A AB is part of an international group. The group was planning a reorganisation involving a number of intra-group transactions. As part of this reorganisation, A AB would acquire all the shares in B from the group company C. The acquisition would mainly be financed by A AB taking a loan from group company D, which is domiciled in another EU country. The terms of the loan, including the interest rate, would be at market terms. A AB requested an advance ruling to know whether the deduction of the interest expenses on the debt to D could be denied on the grounds that the debt relationship had been incurred exclusively or almost exclusively for the purpose of obtaining a significant tax advantage or because the acquisition of B was not essentially commercially motivated. If the interest was subject to non-deductibility, A AB wanted to know whether this would constitute an unauthorised restriction of the freedom of establishment under the EC Treaty. The Board of Advance Tax Rulings concluded that deductions for interest expenses could not be denied. Not agreeing with this ruling the tax authority filed an appeal with the Supreme Administrative Court. Judgment of the Court The Supreme Administrative Court upheld the decision of the Board of Advance Tax Rulings. Although the interest expenses were covered by the Acquisition Rule, it would be in breach of Article 49 TFEU (freedom of establishment) to deny the interest deductions. Excerpt “16. In the case HFD 2021 ref. 68, the Supreme Administrative Court found, with reference to the judgment of the Court of Justice of the European Union in Lexel (C-484/19, EU:C:2021:34), that the provision in Chapter 24, Section 18, second paragraph, of the Tax Code constitutes a restriction of the freedom of establishment which cannot be justified if it is applied to interest payments to companies in other Member States in situations where the companies involved would have been subject to the provisions on group contributions if both companies had been Swedish (paragraph 37). 17. According to the second paragraph of Section 18, interest expenses may not be deducted if the debt relationship has arisen exclusively or almost exclusively in order to obtain a significant tax advantage for the community of interest. According to its wording, the provision makes no distinction between interest paid to Swedish and foreign recipients. The reason why the provision is nevertheless considered to constitute a restriction on the freedom of establishment is that, as stated in the preparatory works, it is not intended to cover interest payments between companies covered by the provisions on group contributions. Such an interest payment is not considered to give rise to any tax advantage since the same result can be achieved with group contributions (Proposition 2012/13:1, pp. 254 and 334, and HFD 2021 ref. 68, paragraph 29, with reference to Lexel, paragraphs 35-44). 18. The question is whether there is reason to assess the provision in Chapter 24, section 19, first paragraph, of the Tax Code differently. According to that provision, interest expenses relating to an intra-group loan to finance an intra-group acquisition of participatory rights are not deductible if the acquisition is not essentially motivated by commercial considerations. Nor does that provision, according to its wording, make any distinction between interest paid to Swedish and foreign recipients. 19. In the first paragraph of Section 19, the prohibition of deduction has not, as in the second paragraph of Section 18, been made dependent on the existence of a possible tax advantage, but on what the borrowed capital has been used for, namely an intra-group acquisition of shareholding rights which is not essentially commercially motivated. Although the provision does not expressly state anything about tax benefits, in the opinion of the Supreme Administrative Court, it cannot be ignored that it is part of a system of rules whose overall purpose is to counteract tax planning with interest deductions. It is clear from the travaux préparatoires that the provision in Section 19, first paragraph also has this purpose (Government Bill 2017/18:245, pp. 193 and 366 et seq.). 20. It can thus be concluded from the travaux préparatoires that the provision in Section 19, first paragraph, is not intended to cover interest payments that do not entail any tax benefit, which is the case when the companies involved are covered by the provisions on group contributions. The refusal of a deduction for interest paid to companies in other Member States on the basis of the first paragraph of Section 19 may therefore, in the same way as when a deduction is refused on the basis of the second paragraph of Section 18, be regarded as entailing a difference in the treatment of domestic and cross-border situations which is, in principle, impermissible. 21. In HFD 2021 ref. 68, the Supreme Administrative Court held that the difference in treatment resulting from the provision in Chapter 24, Section 18, second paragraph, of the Income Tax Code cannot be justified by overriding reasons of public interest (paragraphs 30-36). As has been shown, the provisions in Section 18, second paragraph, and Section 19, first paragraph, have the same purpose, namely to counteract tax planning with interest deductions. Furthermore, both provisions cover transactions carried out under market conditions and are not limited to purely fictitious or artificial arrangements. The reasoning of the Court in the case is therefore equally relevant to the provision in Section 19(1). Thus, the difference in treatment resulting from that provision cannot be justified either. 22. It follows from the above that the provision in Chapter 24, Section 19, first paragraph, of the Tax Code also constitutes an unauthorised restriction of the freedom of establishment if it is applied to interest payments to companies in other Member States and the companies involved would have been subject to the provisions on group contributions if they had been Swedish. 23. It follows from the conditions submitted that A and D would have been subject to the provisions on group contributions if both companies had been Swedish. The ...

JTI Acquisitions Company Ltd was a UK holding company, part of a US group, used as an acquisition vehicle to acquire another US group. The acquisition was partly financed by intercompany borrowings at an arm’s length interest rate. The tax authorities disallowed the interest expense on the basis that the loan was taken out for a unallowable purpose. Judgement of the Upper Tribunal The Court upheld the decision and dismissed JTI Acquisitions Company Ltd’s appeal. According to the Court, a main purpose of the arrangement was to secure a tax advantage for the UK members of the group. The fact that the loans were at arm’s length was relevant but not determinative ...

The tax authorities issued an assessment of additional taxable income for “D. sp. z o.o.” resulting in additional corporate income tax liability for 2014 in the amount of PLN 2,494,583. The basis for the assessment was the authority’s findings that the company understated its taxable income for 2014 by a total of PLN 49,732,274.05, as a result of the inclusion of deductible expenses interest in the amount of PLN 39,244,375.62, under an intra-group share purchase loan agreements paid to W. S.a.r.l. (Luxembourg) expenses for intra-group services in the amount of USD 2,957,837 (amount of PLN 10,487,898.43) paid to W. Inc. (USA) “D. sp. z o.o.” filed a complaint with the Administrative Court (WSA) requesting annulment of the assessment. In a judgment of 15 September 2020 the Administrative Court dismissed the complaint. In the opinion of the WSA, it was legitimate to adjust the terms of the loan agreement for tax purposes in such a way as to lead to transactions that would correspond to market conditions, thus disregarding the arrangements, cf. the OECD TPG 1995 para. 1.65 and 1.66. Furthermore, according to the court the company did not present credible evidence as to the ‘shareholder’s expenses’ and the fact that significant costs were incurred for analogous services purchased from other entities indicates duplication of expenses. Consequently, it is impossible to verify whether the disputed management services were performed at all. Not satisfied with the decision “D. sp. z o.o.” filed an appeal with the Supreme Administrative Court. Judgement of the Supreme Administrative Court The Supreme Administrative Court set aside the decision of the Administrative Court and the tax assessment and refered the case back to the tax authorities for a reexamination. According to the court, there was no legal basis in Poland in 2014 for the non-recognition or recharacterisation of controlled transactions. The Polish arm’s length principle only allowed the tax authorities to price controlled transactions. The provisions (Articles 119a § 1 and § 2 Op) allowing for the substitution of the effects of an artificial legal act, if the main or one of the main purposes of which was to achieve a tax advantage have been in force only since 15 July 2016. And the possibility provided for the tax authority to determine the taxpayer’s income or loss without taking into account the economically irrational transaction undertaken by related parties (Article 11c(4) of the CIT) came into existence even later, as of 1 January 2019. Excerpts “3.2 The tax authorities relied on section 11(1) of the Income Tax Act (as in force in 2014), under which the tax authorities could determine the taxpayer’s income and the tax due without taking into account the conditions established or imposed as a result of the relationship between the contracting entities. However, this income had to be determined by way of estimation, using the methods described in paragraphs 2 and 3 of Article 11 of the Income Tax Act. This is because these are not provisions creating abuse of rights or anti-avoidance clauses. They only allow a different determination of transaction (transfer) prices. The notion of ‘transaction price’ was defined in Article 3(10) of the Op, which, in the wording relevant to the tax period examined in the case, stated that it is the price of the subject of a transaction concluded between related parties. Thus, the essence of the legal institution stipulated in Article 11 of the CIT is not the omission of the legal effects of legal transactions made by the taxpayer or a different legal definition of those transactions, but the determination of their economic effect expressed in the transaction price, disregarding the impact of institutional links between the counterparties (…) It is therefore a legal institution with strictly defined characteristics and can only have the effects provided for in the provisions defining it (as the law stood in 2014). Meanwhile, the application of any provisions allowing the tax authorities to interfere in the legal relations freely formed by taxpayers must be strictly limited and restricted only to the premises defined in those provisions, as they are of a far-reaching interferential nature. Any broadening interpretation of them, as a result of which legal sanction could be obtained by the interference of public administration bodies going further than the grammatical meaning of the words and phrases used in the provisions establishing such powers, is inadmissible.” “3.3 The structure of the DIAS ruling corresponds to the hypothesis of the standard of Article 11c(4) of the 2019 CIT, which was not in force in 2014. Therefore, there was no adequate legal basis for its application with respect to 2014. This legal basis was not provided by Article 11 of the Corporate Income Tax Act in force at that time. This provision regulated the issue of so-called transfer prices, i.e. transaction prices applied between entities related by capital or personality. In this provision, the legislator emphasised the principle of applying the market price (also known as the arm’s length principle), requiring that prices in transactions between related parties be determined in such a way as if the companies were functioning as independent entities, operating on market terms and carrying out comparable transactions in similar market and factual circumstances. When the transaction under review deviates from those between independent parties, in comparable circumstances, then in the event of the occurrence of also other circumstances indicated in Article 11 of the updopdop, the tax authority may require an adjustment of profit. The legislative solutions adopted in Article 11 of the CIT Act (from 1 January 2019 in Article 11a et seq. of the CIT Act) refer to the recommendations contained in the OECD Guidelines on transfer pricing for multinational enterprises and tax administrations. The Guidelines were adopted by the OECD Committee on Fiscal Affairs on 27 June 1995 and approved for publication by the OECD Council on 13 July 1995 (they have been amended several times, including in 2010 and 2017). While the OECD Transfer Pricing Guidelines do not constitute a source of law in the territory ...

“A…, Sociedade Unipessoal LDA” had taken out two intra group loans with the purpose of acquiring 70% of the shares in a holding company within the group. The tax authorities disallowed the resulting interest expenses claiming that the loan transactions lacked a business purpose. The assessment was later upheld by the tax court in decision no. 827/2019-T. An appeal was then filed by “A…, Sociedade Unipessoal LDA” with the Supreme Administrative Court. Judgement of Supreme Administrative Court The Court dismissed the appeal and upheld the decision of the tax court and the assessment issued by the tax authorities. Experts “35. In general, a transaction is considered to have economic substance when it significantly alters the taxpayer’s economic situation beyond the tax advantage it may generate. Now, the analysis of the relevant facts leads to the conclusion that neither A… nor the financial position of the Group’s creditors knew any significant economic change, nor any other economic consequence resulted or was reasonably expected to result beyond the additional increase in interest payable on intra-group loans, certainly with a view to increasing deductions and reducing the taxable profit. Even if there is a business purpose in the transaction – which is not certain in view of the permanence of the underlying economic reality – the objective of reducing the tax exposure, with the consequent reduction of the tax base, appears manifestly preponderant (principal purpose test). 36. Despite the existence of a general clause and special anti-abuse clauses, as well as specific rules on transfer pricing, earnings stripping or thin capitalization, all tax legislation must be interpreted and applied, in its systemic unity, so as to curb the erosion of the tax base and the transfer of profits. This involves a teleological interpretation that is attentive to the object, purpose and spirit of the tax rules, preventing their manifestly abusive use through sophisticated and aggressive tax planning operations. This can only be the case with rules on deductible expenses, as in the case of article 23 of the CIRC, which must be interpreted and applied in accordance with the anti-avoidance objectives that govern the entire national, European and international legal system, in order to prevent the erosion of the tax base. 37. On the other hand, where the deductibility of expenses and losses is concerned, the burden of proof lies with the taxpayer, as this is a fact constituting the claimed deduction (Art. 74, 1 of the LGT). Therefore, the accounting expenses groundedly questioned by the AT, in order to be tax deductible, would have to be objectively proven by the taxpayer who accounted for them. The excessive interest expenses are not objectively in line with the criteria of reasonableness, habituality, adequacy and economic and commercial necessity underlying the letter and spirit of Article 23(1) and (2)(c) of the CIRC, against the backdrop of business normality, economic rationality and corporate scope. We are clearly faced with a form of interest stripping, in fact one of the typical forms of profit transfer and erosion of the tax base. The excessive interest generated and paid in the framework of the financing operations analysed must be considered as “disqualified interest” (disallowed interest). 38. 38. The setting up of credit operations within a group in order to finance an acquisition of shareholdings already belonging to the group, sometimes with interest rates higher than market values and generating chronic problems of lack of liquidity in the sphere of the taxpayer, can hardly be regarded as a business activity subject to generally acceptable standards of economic rationality, and as such worthy of consideration under tax law. The possibility of deducting the respective financial costs was or could never have been conceived and admitted by the tax legislator when it chiselled the current wording of Article 23 of the CIRC. Legal-tax concepts should always be understood by reference to the constitutionally structuring principles of the legal-tax system, to all relevant facts and circumstances in the transactions carried out and to the substantial economic effects produced by them on taxpayers, unless the law refers expressly and exclusively to legal form. In the interpretation and application of tax law the principle of the primacy of substance over form shall apply. 39. The AT is entrusted with the important public interest function of protecting the State’s tax base and preventing profit shifting. In interpreting and applying tax rules, it should seek to strike a reasonable, fair and well-founded balance between the principles of tax law and legal certainty and the protection of legitimate expectations, on the one hand, and, on the other, the constitutional and European requirements of administrative and tax responsiveness in view of the updating and deepening of understanding and knowledge of tax problems, on a global scale, due to the latest theoretical, evaluative and principal developments which, particularly in the last decade, have been occurring in the issue of tax avoidance. 40. 40. The facts in the case records do not allow for the demonstration of the existence of a (current or potential) economic causal connection between the assumption of the financial burdens at stake and their performance in A…’s own interest, of obtaining profit, given the respective object. Hence, the non-tax deductibility of the interest incurred in 2015 and 2016 should be considered duly grounded by the AT, as the requirements of article 23, no. 1, of the CIRC were not met, as this is the only legal basis on which the AT supports the correction resulting from the non-acceptance of the deductibility of financial costs for tax purposes, and it is only in light of this legal provision that the legality of the correction and consequent assessment in question should be assessed. A careful reading of both decisions clearly shows that the fact that different wordings of Article 23 of the CIRC were taken into consideration was not decisive for the different legal solutions reached in both decisions. In both decisions the freedom of management of the corporate bodies of the companies is accepted, and it is certain ...

As a general rule interest expenses are deductible for the purposes of income taxation of a business activity. However, for companies in a group, e.g. companies in the same group, certain restrictions on the deductibility of interest can apply. In Sweden one of these limitations is that if the debt relates to the acquisition of a participation right from another enterprise in the partnership, the deduction can only be made if the acquisition is substantially justified by business considerations, cf. Chapter 24, Sections 16-20 of the Swedish Income Tax Act. A AB is part of the international X group, which is active in the manufacturing industry. A restructuring is planned within the group which will result in A becoming the group’s Swedish parent company. As part of the restructuring, A will acquire all the shares in B AB, which is currently the parent company of the Swedish part of the group, from group company C, which is resident in another EU country. Payment for the shares will be made partly by a contribution in kind equivalent to at least 75 % of the purchase price and partly by A issuing an interest-bearing promissory note on the remaining amount. A AB requested a preliminary ruling from the Tax Board on whether the rules limiting the right to deduct interest would result in interest expenses incurred as a result of the intra-group acquisition of the shares in B AB not being deductible. The Board found that the restructuring is justified for organisational reasons and that it follows from the preparatory works and previous practice that the acquisition is therefore not commercially justified within the meaning of the legislation in question. According to the Board, the application of Swedish domestic law therefore means that no deduction should be allowed. However, the Board found that it would be contrary to the freedom of establishment under the TFEU to deny A AB deduction for the interest expenses. An appeal was filed by the tax authorities with the Supreme Administrative Court in which they requested that the preliminary ruling from the tax board be amended and answer the question by denying A AB a deduction for interest expenses. Judgement of the Court The Court upheld the decision of the Tax Board and allowed deductions for the interest expenses in question. Not for the Swedish rules being contrary to the freedom of establishment under the TFEU but by reason of the interest expenses being justified by business considerations. Excerpts ”15. The interest relates to a debt owed to C which is situated in another EU country. It is clear from the conditions provided that it is only C who is actually entitled to the interest income. Furthermore, the description of the circumstances of, and reasons for, the planned restructuring provided in the application do not constitute grounds for considering that the debt relationship must be created exclusively or almost exclusively in order for the community of interest to obtain a significant tax benefit. Deduction of the interest expenditure should therefore not be refused on the basis of Chapter 24, Section 18. 16. The question is then whether the deduction should be refused on the basis of Chapter 24, Section 19.” … ”26. In this case, a relatively long period of time has elapsed between the external acquisitions of the shares in Y Group’s Parent B – which were completed in 2015 – and the intragroup acquisition of the shares in that company that is now under consideration. However, the acquisition of B has been part of a larger process that has also involved the incorporation of Z Group and eventually W Group into X Group. As this is a process which is typically extensive and complex and which has resulted in the merger of several large manufacturing groups into one, the time lag should not lead to the conclusion that the intra-group acquisition is not substantially justified from a commercial point of view. Furthermore, it appears that the acquisition of the shares in B under consideration would not have taken place if the external acquisitions had not taken place. 27. Since the external acquisitions were made for commercial reasons and the acquisition under consideration in the context of the present restructuring is prompted by the external acquisitions, the acquisition can be considered to be substantially justified on commercial grounds. Accordingly, the deduction of interest expenses should not be denied under Chapter 24, Section 19. 28. The preliminary assessment is therefore confirmed.” Click here for English Translation Click here for other translation ...

In 2001, Singtel, through its wholly owned Australian subsidiary, Singapore Telecom Australia Investments Pty Limited (Singtel Au), acquired the majority of the shares in Cable & Wireless Optus for $17.2 billion. The tax consequences of this acqusition was decided by the Federal Court in Cable & Wireless Australia & Pacific Holding BV (in liquiatie) v Commissioner of Taxation [2017] FCAFC 71. Cable & Wireless argued that part of the price paid under a share buy-back was not dividends and that withholding tax should therefor be refunded. The ATO and the Court disagreed. ATO and Singtel is now in a new dispute  – this time over tax consequences associated with the intra-group financing of the takeover. This case was heard in the Federal Court in August 2021. At issue is a tax assessments for FY 2011, 2012 and 2013 resulting in additional taxes in an amount $268 million. In the assessment interest deductions claimed in Australia on notes issued under a Loan Note Issuance Agreement (LNIA) has been disallowed by the ATO ...

Times Infotainment Media Ltd (TIML India), is in the entertainment business, including running an FM Broadcasting channel in India. It successfully participated in the auction of the radio business of Virgin radio in March 2008 in the United Kingdom. To complete the acquisition, it acquired two SPV companies, namely TML Golden Square Limited and TIML Global Limited. TIML India wholly held TIML Global which in turn wholly held TIML Golden. TIML India received funding from its parent Bennet Coleman & Co. Limited and remitted money primarily as an interest-free loan to TIML Global on 27 June 2008. TIML Global, on behalf of TIL Golden, paid UKP 53.51 million for the acquisition of Virgin Radio Shares. The acquisition of shares in Virgin Radios by TIML Golden was completed on 30 June 2008. TIML India booked the transaction in its accounts as a loan to TIML Global Limited, but the arm’s length interest rate on the loan was claimed at zero percent. The tax authorities computed the arm’s length interest rate of the loan transaction using the CUP method. A Dispute Resolution Panel later determined the arm’s length rate of interest on the intercompany loan based on the State Bank of India’s Prime Lending Rate. Not satisfied TIML India brought the case to the Indian Tax Tribunal. Here they reiterated claims made before lower authorities that the loan was given to acquiring a controlling stake in the company outside India in the same business of the taxpayer. Hence, the transaction was akin to stewardship activity and did not require any benchmarking analysis. It was also argued that the loan was entered purely out of commercial expediency, and the intent of giving the loan should be considered. The funds provided were quasi-equity in nature. Decision of the Income Tax Appellate Tribunal The Tribunal decided in favor of TIML India and set aside the tax assessment. The Tribunal noted that the transaction was remittance to a wholly-owned subsidiary for making further payment of the cost of acquisition of a target company. The SPV was formed primarily to acquire Virgin Radios and was entirely funded from the internal resources of the taxpayer and Indian parent company. The agreement to acquire the Virgin Radios was reached long before the subsidiaries came into existence. It is not a loan simpliciter to TIML Global but in the nature of an advance to TIML-Global with a corresponding obligation to use the funds advanced in the specified manner. The end-use of funds to acquire Virgin Radios was essentially an integral part of the entire transaction. The Tribunal noted that the remittance of funds to TIML Global was for this limited and controlled purpose of acquiring the target companies, and the sequence of events and the material on record unambiguously confirm this factual situation. On that basis the remittance transaction to TIML Global cannot be considered on a standalone basis and can only be viewed in conjunction with the restricted use of these funds, for the strictly limited purpose, by TIML Global. The Tribunal noted that the funding transaction in the case at hand differs from transactions between typical lenders and borrowers and as such is not comparable to a loan transaction. The essence of the transaction is targeted acquisition and providing enabling funds for that purpose. Such a transaction cannot be a loan simpliciter on a commercial basis, which essentially implies that such a borrower can use the funds so received in such manner, even if subject to broad guidelines for purpose test, in furtherance of the borrower’s business interests. The Tribunal observed that a transaction between an SPV and the entity creating such an SPV – as long as it is for a specific transaction structured by the owner entity –  is inherently incapable of taking place between independent enterprises. When a strict condition about end-use, and that end-use is being decided by the owner of the SPV in advance that the SPV was not even in existence, is an inherent part of the transaction of funds being remitted is anything and could not be an uncontrolled condition. The Tribunal held that requirement of arm’s length standards could never be met under the CUP Method, so far as the nature of the present transaction is concerned and observed that when the borrower has no discretion of using the funds gainfully, the commercial interest rates do not come into play at all. The Tribunal ruled that the arm’s length price of the transaction by using the CUP method is NIL ...

“A…, Sociedade Unipessoal LDA” had taken out two intra group loans with the purpose of acquiring 70% of the shares in a holding company within the group. The tax authorities disallowed the resulting interest expenses claiming that the loan transactions lacked a business purpose. A complaint was filed with the Tax Court (CAAD). Decision of the Court The Court decided in favour of the tax authorities and upheld the assessment. Click here for English translation Click here for other translation ...