares in Slobozhanshchyna Agro. Withholding tax on the dividend paid was declared by Slobozhanshchyna Agro at a reduced rate of 5 % in accordance with Art. 10(2)(a) of the Ukraine-Cyprus Double Tax Treaty (see the relevant article below). Following an audit, the tax authorities concluded that the conditions for the application of the reduced rate of 5% under Art. 10(2)(a) were not met. Accordingly, Slobozhanshchyna Agro should have applied a withholding tax rate of 10% under Art. 10(2)(b) of the Tax Treaty. Slobozhanshchyna Agro disagreed with this conclusion and appealed to the Administrative Court. In December 2022, the Administrative Court ruled in favour of the tax authorities. According to the court, entitlement to the benefits under Art. 10(2)(a) of the Ukraine-Cyprus Double Tax Treaty was subject to the condition that the invested amount of not less than EUR 100,000.00 had been received by the Ukrainian taxpayer. The Cypriot company had purchased its shares in Slobozhanshchyna Agro from another Cypriot company for USD 2,600,000.00 and this amount was received by the non-resident. The conditions for the application of Art. 10(2)(a) of the Ukraine-Cyprus Tax Treaty were not met. In May 2023, the Administrative Court of Appeal upheld the decision of the Administrative Court. Slobozhanshchyna Agro appealed to the Supreme Court of Ukraine. Judgement of the Supreme Court The Supreme Court set aside the decision of the Administrative Court and Administrative Court of Appeal and ruled in favor of Slobozhanshchyna Agro. Excerpts (in English) “…A literal interpretation of the content of this provision of the Convention indicates that the actual owner of the dividends (a company that is not a partnership) must invest in the acquisition (i.e. purchase) of shares or other rights of the company in the equivalent of at least EUR 100,000. Article 10(2)(a) of the Convention does not contain a provision stating that the investment must be made in the company by way of a contribution in the form of funds or property to its charter capital.” “…In order for a taxpayer to apply the reduced corporate income tax rate of 5% of the amount of dividends paid, as provided for in subparagraph “a” of paragraph 2 of Article 10 of the Convention between the Government of Ukraine and the Government of the Republic of Cyprus for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income dated 8 December 2012, a combination of two conditions must be met. The beneficial owner of dividends – a company that is not a partnership – must: (1) directly own at least 20 per cent of the capital of the company paying the dividends and (2) invest in the acquisition of shares or other rights in the company in the equivalent of at least EUR 100,000. For the purposes of this rule, an investment includes the acquisition of corporate rights of a company in exchange for funds or property in the equivalent of at least EUR 100,000. At the same time, whether the charter capital of the company whose corporate rights were acquired was increased by the said amount does not affect the applicability of this rule”. Cyprus – Ukraine Double Tax Treaty Dividends (Article 10) Dividends paid by a company which is a resident of a contracting state to a resident of the other contracting state may taxed in that other state. However, such dividends may also be taxed in the state of which the company paying the dividends is a resident and according to the laws of that state, but if the beneficial owner of the dividends is a resident of the other state, the tax so charged shall not exceed: a. 5% of the gross amount of the dividends if the beneficial owner holds at least 20% of the capital of the company paying the dividends or has invested in the acquisition of shares or other rights of the company equivalent of at least €100.000 b. 15% of the gross amount of the dividends in all other cases. New Protocol (applicable from 1 January 2020) ... a. 5% of the gross amount of the dividends if the beneficial owner holds at least 20% of the capital of the company paying the dividends AND has invested in the acquisition of shares or other rights of the company equivalent of at least €100.000 b. 10% of the gross amount of the dividends in all other cases. Click here for English translation Click here for other translation Ukraine vs Slobozhanshchyna Agro September 2023 Supreme Court Case no 480-5366-22 ...

Spain vs EPSON IBÉRICA S.A.U., March 2021, Supreme Court, Case No 390:2021

The SEIKO EPSON CORPORATION is a multinational group of Japanese origin active in among others areas, production and sale of computer products. The group is present in Spain, EPSON IBÉRICA, but has its European HQ in the Netherlands, EPSON EUROPE BV. The main shareholder and sole director of EPSON IBÉRICA S.A.U. was initially Mr. Jose Augusto. However, following a capital increase on 24 April 1986, EPSON IBÉRICA SAU became the subsidiary of the EPSON Group in Spain and Mr. Jose Augusto became a member of its Board of Directors. Mr. Jose Augusto held positions in both EPSON IBERICA and the Dutch parent company EPSON EUROPA until he left on 31 August 2007. As part of his emoluments, EPSON IBERICA made contributions to a pension plan since 1999, totalling EUR 2,842,047.55, including an extraordinary contribution of EUR 2,200,000.00, which was agreed by its Board of Directors on 22 September 2004 and paid to the insurance company managing the pension plan on 25 May 2005, and another contribution of EUR 132,074.67 on 31 July 2007, which was passed on to the Dutch parent company. The accounting expenses entered in the accounts by EPSON IBERICA in this connection amounted to EUR 2 709 972.88 (EUR 2 842 047.55 – EUR 132 074.67), which the entity entered off the books and which, consequently, were not deducted ï¬scally. In particular, the accounting expense computed in FY 2004 and 2005 for the amount of the commitment assumed (2.2 million euros) was not deducted in that year, in accordance with the provisions of Article 13.3 “Provision for risk and expenses”, of the Consolidated Text of the Corporate Income Tax Law However, when the beneficiary (Mr. Jose Augusto) of these contributions receives the amounts from the retirement plan, the corresponding contributions made are deductible at EPSON IBERICA. In 2009, Mr. Jose Augusto exercised his right to receive the benefits provided for in that pension plan and, therefore, the entity made a negative adjustment of EUR 2,709,972.89 in its tax return for that year, an adjustment which, in the Inspectorate’s opinion, should have amounted to only EUR 473,477.59, since not all the contributions made to the aforementioned pension plan were deductible. The contributions made after that date, which amounted to 263,174.45 euros (10 % of 2,631,744.41 euros). The remaining 90 % of the contribution from 1 January 2002 is deemed to have been made by the parent company in the Netherlands, EPSON EUROPE. – The settlement agreement acknowledges that the adjustment should have been bilateral, since the expenditure actually occurred, but considers this provision inapplicable because EPSON EUROPA is resident in the Netherlands, and Article 9 of Spain’s double taxation agreement with the Netherlands does not provide for bilateral adjustment. – In its tax return for 2010, EPSON IBERICA offset in full, for an amount of EUR 1 359 101.07, the negative tax base which it had claimed to have from the previous year (2009), but which it no longer had following the audit carried out. EPSON IBERICA did not agree with the aforementioned settlement agreements and the imposition of the penalty relating to the FY 2009 and 2010 and filed economic-administrative claims against them before the Central Economic-Administrative Court. The claims were resolved by the Central Economic-Administrative Tribunal on 4 February 2016, rejecting them. EPSON’s legal representatives then filed a contentious-administrative appeal against the above decision, which was processed under case number 314/2016 before the Second Section of the Contentious-Administrative Chamber of the National High Court, and a judgment rejecting the appeal was handed down on 22 February 2018. The appellant filed a writ requesting a supplement to the previous judgment, and the Chamber issued an order on 14 May 2018, in which it declared that there was no need to supplement the judgment. The High Court also decided in favour of the tax authorities, and this decision was then appealed by EPSON to the Supreme Tribunal. At issue before the Supreme Tribunal was whether or not the tax authorities should have taken into account the disallowed deduction – resulting in a higher income – when determining the arm’s length remuneration of EPSON IBÉRICA which was based on the transactional net margin method (TNMM). Judgement of the Court The Supreme Court dismissed the appeal of EPSON IBÉRICA and decided in favour of the tax authorities. Excerpt “The key issue in the present appeal is, in fact, the apportionment of costs between EPSON EUROPA and EPSON IBERICA. The judgment under appeal has chosen to consider the apportionment made by the tax inspectorate to be correct, in the light of the circumstances and the evidence in the proceedings. It is not an arbitrary assessment; it is coherent and reasonable and, therefore, we must abide by its result. The assessments under appeal are therefore in accordance with the law, and the adjustment sought by EPSON IBERICA is not appropriate. Lastly, there is nothing to be said in relation to the penalties, since that issue is not covered by the order for admission. In view of the foregoing, in circumstances such as those described, the answer to the appeal is as follows: ‘the Tax Inspectorate is not obliged to take into consideration the transfer pricing policy of the corporate group, in particular where it is based on the Transactional Net Margin Method (TNMM), when regularising transactions involving companies in the same multinational group, where it is not possible to make the relevant bilateral adjustment, in order to proceed to a full regularisation of the taxpayer’s situation.” Click here for English Translation Click here for other translation Spain v Epson STS_1111_2021 ...

South Africa vs. AB LLC and BD Holdings LLC, May 2015, Tax Court, Case No: 13276

US companies, AB LLC and BD Holdings LLC, came to South Africa in 2007 to perform certain services for X, a company based in and operating from South Africa. To perform these services they concluded a contract with X. There only purpose for coming to South Africa was to perform the services and earn income or profits in terms of the contract. Having achieved this objective they left the country in 2008. Furthermore in 2009 they recieved a succes bonus for the work performed in 2007 and 2008. On 14 June 2011 they were assessed for taxation purposes for the 2007, 2008 and 2009 years by the Revenue Service. The total taxable amount for these years, although only earned during the period February 2007 to May 2008, according to the respondent, was R 63.990.639. The assessment was based on the provisions of Articles 7(1), 5(1) and 5(2)(k) of the DTA. According to these assessments the US companies were liable for tax for those years for the income it earned in South Africa during the stay here in 2007 and 2008. It was contended by the US companies that once the requirements of articles 5(2) are met the focus of the enquiry shifts to the requirements in article 5(1), and only if the requirements of article 5(1) are met can it be safely concluded that the existence of a “permanent establishment†has been proved. On this basis the, even if it were found that the requirements of article 5(2)(k) were met in this case (it specifically eschewed any concession to the effect that they were met), it nevertheless has still to be found that the requirements of article 5(1) had been met in order for being held liable for taxation for the income earned (or the profits it made) from operations in this country. The Court refered to basic rules of interpretation: “The need to interpret international treaties in a manner which gives effect to the purpose of the treaty and which is congruent with the words employed in the treaty is well established.†And: “As mentioned above the term must be given a meaning that is congruent with the language of the DTA having regard to its object and purpose.†The defining characteristic in terms of article 5(1) is that it must be “a fixed place of business through which the business of an enterprise is wholly or partly carried onâ€. Thus, the nonresident party (the appellant in this case) is not required to carry out all its business from the “fixed place of business†so established. In this sense, even if some of the obligations were performed from another premises, they would, nevertheless, have established “a permanent establishmentâ€. The Tax Court dismissed the appeal and ruled in favor of the Revenue Service. The Court also upheld a penalty imposition of 100%. The court disagreed with the taxpayer’s argument that it had not intended to avoid the tax but had merely misinterpreted the law in good faith. The court noted: “The appellant must accept responsibility for its own error regardless of whether the error was bona fide or not. In these circumstances, it cannot be held that the respondent acted erroneously, or failed to exercise his discretion judiciously, when only waiving part of the additional tax he was entitled to impose, or that the imposition of the additional tax at all was unduly harsh. The appellant benefitted significantly from the waiver granted by the respondent. In my judgment, taking the waiver into account, it cannot be said that the additional tax imposed is disproportionately punitive. I find no fault with its imposition. Hence, its appeal against the additional tax must fail.” AB LLC and BD Holdings LLC v Commissioner of SARS CASE NO 13276 AB LLC place of management ...