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 ...

“Lux Credit B.V.” took out various credit facilities from related parties [company name 2] s.a.r.l. and [company name 3] s.a.r.l. – both resident in Luxembourg. These were financings whereby “Lux Credit facility B.V.” could draw funds (facilities) up to a pre-agreed maximum amount. In doing so, “Lux Credit B.V.” owed both interest and “commitment fees”. The commitment fees were calculated on the maximum amount of the facility. Interest and commitment fees were owed. The interest payable to [company name 2] and [company name 3], respectively, was calculated by deducting the commitment fees from the interest payable on the amount withdrawn, with interest payable on the amount withdrawn, the commitment fees owed after the due date and the interest owed after the due date. In its returns for the current financial years, “Lux Credit B.V.” charged both interest and commitment fees against taxable profit. Following an audit, an assessment of additional taxable income was issued for the financial years 2012/2013 – 2016/2017. According to the tax authorities, the financial arrangement was not at arm’s length. The interest rate and commitment fees were adjusted and part of the loans were classified as equity. A complaint was filed by “Lux Credit B.V.” Judgement of the District Court The Court found mainly in favour of Credit Facility B.V.. It upheld most of the adjustments relating to commitment fees, but overturned the adjustment to the interest rate. According to the Court, Lux Credit B.V. was entitled to an interest deduction for the years under review, calculated at the contractually agreed interest rate on the amounts actually borrowed. Excerpts “51. With regard to the transfer pricing documentation, the court considers the following. Although the documentation referred to in Section 8b(3) of the 1969 Vpb Act was not available at the time the defendant requested it, the claimant has remedied this defect by again preparing records to substantiate the conditions surrounding the facilities. In the court’s opinion, the defendant did not make it plausible with what it argued that the claimant’s administration contains such defects and shortcomings that it cannot serve as a basis for the profit calculation that must lead to the conclusion that the claimant did not file the required return.10 The court also took into account that the parliamentary history of Section 8b of the 1969 Vpb Act noted that the documentation requirement of Section 8b(3) of the 1969 Vpb Act relates to the availability of information necessary to assess whether the prices and conditions(transfer prices) used in affiliated relationships qualify as arm’s length. 11 In the court’s opinion, the defendant has not argued sufficiently to conclude that the transfer-pricing data further collected, prepared and documented by the claimant and the documents that were present at [company name 2] and [company name 3] on the determination of the credit ratings are so deficient that the claimant has not complied with the obligations of Section 8b(3) of the 1969 Income Tax Act. The fact that source documents for the period, in which the transactions were entered into, have not been preserved and the defendant has comments on the data used by the claimant and disagrees with the outcomes of the claimant, do not alter this.” “56. In the court’s view, the defendant was right to make the adjustments in respect of commitment fees on facilities 1 and 3 for the years under review. The defendant was also correct in imposing the 2014/2015, 2015/2016 and 2016/2017 assessments to correct the commitment fees on Facility 7bn. In assessing whether the defendant was justified in making those corrections, the court relied on what [company name 1] and [company name 2] and [company name 3] agreed on civilly. The agreements between [company name 1] and [company name 2] and [company name 3] explicitly distinguish between interest due and commitment fees due. The court therefore rejects the plaintiff’s position that it must be assessed whether the total of the commitment fee and interest costs remained within the margins of Section 8b of the 1969 Vpb Act, and the commitment fee and interest costs should be considered together as an “all-in rate”. That the terms of Facilities 1, 3 and 7bn show similarities with Payment in Kind loans, as claimed by the claimant, does not make it necessary in this case to deviate from what the parties agreed under civil law. Indeed, the defendant has argued, with reasons, that stipulating headroom for the purpose of funding interest that may be credited, if the same facts and circumstances are present, is not usual in the market but it is usual in the market that over interest to be credited, a charge arises only at the time of the maturity of the interest. It is not usual that a charge – in this case in the form of commitment fees – is already due before the due date. This involves a double burden, as interest is also charged on the commitment fee. On the other hand, the plaintiff has not made it plausible that independent third-party parties were willing to agree such terms in similar circumstances, nor has it made its economic reality plausible. The court also took into account that the claimant did not make any calculations, prior to setting the maximum amount and commitment fees. 57. In the court’s view, the defendant was right to make the adjustments in respect of the commitment fees and interest payable thereon in respect of Facility 5. The defendant has made it plausible that such an agreement between independent third parties will not be concluded. The defendant was right to point out the following aspects:” “In the court’s opinion, with what the defendant has put forward and also in view of what the claimant has put forward in response, the defendant has failed to make it plausible that the interest rates agreed by [company name 1] , [company name 2] and [company name 3] regarding facilities 1, 3 and 7bn are not in line with what would have been agreed by independent parties in the ...

D. Sp. z oo had deducted interest expenses on intra-group loans and expenses related to intra-group services in its taxable income for FY 2015. The loans and services had been provided by a related party in Delaware, USA. Following a inspection, the tax authority issued an assessment where deductions for these costs had been denied resulting in additional taxable income. In regards to the interest expenses the authority held that the circumstances of the transactions indicated that they were made primarily in order to achieve a tax advantage contrary to the object and purpose of the Tax Act (reduction of the tax base by creating a tax cost in the form of interest on loans to finance the purchase of own assets), and the modus operandi of the participating entities was artificial, since under normal trading conditions economic operators, guided primarily by economic objectives and business risk assessment, do not provide financing (by loans or bonds) for the acquisition of their own assets, especially shares in subsidiaries, if these assets generate revenue for them. In regards to support services (management fee) these had been classified by the group as low value-added services. It appeared from the documentation, that services concerned a very large number of areas and events that occurred in the operations of the foreign company and the entire group of related entities. The US company aggregated these expenses and then, according to a key, allocated the costs to – among others – Sp. z o.o. The Polish subsidiary had no influence on the amount of costs allocated or on the verification of such costs. Hence, according to the authorities, requirements for tax deduction of these costs were not met. An appeal was filed by D. Sp. z oo with the Administrative Court requesting that the tax assessment be annulled in its entirety and that the case be remitted for re-examination or that the proceedings in the case be discontinued. Judgement of the Administrative Court The Court dismissed the complaint of D. Sp. z oo and upheld the assessment issued by the tax authorities. Excerpt in regards of interest on intra-group loans “The authorities substantively, with reference to specific evidence and figures, demonstrated that an independent entity would not have agreed to such interest charges without obtaining significant economic benefits, and that the terms of the economic transactions adopted by the related parties in the case at hand differ from the economic relations that would have been entered into by independent and market-driven entities, rather than the links existing between them. One must agree with the authority that a loan granted to finance its own assets is free from the effects of the borrower’s insolvency, the lender does not bear the risk of loss of capital in relation to the subject matter of the loan agreement, since, in principle, it becomes the beneficiary of the agreement. This in turn demonstrates the non-market nature of the transactions concluded. The lack of market character of the transactions demonstrated by the authorities cannot be justified by the argumentation about leveraged buyout transactions presented in the complaint (page 9). This is because the tax authorities are obliged to apply the provisions of tax law, which in Article 15(1) of the A.l.p. outline the limits within which a given expense constitutes a tax deductible cost. In turn, Article 11 of the A.l.t.d.o.p. specifies premises, the occurrence of which does not allow a given expense to be included in tax deductible costs. This is the situation in the present case. Therefore, questioning the inclusion of the above-mentioned interest as a tax deductible cost, the authorities referred to Article 11(1), (2), (4) and (9) of the A.p.d.o.p. and § 12(1) and (2) of the Ordinance of the Minister of Finance of 10 September 2009 and the findings of the OECD contained in para. 1.65 and 1.66 of the “Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations” (the Guidelines were adopted by the OECD Committee on Fiscal Affairs on […] and approved for publication by the OECD Council on […]). According to these guidelines: 1.65. – However, there are two specific situations where, exceptionally, it may be appropriate and justified for a tax administration to consider ignoring the construction adopted by the taxpayer when entering into a transaction between associated enterprises. The first arises when the economic substance of the transaction differs from its form. In this case, the tax administration may reject the parties’ qualification of the transaction and redefine it in a manner consistent with its substance. An example could be an investment in a related company in the form of interest-bearing debt, and according to the principle of the free market and taking into account the economic situation of the borrowing company, such a form of investment would not be expected. In this case, it might be appropriate to define the investment according to its economic substance – the loan could be treated as a subscription to capital. Another situation arises where the substance and form of the transaction are consistent with each other, but the arrangements made in connection with the transaction, taken as a whole, differ from those that would have been adopted by commercially rational independent companies, and the actual structure of the transaction interferes with the tax administration’s ability to determine the appropriate transfer price; 1.66. – In both of the situations described above, the nature of the transaction may derive from the relationship between the parties rather than be determined by normal commercial terms, or it may be so structured by the taxpayer to avoid or minimise tax. In such cases, the terms of the transaction would be unacceptable if the parties were transacting on a free market basis. Article 9 of the OECD Model Convention, allows the terms and conditions to be adjusted in such a way that the transaction is structured in accordance with the economic and commercial realities of the parties operating under the free market principle. Bearing in mind the aforementioned guidelines, in the ...