Tag: Leveraged acquisition of shares

Spain vs SGL Carbon Holding, September 2021, Tribunal Supremo, Case No 1151/2021 ECLI:EN:TS:2021:3572

A Spanish subsidiary – SGL Carbon Holding SL – had significant financial expenses derived from an intra-group loan granted by the parent company for the acquisition of shares in companies of the same group. The taxpayer argued that the intra-group acquisition and debt helped to redistribute the funds of the Group and that Spanish subsidiary was less leveraged than the Group as a whole. The Spanish tax authorities found the transactions lacked any business rationale other than tax avoidance and therefor disallowed the interest deductions. The Court of appeal upheld the decision of the tax authorities. The court found that the transaction lacked any business rationale and was “fraud of law” only intended to avoid taxation. The Court also denied the company access to MAP on the grounds that Spanish legislation determines: The decision was appealed by SGL Carbon to the Supreme Court. Judgement of the Supreme Court The Supreme Court dismissed the appeal of SGL CARBON and upheld the judgment. Click here for English translation Click here for other translation Spain STS_3572_2021 ...

Italy vs Stiga s.p.a., formerly Global Garden Products Italy s.p.a., July 2020, Supreme Court, Case No 14756.2020

The Italian Tax Authorities held that the withholding tax exemption under the European Interest and Royalty Directive did not apply to interest paid by Stiga s.p.a. to it’s parent company in Luxembourg. The interest was paid on a loan established in connection with a merger leverage buy out transaction. According to the Tax Authorities the parent company in Luxembourg was a mere conduit and could not be considered as the beneficial owner of the Italian income since the interest payments was passed on to another group entity. The Court rejected the arguments of the Italian Tax Authorities and recognized the parent company in Luxembourg as the beneficial owner of the interest income. In the decision, reference was made to the Danish Beneficial Owner Cases from the EU Court of Justice to clarify the conditions for application of the withholding tax exemption under the EU Interest and Royalty Directive and for determination of beneficial owner status. The Court also found that no tax abuse could be assessed. In this regard the court pointet out that the parent company in Luxembourg performed financial and treasury functions for other group entities and made independent decisions related to these activities. Click here for Translation Cassazione civile 10072020 n14756 ...

Spain vs SGL Carbon Holding, April 2019, Audiencia Nacional, Case No ES:AN:2019:1885

A Spanish subsidiary – SGL Carbon Holding SL – had significant financial expenses derived from an intra-group loan granted by the parent company for the acquisition of shares in companies of the same group. The taxpayer argued that the intra-group acquisition and debt helped to redistribute the funds of the Group and that Spanish subsidiary was less leveraged than the Group as a whole. The Spanish tax authorities found the transactions lacked any business rationale other than tax avoidance and therefor disallowed the interest deductions. The Court held in favor of the authorities. The court found that the transaction lacked any business rationale and was “fraud of law” only intended to avoid taxation. The Court also denied the company access to MAP on the grounds that Spanish legislation determines: Article 8 Reglamento MAP: Mutual agreement procedure may be denied, amongst other, in the following cases: … (d) Where it is known that the taxpayer’s conduct was intended to avoid taxation in one of the jurisdictions involved. (…) Click here for translation Spain vs SGL Carbon Holding April 22 2019 1885 ...

Spain vs ICL ESPAÑA, S.A. (Akzo Nobel), March 2018, Audiencia Nacional, Case No 1307/2018 ECLI:ES:AN:2018:1307

ICL ESPAÑA, S.A., ICL Packaging Coatings, S.A., were members of the Tax Consolidation Group and obtained extraordinary profits in the financial years 2000, 2001 and 2002. (AKZO NOBEL is the successor of ICL ESPAÑA, as well as of the subsidiary ICL PACKAGING.) On 26 June 2002, ICL ESPAÑA, S.A. acquired from ICL Omicron BV (which was the sole shareholder of ICL ESPAÑA, S.A. and of Elotex AG and Claviag AG) 45.40% of the shares in the Swiss company, Elotex AG, and 100% of the shares in the Swiss company of Claviag AG. The acquisition was carried out by means of a sale and purchase transaction, the price of which was 164.90 million euros, of which ICL ESPAÑA, S.A. paid 134.90 million euros with financing granted by ICL Finance, PLC (a company of the multinational ICL group) and the rest, i.e. 30 million euros, with its own funds. On 19 September 2002, ICL Omicron BV contributed 54.6% of the shares of Elotex AG to ICL ESPAÑA, S.A., in a capital increase of ICL ESPAÑA, S.A. with a share premium, so that ICL ESPAÑA, S.A. became the holder of 100% of the share capital of Elotex AG. The loan of 134,922,000 € was obtained from the British entity, ICL FINANCE PLC, also belonging to the worldwide ICL group, to finance the acquisition of the shares of ELOTEX AG. To pay off the loan, the entity subsequently obtained a new loan of €75,000,000. The financial burden derived from this loan was considered by ICL ESPAÑA as an accounting and tax expense in the years audited, in which for this concept it deducted the following amounts from its taxable base – and consequently from that of the Group: FY 2005 2,710,414.29, FY 2006 2,200,935.72, FY 2007 4,261,365.20 and FY 2008 4.489.437,48. During the FY under review, ICL ESPAÑA SA has considered as a deductible expense for corporate tax purposes, the interest corresponding to loans obtained by the entity from other companies of the group not resident in Spain. The financing has been used for the acquisition of shares in non-resident group companies, which were already part of the group prior to the change of ownership. The amounts obtained for the acquisition of shares was recorded in the groups cash pooling accounts, the entity stating that “it should be understood that the payments relating to the repayment of this loan have not been made in accordance with a specific payment schedule but rather that the principal of the operation has been reduced through the income made by Id ESPAÑA SA from the cash available at any given time”. Similarly, as regards the interest accrued on the debit position of ICL ESPAÑA SA, the entity stated that “the interest payments associated with them have not been made according to a specific schedule, but have been paid through the income recorded by ICL ESPAÑA SA in the aforementioned cash pooling account, in the manner of a credit policy contract, according to the cash available at any given time”. The Spanish tax authorities found the above transactions lacked any business rationale other than tax avoidance and therefor disallowed the interest deductions for tax purposes. This decision was appealed to the National Court. Judgement of the National Court The Court partially allowed the appeal. Excerpts “It follows from the above: 1.- The purchase and sale of securities financed with the loan granted by one of the group companies did not involve a restructuring of the group itself. The administration claims that the transfer of 100% ownership of the shares of both Swiss companies is in all respects formal. And it is true that no restructuring of the group can be seen as a consequence of the operation, nor is this alleged by the plaintiff. 2.- There are no relevant legal or economic effects apart from the tax savings in the operation followed, since, as we have pointed out, we are dealing with a merely formal operation, with no substantive effect on the structure and organisation of the Group. 3.- The taxation in the UK of the interest on the loan does not affect the correct application of Spanish tax legislation, since, if there is no right to deduct the interest generated by the loan, this is not altered by the fact that such interest has been taxed in another country. It is clear that the Spanish authorities cannot make a bilateral adjustment in respect of the amounts paid in the United Kingdom for the taxation of the interest received. For this purpose, provision is made for the mutual agreement procedure under Article 24 of the Convention between the Kingdom of Spain and the United Kingdom of Great Britain and Northern Ireland for the avoidance of double taxation and the prevention of fiscal evasion in relation to taxes on income and on capital and its Protocol, done at London on 14 March 2013 (and in the same terms the previous Instrument of Ratification by Spain of the Convention between Spain and the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion in respect of Taxes on Income and on Capital, done at London on 21 October 1975, Article 26 ).” “For these reasons, we share the appellant’s approach and we understand that the non-compliance with the reinvestment takes place in the financial year 2004 (as the start of the calculation of the three-year period is determined by the deed of sale dated 29 June 2001), and that therefore the regularisation on this point should be annulled because it corresponds to a financial year not covered by the inspection.” “Therefore, and in the absence of the appropriate rectification, this tax expense would be double-counted, firstly because it was considered as a tax expense in 1992 and 1999, and secondly because it was included in seventh parts – in 2003 and in the six subsequent years – only for an amount lower than the amount due, taking into account the proven ...

Spain vs. Bicc Cables Energía Comunicaciones S.A., July 2012, Supreme Court, Case No. 3779/2009

In May 1997, BICC CABLES ENERGÃA COMUNICACIONES, S.A. acquired 177 class B shares in BICC USA Inc. (BUSA) for USD 175 million. The par value of each share was one dollar. The acquisition price of the shares was set on the basis of an Arthur Andersen Report which stated that the fair market value of BUSA was USD 423 million. BUSA was the holding company of four investee companies, so the valuation was made in relation to each of the groups of investee companies. The shares acquired by BICC CABLES were Class B shares, with a fixed annual dividend of 4.5% of the total investment. This dividend was paid, at BUSA’s discretion and in accordance with the agreements entered into between the parties, either in cash or by delivery of shares in the Class B company. The acquisition was financed by (1) Ptas. 3,450,000,000,000 charged to the unrestricted reserves account of BICC CABLES and (2) 22,000,000,000 pesetas through a loan granted by an English bank at an interest rate of 6.03%. As a result of the acquisition, BICC CABLES received a shareholding percentage of 15%, which was much lower than what would correspond to the cost of the shares (175 million US dollars) in relation to the value estimated by the auditing company (423 million US dollars). In 1998, BUSA delivered 32 Class A shares to BICC CABLES as a dividend, valued at 1,321,546,634 pesetas. In 1999, no dividend was paid to the company. In June 1999, BICC CABLES repaid part of the loan early (Ptas. 3,600,000,000). Furthermore, in November 1999, BICC OVERSEAS INVESTMENTS Ltd. (BOIL) acquired the BUSA shares owned by BICC CABLES and, at the same time, subrogates itself to the part of the loan which had not been repaid. The shareholding structure of BICC CABLES was as follows: (1) BICC OVERSEAS INVESTMENTS Ltd. (BOIL), a <>, holds 615,000 shares (43.69% of the capital), 2) BICC CEAT CAVI SRL (BICC Plc.), the parent company of the group, holds 226,451 shares (19.05%), and (3) BANCO SANTANDER holds 500,000 non-voting shares (35.5%). In February 2000 SANTANDER sold its shares to BICC Plc. In 1997, BICC CABLES considered Ptas. 899,129,800 as tax deductible financial expenses arising from the loan. In 1998, the expenses linked to the loan Ptas. 1,326,600,000 were deducted from the taxable income. Dividend received this year (the 32 BUSA class A shares valued at Ptas. 1,321,546,634), was not included in the profit and loss account. The company claimed that income corresponding to the dividend would be accounted for when the shares were sold. In 1999, financial expenses related to the loan Ptas. 489,099,461 were considered deductible. In 2000, the partial repayment of the loan and the loss on the transfer of the shares to BOIL were accounted for, despite the fact that they corresponded to two transactions carried out in 1999″. On this bagground a tax assessment was issued by the tax authorities, in which the tax effects (deductions and losses) of the above transactions were disregarded. This assessment was appealed to the Court by BICC. The court of first instance dismissed the appeal and decided in favour of the tax authorities. Judgement of the Supreme Court The Supreme Court likewise found that the transaction would not have been agreed by independent parties and thus not had been in accordance with the arm’s length principle. Excerpts from the case “The application to the case of the provision in question does not appear to be conditional, contrary to what is claimed in the application, on the classification of the transaction in question as <> or <>. If the absence of free will on the part of the taxpayer is established, if it can be stated that the activity in question was exclusively determined by the link between the companies and if it is clearly inferred – from the evidence – that the same transaction would not have been carried out by independent companies, the competent tax authorities may make the appropriate adjustments, including, in this case, the annulment of any tax effect that might derive from the transaction in question.” “it can be concluded, in agreement with the contested decisions, that the transaction resulted in BICC USA Inc. (BUSA) obtained substantial financial resources without the incorporation of shareholders from outside the group; furthermore, it gave rise to costs for the Spanish entity, which obtained no advantage or profit whatsoever, but only losses. It can easily be concluded that the operation was decided and imposed by the group’s parent company in order to increase the resources of its American subsidiary and that, in any event, in view of the above data, such an operation would not have been carried out by an independent company.” “In any case, it is clear that the Administration has made use of the anti-avoidance rules contained in article nine of the Double Taxation Convention, which constitutes our domestic law.” Click here for English translation Click here for other translation Spain-vs-Bicc-Cables-July-2012-Supreme-Court ...