Skechers US Inc. had formed a related party entity, SKII, in 1999 and transferred IP and $18 million in cash to the entity in exchange for 100 percent of the stock. Skechers then licensed the IP back from SKII and claimed a franchise tax deduction for the royalties and also deductions for management fees and interest expenses on the unpaid balance of royalty fees. The Wisconsin tax authorities held that these were sham transaction lacking business purpose and disallowed the deductions. Judgement of the Tax Appeals Commission The Tax Appeals Commission ruled in favor of the tax authorities. Excerpt “(…) The burden of proof is on Petitioner to prove that the Department’s assessment is incorrect by clear and satisfactory evidence. In this case, Petitioner must prove that it had a valid nontax business purpose for entering into the licensing transaction that generated the royalty deductions claimed on its Wisconsin tax returns and that the licensing transaction had economic substance. Both are required. Petitioner did not present persuasive evidence or testimony of either requirement being met. Therefore, the Department’s assessments are upheld. CONCLUSIONS OF LAW Petitioner did not have a valid nontax business purpose for the creation of SKII. Petitioner did not have a valid nontax business purpose for entering into the licensing transactions between Skechers and SKII that generated the royalty deductions claimed on its Wisconsin tax returns. Petitioner’s licensing transactions between Skechers and SKII did not have economic substance. (…)” ...

The issue was whether the benefits provided by the Argentina-Spain DTC were available to Empresa Distribuidora La Plata S.A., which was owned by two Spanish holding companies, Inversora AES Holding and Zargas Participaciones SL, whose shareholders were Uruguayan holding companies. The Argentine Personal Assets Tax provided that participations in Argentine companies held by non-resident aliens were generally subject to an annual tax of 0.5% or 0.25% on the net equity value of their participation. However, under the Argentina-Spain DTC, article 22.4, only the treaty state where the shareholders were located (Spain) had the right to tax the assets. On this basis, Empresa Distribuidora La Plata S.A. considered that its shares held by Spanish holding companies were not subject to the Personal Assets Tax. The tax authorities disagreed, finding that the Spanish holding companies lacked substance and that the benefits of the Argentina-Spain DTC were therefore not applicable. Judgement of the Tax Court The Tax Court ruled in favour of the tax authorities. The Court held that the treaty benefits did not apply. The Court agreed with the findings of the tax authorities that the Spanish companies had been set up for the sole purpose of benefiting from the Spain-Argentina DTC and therefore violated Argentina’s general anti-avoidance rule. Excerpt “According to the administrative proceedings, based on the background information requested from the International Taxation Directorate of the Spanish Tax Agency and other elements collected by the audit, it appears that: a) the company Inversora AES Americas Holding S.L., is made up as partners by AES Argentina Holdings S.C.A. and AES Platense Investrnents Uruguay S.C.A., both Uruguayan companies; b) the company Zargas Participaciones S.L., has as its sole partner ISKARY S.A., also a Uruguayan company. The purpose of the former is the management and administration of securities representing the equity of companies and other entities, whether or not they are resident in Spanish territory, investment in companies and other entities, whether or not they are resident in Spanish territory, and it has only three employees (one administrative and two in charge of technical areas) and has opted for the Foreign Securities Holding Entities Regime (ETVE). The second company, whose purpose is the management and administration of securities representing the equity of non-resident entities in Spanish territory, has had no employees on its payroll since its incorporation, and has also opted for the ETVE regime. Neither of the two companies is subject to taxation in their own country similar to that in the present case. According to the information provided by the Spanish Tax Agency (see fs. 34 of the Background Zargas Participaciones SL), there is no record that it has any shareholdings in the share capital of other companies. The evidence and circumstances of the case show that the Spanish companies lack genuine economic substance, with the companies AES Argentina Holdings S.C.A. and AES Platense Investments Uruguay S.C.A. (both Uruguayan) holding the shares of Inversora AES Americas Holding S.L. and the company ISKARY S.A. (also Uruguayan) holding 100% of the shares of Zargas Participaciones S.L. Thus, it is reasonable to conclude that the main purpose of their incorporation was to obtain the benefits granted by the Convention by foreign companies from a third country outside the scope of application of the treaty, without the plaintiff having been able to prove with the evidence produced in the proceedings that the Spanish companies carried out a genuine economic activity and that, therefore, they were not mere legal structures without economic substance (in the same sense CNCAF, Chamber I, in re “FIRST DATA CONO SUR S.R.L.” judgement of 3/12/2019). Consequently, the tax criterion should be upheld. With costs.” Click here for English Translation Click here for other translation ...

In case concerns the tax implications of four reinsurance agreements concluded between Codan Forsikring (Codan Insurance) and a controlled Irish company, RSA Reinsurance Ireland Ltd. for FY 2010-2013. The tax authorities had increased Codan Insurance’s taxable income for FY 2010, 2011 and 2012 by DKK 23 million, DKK 25 million, and DKK 18 million and reduced the taxable income for FY 2013 by DKK 4 million. At issue was whether expenses incurred by Codan for reinsurance of policies in Ireland were commercially justified and thus deductible. If so, there were questions as to whether the reinsurance agreements were concluded at arm’s length and whether Codan Insurance’s transfer pricing documentation met the requirements that could be made. By decision of 26 June 2019, the Tax Court reduced the assessment to DKK 0 for the 2010-2012 tax years and upheld Codan’s taxable income for FY 2013. An appeal was filed by the tax authorities. Judgement of the Eastern High Court The High Court upheld the decision of the tax Court and set aside the assessment of the tax authorities. The Court found that the reinsurance agreements with the Irish subsidiary served a commercial purpose and that there were no grounds for setting them aside. The significance of the existence of a controlled relationship between Codan Forsikring and RSA Reinsurance, including the determination of the amount of the commission, had then to be assessed according to the rules on arm’s length correction of transactions between related parties. The Regional Court further found that the transfer pricing documentation was not deficient to such a significant extent that it could be equated with a lack of documentation and that Codan Insurance’s income could not, on the basis specified, be assessed on an estimated basis pursuant to section 3B(8) of the current Tax Control Act, cf. section 5(3). Finally, the Regional Court found that the reinsurance agreements were not outside the scope of what could have been agreed between independent parties, cf. The Regional Court therefore upheld Codan Forsikrings’ claim for acquittal. Click here for English Translation ...

On 16 June 2022 McDonald’s France entered into an settlement agreement according to which it will pay €1.245 billion in back taxes and fines to the French tax authorities. The settlement agreement resulted from investigations carried out by the French tax authorities in regards to abnormally high royalties transferred from McDonald’s France to McDonald’s Luxembourg following an intra group restructuring in 2009. McDonald’s France doubled its royalty payments from 5% to 10% of restaurant turnover, and instead of paying these royalties to McDonald’s HQ in the United States, going forward they paid them to a Swiss PE of a group company in Luxembourg, which was not taxable of the amounts. During the investigations it was discovered that McDonald’s royalty fees could vary substantially from one McDonald’s branch to the next without any justification other than tax savings for the group. This conclusion was further supported by statements of the managers of the various subsidiaries as well as documentation seized which showed that the 100% increase in the royalty rate was mainly explained by a higher profitability of McDonald’s in France and a corresponding increase in taxes due. The investigations led the French tax authorities to question the overall economic substance of the IP company in Luxembourg and the contractual arrangements setup by the McDonald’s group. After being presented with the findings of the investigations and charged with tax fraud etc. McDonald’s was offered a public interest settlement agreement (CJIP) under Article 41-1-2 of the French Code of Criminal Procedure. The final settlement agreement between McDonald’s and the French authorities was announced in a press release from the Financial Public Prosecutor (English translation below). On 16 June 2022, the President of the Paris Judicial Court validated the judicial public interest agreement (CJIP) concluded on 31 May 2022 by the Financial Public Prosecutor (PRF) and the companies MC DONALD’S FRANCE, MC DONALD’S SYSTEM OF FRANCE LLC and MCD LUXEMBOURG REAL ESTATE S.A.R.L pursuant to Article 41-1-2 of the Criminal Procedure Code. under Article 41-1-2 of the Code of Criminal Procedure. Under the terms of the CJIP, MC DONALD’S FRANCE, MC DONALD’S SYSTEM OF FRANCE LLC and MCD LUXEMBOURG REAL ESTATE S.A.R.L, undertake to pay the French Treasury a public interest fine totalling 508,482,964 euros. Several French companies of the MC DONALD’S group have also signed a global settlement with the tax authorities, putting an end to the administrative litigation. The sum of the duties and penalties due under the overall settlement and the public interest fine provided for under the CJIP amounts to a total of EUR 1,245,624,269. Subject to the payment of the public interest fine, the validation of the CJIP extinguishes the public prosecution against the signatory companies. This agreement follows a preliminary investigation initiated by the PNF on 4 January 2016 after the filing of a complaint by the works council of MC DONALD’S OUEST PARISIEN. Opened in particular on the charge of tax fraud, the investigation had been entrusted to the Central Office for Combating Corruption and Financial and Fiscal Offences (OCLCIFF). This is the 10ᵉ CJIP signed by the national financial prosecutor’s office. The Financial Public Prosecutor Jean-François Bohnert Validated Settlement Agreement of 16 June 2022 English translation of the Validated Settelment Agreement Preliminary Settlement Agreement of 31 May 2022 with statement of facts and resulting taxes and fines English translation of the Preliminary Settlement Agreement of 31 May 2022 ...

1. Premiere is the parent company of an MNE group. Company S is a wholly owned subsidiary of Premiere and a member of the Premiere group. Premiere funds R&D and performs ongoing R&D functions in support of its business operations. When its R&D functions result in patentable inventions, it is the practice of the Premiere group that all rights in such inventions be assigned to Company S in order to centralise and simplify global patent administration. All patent registrations are held and maintained in the name of Company S. 2. Company S employs three lawyers to perform its patent administration work and has no other employees. Company S does not conduct or control any of the R&D activities of the Premiere group. Company S has no technical R&D personnel, nor does it incur any of the Premiere group’s R&D expense. Key decisions related to defending the patents are made by Premiere management, after taking advice from employees of Company S. Premiere’s management, and not the employees of Company S, controls all decisions regarding licensing of the group’s patents to both independent and associated enterprises. 3. At the time of each assignment of rights from Premiere to Company S, Company S makes a nominal EUR 100 payment to Premiere in consideration of the assignment of rights to a patentable invention and, as a specific condition of the assignment, simultaneously grants to Premiere an exclusive, royalty free, patent licence, with full rights to sub-licence, for the full life of the patent to be registered. The nominal payments of Company S to Premiere are made purely to satisfy technical contract law requirements related to the assignments and, for purposes of this example, it is assumed that they do not reflect arm’s length compensation for the assigned rights to patentable inventions. Premiere uses the patented inventions in manufacturing and selling its products throughout the world and from time to time sublicenses patent rights to others. Company S makes no commercial use of the patents nor is it entitled to do so under the terms of the licence agreement with Premiere. 4. Under the agreement, Premiere performs all functions related to the development, enhancement, maintenance, protection and exploitation of the intangibles except for patent administration services. Premiere contributes and uses all assets associated with the development and exploitation of the intangible, and assumes all or substantially all of the risks associated with the intangibles. Premiere should be entitled to the bulk of the returns derived from exploitation of the intangibles. Tax administrations could arrive at an appropriate transfer pricing solution by delineating the actual transaction undertaken between Premiere and Company S. Depending on the facts, it might be determined that taken together the nominal assignment of rights to Company S and the simultaneous grant of full exploitation rights back to Premiere reflect in substance a patent administration service arrangement between Premiere and Company S. An arm’s length price would be determined for the patent administration services and Premiere would retain or be allocated the balance of the returns derived by the MNE group from the exploitation of the patents ...

When the captive insurance does not have access to the appropriate skills, expertise and resources and, therefore, the captive insurance is not found to exercise control functions related to the risks associated to the underwriting, an analysis under Chapter I, based on facts and circumstances, may conclude that the risk has not been assumed by the captive insurance or that another MNE is exercising these control functions. In this latter case, the return derived from the investment of the premiums would be allocated to the member(s) of the MNE group that are assuming the risk associated with the underwriting in accordance with the guidance in Chapter I ...

The Spanish tax authorities have published a report on the applicability of their domestic General Anti-Abuse Rule (GAAR). In the report, a conduit arrangement aimed at benefiting from an exemption at source on the payment of interest to EU residents is described. Click here for English translation ...

At issue was the transfer of taxable assets from a shareholder to a 100% owned company, “VSR Inc”. This transfer of resulted in an understatement of profits in a controlled sale of vehicle scrapping rights. Following an audit, the tax authority concluded that the rights had been acquired in the previous quarter from the one transferred and that a sale value below cost could not be justified. According to the tax authorities the arrangement lacked economic or commercial substance. The sole purpose had been to lower the overall taxation. An revised tax assessment – and a substantial fine – was issued by the tax authorities. VSR filed an appeal. Judgement of the Court The court dismissed the appeal and decided in favor of the tax authorities. “Since it is apparent from the above that the above transactions were intended to transfer taxable material from the applicant’s sole proprietorship to the associated company under the name of ” “, TIN and to tax them at a lower average tax rate, all the above transactions are therefore artificial arrangements which are not consistent with normal business behaviour and lead to a significant tax advantage without any assumption of business risk on the part of ” “, TIN Because, for each of the 2005 withdrawal rights, which is identical to a vehicle registration number, the tax authority identified the corresponding purchase document and determined the total acquisition value of these rights at the amount of six hundred and six thousand one hundred and sixty euros (€ 606,160.00), i.e. an average acquisition price per withdrawal right of € 302.32. Consequently, the taxable amount transferred, in the form of an artificial arrangement, from the applicant’s sole proprietorship to the associated company with the name ” “, VAT number , amounts to € 405,580.00 (€ 606,160.00 – € 200,580.00). In the light of the foregoing, the applicant’s claims concerning the tax authority’s unsubstantiated assessment of the existence of artificial arrangements and the absence of the element of intention are rejected as unfounded. Since the public administration is bound by the principle of legality, as laid down in Article 26(1)(b) of the Staff Regulations, the Commission is bound by the principle of proportionality. 2, 43, 50, 50, 82, 83 and 95 & 1 of the Constitution (Council of State 8721/1992, Council of State 2987/1994), which implies that the administration must or may take only those actions provided for and imposed or permitted by the rules laid down by the Constitution, legislative acts, administrative regulatory acts adopted on the basis of legislative authorisation, as well as by any rule of higher or equivalent formal force to them. Since the review of constitutionality is a matter for the courts and does not fall within the competence of the administrative bodies, which are required to apply the existing legislative framework, it is inadmissible and is not being examined in the context of the present action. Consequently, the applicant’s allegation of a breach of the principle of economic freedom in Article 5 of the Constitution, the principle of proportionality in Article 25 para. 1 of the Constitution and the requirements of the Charter of Fundamental Rights of the European Union is rejected as being unfounded. Because the applicant’s claim that the excess amount already paid by ” “, TIN, as income tax (EUR 118 073,21) should be deducted from the income tax assessed on the applicant’s sole proprietorship, TIN, is rejected as unfounded in substance and in law, since there is no relevant provision in the tax legislation providing for such a deduction. With regard to the individual claim that the amount of the income difference found by the audit for his sole proprietorship of € 405,580.00 should be added to the expenses of the I.C.E., this is a matter that should be raised and dealt with by the I.C.E., which is a separate tax entity, and not by the applicant as a natural person, and is therefore irrelevant. “ Click here for English translation Click here for other translation ...

A Swiss company manufactured and distributed pharmaceutical and chemical products. The Swiss company was held by a Dutch parent that held another company in France. R&D activities were delegated by the Dutch parent to its French subsidiary and compensated with cost plus 15%. On that basis the Swiss company had to pay a royalty to its Dutch parent of 2.5% of its turnover for using the IP developed. Following an audit the Swiss tax authorities concluded that the Dutch parent did not contribute to the development of IP. In 2006 and 2007, no employees were employed, and in 2010 and 2011 there were only three employees. Hence the royalty agreement was disregarded and an assessment issued where the royalty payments were denied. Instead the R&D agreement between the Dutch parent and the French subsidiary was regarded as having been concluded between the Swiss and French companies Judgement of the Supreme Court The Court agreed with the decision of the tax authorities. The Dutch parent was a mere shell company with no substance. Hence, the royalty agreement was disregarded and replaced with the cost plus agreement with the French subsidiary. The Court found that it must have been known to the taxpayer that a company without substance could not be entitled to profits of the R&D activities. On that basis an amount equal to 75% of the evaded tax had therefore rightly been imposed as a penalty. Click here for English translation Click here for other translation ...

A GmbH (“Sport Data GmbH”) was founded in 2006 as a wholly-owned subsidiary of A Holding AG, which had been founded shortly before and had its registered office in Switzerland. A AG, Switzerland was also founded as a sister company of A GmbH. A AG is A GmbH´s only customer. The business of A GmbH is the development and support of software for A AG, the maintenance of hardware, the training of employees and the forwarding of information. A AG, Switzerland sells the information provided by A GmbH. For these services A GmbH receives a remuneration from A AG determined as actual costs plus a profit surcharge of 5 %. The tax authorities noted that A AG did not initially have any active business activities. Against this background, the tax office had doubts about the arm’s length nature of the transfer prices. The tax authorities concluded, there were also no “simple services” by A GmbH for which, according to international accounting principles (services of a routine nature), procedures with profit mark-ups in the range of 5% to 15% could be considered. A high quality service should not be compensated by a 5% mark-up, especially if the service is performed using self-created intangible assets. In such cases, the profit split method should instead be applied. An assessment of estimated additional profits was issued. Judgement of the Court The court decided that the remuneration should be based on the cost plus method, but that the margin should be changed from 5 % to 10 % due to the advanced functions performed by A GmbH. Excerpts: “The contacts with the international sports organisers such as the IFA and the customers (companies) are again (only) with A AG, Switzerland. This picture also shows the overall profit situation of the group of companies in comparison: In the first year in dispute, the 5% mark-up applied by the Bf. amounted to 276,214.58 euros, while the share of the company’s profit applied by the tax office (in the context of the BVE) was “only” 195,120 euros. In the following year, the ratio changed in such a way that the surcharge of the complainant amounted to approximately 150,000 euros, while the part assessed by the tax office amounted to approximately 270,000 euros, and in the third year, with the same accounting of the complainant, even approximately 840,000 euros, and in the following years much more. While the performance of the complainant thus remained relatively constant (in the first year longer periods were affected due to a different business year), A AG, Switzerland was able to increase its business results enormously through efficient marketing on the basis of the good functioning of the EDP and/or the training of the employees working worldwide. Even if the business idea and the IT implementation of the same originated with the complainant, the economic success of the group of companies is not least due to the marketing activities of A AG, Switzerland, under the motto “even the best product must first find a buyer”. In this situation, the appropriateness can only be checked using the standard cost+ method.” “As far as a profit mark-up of 5% is charged for this routine activity, a higher profit mark-up must be applied for the services of the complainant in comparison. Determining the amount of the appropriate mark-up within the range of 5 – 15% is naturally associated with uncertainties. One indication in the case of a complaint can be the mark-up rates for IT programming of between 4.78% and 13.95% determined in the transfer pricing study by PwC. Another indication is the assessment of the complainant herself, who had to concede at the hearing that the 5% mark-up may be too low. In a detailed discussion, she was unable to offer any substantive arguments against a 10% mark-up rate. Considering that the defendant’s activities after the development and sale of the software “A Live System”, which is not in dispute here, consist of very different services, a mixed mark-up rate of 10% seems appropriate:” Click here for English translation Click here for other translation ...

“Paper Trading B.V.” was active in the business of buying and selling paper. The paper was purchased (mostly) in Finland, and sold in the Netherlands, Belgium, France, and Germany. The purchasing and selling activities were carried out by the director of Paper Trading B.V. “Mr. O” who was also the owner of all shares in the company. In 1994, Mr. O set up a company in Switzerland “Paper Trader A.G”. The appointed director of “Paper Trader A.G” was a certified tax advisor, accountant, and trustee, who also acted as director of various other companies registered at the same address. The Swiss director took care of administration, correspondence, invoicing and corporate tax compliance. A couple of years later, part of the purchasing and selling of the paper was now carried out through “Paper Trader A.G”. However, Mr. O proved to be highly involved in activities on behalf of “Paper Trader A.G”, and the purchase and sale of its paper. Mr. O was not employed by “Paper Trader A.G”, nor did he receive any instructions from the company. From witness statements quoted by the Court in the context of a criminal investigation, it followed that Mr. O de facto ran “Paper Trader A.G” like Paper Trading B.V. Mr. O decided on a case-by-case basis whether a specific transaction was carried out by either one of the companies. Moreover, both companies had the same suppliers of paper, paper products, logistics providers and buyers. The only difference was the method of invoicing and payment. The tax authorities issued additional corporate income tax assessments for fiscal years 1996, 1997 and 1998. For fiscal year 1999, the tax authorities issued a corporate income tax assessment that deviated from the corporate income tax return filed by Paper Trading B.V. These decisions were appealed at the Court of Appeal in Amsterdam (the Court). Ruling The Court considered it plausible that the attribution of profit was not based on commercial consideration, but motivated by the interest of the Mr O. The aim was to siphon a (large) part of the revenue achieved from trading activities from the tax base in the Netherlands. The Court of Appeal ruled that the income generated by Paper Trader A.G had to be accounted for at the level of the Paper Trading B.V. For administrative services, Paper Trader A.G was entitled to a cost plus remuneration of 15%. Certain expenses could not be included in the cost basis, such as factoring and insurance fees. Judgement of the Supreme Court The Supreme Court confirmed the ruling. Click here for English translation Click here for other translation ...

A holding company of an international Group was established in Spain and in it and in the Group’s operating entity, which was made dependent on it and with which it was fiscally consolidated, intra group loans were requested, for the acquisition of shares in other Group companies, which were mere asset relocations without any economic or business substance, with the sole objective of reducing taxation in Spain: Both in the Spanish holding company and in the operating entity, financial expenses were deducted as a result of that indebtedness, which lead to a drastic reduction in profits in the operating company and losses in the holding company, with the final result that this income remains untaxed. On this background an assessment was issued by the tax authorities where the financial expenses were disallowed under Spanish “fraud by law” provisions. As stated in Article 6.4 of the Civil Code: “Acts carried out under the protection of the text of a rule which pursue a result prohibited by the legal system, or contrary to it, shall be considered to have been carried out in fraud of law and shall not prevent the due application of the rule which it was sought to circumvent“. This, transferred to the tax sphere, is equivalent to the text of Article 24 of the LGT, in the wording given by Law 25/1995, of 20 July 1995 (applicable to the case in question), which states: “In order to avoid tax evasion, it shall be understood that there is no extension of the taxable event when tax is levied on events, acts or legal transactions carried out for the purpose of avoiding payment of the tax, under the cover of the text of rules issued for a different purpose, provided that they produce a result equivalent to that derived from the taxable event. Fraud of tax law must be declared in special proceedings in which the interested party is heard. 2. Events, acts or legal transactions carried out in fraudulent evasion of tax law shall not prevent the application of the evaded tax rule nor shall they give rise to the tax advantages that were intended to be obtained through them. 3. In the settlements made as a result of the tax evasion case, the tax rule that has been evaded shall be applied and the corresponding late payment interest shall be paid, without the imposition of penalties for these purposes alone“. Decision of the TEAC The TEAC confirmed the existence of fraud by law and upheld the assessment. All the actions are legal and real; there is no simulation, but from the set of all the circumstances, without proof that there is a substance and economic business reality, it is concluded that it is a simple exchange of shares within the Group, with the sole purpose of generating the financial expenses in the Spanish entities of the Group, all of which is declared in fraud of law, and the situation is regularised by not admitting the financial expenses involved. There are no international tax reasons for the alleged fraud of law (application of DTAs, infringement of Community Law, etc.) as the application of the concept of fraud of law should have been applied in the same way in the case of a Group with a national parent company and article 24 of the LGT, the provision from which the application of fraud of law derives, does not contain any distinction or restriction depending on whether residents or non-residents are involved. The rules on related-party transactions or transfer pricing do not apply, as it is not disputed that the transactions were carried out at market value; indeed, it is acknowledged that this was the case. It is from the set of circumstances analysed that the existence of fraud by law can be concluded. If it were possible to correct it through the mere application of a specific rule (either related-party transactions or thin capitalisation, etc.) we would no longer be dealing with a case of fraud by law. Click here for English translation Click here for other translation ...