The tax authorities had notified the companies GKN Driveline Firenze s.p.a. and GKN Italia s.p.a. of four notices of assessment, relating to the tax periods from 2002 to 2005, as well as 2011. The assessments related to the signing of a leasing contract, concerning a real estate complex, between GKN Driveline Firenze s.p.a. and the company TA. p.a. and the company TAU s.r.l.. A property complex was owned by the company GKN-Birfield s.p.a. of Brunico and was leased on an ordinary lease basis by the company GKN Driveline Firenze s.p.a. Both companies belonged to a multinational group headed by the company GKN-PLC, the parent company of the finance company GKN Finance LTD and the Italian parent company GKN-Birfield s.p.a., which in turn controlled GKN Driveline Firenze s.p.a. and TAU s.r.l. GKN Driveline Firenze s.p.a. expressed interest in acquiring ownership of the real estate complex; the real estate complex, however, was first sold to TAU s. s.r.l. and, on the same date, the latter granted it to the aforesaid company by means of a transfer lease. Further negotiated agreements were also entered into within the corporate group, as the purchase of the company TAU s.r.l. was financed by the company GKN Finance LTD, at the instruction of GKN- PLC, for an amount which, added to its own capital, corresponded to the purchase price of the property complex. The choice of entering into the transferable leasing contract, instead of its immediate purchase, had led the tax authorities to suggest that this different negotiation had had, as its sole motivation, the aim of unduly obtaining the tax advantage of being able to deduct the lease payments for the nine years of the contract while, if the property complex had been purchased, the longer and more onerous deduction of the depreciation allowances would have been required. The office had therefore suggested that the transaction had been carried out with abuse of law, given that the transfer leasing contract had to be considered simulated, with fictitious interposition of TAU s.r.l. in the actual sale and purchase that took place between GKN Driveline Firenze s.p.a. and GKN Birfield s.p.a. The companies filed appeals against the aforesaid tax assessments, which, after being joined, had been accepted by the Provincial Tax Commission of Florence. The tax authorities then appealed against the Provincial Tax Commission’s ruling. The Regional Tax Commission of Tuscany upheld the appeal of the tax authorities, finding the grounds of appeal well-founded. The appeal judge pointed out that the principle of the prohibition of abuse of rights, applicable also beyond the specific hypotheses set forth in Art. 37bis, Presidential Decree no. 600/1973, presupposes the competition of three characterising elements, such as the distorted use of legal instruments, the absence of valid autonomous economic reasons and the undue tax advantage. In the case at hand, the distorted use of the negotiation acts was reflected in the fact that the leasing contract had been implemented in a parallel and coordinated manner with a plurality of functionally relevant negotiation acts in a context of group corporate connection in which each of these negotiation acts had contributed a concausal element for the purposes of obtaining the desired result. In this context, it was presumable that the company TAU s.r.l., which had been dormant for a long time and had largely insufficient capital, had been appropriately regenerated and purposely financed within the same group to an extent corresponding to the cost of the deal and that, therefore, the leasing contract had been made to allow GKN Driveline Firenze s.p.a. to obtain the resulting tax benefits. The appeal court nevertheless held that the penalties were not applicable. GKN Driveline Firenze s.p.a. and GKN Italia s.p.a. filed an appeal with the Supreme Court. Judgement of the Supreme Court The Supreme Court set aside the decision of the Regional Tax Commission and refered the case back to the Regional Tax Commission, in a different composition. Excerpts “The judgment of the judge of appeal moves promiscuously along the lines of the relative simulation of the agreements entered into within the corporate group and the abuse of rights, with overlapping of factual and legal arguments, while it is up to the judge of merit to select the evidentiary material and from it to derive, with logically and legally correct motivation, the exact qualification of the tax case. In the case in point, the trial judge reasoned in terms of abuse of rights, assuming that the leasing transaction was carried out in place of the less advantageous direct sale, in terms of depreciation charges, but, in this context, he also introduced the figure of relative simulation, which entails a different underlying assumption: that is, that the leasing transaction was not carried out, since the parties actually wanted to enter into a direct sale. Also in this case, no specification is made, at the logical argumentative level, of the assumptions on the basis of which the above-mentioned relative simulation was deemed to have to be configured. Having thus identified the legal terms of the question, the reasoning of the judgment does not fully develop any of the topics of investigation that are instead required for the purposes of ascertaining the abuse of rights, both from the point of view of the anomaly of the negotiating instruments implemented within the corporate group and of the undue tax advantage pursued, while, on the other hand, it appears to be affected by intrinsic contradiction, because it is based simultaneously on both categories, abuse of rights and relative simulation, so that it is not clear whether, in the view of the appeal court, the tax recovery is to be regarded as legitimate because the leasing transaction was aimed exclusively at the pursuit of a tax saving or because that undue tax advantage was achieved through the conclusion of a series of fictitious transactions, both in relation to the financing and to the aforementioned leasing transaction in the absence of any real transfer of immovable property. In conclusion, the sixth plea in law ...

The business activity of A S.A. was wholesale of pharmaceutical products to external pharmacies, hospitals, wholesalers (including: to affiliated wholesalers). The tax authority had noted that the company’s name had been changed in FY 2013, and a loss in the amount of PLN […] had been reported in the company’s tax return. An audit revealed that the Company had transferred significant assets (real estate) to a related entity on non-arm’s length terms. The same real estate was then going forward made available to the company on a fee basis under lease and tenancy agreements. The tax authority issued an assessment where a “restructuring fee” in the amount of PLN […] was added to the taxable income, reflecting the amount which would have been achieved if the transaction had been agreed between independent parties. According to the company the tax authority was not entitled at all to examine the compliance of the terms of these transactions with the terms that would have been agreed between hypothetical independent entities, as the transactions in question were in fact concluded precisely between independent entities. (SKA companies were not CIT taxpayers in 2012, so they did not meet the definition of a “domestic entity” referred to in the aforementioned provision, and therefore a transaction between “related entities” cannot be said to have taken place). Moreover, the institution of “re-characterisation” of a controlled transaction into a proper transaction (according to the authority),could only be applied to transactions taking place after 1 January 2019, pursuant to Article 11e, Section 4 of the A.l.t.p. introduced (from that date). Judgement of the Court The Court decided predominantly in favor of A S.A. and remanded the case back to the tax authorities. Excerpts “The applicant in the course of the case referred to the judgment of the WSA in Warsaw of 18 December 2017, III SA/Wa 3661/16 (approved by the NSA in its judgment of 26 November 2020, II FSK 1919/18). The individual interpretation analysed there by the Court assessed a transaction (from 2012) concluded between a limited liability company and a general partnership. According to the WSA in Warsaw, the provisions of Article 11(4) in conjunction with Article 11(1) of the A.l.t.d.o.p. in the wording in force until 31 December 2014 may only be applied to transactions concluded between related parties – ‘domestic entities’ within the meaning of Article 11 of the A.l.t.d.o.p., and the tax authorities may only assess the income of related parties. The wording of Art. 11 of the A.l.t.p. indicates that it is intended to allow the tax authorities to estimate the income of related parties, if these parties, in transactions concluded between themselves, establish or impose terms and conditions that differ from those that would be established between independent parties, leading to an understatement of income. However, there are no grounds for this provision to be applied to transactions concluded by unrelated entities (a limited liability company and a general partnership) solely for the reason that tax on revenue from participation in a partnership is paid by its partners who are also members of the applicant’s management board. Indeed, it was only the provisions introduced by the Act of 29 August 2014 amending the Corporate Income Tax Act, the Personal Income Tax Act and certain other acts, which entered into force on 1 January 2015, that defined an “affiliated entity” as a natural person, a legal person or an organisational unit without legal personality that meets the conditions set out in the Act. If a contrary position were to be adopted Contrary to the authority’s assertions, these rulings do not concern a different factual situation. Although the audited interpretation concerned the necessity to prepare documentation pursuant to Art. 9a of the A.l.t.c., the applicant also directly inquired about classifying the applicant as an entity related to the general partnership. The courts of both instances were firmly in favour of the absence of such a link (dependence) between a capital company and a partnership, in terms of entering into mutual transactions, within the meaning of Article 11 of the A.l.t.p. in the wording in force until 31 December 2014. Thus, as shown above, the application of Article 11 of the A.l.t.d.o.p. in the present case was un-authorised, which makes it timely to consider the application in the analysed factual state of the general principles arising from Article 14 of the A.l.t.d.o.p. and Chapter 3 of this Act (tax deductible costs), which the authorities, for obvious reasons, have not undertaken so far.” “When reconsidering the case, the authority, taking into account the comments presented above, will issue an appropriate decision, containing in the justification of the decision all the elements referred to in Article 210 § 1 of the Polish Civil Code, including those arising from the cited resolution of the Supreme Administrative Court.” Click here for English Translation Click here for other translation ...

At issue was lease of real estate which was owned by the taxpayer and his wife. He was the managing director of Medinvest and, subsequently, of Long Wave, which were involved in the legal relations in question. He was active in connection with the lease of the properties in question, as managing director of Medinvest, he concluded certain sublease agreements with the final subtenants, and on 1 November 2005, as managing director of Medinvest, he concluded a sublease agreement with Long Wave. Judgement of the Court The Czech Supreme Administrative Court explained that “[t]he purpose of the provision in question is to prevent unwanted shifting of a part of the income tax base between individual income taxpayers and to enable the sanctioning of abusive price speculation in business relations. This includes the so-called “profit shifting” between persons with different tax burdens, which usually occurs when such persons charge each other prices in their transactions that are lower or higher than the prices used between independent persons in normal business relations, and the result of such transactions is an increase in costs or a decrease in sales for the company with the higher tax burden and a siphoning off of part of the profits to the company with the lower or zero income tax rate.” The Court then went on to summarise that “a material difference from normal prices occurs when sales are made too cheap or purchases are too expensive, in which case such a difference must always be satisfactorily documented.” Click here for English Translation Click here for other translation ...

A Czech company (the lessor) owned real estate and rented it to independent parties. An Austrian related company provided management and consulting services to the lessor The service fees significantly increased each year, although the income of the Czech company and the number of lease contracts were constant in the examined yearsThe tax authorities required that the taxpayer prove the actual provision of the services and their relationship to taxable income. The tax authorities rejected this explanation and concluded that the taxpayer had not proven the real condition of the real estate in the examined period.The legal question was: the scope of the burden of proof that rests with the taxpayer with respect to services received from related partyThe court ruled that: the taxpayer was obliged to prove the relationship of the expensed service fees to its taxable income. Tangible evidence of the provided services, including reports, correspondence and confirmation of business trips should be provided by the tax payer in order to prove the actual provision of the services. This case confirms the strong position of tax authorities when challenging the transfer prices of services. If the taxpayer does not meet the benefit test (proving that the services were actually rendered and incurred in relation to its taxable income), the entire service expense is non-deductible. Link to full original text: www.nssoud.cz ...

A lessor rented real estate for a low price to related parties.  The tax authorities claimed that the price was too low and required additional income to be taxed with the lessor. The lessor explained that the low rental fees were due to the poor condition of the real estate that was leased to related parties. The tax authorities rejected this explanation and concluded that the taxpayer had not proven the real condition of the real estate in the examined period. Judgement of the Court The court ruled that: the burden of proof was on the tax authorities and the authorities had to prove all significant parameters of the controlled transaction. The tax authorities must establish the arm’s length price (called the “reference price” in the decision) in order to be able to require that the taxpayer explain the difference between the arm’s length price and the intercompany Price. Furthermore, the tax authorities must give the person to whom the tax base is to be adjusted the opportunity (both in time and in fact) to explain and substantiate the observed difference between the prices in a satisfactory manner. If the taxpayer is able to discharged that burden of proof, the tax authority’s adjustment of the tax base is not an option. Click here for English Translation Click here for other translation ...

At issue was rental payment for real estate between related parties – Mr O.V. and his father. The tax authorities claimed that the price had not been determined in accordance with the arm’s length principle. Judgement of the Supreme Administrative Court The Supreme Administrative Court found the appeal of Mr O.V. to be well-founded and therefore annulled the contested judgment of the Regional Court and referred the case back to it for further proceedings. In these further proceedings, the Regional Court is bound by the legal opinion of the Supreme Administrative Court expressed in this judgment. “It can be concluded that if the tax administrator concludes that the price negotiated between related or close persons is not a price negotiated in normal business relations, it proceeds in accordance with the provisions of Section 23(7) of the Income Tax Act, i.e. it adjusts the tax base by the difference found. The Income Tax Act provides the tax administrator with a wide scope for determining the price customary in business relations. However, its decision and selection criteria must be objective, fair and reviewable. The tax authorities did not do so and the appeal is therefore well-founded in that respect.” Click here for English Translation Click here for other translation ...