Lux PPL SARL received a profit participating loan (PPL) from a related company in Jersey to finance its participation in an Irish company.  The participation in the Irish company was set up in the form of debt (85%) and equity (15%). The profit participating loan (PPL) carried a fixed interest of 25bps and a variable interest corresponding to 99% of the profits derived from the participation in the Irish company, net of any expenses, losses and a profit margin. After entering the arrangement, Lux PPL SARL filed a request for an binding ruling with the Luxembourg tax administration to verify that the interest  charge under the PPL would not qualify as a hidden profit distribution subject to the 15% dividend withholding tax. The tax administration issued the requested binding ruling on the condition that the ruling would be terminate if the total amount of the interest charge on the PPL exceeded an arm’s length charge. Later, Lux PPL SARL received a dividend of EUR 30 million from its participation in the Irish company and at the same time expensed interest on the PPL in its tax return in an amount of EUR 29,630,038. The tax administration found that the interest charged on the PPL exceeded the arm’s length remuneration. An assessment was issued according to which a portion of the interest expense was denied and instead treated as a hidden dividend subject to the 15% withholding tax. Lux PPL SARL filed an appeal to the Administrative Tribunal in which they argued that the tax ruling was binding on the tax administration. In regards to interest charge, Lux PPL SARL argued that according to the OECD TPG, if the range comprises results of relatively equal and high reliability, it could be argued that any point in the range satisfies the arm’s length principle. Judgement of the Administrative Tribunal The Tribunal found the appeal of Lux PPL SARL justified and set aside the decision of the tax administration. According to the Tribunal, the arm’s length interest charge under the PPL could be determined by a comparison with interest on fixed interest loan and any interest charge within the arm’s length range would satisfy the arm’s length principle. Click here for English translation Click here for other translation ...

Airbnb is under examination by the Internal Revenue Service for its income taxes in 2013 and 2016, according to the company’s December 2020 SEC filing. According to the filing a draft notice of adjustment from the IRS proposes that the company owes an additional $1.35 billion in taxes plus interest and penalties for the years in question. The assessment is related to valuation of its intellectual property that was transferred to a subsidiary in FY 2013. Airbnb then had had two subsidiaries outside the United States – Airbnb International Holdings Ltd and Airbnb International Unlimited Co – both resident for tax purposes in tax haven Jersey. The company plans to fight a potential adjustment. “We disagree with the proposed adjustment and intend to vigorously contest it,” “If the IRS prevails in the assessment of additional tax due based on its position and such tax and related interest and penalties, if any, exceeds our current reserves, such outcome could have a material adverse impact on our financial position and results of operations, and any assessment of additional tax could require a significant cash payment and have a material adverse impact on our cash flow,”  Finally, it appears that the company is now in the process of moving its intellectual property back to the United States. Excerpts From Airbnb’s SEC filings “We are currently under examination for income taxes by the Internal Revenue Service (“IRS”) for the years 2013 and 2016. We are continuing to respond to inquiries related to these examinations. While we have not yet received a Revenue Agent’s Report generally issued at the conclusion of an IRS examination, in September 2020, we received a Draft Notice of Proposed Adjustment from the IRS for the 2013 tax year relating to the valuation of our international intellectual property which was sold to a subsidiary in 2013. The notice proposes an increase to our U.S. taxable income that could result in additional income tax expense and cash tax liability of $1.35 billion, plus penalties and interest, which exceeds our current reserve recorded in our consolidated financial statements by more than $1.0 billion. A formal Notice of Proposed Adjustment is expected from the IRS by the end of 2020. Following formal receipt of the Revenue Agent’s adjustment which is anticipated late in the fourth quarter of 2020, we intend to vigorously contest the IRS’s proposed adjustment, including through all administrative and, if necessary, judicial remedies which may include: entering into administrative settlement discussions with the IRS Independent Office of Appeals (“IRS Appeals”) in 2021, and if necessary petitioning the U.S. Tax Court (“Tax Court”) for redetermination if an acceptable outcome cannot be reached with IRS Appeals, and finally, and if necessary, appealing the Tax Court’s decision to the appropriate appellate court. If the IRS prevails in the assessment of additional tax due based on its position and such tax and related interest and penalties, if any, exceeds our current reserves, such outcome could have a material adverse impact on our financial position and results of operations, and any assessment of additional tax could require a significant cash payment and have a material adverse impact on our cash flow.“ “We may have exposure to greater than anticipated income tax liabilities. In September 2020, we received a Draft Notice of Proposed Adjustment from the IRS for the 2013 tax year proposing an increase to our U.S. taxable income that could result in additional income tax expense and cash tax liability of $1.35 billion, plus penalties and interest, which exceeds our current reserve recorded in our consolidated financial statements by more than $1.0 billion.“ “The Company is in various stages of examination in connection with its ongoing tax audits globally, and it is difficult to determine when these examinations will be settled. The Company believes that an adequate provision has been recorded for any adjustments that may result from tax audits. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company may be required to record an adjustment to the provision for income taxes in the period such resolution occurs. It is reasonably possible that over the next 12-month period the Company may experience an increase or decrease in its unrecognized tax benefits as a result of tax examinations or lapses of the statute of limitations. However, an estimate of the range of the reasonably possible change in the next twelve months cannot be made.“ “On July 27, 2015, the United States Tax Court (the “Tax Court”) issued an opinion in Altera Corp. v. Commissioner (the “Tax Court Opinion”), which concluded that related parties in a cost sharing arrangement are not required to share expenses related to stock-based compensation. The Tax Court Opinion was appealed by the Commissioner to the Ninth Circuit Court of Appeals (the “Ninth Circuit”). On June 7, 2019, the Ninth Circuit issued an opinion (the “Ninth Circuit Opinion”) that reversed the Tax Court Opinion. On July 22, 2019, Altera Corp. filed a petition for a rehearing before the full Ninth Circuit. On November 12, 2019, the Ninth Circuit denied Altera Corp.’s petition for rehearing its case. The Company accordingly recognized tax expense of $26.6 million related to changes in uncertain tax positions during the year ended December 31, 2019. The Company will continue to monitor future developments in this case to determine if there will be further impacts to its consolidated financial statements.” “The Ninth Circuit Court of Appeals issued a decision in Altera Corp. v. Commissioner in June of 2019 regarding the treatment of stock-based compensation expense in a cost sharing arrangement, which had a material effect on our tax obligations and effective tax rate for the quarter in which the decision was issued.” “The Company is in the process of providing documentation to the Internal Revenue Service in connection with an examination of the Company’s 2013 income taxes with the primary issue under examination being the valuation of the ...

This case concerns a private equity takeover structure with apparently an intended international mismatch, i.e. a deduction/no inclusion of the remuneration on the provision of funds. The case was (primarily) decided by the Court of Appeal on the basis of non-business loan case law. The facts are as follows: A private equity fund [A] raised LP equity capital from (institutional) investors in its subfund [B] and then channelled it into two (sub)funds configured in the Cayman Islands, Fund [C] and [D] Fund. Participating in those two Funds were LPs in which the limited partners were the external equity investors and the general partners were Jersey-based [A] entities and/or executives. The equity raised in [A] was used for leveraged, debt-financed acquisitions of European targets to be sold at a capital gain after five to seven years, after optimising their EBITDA. One of these European targets was the Dutch [F] group. The equity used in its acquisition was provided not only by the [A] funds (approximately € 401 m), but also (for a total of approximately € 284 m) by (i) the management of the [F] group, (ii) the selling party [E] and (iii) co-investors not affiliated with [A]. 1.4 The equity raised in the [A] funds was converted into hybrid, but under Luxembourg law, debt in the form of preferred equity shares: A-PECs (€ 49 m) and B-PECs (€ 636 m), issued by the Luxembourg mother ( [G] ) of the interested party. G] has contributed € 43 million to the interested party as capital and has also lent or on-lent it approximately € 635 million as a shareholder loan (SHL). The interested party has not provided [G] with any securities and owes [G] over 15% interest per year on the SHL. This interest is not paid, but credited. The SHL and the credited interest are subordinated to, in particular, the claims of a syndicate of banks that lent € 640 million to the target in order to pay off existing debts. That syndicate has demanded securities and has stipulated that the SHL plus credited interest may not be repaid before the banks have been paid in full. The tax authority considers the SHL as (disguised) equity of the interested party because according to him it differs economically hardly or not at all from the risk-bearing equity (participation loan) c.q. because this SHL is unthinkable within the OECD transfer pricing rules and within the conceptual framework of a reasonable thinking entrepreneur. He therefore considers the interest of € 45,256,000 not deductible. In the alternative, etc., he is of the opinion that the loan is not business-like, that Article 10a prevents deduction or that the interested party and its financiers have acted in fraudem legis. In any case he considers the interest not deductible. According to the Court of Appeal, the SHL is a loan in civil law and not a sham, and is not a participation loan in tax law, because its term is not indefinite, meaningless or longer than 50 years. However, the Court of Appeal considers the loan to be non-business because no securities have been stipulated, the high interest is added, it already seems impossible after a short time to repay the loan including the added interest without selling the target, and the resulting non-business risk of default cannot be compensated with an (even) higher interest without making the loan profitable. Since the interested party’s mother/creditress ([G] ) is just as unacceptable as a guarantor as the interested party himself, your guarantor analogy ex HR BNB 2012/37 cannot be applied. Therefore, the Court of Appeal has instead imputed the interest on a ten-year government bond (2.5%) as business interest, leading to an interest of € 7,435,594 in the year of dispute. It is not in dispute that 35,5% of this (€2,639,636) is deductible because 35,5% of the SHL was used for transactions not contaminated (pursuant to Section 10a Vpb Act). The remaining €4,795,958 is attributable to the contaminated financing of the contaminated acquisition of the [F] Group. The Court of Appeal then examined whether the deduction of the remaining € 4,795,958 would be contrary to Article 10a of the Dutch Corporate Income Tax Act or fraus legis. Since both the transaction and the loan are tainted (Article 10a Corporate Income Tax Act), the interested party must, according to paragraph 3 of that provision, either demonstrate business motives for both, or demonstrate a reasonable levy or third-party debt parallelism with the creditor. According to the Court of Appeal, it did not succeed in doing so for the SHL, among other things because it shrouded the financing structure behind [G], in particular that in the Cayman Islands and Jersey, ‘in a fog of mystery,’ which fog of mystery remains at its evidential risk. On the basis of the facts which have been established, including the circumstances that (i) the [A] funds set up in the Cayman Islands administered the capital made available to them as equity, (ii) all LPs participating in those funds there were referred to as ‘[A] ‘ in their names, (iii) all those LPs had the same general partners employed by [A] in Jersey, and (iv) the notification to the European Commission stated that the Luxembourg-based [H] was acquiring full control of the [F] group, the Court formed the view that the PECs to [G] had been provided by the [A] group through the Cayman Islands out of equity initially contributed to [B] LP by the ultimate investors, and that that equity had been double-hybridised through the Cayman Islands, Jersey and Luxembourg for anti-tax reasons. The interested party, on whom the counter-evidence of the arm’s length nature of the acquisition financing structure rested, did not rebut that presumption, nor did it substantiate a third-party debt parallelism or a reasonable levy on the creditor, since (i) the SHL and the B-PECs are not entirely parallel and the interest rate difference, although small, increases exponentially through the compound interest, (ii) the SHL is co-financed by A-PECs, whose interest rate ...

Following the collapse of Enron in 2001, Goldman Sachs and Cargill had purchased a company previously known as Teeside Power Ltd. Teesside Power had claimed hundreds of millions of pounds were owed to the plant by other Enron subsidiaries. In a scheem devised by Ernst and Young, Teesside Power set up a Jersey-based company to avoid paying corporation tax on about £200 million by converting the receivables into shares. The Court of Appeal ruled in favour of the tax authorities and considered the scheme abusive tax avoidance covered by UK GAARs. The Court stated that statutory notes, although they are not endorsed by Parliament, are admissible as an aid to construction. The explanatory notes relating to the 2006 amendment to FA 1996 s 85A(1) confirmed that the amendment aimed to make it absolutely clear that the ‘fairly represent’ rule in s 84(1) takes priority over the accounting treatment mandated by s 85A(1). EWCA Civ 2075 (05 October 2018)”] ...

Oxfam’s list of Tax Havens, in order of significance are: (1) Bermuda (2) the Cayman Islands (3) the Netherlands (4) Switzerland (5) Singapore (6) Ireland (7) Luxembourg (8) Curaçao (9) Hong Kong (10) Cyprus (11) Bahamas (12) Jersey (13) Barbados, (14) Mauritius and (15) the British Virgin Islands. Most notably is The Netherlands placement as no. 3 on the list. Oxfam researchers compiled the list by assessing the extent to which countries employ the most damaging tax policies, such as zero corporate tax rates, the provision of unfair and unproductive tax incentives, and a lack of cooperation with international processes against tax avoidance (including measures to increase financial transparency). Many of the countries on the list have been implicated in tax scandals. For example Ireland hit the headlines over a tax deal with Apple that enabled the global tech giant to pay a 0.005 percent corporate tax rate in the country. And the British Virgin Islands is home to more than half of the 200,000 offshore companies set up by Mossack Fonseca – the law firm at the heart of the Panama Papers scandal. The United Kingdom does not feature on the list, but four territories that the United Kingdom is ultimately responsible for do appear: the Cayman Islands, Jersey, Bermuda and the British Virgin Islands ...