Tag: Loan

France vs Electricité de France, November 2023, CAA de Versailles, Case No 22VE02575

In 2009 the English company EDF Energy UK Ltd (EDFE), a wholly-owned subsidiary of SAS Electricité de France International (SAS EDFI), issued 66,285 bonds convertible into shares (OCAs) for a unit nominal value of EUR 50,000. SAS EDFI subscribed to all of these OCAs for their nominal value, i.e. a total subscription price of EUR 3,314,250,000. The OCAs had a maturity of five years, i.e. until October 16, 2014, and could be converted into new EDFE shares at the instigation of the subscriber at any time after a three-year lock-up period, i.e. from October 16, 2012. Each bond entitled the holder to receive 36,576 EDFE shares after conversion. The annual coupon for the OCAs was set at 1.085%. In this respect, SAS EDFI determined, on the basis of a panel of bond issues of independent comparables, the arm’s length rate that should be applied to conventional bonds, i.e. 4.41% (mid-swap rate and premium of 1.70%), 490 million according to the “Tsiveriotis and Fernandes” model, so that the sum of the present value of the flows of the “debt” component of the bond and the value of the “conversion” option is equal to the subscription price of the OCAs. SAS EDFI recognised the annual interest received at a rate of 1.085% on the bonds as income, thus subject to corporate income tax, i.e. 36 million euros. The tax authorities considered that the “conversion” component had a zero value for SAS EDFI and that, given the terms of the loan – in this case, via the OCA mechanism – and the context of the issuance transaction, the reduction in the interest rate applied compared with the arm’s length rate of 4.41% to which SAS EDFI was entitled, made it possible to achieve a transfer of profits, In the case of SAS EDFI, the difference between the interest rate of 4.41% and the rate corresponding to the actual remuneration recorded had to be reintegrated in order to determine its taxable income. Before the appeal judge, the Minister of Action and Public Accounts contested any value to the “conversion” component on the double ground, on the one hand, that the OCAs issued by EDFE having been subscribed by its sole shareholder, the financial profit that SAS EDFI can hope to make by subscribing and then converting the OCAs into new shares mechanically has a value of zero, since it would be offset by a loss of the same amount on the value of the EDFE shares held prior to this conversion, and on the other hand, that since the OCAs issued by EDFE were subscribed by its sole shareholder, the financial benefit that SAS EDFI can hope to make by subscribing and then converting the OCAs into new shares has a value of zero, since it would be offset by a loss of the same amount on the value of the EDFE shares held before this conversion, on the other hand, since the objective sought by SAS EDFI was not that of a “classic” financial investor and the decision to convert or not the OCAs into new shares will not be taken solely in the interest of the subscriber with a view to maximising his profit, the valuation of the “conversion” component of the OCAs based solely on such an interest is not relevant and, since the financial impact of a conversion was then random, this component must necessarily be given a value close to zero. Not satisfied with the assessment, Electricité de France brought the case to court. The Court of first instance held in favour of the tax authorities. An appeal was then filed by Electricité de France with the Administrative Court of Appeal (CAA). In a decision issued 25 January 2022 the Administrative Court of Appeal overturned the decision from the court of first instance and found in favor of Electricité de France. “…since the Minister for Public Action and Accounts does not justify the zero value of the ‘conversion’ component he refers to, SA EDF and SAS EDFI are entitled to maintain that he was wrong to consider that, by subscribing to the OCAs issued by EDFE, for which the interest rate applied was 1.085% and not the borrowing rate for traditional bonds of 4, 41%, SAS EDFI had transferred profits to its subsidiary under abnormal management conditions, and the amounts corresponding to this difference in rates had to be reintegrated to determine its taxable results pursuant to Article 57 of the General Tax Code and, for EDFE, represented hidden distributions within the meaning of c. of article 111 of the same code which must be subject to the withholding tax mentioned in 2. of article 119 bis of the same code” An appeal was then filed by the tax authorities with the Conseil d’État, which in November 2022 annulled the decision from the CAA and found in favor of tax authorities and remanded the case to the Administrative Court of Appeal. Judgement of the Administrative Court of Appeal In accordance with the guidance provided in the 2022 Judgement of the Conseil d’État, the Court decided in favor the tax authorities. Excerpt (English translation) “On the existence of an indirect transfer of profits: Regarding the application of tax law: 2. On the one hand, under the terms of the first paragraph of article 57 of the general tax code, applicable to corporate tax matters under article 209 of the same code : ” For the establishment of the income tax due by companies which are dependent on or which have control of companies located outside France, the profits indirectly transferred to the latter, either by increase or decrease in purchase or sale prices, or by any other means, are incorporated into the results recorded by the accounts (…) “. It follows from these provisions that, when it notes that the prices invoiced by a company established in France to a foreign company linked to it – or those invoiced to it by this foreign company – are lower – or ...

Portugal vs A S.A., November 2023, Supreme Administrative Court , Case 0134/10.3BEPRT

A S.A. had transferred a dividend receivable to an indirect shareholder for the purpose of acquiring other companies. The tax authorities considered the transfer to be a loan, for which A S.A should have received arm’s length interest and issued an assessment on that basis. A complaint was filed by A S.A. with the tax Court, which ruled in favour of A S.A. and dismissed the assessmemt in 2021 An appeal was then filed by the tax authorities with the Supreme Administrative Court. Judgement of the Court The Supreme Administrative Court upheld the decission of the tax court and dismissed the appeal of the tax authorities. According to the Court the local transfer pricing in article 58 of the CIRC, in the wording in force at the time of the facts did not allow for a recharacterization of a transaction, only for a re-quantification. A recharacterization of the transaction would at the time of the facts only be possible under the Portuguese general anti-abuse clause, which required the tax authorities to prove that the arrangement had been put in place for securing a tax advantage. Such evidence had not been presented. Excerpt “In other words, the fact that the transfer of credits arising from ancillary benefits to non-shareholders is not common is not enough to destroy the characteristics of the ancillary obligation set out in the articles of association, which, as is well known, can be transferred – see art. Furthermore, the Tax Authority’s reasoning reveals a total disregard for the rest of the applicable legal regime, namely the restitution regime provided for in Article 213 of the CSC, which gives them the unquestionable character of quasi-equity benefits. In fact, since the admissibility of supplementary capital contributions in public limited companies has been debated for a long time, but with the majority of legal scholars being in favor of such contributions, the enshrinement in the articles of association of the figure of accessory obligations following the supplementary contributions regime appeared as a solution to the possibility of internal financing of the public limited company, (See, for example, Paulo Olavo Cunha in Direito das Sociedades Comerciais, 3rd edition, Almedina, 2007, pages 441 and 442 (in a contemporary annotation with the legal framework in force at the time). ) . Furthermore, as pointed out by the Deputy Attorney General, whose reasoning, due to its assertiveness, we do not hesitate to refer to again, “This situation is not unrelated to the fact that, in the corporate structure in question, the company “D… ” has a majority stake in the company “A…”, and there is even doctrine that defends “the possibility of transferring the credits resulting from the supplementary installments autonomously from the status of partner” – in an explicit allusion to the view taken by Rui Pinto Duarte (Author cited, “Escritos sobre Direito das Sociedades”, Coimbra Editora, 2008). In conclusion: if the Tax Administration believed that the evidence it had found, to which we have already referred, strongly indicated that the transaction in question was really about the parties providing financing to the company “D…, S.A. “, it was imperative that it had made use of the anti-abuse clause (although there are legal scholars who also include article 58 of the CIRC in the special anti-abuse rules – see Rui Duarte Morais, “Sobre a Notção de “cláusulas antiabusos”, Direito Fiscal, Estudos Jurídicos e Económicos em Homenagem ao Prof. Dr. António Sousa Franco III 2006, p.879 /894) and use the procedure laid down in Article 63 of the CPPT, as the Appellant claims. What is not legitimate, however, in these circumstances, “in view of the letter of the law and the teleology of the transfer pricing system as enshrined in the IRC Code and developed in Ministerial Order 1446-C/2001, is to use this system to carry out a sort of half-correction and, in the other half, i.e., For cases of this nature, there is a specific legal instrument in the legal system – the CGAA – specially designed and aimed at combating this type of practice (Bruno Santiago & António Queiroz Martins, “Os preços de transferência na compra e venda de participações sociais entre entidades relacionadas”, Cadernos Preços de Transferência, Almedina, 2013, Coordenação João Taborda Gama). …” Click here for English translation. Click here for other translation Acordão do Supremo Tribunal Administrativo 0134-10-3-BEPRT ...

Italy vs GKN, October 2023, Supreme Court, No 29936/2023

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 ...

Belgium vs S.E. bv, October 2023, Court of First Instance, Case No. 21/942/A

The taxpayer paid interest on five loans concluded with its Dutch subsidiary (“BV2”) on 31 December 2017, claiming exemption from withholding tax on the basis of the double taxation treaty between Belgium and the Netherlands (Article 11, §3, (a)). The dispute concerns whether the Dutch subsidiary “BV2†can be considered the beneficial owner of these interests. The concept of “beneficial owner” is not defined in the Belgium-Netherlands double tax treaty. However, this concept is also used in the European Directive on interest and royalties. In the Court’s view, this concept must be interpreted in the same way for the application of the Belgian-Dutch double taxation treaty. Indeed, as members of the EU, Belgium and the Netherlands are also obliged to ensure compliance with EU law. The Court noted that, of the five loans on which the taxpayer paid interest to its subsidiary “BV2”, four loans were linked to four other loans granted by a Dutch company higher up in the group’s organisation chart and having the legal form of a “CV” (now an LLC), to the taxpayer’s Dutch parent company, “BV1â€. The fifth loan on which the taxpayer pays interest to its subsidiary “BV2” is clearly linked to a fifth loan granted by the same “CV” (now LLC) to the said subsidiary “BV2”. The taxpayer’s subsidiary “BV2” and its parent company “BV1” together form a tax unit in the Netherlands. At the level of the tax unit, a ruling (“APA-vaststellingsovereenkomst”) has been obtained in the Netherlands, stipulating a limited remuneration for the financing activities that this tax unit carries out for the companies in the group. The “transfer pricing report” attached to the ruling request indicates that a Dutch CV is the lender and that the taxpayer is the final borrower in respect of the loans in question. The “APA-vaststellingsovereenkomst” also clearly shows the link between these various loans. The loans granted by the CV are then transferred to a new Delaware LLC. The mere fact that a tax unit exists between the taxpayer’s subsidiary “BV2” and the parent company “BV1” does not imply ipso facto that the subsidiary “BV2” is a conduit company and therefore does not, in principle, prevent it from being considered a “beneficial owner”. However, a tax unit may be part of an arrangement designed to avoid or evade tax in certain transactions. The tax unity between the subsidiary “BV2” and the parent company “BV1” of the taxpayer has the effect that the interest obtained by the subsidiary “BV2” is offset by the interest paid to the LLC, so that there is virtually no tax to pay on this interest. Furthermore, the taxpayer would not have been able to claim any exemption if he had paid the interest directly to the LLC and if the interposition of the Dutch companies had not been used. In addition to the aforementioned links between the various loans, the Court emphasised the fact that the claims against the taxpayer and the underlying debts were initially held by a single company, that they were then divided between the taxpayer’s Dutch subsidiary “BV2â€Â (claims) and the parent company “BV1â€Â (debts), and then, following a merger between this subsidiary and the parent company, were reunited within the same company (BV 1). According to the court, this also reveals the interlocking nature of these loans, as well as the artificial nature of the construction. It is at least implicit from the above facts that the Dutch subsidiary “BV2” and the parent company “BV1” act only as formal intermediaries and that the final lender is the LLC, which took over the loans from the CV. For the fifth loan, which was financed by the Dutch subsidiary “BV2” directly with the CV (now LCC), it appears that the Dutch company “BV2” has an obligation to pay interest to the CV (now LLC). For the other four loans, significant evidence of actual interest flows was found in the financial statements of the companies concerned. According to the court, the taxpayer had not met his burden of proving that he was the beneficial owner of the interest. The exemption from withholding tax was rightly rejected by the tax authorities on this basis. In addition, the withholding tax must be added to the amount of income for the calculation of the withholding tax (grossing up). Click here for English Translation Click here for other translation Belgium-Beneficial-Owner-Case-21-942-A ORG ...

UK vs JTI Acquisitions Company (2011) Ltd, August 2023, Upper Tribunal, Case No [2023] UKUT 00194 (TCC)

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. UK vs JTI ACQUISITIONS COMPANY (2011) LIMITED ...

Poland vs “D. sp. z o.o.”, August 2023, Supreme Administrative Court, Case No II FSK 181/21

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 ...

Netherlands vs “Lux Credit B.V.”, July 2023, Court of Hague, Case No AWB – 21_4016 (ECLI:NL:RBDHA:2023:12061)

“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 ...

Belgium vs R.B. NV, June 2023, Court of First Instance, Case No. 2021/2991/A

R.B. NV had entered into a loan agreement with a group company in Switzerland. The interest rate on the loan had been determined by applying the method used by the credit agency, Standard & Poor’s. Moreover, it had been concluded that R.B. NV was a “moderately strategic entity”, and a one-notch correction was applied to the “stand-alone credit rating”. Following an audit, the tax administration concluded that the company had not applied the S&P method consistently and that the company’s credit rating should have been the same as that of the group as the company was a “core entity” in the group. On that basis, the interest rate were reduced. Judgement of the Court The court ruled predominantly in favour of the tax authorities. The court found several unjustified deviations in the way R.B. NV had applied the S&P method and on that basis several adjustments were made by the court. According to the court, R.B. NV was not a “core entity” in the group whose credit rating should be the same as that of the group (as held by the tax authorities), but rather a “highly strategic entity” whose credit rating should be one notch lower than that of the group. Click here for English Translation Click here for other translation BELG 2021-2991-A ...

Netherlands vs “X Shareholder Loan B.V.”, June 2023, Court of Appeals, Case No 22/00587, ECLI:NL:GHAMS:2023:1305

After the case was remanded by the Supreme Court in 2022, the Court of Appeal classified a Luxembourg company’s shareholder loan to “X Shareholder Loan B.V.” of €57,237,500 as an ‘imprudent loan’, with the result that the interest due on that loan was only tax deductible to a limited extent. The remaining interest was non-deductible because of fraus legis (evasion of the law). Allowing the interest due on the shareholder loan to be deductible would result in an evasion of tax, contrary to the purpose and purport of the 1969 Corporation Tax Act as a whole. The purpose and purport of this Act oppose the avoidance of the levying of corporate income tax, by bringing together, on the one hand, the profits of a company and, on the other hand, artificially created interest charges (profit drainage), in an arbitrary and continuous manner by employing – for the achievement of in itself considered business objectives – legal acts which are not necessary for the achievement of those objectives and which can only be traced back to the overriding motive of bringing about the intended tax consequence (cf. HR 16 July 2021, ECLI:NL:HR:2021:1152). Click here for English translation Click here for other translation ECLI_NL_GHAMS_2023_1305 ...

Hungary vs “Electronic components Manufacturing KtF”, June 2023, Supreme Court, Case No Kfv.V.35.415/2022/7

“Electric Component Manufacturing KtF” is a Hungarian subsidiary of a global group that distributes electronic components in more than 150 countries worldwide. The tax authorities had conducted a comprehensive tax audit of the Hungarian company for the period from 1 October 2016 to 30 September 2017, which resulted in an assessment of additional taxable income. The transfer pricing issues identified by the tax authorities were the remuneration received by the Hungarian company for its manufacturing activities and excessive interest payments to a group company in Luxembourg. Judgement of the Supreme Court The Supreme Court set aside the judgment of the Court of Appeal and ordered the court to conduct new proceedings and issue a new decision. In its decision, the Court of Appeal had relied on an expert opinion, which the Supreme Court found to to be questionable, because there were serious doubt as to its correctness. Therefore, according to the order issued by the Supreme Court, the Court of Appeal may not undertake a professional assessment of the expert opinion that goes beyond the interpretation of the applicable legislation, nor may it review the expert opinion in the new proceedings in the absence of expertise. Excerpt “[58] In relation to the adjustment of the profit level indicator for manufacturing activities, the expert found that comparable companies do not charge taxes such as the local business tax and the innovation levy as an expense to operating profit, the amount of which distorts comparability, this is a clearly identifiable difference in the cost structure of the company under investigation and the comparable companies, so an adjustment should be made in accordance with the OECD guidelines and the Transfer Pricing Regulation, because the statistical application of the interquartile range restriction cannot be used to increase comparability. However, the Court of First Instance held that it was not disputed that, even if the interquartile range as a statistical method was used, it might be necessary to apply individual adjustments, but that the applicant had not provided the audit with a detailed analysis of the justification for the adjustment and had not provided any documentary evidence in the course of the two administrative proceedings to show how the adjustment applied served to increase comparability. However, the application for review relied on the contradictory nature of the reasoning in this respect, since, while the Court of First Instance criticised the lack of documentation to support the adjustment {Ist judgment, paragraph 34}, it shared the expert’s view that this would indeed require an investment of time and energy which taxpayers could not reasonably be expected to make {Ist judgment, paragraph 35}. [59] On the other hand, the judgment at first instance explained that the applicant had only carried out research in the course of the administrative proceedings into whether the countries of the undertakings used as comparators had a similar type of tax burden to the Hungarian local business tax, and the expert had referred in his expert opinion to the fact that the applicant had only identified this one difference when carrying out the comparative analysis, but, if a detailed analysis is carried out, each difference can be individually identified and quantified and it is for this reason that the OECD guidelines also allow a range of results to be taken into account, because it reduces the differences between the business characteristics of the associated enterprises and the independent companies involved in comparable transactions and also takes account of differences which occur in different commercial and financial circumstances. Thus, the expert did not share the expert’s view that, while the narrowing to the interquartile range includes differences that are not quantifiable or clearly identifiable, individual adjustments should always be applied in the case of clearly identifiable and quantifiable significant differences. Thus, the trial court took a contrary view to the expert on this issue. [60] Nor did the Court of First Instance share the expert’s view in relation to the interest rate on the intercompany loan granted to the applicant by its affiliate and did not accept the expert’s finding that the MNB’s interest rate statistics were an averaging of the credit spreads of the debtor parties involved in the financing transactions, on an aggregated basis and, consequently, the use of the MNB interest rate statistics is not in itself capable of supporting or refuting the arm’s length principle of the interest rate applied in intra-group lending transactions, whether long or short-term. Nor did it accept the method used and described by the applicant in the comparability field, since it did not consider that the applicant should have used an international database to look for comparative data, since comparability was questionable. Furthermore, it considered irrelevant the expert’s reference to the fact that the average loan interest rates in Hungary in 2016 were strongly influenced by the low interest rates on subsidised loans to businesses and criticised the fact that the expert did not consider it necessary to examine the applicant’s current account loans under the cash-pool scheme. [61] It can thus be concluded that the Court of First Instance, in its judgment, did not accept the reasoning of the private expert’s opinion and made professionally different findings from those of the expert on both substantive points. [62] The opinion of the appointed expert is questionable if a) it is incomplete or does not contain the mandatory elements of the opinion required by law, b) it is vague, c) it contradicts itself or the data in the case, or d) there is otherwise a strong doubt as to its correctness [Art. 316 (1) of the Civil Code]. The private expert’s opinion is questionable if a) the case specified in paragraph (1) is present [Art. 316 (2) a) of the Civil Code]. Section 316 of the Private Expert Act specifies and indicates precisely in which cases the expert’s opinion is to be considered as a matter of concern. Thus, the expert’s opinion is of concern if it is incomplete, vague, contradictory or otherwise doubtful. The latter case ...

Portugal vs “A…, Sociedade Unipessoal LDA”, May 2023, Supremo Tribunal Administrativo, Case No JSTA000P31011

“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 ...

Portugal vs “A…, Sociedade Unipessoal LDA”, May 2023, Supremo Tribunal Administrativo, Case No 036/21.8BALSB

“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. 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. 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 that in ...

Greece vs “Loan Ltd”, May 2023, Tax Board, Case No 1177/2023

On 17 April 2015, “Loan Ltd” entered into a bond loan agreement with related parties. The effective interest rate charged to “Loan Ltd” (borrowing costs) in the years under consideration (2016 and 2017) was 8.1%. The interest rate had been determined based on the CUP method and external comparable data. The tax authorities determined the arm’s length interest rate for the loan to be 4,03% and issued an assessment of the additional taxable income resulting from the lower borrowing costs. A complaint was filed by “Loan Ltd” Decision of the Board The Board dismissed the complaint and upheld the assessment of the tax authorities. Excerpt “Because the applicant claims that the audit used inappropriate/non comparable data. Because, however, the audit chose the most reliable internal data in accordance with the OECD Guidelines, namely the interest rate agreed with a third independent bank for the provision of a credit facility (2.03%), which it adjusted by the percentage of the guarantee fee provided by the parent company (2%), resulting in an interest rate in accordance with the principle of equivalence equal to 4.03%. This adjustment is correct, in line with the OECD Guidelines and in the context of good administration. In particular, paragraph 10.177 of the OECD Guidelines states that: “The result of this analysis sets a maximum premium for the guarantee (the maximum amount the guarantee recipient will be willing to pay), i.e. the difference between the interest rate with the guarantee and the interest rate without the guarantee. […] The borrower would not have any incentive to enter into a guarantee agreement if, in total, he pays an amount (to the bank interest and to the guarantor commission) equal to what he would have paid to the bank without the guarantee (interest). Therefore, this maximum commission does not necessarily reflect the result of a negotiation made on a purely commercial basis, but represents the maximum that the borrower would be willing to pay’. The audit, in direct application of the OECD Guidelines, adjusted the lending rate by the maximum commission. Otherwise, the borrower would have paid an aggregate amount (interest to the bank and commission to the guarantor) higher than the amount he would have paid to the bank without the guarantee (interest). Because the audit, to corroborate the audit findings and its reasoning , also sought external comparable data (on an ancillary basis), namely, interest rates of comparable loans from the Bank of Greece and the Bank of Denmark. The Bank of Greece yielded an interest rate of 5.02% and from the Bank of Denmark 3.70% (3% plus 0.70% to reflect the country-Greece risk ). Because the above external comparables confirm the correctness of the audit approach, as they are close to the interest rate determined by the audit (4.03%) and at a significant deviation from the interest rate of the assessed intragroup transaction (8.1%). It should be noted that the reliance on central bank data is in line with a number of decisions of our Office (see, for example, BIT 4560/2021), but also a common methodology in numerous Documentation Files. As therefore, the claim of the applicant is rejected as unfounded.” Click here for English translation Click here for other translation gr-ded-2023-1177_en_ath-1177_2023 ...

Italy vs SGL CARBON SPA, May 2023, Supreme Court, Case No 11625/2023

SGL CARBON SPA paid interest on loans received from the German parent of the SGL Group. The tax authorities considered, that the interest rate applied to the intra-group loan was significantly higher than the average interest rate applied in the German market. The interest rate was therefore determined based on external CUPs SGL disagreed with the resulting assessment and brought the case before the Italien Courts. Judgement of the Supreme Court The Supreme Court ruled in favor of SGL. “The first plea is well founded. The Provincial Tax Commission, in fact, in its judgment at first instance held that the notice of assessment which is the subject of the present dispute was unlawful, on the basis of two distinct rationes decidendi. In particular, the Provincial Tax Commission pointed out, first of all, the erroneousness of the criterion (so-called external comparison) employed by the Revenue Agency for the identification of normal value and, conversely, the legitimacy of the criterion (so-called of the internal comparison) applied by the taxpayer and consequent deductibility of interest: “the provision in Article 9 of Presidential Decree No. 917/1986 directs the case in preference for the comparison of interest rates towards the so-called internal comparison. The different procedure of the so-called external comparison, applied in this case, should have been accompanied by the Agency’s reasoning and argued with the assessment of the borrower’s reliability taking into account that the applicant closes its financial statements with a significant loss (… ) In relation to the monthly interest rates drawn by the Agency from the February 2006 Deutsche Bundesbank report for one-year loans to non-lenders, the Commission does not deny them a content of truth, but points out that such data would have required careful examination in order to identify the criteria of their formation, and allow the lode adjustment for comparison in a homogeneous context with the case at hand.” Secondly, the C.T.P. notes the non-existence of transfer of taxable income from Italy to Germany and, therefore, the non-existence of a condition for the applicability of the transfer pricing rules: ‘The Commission notes that the burden of financing borne by the parent company is greater than the burden borne by the appellant and this difference in burden makes it possible to verify the absence of transfer of income from Italy to Germany’. Secondly, the C.T.P. notes the non-existence of transfer of taxable income from Italy to Germany and, therefore, the non-existence of a condition for the applicability of the transfer pricing rules: ‘The Commission notes that the burden of financing borne by the parent company is greater than the burden borne by the appellant and this difference in burden makes it possible to verify the absence of transfer of income from Italy to Germany’.“ Click here for English translation Click here for other translation Italy vs SGL Carbon 040523 SC 11625-2023 ...

Malaysia vs Watsons Personal Care Stores Holding Limited, April 2023, High Court, Case No WA-14-20-06/2020

In 2003, Watsons Personal Care Stores Holding Limited borrowed USD 36,842,335.00 from Watson Labuan in order to acquire a substantial number of shares in Watson Malaysia and in 2012, the Company borrowed another USD 1,276,000.00 from Watson Labuan to finance the acquisition of shares. According to the loan agreement the annual interest rate was 3% plus the London Interbank Offered Rate (LIBOR) and the principal amount was to be paid on demand by Watson Labuan. In 2013 the tax authorities (DGIR) requested information from Watsons Personal Care Stores Holding Limited relating to cross border transactions for transfer pricing risk assessment purposes and following an audit for FY 2010-2012 the tax authorities informed the Company that the interest would be adjusted under section 140A of the ITA (Malaysian arm’s length provision). Furthermore, the interest expenses paid would not be allowed as a deduction because the transaction as a whole would not have been entered into between unrelated parties. Watsons Personal Care Stores Holding Limited filed a complaint against the assessment and in a decision handed down in 2020 the Special Commissioners of Income Tax (SCIT) allowed the appeal and set aside the assessment of the tax authorities. The tax authorities then filed a Notice of Appeal against the decision with the High Court. Judgement of the Court The Court upheld the decision of the Special Commissioners of Income Tax and set aside the assessment issued by the tax authorities. Excerpts “20. Having read Rule 8 (1) and 8(2) of the TP Rules together, it is clear that while the DGIR has the power to disregard structures that differ from those which would have been adopted by independent persons behaving in a commercially rational manner and the actual structure impedes the DGIR from determining an appropriate transfer price, if DGIR so chooses to disregard the structure under Rule 8(1), Rule 8(2) requires the DGIR to make the adjustment as it thinks fit to reflect the structure that would have been adopted by an independent person dealing at arm’s length.” (…) “36. In contrast I find that the DGIR has not put forward any evidence to refute the Company’s TP analysis, and there is no basis on which the DGIR would have concluded that the interest charged is higher than what would have been agreed between independent persons. Therefore, I view that the DGIR’s rejection of the comparables amounts to a bare denial, lacking in any evidence or basis as the SCIT had correctly held in its Grounds of Decision. 37. In the circumstances, the DGIR did not substantiate its allegations in any documentary form to show that the interest rate is not at arm’s length. What is available is only the TP Documentation prepared by the Company, which was entirely disregarded by the DGIR in coming to its Decisions. 38. I view that the SCIT’s decision is founded on a correct application of the law and inference of facts that are consistent with the primary facts and evidence of the case as the SCIT had set out in its Grounds of Decision dated 19.5.2021. 39. This court is of the view that the DGIR is utilizing section 140A of the ITA to disregard the transactions undertaken. Thus, the DGIR did not act within the powers conferred to it under the said section. 40. It is to be noted that section 140A of the ITA does not give the DGIR the power to disregard/ignore any transactions. Instead, section 140A clearly requires the DGIR to substitute the price in respect of the transaction to reflect an arm’s length price for the transaction where it has reasons to believe that the transactions were not carried out at arm’s length. 41. Therefore, I view that the SCIT correctly held that the DGIR’s failure to make any adjustments to the Loans or substitute an arm’s length rate is contrary to section 140A of the ITA: – [14] The Respondent also did not make any adjustments to the structure of the loan transactions or substitute the interest rate that would have been expected between an independent persons to the loan transaction between the Appellant and Watson Labuan as stipulated in Section 140A of the ITA and Rule 8(1) and (2) of the Income Tax TPR. The Respondent merely substituted the interest rate with 0% on the basis that no independent party would carry out such transaction. (See: page 11 of the Additional Record of Appeal (Enclosure 29)) 42. I find that the DGIR’s insistence that it can substitute a price with zero is misconceived and in effect, disregarding the transaction without substituting an arm’s length price. This shows that the DGIR failed to read Rule 8 of the TP Rules in its entirety. The DGIR only chose to apply Rule 8(1) of the TP Rules but failed to consider Rule 8(2). For ease of convenience Rules 8(2) is reproduced below: – “(2) Where the Director General disregards any structure adopted by a person in entering into a controlled transaction under subrule (1), the Director General shall make adjustment to the structure of that transaction as he thinks fit to reflect the structure that would have been adopted by an independent person dealing at arm’s length having regards to the economic and commercial reality” (emphasis added) 43. The DGIR in its submissions attempts to argue that it ‘substituted’ the interest with 0% because no independent person or Company would enter into similar transaction. Therefore, the interest rate ought to be 0%. 44. I find that the DGIR’s arguments is devoid of merits for the following reasons: – 44.1 The test under Rule 8(2) is not whether an independent person would enter into a similar transaction. The test is a price which “… would have been adopted by an independent person dealing at arm’s length… ” The DGIR’s argument is legally inconsistent with the language of Rule 8(2); and 44.2 The language in Rule 8(2) notwithstanding, the DGIR has not provided any evidence to support its allegations that no commercial ...

Korea vs “Korean Clothing Corp”, March 2023, Tax Tribunal, Case No 조심 2022중2863

“Korean Clothing Corp” had two overseas subsidiaries – a fabric dyeing entity (AAA) and a sweater manufacturing entity (BBB). Following an tax audit for FY 2016~2020, the tax authorities issued an assessment of additional tax as a result of non arm’s length transactions. According to the tax authorities “Korean Clothing Corp” had not collected accounts receivables from related parties AAA and BBB, which had passed the typical payment terms. An arm’s length interest on the outstanding amount had therefor been calculated based on the weighted average interest rates in comparable transactions between independent parties. “Korean Clothing Corp” had also provided a financial guarantee to AAA related to a bank loan in 2014, which later resulted in “Korean Clothing Corp” paying back the loan to the bank in FY2018 and FY2019. “Korean Clothing Corp” accounted for the payment as a loss from the discontinued business in FY2018 and as a ‘miscellaneous loss’ in FY2019. The tax authorities found that “Korean Clothing Corp” arbitrarily had paid back the loan on behalf of AAA and that the amount in question was a non-deductible expense. A complaint was filed by “Korean Clothing Corp” with the Tax Tribunal. Decision of the Tax Tribunal The tribunal dismissed the complaint of “Korean Clothing Corp” and upheld the assessment issued by the tax authorities. The court found that the arm’s length interest rate applied by the tax authorities was reasonable and that denying the tax deductions for the payment of AAA’s loan was also in accordance with local tax regulations. Click here for English translation Click here for other translation Korea 조세심íŒì› 조심2022중2863 ...

The South African Revenue Service (SARS) issues Arm’s Length Guidance on Intra-Group Loans

17 January 2023 the South African Revenue Service (SARS) released an interpretation note titled “DETERMINATION OF THE TAXABLE INCOME OF CERTAIN PERSONS FROM INTERNATIONAL TRANSACTIONS: INTRA-GROUP LOANS†which provides guidance on how SARS will determine arm’s length pricing for intra-group loans. The Note also provides guidance on the consequences for a taxpayer if the amount of debt, the cost of debt or both are not arm’s length. According to the note an intra-group loan would be incorrectly priced if the amount of debt funding, the cost of the debt or both are excessive compared to what is arm’s length. Legal-IN-127-Determination-of-the-taxable-income-of-certain-persons-from-international-transactions-Intra-group-loans ...

Italy vs Engie Produzione S.p.a, January 2023, Supreme Court, Case No 6045/2023 and 6079/2023

RRE and EBL Italia, belonged to the Belgian group ELECTRABEL SA (which later became the French group GDF Suez, now the Engie group); RRE, like the other Italian operating companies, benefited from a financing line from the Luxembourg subsidiary ELECTRABEL INVEST LUXEMBOURG SA (“EIL”). In the course of 2006, as part of a financial restructuring project of the entire group, EBL Italia acquired all the participations in the Italian operating companies, assuming the role of sub-holding company, and EIL acquired 45 per cent of the share capital of EBL Italia. At a later date, EBL Italia and EIL signed an agreement whereby EIL assigned to EBL Italia the rights and obligations deriving from the financing contracts entered into with the operating companies; at the same time, in order to proceed with the acquisition of EIL’s receivables from the operating companies, the two companies concluded a second agreement (credit facility agreement) whereby EIL granted EBL Italia a loan for an amount equal to the receivables being acquired. Both the tax commissions of first and of second instance had found the Office’s actions to be legitimate. According to the C.T.R., in particular, the existence of a “symmetrical connection between two financing contracts entered into, both signed on the same date (31/07/2006) and the assignments of such credits to EBL Italia made on 20/12/2006, with identical terms and conditions” and the fact that “EBL Italia accounted for the interest expenses paid to EIL in a manner exactly mirroring the interest income paid by Rosen, so as to channel the same interest, by contractual obligation, punctually to EIL’ showed that EBL Italia ‘had no management autonomy and was obliged to pay all the income flows, that is to say, the interest, obtained by Rosen immediately to the Luxembourg company EIL’, with the result that the actual beneficiary of the interest had to be identified in the Luxembourg company EIL. Judgement of the Court The Supreme Court confirmed the legitimacy of the notices of assessment issued by the Regional Tax Commission, for failure to apply the withholding tax on interest expense paid. According to the Court ‘abuse in the technical sense’ must be kept distinct from the verification of whether or not the company receiving the income flows meets the requirements to benefit from advantages that would otherwise not be due to it. One thing is the abuse of rights, another thing are the requirements to be met in order to be entitled to the benefits recognised by provisions inspired by anti-abuse purposes. “On the subject of the exemption of interest (and other income flows) from taxation pursuant to Article 26, of Presidential Decree No. 600 of 29 September 1973”, the burden of proof it is on the taxpayer company, which claims to be the “beneficial owner”. To this end, it is necessary for it to pass three tests, autonomous and disjointed” the recipient company performs an actual economic activity the recipient company can freely dispose of the interest received and is not required to remit it to a third party the recipient company has a function in the financing transaction and is not a mere conduit company (or société relais), whose interposition is aimed exclusively at a tax saving. The Supreme Court also ruled out the merely ‘domestic’ nature of the transaction as it actually consisted in a cross-border payment of interest. Click here for English translation Click here for other translation Italy vs Engie 28 Feb 2023 Supreme Court No 6045-2023 and 6079-2023 ...

France vs Willink SAS, December 2022, Conseil d’Etat, Case No 446669

In 2011, Willink SAS issued two intercompany convertible bonds with a maturity of 10 years and an annual interest rate of 8%. The tax authorities found that the 8% interest rate had not been determined in accordance with the arm’s length principle. Willink appealed, but both the Administrative Court and later the Administrative Court of Appeal sided with the tax authorities. Judgment of the Supreme Court The Conseil d’Etat overturned the decision and ruled in favour of Willink SAS. The court found that RiskCalc could be used to determine a company’s credit rating for transfer pricing purposes in a sufficiently reliable manner, notwithstanding its shortcomings and the differences in the business sectors of the comparables. Click here for English translation Click here for other translation France Conseil d'État, 3ème chambre, 22_12_2022, 446669 ...

Portugal vs “V… Multimédia – Serviços de Telecomunicações e Multimédia, SGPS, S.A.”, December 2022, Supreme Administrative Court, Case 02142/11.8BELRS

The tax authorities had issued a notice of assessment in which payments for a parent company guarantee had been adjusted on the basis of the arm’s length principle. The Administrative Court of Appeal annulled the assessment. The tax authorities filed an appeal with the Supreme Administrative Court. Judgement of the Court The Supreme Administrative Court upheld the decision of the Administrative Court of Appeal and dismissed the appeal of the tax authorities. According to the Court, I – The Tax Administration may, under the provisions of article 58 of the CIRC, make corrections to the taxable income whenever, by virtue of special relations between the taxpayer and another person, whether or not subject to IRC, different conditions have been established in certain operations from those that are generally agreed upon between independent persons and these particular conditions have led to the profit ascertained on the basis of accounting being different from that which would have been ascertained had such special relations not existed. II – It is incumbent on the Tax Administration to allege and prove both the existence of special relations and the “normal circumstances” under which certain transactions take place, that is, the conditions under which, as a rule, those transactions take place between independent legal persons. III – As the assessment of comparability of transactions, required by Article 4(3) of Ministerial Order 1446-C/2001, is based on an economic criterion, the assessment issued under Article 58 of the CIRC must be annulled if the tax authorities were unable to demonstrate that, in the specific case, the transactions present relevant economic and financial characteristics that are sufficiently similar to ensure the high degree of comparability legally required in order for corrections to be made to the taxable amount via the transfer pricing regime. IV – The rules of hermeneutics of tax law do not allow Article 17 EBF to be interpreted as meaning that, in cases where employment contracts that are eligible under the aforementioned article terminate or commence during the tax period, the maximum limit of the increase provided for in no. 1 should be restricted in proportion to the time the contracts have been in force. V – In tax benefits that depend on the behaviour of the taxpayer, who may freely choose to fulfil the legally established conditions in order to enjoy them, the question of the principle of equality should be posed in relation to the conditions of access to the benefit and not in relation to the contours in which they are provided. VI – There is no discriminatory treatment, or even arbitrariness of the legal solution, if it is placed at the disposal of the taxpayer to optimise the variable effects of the tax benefit. Extracts from the judgement “In view of the provisions of article 5 of Ministerial Order no. 1446-C/2001, especially paragraph d), one cannot ignore the fact that the relationship between the Impugnant and its controlled companies cannot be comparable to the relationships established between entities that are independent from each other, as the latter are normally prevented under the terms of article 6(3) of the CSC from providing this type of guarantees to third parties, this function being reserved for credit institutions. In this regard, it should also be noted, as pointed out in the appealed decision, that the economic risk borne in the two operations is significantly different and “although the guarantee and the autonomous bank guarantee may share common characteristics, the way in which the risk falls on the guarantor and on the guarantor of the autonomous bank guarantee potentially generates differences that significantly affect their comparability” (emphasis added). 3.2.5.6 In conclusion, as it is the responsibility of the Tax Administration to demonstrate the verification of the prerequisites for applying the transfer price regime enshrined in Article 58(1) of the CIRC – which is the responsibility of the Portuguese Tax Authorities – it is important that the transfer price regime is applied. In conclusion, as it is the Tax Authorities’ duty to demonstrate the verification of the assumptions of application of the transfer pricing regime set forth in article 58, no. 1 of the CIRC – which, in this case, would translate into proving that the provision of guarantee by the Appellant and the provision of autonomous bank guarantees whose costs were supported by the Appellant, meet conditions to be considered comparable, as they present sufficiently similar relevant economic and financial characteristics -, which proof it failed to do, it is necessary to conclude, as did the appealed sentence, for the existence of error on the factual and legal assumptions of the assessment leading to its annulment in this part. The present appeal should, therefore, be dismissed in this part, on the grounds set out above.” Click here for English translation. Click here for other translation Portugal-vs-Servicos-de-Telecomunicacoes-e-Multimedia-SGPS-SA-December-2022-SAC-ORG ...

France vs Electricité de France, November 2022, Conseil d’État, Case No 462383 (ECLI:FR:CECHR:2022:462383.20221116)

In 2009 the English company EDF Energy UK Ltd (EDFE), a wholly-owned subsidiary of SAS Electricité de France International (SAS EDFI), issued 66,285 bonds convertible into shares (OCAs) for a unit nominal value of EUR 50,000. SAS EDFI subscribed to all of these OCAs for their nominal value, i.e. a total subscription price of EUR 3,314,250,000. The OCAs had a maturity of five years, i.e. until October 16, 2014, and could be converted into new EDFE shares at the instigation of the subscriber at any time after a three-year lock-up period, i.e. from October 16, 2012. Each bond entitled the holder to receive 36,576 EDFE shares after conversion. The annual coupon for the OCAs was set at 1.085%. In this respect, SAS EDFI determined, on the basis of a panel of bond issues of independent comparables, the arm’s length rate that should be applied to conventional bonds, i.e. 4.41% (mid-swap rate and premium of 1.70%), 490 million according to the “Tsiveriotis and Fernandes” model, so that the sum of the present value of the flows of the “debt” component of the bond and the value of the “conversion” option is equal to the subscription price of the OCAs. SAS EDFI recognised the annual interest received at a rate of 1.085% on the bonds as income, thus subject to corporate income tax, i.e. 36 million euros.. The tax authorities considered that the “conversion” component had a zero value for SAS EDFI and that, given the terms of the loan – in this case, via the OCA mechanism – and the context of the issuance transaction, the reduction in the interest rate applied compared with the arm’s length rate of 4.41% to which SAS EDFI was entitled, made it possible to achieve a transfer of profits, In the case of SAS EDFI, the difference between the interest rate of 4.41% and the rate corresponding to the actual remuneration recorded had to be reintegrated in order to determine its taxable income. Before the appeal judge, the Minister of Action and Public Accounts contested any value to the “conversion” component on the double ground, on the one hand, that the OCAs issued by EDFE having been subscribed by its sole shareholder, the financial profit that SAS EDFI can hope to make by subscribing and then converting the OCAs into new shares mechanically has a value of zero, since it would be offset by a loss of the same amount on the value of the EDFE shares held prior to this conversion, and on the other hand, that since the OCAs issued by EDFE were subscribed by its sole shareholder, the financial benefit that SAS EDFI can hope to make by subscribing and then converting the OCAs into new shares has a value of zero, since it would be offset by a loss of the same amount on the value of the EDFE shares held before this conversion, on the other hand, since the objective sought by SAS EDFI was not that of a “classic” financial investor and the decision to convert or not the OCAs into new shares will not be taken solely in the interest of the subscriber with a view to maximising his profit, the valuation of the “conversion” component of the OCAs based solely on such an interest is not relevant and, since the financial impact of a conversion was then random, this component must necessarily be given a value close to zero. Not satisfied with the assessment, Electricité de France brought the case to court. The Court of first instance held in favour of the tax authorities. An appeal was then filed by Electricité de France with the Administrative Court of Appeal (CAA). In a decision issued 25 January 2022 the Administrative Court of Appeal overturned the decision from the court of first instance and found in favor of Electricité de France. “…since the Minister for Public Action and Accounts does not justify the zero value of the ‘conversion’ component he refers to, SA EDF and SAS EDFI are entitled to maintain that he was wrong to consider that, by subscribing to the OCAs issued by EDFE, for which the interest rate applied was 1.085% and not the borrowing rate for traditional bonds of 4, 41%, SAS EDFI had transferred profits to its subsidiary under abnormal management conditions, and the amounts corresponding to this difference in rates had to be reintegrated to determine its taxable results pursuant to Article 57 of the General Tax Code and, for EDFE, represented hidden distributions within the meaning of c. of article 111 of the same code which must be subject to the withholding tax mentioned in 2. of article 119 bis of the same code” An appeal was then filed by the tax authorities with the Conseil d’État Judgement of the Supreme Administrative Court The Supreme Administrative Court annulled the decision from the CAA and found in favor of tax authorities. Excerpts “(…) 4. It follows from the statements in the judgment under appeal that the court first found that the interest rate agreed between EDFI and its subsidiary in 2009 was lower than the rate that would remunerate bond financing in an arm’s length situation. Secondly, it considered that the granting to EDFI of an option to convert its shares into shares of the financed company could be valued in the same way as the granting of the same option in the context of a transaction between companies with no capital ties. The court deduced that the interest rate in dispute, including the value of this option, did not constitute an indirect transfer of profits abroad. 5. However, the situation arising from the grant to the sole shareholder of the company financed of an option to convert the bonds he has subscribed to into shares of the company is, by its very nature, not comparable to an arm’s length situation, since the value of this option, consisting exclusively in the opening of an option to acquire a fraction of the company’s capital ...

France vs SAP France, September 2022, Conseil d’État, Case No. 461639

SAP AG (now SAP SE) is a German multinational software corporation that develops enterprise software to manage business operations and customer relations. The company is especially known for its ERP software. SAP France, a 98% subsidiary of SA SAP France Holding, itself wholly owned by the German group, had deposited funds under a Cash Management Agreement as sight deposits carrying an interest of 0%. Following an audit for the financial years 2012 and 2013, two assessment proposals were issued in December 2015 and November 2016, relating in particular to the 0% interest rate charged on the cash deposits. The tax authorities had added interest to SA SAP France’s taxable income calculated by reference to the rate of remuneration on sight deposits. SAP France contested the adjustments and furthermore requested the benefit of the reduced rate of corporation tax on income from industrial property, pursuant to Article 39 of the French General Tax Code, with regard to the royalties from the licensing agreements relating to Business Object products and Cartesis solutions. SAP France Holding, the head of the group is appealing against the ruling of 30 January 2020 by which the Montreuil Administrative Court rejected its requests for the reconstitution of its overall tax loss carry-forward in the amount of EUR 171,373 for 2012, 314,395 in duties for 2013 and the additional contribution to corporate income tax on the amounts distributed for 2012 and 2013, for amounts of €5,141 and €14,550 respectively, and, in application of the reduced tax rate, the refund of an overpayment of corporate income tax and additional contributions for €27,461,913 for the years 2012 to 2015. In regards to added interest on the deposited funds under a Cash Management Agreement the Court of Appeal decided in favor of the tax authorities. An appeal was filed by SAP France with the Supreme Court. Judgement of the Conseil d’État The Supreme Court set aside the decision of the Court of Appeal. Excerpt “2. Under the terms of Article 57 of the same code: “For the purposes of determining the income tax due by companies that are dependent on or control companies located outside France, the profits indirectly transferred to the latter, either by way of an increase or decrease in purchase or sale prices, or by any other means, are incorporated into the results shown in the accounts. The same procedure shall be followed in respect of undertakings which are dependent on an undertaking or a group which also controls undertakings situated outside France (…) In the absence of precise information for making the adjustments provided for in the first, second and third paragraphs, the taxable income shall be determined by comparison with that of similar undertakings normally operated. It follows from these provisions that, when it finds that the prices charged by an enterprise established in France to a foreign enterprise which is related to it – or those charged to it by this foreign enterprise – are lower – or higher – than those charged by similar enterprises normally operated, In the event that the charges levied in France by a related foreign company – or those invoiced to it by that foreign company – are lower – or higher – than those levied by similar companies operating normally, i.e. at arm’s length, the administration must be considered to have established the existence of an advantage which it is entitled to reintegrate into the results of the French company, unless the latter can prove that this advantage had at least equivalent counterparts for it. In the absence of such a comparison, the department is not, on the other hand, entitled to invoke the presumption of transfers of profits thus instituted but must, in order to demonstrate that an enterprise has granted a liberality by invoicing services at an insufficient price – or by paying them at an excessive price – establish the existence of an unjustified difference between the agreed price and the market value of the property transferred or the service provided 3. In order to judge that SAP France had granted SAP AG a advantage by renouncing, for the years 2012 and 2013, to receive a remuneration in return for the deposit of its cash surpluses with the latter, the administrative court of appeal ruled that the administrative court of appeal based its decision on the fact that this zero remuneration was unrelated to the remuneration to which the company would have been entitled if it had placed its cash surpluses with a financial institution on that date, without this absence of remuneration finding its counterpart in the possibility of financing cash requirements, which were non-existent for the years in question. In holding, however, that the fact that the rate of remuneration of the sums thus deposited with SAP AG resulted from the application of the rate formula provided for in the cash management agreement, which the parties chose to limit to a non-negative result during the performance of that agreement, is irrelevant in this respect, without investigating whether SAP France had acted in accordance with its interest in concluding the agreement in these terms on 17 December 2009, or what obligations it had during the years in dispute, the Administrative Court of Appeal erred in law. 4. It follows from the foregoing, without it being necessary to rule on the other grounds of appeal, that the company SAP France Holding is entitled to request the annulment of Article 3 of the judgment which it is challenging. In the circumstances of the case, it is appropriate to charge the State with the sum of 3,000 euros to be paid to the company SAP France Holding under Article L. 761-1 of the Administrative Justice Code.” Click here for English translation Click here for other translation Conseil d'État, 8ème - 3ème chambres réunies, 20_09_2022, 461639 ...

§ 1.482-2(a)(4) Example 5.

Assume that A and B are commonly controlled taxpayers and that the applicable Federal rate is 10 percent, compounded semiannually. On June 30, 1986, A sells property to B and receives in exchange B’s purchase-money note in the amount of $2,000,000. The stated interest rate on the note is 9%, compounded semiannually, and the stated redemption price at maturity on the note is $2,000,000. Assume that the other applicable Code section to this transaction is section 1274. As provided in section 1274A(a) and (b), the discount rate for purposes of section 1274 will be nine percent, compounded semiannually, because the stated principal amount of B’s note does not exceed $2,800,000. Section 1274 does not apply to this transaction because there is adequate stated interest on the debt instrument using a discount rate equal to 9%, compounded semiannually, and the stated redemption price at maturity does not exceed the stated principal amount. Under paragraph (a)(3)(iii) of this section, the district director may apply section 482 and paragraph (a) of this section to this $2,000,000 note to determine whether the 9% rate of interest charged is less than an arm’s length rate of interest, and if so, to make appropriate allocations to reflect an arm’s length rate of interest ...

§ 1.482-2(a)(4) Example 4.

X and Y are commonly controlled taxpayers. At a time when the applicable Federal rate is 12 percent, compounded semiannually, X sells property to Y in exchange for a note with a stated rate of interest of 18 percent, compounded semiannually. Assume that the other applicable Code section to the transaction is section 483. Section 483 does not apply to this transaction because, under section 483(d), there is no total unstated interest under the contract using the test rate of interest equal to 100 percent of the applicable Federal rate. Under paragraph (a)(3)(iii) of this section, section 482 and paragraph (a) of this section may be applied by the district director to determine whether the rate of interest under the note is excessive, that is, to determine whether the 18 percent stated interest rate under the note exceeds an arm’s length rate of interest ...

§ 1.482-2(a)(4) Example 3.

The facts are the same as in Example 2 except that the amount lent by Z to B is $9,000, and that amount is the aggregate outstanding amount of loans between Z and B. Under the $10,000 de minimis exception of section 7872(c)(3), no adjustment for interest will be made to this $9,000 loan under section 7872. Under paragraph (a)(3)(iii) of this section, the district director may apply section 482 and paragraph (a) of this section to this $9,000 loan to determine whether the rate of interest charged is less than an arm’s length rate of interest, and if so, to make appropriate allocations to reflect an arm’s length rate of interest ...

§ 1.482-2(a)(4) Example 2.

B, an individual, is an employee of Z corporation, and is also the controlling shareholder of Z. Z makes a term loan of $15,000 to B at a rate of interest that is less than the applicable Federal rate. In this instance the other operative Code section is section 7872. Under section 7872(b), the difference between the amount loaned and the present value of all payments due under the loan using a discount rate equal to 100 percent of the applicable Federal rate is treated as an amount of cash transferred from the corporation to B and the loan is treated as having original issue discount equal to such amount. Under paragraph (a)(3)(iii) of this section, section 482 and paragraph (a) of this section may also be applied by the district director to determine if the rate of interest charged on this $15,000 loan (100 percent of the AFR, compounded semiannually, as adjusted by section 7872) is an arm’s length rate of interest. Because the rate of interest on the loan, as adjusted by section 7872, is within the safe haven range of 100-130 percent of the AFR, compounded semiannually, no further interest rate adjustments under section 482 and paragraph (a) of this section will be made to this loan ...

§ 1.482-2(a)(4) Example 1.

An individual, A, transfers $20,000 to a corporation controlled by A in exchange for the corporation’s note which bears adequate stated interest. The district director recharacterizes the transaction as a contribution to the capital of the corporation in exchange for preferred stock. Under paragraph (a)(3)(i) of this section, section 1.482-2(a) does not apply to the transaction because there is no bona fide indebtedness ...

§ 1.482-2(a)(4) Examples.

The principles of paragraph (a)(3) of this section may be illustrated by the following examples: ...

§ 1.482-2(a)(3) Coordination with interest adjustments required under certain other Code sections.

If the stated rate of interest on the stated principal amount of a loan or advance between controlled entities is subject to adjustment under section 482 and is also subject to adjustment under any other section of the Internal Revenue Code (for example, section 467, 483, 1274 or 7872), section 482 and paragraph (a) of this section may be applied to such loan or advance in addition to such other Internal Revenue Code section. After the enactment of the Tax Reform Act of 1964, Pub. L. 98-369, and the enactment of Pub. L. 99-121, such other Internal Revenue Code sections include sections 467, 483, 1274 and 7872. The order in which the different provisions shall be applied is as follows – (i) First, the substance of the transaction shall be determined; for this purpose, all the relevant facts and circumstances shall be considered and any law or rule of law (assignment of income, step transaction, etc.) may apply. Only the rate of interest with respect to the stated principal amount of the bona fide indebtedness (within the meaning of paragraph (a)(1) of this section), if any, shall be subject to adjustment under section 482, paragraph (a) of this section, and any other Internal Revenue Code section. (ii) Second, the other Internal Revenue Code section shall be applied to the loan or advance to determine whether any amount other than stated interest is to be treated as interest, and if so, to determine such amount according to the provisions of such other Internal Revenue Code section. (iii) Third, whether or not the other Internal Revenue Code section applies to adjust the amounts treated as interest under such loan or advance, section 482 and paragraph (a) of this section may then be applied by the district director to determine whether the rate of interest charged on the loan or advance, as adjusted by any other Code section, is greater or less than an arm’s length rate of interest, and if so, to make appropriate allocations to reflect an arm’s length rate of interest. (iv) Fourth, section 482 and paragraphs (b) through (d) of this section and §§ 1.482-3 through 1.482-7, if applicable, may be applied by the district director to make any appropriate allocations, other than an interest rate adjustment, to reflect an arm’s length transaction based upon the principal amount of the loan or advance and the interest rate as adjusted under paragraph (a)(3) (i), (ii) or (iii) of this section. For example, assume that two commonly controlled taxpayers enter into a deferred payment sale of tangible property and no interest is provided, and assume also that section 483 is applied to treat a portion of the stated sales price as interest, thereby reducing the stated sales price. If after this recharacterization of a portion of the stated sales price as interest, the recomputed sales price does not reflect an arm’s length sales price under the principles of § 1.482-3, the district director may make other appropriate allocations (other than an interest rate adjustment) to reflect an arm’s length sales price ...

§ 1.482-2(a)(2)(iii)(E) Foreign currency loans.

The safe haven interest rates prescribed in paragraph (a)(2)(iii)(B) of this section do not apply to any loan or advance the principal or interest of which is expressed in a currency other than U.S. dollars ...

§ 1.482-2(a)(2)(iii)(D) Lender in business of making loans.

If the lender in a loan or advance transaction to which paragraph (a)(2) of this section applies is regularly engaged in the trade or business of making loans or advances to unrelated parties, the safe haven rates prescribed in paragraph (a)(2)(iii)(B) of this section shall not apply, and the arm’s length interest rate to be used shall be determined under the standards described in paragraph (a)(2)(i) of this section, including reference to the interest rates charged in such trade or business by the lender on loans or advances of a similar type made to unrelated parties at and about the time the loan or advance to which paragraph (a)(2) of this section applies was made ...

§ 1.482-2(a)(2)(iii)(C) Applicable Federal rate.

For purposes of paragraph (a)(2)(iii)(B) of this section, the term applicable Federal rate means, in the case of a loan or advance to which this section applies and having a term of – (1) Not over 3 years, the Federal short-term rate; (2) Over 3 years but not over 9 years, the Federal mid-term rate; or (3) Over 9 years, the Federal long-term rate, as determined under section 1274(d) in effect on the date such loan or advance is made. In the case of any sale or exchange between controlled entities, the lower limit shall be the lowest of the applicable Federal rates in effect for any month in the 3-calendar- month period ending with the first calendar month in which there is a binding written contract in effect for such sale or exchange (lowest 3-month rate, as defined in section 1274(d)(2)). In the case of a demand loan or advance to which this section applies, the applicable Federal rate means the Federal short-term rate determined under section 1274(d) (determined without regard to the lowest 3-month short term rate determined under section 1274(d)(2)) in effect for each day on which any amount of such loan or advance (including unpaid accrued interest determined under paragraph (a)(2) of this section) is outstanding ...

§ 1.482-2(a)(2)(iii)(B) Safe haven interest rate based on applicable Federal rate.

Except as otherwise provided in this paragraph (a)(2), in the case of a loan or advance between members of a group of controlled entities, an arm’s length rate of interest referred to in paragraph (a)(2)(i) of this section shall be for purposes of chapter 1 of the Internal Revenue Code – (1) The rate of interest actually charged if that rate is – (i) Not less than 100 percent of the applicable Federal rate (lower limit); and (ii) Not greater than 130 percent of the applicable Federal rate (upper limit); or (2) If either no interest is charged or if the rate of interest charged is less than the lower limit, then an arm’s length rate of interest shall be equal to the lower limit, compounded semiannually; or (3) If the rate of interest charged is greater than the upper limit, then an arm’s length rate of interest shall be equal to the upper limit, compounded semiannually, unless the taxpayer establishes a more appropriate compound rate of interest under paragraph (a)(2)(i) of this section. However, if the compound rate of interest actually charged is greater than the upper limit and less than the rate determined under paragraph (a)(2)(i) of this section, or if the compound rate actually charged is less than the lower limit and greater than the rate determined under paragraph (a)(2)(i) of this section, then the compound rate actually charged shall be deemed to be an arm’s length rate under paragraph (a)(2)(i). In the case of any sale-leaseback described in section 1274(e), the lower limit shall be 110 percent of the applicable Federal rate, compounded semiannually ...

§ 1.482-2(a)(2)(iii)(A)(2) Grandfather rule for existing loans.

The safe haven rates prescribed in paragraph (a)(2)(iii)(B) of this section shall not apply, and the safe haven rates prescribed in § 1.482-2(a)(2)(iii) (26 CFR part 1 edition revised as of April 1, 1985), shall apply to – (i) Term loans or advances made before May 9, 1986; and (ii) Term loans or advances made before August 7, 1986, pursuant to a binding written contract entered into before May 9, 1986 ...

§ 1.482-2(a)(2)(iii)(A)(1) General rule.

Except as otherwise provided in paragraph (a)(2) of this section, paragraph (a)(2)(iii)(B) applies with respect to the rate of interest charged and to the amount of interest paid or accrued in any taxable year – (i) Under a term loan or advance between members of a group of controlled entities where (except as provided in paragraph (a)(2)(iii)(A)(2)(ii) of this section) the loan or advance is entered into after May 8, 1986; and (ii) After May 8, 1986 under a demand loan or advance between such controlled entities ...

§ 1.482-2(a)(2)(ii) Funds obtained at situs of borrower.

Notwithstanding the other provisions of paragraph (a)(2) of this section, if the loan or advance represents the proceeds of a loan obtained by the lender at the situs of the borrower, the arm’s length rate for any taxable year shall be equal to the rate actually paid by the lender increased by an amount which reflects the costs or deductions incurred by the lender in borrowing such amounts and making such loans, unless the taxpayer establishes a more appropriate rate under the standards set forth in paragraph (a)(2)(i) of this section ...

§ 1.482-2(a)(2)(i) In general.

For purposes of section 482 and paragraph (a) of this section, an arm’s length rate of interest shall be a rate of interest which was charged, or would have been charged, at the time the indebtedness arose, in independent transactions with or between unrelated parties under similar circumstances. All relevant factors shall be considered, including the principal amount and duration of the loan, the security involved, the credit standing of the borrower, and the interest rate prevailing at the situs of the lender or creditor for comparable loans between unrelated parties ...

§ 1.482-2(a)(1)(iv)(B)

Notwithstanding the first-in, first-out payment application rule described in paragraph (a)(1)(iv)(A) of this section, the taxpayer may apply payments or credits against amounts owed in some other order on its books in accordance with an agreement or understanding of the related parties if the taxpayer can demonstrate that either it or others in its industry, as a regular trade practice, enter into such agreements or understandings in the case of similar balances with unrelated parties ...

§ 1.482-2(a)(1)(iv)(A) Example.

(i) Facts. X and Y are members of a group of controlled entities within the meaning of section 482. Assume that the balance of intercompany trade receivables owed by X to Y on June 1 is $100, and that all of the $100 balance represents amounts incurred by X to Y during the month of May. During the month of June X incurs an additional $200 of intercompany trade receivables to Y. Assume that on July 15, $60 is properly credited against X’s intercompany account to Y, and that $240 is properly credited against the intercompany account on August 31. Assume that under paragraph (a)(1)(iii)(B) of this section interest must be charged on X’s intercompany trade receivables to Y beginning with the first day of the third calendar month following the month the intercompany trade receivables arise, and that no alternative interest-free period applies. Thus, the interest-free period for intercompany trade receivables incurred during the month of May ends on July 31, and the interest-free period for intercompany trade receivables incurred during the month of June ends on August 31. (ii) Application of payments. Using a FIFO payment order, the aggregate payments of $300 are applied first to the opening June balance, and then to the additional amounts incurred during the month of June. With respect to X’s June opening balance of $100, no interest is required to be accrued on $60 of such balance paid by X on July 15, because such portion was paid within its interest-free period. Interest for 31 days, from August 1 to August 31 inclusive, is required to be accrued on the $40 portion of the opening balance not paid until August 31. No interest is required to be accrued on the $200 of intercompany trade receivables X incurred to Y during June because the $240 credited on August 31, after eliminating the $40 of indebtedness remaining from periods before June, also eliminated the $200 incurred by X during June prior to the end of the interest-free period for that amount. The amount of interest incurred by X to Y on the $40 amount during August creates bona fide indebtedness between controlled entities and is subject to the provisions of paragraph (a)(1)(iii)(A) of this section without regard to any of the exceptions contained in paragraphs (a)(1)(iii)(B) through (E) ...

§ 1.482-2(a)(1)(iv)(A)

Except as otherwise provided in this paragraph (a)(1)(iv), in determining the period of time for which an amount owed by one member of the group to another member is outstanding, payments or other credits to an account are considered to be applied against the earliest amount outstanding, that is, payments or credits are applied against amounts in a first-in, first-out (FIFO) order. Thus, tracing payments to individual intercompany trade receivables is generally not required in order to determine whether a particular intercompany trade receivable has been paid within the applicable interest-free period determined under paragraph (a)(1)(iii) of this section. The application of this paragraph (a)(1)(iv)(A) may be illustrated by the following example: ...

§ 1.482-2(a)(1)(iii)(E)(4) Example.

(i)Facts. X and Y use the calendar year as the taxable year and are members of the same group of controlled entities within the meaning of section 482. For Y’s 1988 calendar taxable year X and Y intend to use the interest-free period determined under this paragraph (a)(1)(iii)(E) for intercompany trade receivables attributable to X’s purchases of certain products from Y for resale by X in the ordinary course of business to unrelated persons in country Z. For its 1987 calendar taxable year all of X’s sales in country Z were of products within a single product group based upon a three-digit SIC code, were not manufactured, produced, or constructed (within the meaning of § 1.954-3(a)(4)) by X, and were sold in the ordinary course of X’s trade or business to unrelated persons located only in country Z. These sales and the month-end accounts receivable balances (for such sales and for such sales uncollected from prior months) are as follows: Month Sales Accounts receivable Jan. 1987 $500,000 $2,835,850 Feb. 600,000 2,840,300 Mar. 450,000 2,850,670 Apr. 550,000 2,825,700 May. 650,000 2,809,360 June 525,000 2,803,200 July 400,000 2,825,850 Aug. 425,000 2,796,240 Sept. 475,000 2,839,390 Oct. 525,000 2,650,550 Nov. 450,000 2,775,450 Dec. 1987 650,000 2,812,600 Totals 6,200,000 33,665,160 (ii) Average collection period. X’s total sales within the same product group to unrelated persons within country Z for the period are $6,200,000. The average receivables balance for the period is $2,805,430 ($33,665,160/12). The average collection period in whole days is determined as follows: (iii) Interest-free period. Accordingly, for intercompany trade receivables incurred by X during Y’s 1988 calendar taxable year attributable to the purchase of property from Y for resale to unrelated persons located in country Z and included in the product group, X may use an interest-free period of 175 days (165 days in the average collection period plus 10 days, but not in excess of a maximum of 183 days). All other intercompany trade receivables incurred by X are subject to the interest-free periods described in paragraphs (a)(1)(iii) (B), (C), or (D), whichever are applicable. If X makes sales in other foreign countries in addition to country Z or makes sales of property in more than one product group in any foreign country, separate computations of X’s average collection period, by product group within each country, are required in order for X and Y to determine an interest-free period for such product groups in such foreign countries under this paragraph (a)(1)(iii)(E) ...

§ 1.482-2(a)(1)(iii)(E)(4) Illustration.

The interest-free period provided under paragraph (a)(1)(iii)(E) of this section may be illustrated by the following example: ...

§ 1.482-2(a)(1)(iii)(E)(3) Average collection period.

An average collection period for purposes of this paragraph (a)(1)(iii)(E) is determined as follows – (i) Step 1. Determine total sales (less returns and allowances) by the related purchaser in the product group to unrelated persons located in the same foreign country during the related purchaser’s last taxable year ending on or before the first day of the related seller’s taxable year in which the intercompany trade receivable arises. (ii) Step 2. Determine the related purchaser’s average month-end accounts receivable balance with respect to sales described in paragraph (a)(1)(iii)(E)(2)(i) of this section for the related purchaser’s last taxable year ending on or before the first day of the related seller’s taxable year in which the intercompany trade receivable arises. (iii) Step 3. Compute a receivables turnover rate by dividing the total sales amount described in paragraph (a)(1)(iii)(E)(2)(i) of this section by the average receivables balance described in paragraph (a)(1)(iii)(E)(2)(ii) of this section. (iv) Step 4. Divide the receivables turnover rate determined under paragraph (a)(1)(iii)(E)(2)(iii) of this section into 365, and round the result to the nearest whole number to determine the number of days in the average collection period. (v) Other considerations. If the related purchaser makes sales in more than one foreign country, or sells property in more than one product group in any foreign country, separate computations of an average collection period, by product group within each country, are required. If the related purchaser resells fungible property in more than one foreign country and the intercompany trade receivables arising from the related party purchase of such fungible property cannot reasonably be identified with resales in particular foreign countries, then solely for the purpose of assigning an interest-free period to such intercompany trade receivables under this paragraph (a)(1)(iii)(E), an amount of each such intercompany trade receivable shall be treated as allocable to a particular foreign country in the same proportion that the related purchaser’s sales of such fungible property in such foreign country during the period described in paragraph (a)(1)(iii)(E)(2)(i) of this section bears to the related purchaser’s sales of all such fungible property in all such foreign countries during such period. An interest-free period under this paragraph (a)(1)(iii)(E) shall not apply to any intercompany trade receivables arising in a taxable year of the related seller if the related purchaser made no sales described in paragraph (a)(1)(iii)(E)(2)(i) of this section from which the appropriate interest-free period may be determined ...

§ 1.482-2(a)(1)(iii)(E)(2) Interest-free period.

The interest-free period under this paragraph (a)(1)(iii)(E), however, shall in no event exceed 183 days. The related purchaser does not have to conduct business outside the United States in order to be eligible to use the interest-free period of this paragraph (a)(1)(iii)(E). The interest-free period under this paragraph (a)(1)(iii)(E) shall not apply to intercompany trade receivables attributable to property which is manufactured, produced, or constructed (within the meaning of § 1.954-3(a)(4)) by the related purchaser. For purposes of this paragraph (a)(1)(iii)(E) a product group includes all products within the same three-digit Standard Industrial Classification (SIC) Code (as prepared by the Statistical Policy Division of the Office of Management and Budget, Executive Office of the President.) ...

§ 1.482-2(a)(1)(iii)(E)(1) General rule.

If in the ordinary course of business one member of the group (related purchaser) purchases property from another member of the group (related seller) for resale to unrelated persons located in a particular foreign country, the related purchaser and the related seller may use as the interest-free period for the intercompany trade receivables arising during the related seller’s taxable year from the purchase of such property within the same product group an interest-free period equal the sum of – (i) The number of days in the related purchaser’s average collection period (as determined under paragraph (a)(1)(iii)(E)(2) of this section) for sales of property within the same product group sold in the ordinary course of business to unrelated persons located in the same foreign country; plus (ii) Ten (10) calendar days ...

§ 1.482-2(a)(1)(iii)(D) Exception for regular trade practice of creditor member or others in creditor’s industry.

If the creditor member or unrelated persons in the creditor member’s industry, as a regular trade practice, allow unrelated parties a longer period without charging interest than that described in paragraph (a)(1)(iii)(B) or (C) of this section (whichever is applicable) with respect to transactions which are similar to transactions that give rise to intercompany trade receivables, such longer interest-free period shall be allowed with respect to a comparable amount of intercompany trade receivables ...

§ 1.482-2(a)(1)(iii)(C) Exception for trade or business of debtor member located outside the United States.

In the case of an intercompany trade receivable arising from a transaction in the ordinary course of a trade or business which is actively conducted outside the United States by the debtor member, interest is not required to be charged until the first day of the fourth calendar month following the month in which such intercompany trade receivable arises ...

§ 1.482-2(a)(1)(iii)(B) Exception for certain intercompany transactions in the ordinary course of business.

Interest is not required to be charged on an intercompany trade receivable until the first day of the third calendar month following the month in which the intercompany trade receivable arises ...

§ 1.482-2(a)(1)(iii)(A) General rule.

This paragraph (a)(1)(iii) is effective for indebtedness arising after June 30, 1988. See § 1.482-2(a)(3) (26 CFR Part 1 edition revised as of April 1, 1988) for indebtedness arising before July 1, 1988. Except as otherwise provided in paragraphs (a)(1)(iii)(B) through (E) of this section, the period for which interest shall be charged with respect to a bona fide indebtedness between controlled entities begins on the day after the day the indebtedness arises and ends on the day the indebtedness is satisfied (whether by payment, offset, cancellation, or otherwise). Paragraphs (a)(1)(iii)(B) through (E) of this section provide certain alternative periods during which interest is not required to be charged on certain indebtedness. These exceptions apply only to indebtedness described in paragraph (a)(1)(ii)(A)(2) of this section (relating to indebtedness incurred in the ordinary course of business from sales, services, etc., between members of the group) and not evidenced by a written instrument requiring the payment of interest. Such amounts are hereinafter referred to as intercompany trade receivables. The period for which interest is not required to be charged on intercompany trade receivables under this paragraph (a)(1)(iii) is called the interest-free period. In general, an intercompany trade receivable arises at the time economic performance occurs (within the meaning of section 461(h) and the regulations thereunder) with respect to the underlying transaction between controlled entities. For purposes of this paragraph (a)(1)(iii), the term United States includes any possession of the United States, and the term foreign country excludes any possession of the United States ...

§ 1.482-2(a)(1)(ii)(B) Alleged indebtedness.

This paragraph (a) does not apply to so much of an alleged indebtedness which is not in fact a bona fide indebtedness, even if the stated rate of interest thereon would be within the safe haven rates prescribed in paragraph (a)(2)(iii) of this section. For example, paragraph (a) of this section does not apply to payments with respect to all or a portion of such alleged indebtedness where in fact all or a portion of an alleged indebtedness is a contribution to the capital of a corporation or a distribution by a corporation with respect to its shares. Similarly, this paragraph (a) does not apply to payments with respect to an alleged purchase-money debt instrument given in consideration for an alleged sale of property between two controlled entities where in fact the transaction constitutes a lease of the property. Payments made with respect to alleged indebtedness (including alleged stated interest thereon) shall be treated according to their substance. See § 1.482-2(a)(3)(i) ...

§ 1.482-2(a)(1)(ii)(A) Interest on bona fide indebtedness.

Paragraph (a) of this section applies only to determine the appropriateness of the rate of interest charged on the principal amount of a bona fide indebtedness between members of a group of controlled entities, including – (1) Loans or advances of money or other consideration (whether or not evidenced by a written instrument); and (2) Indebtedness arising in the ordinary course of business from sales, leases, or the rendition of services by or between members of the group, or any other similar extension of credit ...

§ 1.482-2(a)(1)(i) In general.

Where one member of a group of controlled entities makes a loan or advance directly or indirectly to, or otherwise becomes a creditor of, another member of such group and either charges no interest, or charges interest at a rate which is not equal to an arm’s length rate of interest (as defined in paragraph (a)(2) of this section) with respect to such loan or advance, the district director may make appropriate allocations to reflect an arm’s length rate of interest for the use of such loan or advance ...

Uber-files – Tax Avoidance promoted by the Netherlands

Uber files – confidential documents, leaked to The Guardian newspaper shows that Uber in 2015 sought to deflect attention from its Dutch conduits and Caribbean tax shelters by helping tax authorities collect taxes from its drivers. At that time, Uber’s Dutch subsidiary received payments from customers hiring cars in cities around the world (except US and China), and after paying the drivers, profits were routed on as royalty fees to Bermuda, thus avoiding corporate income tax. In 2019, Uber took the first steps to close its Caribbean tax shelters. To that end, a Dutch subsidiary purchased the IP that was previously held by the Bermudan subsidiary, using a $16 billion loan it had received from Uber’s Singapore holding company. The new setup was also tax driven. Tax depreciations on the IP acquired from Bermuda and interest on the loan from Singapore will significantly reduce Uber’s effective tax rate in years to come. Centre for International Corporate Tax Accountability and Research (CICTAR) has revealed that in 2019 Uber’s Dutch headquarter pulled in more than $US5.8 billion in operating revenue from countries around the world. “The direct transfer of revenue from around the world to the Netherlands leaves little, if any, taxable profits behind,“. “Uber created an $8 billion Dutch tax shelter that, if unchecked, may eliminate tax liability on profits shifted to the Netherlands for decades to come.” According to the groups 10-Q filing for the quarterly period ended June 30, 2022, Uber it is currently facing numerous tax audits. “We may have exposure to materially greater than anticipated tax liabilities. The tax laws applicable to our global business activities are subject to uncertainty and can be interpreted differently by different companies. For example, we may become subject to sales tax rates in certain jurisdictions that are significantly greater than the rates we currently pay in those jurisdictions. Like many other multinational corporations, we are subject to tax in multiple U.S. and foreign jurisdictions and have structured our operations to reduce our effective tax rate. Currently, certain jurisdictions are investigating our compliance with tax rules. If it is determined that we are not compliant with such rules, we could owe additional taxes. Certain jurisdictions, including Australia, Kingdom of Saudi Arabia, the UK and other countries, require that we pay any assessed taxes prior to being allowed to contest or litigate the applicability of tax assessments in those jurisdictions. These amounts could materially adversely impact our liquidity while those matters are being litigated. This prepayment of contested taxes is referred to as “pay-to-play.†Payment of these amounts is not an admission that we believe we are subject to such taxes; even when such payments are made, we continue to defend our positions vigorously. If we prevail in the proceedings for which a pay-to-play payment was made, the jurisdiction collecting the payment will be required to repay such amounts and also may be required to pay interest. Additionally, the taxing authorities of the jurisdictions in which we operate have in the past, and may in the future, examine or challenge our methodologies for valuing developed technology, which could increase our worldwide effective tax rate and harm our financial position and operating results. Furthermore, our future income taxes could be adversely affected by earnings being lower than anticipated in jurisdictions that have lower statutory tax rates and higher than anticipated in jurisdictions that have higher statutory tax rates, changes in the valuation allowance on our U.S. and Netherlands’ deferred tax assets, or changes in tax laws, regulations, or accounting principles. We are subject to regular review and audit by both U.S. federal and state tax authorities, as well as foreign tax authorities, and currently face numerous audits in the United States and abroad. Any adverse outcome of such reviews and audits could have an adverse effect on our financial position and operating results. In addition, the determination of our worldwide provision for income taxes and other tax liabilities requires significant judgment by our management, and we have engaged in many transactions for which the ultimate tax determination remains uncertain. The ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made. Our tax positions or tax returns are subject to change, and therefore we cannot accurately predict whether we may incur material additional tax liabilities in the future, which could impact our financial position. In addition, in connection with any planned or future acquisitions, we may acquire businesses that have differing licenses and other arrangements that may be challenged by tax authorities for not being at arm’s-length or that are otherwise potentially less tax efficient than our licenses and arrangements. Any subsequent integration or continued operation of such acquired businesses may result in an increased effective tax rate in certain jurisdictions or potential indirect tax costs, which could result in us incurring additional tax liabilities or having to establish a reserve in our consolidated financial statements, and could adversely affect our financial results. Changes in global and U.S. tax legislation may adversely affect our financial condition, operating results, and cash flows. We are a U.S.-based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. U.S. tax legislation enacted on December 22, 2017, and modified in 2020, the Tax Cuts and Jobs Act (“the Actâ€), has significantly changed the U.S. federal income taxation of U.S. corporations. The legislation and regulations promulgated in connection therewith remain unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and incremental implementing regulations by the U.S. Treasury and U.S. Internal Revenue Service (the “IRSâ€), any of which could lessen or increase certain adverse impacts of the legislation. In addition, it remains unclear in some instances how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities. Furthermore, beginning on ...

Rio Tinto has agreed to pay AUS$ 1 billion to settle a dispute with Australian Taxation Office over its Singapore Marketing Hub

On 20 July 2022 Australian mining group Rio Tinto issued a press release announcing that a A$ 1 billion settlement had been reached with the Australian Taxation Office. “The agreement resolves the disagreement relating to interest on an isolated borrowing used to pay an intragroup dividend in 2015. It also separately resolves the pricing of certain transactions between Rio Tinto entities based in Australia and the Group’s commercial centre in Singapore from 2010-2021 and provides certainty for a further five-year period. Rio Tinto has also reached agreement with the Inland Revenue Authority of Singapore (IRAS) in relation to transfer pricing for the same periods. Reaching agreement with both tax authorities ensures Rio Tinto is not subject to double taxation. As part of this agreement, Rio Tinto will pay to the ATO additional tax of A$613m for the twelve historical years (2010 to 2021). This is in addition to the A$378m of tax paid in respect of the original amended assessments issued by the ATO. Over this period, Rio Tinto paid nearly A$80bn in tax and royalties in Australia. Peter Cunningham, Rio Tinto Chief Financial Officer, said “We are glad to have resolved these longstanding disputes and to have gained certainty over future tax outcomes relating to our Singapore marketing arrangements. Rio Tinto remains committed to our commercial activities in Singapore and the valuable role played by our centralised commercial team.†Additional Information Rio Tinto was issued amended assessments in respect of iron ore marketing in 2017 (A$447m for the 2010 to 2013 years), for aluminium marketing in 2020 (A$86m for the 2010 to 2016 years) and for the intragroup dividend financing matter in 2021 (A$738m for the 2015 to 2018 years). The agreements separately reached with the ATO and IRAS cover the transfer pricing related to the marketing of all products between Australia and Singapore, including iron ore and aluminium, for all historical years from 2010 to 2021 and the future period to 2026. The ATO settlement payment includes A$55m of interest and A$22m of penalties. On 20 March 2020, Rio Tinto lodged requests for dispute resolution between the ATO and IRAS under the double tax treaty between Australia and Singapore (as disclosed in Rio Tinto’s 2020 half-year results). As a result of the agreements reached with both tax authorities, those requests have been withdrawn.” The settlement agreement has also been announced by the Australian Tax Office. ATO vs RIO TINTO70098 See also Australia vs Rio Tinto and BHP Billiton, April 2017 – Going to Court and Mining Group Rio Tinto in new A$ 86 million dispute with the ATO over pricing of aluminum ...

UK vs BlackRock, July 2022, Upper Tribunal, Case No [2022] UKUT 00199 (TCC)

In 2009 the BlackRock Group acquired Barclays Global Investors for a total sum of $13,5bn. The price was paid in part by shares ($6.9bn) and in part by cash ($6.6bn). The cash payment was paid by BlackRock Holdco 5 LLC – a US Delaware Company tax resident in the UK – but funded by the parent company by issuing $4bn loan notes to the LLC. In the years following the acquisition Blackrock Holdco 5 LLC claimed tax deductions in the UK for interest payments on the intra-group loans. Following an audit in the UK the tax authorities disallowed the interest deductions. The tax authorities held that the transaction would not have happened between independent parties. They also found that the loans were entered into for an unallowable tax avoidance purpose. A UK taxpayer can be denied a deduction for interest where a loan has an unallowable purpose i.e, where a tax advantage is the company’s main purpose for entering into the loan relationship (section 441 of the Corporation Tax Act 2009). If there is such an unallowable purpose, the company may not bring into account for that period ….so much of any debit in respect of that relationship as is attributable to the unallowable purpose. An appeal was filed by the BlackRock Group. In November 2020 the First Tier Tribunal found that an independent lender acting at arm’s length would have made loans to LLC5 in the same amount and on the same terms as to interest as were actually made by LLC4 (the “Transfer Pricing Issueâ€). The FTT further found that the Loans had both a commercial purpose and a tax advantage purpose but that it would be just and reasonable to apportion all the debits to the commercial purpose and so they were fully deductible by LLC5 (the “Unallowable Purpose Issueâ€). An appeal was then filed with the Upper Tribunal by the tax authorities. Judgement of the Upper Tribunal The Upper Tribunal found that the First Tier Tribunal had erred in law and therefore allowed HMRC’s appeal on both the transfer pricing issue and the unallowable purpose issue. The First Tier Tribunal’s Decision was set aside and the tax authorities amendments to LLC5’s tax returns were confirmed. Transfer Pricing “The actual provision of the loans from LLC4 to LLC5 differed from any arm’s length provision in that the loans would not have been made as between independent enterprises. The actual provision conferred a potential advantage in relation to United Kingdom taxation. The profits and losses of LLC5, including the allowing of debits for the interest and other expenses payable on the Loans, are to be calculated for tax purposes as if the arm’s length provision had been made or imposed instead of the actual provision. In this case, no arm’s length loan for $4 billion would have been made in the form that LLC4 made to LLC5 and hence HMRC’s amendments to the relevant returns should be upheld and confirmed.” Unallowable Purpose “The FTT did not err in finding that LLC5 had both a commercial purpose and an unallowable tax advantage main purpose in entering into the Loans. However, it was wrong to decide that the just and reasonable apportionment was solely to the commercial purpose. But for the tax advantage purpose there would have been no commercial purpose to the Loans and all the relevant facts and circumstances lead inexorably to the conclusion that the loan relationship debits should be wholly attributed to the unallowable tax purpose and so disallowed.” HMRC_v_Blackrock_Holdco_LLC5_UT-2021-000022_-_final_decision_ ...

Netherlands vs “X Shareholder Loan B.V.”, July 2022, Supreme Court, Case No 20/03946, ECLI:NL:HR:2022:1085.

“X Shareholder Loan B.V.” and its subsidiaries had been set up in connection with a private equity acquisition structure. In 2011, one of “X Shareholder Loan B.V.”‘s subsidiaries bought the shares of the Dutch holding company. This purchase was partly financed by a loan X bv had obtained from its Luxembourg parent company. The Luxembourg parent company had obtained the the funds by issuing ‘preferred equity certificates’ (PECs) to its shareholders. These shareholders were sub-funds of a private equity fund, none of which held a direct or indirect interest in “X Shareholder Loan B.V.” of more than one-third. The tax authorities found, that deductibility of the interest paid by “X Shareholder Loan B.V.” to its Luxembourg parent was limited under Section 10a Vpb 1969 Act. The Court of Appeal upheld the assessment. According to the Court, whether there is an intra-group rerouting does not depend on whether the parties involved are related entities within the meaning of section 10a, i.e. whether they hold an interest of at least one-third. Instead, it should be assessed whether all the entities involved belong to the same group or concern. This does not necessarily require an interest of at least one-third. No satisfied with the decision “X Shareholder Loan B.V.” filed an appeal with the Supreme Court. Judgement of the Supreme Court The Supreme Court declared the appeal well-founded and remanded the case to Court of Appeal for further consideration of the issues that had not addressed by the court in its previous decision. Click here for English translation Click here for other translation ECLI_NL_HR_2022_1085 ...

Portugal vs “L…. Engenharia e Construções, S.A.”, June 2022, Tribunal Central Administrativo Sul, Case 1339/13.0BELRA

At issue was an interest free loan granted by “L…. Engenharia e Construções, S.A.” to a related party. The loan had been granted before the parties became related following an acquisition in 2007. The tax authorities had issued an assessment where the interest had been determined to 1.4% based on the interest rate that would later apply to the loan according to the agreement. An appeal was filed by “L…. Engenharia e Construções, S.A.” with the Administrative Court, where the assessment was later set aside. An appeal was then filed by the tax authorities with the Administrative Court of Appeal. Judgement of the Court The Administrative Court of Appeal upheld the decision of the administrative court, dismissed the appeal of the tax authorities and annulled the assessment. Excerpt “In this regard, it cannot be ignored that the contract entered into by the Claimant with the company Construtora do L…. SGPS, SA, on 21 September 2004, is not a true shareholder loan contract, as understood by the Tax Inspection Services (see points 1 to 3 and 6 of the list of proven facts). This is because that type of contract presupposes that it is the partner who lends the company money or another fungible item, the latter being obliged to return it another of the same type and quality, and not the reverse, under the terms of Article 243(1) of the Commercial Companies Code (CSC) (see points 1 to 3 and 6 of the list of proven facts). Therefore, as the company Construtora do L…. SGPS, SA, holder of 94.72% of the share capital of the Disputant Company on 31 December 2007, and as the Disputant Company did not hold any shareholding in that company until that date, it follows that the Disputant Company could not make shareholder loans to the said company, under penalty of breach of the said legal provision (see points 1 to 3 and 42 of the list of proven facts). Therefore, it is necessary to qualify both contracts at issue in the present proceedings as loan contracts, whose regime is legally foreseen in Articles 1142 and following of the Civil Code (see points 1 to 6 and 42 of the list of proven facts). In addition, these are onerous loan agreements, since they provide not only for the repayment of the capital lent, but also for the payment of interest to the Impugner, increased by a percentage of 1.5% (see points 1 to 3, 6 and 7 of the list of proven facts). “The correction of transfer prices cannot be based solely on the appeal to the general principle that a loan between related entities should bear interest, but rather involves demonstrating that transactions of the same or similar nature performed between independent entities in similar circumstances involve the requirement of interest, and it is not arguable in the case law of the Supreme Administrative Court that the determination of arm’s length conditions is a burden that the law places on the Tax Administration. As stated in the doctrinal summary of the Supreme Administrative Court ruling of 11/10/2021, in case no. 01209/11.7BELRS, “The AT has the burden of proving the existence of special relations, as well as the terms under which operations of the same nature normally take place between independent persons and under identical circumstances. This means that the correction referred to in Article 58 of the CIRC cannot, therefore, be based on indications or presumptions, and the AT is obliged to prove the abovementioned legal requirements in order to be able to correct the taxpayer’s taxable income under this regime”. Having decided in this line, the sentence did not incur in the pointed errors of judgment, deserving to be fully confirmed.” Click here for English translation. Click here for other translation Portugal June 2022 Tribunal Central Administrativo Sul 1339-13 0BELRA ORG ...

Poland vs “Shopping Centre Developer sp.k.”, June 2022, Supreme Administrative Court, Case No II FSK 3050/19

A Polish company, “Shopping Centre Lender sp.k.”, had been granted three intra group loans in FY 2013 for a maximum amount of EUR 2 million, EUR 115 million and EUR 43.5 million. The interest rate on the loans had been set at 9%. The tax authorities found that the 9% interest rate was higher than the arm’s length rate, and issued an assessment where the interest rate had been lowered to 3.667%, resulting in lower interest expenses and thus additional taxable income. “Shopping Centre Lender sp.k.” filed an appeal with the Administrative Court claiming that the procedure for estimating income – determining the arm’s length interest rate – had not been conducted correctly by the tax authority. In a judgement issued in May 2019 (no. III SA/Wa 1777/18) the Administrative Court issued a judgement in favour of the company. An appeal was then filed by the tax authorities with the Supreme Administrative Court. Judgement of the Supreme Administrative Court The Supreme Administrative Court upheld the decision of the Administrative Court and dismissed the appeal of the tax authorities. Excerpts “In the opinion of the Supreme Administrative Court, the Court of First Instance made a proper assessment of the case submitted to its review. In the justification of the contested judgment, it presented the legal basis for the decision and its explanation, and within this framework it diagnosed the infringements committed by the authority and assessed their impact on the results of the case. It did so in a clear manner which makes it possible to review the grounds on which it was based. The conclusions formulated, as well as the objections to the proceedings conducted and the content of the decision concluding them, were presented in a reliable and comprehensive manner, in mutual confrontation of the state of the case, applicable legal norms and case-law. It indicated which provisions had been violated, which allegations of the complaint it considered justified and why. In the present case, the essence of the dispute essentially boiled down to determining whether the interest rate (9% p.a.) of the three loans concluded in 2013 for a maximum amount of EUR 2 million, EUR 115 million and EUR 43.5 million (in respect of which the total balance of liabilities as at 30 September 2014 amounted to almost PLN 623 million), which were granted to the Applicant by a related entity, was in line with market conditions, i.e. whether independent, rational entities would have agreed on an interest rate of that amount under comparable conditions. More generally, however, the issue in the case oscillated around so-called transfer pricing and generally – in view of the arguments now raised by the parties – boiled down to an assessment of whether, in fact, the procedure for estimating income [art. 11 of the AOP] had been conducted correctly, as the authority argued, or, as the Appellant and the Court argued, in breach of the provisions of the Act and the Ordinance.” “Referring in turn to the individual problems diagnosed by the WSA, it should be pointed out that this Court, taking into account the disposition arising from the content of Article 11(1) of the A.p.d.o.p., rightly emphasised that its application (in order to determine the income of a given entity and the tax due) requires a prior analysis of comparability. In order to determine what conditions would be set between independent entities, it is necessary to determine what transactions concluded by independent entities are comparable to the transaction assessed from the point of view of Article 11(1) of the A.l.t.d.o.p., which requires a prior comparability analysis. Such an analysis is always conducted, as it serves the purpose of determining whether the prerequisite for estimating income (and the tax due) under Article 11(1) of the A.l.t.c. has been fulfilled. This conclusion is also confirmed by the above-mentioned § 6(1) of the Ordinance, The comparability analysis precedes the assessment, regardless of the method of assessment that would ultimately be applied. On the other hand, § 21 of the Ordinance (Chapter 5) indicates how to estimate income in the case of the specific benefits specified therein (loan or credit). One must agree with the Court of First Instance that the application of Article 11(1) of the A.P.C. requires a prior comparability analysis in respect of the loans in question. A properly conducted comparability analysis should consist of the steps listed in § 6(4) of the Ordinance and establish the relevant comparability factors (§ 21(3) of the Ordinance, which uses the term “relevant circumstances relating to a particular case”) arising from § 6(3) and § 21(3) of the Ordinance.” “The point is that it is not a matter of carrying out any comparability analysis, but rather one consisting precisely of the steps listed in § 6(4) of the Ordinance and establishing the relevant comparability factors arising from § 6(3) and § 21(3) of the Ordinance. As the Court of First Instance aptly pointed out, § 6(4) lists the consecutive stages comprising the comparability analysis, of which the first two in particular include – a general analysis of information concerning the taxpayer and its economic environment (stage one) and an analysis of the terms and conditions established or imposed between related parties, in particular on the basis of the functions they perform, the assets involved and the risks incurred, as a result of which economically relevant factors in the circumstances of the case under review should be identified (stage two). In the realities of this case, the Court of First Instance correctly held that the authority, in its decision issued pursuant to Article 11(1) of the A.p.d.o.p. – taking into account the aforementioned provisions of the Ordinance – in carrying out the comparability analysis was obliged to carry out the individual stages and identify the relevant comparability factors, and this should have been appropriately reflected in the wording of the decision. And although one has to agree with the authority that the Regulation does not indicate the necessity of drawing up the analysis in the ...

Italy vs BASF Italia s.p.a., June 2022, Supreme Court, Cases No 19728/2022

The German BASF group is active in the chemical industry and has subsidiaries all over the world including Italy. In FY 2006 BASF Italia s.p.a. was served with two notices of assessment by the tax authorities. The tax assessments formulated three findings. 1. non-deductibility of the cancellation deficit – arising from the merger by incorporation of Basf Agro s.p.a. into Basf Italia s.p.a., resolved on 27 April 2004 – which the acquiring company had allocated to goodwill, the amortisation portions of which had been deducted in tenths and then, from 2005, in eighteenths. The Office had denied the deductibility on the ground that the company, in the declaration submitted electronically, had not expressly requested, as required by Article 6(4) of Legislative Decree No. 358 of 8 October 1997, the tax recognition of the greater value of goodwill recorded in the balance sheet to offset the loss from cancellation, as allowed by paragraphs 1 and 2 of the same provision. Moreover, as a subordinate ground of non-deductibility, the assessment alleged the unenforceability to the Administration of the same merger pursuant to Article 37-bis of Presidential Decree No 600 of 29 September 1973, assuming its elusive nature. 2. non-deductibility of the annulment deficit – arising from the merger by incorporation of Basf Espansi s.p.a. into Basf Italia s.p.a., resolved in 1998 – which the acquiring company had allocated partly to goodwill and partly to the revaluation of tangible fixed assets, the depreciation portions of which had been deducted annually. The Office, also in this case, had denied the deductibility due to the failure to express the relative option, pursuant to Article 6(4) of Legislative Decree No. 358 of 1997, in the company’s declaration. 3. non-deductibility of interest expenses arising from a loan obtained by the taxpayer to carry out the transactions above. The Provincial Tax Commission of Milan partially upheld BASF’s appeals against the tax assessments, upholding the latter limited to the finding referred to in the second finding, concerning the non-deductibility of the cancellation deficit arising from the merger by incorporation of Basf Espansi s.p.a.. The Lombardy CTR, accepted the first and rejected the second, therefore, in substance, fully confirming the tax assessments. BASF then filed an appeal with the Supreme Court against the judgment, relying on seven pleas. The sixth plea related to lack of reasoning in the CTR judgement in regards of non-deductibility for interest expenses arising from the intra group loan. Judgement of the Supreme Court The Supreme Court found that the (first and) sixth plea was well founded and remanded the judgement to the CTR, in a different composition. Excerpts “7. The sixth plea in law criticises, pursuant to Article 360(1)(3) of the Code of Civil Procedure, the judgment under appeal for breach of Article 110(7) of Presidential Decree No 917 of 1986, in so far as the CTR held that the interest expense incurred by the appellant in connection with the loan obtained from another intra-group company for the purchase of the share package of Basf Agro s.p.a. was not deductible. The plea is well founded. In fact, the CTR reasoned on this point solely by stating that the deduction was ‘held to be inadmissible on the basis of the thesis underlying the contested assessment, that is, the intention to evade tax’. Such ratio decidendi is limited to the uncritical mention of the Administration’s thesis, which, however, as far as can be understood from the concise wording used by the CTR, does not relate to the financing in itself, but to the transaction, referred to in the first relief, in which it was included. A transaction whose evasive nature was not even appreciated by the CTR, the question having been absorbed by the non-deductibility, for other reasons, of the negative component arising from the merger by incorporation of Basf Agro.” Click here for English translation Click here for other translation Italy vs BASF SC June 2022 ...

Norway vs Petrolia Noco AS, May 2022, Court of Appeal, Case No LB-2022-18585

In 2011, Petrolia SE established a wholly owned subsidiary in Norway – Petrolia Noco AS – to conduct oil exploration activities on the Norwegian shelf. From the outset, Petrolia Noco AS received a loan from the parent company Petrolia SE. The written loan agreement was first signed later on 15 May 2012. The loan limit was originally MNOK 100 with an agreed interest rate of 3 months NIBOR with the addition of a margin of 2.25 percentage points. When the loan agreement was formalized in writing in 2012, the agreed interest rate was changed to 3 months NIBOR with the addition of an interest margin of 10 percentage points. The loan limit was increased to MNOK 150 in September 2012, and then to MNOK 330 in April 2013. In the tax return for 2012 and 2013, Petrolia Noco AS demanded a full deduction for actual interest costs on the intra-group loan to the parent company Petrolia SE. An assessment was issued by the tax authorities for these years, where the interest deductions had been partially disallowed. The assessment for these years was later upheld in court. For FY 2014, 2015 and 2016, Petrolia Noco AS had also claimed a full deduction for actual interest costs on the entire intra-group loan to the parent company. It is the assessment for these years that is the subject of dispute in this case. The assessment was first brought to the Court of Oslo where a decision in favour of the tax authorities was issued in November 2021. This decision was appealed by Petrolia Noco AS to the Court of Appeal. Judgement of the Court The Court of Appeal dismissed the appeal and decided in favour of the Norwegian tax authorities. Excerpts “The Court of Appeal also agrees with the state that neither the cost plus method nor a rationality analysis can be considered applicable in this case. With the result the Court of Appeal has reached so far, the CUP method should be preferred – in line with the OECD guidelines. After this, in summary, it appears clear that the interest margin on the intra-group loan is significantly higher than in a comparable and independent market and thus not an arm’s length price. The higher interest implies a reduction in the appellant’s income, cf. Tax Act section 13-1 first paragraph. The Court of Appeal cannot see that the adjustments claimed by the appellant change this. In the Court of Appeal’s view, it is also clear that the reduction in income has its cause in the community of interest. Whether adjustments should be made to the basis of comparison at the time of the price change, the Court of Appeal comes back to when assessing the exercise of discretion. Consequently, there was access to a discretionary determination of the appellant’s income according to Section 13-1 first paragraph of the Tax Act, also with regard to the interest margin.” “In the Court of Appeal’s view, additional costs that would have been incurred by independent parties, but which are not relevant in the controlled transaction, must be disregarded. Reference is made to the OECD guidelines (2020) point C.1.2.2, section 10.96: In considering arm’s length pricing of loans, the issue of fees and charges in relation to the loan may arise. Independent commercial lenders will sometimes charge fees as part of the terms and conditions of the loan, for example arrangement fees or commitment fees in relation to an undrawn facility. If such charges are seen in a loan between associated enterprises, they should be evaluated in the same way as any other intra-group transaction. In doing so, it must be borne in mind that independent lenders’ charges will in part reflect costs incurred in the process of raising capital and in satisfying regulatory requirements, which associated enterprises might not incur. The decisive factor is whether the costs or rights that the effective interest margin in the observed exploration loans between independent parties is an expression of, are also relevant in the intra-group loan. As far as the Court of Appeal understands, the appellant does not claim that various fees or costs incurred in exploration loans from a bank have been incurred in the intra-group loan, and in any case no evidence has been provided for this. In the Court of Appeal’s view, such costs and fees are therefore not relevant in the comparison. The appellant, on the other hand, has stated that the loan limit that Petrolia SE had made available, and the fact that the loan limit was increased if necessary, means that a so-called “commitment fee”, which accrues in loans between independent parties where an unused credit facility is provided, must be considered built into the agreed interest rate. In the Court of Appeal’s view, Petrolia SE cannot be considered to have had any obligation to make a loan limit available or to increase the loan limit if necessary. It appears from the loan agreement point 3.2 that the lender could demand repayment of the loan at its own discretion. The appellant has stated that this did not entail any real risk for the borrower. It is probably conceivable that Petrolia SE did not intend for this clause to be used, and that the appellant had an expectation of this. In this sense, it was a reality in the loan framework. However, it is clear, and acknowledged by the appellant, that the point of financing the appellant through loans rather than higher equity was Petrolia SE’s need for flexibility. Thus, it appears to the Court of Appeal that it is clear that the appellant had no unconditional right to the unused part of the loan limit. The Court of Appeal therefore believes that the Board of Appeal has not made any mistakes by comparing with nominal interest margins. On this basis, the Court of Appeal can also see no reason why it should have been compared with the upper tier of the observed nominal interest margins in the exploration loans between independent parties. In ...

Chile vs Avery Dennison Chile S.A., May 2022, Court of Appeal, Case N° Rol: 99-2021

The US group, Avery Dennison, manufactures and distributes labelling and packaging materials in more than 50 countries around the world. The remuneration of the distribution and marketing activities performed Avery Dennison Chile S.A. had been determined to be at arm’s length by application of a “full range” analysis based on the resale price minus method. Furthermore, surplus capital from the local company had been placed at the group’s financial centre in Luxembourg, Avery Management KGAA, at an interest rate of 0,79% (12-month Libor). According the tax authorities in Chile the remuneration of the local company had not been at arm’s length, and the interest rate paid by the related party in Luxembourg had been to low, and on that basis an assessment was issued. A complaint was filed by Avery Dennison with the Tax Tribunal and in March 2021 the Tribunal issued a decision in favour of Avery Dennison Chile S.A. “Hence, the Respondent [tax authorities] failed to prove its allegations that the marketing operations carried out by the taxpayer during the 2012 business year with related parties not domiciled or resident in Chile do not conform to normal market prices between unrelated parties..” “Although the OECD Guidelines recommend the use of the interquartile range as a reliable statistical tool (point 3.57), or, in cases of selection of the most appropriate point of the range “the median” (point 3.61), its application is not mandatory in the national tax administration…” “the Claimant [taxpayer]carried out two financing operations with its related company Avery Management KGAA, domiciled in Luxembourg, which contains one of the treasury centres of the “Avery Dennison” conglomerate, where the taxpayer granted two loans for US $3.200.000.- in 2010 and another for US $1.1000.000.- in 2011.” “In relation to the financial transactions, the transfer pricing methodology used and the interests agreed by the plaintiff have been confirmed. Consequently, Assessment No. 210, dated 30 August 2016, should be annulled and, consequently, this Tax and Customs Court will uphold the claim presented in these proceedings.” An appeal was then filed by the tax authorities. Judgement of the Court of Appeal The Court upheld the decision of the Tax Tribunal and set aside the assessment issued by the tax authorities. Excerpts “(…) Fourth: That the OECD regulations – while article 38 of the LIR was in force – should be understood as a guide with indications or suggestions for determining prices assigned between related parties with respect to those charged between independent parties. The aim is to eliminate distortions that may arise between companies with common ownership and to respect market rules. Notwithstanding the above recognition, Article 38 of the LIR regulated transfer prices and even though its normative content was minimal and insufficient to provide an adequate response on the matter, its text must be followed for the purposes of resolving the conflict in question, especially if one considers that the third paragraph of the provision states that when prices between related companies are not in line with the values charged between independent companies for similar transactions, “the Regional Directorate may challenge them, taking as a reference basis for such prices a reasonable profitability for the characteristics of the transaction, or the production costs plus a reasonable profit margin. The same rule shall apply with respect to prices paid or owed for goods or services provided by the parent company, its agencies or related companies, when such prices do not conform to normal market prices between unrelated parties, and may also consider the resale prices to third parties of goods acquired from an associated company, minus the profit margin observed in similar operations with or between independent companies”. The following paragraph adds that if the company does not carry out the same type of operations with independent companies, the Regional Directorate “may challenge the prices based on the values of the respective products or services on the international market (…) for this purpose (…) it shall request a report from the National Customs Service, the Central Bank of Chile or the bodies that have the required information”. It can be inferred from the transcribed rule that the use of external comparables is only authorised if the company does not carry out any type of transaction of goods and services with independent companies; that the challenge must be well-founded; and that the taxpayer and the SII are free to use the method that seems most appropriate to them as long as the legal requirements are met. It is also relevant to note that the domestic regulations at that date did not contemplate all the methods included in the OECD guidelines and it is inappropriate, under article 38 of the LIR, to resort directly to such guidelines in respect of situations not provided for in the domestic regulations, i.e., in relation to methods not included in the aforementioned provision. An interpretation contrary to the above would infringe the principle of legality of taxes or legal reserve, according to which only the law can impose, eliminate, reduce or condone taxes of any kind or nature, establish exemptions or modify existing ones and determine their form, proportionality or progress. Fifth: That the contested act shows that the method used by the SII for the entire period under review, business year 2012, corresponds to the so-called “Transactional Net Margin Method” for marketing operations, and the ” Comparable Uncontrolled Price Method” for financial operations, The Court therefore agrees with the findings of the lower court in grounds 22 to 25 of the judgment under review regarding the lack of the necessary grounds for the administrative act, in that the tax authority, although obliged to do so, omitted to analyse the transactions in accordance with the legislation in force at the date on which they were carried out…” Click here for English translation Click here for other translation Chile vs Avery Dennison Chile May 2022 ...

Poland vs D. Sp. z oo, April 2022, Administrative Court, Case No I SA/Bd 128/22

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 ...

Japan vs Universal Music Corp, April 2022, Supreme Court, Case No 令和2(行ヒ)303

An intercompany loan in the form of a so-called international debt pushdown had been issued to Universal Music Japan to acquire the shares of another Japanese group company. The tax authority found that the loan transaction had been entered for the principal purpose of reducing the tax burden in Japan and issued an assessment where deductions of the interest payments on the loan had been disallowed for tax purposes. The Tokyo District Court decided in favour of Universal Music Japan and set aside the assessment. The Court held that the loan did not have the principle purpose of reducing taxes because the overall restructuring was conducted for valid business purposes. Therefore, the tax authorities could not invoke the Japanese anti-avoidance provisions to deny the interest deductions. In 2020 the decision of the district court was upheld by the Tokyo High Court. The tax authorities then filed an appeal with the Supreme Court Decision of the Court The Supreme Court dismissed the appeal and set aside the assessment of the tax authorities. “The term “economic rationality” is used to refer to the economic rationality of a series of transactions. In examining whether or not the entire series of transactions lacks economic rationality, it is necessary to consider (i) whether the series of transactions is unnatural, such as being based on procedures or methods that are not normally assumed or creating a form that deviates from the actual situation, and (ii) whether there are other rational reasons for such a reorganisation other than a decrease in tax burden. (iii) Whether there are any business objectives or other reasons other than a reduction in the tax burden that would constitute a rational reason for such a reorganisation.” “However, the borrowings in question were made under an agreement to be used solely for the purchase price of the shares of the domestic corporations in question and related costs, and in fact the appellant acquired the shares and brought the domestic corporations under its control, and there is no indication that the amount borrowed was unreasonably high in relation to its intended use. In addition, the interest and repayment period of the loan were determined based on the expected profit of the appellant, and there is no evidence that the appellant is currently experiencing any difficulty in paying the interest on the loan. It is therefore difficult to say that the above points make the borrowing unnatural or unreasonable. (d) Considering the above circumstances as a whole, the borrowing in question cannot be said to be unnatural or unreasonable from an economic and substantive standpoint, i.e. to lack economic rationality. Therefore, the borrowing in question does not fall within the scope of Article 132(1) of the Corporate Tax Act, which states that “the borrowing is deemed to result in an unreasonable decrease in the corporate tax burden if it is permitted”.” Click here for English Translation Click here for other translation Japan vs Universal Music SC ...

Portugal vs “A S.A.”, March 2022, CAAD – Administrative Tribunal, Case No : 213/2021-T

A S.A. is 51% owned by B SA and 49% by C Corp. A S.A is active in development of energy efficiency projects. In 2015 A S.A took out loans from B and C at an annual interest rate of 3.22xEuribor 12 months, plus a spread of 14%. A S.A had also paid for services to related party D. The tax authorities issued an assessment related to the interest rate on the loan and the service purportedly received and paid for. A complaint was filed by A S.A. with the Administrative Tribunal (CAAD). Judgement of the CAAD The complaint of A S.A was dismissed and the assessment upheld. Excerpts regarding the interest rate “Now, regarding the first argument, it falls immediately by the base, since the Applicant has not proved that it had made any effort to finance itself with the bank and that this effort was unsuccessful. On the contrary, it seems to result from the request for arbitration award that the Claimant and its shareholders have immediately assumed that, given the financial situation that the country was still experiencing in 2014, any request for financing made by a newly created entity and without business expectations would be rejected outright by all banks. For that reason, the Claimant did not prove, nor could it, that the interest it contracted with its shareholders was more favourable to it than what the banks would demand from it. In short, it cannot but be stated that, in view of this, the Defendant could not assume any other position than to investigate whether the shareholders of the Claimant had taken advantage of the socio-financial context of the country to contract a fixed spread of 14%. … As the Respondent summarized very well in its allegations (no. 58) That is, if an independent bank agreed to provide financing to the Claimant, of similar amount and term to the shareholder loans, remunerated at an annual nominal interest rate (TAN) calculated according to the monthly average of the 6-month Euribor rate of the previous month, plus a spread of 3 percentage points, then nothing justifies that the partners require from the company a remuneration for the shareholder loans that includes a spread of 14 percentage points.” Excerpts regarding the services “But it was not only the formal issue that justified the position of the AT and that leads this Court to agree with it. The absence of material evidence that the work had been performed is further compounded by the fact that, during the inspection, the AT found invoices (which the Claimant has registered in its accounts under account “62213 – Specialized work”), issued by the accounting firm “H…, Lda, as well as other “Specialized work”, for services related to the execution and management of the contracts, issued by suppliers B… and I…, which indicates that entities other than D… were involved in the provision of services. The management services for the … and of …, which were ongoing in 2017, and whose invoicing started that year, were performed by B… and I… and not by D… . Thus, the association of all the facts necessarily leads to the non-deductibility of D…’s invoice, since it was up to the Claimant to prove that the work was performed by D… and it failed to do so. As recently decided by the South Administrative Central Court in its ruling of 27 May 2021 in case no. 744/11.1BELRA (available at www.dgsi.pt) I- Invoices are not only relevant documents for the purpose of exercising the right to deduct, but also relevant for the purpose of exercising the AT’s control powers. II- There is no hierarchy between the various requirements imposed on invoices. III- The CJEU has held that the right to deduct is admissible even if some formal requirements are not met by invoices, provided that the material situation is demonstrated. IV- The failure to scrupulously comply with the formalities required in terms of issuing invoices may not compromise the exercise of the right of deduction, provided that the substantive requirements have been complied with and that the AT has all the elements to substantively characterise the transaction, it being understood that the burden of proof will rest with the taxable person. V- As no documentary evidence has been submitted containing a content that enables the gaps in the invoices to be overcome, the right to deduct is not admissible. Therefore, as the Claimant has not complied with the provisions of nos. 3 and 4 of article 23 of the CIRC, by virtue of paragraph c) of no. 1 of article 23-A, the invoice for the provision of services in the amount of €30,000.00, which determines the correction of the taxable income in that amount, cannot be deductible.” “Based on these grounds, the Court decides to consider the request made by the Claimant as totally unfounded” Click here for English translation Click here for other translation CAAD - Jurisprudência 23 March 2022 ...

Norway vs ConocoPhillips Skandinavia AS, March 2022, Court of Appeal, Case No LG-2021-38180

ConocoPhillips Skandinavia AS (COPSAS) is a wholly owned subsidiary of the Norwegian branch of ConocoPhillips Norway, which is registered in Delaware, USA. ConocoPhillips Norway, which does not conduct special taxable business, is a wholly owned company in the ConocoPhillips Group. The group’s headquarters are in Houston, Texas, USA. The question at issue was whether the interest rate on a loan had been set too high, thus resulting in a reduction of the taxable income of COPSAS. In May 2013, COPSAS entered into a loan agreement with the related company ConocoPhillips Norway Funding Ltd (COPN Funding). The loan had a limit of NOK 20 billion and a term of 5 years. The agreed interest rate was NIBOR 6M + 1.25%. NIBOR 6M is a current interest rate (benchmark interest rate), while 1.25% is a fixed interest rate – the so-called «interest margin». The interest margin of 1.25% corresponds to 125 so-called basis points (bp). The loan facility was primarily established to finance investments in two fields on the Norwegian continental shelf, where the company is the operator. From previous years, the company has had several long-term loans in USD and NOK with an interest margin of 37.5 bp above a reference interest rate of either LIBOR or NIBOR. The loans have previously been rolled out and renewed for five years at a time. The interest margin of 37.5 bp was fixed. With effect from 27 October 2015, the loans in USD were combined into one loan in NOK. The interest margin of 37.5 bp was continued. The company’s loan of May 2013 did not replace any previous loans. The fixed interest margin of 1.25% on the company’s borrowing limit of May 2013 had been based on an interest rate analysis prepared by PwC in connection with the borrowing (“Intercompany interest rate analysis”, hereinafter the “interest rate analysis”) on 3 May 2013. On 8 March 2019, the Oil Tax Office issued a decision where the interest rate of the May 2013-loan was set at NIBOR 6M + 75 bp. This led to the following conclusion: «The determinations for the income years 2013-2017 are changed accordingly by ConocoPhillips Skandinavia AS’ interest expenses on interest-bearing debt being reduced by the following amounts: Income year 2013: NOK 27,875,000 Income year 2014: NOK 52,487,500 Income year 2015: NOK 70,972,223 Income year 2016: NOK 71,909,445 Income year 2017: NOK 63,777,778 » The Court of Appeal notes that when basis points are discussed in the following, reference is made to basis points beyond 6 months NIBOR, unless otherwise specified. The reason for this is that the borrowing rate is agreed as NIBOR 6M + 125 bp. COPSAS filed a lawsuit with the District Court where the decision issued by the tax authorities was upheld. COPSAS then filed an appeal with the Court of Appeal. Judgement of the Court of Appeal The Court dismissed the appeal and decided in favour of the Norwegian tax authorities. Excerpts “The Court of Appeal further points out that COPSAS has on average used around half the borrowing limit, and that the borrowing limit of NOK 20 billion was mostly used to borrow NOK 14 billion. Although it was not clear at the time of entering into the agreement how large a part of the loan framework was to be used, there is much to suggest that if it had been a loan between independent parties, COPSAS would not have taken out a loan of NOK 20 billion and paid for flexibility , when it has been shown that only a limited part of the borrowing limit was used. The Court of Appeal also points out that the loan agreement contains a clause on interest rate adjustment if COPSAS changes its “credit standing” during the term. This means that the agreement allows the interest rate to be adjusted if the loan is drawn up in full, and this can thus also reduce the value of the opportunity to use the entire loan framework. The question then is whether it should be adjusted for swap, ie currency risk. The experts, Hoddevik and Steen, explained why it is appropriate for companies operating on the Norwegian continental shelf to also borrow money in Norwegian kroner. There will be an extra risk if the companies borrow in dollars, when other income and expenses, including tax, are calculated in kroner. At the same time, a loan of the magnitude relevant in this case must be raised in the international dollar market. The Norwegian bond market is too small for it to be relevant to borrow such amounts in the Norwegian bond market. If COPSAS had borrowed in the market, they would therefore have had to take out a loan in dollars and pay a premium for the loan to be converted to Norwegian kroner. The various interest rate indices referred to do not take swap into account, but are based on loans taken out in the same currency in which they are to be repaid. The Court of Appeal points out that no consideration has been agreed for this component either, and that it can indicate that the parties have considered that no swap costs should be calculated. One view is that for the lender, COPN Funding, the exchange risk can go both ways, ie that it is basically coincidental whether there is a gain or a loss by the lender operating in the dollar market, while lending in kroner. When it is an intra-group loan, there is no basis for calculating consideration for swap as losses and gains are within the group. As emphasized by the State, compensation for counterparty risk is then not relevant. The Court of Appeal refers here to LG-2016-92595, the Hess judgment, The Court of Appeal considers that when the loan has been raised in Norwegian kroner and is to be repaid in Norwegian kroner, no adjustments shall be made as if the loan had been agreed in dollars, which would then be paid out and repaid in Norwegian kroner. In the same way ...

Portugal vs “A SGPS S.A.”, March 2022, CAAD – Administrative Tribunal, Case No : P590_2020-T

A SGPS S.A. is the parent company of Group A. In 2016, a subsidiary, B S.A., took a loan in a bank, amounting to 1,950,000.00 Euros, and incurred interest costs and Stamp Tax. However, the majority of the loan, an amount of €1,716,256.60, was transferred as an interest free loan to A SGPS S.A. The tax authorities issued an assessment related to costs incurred on the loan and deducted by B S.A. The tax authorities disallowed B S.A.’s deduction of the costs as they were not intended to protect or obtain income, and therefore did not meet the requirements for deductibility under the general provisions of the Tax Code; A complaint was filed by A SGPS S.A. with the Administrative Tribunal. According to A SGPS SA the tax authorities did not justify why it considered that the expenses incurred by B S.A. to an independent bank for a loan that was passed on to the parent company were not deductible. According to A SGPS SA, this was not an issue of requirements for deductibility , but rather a question of transfer pricing. Hence, the correct framework for an adjustment would be that of article 63 regarding pricing of controlled transactions and not the general provisions in Article 23 of the Tax Code. Therefore the tax authorities had erred in law. Judgement of the CAAD In regards of B S.A.s deductions of loan expenses, the complaint of A SGPS S.A was dismissed and the assessment upheld. According to the tribunal, expenses held by a subsidiary to grant a loan to a parent company could not be said to “protect or obtain income” of the subsidiary since it did not own the parent company. “…the basic rule of deductibility of expenses is stated in article 23, no. 1 of the IRC Code, which, in its normative hypothesis, contains the respective constitutive assumptions, of a substantive nature, requiring a connection between the expenses and the activity generating income subject to IRC. Note that this is not a requirement of a direct causal relation between expenses and income (see Judgments of the Supreme Administrative Court of 24 September 2014, Case No. 0779/12; of 15 November 2017, Case No. 372/16; and of 28 June 2017, Case No. 0627/16, of 28 June 2017 ). The latter judgement considers “definitively ruled out a finalistic view of indispensability (as a requirement for costs to be accepted as tax costs), according to which a cause-effect relation, of the type conditio sine qua non, between costs and income would be required, so that only costs for which it is possible to establish an objective connection with the income may be considered deductible”. The causal connection should be made between the expenses and the activity globally considered (going beyond the strict expense-income nexus), and the Administration cannot assess the correctness, convenience or opportunity of the business and management decisions of the corporate entities. As highlighted by the Judgment of the Supreme Administrative Court of 21 September 2016, Case No. 0571/13 “[t]he concept of indispensability of costs, to which article 23 of the CIRC refers, refers to the costs incurred in the interest of the company or supported within the scope of the activities arising from its corporate scope”. On the other hand, this construction requires a link of subjective imputation that is implicit in the relationship required between the expense and the activity. This link must be made with the specific activity of the taxpayer and not with any other activity, namely that of its partners or third parties. It is in this framework that the corrections under analysis are based and not on the transfer pricing regime (see article 63 of the IRC Code), or on the “anti-abuse” regime, for which reason the assessment of the latter does not belong here. The Court is limited to the knowledge of the reasons expressed in the contemporaneous grounds of the tax act and if a correction has several valid grounds, only those that have been invoked as grounds for the contested act may be assessed. In this case, the only basis of the addition to the taxable amount of the deducted financial costs respects to the non-compliance of the assumptions of article 23, no. 1 of the Corporate Income Tax Code. As the conditions that integrate the normative hypothesis are not met, one cannot but validly conclude, together with the Defendant, that the deduction is not admissible. This, without prejudice to the fact that the factual situation may possibly be subject to a concurrent framework in other rules, which, as said, it is not for us to assess if they are not part of the foundations of the tax acts. The point is that the legal-tax regime effectively applied is based on correct legal and factual assumptions. … Taking into account the criterion described, the granting of free loans by B…, S.A. to the parent company [the Claimant] does not appear susceptible of being regarded as an activity of management of a financial asset by the former, since it is not the latter that holds shares in the parent company, but the opposite. In effect, there is no asset of which B…, S.A. is the holder that underlies this financing operation to the parent company. Nor can the argument regarding the exercise of significant influence over management, usually measured (in relation to subsidiary companies) by a percentage holding of at least 20%, be invoked in these circumstances to judge that the interest in the investment has been verified. Here, the significant influence is exercised in the opposite direction, since the parent company holds 92% of the capital of the Claimant. Therefore, it is concluded that the non-interest bearing financing granted by B…, S.A. to the Claimant are not carried out within the scope of the activity of the former and in its economic interest, so, in agreement with the Defendant, the financial costs incurred do not pass the test of the necessary causal relation between the expenses incurred and the activity of ...

Austria vs C-Group, March 2022, Bundesfinanzgericht, Case No RV/7102553/2021

C is the parent company of the C-group which is involved in the construction business. C is part of a joint venture and for the expansion of these activities a framework agreement on shareholder loans was concluded. Under the agreement two shareholder loans were granted: ***loan*** II totalling 212,935,716.33 euros and ***loan*** III totalling 446,000,000 euros. At issue is whether (***loan*** II and ***loan*** III) are to be regarded as hidden equity capital or debt capital. In regards of loan II a binding ruling had previously been issued stating that the loan was hidden equity. C took the position that both loan II and loan III were to be treated for tax purposes as equity capital. Following an audit the tax authorities assessed both shareholder loans as debt capital and added interest income to the taxable income of C. In regards of the binding ruling previously issued, the authorities stated that the underlying facts had changed to such an extend that the ruling was no longer binding. The court of first instance held in favour of C, and an appeal was then filed by the tax authorities. Judgement of the Court The court upheld the decision of the court of first instance and found that the shareholder loans should be treated as hidden equity capital. Excerpts Loan II “Pursuant to § 118 (7) BAO, there is a legal claim that the assessment under tax law made in the information notice is used as a basis for the levying of the tax if the actual facts do not or only insignificantly deviate from those on which the information notice was based. It is certain that the complainant was issued a legally binding information notice in connection with the interest on the shareholder loan ***loan*** II. This information notice confirms that the loan granted has the character of hidden equity capital; an interest calculation for income tax purposes can therefore be omitted. It is also clear that the facts on which the tax office based the information notice have not changed. However, the tax authority now assumes that the factual elements on which the legal assessment of the information notice was based, and which were actually realised, were irrelevant for the assessment of the hidden equity in the present case.” Loan III “The separation principle is derived from the legal personality of a corporation, which allows for tax-effective service relationships between the shareholder and the corporation (cf. e.g. VwGH 28.04.2011, 2007/15/0031). The limit of the separation principle is the arm’s length principle (cf. Raab/Renner in Lachmayer/Strimitzer/Vock (eds.), Die Körperschaftsteuer (KStG 1988) (32nd ed. 2019) § 8 marginal no. 146). In connection with the granting of shareholder loans, conditions that are not arm’s length speaks in favour of hidden equity (cf. e.g. Ressler/Stürzlinger in Lang/Rust/Schuch/Staringer (eds.) KStG2 (2016) § 8 marginal no. 47). Conditions that are not customary for third parties speak against the existence of a genuine or serious shareholder loan (cf. e.g. VwGH 14.12.2000, 95/15/0127; 26.07.2006, 2004/14/0151). In the opinion of the authority concerned, only the lack of interest speaks in favour of the shareholder loan not being customary for third parties. A single indication was not sufficient to reclassify a shareholder loan as hidden equity. On the other hand, the subjective intention to repay the loan was to be regarded as the basis for the assumption that the loan was in fact debt and not equity. The fact that subjectively there was already an intention to repay at the time the shareholder loan was granted is not questioned in principle by the complainant, who himself points out in justification of the chosen model that a greater flexibility for a possible later repayment should be ensured. In addition, the chosen construction can also be explained on the basis of the company law legislation of ***Land***, according to which a repayment of equity capital is only possible in the context of a capital reduction or in the event of liquidation (cf. the legal opinion submitted on 22 February 2022). For the Federal Supreme Finance Court it is clear that the shareholder loan ***loan*** III was not granted at arm’s length (see in detail the explanations and assessment of the circumstantial evidence as part of the evaluation of the evidence). Thus, in the opinion of the Federal Fiscal Court, there is no shareholder loan to be recognised for tax purposes, but hidden equity. Since no interest is to be paid on equity capital (for tax purposes), the appeal is to be upheld on this point and the interest payment made by the authorities is to be reversed.” Click here for English translation Click here for other translation Austria vs Capital AG 136078.1.1 ...

Italy vs Mauser S.p.A., February 2022, Supreme Court, Case No 6283/2022

Following an audit, Mauser S.p.A. received four notices of assessment relating to the tax periods from 2004 to 2007. These notices contested, in relation to all tax periods, the elusive purpose of a financing operation of Mauser S.p.A. by the non-resident parent company, as it was aimed at circumventing the non-deductibility of interest expense pursuant to Article 98 pro tempore of Presidential Decree No. 917 of 22 December 1986 (TUIR) on the subject of thin capitalisation. The loan, which began in 2004, had resulted in the recognition of €25,599,000.00 among other reserves, indicated as a payment on account of a future capital increase, as well as €55,040,474.29 as an interest-bearing shareholder loan, the latter of which was subsequently partly waived and also transferred to reserves. The loan had also contributed to the generation of losses in the years in question, which had been covered through the use of the aforementioned reserve (as a reserve), whose interest paid to the parent company had then been deducted from taxable income. According to the tax authorities the payment on account of a future capital increase constituted a financial debt towards the sole shareholder and not (as indicated by the taxpayer) a capital contribution, which therefore would not have contributed to the determination of the relevant net equity pursuant to Article 98 TUIR; as a result, the equity imbalance between loans and adjusted net equity pursuant to Article 98, paragraphs 1 and 2, letter a) TUIR pro tempore (net equity increased by the capital contributions made by the shareholder) would have been configured. Consequently, the tax authorities had concluded that the financing transaction as a whole was elusive in nature, as it was of a financial nature and aimed at circumventing the prohibition of the remuneration of the shareholders’ loan in the presence of the thin capitalisation requirements. With the notice relating to the 2006 tax year, Mauser S.p.A. was also charged with a second finding, relating to the infringement of the transfer pricing provisions pursuant to Article 110, paragraph 7 in relation to transactions involving the sale of intra-group assets. The tax authorities, while noting that Mauser S.p.A. had used the cost-plus computation method for the purpose of the correct application of the OECD rules on transfer pricing, had observed that following the merger of Gruppo Maschio SPA – for whose acquisition the above mentioned financing was intended – a merger deficit had resulted, partly allocated to goodwill of the target company. The tax authorities considered that the portion of goodwill amortisable for the year 2006 should be included in the cost base, increasing the percentage of overhead costs as a percentage of production costs, contributing to increase the total cost for the purpose of determining the arm’s length remuneration. Mauser S.p.A. raised preliminary issues relating to the breach of the preventive cross-examination procedure and the forfeiture of the power of assessment, considering the provision of Article 37-bis of Presidential Decree No. 600 of 29 September 1973 to be inapplicable to the case at hand, and also considering the existence of valid economic reasons consisting in the purpose of the acquisition of the company, which was then effectively merged. He then deduced that the method of calculating the transfer prices was erroneous insofar as the Office had included the amortisation quota of the goodwill allocated to the merger deficit. The C.T.P. of Milan upheld the merits of the joined appeals of Mauser S.p.A. An appeal was then filed by the tax authorities and in a ruling dated 19 May 2015, the Lombardy Regional Administrative Court decided in favour of the tax authorities, holding that the loans “were not used in accordance with the rules envisaged in such cases, but were instead used to cover the company’s losses”, and then held that the transfer price recovery was also correct, on the assumption that the amortisation of goodwill was legitimate. Mauser S.p.A. then filed an appeal with the Supreme Court, relying on six grounds. In the first ground of appeal Mauser S.p.A. points out that the grounds of the judgment do not contain adequate evidence of the logical path followed, also in view of the failure to transcribe the judgment at first instance and the arguments of the parties, as well as the statement of the facts of the case. Mauser S.p.A. observes that the confirmation of the finding as to the evasive nature of the financing transaction shows mere adherence to the position of one of the parties to the proceedings without any statement of reasons, nor does it consider what the regulatory provisions subject to assessment would be in relation to both profiles. It also observes how the reasoning relating to the confirmation of the transfer pricing relief refers to facts other than those alleged by the Office. Judgement of the Supreme Court The Supreme Court upheld the first ground of appeal and declared the other grounds of appeal to be absorbed; set aside the judgment under appeal and refered the case back to the Lombardy Regional Administrative Court, in a different composition. Excerpts “The first ground is well founded, agreeing with the conclusions of the Public Prosecutor. The two recoveries made by the Office presuppose – the first – the qualification (for the purposes of the financial imbalance referred to in Art. The two recoveries made by the Office presuppose – the first – the classification (for the purposes of the financial imbalance referred to in Article 98 TUIR pro tempore) of the future capital contribution made by the sole shareholder of the taxpayer company as a debt item and not as a capital reserve item (entered among the other reserves), a fundamental circumstance for the purposes of considering whether or not it contributes to the portion of adjusted shareholders’ equity ‘increased by the capital contributions made by the same shareholder’, capable of constituting the financial imbalance referred to in Article 98 TUIR cited above. Similarly (considering that the Office has moved in the direction of an overall elusive activity), proof is ...

South African Revenue Service releases comprehensive Interpretation Note on intra-group loans

The South African Revenue Service (SARS) has published a comprehensive Interpretation Note on intra-group loans. The note provides taxpayers with guidance on the application of the arm’s length principle in the context of the pricing of intra-group loans. The pricing of intra-group loans includes a consideration of both the amount of debt and the cost of the debt. An intra-group loan would be incorrectly priced if the amount of debt funding, the cost of the debt or both are excessive compared to what is arm’s length. The Note also provides guidance on the consequences for a taxpayer if the amount of debt, the cost of debt or both are not arm’s length. The guidance and examples provided are not an exhaustive consideration of every issue that might arise. Each case will be decided on its own merits taking into account its specific facts and circumstances. The application of the arm’s length principle is inherently of a detailed factual nature and takes into account a wide range of factors particular to the specific taxpayer concerned. LAPD-LPrep-Draft-2022-04-Draft-IN-on-intragroup-loans-11-February-2022 ...

Austria vs “ACQ-Group”, February 2022, Bundesfinanzgericht, Case No RV/7104702/2018

“ACQ-Group” had acquired the shares in foreign subsidiaries and financed the acquisition partially by intra group loans. Furthermore, in the years following the acquisition, goodwill amortisations were deducted for tax purposes. The tax authorities issued an assessment where the interest rate on the loans had been reduced, and where costs related to external financing and amortisations of acquired goodwill had been denied. An appeal was filed by “ACQ”. Decision of the Federal Tax Court Before the judgment was delivered the appeal filed by “ACQ” in regards of the interest rate on the intra group loans was withdrawn. “***Firma*** Services GmbH pays interest of a non-variable 9% p.a. to the affiliated (grandparent) company ***6*** for an intercompany loan (“Intercompany Loan”). As stated in the statement of facts in the enclosure, the high difference between the intercompany loan interest rate and the arm’s length interest rate is a clear violation of the arm’s length principle as defined in the OECD Transfer Pricing Guidelines and the current case law of the Administrative Court. The payments exceeding the arm’s length interest rates constitute a hidden distribution.” The Court partially upheld the appeal and amended the assessment in regards of goodwill amortisations and financing costs. Goodwill amortisation within the meaning of section 9(7) KStG 1988 and the deduction of interest on borrowed capital in the case of acquisitions of shareholdings pursuant to section 11(1)(4) KStG 1988 were introduced with the 2005 Tax Reform Act in order to make Austria more attractive as a business location. § Section 9 (7) KStG 1988 contained a “group barrier” from the beginning in order to prevent arrangements within the group or within the group of companies. Thus, goodwill amortisation is not available if the participation is acquired by a company belonging to the group or by a shareholder exercising a controlling influence. The Budget Accompanying Act 2011 restricted the deductibility of interest on borrowed capital to the extent that debt-financed group acquisitions should no longer lead to a deduction of operating costs. The explanatory notes justified this change in the law by stating that undesirable arrangements in the group, which led to an artificial generation of operating expenses, should be prevented. Click here for English translation Click here for other translation RV-7104702-2018 ...

Italy vs Arnoldo Mondadori Editore SpA , February 2022, Supreme Court, Cases No 3380/2022

Since Arnoldo Mondadori Editore SpA’s articles of association prevented it from issuing bonds, financing of the company had instead been archived via an arrangement with its subsidiary in Luxembourg, Mondadori International S.A. To that end, the subsidiary issued a bond in the amount of EUR 350 million, which was subscribed for by US investors. The funds raised were transferred to Arnoldo Mondadori Editore SpA via an interest-bearing loan. The terms of the loan – duration, interest rate and amount – were the same as those of the bond issued by Mondadori International S.A. to the US investors. The Italian tax authority denied the withholding tax exemption in regards of the interest paid on the loan. According to the tax authorities Mondadori International S.A. had received no benefit from the transaction. The interest paid by Arnoldo Mondadori Editore SpA was immediately and fully transferred to the US investors. Mondadori International S.A. was by the authorities considered a mere conduit company, and the US investors were the beneficial owners of interest which was therefore subject to 12.5% withholding tax. Judgement of the Supreme Court The Supreme Court set aside the assessment of the tax authorities and decided in favor of Arnoldo Mondadori Editore SpA. The court held that the beneficial owner requirement should be interpreted in accordance with the current commentary on Article 11 of the OECD Model Tax Convention. On that basis Mondadori International S.A. in Luxembourg was the beneficial owner of the interest and thus entitled to benefit from the withholding tax exemption. Excerpt “First, the company must take one of the forms listed in the annex to Directive 2004/49; second, it must be regarded, under the tax legislation of a Member State, as resident there for tax purposes and not be regarded, under a double taxation convention, as resident for tax purposes outside the European Union; third, it must be subject to one of the taxes listed in Article 3(a)(iii) of Directive 2003/49, without benefiting from an exemption (cf. paragraph 147 of the aforementioned decision; also paragraph 120 of Court of Justice, 26 February 2019, Case C 116/16, T Danmark; No 117/18, Y Denmark). Nor is the national authority, then, required to identify the entity or entities which it considers to be the beneficial owner of the “interest” in order to deny a company the status of beneficial owner of the “interest” (paragraph 145). Finally, in its judgment of 26 September 2019 on Joined Cases C 115/16, C 118/16, C 119/16 and C 299/16, the Court of Justice expressed the principle that the beneficial owner is anyone who does not appear to be a construction of mere artifice, providing additional indicators or spy-indicators whose presence is an indication of exlusive intent. 4. Now, in the case at hand, it emerges from the principles set out above that the “actual beneficiary” of the interest on the Italian bond must be considered to be the Luxembourg company. And in fact, contrary to the case law examined above, in the case under examination, it is not disputed in the documents that Mondadori International s.a: 1) has existed for more than fifty years; 2) has its own real operational structure and does not constitute an “empty box 3) its corporate purpose is the holding and sale of shares in publishing companies; 4) it produced profits of over EUR 8 million in the tax year in question 5) it issued the bond six months before the Italian company when the latter could not do so and precisely because it could not do so: the two loans remain distinct by virtue of their negotiating autonomy and find different justification 6) the interest received by the Italian parent company was recognised in its financial statements and contributed to its income; 7) it has actual disposal of the sums, in the absence of contractually fixed obligations of direct (re)transfer 8) it issued its own bonds, discounting the relative discipline, placing its assets as collateral for the American investors. In particular, the breach and misapplication of the law emerges due to the examination of the contractual conditions, duly reported in the appeal for cassation, fulfilling the burden of exhaustiveness of the writing (see especially pages 134 – 136). There are no obligations, limits or conditions that provide for the transfer to the United States of the amounts received from Italy, thus leaving entrepreneurial autonomy and patrimonial responsibility in the hands of the Luxembourg company, which, moreover, has a vocation by statute for corporate operations of this type. These principles have misguided the judgment on appeal, which therefore deserves to be set aside and referred back to the judge on the merits so that he may comply with the aforementioned European and national principles, which we intend to uphold. 5. The appeal is therefore well-founded and deserves to be upheld, with the absorption of grounds 1, 2, 4, 6 and 7 of appeal r.g. no. 7555/2013 and the analogous grounds 2, 3, 4, 5, 7 and 8 of appeal r.g. no. 7557/2013, all of which focus on the same question of whether Mondatori Editore is the “beneficial owner” of the payment of interest on the bond loan.” Click here for English translation Click here for other translation Italy BO case_20220203_2022-3380 ...

France vs Electricité de France, January 2022, CAA de VERSAILLES, Case No 20VE00792

In 2009 the English company EDF Energy UK Ltd (EDFE), a wholly-owned subsidiary of SAS Electricité de France International (SAS EDFI), issued 66,285 bonds convertible into shares (OCAs) for a unit nominal value of EUR 50,000. SAS EDFI subscribed to all of these OCAs for their nominal value, i.e. a total subscription price of EUR 3,314,250,000. The OCAs had a maturity of five years, i.e. until October 16, 2014, and could be converted into new EDFE shares at the instigation of the subscriber at any time after a three-year lock-up period, i.e. from October 16, 2012. Each bond entitled the holder to receive 36,576 EDFE shares after conversion. The annual coupon for the OCAs was set at 1.085%. In this respect, SAS EDFI determined, on the basis of a panel of bond issues of independent comparables, the arm’s length rate that should be applied to conventional bonds, i.e. 4.41% (mid-swap rate and premium of 1.70%), 490 million according to the “Tsiveriotis and Fernandes” model, so that the sum of the present value of the flows of the “debt” component of the bond and the value of the “conversion” option is equal to the subscription price of the OCAs. SAS EDFI recognised the annual interest received at a rate of 1.085% on the bonds as income, thus subject to corporate income tax, i.e. 36 million euros.. The tax authorities considered that the “conversion” component had a zero value for SAS EDFI and that, given the terms of the loan – in this case, via the OCA mechanism – and the context of the issuance transaction, the reduction in the interest rate applied compared with the arm’s length rate of 4.41% to which SAS EDFI was entitled, made it possible to achieve a transfer of profits, In the case of SAS EDFI, the difference between the interest rate of 4.41% and the rate corresponding to the actual remuneration recorded had to be reintegrated in order to determine its taxable income. Before the appeal judge, the Minister of Action and Public Accounts contested any value to the “conversion” component on the double ground, on the one hand, that the OCAs issued by EDFE having been subscribed by its sole shareholder, the financial profit that SAS EDFI can hope to make by subscribing and then converting the OCAs into new shares mechanically has a value of zero, since it would be offset by a loss of the same amount on the value of the EDFE shares held prior to this conversion, and on the other hand, that since the OCAs issued by EDFE were subscribed by its sole shareholder, the financial benefit that SAS EDFI can hope to make by subscribing and then converting the OCAs into new shares has a value of zero, since it would be offset by a loss of the same amount on the value of the EDFE shares held before this conversion, on the other hand, since the objective sought by SAS EDFI was not that of a “classic” financial investor and the decision to convert or not the OCAs into new shares will not be taken solely in the interest of the subscriber with a view to maximising his profit, the valuation of the “conversion” component of the OCAs based solely on such an interest is not relevant and, since the financial impact of a conversion was then random, this component must necessarily be given a value close to zero. Not satisfied with the assessment, Electricité de France brought the case to court. The Court of first instance held in favour of the tax authorities. An appeal was then filed by Electricité de France with the CAA. Decision of the Court of Appeal The Court overturned the decision from the court of first instance and found in favor of Electricité de France. “…since the Minister for Public Action and Accounts does not justify the zero value of the ‘conversion’ component he refers to, SA EDF and SAS EDFI are entitled to maintain that he was wrong to consider that, by subscribing to the OCAs issued by EDFE, for which the interest rate applied was 1.085% and not the borrowing rate for traditional bonds of 4, 41%, SAS EDFI had transferred profits to its subsidiary under abnormal management conditions, and the amounts corresponding to this difference in rates had to be reintegrated to determine its taxable results pursuant to Article 57 of the General Tax Code and, for EDFE, represented hidden distributions within the meaning of c. of article 111 of the same code which must be subject to the withholding tax mentioned in 2. of article 119 bis of the same code” Click here for English translation Click here for other translation CAA de VERSAILLES, 3ème chambre, 25_01_2022, 20VE00792, Inédit au recueil Lebon ...

TPG2022 Chapter X paragraph 10.108

Such an approach would represent a departure from an arm’s length approach based on comparability since it is not based on comparison of actual transactions. Furthermore, it is also important to bear in mind the fact that such letters do not constitute an actual offer to lend. Before proceeding to make a loan, a commercial lender will undertake the relevant due diligence and approval processes that would precede a formal loan offer. Such letters would not therefore generally be regarded as providing evidence of arm’s length terms and conditions ...

TPG2022 Chapter X paragraph 10.107

In some circumstances taxpayers may seek to evidence the arm’s length rate of interest on an intra-group loan by producing written opinions from independent banks, sometimes referred to as a “bankability†opinion, stating what interest rate the bank would apply were it to make a comparable loan to that particular enterprise ...

TPG2022 Chapter X paragraph 10.106

The reliability of economic models’ outcomes depends upon the parameters factored into the specific model and the underlying assumptions adopted. In evaluating the reliability of economic models as an approach to pricing intra-group loans it is important to note that economic models’ outcomes do not represent actual transactions between independent parties and that, therefore, comparability adjustments would be likely required. However, in situations where reliable comparable uncontrolled transactions cannot be identified, economic models may represent tools that can be usefully applied in identifying an arm’s length price for intra-group loans, subject to the same constraints regarding market conditions discussed in paragraph 10.98 ...

TPG2022 Chapter X paragraph 10.105

In their most common variation, economic models calculate an interest rate through a combination of a risk-free interest rate and a number of premiums associated with different aspects of the loan – e.g. default risk, liquidity risk, expected inflation or maturity. In some instances, economic models would also include elements to compensate the lender’s operational expenses ...

TPG2022 Chapter X paragraph 10.104

Certain industries rely on economic models to price intra-group loans by constructing an interest rate as a proxy to an arm’s length interest rate ...

TPG2022 Chapter X paragraph 10.103

Accordingly, the use of credit default swaps to approximate the risk premium associated to intra- group loans will require careful consideration of the above-mentioned circumstances to arrive at an arm’s length interest rate ...

TPG2022 Chapter X paragraph 10.102

As financial instruments traded in the market, credit default swaps may be subject to a high degree of volatility. This volatility may affect the reliability of credit default swaps as proxies to measure the credit risk associated to a particular investment in isolation, since the credit default spreads may reflect not only the risk of default but also other non-related factors such as the liquidity of the credit default swaps contracts or the volume of contracts negotiated. Those circumstances could lead to situations where, for instance, the same instrument may have different credit default swaps spreads ...

TPG2022 Chapter X paragraph 10.101

Credit default swaps reflect the credit risk linked to an underlying financial asset. In the absence of information regarding the underlying asset that could be used as a comparable transaction, taxpayers and tax administrations may use the spreads of credit default swaps to calculate the risk premium associated to intra-group loans ...

TPG2022 Chapter X paragraph 10.100

In some intra-group transactions, the cost of funds approach may be used to price loans where capital is borrowed from an unrelated party which passes from the original borrower through one or more associated intermediary enterprises, as a series of loans, until it reaches the ultimate borrower. In such cases, where only agency or intermediary functions are being performed, as noted at paragraph 7.34, “it may not be appropriate to determine the arm’s length pricing as a mark-up on the costs of the services but rather on the costs of the agency function itself.†...

TPG2022 Chapter X paragraph 10.99

The application of the cost of funds approach requires consideration of the options realistically available to the borrower. On prevailing facts and circumstances, a borrowing MNE would not enter into a transaction priced under the cost of funds approach if it could obtain the funding under better conditions by entering into an alternative transaction ...

TPG2022 Chapter X paragraph 10.98

One consideration to be kept in mind with the cost of funds approach is that it should be applied by considering the lender’s cost of funds relative to other lenders operating in the market. The cost of funds can vary between different prospective lenders, so the lender cannot simply charge based on its cost of funds, particularly if there is a potential competitor who can obtain funds more cheaply. A lender in a competitive market may seek to price at the lowest possible rate in order to win business. In the commercial environment, this will mean that lenders drive operating costs as low as possible and seek to minimise the cost of obtaining funds to lend ...

TPG2022 Chapter X paragraph 10.97

In the absence of comparable uncontrolled transactions, the cost of funds approach could be used as an alternative to price intra-group loans in some circumstances. The cost of funds will reflect the borrowing costs incurred by the lender in raising the funds to lend. To this would be added the expenses of arranging the loan and the relevant costs incurred in servicing the loan, a risk premium to reflect the various economic factors inherent in the proposed loan, plus a profit margin, which will generally include the lender’s incremental cost of the equity required to support the loan ...

TPG2022 Chapter X paragraph 10.96

In considering arm’s length pricing of loans, the issue of fees and charges in relation to the loan may arise. Independent commercial lenders will sometimes charge fees as part of the terms and conditions of the loan, for example arrangement fees or commitment fees in relation to an undrawn facility. If such charges are seen in a loan between associated enterprises, they should be evaluated in the same way as any other intra-group transaction. In doing so, it must be borne in mind that independent lenders’ charges will in part reflect costs incurred in the process of raising capital and in satisfying regulatory requirements, which associated enterprises might not incur ...

TPG2022 Chapter X paragraph 10.95

Whereas it is unlikely that an MNE group’s average interest rate paid on its external debt meets the comparability requirements to be considered as an internal CUP, it may be possible to identify potential comparable loans within the borrower’s or its MNE group’s financing with an independent lender as the counterparty. As with external CUPs, it may be necessary to make appropriate adjustments to improve comparability. See Example 1 at 1.164 – 1.166 ...

TPG2022 Chapter X paragraph 10.94

When considering issues of comparability, the possibility of internal CUPs should not be overlooked ...

TPG2022 Chapter X paragraph 10.93

Arm’s length interest rates can also be based on the return of realistic alternative transactions with comparable economic characteristics. Depending on the facts and circumstances, realistic alternatives to intra-group loans could be, for instance, bond issuances, loans which are uncontrolled transactions, deposits, convertible debentures, commercial papers, etc. In the evaluation of those alternatives as potential comparables it is important to bear in mind that, based on facts and circumstances, comparability adjustments may be required to eliminate the material effects of differences between the controlled intra-group loan and the selected alternative in terms of, for instance, liquidity, maturity, existence of collateral or currency ...

TPG2022 Chapter X paragraph 10.92

In the search for comparability data, a comparable is not necessarily restricted to a stand-alone entity. In examining commercial loans, where the potentially comparable borrower is a member of an MNE group and has borrowed from an independent lender, provided all other economically relevant conditions are sufficiently similar, a loan to a member of a different MNE group or between members of different MNE groups could be a valid comparable ...

TPG2022 Chapter X paragraph 10.91

The arm’s length interest rate for a tested loan can be benchmarked against publicly available data for other borrowers with the same credit rating for loans with sufficiently similar terms and conditions and other comparability factors. With the extent of competition often present within lending markets, it might be expected that, given the characteristics of the loan (amount, maturity, currency, etc.) and the credit rating of the borrower or the rating of the specific issuance (see Section C.1.1.2.), there would be a single rate at which the borrower could obtain funds and a single rate at which a lender could invest funds to obtain an appropriate reward. In practice, however, there is unlikely to be a single “market rate” but a range of rates although competition between lenders and the availability of pricing information will tend to narrow the range ...

TPG2022 Chapter X paragraph 10.90

The widespread existence of markets for borrowing and lending money and the frequency of such transactions between independent borrowers and lenders, coupled with the widespread availability of information and analysis of loan markets may make it easier to apply the CUP method to financial transactions than may be the case for other types of transactions. Information available often includes details on the characteristics of the loan and the credit rating of the borrower or the rating of the specific issuance. Characteristics which will usually increase the risk for the lender, such as long maturity dates, absence of security, subordination, or application of the loan to a risky project, will tend to increase the interest rate. Characteristics which limit the lender’s risk, such as strong collateral, a high quality guarantee, or restrictions on future behaviour of the borrower, will tend to result in a lower interest rate ...

TPG2022 Chapter X paragraph 10.89

Once the actual transaction has been accurately delineated, arm’s length interest rates can be sought based on consideration of the credit rating of the borrower or the rating of the specific issuance taking into account all of the terms and conditions of the loan and comparability factors ...

TPG2022 Chapter X paragraph 10.88

The following paragraphs present different approaches to pricing intra-group loans. As in any other transfer pricing situation, the selection of the most appropriate method should be consistent with the actual transaction as accurately delineated, in particular, through a functional analysis (see Chapter II) ...

TPG2022 Chapter X paragraph 10.87

A guarantee from another party may be used to support the borrower’s credit. A lender placing reliance on a guarantee or guarantees would need to evaluate the guarantor(s) in a similar way to that in which it evaluates the original borrower. For the lender to take a guarantee into account in setting or adjusting the terms and conditions of a loan, it would need to be reasonably satisfied that the guarantor(s) would be able to meet any shortfall resulting from the borrower being unable to meet its obligations in full in the event of a default. Guarantees are discussed in more detail in Section D ...

TPG2022 Chapter X paragraph 10.86

There may be less information asymmetry between entities (that is, better visibility) in the intra- group context than in situations involving unrelated parties. Intra-group lenders may choose not to have covenants on loans to associated enterprises, partly because they are less likely to suffer information asymmetry and because it is less likely that one part of an MNE group would seek to take the same kind of action as an independent lender in the event of a covenant breach, nor would it usually seek to impose the same kind of restrictions. Where there is an absence of covenants in any written agreement between the parties, it will be appropriate to consider under Chapter I guidance whether there is, in practice, the equivalent of a maintenance covenant between the parties and the consequential impact upon the pricing of the loan ...

TPG2022 Chapter X paragraph 10.85

Maintenance covenants refer typically to financial indicators which have to be met at regular, predetermined intervals during the life of a covenanted loan. Maintenance covenants can act as an early warning system so that in the event of financial underperformance by the borrower, the borrower and/or lender can move to take remedial action at an early stage. This can help to protect unrelated lenders against information asymmetry ...

TPG2022 Chapter X paragraph 10.84

Incurrence covenants require or prohibit certain actions by the borrower without the consent of the lender. Incurrence covenants may, for example, prohibit the borrower from taking on additional debt, creating any charge on the assets of the entity or disposing of particular assets of the entity, thus giving some degree of certainty over the balance sheet of the borrower ...

TPG2022 Chapter X paragraph 10.83

The purpose of covenants in a loan agreement is generally to provide a degree of protection to the lender and so limit its risk. That protection may be in the form of incurrence covenants or maintenance covenants ...

TPG2022 Chapter X paragraph 10.82

Where this is the case, the credit rating of the MNE group may also be used for the purpose of pricing the accurately delineated loan where the facts so indicate, particularly in situations such as where the MNE is important to the group as described in paragraphs 10.78 and 10.79 and where the MNE’s indicators of creditworthiness do not differ significantly from those of the group. An MNE group credit rating is unaffected by controlled transactions and reflects the actual basis on which the group seeks external funding from independent lenders. In situations where an MNE group does not have an external credit rating, consideration may be given to conducting the credit rating analysis at the MNE group level for assessing the controlled transaction. In all cases, the MNE group credit rating, like any other credit rating, will be appropriate only if it is determined to be the most reliable indicator of the MNE credit rating in light of all the facts and circumstances ...

TPG2022 Chapter X paragraph 10.81

It is also important to note that although there are established approaches to estimate a credit rating for a particular group member or debt issuance, the considerations detailed above mean that a pricing approach based on the separate entity credit ratings that are derived from publicly available financial tools (see paragraph 10.72), the implicit support analysis, the difficulties of accounting for controlled transactions reliably and the presence of information asymmetry may pose challenges that, if not resolved, may result in outcomes that are not reliable ...

TPG2022 Chapter X paragraph 10.80

The impact of an assessment of implicit support is a matter of judgement. The kind of information on which the MNE group would base a decision of whether or not to provide support to a borrower in particular circumstances may not be available to a tax administration, as is frequently the case in transfer pricing examinations, and the existence of information asymmetry may affect the ability of tax administrations to establish the likelihood of support (see section B.2 in Chapter IV). Furthermore, changing facts and circumstances affecting the willingness or ability of the MNE group to provide support may mean that there is no decision by the MNE group itself until the eventuality for such support arises. This contrasts, for example, where the MNE receives a formal guarantee from another group member. The past behaviour of an MNE group as regards providing support may be a useful indicator of likely future behaviour but an appropriate analysis should be undertaken to identify whether different conditions apply ...

TPG2022 Chapter X paragraph 10.79

Another key consideration would be the likely consequences for other parts of the MNE group of supporting or not supporting the borrower. The criteria used to determine the status of an entity in this regard may include such considerations as legal obligations (e.g. regulatory requirements), strategic importance, operational integration and significance, shared name, potential reputational impacts, negative effects on the overall MNE group, general statement of policy or intent, and any history of support and common behaviour of the MNE group with respect to third parties. The relative relevance of those factors may vary from one industry to another ...

TPG2022 Chapter X paragraph 10.78

Implicit support from the group may affect the credit rating of the borrower or the rating of any debt which it issues. The relative status of an entity within the group may help determine what impact that potential group support has on the credit rating of a debt issuer. Entities of an MNE group will be more or less likely to receive group support according to the relative importance of the entity to the MNE group as a whole and the linkages between the entity and the rest of the MNE group, either in its current form or in terms of future strategy. An MNE group member with stronger links, that is integral to the group’s identity or important to its future strategy, typically operating in the group’s core business, would ordinarily be more likely to be supported by other MNE group members and consequently have a credit rating more closely linked to that of the MNE group. Conversely, it may be reasonable to assume that an entity would be likely to receive support from the rest of the MNE group in more limited circumstances where it does not show those same indicators or the linkages are weaker. In the case of an entity where there is evidence that no support would be provided by the MNE group, it may be appropriate on the prevailing facts and circumstances to consider the entity on the basis of its own stand-alone credit rating only ...

TPG2022 Chapter X paragraph 10.77

In the context of intra-group loans, this incidental benefit that the MNE is assumed to receive solely by virtue of group affiliation, is referred to as implicit support. The effect of potential group support on the credit rating of an entity and any effect on that entity’s ability to borrow or the interest rate paid on those borrowings would not require any payment or comparability adjustment. See Example 1 at paragraphs 1.184 – 1.186 of Chapter I and Section D.3 ...

TPG2022 Chapter X paragraph 10.76

The effect of group membership is relevant for informing the conditions under which an MNE would have borrowed from an independent lender at arm’s length in two ways in particular. Firstly, the external funding policies and practices of group management will assist in informing the form and terms and conditions of the debt the MNE would have entered into with an independent lender, including the pricing (i.e. interest rate paid), and all economically relevant characteristics such as the type of loan, its term, currency, security, covenants, business strategies, and so forth. Secondly, the MNE may receive support from the group to meet its financial obligations in the event of the borrower getting into financial difficulty. Paragraph 1.178 of Chapter I of these Guidelines is relevant to analyse the effect of group membership on the terms and conditions of a borrowing when the borrowing MNE obtains an incidental benefit arising solely by virtue of group affiliation, i.e. passive association ...

TPG2022 Chapter X paragraph 10.75

In conducting a credit rating analysis, it is important to note that the financial metrics may be influenced by current and past controlled transactions (such as sales, or interest expenses). If it appears that such controlled transactions are not in accordance with the arm’s length principle, the credit rating derived in light of such intra-group transactions may not be reliable. (See also guidance in section B). These considerations apply both to controlled transactions that may affect the current earnings of the MNE and to previous funding and other intra-group transactions that may have had an impact on the measures of income and capital of the MNE that are the subject of quantitative analysis ...

TPG2022 Chapter X paragraph 10.74

For these reasons, the reliability of credit rating results derived from the use of publicly available financial tools may be improved to the extent the analysis can reproducibly demonstrate consistency of ratings using such tools with those provided by independent credit rating agencies ...

TPG2022 Chapter X paragraph 10.73

The credit rating methodology used in publicly available financial tools may differ significantly in certain respects from the credit rating methodologies applied by independent credit rating agencies to determine official credit ratings and the impact of any such differences should be carefully considered. For instance, publicly available tools generally use only a limited sample of quantitative data to determine a credit rating. Official credit ratings published by independent credit rating agencies are derived as a result of far more rigorous analysis that includes quantitative analysis of historic and forecast entity performance as well as detailed qualitative analysis of, for instance, management’s ability to manage the entity, industry specific features and the entity’s market share in its industry ...

TPG2022 Chapter X paragraph 10.72

Publicly available financial tools are designed to calculate credit ratings. Broadly, these tools depend on approaches such as calculating the probability of default and of the likely loss should default occur to arrive at an implied rating for the borrowing. This can then be compared to a market database in a search for comparables to arrive at a price or price range for the borrowing. In considering whether the application of these tools results in a reliable assessment of the credit rating of controlled transactions, potential issues that need to be borne in mind include that the results are not based on a direct comparison with transactions between independent parties but are subject to the accuracy of the input parameters, a tendency to rely more on quantitative inputs at the expense of qualitative factors, and a lack of clarity in the processes (i.e. the workings of the underlying algorithms and processes may not be transparent) ...

TPG2022 Chapter X paragraph 10.71

Particular considerations should be borne in mind when determining a credit rating for a specific MNE within an MNE group for the purpose of assessing controlled transactions. Where an MNE has a publicly available credit rating published by an independent credit rating agency, that rating may be informative for an arm’s length analysis of the MNE’s controlled financing transactions. However, in most cases, publicly available credit ratings are only available for the MNE group. An approach often used for a specific MNE is to apply quantitative and qualitative analyses of the individual characteristics of the MNE using publicly available financial tools or independent credit rating agencies’ methodologies to seek to replicate the process used to determine the credit rating of the MNE group. This approach also involves taking into account improvements in creditworthiness that the specific MNE would be assumed to receive as a result of being part of the MNE group ...

TPG2022 Chapter X paragraph 10.70

The credit rating of an MNE or MNE group may differ from an issue rating due to the fact that the credit risk of a financial instrument is linked to its specific features and not only to the risk profile of the borrowing MNE. On prevailing facts and circumstances, and provided there is comparability between the third party debt issuance and the controlled transaction, when both an issuer and issue ratings are available, the issue rating of the particular debt issuance would be more appropriate to use to price the controlled financial transaction ...

TPG2022 Chapter X paragraph 10.69

The credit rating of a particular debt issuance (“issue ratingâ€) is an opinion about the creditworthiness of the issuer with respect to a specific financial instrument. The issue rating considers specific features of the financial instrument, for instance, guarantees, securities and level of seniority ...

TPG2022 Chapter X paragraph 10.68

It is important that the MNE group appropriately documents the reasons and selection of the credit rating used for a particular MNE when pricing intra-group loans and other controlled financial transactions ...

TPG2022 Chapter X paragraph 10.67

There may be special circumstances, such as in the case of start-up entities, or those that have recently been part of a merger, that may have an impact on the credit rating of a group entity. These special situations should be taken into consideration ...

TPG2022 Chapter X paragraph 10.66

As a credit rating depends on a combination of quantitative and qualitative factors, there is still likely to be some variance in creditworthiness between borrowers with the same credit rating. In addition, when making comparisons between borrowers using the kind of financial metrics typically seen as important to lenders, such as debt-earnings or debt-equity ratios, it is important to note that the same financial metrics will not necessarily result in the same credit rating if there are other differences between the rated parties. For example, it may require stronger financial metrics to obtain a given rating in some industries than to obtain the same rating for a borrower in other industries. More intrinsically risky industries and those with less stable revenue streams tend to require better financial ratios in order to obtain the same rating ...

TPG2022 Chapter X paragraph 10.65

Information is readily available in many lending markets on the different rates of interest charged for differently rated enterprises and such information may usefully contribute to performing comparability analyses. Financing transactions that the borrowing MNE or another MNE within the group has with external lenders may also be reliable comparables for interest rates charged by associated enterprises (see paragraphs 10.94 and 10.95). Financing transactions undertaken by the borrowing MNE or another entity in the MNE group, for example the MNE group parent, will be reliable comparables only where the differences between the controlled and uncontrolled transactions do not materially affect the interest rate or reasonably accurate adjustments can be made ...

TPG2022 Chapter X paragraph 10.64

The credit rating of an MNE or MNE group (usually referred to as the “issuer credit ratingâ€) is an opinion about its general creditworthiness. Such an opinion is usually premised on the MNE or MNE group’s capacity and willingness to meet its financial obligations in accordance with the terms of those obligations. The credit rating of an MNE or MNE group is effectively a form of relative ranking of the creditworthiness in comparison to other borrowers. In general, a lower credit rating will indicate a greater risk of default and be expected to result in a higher rate of return for lenders ...

TPG2022 Chapter X paragraph 10.63

Credit ratings can be determined for the overall creditworthiness of an MNE or MNE group4 or for a specific issuance of debt. As detailed in the following paragraphs, determining credit ratings requires consideration of quantitative – e.g. financial information – and qualitative factors – e.g. industry and country in which the MNE or MNE group operates ...

TPG2022 Chapter X paragraph 10.62

The creditworthiness of the borrower is one of the main factors that independent investors take into account in determining an interest rate to charge. Credit ratings can serve as a useful measure of creditworthiness and therefore help to identify potential comparables or to apply economic models in the context of related party transactions. Furthermore, in the case of intra-group loans and other financial instruments that are the subject of controlled transactions, the effect of group membership may be an economically relevant factor that affects the pricing of these instruments. Accordingly, this subsection elaborates on the use of credit ratings and the effect of group membership in the context of pricing intra- group loans. Where appropriate, reference to this subsection will be made in other parts of this guidance ...

TPG2022 Chapter X paragraph 10.61

The economic conditions of loans should also be viewed in the context of regulations that may affect the position of the parties. For example, insolvency law in the jurisdiction of the borrower may provide that liabilities towards associated enterprises are subordinated to liabilities towards unrelated parties ...

TPG2022 Chapter X paragraph 10.60

Macroeconomic circumstances may lead to changes in the financing costs in the market. In such a context, a transfer pricing analysis with regard to the possibilities of the borrower or the lender to renegotiate the terms of the loan to benefit from better conditions will be informed by the options realistically available to both the borrower and the lender ...

TPG2022 Chapter X paragraph 10.59

Borrowers will also consider the potential impact of changes in economic conditions such as interest rates and exchange rates, as well as the risk of not being able to make timely payments of interest and principal on the loan if the borrower’s business encounters unexpected difficulties, and the risk of not being able to raise more capital (either debt or equity) if necessary ...

TPG2022 Chapter X paragraph 10.58

Borrowers seek to optimise their weighted average cost of capital and to have the right funding available to meet both short-term needs and long-term objectives. When considering the options realistically available to it, an independent business seeking funding operating in its own commercial interests will seek the most cost effective solution, with regard to the business strategy it has adopted. For example in respect of collateral, in some circumstances, assuming that the business has suitable collateral to offer, this would usually be secured funding, ahead of unsecured funding, recognising that a business’s collateral assets and its funding requirements may differ over time, e.g. because collateral is finite, the decision to pledge collateral on a particular borrowing precludes the borrower from pledging that same collateral on a subsequent borrowing. Therefore, an MNE pledging collateral would take into account its options realistically available regarding its overall financing (e.g. possible subsequent loan transactions) ...

TPG2022 Chapter X paragraph 10.57

Credit risk for the lender is the potential that the borrower will fail to meet its payment obligations in accordance with the terms of the loan. In deciding whether a prospective loan is a good commercial opportunity, a lender will also consider the potential impact of changes which could happen in economic conditions affecting the credit risk it bears, not only in relation to the conditions of the borrower but in relation to potential changes in economic conditions, such as a rise in interest rates, or the exposure of the borrower to movements in exchange rates ...

TPG2022 Chapter X paragraph 10.56

In the case of a loan from the parent entity of an MNE group to a subsidiary, the parent already has control and ownership of the subsidiary, which would make the granting of security less relevant to its risk analysis as a lender. Therefore, in evaluating the pricing of a loan between associated enterprises it is important to consider that the absence of contractual rights over the assets of the borrowing entity does not necessarily reflect the economic reality of the risk inherent in the loan. If the assets of the business are not already pledged as security elsewhere, it will be appropriate to consider under Chapter I analysis whether those assets are available to act as collateral for the otherwise unsecured loan and the consequential impact upon the pricing of the loan ...

TPG2022 Chapter X paragraph 10.55

When an enterprise is making a loan to an associated enterprise, it will not necessarily follow all of the same processes as an independent lender. For example, it may not need to go through the same process of information gathering about the borrower’s business, as the required information may already be readily available within the MNE group. However, in considering whether the loan has been made on conditions which would have been made between independent enterprises, the same commercial considerations such as creditworthiness, credit risk and economic circumstances are relevant ...

TPG2022 Chapter X paragraph 10.54

An independent lender will carry out a thorough credit assessment of the potential borrower to enable the lender to identify and evaluate the risks involved and to consider methods of monitoring and managing these risks. That credit assessment will include understanding the business itself as well as the purpose of the loan, how it is to be structured and the source of its repayment which may include analysis of the borrower’s cash flow forecasts and the strength of the borrower’s balance sheet ...

TPG2022 Chapter X paragraph 10.53

The lender’s perspective in the decision of whether to make a loan, how much to lend, and on what terms, will involve evaluation of various factors relating to the borrower, wider economic factors affecting both the borrower and the lender, and other options realistically available to the lender for the use of the funds ...

TPG2022 Chapter X paragraph 10.52

As in any other transfer pricing scenarios, the guidance in Section D.1 of Chapter I applies to determine whether the lender and the borrower assume risks related to intra-group loans. In particular, it is important to consider the risks that the funding arrangements carry for the party providing the funds, and the risks related to the acceptance and use of the funds from the perspective of the recipient. These risks will relate to repayment of the amount transferred, compensation expected for the use of that amount over time, and compensation for other associated risk factors ...

TPG2022 Chapter X paragraph 10.51

In considering the commercial and financial relations between the associated borrower and lender, and in an analysis of the economically relevant characteristics of the transaction, both the lender’s and borrower’s perspectives should be taken into account, acknowledging that these perspectives may not align in every case ...

TPG2022 Chapter X paragraph 10.50

The following sections outline the transfer pricing considerations which arise from some relevant treasury activities that are often performed within MNE groups, i.e. the provision of intra-group loans, cash pooling, and hedging activities ...

TPG2022 Chapter VII paragraph 7.15

In considering whether a charge for the provision of services would be made between independent enterprises, it would also be relevant to consider the form that an arm’s length consideration would take had the transaction occurred between independent enterprises dealing at arm’s length. For example, in respect of financial services such as loans, foreign exchange and hedging, all of the remuneration may be built into the spread and it would not be appropriate to expect a further service fee to be charged if such were the case. Similarly, in some buying or procurement services a commission element may be incorporated in the price of the product or services procured, and a separate service fee may not be appropriate ...

Germany vs “HQ Lender GmbH”, Januar 2022, Bundesfinanzhof, Case No IR 15/21

“HQ Lender GmbH” is the sole shareholder and at the same time the controlling company of A GmbH. The latter held 99.98% of the shares in B N.V., a corporation with its seat in Belgium. The remaining shares in B N.V. were held by HQ Lender GmbH itself. A GmbH maintained a clearing account for B N.V., which bore interest at 6% p.a. from 1 January 2004. No collateralisation was agreed in regards of the loan. In the year in dispute (2005), the interest rate on a working capital loan granted to the plaintiff by a bank was 3.14%. On 30 September 2005, A GmbH and B N.V. concluded a contract on a debt waiver against a debtor warrant (… €). The amount corresponded to the worthless part of the claims against B N.V. from the clearing account in the opinion of the parties to the contract. Although it was deducted from the balance sheet of A GmbH to reduce profits, the tax authorities neutralised the reduction in profits with regard to the lack of collateralisation of the claim in accordance with section 1 (1) of the German Income Tax Act (AStG) through an off-balance sheet addition. An appeal was filed by HQ Lender GmbH. Judgement of the BFH The BFH allowed the appeal of HQ Lender GmbH and referred the case back to the FG Düsseldorf. The FG has to determine whether there is a loan that can be recognized for tax purposes at all or whether this “clearing account” is more of an equity transfer by the shareholder. The distinction between loans occasioned by business and contributions occasioned by the company relationship is to be made on the basis of the totality of the objective circumstances. Individual criteria of the arm’s length comparison are not to be accorded the quality of indispensable prerequisites of the facts. The lack of collateral for a loan is one of the “conditions” within the meaning of § 1, para. 1 of the German Income Tax Act (AStG) which, when considered as a whole, can lead to the business relationship being unusual; the same applies to Article 9, para. 1 of the OECD Model Convention (here: Article 9 of the DTC-between Germany and Belgium 1967). Whether an unsecured intercompany loan is in conformity with the arm’s length principle in the context of an overall consideration of all circumstances of the individual case depends on whether a third party would also have granted the loan under the same conditions – if necessary, taking into account possible risk compensation. If an unsecured group loan would only have been granted at a higher interest rate than the one actually agreed, an income adjustment must be made primarily in the amount of this difference. In the context of arm’s length determinations, the granting of unsecured loans by third parties to the group parent company is not suitable to replace the assessment of the loan granted to a (subsidiary) company on the basis of the standard of an arm’s length granting of a loan. Click here for English translation Click here for other translation BFH-Urteil-I-R-15-21 ...

Peru vs. “Mining Corp”, December 2021, Tax Court, Case No 11557-1-2021

Mining Corp had deducted interest payments on an intra-group syndicated loan of $200.000.000 of which it stated an amount of $94,500,000.00, had been used, that is, a part of the syndicate $200,000,000.00, which was the subject of the loan, had been used to prepay the same loan for $65,000,000.00 and $29,500,000.00. Following an audit the tax authorities issued an assessment where, among other issued, deductions of interest payment on the loan had been adjusted. According to the tax authorities the accounting record of the credit or income from financing or the Cash Flow Statement was not sufficient to support the financial expenditure, especially if this does not demonstrate the movement of the money and its use in acquisitions, payments to third parties and other activities related to the line of business. In order to prove the use of the resources obtained, it was necessary to have the supporting documentation to prove the use of the resources obtained, and verify the link of the financing with the obtaining of taxable income or the maintenance of the source, such as a permanent control of fixed assets that would allow to verify the investments made in such item, investment plans and/or projects, contracts that accredit the investments made or loans made to its related parties, sample analyses documented with payment vouchers that support such acquisitions, among others, which has not occurred in the present case. In the audit of the current financial year 2009, the company had indicated that the loan was used for: (i) loans to subsidiaries and related parties for $149 379 000.00, (ii) time deposits for $33 753 884.00, and (iii) prepayments of the principal debt for $100 000 000.00 totalling $283 132 884.00; however, in this regard the Administration left the following observations: The earmarked amount of $283 132 884.00 exceeds the loan amount of $200 000 000.00. Despite the fact that this is the same loan is observed in the audit of the 2008 financial year, the purposes supported by the appellant are different. According to the tax authorities The loans to subsidiaries and related parties are only supported by the audited financial statements for 2009; however, no documents are presented to prove that the transfers were made to the aforementioned companies during the 2008 financial year, nor have the contracts for the loans with related parties been presented, nor have the reasons for these loans been indicated. For the fixed-term deposits, it shows a table of the deposits made, indicating the balances at the end of 2009; however, the balance of the statement of account sent by magnetic media does not coincide with this balance; furthermore, it did not document the link between the loan received and the deposit received in the bank. For the prepayments to the principal debt made on June 2, 2009, he did not document that after almost one (1) year of having received the loan, it is the same money that was indebted, which serves for the prepayment of the same. That for this reason, the Administration observed the amount of S/8,718,744.83 as it considered that the financial expenses generated by the loan received were not deductible, as there was no documentary evidence of their use for the company’s investments. An appeal was filed by Mining Corp. Judgement of the Tax Court The Tax Court revoked the appealed decision and order the Administration to recognise the deduction of the expenses for non-domiciled withholdings related to the financial charges related to the amount of S/428,298.27 and the proportional part of the $100,000,000.00, as established in the resolution, confirming it in the rest of the points of the present objection.. Excerpts “That, as stated by this Court in Resolutions No. 10813-3-2010 and 13080-9-201O, among others, the so-called “causality principle” is the relationship between the expenditure and the generation of taxable income or the maintenance of the producing source, i.e., all expenses must be necessary and linked to the activity carried out, a notion that must be analysed considering the criteria of reasonableness and proportionality, according to the nature of the operations carried out by each taxpayer. In accordance with the criteria adopted by this Court in Resolutions Nº 02607-5-2003 and 08318-3-2004, for an expense to be considered necessary there must be a causal relationship between the expenses incurred and the income generated, and therefore the necessity of the expense must be assessed in each case and, likewise, in Resolution Nº 06072-5-2003 it was established that it is necessary to analyse whether the expense is duly supported by the corresponding documentation and whether its use is accredited. That in the present case, it can be seen that the Administration has concluded that the non-domiciled Income Tax that the appellant assumed is not deductible, inasmuch as it did not support the causality of the financial expenses that originated the payment of said tax, according to the principle of causality contained in article 37 of the Income Tax Law. It is clear from the foregoing that the Administration refused the deduction made by the appellant on the grounds that the latter had not substantiated the causality of the financial charges repaired in the proceedings; However, this instance has concluded that the assessment for financial charges related to the syndicated loan for $30,000,000.00 is not in accordance with the law, and that the financial expenses related to the amortisation of $100,000,000.00 are only partially deductible; consequently, the position put forward by the Administration to maintain this assessment is unfounded and, consequently, it is appropriate to lift this assessment. As for the non-domiciled income tax that the appellant assumed in relation to the syndicated loan obtained of $200,000,000.00, in the part whose causality was not supported, it should be noted that the appellant alleges that it was directly liable for the payment of the interest, under Article 47 of the Income Tax Law, and that therefore the tax assumed corresponding to third parties was deductible as an expense. In this regard, article 47 of the Income Tax Law regulates ...

France vs BSA Finances, December 2021, Court of Appeal Versailles, Case No 20VE03249

In 2009, 2010 and 2011 BSA Finances received a total of five loans granted by the Luxembourg company Nethuns, which belongs to the same group (the “Lactalis group”). Depending on the date on which the loans were granted, they carried interest rates of respectively 6.196%, 3.98% and 4.52%. Following an audit covering the FY 2009 to 2011, the tax authorities considered that BSA Finances did not justify that the interest rates thus charged should exceed the average effective rates charged by credit institutions for variable-rate loans to companies with an initial term of more than two years. Hence, the portion of interest exceeding these rates was considered non-deductible pursuant to the provisions of Article 212(I) of the General Tax Code. In 2017, the  Administrative Court ruled in favor of BSA Finances and discharged the additional corporate tax. But this decision was appealed by the authorities to the Administrative Court of Appeal which in  June 2019 overturned the decision of the lower court. The Judgement from the Administrative court of Appels was then appealed by BSA Finances to the French Supreme Administrative Court. The Supreme Administrative Court overturned the decision from the Court of Appeal and remanded the case to the Court of Appeal. “In considering that the company had not established that the margin rates applied were in line with market rates for loans made under the same conditions, whereas the Riskcalc application, which it was not disputed was fed from the company’s balance sheets and profit and loss accounts over several years, had classified its level of risk as “BBB/BBB-” on the basis of comparative ratios established by Moody’s, that the refinancing contracts produced, which made it possible to determine the actual margin rate of the loans taken out by the applicant company itself, were accompanied by details making it possible to compare the main specific conditions with the clauses of the loans in dispute and that, lastly, the combination of these elements was such as to justify, in the absence of any element to the contrary, that the credit margins applied by Nethuns were in line with market practices, the Court distorted the documents in the file submitted for its assessment.” Judgement of the Court of Appeal The court ruled in favor of BSA stating that a scoring obtained by using automated tools such as RiskCalc is inherently less accurate than the actual rating a proper rating agency the fact such a scoring is less accurate does not mean that it can be disregarded systematically. in the absence of any valid criticism of the scoring by the tax authorities, it was an acceptable proof “10. After the Conseil d’Etat, in its decision of 11 December 2020, annulled the judgment of the Court of Appeal of 25 June 2019 on the grounds that the combination of elements attesting to a rating of the company’s risk by means of a publicly accessible financial tool, namely the RiskCalc software developed by the rating agency Moody’s, which it was not disputed was fed from the company’s balance sheets and profit and loss accounts over several years, and the syndicated contracts entered into with the company, which were not the subject of a complaint, was not sufficient to justify the decision, and the syndicated contracts concluded with financial organisations in 2010 and 2011 were such as to justify, in the absence of any evidence to the contrary, that the credit margins applied by Nethuns were in line with market practices, the Minister for Economic Affairs, The Minister of the Economy, Finance and Recovery reiterated his criticism of the RiskCalc software, arguing that it covers only a small fraction of the methodology used by the rating agencies, so that it provides only a measure of the probability of default that is meaningful only in relation to the scale of default probabilities created by the software itself. It questions the relevance of the model for entities such as SNC BSA Finances insofar as it is based on data from companies with gross assets of less than EUR 10 million, and is therefore not relevant to global groups. It also stresses the inadequacy of the information provided by the methodologies published by Moody’s regarding the adjustments allowed by the software and their potential impact on the rating, even though these adjustments may be significant, particularly in terms of taking into account the support of the parent company or the special treatment of shareholder loans. 11. However, on the one hand, SA BSA argues, without being challenged, that the ‘BBB/BBB-‘ ratings used correspond to a ‘conservative’ analysis based on ratings that are less downgraded than those of SNC BSA Finances with regard to the rating of its main partner, known as a corroborative economic analysis, so that, having itself made the necessary adjustments, the argument based on the failure to take account of the group’s support in determining the rating is, in any event, lacking in fact. The Minister does not mention, in detail, any other form of data restatement, in particular as regards a possible ‘special treatment of shareholder loans’, which would have been necessary in this case. On the other hand, SA BSA argues, again without being challenged, that if the model is established with regard to a sample drawn up by Moody’s showing the balance between small and large companies, it does not lead to an under-representation of the latter given their economic weight. Finally, in a more general way, it is certainly constant that the ratings obtained from tools of the trade make it possible to attribute a rating to a specific loan that is more approximate than a credit rating that could be carried out by a rating agency for a given borrower. Nevertheless, while SA BSA argues without being challenged that the use of a rating agency is not intended to apply, given its cost, in an intra-group transaction, the rating provided in this case by RiskCalc can be considered sufficiently reliable to justify the profile of SNC BSA Finances and ...

Australia vs Singapore Telecom Australia Investments Pty Ltd, December 2021, Federal Court of Australia, Case No FCA 1597

Singapore Telecom Australia Investments Pty Ltd entered into a loan note issuance agreement (the LNIA) with a company (the subscriber) that was resident in Singapore. Singapore Telecom Australia and the subscriber were ultimately 100% owned by the same company. The loan notes issued totalled approximately $5.2 billion to the subscriber. The terms of the LNIA was amendet on three occasions – the first amendment and the second amendment were expressed to have effect as from the date when the LNIA was originally entered into. The interest rate under the LNIA as amended by the third amendment was 13.2575% Following an audit the tax authorities issued an amended assessment under the transfer pricing provisions and denied interest deductions totalling approximately $894 million in respect of four years of income. According to the tax authorities the conditions agreed between the parties differed from the arm’s length principle. Singapore Telecom Australia appealed the assessment to the Federal Court. Judgement of the Federal Court The court upheld the the assessment issued by the tax authorities and dismissed the appeal of Singapore Telecom Australia. Click here for translation Singapore Telecom Australia Investments Pty Ltd FCA 1597 ...

France vs SAP France, December 2021, CAA de VERSAILLES, Case No. 20VE01009

SAP AG (now SAP SE) is a German multinational software corporation that develops enterprise software to manage business operations and customer relations. The company is especially known for its ERP software. SA SAP France, a 98% subsidiary of SA SAP France Holding, itself wholly owned by the German group, had deposited funds under a Cash Management Agreement as sight deposits carrying an interest of 0%. Following an audit for the financial years 2012 and 2013, two assessment proposals were issued in December 2015 and November 2016, relating in particular to the 0% interest rate charged on the cash deposits. The tax authorities had added interest to SA SAP France’s taxable income calculated by reference to the rate of remuneration on sight deposits. SA SAP France contested the adjustments and furthermore requested the benefit of the reduced rate of corporation tax on income from industrial property, pursuant to Article 39 of the French General Tax Code, with regard to the royalties from the licensing agreements relating to Business Object products and Cartesis solutions. SA SAP France Holding, the head of the group is appealing against the ruling of 30 January 2020 by which the Montreuil Administrative Court rejected its requests for the reconstitution of its overall tax loss carry-forward in the amount of EUR 171,373 for 2012, 314,395 in duties for 2013 and the additional contribution to corporate income tax on the amounts distributed for 2012 and 2013, for amounts of €5,141 and €14,550 respectively, and, in application of the reduced tax rate, the refund of an overpayment of corporate income tax and additional contributions for €27,461,913 for the years 2012 to 2015. Judgement of the Court of Appeal In regards of the added interest on the deposited funds under a Cash Management Agreement the Court decided in favor of the tax authorities. Excerpt “In order to reintegrate into the taxable results of SA SAP France the interest at the monthly rate for sight deposits on the sums it made available to SAP AG under a cash management agreement concluded on 17 December 2009 between the parties, the department noted that SAP AG, now SAP SE, a company under German law, held 100% of SA SAP France Holding, SA SAP France’s parent company, and that the EONIA rate for interbank relations, reduced by 0.15% stipulated in the agreement, had led to a total absence of remuneration for the sums made available to the central treasury by SA SAP France as of August 2012, for very significant amounts ranging from 132 to 432 million euros. In these circumstances, the administration establishes the existence of an advantage consisting of the granting of interest-free advances by SA SAP France to the company SAP AG, located outside France, which controls it through SA SAP France Holding. If the latter argues that the rate stipulated is a market rate whose evolution is independent of the control of the parties, and that it was capped at 0 % whereas a strict application of the agreement would have led to a negative rate, these circumstances are inoperative, since this rate is unrelated to the remuneration to which SA SAP France could have claimed if it had placed its cash surpluses with a financial institution. Furthermore, by maintaining that the investment of its funds with SAP AG is particularly secure and that it enables it to obtain immediate and unconditional financing from the central treasury at the rate of EONIA + 30%, the applicant company does not justify an interest of its own which can be regarded as a consideration, since it is common ground that its situation vis-à-vis the central treasury was constantly in credit for very substantial amounts which greatly exceeded its working capital requirements. Finally, the monthly rate for sight deposits of between 0.15 and 0.18% applied by the department corresponds to the interest rate which SA SAP France could have obtained from a financial institution and the applicant does not propose a more relevant comparable. It follows that the administration establishes the existence during 2012 and 2013 of a transfer of profit, within the meaning of the provisions of Article 57 of the General Tax Code, from SA SAP France to the company SAP AG located outside France, for the amounts of EUR 171 373 in 2012 and EUR 484 986 in 2013, which the administration reintegrated into the results of SA SAP France.” Click here for English translation Click here for other translation CAA de VERSAILLES, 1ère chambre, 17_12_2021, 20VE01009, Inédit au recueil Lebon - Légifrance ...

Spain releases report on application of their General Anti-Abuse Rule.

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 Spain GAAR report ...

Finland vs D Oy, December 2021, Supreme Administrative Court, Case No. KHO:2021:179

At issue was whether interest expenses incurred as a result of intra-group liabilities related to the acquisition of shares were tax deductible. In August 2010, the Swedish companies H AB and B AB had agreed, among other things, to sell E Oy’s shares to B AB and to allow B AB to transfer its rights and obligations to purchase the said shares directly or indirectly to its own subsidiary. B AB’s subsidiary had established D Oy in August 2010. In September 2010, before the completion of the acquisition, B AB had transferred its rights and obligations to purchase E Oy’s shares to D Oy. Ownership of E Oy’s shares had been transferred to D Oy at the end of September 2010. D Oy had financed the acquisition of E Oy’s shares mainly with a debt it had taken from B AB, from which D Oy had deducted the interest expenses incurred in its annual taxation. The tax audit report considered that no business-independent business grounds had been presented for the transfer of the loan liability of the acquisition to D Oy in a multi-stage ownership and financing arrangement and that the arrangement had been implemented solely to benefit from the Finnish group grant scheme and interest deduction. On this basis, the interest expenses on the debt related to the acquisition of E Oy’s shares had been added to D Oy’s taxable income in the tax adjustments submitted for the tax years 2012–2015 to the detriment of the taxpayer and when the tax for 2016 was delivered. In addition, the Taxpayers’ Law Enforcement Unit had stated that the actions in question were entirely artificial in a way that was proportional to the Supreme Administrative Court’s yearbook decision in the Supreme Administrative Court 2016: The Administrative Court held that the arrangement as a whole had to be regarded as artificial. Hence, deductibility of the interest paid to the foreign group company could be denied on the basis of the tax avoidance provision. This decision was appealed to the Supreme Administrative Court by the company. Judgement of the Supreme Administrative Court The Court set aside the decision of the administrative court and ruled in favor of D Oy. The Court held that the establishment of an auxiliary company as a company acquiring shares in an acquisition between independent parties and the financing of the company partly with equity and partly with intra-group debt could not be considered as artificial transactions. In such a situation, the deductibility of interest could not be denied under the tax avoidance provision. D Oy had acquired E Oy’s shares from an independent party. Based on the preliminary work of the Business Income Tax Act, the legislator’s starting point was that in share transactions between independent parties, the tax benefits related to the use of holding companies are limited by amending the law. Therefore, and taking into account that the premise of the Business Income Tax Act was that interest expenses accrued in business activities are deductible, the establishment of a holding company as an acquiring company and the financing of a holding company as an artificial act. Nor did such a situation have to be equated with the situation presented in the Supreme Administrative Court’s yearbook decision KHO 2016: 72. D Oy was thus entitled to deduct the interest expenses of the debt related to the acquisition of E Oy in its taxation for the tax years 2012 and 2013 as provided in section 7 and section 18 (1) (2) of the Business Income Tax Act and section 7 of the same law in its taxation for 2014–2016. as provided for in Article 18 (1) (2) and Article 18a. Tax years 2012–2016. in the manner provided for in subsection 1 (2) and section 18 a. Tax years 2012–2016. in the manner provided for in subsection 1 (2) and section 18 a. Tax years 2012–2016. Click here for English translation Click here for other translation KHO 2021 179 ...

Finland vs G Oy, December 2021, Supreme Administrative Court, Case No. KHO:2021:178

At issue was whether interest expenses incurred as a result of intra-group liabilities related to the acquisition of shares were tax deductible. In 2005, CA / S, indirectly owned by private equity investors A and B, had purchased a listed share in DA / S. DA / S’s subsidiary EA / S had established H AB in July 2008. On 25 August 2008, EA / S had transferred approximately 83.8 per cent of F Oy’s shares in kind to H AB and sold the remaining approximately 16.2 per cent at the remaining purchase price. On August 26, 2008, EA / S had subscribed for new shares in G Oy and paid the share subscription price in kind, transferring 56 percent of H AB’s shares. On August 27, 2008, G Oy had purchased the remaining 44 percent of H AB’s shares. EA / S had granted G Oy a loan corresponding to the purchase price, the interest expenses of which the company had deducted annually in its taxation. The share transfers in 2008 had been reported to be related to the 2005 acquisition and In the share transfers carried out in 2008, EA / S’s direct holding in F Oy had been changed to indirect. The change in ownership structure was implemented within a short period of time as a series of share transfers. With the help of the share transfers, new debt relationships had been created in the Group, with the aim of transferring the interest burden on EA / S to G Oy corresponding to the purchase price of H AB’s shares. When the share transfers were considered as a whole, their purpose was to seek a tax advantage in the form of interest deductions. The share transfers had therefore not corresponded to the real nature or purpose of the case and were artificial in nature. The Administrative Court held that when the share transfers were considered as a whole, their purpose was to seek a tax advantage in the form of interest deductions. The share transfers had therefore not corresponded to the real nature or purpose of the case and were artificial in nature. Hence, deductibility of the interest paid to the foreign group company could be denied on the basis of the tax avoidance provision. This decision was appealed to the Supreme Administrative Court by the company. Judgement of the Supreme Administrative Court The Court dismissed the appeal and upheld the decision of the administrative court. It stated that the subsidiary had been used in a multi-stage arrangement within the group as a company acquiring shares and that the arrangement as a whole had to be considered wholly artificial. According to the settled case law of the Court of Justice of the European Union, national measures restricting the right to deduct interest do not infringe the freedom of establishment within the meaning of Article 49 TFEU if they deal only with purely artificial arrangements. The judgment of the Court of Justice in Case C-484/19, Lexel, does not have to be considered as a change in this settled case law. In the light of these factors and the artificial nature of the present share transfers, the Supreme Administrative Court held that the denial of the right to deduct interest expenses accrued to G Oy under section 28 of the Tax Procedure Act was not contrary to Article 49 TFEU in the present case. The denial of the right to deduct interest expenses was also not contrary to the prohibition of discrimination in the Nordic tax treaty. KHO 2021 178 Click here for English translation Click here for other translation KHO 2021 178 ...

Portugal vs “Welding Mesh SA”, December 2021, CAAD Tax Arbitration, Case No 194/2021-T

A Portuguese subsidiary – A SA – had received intra group loans in foreign currency and had various other transactions with foreign group companies. The tax authorities claimed that the pricing of the transactions had not been at arm’s length and that the interest payment and exchange losses on the loans were not tax deductible. Decision of CAAD The CAAD set aside the assessment and decided in favour of “Welding Mesh SA” Click here for English translation Portugal - P194_2021-T - 2021-12-07 ...

Greece vs “GSS Ltd.”, December 2021, Tax Court, Case No 4450/2021

An assessment was issued for FY 2017, whereby additional income tax was imposed on “GSS Ltd” in the amount of 843.344,38 €, plus a fine of 421.672,19 €, i.e. a total amount of 1.265.016,57 €. Various adjustments had been made and among them interest rates on intra group loans, royalty payments, management fees, and losses related to disposal of shares. Not satisfied with the assessment, an appeal was filed by “GSS Ltd.” Judgement of the Tax Court The court dismissed the appeal of “GSS Ltd.” and upheld the assessment of the tax authorities Excerpts “Because only a few days after the entry of the holdings in its books, it sold them at a price below the nominal value of the companies’ shares, which lacks commercial substance and is not consistent with normal business behaviour. Since it is hereby held that, by means of the specific transactions, the applicant indirectly wrote off its unsecured claims without having previously taken appropriate steps to ensure its right to recover them, in accordance with the provisions of para. 4 of Article 26 of Law 4172/2013 and POL 1056/2015. Because even if the specific actions were suggested by the lending bank Eurobank, the applicant remains an independent entity, responsible for its actions vis-à-vis the Tax Administration. In the absence of that arrangement, that is to say, in the event that the applicant directly recognised a loss from the write-off of bad debts, it would not be tax deductible, since the appropriate steps had not been taken to ensure the right to recover them. Because on the basis of the above, the audit correctly did not recognise the loss on sale of shareholdings in question. The applicant’s claim is therefore rejected as unfounded.” “Since, as is apparent from the Audit Opinion Report on the present appeal to our Office, the audit examined the existence or otherwise of comparable internal data and, in particular, examined in detail all the loan agreements submitted by the applicant, which showed that the interest rates charged to the applicant by the banks could not constitute appropriate internal comparative data for the purpose of substantiating the respective intra-group transactions, since the two individual stages of lending differ as to the nature of the transactions. (a) the existence of contracts (the bank loans were obtained on the basis of lengthy contracts, unlike the loans provided by the applicant for which no documents were drawn up, approved by the Board of Directors or general meetings), (b) the duration of the credit (bank loans specify precisely the time and the repayment instalments, unlike the applicant’s loans which were granted without a specific repayment schedule), (c) the interest rate (bank loans specify precisely the interest rate on the loan and all cases where it changes, unlike the applicant’s loans, (d) the existence of collateral (the bank loans were granted with mortgages on all the company’s real estate, with rental assignment contracts in the case of leasing and with assignment contracts for receivables from foreign customers (agencies), unlike the applicant’s loans which were granted without any collateral), (e) the size of the lending (the loans under comparison do not involve similar funds), (f) security conditions in the event of non-payment (the bank loans specified precisely the measures to be taken in the event of non-payment, unlike the applicant’s loans, for which nothing at all was specified), (g) the creditworthiness of the borrower (the banks lent to the applicant, which had a turnover, profits and real estate, unlike the related companies, most of which had no turnover, high losses and negative equity), (h) the purpose of the loan (83 % of the applicant’s total lending was granted to cover long-term investment projects as opposed to loans to related parties which were granted for cash facilities and working capital). Since, in the event that the applicant’s affiliated companies had made a short-term loan from an entity other than the applicant (unaffiliated), then the interest rate for loans to non-financial undertakings is deemed to be a reasonable interest rate for loans on mutual accounts, as stated in the statistical bulletin of the Bank of Greece for the nearest period of time before the date of the loan (www.bankofgreece.gr/ekdoseis-ereyna/ekdoseis/anazhthsh- ekdosewn?types=9e8736f4-8146-4dbb-8c07-d73d3f49cdf0). Because the work of this audit is considered to be well documented and fully justified. Therefore, the applicant’s claim is rejected as unfounded.” Click here for English translation Click here for other translation Greece 4450-2021 ...

Denmark vs Takeda A/S and NTC Parent S.a.r.l., November 2021, High Court, Cases B-2942-12 and B-171-13

The issue in these two cases is whether withholding tax was payable on interest paid to foreign group companies considered “beneficial owners” via conduit companies covered by the EU Interest/Royalties Directive and DTA’s exempting the payments from withholding taxes. The first case concerned interest accruals totalling approximately DKK 1,476 million made by a Danish company in the period 2007-2009 in favour of its parent company in Sweden in connection with an intra-group loan. The Danish Tax Authorities (SKAT) subsequently ruled that the recipients of the interest were subject to the tax liability in Section 2(1)(d) of the Corporation Tax Act and that the Danish company was therefore obliged to withhold and pay withholding tax on a total of approximately DKK 369 million. The Danish company brought the case before the courts, claiming principally that it was not obliged to withhold the amount collected by SKAT, as it disputed the tax liability of the recipients of the interest attributions. The second case concerned interest payments/accruals totalling approximately DKK 3,158 million made by a Danish company in the period 2006-2008 in favour of its parent company in Luxembourg in respect of an intra-group loan. SKAT also ruled in this case that the interest payments/write-ups were taxable for the recipients and levied withholding tax on them from the Danish company totalling approximately DKK 817 million. The Danish company appealed to the courts, claiming principally that the interest was not taxable. The Eastern High Court, as first instance, dealt with the two cases together. The European Court of Justice has ruled on a number of preliminary questions in the cases, see Joined Cases C-115/16, C-118/16, C119/16 and C-299/16. In both cases, the Ministry of Taxation argued in general terms that the parent companies in question were so-called “flow-through” companies, which were not the “beneficial owners” of the interest, and that the real “beneficial owners” of the interest were not covered by the rules on tax exemption, i.e. the EU Interest/Royalties Directive and the double taxation conventions applicable between the Nordic countries and between Denmark and Luxembourg respectively. Judgement of the Eastern High Court In both cases, the Court held that the parent companies in question could not be regarded as the “beneficial owners” of the interest, since the companies were interposed between the Danish companies and the holding company/capital funds which had granted the loans, and that the corporate structure had been established as part of a single, pre-organised arrangement without any commercial justification but with the main aim of obtaining tax exemption for the interest. As a result, the two Danish companies could not claim tax exemption under either the Directive or the Double Taxation Conventions and the interest was therefore not exempt. On 3 May 2021, the High Court ruled on two cases in the Danish beneficial owner case complex concerning the issue of taxation of dividends. The judgment of the Regional Court in Denmark vs NETAPP ApS and TDC A/S can be read here. Click here for English translation Click here for other translation Takeda AS and NTC Parents Sarl Nov 2021 case no b-2942-12 ...

Liechtenstein vs “A-Geothermal Finance AG”, December 2021, Administrative Court, Case No VGH 2021/085

“A-Geothermal Finance AG” (A AG) financed geothermal projects developed by the E GmbH. The sole shareholder is af A AG. Since 2012, B has also been the sole shareholder of C AG. C AG holds as a subsidiary E GmbH with developed two geothermal projects. These projects were financed by A AG, namely with loans to E GmbH, which forwarded the loan amounts to F S.p.a. In the period from November 2010 to March 2017, A AG granted a large number of loans ranging from EUR 10,000.00 to EUR 270,000.00. At the end of 2017, loans receivable (including interest in arrears on the loan) from E GmbH, amounted to CHF 9,397,427.00. A AG made value adjustments on this amount, namely in 2016 in the amount of CHF 7,676,057.00 and in 2017 in the amount of CHF 1,721,370.00. The tax administration did not recognize these value adjustments as tax deductible business-related operating expenses, essentially with the argument that the granting of the loan did not stand up to the arm’s length principle. An appeal was filed by A AG. Judgement of the Administrative Court The Court dismissed the appeal against the decision and the decision of the tax authorities upheld. Excerpts “The complainant argues in point 2 of its complaint that the lower courts should have clarified the complainant’s intentions and motivations in connection with the considerable advance payments and investments made – i.e. the loans granted – by examining witnesses and parties. This is not the case, because even if the complainant’s intentions and motivations were established as alleged by the complainant, an independent third party would not have made the loans and advance payments that are the subject matter of the proceedings. Thus, even if B, as a member of the competent administrative bodies of the “geothermal group”, had tacitly or even verbally promised a third party that he would provide him with a general contractor contract with a turnover of approximately EUR 16 million if the foreign state granted the concession for the construction of the two geothermal plants, the independent third party would not have granted such loans as the complainant did. “In points 5.3 and 5.4 of its complaint, the complainant argues that it therefore did not provide F S.p.a. and E GmbH with its own funds, because the external financing on the part of the complainant was intended to ensure that, if the project had been successful and a third party investor had entered, the complainant’s investments would have existed as a debt in F S.p.a. and would therefore have had to be satisfied first. This ensured that the complainant would be the first to get back the money it had invested if the project had been successful. The structure chosen in this case had been the best possible and only possible one for participation in the tender. The initiative for the development of geothermal projects had always come from the complainant, which was why the project had also been carried out in the complainant’s interest and at its risk. The security of the pledge of the shares in F S.p.a. would not have resulted in any additional benefit because of the complete control. These arguments do not change the assessment that a third party would not have provided the loans and advance payments at issue in the proceedings at the conditions that the complainant provided and were promised to it. If the complainant had participated in F S.p.a. as sole shareholder from the beginning – which it could also have done indirectly via C AG or E GmbH – it would have had the chance to obtain its profit if the geothermal projects had been successful. With such a participation, the complainant would have been free to make the loans and advance payments at issue in the proceedings as such. The complainant would therefore not have been forced to provide the amount of over EUR 7 million that was the subject of the proceedings as equity capital of the foreign company. Thus, the chosen structure, namely that B rather than the complainant holds the “geothermal group” and that the complainant grants the risk capital in the form of loans, was by no means the only and, moreover, the best possible variant. 8. In summary, the “structure” chosen meant that the complainant had to bear the entire risk associated with the planning and development of the two geothermal projects, at least until the concession was granted by the foreign state. In return, the complainant obtained a written guarantee of a relatively low interest rate on the loans it had granted. In addition, it hoped that after the concession was granted by the foreign state, it would be awarded a contract that it could carry out at a profit – if possible with around EUR 10 million. However, the profit opportunities associated with the geothermal projects – up to EUR 200 million – would not have been available to it, but to its sole shareholder B. Such a structure does not stand up to the arm’s length principle: an independent third party would not have entered into the commitment that the complainant did. From an ex post perspective, it must be noted that only the risk associated with the geothermal projects materialised and the loans and advance payments made by the complainant were lost. Because these services do not stand up to the arm’s length principle, they may not be claimed as tax reductions. 9. For all these reasons, the appeal of 23 September 2021 is not justified” Click here for English translation Click here for other translation Liechtenstein VGH2021085 ...

Korea vs “K-GAS Corp”, November 2021, Daegu District Court, Case No 2019구합22561

K-GAS Corp had issued loans and performance guarantees to overseas subsidiaries but received no remuneration in return. The tax authorities issued an assessment where additional taxable income was determined by application of the arm’s length principle. An appeal was filed by K-GAS with the district court. Decision of the Court The court upheld the decision of the tax authorities and dismissed the appeal of K-GAS Corp. Excerpts related to loans “In light of the following circumstances, which can be known by the above acknowledged facts, in light of the above legal principles, it is not economically reasonable for the Plaintiff to decide not to receive interest on the self-financing portion of the case loan to the subsidiaries in question 1 until the end of the exploration phase, and there is no illegality in the method of calculating the normal price of the Defendant. … …the Plaintiff lent the money raised from the outside to the subsidiaries in the first issue, and in this type of financial transaction, it is the most reasonable and direct method to view the interest obtained by adding a certain profit to the borrowing interest corresponding to the procurement cost according to the cost plus method as the normal price (the Plaintiff also argued for the above effect on the normal price on the premise of ‘general loan and loan transactions’ (page 18 of the Complaint)). However, the Defendant not only calculated the normal price by applying the interest rate on the loan in this case, which is lower than the borrowing interest rate of the self-funding in this case, but also the price is lower than the interest rate calculated according to the Comparable Third Party Price Act when the Plaintiff lends funds for overseas resource development projects to Australian subsidiaries at the same time, so it cannot be considered that the normal price calculated by the Defendant exceeds the range of the price that is applied or is expected to be applied in ordinary transactions.” Excerpts related to performance guarantees “In light of the following circumstances, which can be seen by the above acknowledged facts, in the light of the legal principles seen in Paragraph (1) of A.A., it is not economically reasonable for the Plaintiff to not receive the performance guarantee fee from the subsidiaries, etc. of the third issue on the performance guarantee in this case, and there is no illegality in the method of calculating the normal price of the Defendant. … As seen earlier, the Plaintiff has received a performance guarantee fee when he/she guarantees the performance of the liability to pay the price under a gas sales contract of another overseas subsidiary or second-tier company. In cases of the performance guarantee in this case, it is deemed that there exists a reasonable ground not to receive the performance guarantee fee, in distinction from the above transaction, only a difference in the details of the principal obligation subject to the guarantee exists. The Plaintiff also explains that the above transaction is a payment guarantee for the business of an overseas subsidiary in the same position as an independent third-party company, so it is natural to receive a commission in return for the risks borne by the Plaintiff. There is no reason to deem otherwise in that the performance guarantee in this case is also for the business carried out by the subsidiary, etc., which is independent from the Plaintiff. The calculation of the reasonable performance guarantee fee by the Defendant for the provision of performance in this case is based on the risk approach that is the method of calculation of the performance guarantee fee that the Plaintiff has actually received from the overseas subsidiary, and as seen earlier, it is hard to deem that there is any illegality in the method of calculation of the reasonable performance guarantee fee by the Defendant, unless it is impossible to deem that the Plaintiff has no risk of performance guarantee in this case.” Click here for English translation Click here for other translation Korea 22561 Nov 2021 ORG ...

Italy vs Pompea S.p.A., October 2021, Supreme Court, Case No 27636/2021

This case deals with a non-interest bearing intragroup loan granted by Pompea S.p.A. to a foreign subsidiary and deductibility of interest expenses incurred by Pompea S.p.A. to obtain the funding needed to grant this loan to the subsidiary. The company was of the opinion that interest free inter-company loans were not covered by the Italien arm’s length provision at the time where the loan in question was established. The Italien tax authorities claimed that the arrangement was covered by the transfer pricing regulations art. 110 paragraph 7, and that an arm’s length interest had to be paid on the loan. They also found that interest on the bank loan was not deductible. Judgement of the Supreme Court The Court found that non-interest-bearing loan, was covered by the rules laid down in Article 110(7) of the TUIR (the Italien arm’s length provisions). Furthermore, the court found that the OECD 2010 TP Guidelines were unambiguous in clarifying (Chapter VII of the 2010 Guidelines, paras. 7.14 and 7.15 with respect to the identification and remuneration of loans as intragroup services, and 7.19, 7.29 and 7.31 with respect to the determination of the payment), that the remuneration of an intragroup loan must normally take the form of the payment of an interest rate corresponding to that which would have been expected between independent enterprises in comparable circumstances’. With regard to the deductibility of interest expense deriving from the bank loan, the Court found that these were related to the entire business activity carried out by the group and therefor deductible. Click here for English translation Click here for other translation 27636_2021 ...

ATO and Singtel in Court over Intra-company Financing Arrangement

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 ...

Greece vs Cypriot company Ltd., September 2021, Tax Court, Case No 2940

This case deals with arm’s length pricing of various inter-company loans which had been granted – free of interest – by Cypriot company Ltd. to an affiliate group company. Following an audit of Cypriot company Ltd, an upwards adjustment of the taxable income was issued. The adjustment was based on a comparison of the terms of the controlled transaction and the terms prevailing in transactions between independent parties. The lack of interest on the funds provided (deposit of a remittance minus acceptance of a remittance) was not considered in accordance with the arm’s length principle. Cypriot company Ltd disagreed with the assessment and filed an appeal with the tax court. Judgement of the Tax Court The Tax Court dismissed the appeal of Cypriot company Ltd. in regards of the arm’s length pricing of the loans. Excerpt “It is evident from the above that the bond loan taken is related to the outstanding balance of the debt as at 31/12/2014 and is not an investment option. As the contracting companies are related entities, the above transaction falls within the scope of the verification of the arm’s length principle. As in the previous cases above, the independent party for the comparison of the terms of the transaction is understood to be domestic financial institutions. Therefore, the independent market interest rate for the calculation of interest is the interest rate of bank loans in euro for the interest rate category to non-financial companies “To non-financial companies – Long-term loans of regular maturity – Loans over EUR 1 million”, according to the methodology defined by the Bank of Greece. For the month of purchase of the bonds (December 2015), the applicable average market interest rate is approximately 4.86%, higher than the one specified in the contract (2%). It can therefore be seen that in the present case the principle of equal distance is not respected, since interest crediting the lender with a lower interest rate than the one applicable between independent parties is calculated. The accounting of interest on the funds granted at a lower rate of interest constitutes a derogation from the arm’s length principle. Therefore, the audit was right to calculate imputed credit interest in order to restore the arm’s length principle and in accordance with the provisions of Article 50 of the Law. 4174/2013. The applicant claims that it was not informed as to how to calculate the interest for the 2018 tax year in the note of findings, however, the reasoning and the numerical verifications are identical to the corresponding accounting differences of the previous years for which it received detailed information and therefore the allegations made as to the violation of the right to be heard in this matter lack any substantial basis. Since the applicant company also claims that the contested acts, which are unfavourable attributive acts, were adopted by the Tax Administration after the expiry of the exclusive period of one month from the submission of the observations and in breach of the provisions of Article 28 of Law No. 4174/2013 in conjunction with the provisions of Article 10 par. 5 of Law no. 2690/1999. However, this claim is rejected as unfounded as the right to control and issue tax acts is regulated exclusively by Article 36 of Law No. 4174/2013 and as it is clear from the evidence in the file, the stamp duty and income tax differences in question were charged by the issuance and notification of the contested acts within the prescribed limitation period (except for the contested stamp duty act for the tax year 2014, which was referred to above). Because the findings of the audit, as recorded in the 08/12/2020 partial audit reports of the income tax and stamp duty assessment of the C.E.M.E.P. auditor, on which the contested acts are based, are considered to be valid, acceptable and fully reasoned.” Click here for English translation Click here for other translation ΔΕΔ Α 2940ORG ...

India vs Times Infotainment Media Ltd, August 2021, Income Tax Appellate Tribunal – Mumbai, TIA No 298/Mum/2014

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. Times_Infotainment_Media_Ltd_vs_Dcit_Rg_1_3_Mumbai_on_30_August_2021 (1) (1) ...

El Salvador vs Corp, June 2021, Tax Court, Case No 096-2021

Following an audit the tax authorities issued an assessment regarding interest payments on intra group loans and tax deductions for the costs for various services. An appeal was filed by the company. Judgement of the Tax Court The court upheld the assessment and decided in favour of the tax authorities. Click here for English translation TAIIA-R1704012TM ...

Brazil vs Natura Cosmeticos S/A, August 2021, CARF, Case No. 16327.000738/2004-66

Natura Cosmeticos S/A had been issued a tax assessment for FY 1999 to 2001. In the assessment interest income from loans granted to foreign group entities had been added to the taxable income of the company. NATURA COSMETICOS S/A stated that the transfer pricing rule provided for in paragraph 1 of article 22 of Law 9,430/96 did not apply. The rule determines that “in the case of a loan with a related person, the lending legal entity, domiciled in Brazil, must recognize, as financial income corresponding to the operation, at least the amount calculated in accordance with the provisions of this articleâ€. Article 22 provides that interest paid to a related person, when arising from a contract not registered with the Central Bank, will only be deductible for purposes of determining taxable income “up to the amount that does not exceed the amount calculated based on the Libor rateâ€. The remittance to related legal entities abroad was made by means of a transfer in reais, registered in the Central Bank Information System (Sisbacen). For this reason, the operation was submitted to the control of the regulatory authority and there was no legal obligation at the time regarding registration with the BC. Judgement of the Conselho Administrativo de Recursos Fiscais A split decision was handed down in favor of Natura Cosméticos S/A. The majority of counselors understood that the transfer price adjustments in the loan granted by the legal entity domiciled in the country to the related person were not applicable, “to the extent that the exchange or international transfer in reais is registered with Sisbacen, and the supporting documentation of the loan has been presented to the exchange operating bankâ€. They voted to approve the appeal of Natura Cosméticos S/A. The minority of counselors understood that the rule in paragraph 4 does not apply in the specific case. “The extensive interpretation proposed by the appellant, in the sense of accepting that the simple registration with Sisbacen of the remittance of resources to the linked companies abroad may be equivalent to registration with the BC, is not supported by any normative legal act”. The counselor voted to deny the appeal to prevent the court from admitting “minorization of applicable taxation without support by lawâ€. They voted to dismiss the appeal of Natura Cosméticos S/A. Click here for English Translation Click here for other translation Brazil CARF 16327000738200466_6479039 ...

Peru vs. Borrower Branch, June 2021, Tax Court, Case No 05569-1-2021

A foreign group had transferred funds to a branch in Peru and claimed that the transfer was a capital contribution – and not a loan. Following an audit the tax authorities issued an assessment, where the funds were considered a loan and withholding taxes on the determined interest payments was lifted. An appeal was filed by the group. Judgement of the Tax Court The Tax Court set aside the assessment and decided in favour of the group. Excerpts ” In this regard, the table presented shows that four of the elements considered by the law were taken into account, which were duly substantiated. Thus, with regard to the amounts of the transfers at the beginning and end of the year, it can be seen that these were between $570 million and $780 million, while the comparable operations presented amounts of between $100 million and $1 billion. In relation to the term or amortisation period, in the case of the operation under analysis, it was determined that since it was not paid during the 2013 financial year, the term of the comparables should not be less than one year; therefore, in the case of the comparables, terms ranging from 3 to 5 years were identified. Regarding the start date of the comparable loans, it was considered that the subscription date should be at least two years, considering that, according to the information available, the transfer of funds from the parent company started in that period and it was assessed that they should be in force throughout 2013. With regard to the guarantees, it was concluded that the comparable operations are secured loans, while those analysed are not, which suggests that the Administration is acting conservatively, as the loans received from the related party under their current conditions (without guarantee) would imply the application of a higher interest rate than those selected as comparable. From the evaluation carried out, it can be seen that the Administration carried out the analysis of some of the characteristics applicable to the case in question, as considered in article 11O of the Income Tax Law Regulations; However, it is noted that it has not taken into account some other elements of the operation that are relevant in order to establish a comparable financial transaction and that may have an impact on the setting of the interest rate to be charged, such as the solvency of the debtor and the risk rating, elements considered by paragraph d) of article 32-A of the Income Tax Law and paragraph a) of numeral 1 of article 110 of the regulations of the aforementioned law. In this regard, it has not been proven that the Administration had carried out a correct comparability analysis for the transaction subject to assessment, i.e. a due comparison of the transaction under examination with a transaction carried out between independent parties under the same or similar conditions, in accordance with the provisions of article 32-A, paragraph d) of the Income Tax Law and article 110 of the regulations of the aforementioned law, in order to establish the market value of the interest rate agreed between the appellant and its related party in the 2013 financial year. That in accordance with the foregoing, the aforementioned objection is not duly substantiated, and therefore, it should be lifted; and consequently, the appealed decision should be revoked and the contested determination should be annulled. ” Click here for English translation Click here for other translation 2021_1_05569 ...

Peru vs. Perupetro, June 2021, Tax Court, Case No 05562-1-2021

A foreign group had transferred funds to one of its branches, Perupetro, in Peru and claimed that the transfer was a capital contribution – and not a loan. Following an audit the tax authorities issued an assessment, where the funds transferred were considered a loan and withholding taxes on the interest payments had been lifted. An appeal was filed by Perupetro. Perupetro held that the transfers of funds made by its non-domiciled parent company in its favour in the financial year 2014 constitute assigned capital (capital contributions) and not loans as considered by the Administration. It pointed out that the tax authorities has not followed the procedure established by the Income Tax Law and the OECD Guidelines to delineate the operation observed, a situation that would have allowed it to note that it does not qualify as a loan. Perupetro further claimed that the tax authorities had not carried out a correct comparability analysis for the transaction subject to assessment, i.e. a proper comparison of the transaction under examination with a transaction carried out between independent parties under the same or similar conditions, in accordance with the provisions of paragraph d) of article 32-A of the Income Tax Law and article 110 of the regulations of the aforementioned law, in order to establish the market value of the interest rate agreed between the appellant and its related party in the 2014 financial year. Judgement of the Tax Court The Tax Court sets aside the assessment and decided in favour of Perupetro. Excerpts ” From the evaluation carried out, it can be seen that the Administration carried out the analysis of some of the characteristics applicable to the case in question, as considered in article 110 of the Income Tax Law Regulations; However, it is noted that it has not taken into account some other elements of the operation that are relevant in order to establish a comparable financial transaction and that may have an impact on the setting of the interest rate to be charged, such as the solvency of the debtor and the risk rating, elements considered by paragraph d) of article 32-A of the Income Tax Law and paragraph a) of numeral 1 of article 110 of the regulations of the aforementioned law. In this regard, it has not been proven that the Administration had carried out a correct comparability analysis for the transaction subject to assessment, i.e. a proper comparison of the transaction under examination with a transaction carried out between independent parties under the same or similar conditions, in accordance with the provisions of paragraph d) of article 32-A of the Income Tax Law and article 110 of the regulations of the aforementioned law, in order to establish the market value of the interest rate agreed between the appellant and its related party in the 2014 financial year. That in accordance with the foregoing, the objection of the Administration is not duly substantiated, and it is therefore appropriate to lift it and, consequently, revoke the appealed ruling and annul the contested determination ruling.” Click here for English Translation Click here for other translation 2021_1_05562 ...

Germany vs “G-Corp GmbH”, June 2021, Bundesfinanzhof, Case No I R 32/17

A German corporation,”G Corp” held interests in domestic and foreign companies in the year in dispute (2005). G Corp granted loans to various subordinate companies – resident in France and the USA. These loans were mainly at fixed interest rates; instead of a fixed interest rate, an annual participation of 12.5% in the balance sheet profit of the subordinate company, limited to a maximum amount of 25% of the loan volume, was agreed as consideration for one loan. No collateral was provided. In the year in dispute, G Corp wrote off these loans against taxable profits. G Corp also transferred assets at book value to a Maltese subsidiary company, of which it was the sole shareholder, and contributed the shares in this company, pursuant to section 23(4) of the Reorganisation Tax Act applicable in the year in dispute, also at book value, to another Malta-based company in the context of a capital increase against the granting of company rights. Finally, in the year in dispute, G Corp and its controlled companies earned interest income from loan claims against various foreign subordinated companies totalling … €. The tax authorities issued an assessment where the taxable income related to a partial value write-downs on unsecured loan receivables issued within the group and a book value transfer of assets to foreign subsidiaries had been adjusted. In 2017 the regional tax court issued its decision concluding that the adjustment was not possible under the relevant German arm’s length provision. This decision was then appealed to the Federal tax court by both parties. Judgment of the Court (Bundesfinanzhof) The Federal tax court found the appeal well-founded and referred the case back to the regional fiscal court. Click here for English translation Click here for other translation Bundesfinanzhof IR 3-17 ...

UK vs G E Financial Investments Ltd., June 2021, First-tier Tribunal, Case No [2021] UKFTT 210 (TC), TC08160

The case concerned a complex financing structure within the General Electric Group. The taxpayer, GE Financial Investments Ltd (GEFI Ltd), a UK resident company was the limited partner in a Delaware limited partnership, of which, GE Financial Investments Inc (GEFI Inc) a Delaware corporation was the general partner. GEFI Ltd filed UK company tax returns for FY 2003-2008 in which the company claimed a foreign tax credit for US federal income tax. In total, US federal income taxes amounted to $ 303 millions and exceeded the amount of tax due in the UK. The tax authorities opened an enquiry into each of GEFI’s company tax returns for the relevant period, and subsequently issued an assessment where the claims for foreign tax credits was denied in their entirety. Judgement of the Tax Tribunal The tribunal dismissed the appeal of GEFI Ltd and ruled that the UK company did not carry on business in the US. Hence GEFI Ltd was not entitled to a foreign tax credit. Excerpt “By contrast the construction of Article 4 advanced by HMRC requires both worldwide taxation and a connection or attachment to the contracting state concerned. In my judgment, this is the correct approach as it takes into account the common feature or similarity of domicile, residence, citizenship etc, in the context of the Convention, ie that they are all criteria providing, in addition to the imposition of a worldwide liability to tax, a “connection†or “attachment†of a person to the contracting state concerned. Such an interpretation is consistent with Widrig (see paragraphs 44 – 46, above) and Vogel (see paragraph 47, above) and Crown Forest which, as Ms McCarthy submits, when properly understood in context is authority for the proposition that full or worldwide taxation is a necessary feature of the connecting criterion but is not sufficient of itself. … Although her further submission, that, other than the imposition of a worldwide liability to US tax, share stapling has no US law consequences at federal or state level (eg it does not carry with it US filing or reporting obligations or make a stapled overseas company’s constitutional documents subject to or dependent on US law), was not supported by evidence, I agree that, given the differences that do exist for tax purposes (see paragraph 29, above) the connection or attachment is between the stapled entities rather than to the country concerned. 66. Therefore, in the absence of the necessary connection or attachment by GEFI to the US, and despite Mr Baker’s persuasive submissions to the contrary, I do not consider that GEFI was a resident of the US for the purposes of Article 4 of the Convention by reason of the share staple between it and GEFI Inc. As such it is necessary to consider Issue 2, the Permanent Establishment Issue. … However, Ms McCarthy confirmed that, should I conclude that the activities of the LP are sufficient to amount to the carrying on of a business, there is no separate dispute as to whether that business is carried on in Stamford, Connecticut, or some other location. 71. As such, it is therefore necessary to consider what is in effect the only issue between the parties under issue 2(a), namely whether, as it contends, GEFI by its participation in the LP carried on a business in the US or, as HMRC argue, it did not.” … I agree with Ms McCarthy who submits that there is nothing to suggest that personnel or agents acting on behalf of the LP made or conducted continuous and regular commercial activities in the US. All that appears to have happened was that monies were directed straight to GELCO without negotiating terms or the consideration at a director level as would have been expected from a company carrying on commercial activities on sound business principles. … Therefore, notwithstanding its objects, and having regard to the degree of activity as a whole, particularly the lack of participation in the strategic direction of the LP by the directors of GEFI Inc, I have come to the conclusion that GEFI was not carrying on a business in the US through its participation in the LP. … Having concluded for the reasons above that GEFI did not carry on business in the US it is not necessary to address Issue 2(b), ie whether, if GEFI had carried out business in the US, US tax was payable under US law and if so whether the UK is required under Article 24(4)(a) to give relief against this US tax. … Therefore, for the reasons above the appeal is dismissed.” ”G UKFTT 210 (TC) TC08160″] ...

Finland vs A Oyj, May 2021, Supreme Administrative Court, Case No. KHO:2021:66

A Oyj was the parent company of the A-group, and responsible for the group’s centralised financial activities. It owned the entire share capital of D Oy and B Oy. D Oy in turn owned the entire share capital of ZAO C, a Russian company. A Oyj had raised funds from outside the group and lent these funds to its Finnish subsidiary B Oy, which in turn had provided a loan to ZAO C. The interest charged by B Oy on the loans to ZAO C was based on the cost of A Oyj’s external financing. The interest rate also included a margin of 0,55 % in tax year 2009, 0,58 % in tax year 2010 and 0,54 % in tax year 2011. The margins had been based on the average margin of A Oyj’s external financing plus 10 %. The Tax Administration had considered that the level of interest to be charged to ZAO C should have been determined taking into account the separate entity principle and ZAO C’s credit rating. In order to calculate the arm’s length interest rate, the synthetic credit rating of ZAO C had been determined and a search of comparable loans in the Thomson Reuters DealScan database had been carried out. On the basis of this approach, the Tax Administration had considered the market interest margin to be 2 % for the tax year 2009 and 3,75 % for the tax years 2010 and 2011. In the tax adjustments the difference between the interest calculated based on the adjusted rates and the interest actually charged to ZAO C had been added to A Oyj’s taxable income. Judgement of the Supreme Administrative Court The court overturned an earlier decision handed down by the Administrative Court of Helsinki and ruled in favour of A Oyj. The Supreme Administrative Court held that ZAO C had received an intra-group service in the form of financing provided by A Oyj through B Oy. The Court also considered that the cost-plus pricing method referred to in the OECD Transfer Pricing Guidelines was the most appropriate method for assessing the pricing of intra-group services. Thus, the amount of interest to be charged to ZAO C could have been determined on the basis of the costs incurred by the Finnish companies of the group in obtaining the financing, i.e. the cost of external financing plus a mark-up on costs, and ZAO C could have benefited from the better creditworthiness of the parent company of the group. Consequently the Supreme Administrative Court annulled the previous decisions of the Administrative Court and set aside the tax adjustments. Excerpts “B Oy has been responsible for financing ZAO C and certain other group companies with funds received from the parent company. The company is a so-called ‘shell company’ which has had no other activity since 2009 than to act as a company through which intra-group financing formally flows.” “The question is whether the tax assessments of A Oyj for the tax years 2009 to 2011 could be adjusted to the detriment of the taxpayer and the taxable income of the company increased pursuant to Article 31 of the Tax Procedure Act, because the level of the interest margin paid by ZAO C to the Finnish group companies was below the level which ZAO C would have had to pay if it had obtained financing from an independent party. The Supreme Administrative Court’s decision KHO 2010:73 concerns a situation where a new owner had refinanced a Finnish OY after a takeover. The interest rate paid by the Finnish Oy on the new intra-group debt was substantially higher than the interest rate previously paid by the company to an external party, which the Supreme Administrative Court did not consider to be at arm’s length. The present case does not concern such a situation, but whether ZAO C was able to benefit financially from the financing obtained through the Finnish companies of the group. In its previous case law, the Supreme Administrative Court has stated that the methods for assessing market conformity under the OECD Transfer Pricing Guidelines are to be regarded as an important source of interpretation when examining the market conformity of the terms of a transaction (KHO 2013:36, KHO 2014:119, KHO 2017:146, KHO 2018:173, KHO 2020:34 and KHO 2020:35). As explained above, the transfer pricing guidelines published by the OECD in 1995 and 2010 are essentially the same in substance for the present case. It is therefore not necessary to assess whether the company’s tax assessment for the tax year 2009 could have been adjusted to the detriment of the taxpayer on the basis of the 2010 OECD transfer pricing guidelines. According to the OECD transfer pricing guidelines described above, when examining the arm’s length nature of intra-group charges, a functional analysis must first be carried out, in particular to determine the legal capacity in which the taxpayer carries out its activities. The guidelines further state that almost all multinational groups need to organise specifically financial services for their members. Such services generally include cash flow and solvency management, capital injections, loan agreements, interest rate and currency risk management and refinancing. In assessing whether a group company has provided financial services, the relevant factor is whether the activity provides economic or commercial value to another group member which enhances the commercial position of that member. In contrast, a parent company is not considered to receive an internal service when it receives an incidental benefit that is merely the result of the parent company being part of a larger group and is not the result of any particular activity. For example, no service is received when the interest-earning enterprise has a better credit rating than it would have had independently, simply because it is part of a group. The financial activities of the A group are centralised in A Oyj. The group’s external and internal loan agreements have prohibited A Oyj subsidiaries from obtaining external financing in their own name. Where necessary, the subsidiaries have provided collateral for ...

Germany vs Lender GmbH, May 2021, Bundesfinanzhof, Case No I R 62/17

Lender GmbH acquired all shares in T GmbH from T in 2012 (year in dispute) for a purchase price of … €. To finance the purchase price of the shares, Lender GmbH took out a loan from its sole shareholder, D GmbH, a loan in the amount of … €, which bore interest at 8% p.a. (shareholder loan). The interest was not to be paid on an ongoing basis, but only on expiry of the loan agreement on 31.12.2021. No collateral was agreed. D GmbH, for its part, borrowed funds in the same amount and under identical terms and conditions from its shareholders, among others from its Dutch shareholder N U.A. In addition Lender GmbH received a bank loan in the amount of … €, which had an average interest rate of 4.78% p.a. and was fully secured. Finally Lender GmbH also received a vendor loan from the vendor T in the amount of … €, which bore an interest of 10 % p.a. and was not secured. The shareholder loan was subordinated to all other liabilities. The tax office issued a tax assessment in 2016 with regard to interest payments on the shareholder loan. According to the tax authorities an interest rate of of 5 % would have been agreed between independent parties. The difference up to the actual interest rate of 8% was therefore considered a hidden profit distribution(vGA) and added to the income of Lender GmbH. A complaint filed by Lender GmbH against the tax assessment was unsuccessful (Cologne Fiscal Court, Judgment of 29.06.2017 – 10 K 771/16.) The appeal before the Bundesfinanzhof was directed against this judgment. Lender GmbH claims that there has been an infringement of substantive law and requests that the contested judgment be set aside and that the the 2012 corporate income tax assessment be annulled. The tax authorities requests that the appeal be rejected. Judgment of the Court (Bundesfinanzhof) When determining the arm’s length loan interest rate for an unsecured shareholder loan, the statutory subordination of shareholder loans (section 39(1)(5) InsO) does not preclude a risk premium when determining the interest rate to compensate for the lack of loan collateralisation. It is contrary to general principles of practice if the court assumes without factual findings that a third party would agree on the same interest rate for a subordinated and unsecured loan as for a secured and senior loan. The judgment of the Cologne Fiscal Court of 29 June 2017 – 10 K 771/16 is set aside and the case is referred back to the Cologne Fiscal Court for a different hearing and decision. Click here for English translation Click here for other translation Germany vs Corp May 2021 Bundesfinanzhof 62-17 ...

Portugal vs “M Fastfood S.A”, April 2021, Tribunal Central Administrativo Sul, Case No 1331/09

“M Fastfood S.A” was incorporated as a subsidiary company of an entity not resident in Portuguese territory, M Inc., a company with registered office in the United States. “M Fastfood S.A” had obtained financing from M Inc. for investment in its commercial activity, which resulted in indebtedness totalling EUR 74,000,000.00. The activity of “M Fastfood S.A” is “the opening, assembling, promotion, management, administration, purchase, sale, rental, leasing and cession of exploration of restaurants, for which purpose it may acquire or grant licenses or sub-licenses and enter into franchise contracts. It also includes the purchase, sale, rental, administration and ownership of urban buildings and the acquisition, transfer, exploitation and licensing of copyrights, trademarks, patents and industrial and commercial secrets and, in general, any industrial property rights”. “M Fastfood S.A” was in a situation of excessive indebtedness towards that entity, in light of the average equity capital presented by it in 2004, on 27 January 2005 it submitted a request to the tax authorities for the purposes of demonstrating the equivalence of indebtedness towards an independent entity. Following a tax audit concerning FY 2004 the authorities considered that the interest limitation rule should be applied, which resulted in corrections to the taxable amount in respect of excess interest paid. “M Fastfood S.A” presented a report, which intended to demonstrate that the level and conditions of indebtedness towards M Inc. were similar to those that could be obtained if it had chosen to obtain financing from an independent financial institution. According to the report “M Fastfood S.A.” was, at the time, in a period of strong expansion, which resulted in the opening of 118 fast-food outlets in recent years. That within the scope of its implementation strategy in the national market, the location of the restaurants plays a fundamental role and constitutes a decisive factor for the success of the business. That the ideal or optimum location of the establishments is very costly and therefore substantial investment has become necessary. According to “M Fastfood S.A.”, the conditions obtained were favourable, in particular the interest rates agreed with M Inc., which were lower than those that would be charged by an independent financial institution, presenting as proof financing proposals issued by B… Bank. Based on the report M Fastfood concludes are sufficient to constitute proof that the conditions of the financing considered excessive are similar, or even more favourable, to the conditions practiced by independent entities, the reason why no. 1 of article 61 of the Corporate Income Tax Code is applicable”. The tax authorities found that, the evidence submitted by “M Fastfood S.A.” was insufficient to demonstrate that the debt obtained from M Inc. is at least as advantageous as it would have been had they used an independent financial institution. Decision of Supreme Administrative Court The Supreme Administrative Court set aside the the assessment issued by the tax authorities and decided in favour of “M Fastfood S.A.”. Experts ” … Article 56 EC must be interpreted as meaning that the scope of that legislation is not sufficiently precise. Article 56 EC must be interpreted as precluding legislation of a Member State which, for the purposes of determining taxable profits, does not allow for the deduction as an expense of interest paid in respect of that part of the debt which is classified as excessive, paid by a resident company to a lending company established in a non-member country with which it has special relations, but allows such interest paid to a resident lending company with which the borrowing company has such relations, where, if the lending company established in a third country does not have a holding in the capital of the resident borrowing company, that legislation nevertheless presumes that any indebtedness of the latter company is in the nature of an arrangement intended to avoid tax normally due or where it is not possible under that legislation to determine its scope of application with sufficient precision in advance. As it is up to the national judge faced with such an interpretation to decide on its application to the specific case, it is important to mention that the situation which this review intends to decide on is identical in its contours to the one assessed by the CJEU. In fact, it is clear that the situation at issue in this review falls within the scope of the free movement of capital, and that it translates into less favourable tax treatment of a resident company that incurs indebtedness exceeding a certain level towards a company based in a third country than the treatment reserved for a resident company that incurs the same indebtedness towards a company based in the national territory or in another Member State. What is at issue is deciding whether such discrimination may be justified as a means of avoiding practices the sole purpose of which is to avoid the tax normally payable on profits generated by activities carried on within the national territory. However, although we agree with the CJEU that the provisions in question – Articles 61 and 58 of the CIRC – are appropriate as a means of preventing tax avoidance and evasion, we must agree with the Court that such a restriction is disproportionate to the intended aim. As the court in question correctly states “as article 58 of the CIRC covers situations which do not necessarily imply a participation by a third country lending company in the capital of the resident borrowing company and as it can be seen that the absence of such a participation results from the company’s being a resident borrower”, the Court agrees with the Court. in the absence of such participation, it results from the method of calculation of the excess debt provided for in Article 61(3) that any debt existing between these two companies should be considered excessive, Article 61 consecrates a discriminatory measure which limits the free movement of capital as only non-resident entities are subject to the regime of Article 61 of the CIRC when IRC tax ...

Italy vs GI Group S.p.A., May 2021, Supreme Court, Case No 13850/2021

A non-interest-bearing loan had been granted by GI Group S.p.A., to a related company – Goldfinger Limited – in Hong Kong, in order to acquire a 56% shareholding in the Chinese company Ningbo Gi Human Resources Co. Limited. The Italien tax authorities had issued an assessment, where an interest rate on the loan had been determined and an amount equal to the interest calculated on that basis had been added to the taxable income of GI Group S.p.A. GI Group brought this assessment to the Regional Tax Commission where a decision was rendered setting aside the assessment. This decision was appealed to the Supreme Court by the tax authorities. Judgement of the Supreme Court The Supreme court upheld the appeal of the tax authorities and referred the case back to the Regional Tax Commission. According to the Supreme Court, the decision of the Tax Commission dit not comply with the principles of law concerning the subject matter of evidence and the burden of proof on tax authorities and the taxpayer. Excerpts: “…In conclusion, according to the Court, “such discipline, being aimed at repressing the economic phenomenon of transfer pricing, i.e. the shifting of taxable income as a result of transactions between companies belonging to the same group and subject to different national laws, does not require the administration to prove the avoidance function, but only the existence of “transactions” between related companies at a price apparently lower than the normal one” “according to the application practice of the Italian Revenue Agency (Circular No. 6/E of 30 March 2016 on leveraged buy-outs), the reclassification of debt (or part of it) as a capital contribution should represent an “exceptional measure”. Moreover, it is not excluded that free intra-group financing may have a place in the legal system where it can be demonstrated that the deviation from the arm’s length principle is due to “commercial reasons” within the group, related to the role that the parent company assumes in supporting the other companies of the group; “ “…the Regional Commission did not comply with the (aforementioned) principles of law concerning the subject-matter of the evidence and the criterion for sharing the burden of proof, between the tax authorities and the taxpayer, on the subject of international transfer pricing. In essence, the examination of the trial judge had to be oriented along two lines: first, it had to verify whether or not the tax office had provided the evidence, to which it was entitled, that the Italian parent company had carried out a financing transaction in favour of the foreign subsidiary, as a legitimate condition for the recovery of the taxation of the interest income on the loan, on the basis of the market rate observable in relation to loans with sufficiently “comparable” characteristics and provided to entities with the same credit rating as the associated debtor company (see the OECD Report 2020), the determination of which is quaestio facti referred to the judge of merit; secondly, once this preliminary profile had been established, also on the basis of the principle of non-contestation, it had to be verified whether, for its part, the company had demonstrated that the non-interest-bearing loan was due to commercial reasons within the group, or in any event was consistent with normal market conditions or whether, on the contrary, it appeared that that type of transaction (i.e. the loan of money) between independent companies operating in the free market would have taken place under different conditions. Instead, as stated above (see p. 2 of the “Findings”), the C.T.R. required the Office to demonstrate facts and circumstances extraneous to the onus pro bandi of the Administration, such as the existence of an interest of Goldfinger Ltd in obtaining and remunerating the loan and, again, that there had been other similar onerous intra-group loans; Click here for English translation Click here for other translation IT vs GI Group Sez. 5 Num. 13850 Anno 2021 ...

Chile vs Avery Dennison Chile S.A., March 2021, Tax Court, Case N° RUT°96.721.090-0

The US group, Avery Dennison, manufactures and distributes labelling and packaging materials in more than 50 countries around the world. The remuneration of the distribution and marketing activities performed Avery Dennison Chile S.A. had been determined to be at arm’s length by application of a “full range” analysis. Furthermore, surplus capital from the local company had been placed at the group’s financial centre in Luxembourg, Avery Management KGAA, at an interest rate of 0,79% (12-month Libor). According the tax authorities in Chile the remuneration of the local company had not been at arm’s length, and the interest rate paid by the related party in Luxembourg had been to low. Judgement of the Tax Tribunal The Tribunal decided in favour of Avery Dennison Chile S.A. “Hence, the Respondent [tax authorities] failed to prove its allegations that the marketing operations carried out by the taxpayer during the 2012 business year with related parties not domiciled or resident in Chile do not conform to normal market prices between unrelated parties..” “Although the OECD Guidelines recommend the use of the interquartile range as a reliable statistical tool (point 3.57), or, in cases of selection of the most appropriate point of the range “the median” (point 3.61), its application is not mandatory in the national tax administration…” “the Claimant [taxpayer]carried out two financing operations with its related company Avery Management KGAA, domiciled in Luxembourg, which contains one of the treasury centres of the “Avery Dennison” conglomerate, where the taxpayer granted two loans for US $3.200.000.- in 2010 and another for US $1.1000.000.- in 2011.” “In relation to the financial transactions, the transfer pricing methodology used and the interests agreed by the plaintiff have been confirmed. Consequently, Assessment No. 210, dated 30 August 2016, should be annulled and, consequently, this Tax and Customs Court will uphold the claim presented in these proceedings.” Click here for English translation Click here for other translation CH vs Avery Dennison 16-9-0001493-0 ...

Norway vs Petrolia Noco AS, March 2021, Court of Appeal, Case No LB-2020-5842

In 2011, Petrolia SE established a wholly owned subsidiary in Norway – Petrolia Noco AS – to conduct oil exploration activities on the Norwegian shelf. From the outset, Petrolia Noco AS received a loan from the parent company Petrolia SE. The written loan agreement was first signed later on 15 May 2012. The loan limit was originally MNOK 100 with an agreed interest rate of 3 months NIBOR with the addition of a margin of 2.25 percentage points. When the loan agreement was formalized in writing in 2012, the agreed interest rate was changed to 3 months NIBOR with the addition of an interest margin of 10 percentage points. The loan limit was increased to MNOK 150 in September 2012, and then to MNOK 330 in April 2013. In the tax return for 2012 and 2013, Petrolia Noco AS demanded a full deduction for actual interest costs on the intra-group loan to the parent company Petrolia SE. Following an audit for FY 2012 and 2013, the tax authorities concluded that parts of the intra-group loan should be reclassified from loan to equity due to thin capitalization. Thus, only a deduction was granted for part of the interest costs. Furthermore, the authorities reduced the interest rate from 10 per cent to 5 per cent. For the income years 2012 and 2013, this meant that the company’s interest costs for distribution between the continental shelf and land were reduced by NOK 2,499,551 and NOK 6,482,459, respectively, and financial expenses by NOK 1,925,963 and NOK 10,188,587,respectively. The assessment was first brought to the Court of Oslo where a decision in favour of the tax authorities was issued in November 2019. This decision was appealed by Petrolia Noco AS to the Court of Appeal. Judgement of the Court The Court of Appeal also decided in favour of the Norwegian tax authorities. Excerpts “The Court adds for this reason that the appellant had higher debt ratio than the company could have had if the loan should have been taken up from an independent lender. In the Court of Appeal’s view, the fact that the appellant actually took out such a high loan as the intra-group loan is solely due to the fact that the lender was the company’s parent company. For this reason, there was a ” reduction ” in the appellant income ” due to” the community of interest. There is thus access to discretion in accordance with the Tax Act § 13-1 first paragraph.” “Thus, there is no basis for the allegation that the Appeals Board’s decision is based on an incorrect fact on this point, and in any case not a fact to the detriment of the appellant. Following this, the Court of Appeal finds that there are no errors in the Appeals Board’s exercise of discretion with regard to the determination of the company’s borrowing capacity. The decision is therefore valid with regard to the thin capitalization.” “The Court of Appeal otherwise agrees with the respondent that the cost- plus method cannot be considered applicable in this case. Reference is made to LB-2016-160306, where it is stated : For loans, however, there is a market, and the comparable prices are margins on loans with similar risk factors at the same time of lending . The cost- plus method provides no guidance for pricing an individual loan. An lender will, regardless of its own costs , not achieve a better interest rate on lending than what is possible to achieve in the market. The Court of Appeal agrees with this, and further points out that the risk picture for Petrolia Noco AS and Petrolia SE was fundamentally different. The financing costs of Petrolia SE therefore do not provide a reliable basis for assessing the arm’s length interest rate on the loan to Petrolia Noco AS.” “…the Court of Appeal can also see no reason why it should have been compared with the upper tier of the observed nominal interest margins in the exploration loans between independent parties. In general, an average such as the Appeals Board has been built on must be assumed to take into account both positive and negative possible variables in the uncontrolled exploration loans in a responsible manner. The Court of Appeal cannot otherwise see that the discretion is arbitrary or highly unreasonable. The decision is therefore also valid with regard to the price adjustment.” Click here for translation NO vs Petrolia march 2021 Dom_ LB-2020-5842 ...

Spain vs DIGITEX INFORMÃTICA S.L., February 2021, National Court, Case No 2021:629

DIGITEX INFORMATICA S.L. had entered into a substantial service contract with an unrelated party in Latin America, Telefonica, according to which the DIGITEX group would provide certain services for Telefonica. The contract originally entered by DIGITEX INFORMATICA S.L. was later transferred to DIGITEX’s Latin American subsidiaries. But after the transfer, cost and amortizations related to the contract were still paid – and deducted for tax purposes – by DIGITEX in Spain. The tax authorities found that costs (amortizations, interest payments etc.) related to the Telefonica contract – after the contract had been transferred to the subsidiaries – should have been reinvoiced to the subsidiaries, and an assessment was issued to DIGITEX for FY 2010 and 2011 where these deductions had been disallowed. DIGITEX on its side argued that by not re-invoicing the costs to the subsidiaries the income received from the subsidiaries increased. According to the intercompany contract, DIGITEX would invoice related entities 1% of the turnover of its own customers for branding and 2% of the turnover of its own or referred customers for know-how. However, no invoicing could be made if the operating income of the subsidiaries did not exceed 2.5% of turnover, excluding the result obtained from operations carried out with local clients. Judgement of the Court The Audiencia Nacional dismissed the appeal of DIGITEX and decided in favour of the tax authorities. Excerpt “1.- The income derived from the local contracts for customer analysis and migration services corresponds to the appellant Group entities and designated as PSACs, i.e. to the same affiliates. Therefore, the taxpayer should have re-invoiced the costs of the project to these subsidiaries, according to the revenue generated in each of them. And this by application of the principle of correlation between income and expenditure set out in RD 1514/2007. The plaintiff should not be surprised by this consideration insofar as this was done, at least partially, in the financial year 2010, in which it already re-invoiced EUR 339 978.55. Consequently, it cannot be said that the defendant administration went against its own actions when it took the view that the plaintiff in 2009 should have recorded in its accounts an intangible asset of EUR 50 million, in view of what happened later, in 2010, when the contracts with the subsidiaries were concluded and the PSACs became PSACs. Therefore, it was the plaintiff itself that went against its own actions, acting differently between 2010 and 2011 when it came to allocating the costs derived from the intangible amortisation and the financial expenses of the loan contracted. 2.- Even if we were to admit that the services provided by the plaintiff have added value by incorporating both a trademark licence and know-how, this does not mean that such re-invoicing does not have to be carried out, when, as has been said, in 2009 DIGITEX INFORMATICA S.L was acting as PSAC under the mediation contract, but as a result of the new contracts entered into with the Latin American subsidiaries in 2010, this position as PSAC was assumed by the said subsidiaries present in the seven Latin American countries. As regards the method of determining the profit, it is appropriate to refer to the operating margin expressly contained in the contracts concluded by the plaintiff with the subsidiaries and not to the general margin determined by the plaintiff in accordance with folio 32 et seq. of the application (according to the final result of the profit and loss account), despite the reports provided by the appellant. And so it is that the latter cannot contradict itself by going against its own acts to the point of altering the literal nature of the contracts, even if it indicates that the will of the parties in the other to the contrary, in accordance with the provisions of Article 1281 of the CC.” Click here for English Translation Click here for other translation Spain vs DIGITEX INFORMATICA SL SAN_629_2021 ...

Belgium vs ENGIE CC cv, January 2021, Supreme Court, Case No F.18.0140.N

ENGIE CC granted a loan to one of its group companies (Electrabel Nederland Holding bv). In 2005 Electrabel Holding bv repaid the loan prematurely and paid – as contractually stipulated – a reinvestment fee of EUR 5,611,906.11 to the plaintiff. Following a tax audit in 2008, the tax authorities established that an incorrect interest rate had been used and that the reinvestment fee should only have been EUR 2,853,070.69, hence EUR 2,758,835.42 was overpaid. The tax authorities issued an assessment to ENGIE, according to which the excess amount would be taxed as an abnormal or gratuitous advantage. ENGIE then took the unilateral initiative to repay the excess amount to Electrabel Nederland Holding bv. On that basis ENGIE contested the qualification of the excessive part of the reinvestment fee as an abnormal or gratuitous advantage, since it would have been an error and therefore an undue payment. The Court of First Instance and later the Court of appeal, declared the complaint and appeal of ENGIE unfounded. Judgement of the Supreme Court Based on the conclusion of the Advocate General J. Van der Fraenen (ENG), the Supreme Court dismissed ENGIE’s appeal. Click Here for English Translation Click here for other translation ECLI_BE_CASS_2021_ARR.20210129.1N.17_NL ...

Portugal vs “A…, Sociedade Unipessoal LDA”, January 2021, Tax Court (CAAD), Case No 827/2019-T

“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 P827_2019-T - 2021-01-25 - JURISPRUDENCIA ...

Denmark vs. “H Borrower and Lender A/S”, January 2021, Tax Tribunal, Case no SKM2021.33.LSR

“H Borrower and Lender A/S”, a Danish subsidiary in the H Group, had placed deposits at and received loans from a group treasury company, H4, where the interest rate paid on the loans was substantially higher than the interest rate received on the deposits. Due to insufficient transfer pricing documentation, the tax authorities (SKAT) issued a discretionary assessment of taxable income where the interest rate on the loans had been adjusted based on the rate received on the deposits. Decision of the Court The National Tax Tribunal stated that the documentation was deficient to such an extent that it could be equated with a lack of documentation. The tax authorities had therefore been entitled to make a discretionary assessment. The National Tax Court referred, among other things, to the fact that the company’s transfer pricing documentation lacked a basic functional analysis of the group treasury company with which the company had controlled transactions. “The National Tax Tribunal finds that the company has not proved that SKAT’s estimates are not in accordance with the arm’s length principle. It is hereby emphasized that the company has received a loan from H4, where the interest rate is based on a base interest rate plus a risk margin of 130 bps. Thus, the interest paid on these loans has been higher than the interest received by placing liquidity with H4. The National Tax Tribunal does not find it proved by the company that these two cash flows should constitute different financing instruments with different risks, and that the interest rates must therefore be different. The lack of functional analysis for H4 in the TP documentation means, in the opinion of the National Tax Tribunal, that it cannot be considered to be in accordance with the arm’s length principle, that H4 must receive a proportionately higher interest payment from the company than what is paid to the company. In this connection, it is taken into account that H4 has no employees and thus cannot be considered to have control over the risks associated with the various controlled transactions. The fact that the company has entered into different contractual obligations for the two cash flows is given less weight due to the lack of a functional analysis for H4. The company’s argument that the interest rate for deposits with H4 according to the National Tax Court’s previous decision, published by SKM2014.53.LSR, must be determined without risk margin, as there is a full set-off against the company’s loan from H4, can not either taken into account, as the interest rates for the two cash flows in this way would be different. The National Tax Tribunal finds that the decision in SKM2014.53.LSR must be interpreted as meaning that the interest rates for comparable cash flows that are fully hedged between two group parties must bear interest at the same rate, as the cash flows in this way cancel out each other.” Click here for translation SKM2021-33-LSR ...

Poland vs Q. F. sp. z o.o., January 2021, Supreme Administrative Court, Case No II FSK 2514

A request for an interpretation was submitted by a company in regards to financial transactions (loans and guarantees) with related parties. The requested interpretation was relevant in determining the amount of the controlled transactions and on that basis whether the taxpayer was required to prepare TP documentation or not. The company held that in determining the value of a loan transaction, only the value of interest should be taken into account. The tax authorities held that both the amount of interest and the amount of capital were to be included in amount of the transaction. Judgement of the Supreme Administrative Court The Court decided in favour of the tax authorities. Applying a linguistic interpretation, the court found no support for excluding the capital part of a loan transaction from the amount of the transaction. Click here for English Translation Click here for other translation II FSK 2514 ...

Portugal vs “B Lender S.A”, January 2021, Supremo Tribunal Administrativo, Case No JSTA000P26984

In 2005 “B Lender S.A” transferred a supplementary capital contributions to company C. The capital was to be paid back in 31 October 2009 and was provided interest-free. Tax Authorities adjusted the taxable income of “B Lender S.A” with an amount of EUR 1,586,272.23, of which EUR 1,575,958.86 was attributable to interest on capital transactions, which it reclassified as interest-bearing loan under the arm’s length provisions of article 58 of the CIRC. The assessment of additional income was upheld by a decision from the tax court. An appeal was then filed by “B Lender S.A.” Decision of Supreme Administrative Court The Supreme Administrative Court set aside the decision of the tax court and decided in favour of A “B Lender S.A.” Experts “The question translates, in short, into knowing whether the arm’s length principle requires or imposes that a transaction of performance of ancillary services, within the scope of a group of companies be taxed as if it earned interest, even if, in fact, it has been agreed that it does not earn interest. This is not a simple matter to be clarified and requires a prior conceptual and legal framework, which it is important to follow. … It is clear from the above that the tax authorities will act in accordance with the general rule allowing the reclassification of the transaction carried out by the parties, under the terms of the provisions of the above-mentioned rule. The defendant’s action, on the specific point of the material reclassification of the transaction in question, is not only not illegal, but is also anchored in this basic parameter of action, permitted and imposed by the law “which sets out and defines the general principles governing Portuguese tax law and the powers of the tax authorities and guarantees of taxpayers” [see LGT, preamble]. On the other hand, what the appellant foresees as a requalification of the transaction is nothing more than the association of the transaction to the typical contract in which it may be subsumed, in accordance with the command contained in the legal rule which regulates the figure of accessory payments (cf. the said Art 287(1) of the CSC). The classification of the “transfer of funds” operation, through the provision of ancillary services, as a loan therefore appears legitimate and the tax facts at issue herein do not involve any error of factual or legal assumptions. Going forward, what is important to decipher at this point is whether s 58 is such as to require or impose that the transaction in question be interest-bearing for tax purposes. … In the section dedicated to “guidance on the application of the arm’s length principle” (“C.”), one can read, with relevance to the solution of the present case: “The application of the arm’s length principle is generally based on a comparison between the conditions applied in a linked transaction and the conditions applied in a transaction between independent enterprises. For that comparison to be meaningful, the economic characteristics of the situations considered must be sufficiently comparable. (…) In order to determine the degree of comparability, and in particular the adjustments to be made in order to achieve that comparability, it is necessary to understand the way in which independent companies assess the terms of possible transactions. When weighing the terms of a possible transaction, independent companies will compare it with other options realistically available to them and will only conclude the transaction if they have no other clearly more advantageous alternative. For example, a company is unlikely to accept a price offered for one of its products by an independent company if it knows that other potential customers are willing to pay more under similar conditions. This element is relevant to the issue of comparability since independent firms generally take into account all economically significant differences between the options realistically available to them (…) when considering those options. Consequently, when making comparisons arising from the application of the arm’s length principle, the tax administration must also take such differences into account when defining whether the situations considered are comparable and what adjustments may be necessary for the purposes of such comparability.” [paragraph 1.15 of the document]. The same summary of the OECD guidelines on the matter reveals, in paragraph 1.36, as to the recognition of transactions actually carried out (ii.), and with particular acuity for the issue we are dealing with: “1.36.. The identification by the Tax Administration of a connected transaction should be based on the transaction that has actually taken place between the parties and on the way it has been structured by the parties, in accordance with the methods used by the taxpayer insofar as they are consistent with the methods set out in Chapters II and III. Save in exceptional cases, the tax administration shall not abstract from or substitute other transactions for the actual transactions. Restructuring legitimate business operations would amount to a wholly arbitrary procedure, the iniquity of which would be further aggravated by double taxation if the other tax administration involved took a different view on how the operation should be structured. 1.37. There are, however, two specific cases where, exceptionally, the tax authorities may be justified in disregarding the structure adopted by a taxpayer to carry out the linked transaction. The first case arises where there is a disagreement between the form of the transaction and its economic substance. The tax authorities may then disregard the qualification made by the parties and reclassify it according to its substance. This first case can be illustrated by the example of a company investing in an associated company in the form of an interest-bearing loan when, at arm’s length, given the economic situation of the borrowing company, the investment would not normally take that form. The tax authorities will then be entitled to qualify the investment by reference to its economic substance and to treat the loan as a capital subscription”. From the excerpts transcribed it is clear the guideline to be adopted in the treatment of the issue ...

Ukrain vs PJSC Galnaftochim, January 2021, Supreme Court, Case No 813/3748/16

The tax authority conducted an inspection, where it found that PJSC Galnaftochim, when conducting business transactions with a non-resident related party, had to submit a report on controlled transactions. PJSC Galnaftochim, disagreeing with the results of the audit, appealed to the court to cancel the tax assessment notice, as there were no grounds for submitting the relevant report. When paying interest to a non-resident for using a loan, PJSC Galnaftochim paid a tax of 2% of the total interest amount and believed that the transaction was not a controlled transaction within the meaning of the Tax Code of Ukraine. The District Administrative Court upheld the claim of PJSC Galnaftochim in a ruling upheld by the Lviv Administrative Court of Appeal. The courts proceeded from the fact that the legislator, when defining the criteria for classifying a business transaction as a controlled transaction, emphasises that such a transaction must affect the object of income taxation. At the same time, the business transaction under study on payment of interest for the use of credit funds does not meet this criterion, and therefore cannot be reflected in the accounts provided for accounting for profits, losses and financial results. This transaction reduces assets, as it inherently involves writing off funds in favour of the recipient, and also reduces interest payment obligations without affecting the financial result. An appal was then filed by the tax authorities with the Supreme Court. Judgement of the Supreme Court The Supreme Court partially upheld the appeal, cancelled the decisions of the lower courts and remanded the case for a new trial to the court of first instance. The determination of whether transactions are business transactions for transfer pricing purposes is based on their impact on the taxable profit reflected in the income tax return in accordance with the law. For the purposes of transfer pricing, only those business transactions that affect or may affect the taxpayer’s profit, as well as certain types of income that are taxed separately from the profit for non-residents and taxpayers, are taken into account. The courts should provide regulatory justification in their decisions for the conclusion that a transaction involving the repayment of interest on a loan cannot be recorded in the accounts used to record profits, losses and financial results, and that the transaction reduces receivebles and liabilities for interest payments without changing the financial result. The actual impact of the transaction on payment of interest on the use of the loan on the taxable profit reflected in the declaration cannot be left out of the study. Click here for English translation Click here for other translation Ukrain SC 813-3748-16 ...

Sweden vs TELE2 AB, January 2021, Administrative Court, Case No 13259-19 and 19892-19

The Swedish group TELE2, one of Europe’s largest telecommunications operators, had invested in an entity in Kazakhstan, MTS, that was owned via a joint venture together with an external party. Tele2 owned 51% of the Joint venture and MTS was financed by Tele2’s financing entity, Tele2 Treasury AB, which, during 2011-2015, had issued multiple loans to MTS. In September 2015, the currency on the existing internal loans to MTS was changed from dollars to KZT. At the same time a ‘Form of Selection Note’ was signed according to which Tele2 Treasury AB could recall the currency denomination within six months. A new loan agreement denominated in KZT, replacing the existing agreements, was then signed between Tele2 Treasury AB and MTS. In the new agreement the interest rate was also changed from LIBOR + 4.6% to a fixed rate of 11.5%. As a result of these contractual changes to the loan agreements with MTS, Tele2 Treasury AB in its tax filing deducted a total currency loss of SEK 1 840 960 000 million for FY 2015. Following an audit, the Swedish tax authorities issued an assessment where the tax deduction for the full amount had been disallowed. However, during the proceedings at Court the authorities acknowledged deductions for part of the currency loss – SEK 745 196 000 – related to the period between 22 October to 31 December 2015. Hence, at issue before the Court was disallowed deductions of the remaining amount of SEK 1 095 794 000. Decision of the Court The Administrative Court ruled in favor of the tax authorities. Tele2 Treasury AB could not deduct exchange rate losses resulting from the loan arrangements with MTS related to the period between 1 September and 21 October 2015. “…there have been no reasons to assume that MTS has risked bankruptcy, and that the company’s right to interest and repayments would thus have been in jeopardy. Thus, MTS’s financial position cannot be a reason to believe that the currency conversion would have been commercially justified. With regard to commerciality, the court considers it strange that an independent lender would take great risks to secure the financing when the borrower and another external player are to carry out a merger. That the company assumed responsibility for getting MTS financing in place speak instead of that it was the financial interests of the common interests that prompted the decision to conduct currency conversion. The court thus considers that the company cannot be considered to have any significant interest in securing MTS financing. In this context, the company has stated that other companies within the Tele2 Group’s financial interests must be taken into account when assessing the current issue. However, as stated by the Administrative Court above, the relationship with any other companies in a partnership with the trader shall not be taken into account. In this context, the company has referred to the Court of Appeal in Gothenburg’s judgment of 30 September 2011 in case no. 5854-10. However, the Administrative Court cannot, based on the circumstances and reasoning in the judgment, read out any general conclusions that could provide support for the company’s view in the current cases. The Administrative Court therefore considers that the company’s reasons for the conversion cannot be considered to be any other than reasons attributable to the common interest with MTS.” According to a press release from TELE2 the decision will be appealed. Click here for translation Sweden vs TELE2 040121 ...

Netherlands vs X B.V., December 2020, Supreme Court (Preliminary ruling by the Advocate General), Case No 20/02096 ECLI:NL:PHR:2020:1198

This case concerns a private equity takeover structure with apparently an intended international mismatch, i.e. a deduction/no inclusion of the remuneration on the provision of funds. The case was (primarily) decided by the Court of Appeal on the basis of non-business loan case law. The facts are as follows: A private equity fund [A] raised LP equity capital from (institutional) investors in its subfund [B] and then channelled it into two (sub)funds configured in the Cayman Islands, Fund [C] and [D] Fund. Participating in those two Funds were LPs in which the limited partners were the external equity investors and the general partners were Jersey-based [A] entities and/or executives. The equity raised in [A] was used for leveraged, debt-financed acquisitions of European targets to be sold at a capital gain after five to seven years, after optimising their EBITDA. One of these European targets was the Dutch [F] group. The equity used in its acquisition was provided not only by the [A] funds (approximately € 401 m), but also (for a total of approximately € 284 m) by (i) the management of the [F] group, (ii) the selling party [E] and (iii) co-investors not affiliated with [A]. 1.4 The equity raised in the [A] funds was converted into hybrid, but under Luxembourg law, debt in the form of preferred equity shares: A-PECs (€ 49 m) and B-PECs (€ 636 m), issued by the Luxembourg mother ( [G] ) of the interested party. G] has contributed € 43 million to the interested party as capital and has also lent or on-lent it approximately € 635 million as a shareholder loan (SHL). The interested party has not provided [G] with any securities and owes [G] over 15% interest per year on the SHL. This interest is not paid, but credited. The SHL and the credited interest are subordinated to, in particular, the claims of a syndicate of banks that lent € 640 million to the target in order to pay off existing debts. That syndicate has demanded securities and has stipulated that the SHL plus credited interest may not be repaid before the banks have been paid in full. The tax authority considers the SHL as (disguised) equity of the interested party because according to him it differs economically hardly or not at all from the risk-bearing equity (participation loan) c.q. because this SHL is unthinkable within the OECD transfer pricing rules and within the conceptual framework of a reasonable thinking entrepreneur. He therefore considers the interest of € 45,256,000 not deductible. In the alternative, etc., he is of the opinion that the loan is not business-like, that Article 10a prevents deduction or that the interested party and its financiers have acted in fraudem legis. In any case he considers the interest not deductible. According to the Court of Appeal, the SHL is a loan in civil law and not a sham, and is not a participation loan in tax law, because its term is not indefinite, meaningless or longer than 50 years. However, the Court of Appeal considers the loan to be non-business because no securities have been stipulated, the high interest is added, it already seems impossible after a short time to repay the loan including the added interest without selling the target, and the resulting non-business risk of default cannot be compensated with an (even) higher interest without making the loan profitable. Since the interested party’s mother/creditress ([G] ) is just as unacceptable as a guarantor as the interested party himself, your guarantor analogy ex HR BNB 2012/37 cannot be applied. Therefore, the Court of Appeal has instead imputed the interest on a ten-year government bond (2.5%) as business interest, leading to an interest of € 7,435,594 in the year of dispute. It is not in dispute that 35,5% of this (€2,639,636) is deductible because 35,5% of the SHL was used for transactions not contaminated (pursuant to Section 10a Vpb Act). The remaining €4,795,958 is attributable to the contaminated financing of the contaminated acquisition of the [F] Group. The Court of Appeal then examined whether the deduction of the remaining € 4,795,958 would be contrary to Article 10a of the Dutch Corporate Income Tax Act or fraus legis. Since both the transaction and the loan are tainted (Article 10a Corporate Income Tax Act), the interested party must, according to paragraph 3 of that provision, either demonstrate business motives for both, or demonstrate a reasonable levy or third-party debt parallelism with the creditor. According to the Court of Appeal, it did not succeed in doing so for the SHL, among other things because it shrouded the financing structure behind [G], in particular that in the Cayman Islands and Jersey, ‘in a fog of mystery,’ which fog of mystery remains at its evidential risk. On the basis of the facts which have been established, including the circumstances that (i) the [A] funds set up in the Cayman Islands administered the capital made available to them as equity, (ii) all LPs participating in those funds there were referred to as ‘[A] ‘ in their names, (iii) all those LPs had the same general partners employed by [A] in Jersey, and (iv) the notification to the European Commission stated that the Luxembourg-based [H] was acquiring full control of the [F] group, the Court formed the view that the PECs to [G] had been provided by the [A] group through the Cayman Islands out of equity initially contributed to [B] LP by the ultimate investors, and that that equity had been double-hybridised through the Cayman Islands, Jersey and Luxembourg for anti-tax reasons. The interested party, on whom the counter-evidence of the arm’s length nature of the acquisition financing structure rested, did not rebut that presumption, nor did it substantiate a third-party debt parallelism or a reasonable levy on the creditor, since (i) the SHL and the B-PECs are not entirely parallel and the interest rate difference, although small, increases exponentially through the compound interest, (ii) the SHL is co-financed by A-PECs, whose interest rate ...

France vs BSA Finances, December 2020, Supreme Administrative Court , Case No 433723

In 2009, 2010 and 2011 BSA Finances received a total of five loans granted by the Luxembourg company Nethuns, which belongs to the same group (the “Lactalis group”). Depending on the date on which the loans were granted, they carried interest rates of respectively 6.196%, 3.98% and 4.52%. Following an audit covering the FY 2009 to 2011, the tax authorities considered that BSA Finances did not justify that the interest rates thus charged should exceed the average effective rates charged by credit institutions for variable-rate loans to companies with an initial term of more than two years. Hence, the portion of interest exceeding these rates was considered non-deductible pursuant to the provisions of Article 212(I) of the General Tax Code. In 2017, the  Administrative Court ruled in favor of BSA Finances and discharged the additional corporate tax. But this decision was appealed by the authorities to the Administrative Court of Appeal which in  June 2019 overturned the decision of the lower court. The Judgement from the Administrative court of Appels was then appealed by BSA Finances to the French Supreme Administrative Court. Decision of the Supreme Administrative Court The Supreme Administrative Court overturned the decision from the Court of Appeal and found in favor of BSA. “In considering that the company had not established that the margin rates applied were in line with market rates for loans made under the same conditions, whereas the Riskcalc application, which it was not disputed was fed from the company’s balance sheets and profit and loss accounts over several years, had classified its level of risk as “BBB/BBB-” on the basis of comparative ratios established by Moody’s, that the refinancing contracts produced, which made it possible to determine the actual margin rate of the loans taken out by the applicant company itself, were accompanied by details making it possible to compare the main specific conditions with the clauses of the loans in dispute and that, lastly, the combination of these elements was such as to justify, in the absence of any element to the contrary, that the credit margins applied by Nethuns were in line with market practices, the Court distorted the documents in the file submitted for its assessment.” Click here for English translation Click here for other translation Conseil d'État, 8ème - 3ème chambres réunies, 11_12_2020, 433723, Inédit au recueil Lebon - Légifrance ...

France vs Sté Paule Ka Holding, December 2020, Paris Administrative Court of Appeal, Case No 18PA02715

Sté Paule Ka Holding, was set up as part of a leveraged buy-out (LBO) operation to finance the acquisition of the Paule Ka group, and in 2011 it acquired the entire capital of the group a price of 42 million euros. The acquisition was financed by issuing convertible bonds carrying an interest rate of 8%. The French tax authorities issued an assessment where deductions for certain payments related to the acquisition and part of the interest payments on the bonds were disallowed. Decision from the Administrative court of appeal The Court found in favor of the company in regards to the payment related to the acquisition and in favor of the tax administration in regards to the partially disallowed deduction of interest payments. “It follows from the foregoing that the elements invoked by the administration do not provide proof that the expenditure of EUR 390,227 correctly entered in the accounts was not incurred in the interest of the company Paule Ka Holding. The latter is thus entitled to argue that the administration was wrong to refuse to deduct it in respect of the financial year ended in 2012 and, consequently, to request the reduction of the tax bases and the discharge of the corresponding taxes, including the penalties for deliberate failure to comply as provided for in a) of Article 1729 of the General Tax Code, applied by the administration to this head of rectification.” “...These bonds have a term of ten years, bear interest at a rate of 8%, have a principal amount that is repayable in full at maturity, are not accompanied by any guarantee or security, bear capitalised interest and are convertible at maturity at the rate of one new share with a value of one euro for every 10 OCAs granted. Paule Ka Holding recognised interest on bonds of EUR 2 083 490 for the year ended 2012 and EUR 2 574 298 for the year ended 2013 as an expense. The department questioned the amount of these deductions for the interest paid on the bonds subscribed by Black Tie Luxco by applying the legal interest rate provided for in Article 39(1)(3) of the General Tax Code, i.e. 3.64% and 3.10% for the said financial years. Deductions for the difference in the calculated interest in the amount of EUR 1,092,601 for the financial year ending in 2012 and EUR 908,667 for the financial year ending in 2013 were disallowed. To justify the rate applied to the above-mentioned compulsory loans, Paule Ka Holding produced a study drawn up by the firm Dauge et associés on 30 September 2015. This firm carried out a credit rating of the company, based on an analysis of its financial structure with regard to its balance sheet situation, based on two criteria, the Banque de France rating of the borrower, based on the criteria of earning capacity, financial autonomy The Banque de France rating of the borrower, based on the criteria of earning capacity, financial autonomy, solvency and liquidity, and the estimate of the credit risk of the OCAs issued using the Standard and Poor’s analysis grid, on the basis of the group’s consolidated business plan, to conclude that the rating is estimated at BB-, corresponding to a satisfactory business risk profile and an aggressive financial risk. Based on this rating, it then estimated the credit margin applicable to the OCAs based on the European Commission’s recommendations for estimating reference and discount rates, with margin levels based on credit rating categories. The firm concluded from these elements that the interest rate of 8% seemed appropriate given the profile of the borrower and the characteristics of the bonds issued. However, the study produced consists of generalities and the data presented in it is not documented. Indeed, the mere reference to a credit rating does not imply that all the companies concerned by this rating have identical repayment capacities, taking into account all the quantitative and qualitative factors specific to each company. Furthermore, it does not appear from this study that the internal rating of Paule Ka Holding, as described, takes sufficient account of the company’s own characteristics, in particular the state of its accounts, its competitive positioning and the quality of its managers and employees. This internal rating does not take into account the possibility of the company receiving external assistance in the event of difficulties in honouring its commitments. Under these conditions, this study is insufficient to justify the rate applied to the bonds in dispute. In addition, Paule Ka Holding has provided examples of companies that took out bonds in the context of LBO transactions for acquisitions dated from May 2011 to June 2012 at rates varying between 7 and 12%, which, according to the company, show that the rate of 8% was a market rate compared with those applied by other companies of comparable size and for loans of the same nature. However, the investigation shows that the bonds presented for comparison have either a shorter duration than those in dispute or are not convertible into shares. Their amount is very different from that issued by Paule Ka Holding, some of which are also associated with “senior” debts. Moreover, the issuing companies, of very different sizes, carry out their activities in different fields from that of Paule Ka Holding, a takeover structure of a group in the high-end ready-to-wear sector. There is nothing to show the conditions under which the loans presented for comparison purposes were established. Under these conditions, since the comparability of the economic conditions has not been demonstrated, the terms of comparison proposed by Paule Ka Holding do not justify the rate applied to the bond loans in dispute. It follows from the foregoing that Paule Ka Holding does not justify the rate it could have obtained from independent financial institutions or organisations for a loan granted under similar conditions with regard to the yield on bond loans from undertakings in comparable economic conditions, for loans constituting a realistic alternative to an intra-group loan, taking into account its own characteristics, in particular its risk profile. It does not therefore ...

France vs WB Ambassador, December 2020, Supreme Administrative Court, Case No 428522

WB Ambassador, took out two loans with its Luxembourg parent company and another group company, each bearing an annual interest rate of 7%. Following an audit, the tax authorities, considering that the company did not justify that the 7% interest rate of the above-mentioned intra-group loans corresponded to the rate it could have obtained from independent financial institutions or organisations under similar conditions and partially disallowed deductions of the interest incurred. Supreme Administrative Court The Supreme Administrative Court overturned the decision of the Administrative court of Appeal and ruled in favor of the WB Ambassador. It stated that the Lower Court had erred in law in ruling out the possibility that a company, in order to justify the rate it could have obtained from independent financial institutions for a loan granted under similar conditions, could rely, in order to assess that rate, on the yield of bond issues granted by undertakings in comparable economic conditions. Consequently, WB Ambassador was entitled, without needing to examine the other pleas in law of its appeal, to seek the annulment of the judgment which it is challenging. “The borrowing company, which has the burden of proving the rate it could have obtained from independent financial institutions or organisations for a loan granted under similar conditions, may provide this proof by any means. In this respect, in order to evaluate this rate, it may, where appropriate, take account of the yield on bonds issued by undertakings in comparable economic conditions, where such bonds constitute, in the circumstances under consideration, a realistic alternative to an intra-group loan.” Click here for English translation Click here for other translation Conseil d'État, 9ème chambre, 10_12_2020, 428522, Inédit au recueil Lebon - Légifrance ...

Romania vs Lender A. SA, December 2020, Supreme Court, Case No 6512/2020

In this case, A. S.A. had granted interest free loans to an affiliate company – Poiana Ciucas S.A. The tax authorities issued an assessment of non-realised income from loans granted. The tax authorities established that the average interest rates charged for comparable loans granted by credit institutions in Romania ranged from 5.45% to 19.39%. The court of first instance decided in favor of the tax authorities. An appeal against this decision was lodged by S S.A. According to S S.A. “The legal act concluded between the two companies should have been regarded as a contribution to the share capital of Poiana CiucaÈ™ S.A. However, even if it were considered that a genuine loan contract (with 0% interest) had been concluded, it cannot be held that the company lacked the capacity to conclude such an act, since, even if the purpose of any company is to make a profit, the interdependence of economic operations requires a distinction to be made between the immediate purpose and the intermediate purpose of a commercial activity, both of which are the cause of any legal act. Since company A. S.A. is the majority shareholder in Poiana CiucaÈ™ S.A., the grant of a sum of money to the latter, at a time when it was unable to secure financing, is intended to safeguard the economic activity and, implicitly, to obtain subsequent benefits for the company.” “The essential legal issue in this case is that for the period prior to 14 May 2010 (when the tax legislation changed) there was no legal basis for reconsidering the records of the Romanian related persons. Art. 11 para. (1) sentence 1 of the Tax Code cannot be considered as applicable in this case, as it refers to the right of the tax authority to disregard a fictitious/unrealistic transaction, which is not the case of the operation analysed during the tax inspection, which took place between companies A. and Poiana CiucaÈ™. Thus, the second sentence of Art. 11 para. (1) of the Tax Code, relating to the reclassification of the form of a transaction, becomes fully applicable to the factual situation at issue, as the tax authority considered the transaction between the two companies to be a genuine loan and not a contribution to the share capital.” Judgement of Supreme Court The Court set aside the appealed judgment, and refer the case back to the court of first instance. Excerpts “Consequently, the High Court finds that the objection of limitation of the authority’s right to determine tax liabilities for 2008 is well founded, since the decision of the court of first instance rejecting that objection was handed down with the incorrect application of the relevant provisions of substantive law, a ground for annulment provided for in Article 488(2) of the EC Treaty. (At the same time, from an analysis of the documents in the case-file, it is not possible to determine the amount of the sums withheld from the applicant company by the contested acts, representing corporation tax for 2008, interest and late payment penalties relating to that tax liability for the year in question, so that the Court of Appeal cannot determine with certainty the amount of those sums.” “As regards the appellant’s criticisms concerning the contract between it and Poiana CiucaÈ™ S.A., the judgment under appeal reflects the correct interpretation and application of the provisions of Articles 11 and 19(1)(b) of the Civil Service Code. (5) of Law No 571/2003 on the Fiscal Code, as in force at the relevant time, the provisions of Article 1266 of the Civil Code, Article 1 of Law No 31/1990 and point 1.65 of the OECD Transfer Pricing Guidelines. Thus, in analysing the applicant’s claims concerning the classification of the contract concluded between A. S.A. and Poiana CiucaÈ™ S.A. as representing a contribution to the share capital, the Court of First Instance correctly held that those claims were unfounded, having regard to the provisions of Articles 1266 and 1267 of the Civil Code and the content of the contractual clauses contained in the contract in question. From an interpretation of the extrinsic and intrinsic elements of the contract, it cannot be held that the legal act between the contracting parties which occurred approximately eight years after the conclusion of the contract and the making available of the initial funds constitutes an element indicating that those funds represent a contribution to the share capital and that that was the original and real intention of the parties. In accordance with the view expressed by the judge hearing the case, it is held that the obligation to repay the sum granted by way of a loan was extinguished between the contracting parties by a new expression of will which took place between 2015 and 2016 and which cannot have retroactive effect from the date of conclusion of the contract (1 January 2007). That conclusion of the Court of First Instance, with which the Court of First Instance agrees, is not the result of a strictly grammatical analysis of the contractual clauses stipulated by the two parties, but is based on an analysis of the legal act which subsequently arose between the parties, taking into account the entire factual context in which it was concluded, in relation to the clauses of the loan agreement, the content of which was examined in a relevant manner by the court, holding that those clauses cannot be interpreted in the sense asserted by the applicant as regards the nature of the contract. A further argument in support of the above conclusion also derives from the manner in which the contractual terms were performed, the subsequent conduct of the lender, which did not receive any repayment of the sum paid and did not charge any interest, being relevant in that regard. The Court of First Instance examined the lender’s conduct both in the light of the defining features of the loan agreement and in the light of the terms of the contract at issue, finding that that conduct fully complied with the ...

Spain vs JACOBS DOUWE EGBERTS ES, SLU., November 2020, Tribunal Superior de Justicia, Case No STSJ M 7038/2019 – ECLI:EN:TS:2020:3730

At issue in this case was whether or not it is possible to regularize transactions between companies by directly applying art. 9.1 of DTA between Spain and French, without resorting to the transfer pricing methods provided for in local Spanish TP legislation. Application of article 9 and taxing according to local tax legislation is often a question of determining the arm’s length price. But sometimes other rules will apply regardless of the value – for instance anti avoidance legislation where the question is not the price but rather the justification and substance of the transaction. In the present case the arm’s length price of the relevant transaction was not discussed, but rather whether or not transaction of shares had sufficient economic substance to qualify for application of Spanish provisions for tax depreciation of the shares in question. The National Court understood that the share acquisition lacked substance and only had a tax avoidance purpose. It could not be understood that the appellant company has undergone a actual depreciation of its shares to the extent necessary to make a tax deduction. Judgement of the supreme Court The Supreme Court dismissed the appeal and upheld the decision of the National Court. The court pointed out that the regularization of transactions between Spanish and French companies, through the application of art. 9.1 in the DTA, can be carried out without the need to resort to the methods provided for in local legislation for determining the arm’s length value of transactions between related parties. Excerpts “IV.- What has just been stated are the abstract terms of the regulation contained in the aforementioned Article 9.1; and this shows that its individualisation or practical application to some singular facts will raise two different problems. The first will be to determine whether the specific commercial or financial transactions concluded between these two legal persons, Spanish and French, have an explanation that justifies them according to the legal or economic logic that is present in this type of relationship. The second problem will have to be tackled once the first one just mentioned has been positively resolved, or when it has not been raised; and it will consist of quantifying the tax scope of the singular commercial or financial operation whose justification has been recognised or accepted. V.- The above shows that the application of this Article 9.1 Tax Treaty must be accompanied by the application of internal rules; and these may be constituted by Article 16 of the TR/LISOC or by other different internal rules, for the reasons expressed below. Thus, Article 10 TR/LISOC shall be applied when, without questioning the justification of the transactions concluded between entities or persons that deserve to be considered as “associated enterprises”, only the quantification or the value, in market terms, of the object or price of these transactions is in dispute. But other internal rules will have to be applied when what is disputed with regard to these transactions is not the amount of their object but the justification of the legal transaction that materialises them, because this externalises a single purpose of fiscal avoidance and is not justified by circumstances or facts that reveal its legal or economic logic. And these rules, as the Abogado del Estado argues in his opposition to the cassation, may be embodied by those which regulate the powers recognised by the LGT 2003 to the Administration in order to achieve a correct application of the tax rules, such as those relating to assessment, the conflict in the application of the tax rule and simulation (Articles 13, 15 and 16 of that legal text). VI.- The answer which, on the basis of what has just been set out, must be given to the question of objective appeal, defined by the order which agreed the admission of the present appeal, must be that expressed below. That the regularisation of transactions between Spanish and French companies, by means of the application of Article 9.1 of the Agreement between the Kingdom of Spain and the French Republic for the avoidance of double taxation and the prevention of evasion and avoidance of fiscal fraud in the field of income tax and wealth tax of 10 October 1995, can be carried out without the need to resort to the methods provided for determining the market value in related transactions and to the procedure established for that purpose in the internal regulations. ELEVENTH – Decision on the claims raised in the appeal. I.- The application of the above criterion to the controversy tried and decided by the judgment under appeal leads to the conclusion that the infringements alleged in the appeal are not to be assessed. This is for the following reasons. The main question at issue was not the amount or quantification of the transactions which resulted in the acquisition by the appellant SARA LEE SOUTHERN EUROPE SL (SLSE) of shares in SLBA Italia. It was the other: whether or not the acquisition of those shares was sufficiently justified to be considered plausible and valid for making the allocations which had been deducted for the depreciation of securities of SARA LEE BRANDED APPAREL, SRL. The tax authorities and the judgment under appeal, as is clear from the foregoing, understood that this acquisition lacked justification and only had a tax avoidance purpose, because this was the result of the situation of economic losses that characterised the investee company in the years preceding the acquisition. They invoked Article 9.1 of the DTA to point out that, in those circumstances of economic losses, the parameter of comparability with normal or usual transactions between independent companies, which that article establishes in order to accept that a related-party transaction actually existed, could not be assessed in the transactions in question. And they reached the final conclusion that, in those particular circumstances, it cannot be understood that the appellant company has undergone a depreciation of its shares to the extent necessary to make a deduction based on those shares.” Click here for English translation Click here ...

UK vs Blackrock, November 2020, First-tier Tribunal, Case No TC07920

In 2009 the BlackRock Group acquired Barclays Global Investors for a total sum of $13,5bn . The price was paid in part by shares ($6.9bn) and in part by cash ($6.6bn). The cash payment was paid by BlackRock Holdco 5 LLC – a US Delaware Company tax resident in the UK – but funded by the parent company by issuing $4bn loan notes to the LLC. In the years following the acquisition Blackrock Holdco 5 LLC claimed tax deductions in the UK for interest payments on the intra-group loans. Following an audit in the UK the tax authorities disallowed the interest deductions. The tax authorities held that the transaction would not have happened between independent parties. They also found that the loans were entered into for an unallowable tax avoidance purpose. A UK taxpayer can be denied a deduction for interest where a loan has an unallowable purpose i.e, where a tax advantage is the company’s main purpose for entering into the loan relationship (section 441 of the Corporation Tax Act 2009). If there is such an unallowable purpose, the company may not bring into account for that period ….so much of any debit in respect of that relationship as is attributable to the unallowable purpose. The Court ruled in favor of BlackRock and allowed tax deduction for the full interest payments. According to the Court it was clear that the transaction would not have taken place in an arm’s length transaction between independent parties. However there was evidence to establish that there could have been a similar transaction in which an independent lender. Hence, the court concluded that BlackRock Holdco 5 LLC could have borrowed $4bn from an independent lender at similar terms and conditions. In regards to the issue of “unallowable purposes” the court found that securing a tax advantage was a consequence of the loan. However,  Blackrock LLC 5 also entered into the transactions with the commercial purpose of acquiring Barclays Global Investors. The Court considered that both reasons were “main purposes” and apportioned all of the debits (interest payments) to the commercial purpose. UK vs Blackrock November 2020 TC07920 ...

France vs Studialis, October 2020, Administrative Court of Appeal, Case No 18PA01026

Between the end of 2008 and the end of 2012 Studialis had issued bonds subscribed by British funds, partners of a Luxembourg company, itself a majority partner of Studialis, carrying an interest rate of 10%. The Tax authorities considered that the interest rate on the bonds was higher than the limit provided for by Article 212, I of the CGI (at the time between 2.8% and 4.1%). According to the authorities only an effective loan offer contemporaneous with the transactions and taking into account the specific characteristics of the borrowing company could establish with certainty the rate it would have received from a independent credit institution, and rejected all the evidence in support of the pricing presented by the company. Decision of the Administrative Court of Appeal The Court ruled in favor of Studialis. It considered that the evidence provided by Studialis – loan offers and certificates from independent banks combined with and a comparability study on rates of bonds using “Riskcalc” – sufficiently justified the 10% interest rate on the bonds issued by Studialis. Click here for English translation Click here for other translation CAA de PARIS, 5ème chambre, 22_10_2020, 18PA01026, Inédit au recueil Lebon - Légifrance ...

Italy v Sapio Industrie srl, October 2020, Supreme Court, Case No 21828/2020

Sapio Industrie Srl had granted an interest-free loan to its German subsidiary, which was in financial difficulties. The tax authorities issued an assessment in which an arm’s length interest rate was determined and added to Sapio Industrie’s taxable income on the basis of the Italian arm’s length principle. Sapio Industrie appealed and both the District Court and later the Regional Court (CTR) ruled in favour of the company and annulled the assessment. The tax authorities then appealed to the Supreme Court. Judgement of the Supreme Court The Supreme Court ruled in favour of the tax authorities, overturning the contested judgment of the Regional Court (CTR) and referring the case back to the Regional Court, in a different composition. Excerpts “(…)the ‘rationale’ of the legislation in question is to be found in the arm’s length principle set out in paragraph 1 of Art. 9 of the OECD Model Tax Convention, where it is provided that “(Where) the two (associated) enterprises, in their commercial or financial relations, are bound by conditions accepted or imposed other than those which would be agreed upon between independent companies, profits which, but for those conditions, would have been made by one of the enterprises, but which, by reason of those conditions, have not been made, may be included in the profits of that enterprise and taxed accordingly”; the tax authorities may therefore review the appropriateness – in line with the normal market value – of the transactions put in place potentially generating income components, regardless of the negotiating autonomy of the parties and of the contractual agreements established by the economic entities concerned; the possible unsuccessfulness of the financing agreed upon by the parties does not, per se, exclude the application of the provisions on the correct determination of intercompany transfer prices; In essence, in attempting to adjust profits by reference to the conditions that would have occurred between independent companies in comparable transactions and in comparable circumstances (i.e. in ‘comparable transactions between independent parties’), the arm’s length principle adopts an approach of treating the entities of a multinational group as operating as separate entities and not as indissociable subsets of a single group. Since, under the separate entity approach, the entities of a multinational group are treated as independent entities, the focus is on the nature of the transactions entered into between these entities and on whether the terms of these transactions differ from the terms that would have occurred in comparable transactions between independent parties” (thus “OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations”, paragraph B.l, n 1.6); Click here for English translation Click here for other translation Cass 9-10-2020 no 21828 ...

Romania vs Impresa Pizzarotti & C SPA Italia, October 2020, ECJ Case C-558/19

A Regional Court of Romania requested a preliminary ruling from the European Court of Justice in the Case of Impresa Pizzarotti. Impresa Pizzarotti is the Romanian branch of SC Impresa Pizzarotti & C SPA Italia (‘Pizzarotti Italia’), established in Italy. In 2017, the Romanian tax authorities conducted an audit of an branch of Impresa Pizzarotti. The audit revealed that the branch had concluded, as lender, two loan agreements with its parent company, Pizzarotti Italia: one dated 6 February 2012 for EUR 11 400 000 and another dated 9 March 2012 for EUR 2 300 000. Those sums had been borrowed for an initial period of one year, which could be extended by way of addendum, that the loan agreements did not contain any clause concerning the charging of interest by Impresa Pizzarotti, and that although the outstanding amount as of 1 January 2013 was EUR 11 250 000, both loans had been repaid in full by 9 April 2014. Transactions between Romanian persons and non-resident related persons are subject to the rules on transfer pricing. The concept of ‘Romanian persons’ covers a branch which is the permanent establishment of a non-resident person The tax authorities held that the local branch of Impresa Pizzarotti, was to be treated as a person related to Pizzarotti Italia and that the interest rate on those loans should have been set at market price, in accordance with the rules on transfer pricing. Consequently, a tax assessment was issued based on the tax audit report of the same date imposing on Impresa Pizzarotti a tax increase of 297 141.92 Romanian lei (RON) (approximately EUR 72 400) and an additional taxable amount of RON 1 857 137 (approximately EUR 452 595). Impresa Pizzarotti subsequently brought the case before the Romanian national court, the Tribunalul Cluj (Regional Court, Cluj, Romania), seeking annulment of the tax assessment. Impresa Pizzarotti held that the national provisions relied on by the tax office infringe Articles 49 and 63 TFEU, in so far as they provide that transfers of money between a branch established in one Member State and its parent company established in another Member State constitute transactions which may be subject to the rules on transfer pricing, whereas those rules do not apply where the branch and its parent company are established in the territory of the same Member State. The Romanian Court decided to stay the proceedings and to refer the following question to the Court of Justice for a preliminary ruling: “>‘Do Articles 49 and 63 [TFEU] preclude national legislation such as [Articles 11(2) and 29(3) of the Tax Code], which provides that a transfer of money from a company branch resident in one Member State to the parent company resident in another Member State may be reclassified as a revenue-generating transaction, with the consequent obligation to apply the rules on transfer pricing, whereas, if the same transaction had been effected between a company branch and a parent company, both of which were resident in the same Member State, that transaction could not have been reclassified in the same way and the rules on transfer pricing would not have been applied?’ Judgement of the Court The Court concluded that Romanian transfer pricing regulations were not in breach with the EU Fredoms of Establishment, cf. Article 49 TFEU. “By taxing the permanent establishment on the basis of the presumed amount of the remuneration for the advantage granted gratuitously to the parent company, in order to take account of the amount which that permanent establishment would have had to declare in respect of its profits if the transaction had been concluded in accordance with market conditions, the legislation at issue in the main proceedings thus allows Romania to exercise its power to tax in relation to activities carried out in its territory.” “…national legislation…, which seeks to prevent profits generated in the Member State concerned from being transferred outside the tax jurisdiction of that Member State via transactions that are not in accordance with market conditions, without being taxed, is appropriate for ensuring the preservation of the allocation of the power to tax between Member States.” “…national legislation which provides for a consideration of objective and verifiable elements in order to determine whether a transaction represents an artificial arrangement, entered into for tax reasons, is to be regarded as not going beyond what is necessary to attain the objectives relating to the need to maintain the balanced allocation of the power to tax between Member States and to prevent tax avoidance where, first, on each occasion on which there is a suspicion that a transaction goes beyond what the companies concerned would have agreed under fully competitive conditions, the taxpayer is given an opportunity, without being subject to undue administrative constraints, to provide evidence of any commercial justification that there may have been for that transaction…” “…, it appears that the Romanian legislation at issue in the main proceedings does not go beyond what is necessary to attain the legitimate objective underlying that legislation.” “…, the answer to the question referred is that Article 49 TFEU must be interpreted as not precluding, in principle, legislation of a Member State under which a transfer of money from a resident branch to its parent company established in another Member State may be reclassified as a ‘revenue-generating transaction’, with the consequent obligation to apply the rules on transfer pricing, whereas, if the same transaction had been effected between a company branch and a parent company, both of which were established in the same Member State, that transaction would not have been classified in the same way and the rules on transfer pricing would not have been applied.” Article 49 TFEU must be interpreted as not precluding, in principle, legislation of a Member State under which a transfer of money from a resident branch to its parent company established in another Member State may be reclassified as a ‘revenue-generating transaction’, with the consequent obligation to apply the rules on transfer pricing, whereas, if the same transaction had been effected between a company branch and a parent company, both of which were established ...

Chile vs Wallmart Chile S.A, October 2020, Tax Court, Case N° RUC N° 76.042.014K

In 2009, Walmart acquired a majority in Distribución y Servicio D&S S.A., Chile’s leading food retailer. With headquarters in Santiago, Walmart Chile operates several formats including hypermarkets, supermarkets and discount stores. Following an audit by the tax authorities related to FY 2015, deduction of interest payments in the amount of CH$8.958,304,857.- on an “intra-group loan” was denied resulting in a tax payable of Ch$1,786,488,290. According to Wallmart, the interest payments related to debt in the form of future dividend payments/profit distributions. Decision of the Tax court “…this Court concludes that the claimant has not been able to prove the existence of a current account between Inversiones Walmart and Walmart Chile, nor has it been able to prove the appropriateness of the reduction in expenses in the amount of CH$8.958,304,857.- for interest paid to its related company, because it did not justify the need for such disbursement for the purpose of getting into debt in order to distribute profits among the partners, nor did it prove that such disbursement generates income subject to first category tax, as provided for in article 31 No. 1 of the LIR.In addition, the claimant also failed to prove that it was in a situation that would make the tax authority’s pronouncement in Official Letter No. 709 of 2008 applicable to it, pursuant to Article 26 of the Tax Code.That, due to the justifications mentioned above, which meet the criteria of consistency, reasonableness, sufficiency, clarity, and in general with the principles that enshrine healthy criticism, is that this judge has concluded that the complainant did not overturn the objections of the tax authority and, consequently, has not been able to prove the appropriateness of the reduction of the expenditure in question.It is therefore concluded that the contested assessment was issued in full compliance with the legal provisions governing the matter, which is why the Tax and Customs Court considers it appropriate not to proceed with the claim presented in the proceedings.” Click here for English translation Chile Walmartnw ...

France vs Willink SAS, September 2020, CAA de PARIS, Case No 20PA00585

In 2011, Willink SAS issued two intercompany convertible bonds with a maturity of 10 years and an annual interest rate of 8%. The tax authorities found that the 8% interest rate had not been determined in accordance with the arm’s length principle. Willink appealed, but in a decision issued in 2019 the Administrative Court sided with the tax authorities. An appeal was then filed with the Court of Appeal. Judgment of the Supreme Court The Court of Appeal dismissed the appeal of Willink and upheld the decision of the Administrative Court. Excerpt “7. It is common ground that the funds Apax France VIII-A, Apax France VIII-B and the companies MidInvest and Telecom Online are linked to the company Willink, of which they are all partners, and that the rate of 8% exceeds the rate provided for in the first paragraph of 3° of 1 of Article 39 of the General Tax Code. To justify that this rate was not higher than the one it could have obtained from independent financial institutions or organisations under similar conditions, SAS Willink produced before the Court a comparative rate study carried out in 2020 using the Riskcalc software developed by Moody’s Analytics, a subsidiary of the rating agency Moody’s. This study is based on a model calculating the probability of default in the short term (one year) and the long term (five years) and then associates an implicit scoring. In order to select the most reliable and consistent scoring possible, this was determined on the basis of the applicant’s financial statements for the years 2011, 2012 and 2013. A search for comparable transactions on the open market was then carried out using the SetP Capital IQ database. Transactions were selected for which the issuing companies had a score comparable to Willink, issued by public or private companies across a range of industries during the relevant period. The sample was then refined, including transactions with a maturity close to each of the bonds to be compared. An interquartile range of arm’s length interest rates was then constructed on the basis of the bonds identified as comparables and used to identify median rates. 8. Although it is possible to assess the arm’s length rates by taking into account the yield on bonds, it is only on condition that, even if the loan is a realistic alternative to an intra-group loan, the reference companies are in comparable economic conditions. In the present case, this condition cannot be considered to be met for the companies selected in the sample of the report mentioned above. The level of risk used as a basis for comparison is based on a statistical model derived from historical quantitative data for companies that are not representative of the market, since defaulting companies are over-represented, and was determined on the basis of some ten financial data provided by the company itself. There is nothing to establish that this risk rating adequately takes into account all the factors recognised as forward-looking, and in particular the characteristics specific to the sector of activity concerned, even though this sector of activity is provided for the implementation of the model. Nor is it established that the so-called comparable companies in the study sample, which belonged to heterogeneous sectors of activity, would have presented the same level of risk for a banker as that with which the interested party was confronted at the same time. It follows that SAS Willink, which cannot usefully argue in these circumstances that the service cannot require a rating from a rating agency for each of the intra-group financing operations, cannot be regarded as providing the proof, which is incumbent on it, that it could have obtained a rate of 8 % from independent financial institutions or organisations under similar conditions. 9. It follows from all the foregoing that SAS Willink is not entitled to maintain that it was wrongly dismissed by the contested judgment of the Paris Administrative Court. Consequently, its claims for the application of Article L 761-1 of the Code of Administrative Justice can only be rejected.” Click here for English translation Click here for other translation CAA de PARIS, 2ème chambre, 23_09_2020, 20PA00585 ...

Romania vs “Machinery rental” S.C. A. SRL, September 2020, Supreme Court, Case No 4453/2020

An assessment had been issued where the pricing of intra group rental expenses for machinery had been set aside by the tax authorities for FY 2010-2013. By an application filed with the Court of Appeal S.C. A. S.R.L. requested the Court for annulment of the assessment issued by the tax authorities. The Court of Appeal by judgment no. 164 of 31 October 2017, partially partially annulled the assessment. Unsatisfied with this decision, both parties filed an appeal to the High Court. S.C. A. S.R.L. considers that the first court misapplied the substantive rules of law applicable to the case with regard to the additional determination of a corporation tax in the amount of RON 56,715 for 2010, with reference to the interpretation of the OECD Guidelines. “Although the expert appointed by the court of first instance correctly established the adjusted margins of trade mark-up for each of the years 2010 to 2013 and the adjusted margins of operating profit for the same period, he erred in finding that, for the purposes of the final calculation, an analysis of the year-by-year comparability of the profitability indicators obtained in the period 2010 to 2013 is required. The approach is wrong because paragraphs 3.76 and 3.79 of the OECD Guidelines require the elimination of any market influences or gaps that may have an impact on the company, the only correct method being to use multi-year financial data. The use of this method is intended to minimise the impact of individual factors on comparable entities and the economic environment, as well as temporary economic factors such as the economic crisis.” Judgement of Supreme Court The Supreme Court upheld the decision of the court of first instance. Excerpts “As regards the method chosen, although the appellant criticises the ‘year-on-year’ comparability method, it does not specifically point out what its shortcomings are, but only why it is necessary to use the method of multi-year or agreed financial data. The ‘year-on-year’ comparability method was used because it was observed that the adjusted net trading profit margins and adjusted operating profit margins for 2012 were lower than the lower quartile limit, so it was correctly required to adjust the company’s 2012 revenue to bring the profitability indicators to the median of the market range obtained for independent comparable companies. Paragraph 3.76 of the OECD Guidelines was correctly interpreted by the court of first instance as meaning that the provision primarily considers the analysis of the data for the year under assessment and, in the alternative, the data for previous years, so that the use of the aggregate comparison method is not required. Furthermore, paragraph 3.79 of the OECD Guidelines states that the use of multi-yearly data may only be used to improve the accuracy of the range of comparison, but in the present case the appellant has not shown in concrete terms the consequences of using that method.” “With regard to the estimation of transfer prices and the increase of the tax base by the amount of RON 3 815 806, the appellant-respondent submits that the difference in income between the expert’s report and the tax inspection report is due solely to the fact that the expert used the indicators from 7 companies and the tax authority used the indicators from 3 companies out of the 11 chosen. The criticism is unfounded because the expert and, by implication, the court of first instance, demonstrated that there were 4 other companies which were comparable in terms of the activity carried out and for which the tax inspection authorities considered that there was no information, but it was demonstrated by the evidence in the file that they should be included in the comparability sample.” Click here for English translation Click here for other translation Jurisprudence 4453-2020 ...

UK vs Irish Bank Resolution Corporation Limited and Irish Nationwide Building Society, August 2020, Court of Appeal , Case No [2020] EWCA Civ 1128

This case concerned deductibility of notional interest paid in 2003-7 by two permanent establishments in the UK to their Irish HQs. The loans – and thus interest expenses – had been allocated to the PEs as if they were separate entities. The UK tax authorities held that interest deductibility was restricted by UK tax law, which prescribed that PE’s has such equity and loan capital as it could reasonably be expected to have as a separate entity. The UK taxpayers, refered to  Article 8 of the UK-Ireland tax treaty. Article 8 applied the “distinct and separate enterprise” principle found in Article 7 of the 1963 OECD Model Tax Convention, which used the language used in section 11AA(2). Yet nothing was said in the treaty about assumed levels of equity and debt funding for the PE. In 2017, the First-tier Tribunal found in favour of the tax authority, and in October 2019 the Upper Tribunal also dismissed the taxpayers’ appeals. Judgement of the UK Court of Appeal The Court of Appeal upheld the decision of the Upper Tribunal and dismissed the appeal of Irish Bank Resolution Corporation and and Irish Nationwide Building Society. Click here for other translation UK vs Irish Bank Resolution Corp. Ltd Aug 2020 case no A3-2019-3060 ...

Netherlands vs X B.V., July 2020, Supreme Court (Preliminary ruling by the Advocate General), Case No ECLI:NL:PHR:2020:672

X bv is part of the worldwide X group, a financial service provider listed on the US stock exchange. At issue is deductibility of interest payments by X bv on a € 482 million loan granted by the parent company, US Inc. In 2010 the original loan between X bv and US Inc. was converted into two loans of € 191 million and € 291 million granted by a Luxembourg finance company in the X group, to two jointly taxed subsidiaries of X bv. According to the Dutch Tax Authorities, the interest payments on these loans falls under the provisions in Dutch art. 10a of the VPB Act 1969 whereby interest deductions are restricted. The Court of appeal disagreed and ruled in favor of X bv. This decision was appealed to the Supreme Court by the tax authorities. In a preliminary ruling, the Advocate General advises the Supreme Court to dismiss the appeal. According to the Advocate General, X bv is entitled to the interest deduction. The conditions of the loans are at arm’s length. Taxpayers are free in their choice of financing their participations, including choosing financing arrangements based on tax reasons. The loans have not been taken out on the basis of non-business (shareholder) motives. Nor is it important that the interest deducted in the Netherlands is also deducted in the US and France (under the Dutch provisions applicable in the years of the disputed transactions). Click here for translation ECLI_NL_PHR_2020_672 ...

Greece vs “Lender Corp”, March 2020, Court, Case No A 638/2020

“Lender Corp” had received a loan from a related party for repayment of outstanding dividends to its shareholders. The tax authority disallowed Lender Corp’s interest expenses on the loan. They found that the receipt of the loan was not in compliance with the provisions of paragraph a of Article 22 of Law No. 4172/2013, since the loan capital was not used in the interest of the company. Although the funds were made available for the fulfilment of obligations, they did not contribute to the generation of income or the development of the company’s business. Hence interest on the loan was considered as a non-deductible business expense. Lender Corp then filed an appeal. Judgement of the Court The court dismissed the appeal of Lender Corp and upheld the decision of the tax authorities. “As is evident from the information in the file of the present appeal, on 25.06.2015 the General Meeting of the shareholders of the company ” ” decided to distribute a first dividend and an additional dividend from the profits of the fiscal year 2014 and previous ones, totalling € 39,600,000. However, due to a lack of cash to cover the related obligation, the Company obtained loans of €12,300,000 and $23,200,000 during the 2015 tax year from the affiliated company ” ” at interest rates of 3.4% and 4.8%, respectively. The loan amounts were paid on behalf of the Company, by the lending company, directly into the bank accounts of its shareholders in repayment of dividends due to the borrowing company. Because it follows from the above that the interest paid by the company ” ” on a loan received from a foreign affiliated company to cover the dividend (first and additional) distributed to its shareholders is not deductible from its gross income, since paragraph (a) of Article 22 of Law 4172 is not fulfilled. /2013, since the loan amounts received were not used by the company in its interest, since although they were made available for the fulfilment of the company’s relevant obligation, they did not contribute to the creation of income or the development of its business and, therefore, the applicant’s claim is rejected as unfounded. “ Click here for English translation Click here for other translation 638-2020 ...

UK vs Smith & Nephew, March 2020, Court of Appeal, Case No A3/2019/0521

In the case of HMRC v Smith & Nephew Overseas Ltd, consideration was given to the “fairly represent†requirement in the loan relationship code. The dispute concerns each of the Smith & Nephew’s entitlement to set off foreign exchange losses against their liability to corporation tax. The exchanges loss arose as a result of Smith & Nephews changing their functional accounting currencies from sterling to US dollars on 23 December 2008 at a time when the only asset on their balance sheets was a very substantial inter-company debt owed to them by their parent company. The debts were denominated in sterling but then had to be converted into dollars when the companies’ accounts were restated in dollars. The next day, the debts were disposed of as part of a group restructuring. The exchange losses arose from Smith & Nephew’s ‘loan relationships’ as that term is used in Chapter 2 of Part IV of the Finance Act 1996 (‘Chapter 2’). Section 80 provides that all profits and gains arising to a company from its loan relationships should be chargeable to tax as income in accordance with Chapter 2. It provides also that the Chapter has effect for the purpose of determining how any deficit on a company’s loan relationships is to be brought into account. Section 81 defines ‘loan relationship’ for the purposes of the Corporation Tax Acts. A loan relationship exists whenever a company stands in the position of a creditor or debtor as respects any money debt and that debt is one arising from a transaction for lending money. Section 82 sets out the method for bringing into account any gains or deficits arising from the company’s loan relationships and provides that those gains and deficits shall be computed in accordance with section 82, using the credits and debits given for the accounting period in question by the provisions of Chapter 2. Section 84 then provides for what debits and credits are to be brought into account in respect of the company’s loan relationships. It provides that the credits and debits to be brought into account shall be the sums which when taken together ‘fairly represent’ all profits, gains and losses of the company arising from its loan relationships. As originally enacted, section 84 did not cover gains and losses arising from fluctuations in currency exchange rates as they affected a company’s loan relationships. The Finance Act 2002 introduced section 84A to deal with exchange gains and losses arising from loan relationships. Section 84A provides, broadly, that exchange gains and losses are included in the references in section 84 to profits, gains and losses arising from its loan relationships. The term ‘exchange gains and losses’ is defined by section 103(1A), which was also introduced by the Finance Act 2002. Section 84A(3), however, excepted certain exchange gains and losses so that they were not included in the credits and debits covered by section 84. The category of exchange gains or losses to which section 84A does not apply because of section 84A(3) include those which fall within either section 84A(3)(a) or (b) and which are recognised in the company’s statement of total recognised gains and losses (‘STRGL’), rather than in its profit and loss account. Section 84A conferred on HM Treasury a regulation-making power to bring into account in prescribed circumstances amounts which are taken out of the regime by section 84A(3). HM Treasury exercised that power in 2002 making regulations which covered, amongst other things, the disposal of loan relationships in respect of which exchange gains and losses have been recognised in the company’s STRGL. The question was whether, if applicable to exchange losses, the losses satisfied the ‘fairly represent-test’ On that issue the court refered to the GDF Suez judgement where the following reasoning was provided: “I agree with HMRC’s submission that the presence or absence of a tax avoidance purpose should not be determinative. Although the Court in GDF Suez explained how the amendments to the loan relationships regime in 2004 and 2006 were prompted by the desire to close loopholes and prevent tax avoidance, the wording of the statute does not refer to tax avoidance as a yardstick. It is not correct to give the ‘fairly represent’ test a limited meaning by regarding tax avoidance as the paradigm situation where the test would not be met. The test may well be failed in a case where there is an avoidance motive but where the more specific provisions directed at preventing avoidance do not, for whatever reason, apply. However, the override is not limited to that situation since it is intended to operate in favour of the taxpayer as well as in favour of HMRC. It may lead, for example, to profits being left out of account for tax purposes even though they are included in the company’s accounts in accordance with GAAP. I also agree that the presence or absence of an ‘asymmetry’ of the tax treatment of a transaction when looked at from the perspective of the counterparties is not a factor that need be present in every case where the override is triggered. It so happens that asymmetry was a factor both in GDF Suez and in the earlier case of DCC Holdings (UK) Ltd v Revenue and Customs Commissioners [2010] UKSC 58, [2011] 1 WLR 44. That does not mean, in my view, that the absence of an asymmetry in any subsequent case militates against the override being triggered. Finally, I agree with Mr Gibbon [counsel for HMRC] that the hurdle of ‘manifest absurdity’ which the Upper Tribunal appears to have applied before triggering the ‘fairly represent’ override is too stringent test. The true analysis is that section 84(1) is engaged wherever fair representation would not otherwise be achieved.†HMRC’s  appeal was dismissed by the Court. UK vs SMITH & NEPHEW cout of appeal 030320 ...

Germany vs “Write-Down KG”, February 2020, Bundesfinanzhof, Case No I R 19/17

In 2010, “Write-Down KG” granted a loan to its Turkish subsidiary (“T”). The loan bore interest at 6% per annum but was unsecured. In 2011, Write-Down KG decided to liquidate T. Write-Down KG therefore wrote off its loan and interest receivable from T and claimed the write-off as a tax deduction. The German tax authorities disallowed the deduction because the loan had been unsecured which was considered not to be at arm’s length. An appeal was lodged with the local tax court, which upheld the tax authorities’ position. An appeal was then made to the Federal Tax Court. Judgement of the Court The court ruled that the waiver of security for a shareholder loan may not be at arm’s length. Such a deviation from the arm’s length principle may lead to a write-off of the loan receivable and thus to a reduction in income. This reduction in income may be reversed on the basis of the arm’s length principle contained in Section 1 of the German Foreign Tax Act. Furthermore, article 9 OECD-MTC does not prohibit such an income adjustment. Excerpts “28. (2) The loan relationship between the plaintiff and T Ltd, who are related parties within the meaning of § 1, para. 2, no. 1 AStG, is a foreign business relationship within the meaning of § 1, para. 5 AStG, the conditions of which include the non-security of the claims. In order to avoid repetitions, reference is made to the statements in the Senate’s ruling in BFHE 263, 525, BStBl II 2019, 394. The plaintiff’s objection at the oral hearing that the transactions were ultimately purely domestic commercial transactions is not comprehensible in view of the loan agreement with T Ltd, which is domiciled in Turkey. 29. (3) Furthermore, the Regional Court bindingly determined (§ 118 (2) FGO) that a third party would not have granted the loan to T Ltd. without providing collateral. 30. Even if the FG did not explicitly extend its findings to the interest claims resulting from the loan, it seems impossible on the basis of the further circumstances established that a lender not affiliated with T Ltd. would not have secured these claims. In particular, it must be taken into account that T Ltd was a newly founded company that did not have any significant fixed assets and that the collateralisation was not dispensable from the point of view of the so-called group retention (cf. again the Senate’s decision in BFHE 263, 525, BStBl II 2019, 394, as well as the Senate’s subsequent decisions in BFH/NV 2020, 183; of 19.06.2019 – I R 54/17, juris; of 14.08.2019 – I R 14/18, juris). In this situation, there is no need to refer the case back to the Fiscal Court for further clarification of the facts. 31. (4) The reduction in income within the meaning of section 1(1) sentence 1 AStG occurred due to (“as a result of”) the lack of collateralisation. In this respect, the Senate also refers to its ruling in BFHE 263, 525, BStBl II 2019, 394. 32. (5) Nor does Article 9(1) of the Agreement between the Federal Republic of Germany and the Republic of Turkey for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion in the Field of Taxes on Income of 19 September 2011 (BGBl II 2012, 527, BStBl I 2013, 374) – DBA-Türkei 2011 -, which is applicable as of 1 January 2011, preclude the correction of income.” “34. (6) Finally, Union law does not conflict with an income adjustment under section 1, paragraph 1, sentence 1 AStG. Since Turkey is not a Member State of the European Union, reference is made in this respect to the statements in the Senate rulings of 27 February 2019 – I R 51/17 (BFHE 264, 292) and of 14 August 2019 – I R 14/18 (juris). 35. The freedom of movement of capital, which is in principle also protected in dealings with third countries (Article 63 of the Treaty on the Functioning of the European Union in the version of the Treaty of Lisbon amending the Treaty on European Union and the Treaty establishing the European Community, Official Journal of the European Union 2008, no. C 115, 47 –AEUV–) is superseded by the freedom of establishment, which has priority in this respect (Senate judgements of 6 March 2013 – I R 10/11, BFHE 241, 157, BStBl II 2013, 707; of 19 July 2017 – I R 87/15, BFHE 259, 435, BStBl II 2020, 237). Moreover, it would not be applicable – despite the amendments to Article 1(1) AStG made by the UntStRefG 2008 – also because of the so-called standstill clause of Article 64(1) TFEU (cf. Senate judgment in BFHE 264, 292). Click here for English translation Click here for other translation BFH-Urteil-I-R-19-17 ...

Italy vs “Lender” SpA, February 2020, Regional Tax Tribunal for Umbria, Case No 18/02/2020 n. 56

An Italian parent company “Lender SpA” had granted interest free loans to foreign subsidiaries. Lender SpA had also paid subsidiaries for services rendered. The Italian tax authorities held that interest should be paid on the loans and that the company had not sufficiently demonstrated the conditions to justify the deductibility of costs of services. The regional Court found in favor of the tax authorities and dismissed the appeal of Lender SpA. “For these loans, which took place on the initiative of the Managing Director and in the absence of a resolution of the Shareholders’ Meeting, the Company partly used its available liquidity and partly resorted to the credit market. In this situation, contrary to what was claimed by the company xxxxx, the principle established by the aforementioned art. 110, paragraph 7 of the Consolidated Income Tax Act should have been applied and, therefore, the Italian company should have valued the financing services provided to its foreign subsidiaries at the same price it would have charged to independent companies for similar transactions carried out under similar conditions in a free market. The arm’s length principle, established by the OECD treaties, applies to intra-group services, which also include loan agreements (see OECD transfer pricing Guidelines for Multinational Enterprises and Tax Administrations of 22 July 2010, paragraphs 7.14 and 7.15 of Chapter VII). According to the above mentioned guidelines, ‘payment for intra-group services should be that which would have been made and accepted between independent enterprises, in comparable circumstances’ and, in the case of financing, as in the present case, a remuneration must be present, through the provision of an interest rate.” “the provisions of Article 110 of the Consolidated Income Tax Law apply “not only when the prices or consideration agreed upon are lower than the average prices in the economic sector of reference, but also when a zero consideration has been agreed upon for the sale of the asset (in this case, a certain amount of money). The Inland Revenue Office, already in 1980, with Circular No. 32, had clarified that intra-group transactions, including loans, are subject to transfer pricing rules.” “the provisions of Article 110 of the Consolidated Income Tax Law apply “not only when the prices or consideration agreed upon are lower than the average prices in the economic sector of reference, but also when a zero consideration has been agreed upon for the sale of the asset (in this case, a certain amount of money).” “With regard to the deduction of costs for the provision of intra-group services (concerning administrative, tax, legal, commercial, financial, etc.), this T.R.C., agreeing with the decision appealed, notes that the taxpayer has not sufficiently demonstrated the conditions to justify the deductibility of the costs invoiced by the parent company xxxxx towards the subsidiary xxxxx, merely recalling an agreement between the aforementioned companies. In addition, the assessment activity revealed that, in the year under dispute: the xxxxx company increased the number of staff assigned to carry out the services invoiced by the parent company, hiring another four administrative employees (which were added to another four hired in 2012); it incurred significant costs for professional fees (equal to 949 euros).073, 19) and for legal expenses (equal to € 174,616.32); she availed herself of a tax consultant, to whom she paid about € 150,000.00 in 2013; for the preparation of the financial statements she was assisted by the xxxxx auditing firm; for legal affairs she availed herself of xxxxx. These circumstances are suitable to demonstrate that the company carries out independent and relevant administrative activities xxxxx.” Click here for English translation Click here for other translation Sentenza del 18_02_2020 n. 56 - Comm. Trib. Reg. per l'Umbria - Sezione_Collegio 1 ...

Italy vs “Lender” SpA, February 2020, Regional Tax Tribunal for Umbria, Case No 18/02/2020 n. 56/01

An Italian parent company “Lender SpA” had granted interest free loans to foreign subsidiaries. Lender SpA had also paid subsidiaries for services rendered. The Italian tax authorities held that interest should be paid on the loans and that the company had not sufficiently demonstrated the conditions to justify the deductibility of costs of services. The regional Court found in favor of the tax authorities and dismissed the appeal of Lender SpA. “For these loans, which took place on the initiative of the Managing Director and in the absence of a resolution of the Shareholders’ Meeting, the Company partly used its available liquidity and partly resorted to the credit market. In this situation, contrary to what was claimed by the company xxxxx, the principle established by the aforementioned art. 110, paragraph 7 of the Consolidated Income Tax Act should have been applied and, therefore, the Italian company should have valued the financing services provided to its foreign subsidiaries at the same price it would have charged to independent companies for similar transactions carried out under similar conditions in a free market. The arm’s length principle, established by the OECD treaties, applies to intra-group services, which also include loan agreements (see OECD transfer pricing Guidelines for Multinational Enterprises and Tax Administrations of 22 July 2010, paragraphs 7.14 and 7.15 of Chapter VII). According to the above mentioned guidelines, ‘payment for intra-group services should be that which would have been made and accepted between independent enterprises, in comparable circumstances’ and, in the case of financing, as in the present case, a remuneration must be present, through the provision of an interest rate.” “the provisions of Article 110 of the Consolidated Income Tax Law apply “not only when the prices or consideration agreed upon are lower than the average prices in the economic sector of reference, but also when a zero consideration has been agreed upon for the sale of the asset (in this case, a certain amount of money). The Inland Revenue Office, already in 1980, with Circular No. 32, had clarified that intra-group transactions, including loans, are subject to transfer pricing rules.” “the provisions of Article 110 of the Consolidated Income Tax Law apply “not only when the prices or consideration agreed upon are lower than the average prices in the economic sector of reference, but also when a zero consideration has been agreed upon for the sale of the asset (in this case, a certain amount of money).” “With regard to the deduction of costs for the provision of intra-group services (concerning administrative, tax, legal, commercial, financial, etc.), this T.R.C., agreeing with the decision appealed, notes that the taxpayer has not sufficiently demonstrated the conditions to justify the deductibility of the costs invoiced by the parent company xxxxx towards the subsidiary xxxxx, merely recalling an agreement between the aforementioned companies. In addition, the assessment activity revealed that, in the year under dispute: the xxxxx company increased the number of staff assigned to carry out the services invoiced by the parent company, hiring another four administrative employees (which were added to another four hired in 2012); it incurred significant costs for professional fees (equal to 949 euros).073, 19) and for legal expenses (equal to € 174,616.32); she availed herself of a tax consultant, to whom she paid about € 150,000.00 in 2013; for the preparation of the financial statements she was assisted by the xxxxx auditing firm; for legal affairs she availed herself of xxxxx. These circumstances are suitable to demonstrate that the company carries out independent and relevant administrative activities xxxxx.” Click here for English translation Click here for other translation Sentenza del 18_02_2020 n. 56 - Comm. Trib. Reg. per l'Umbria - Sezione_Collegio 1 ...

Hungary vs “Lender” Kft, February 2020, Budapest Administrative Court, Case No. 16.K.33.691/2019/18

In 2008 Lender Kft. entered into a loan agreement with its foreign domiciled affiliated company Kft. 1. According to the terms of the contract, the loan amounted to 53,174,516, the maturity date of the loan was 31 January 2013 and the interest was paid semi-annually at the semi-annual CDI rate fixed in the contract plus 200 basis points per annum. In the years 2009-2011, Kft. 1 paid 15 % of the interest as withholding tax, and Lender Kft. received 85 % of the interest. In its books, Lender Kft. entered 100 % of the interest as income, while the 15 % withholding tax was recorded as other expenses. According to Lender Kft’s transfer pricing records, the normal market interest rate range was 8,703 % to 10,821 % in FY 2009, 10,704 % to 12,598 % in the FY 2010 and 10,704 % to 12,598 % in FY 2001, and the interest rates applied in the loan transaction were 10,701 % to 12,529 %, 12,517 % to 14,600 % and 12,517 % to 14,600 % in the same years. In other words, according to the records, the interest rates applied to the transaction were partly within and partly above the market price range. Lender Kft. used the CUP method to determine the transfer price, taking into account external and internal comparables. As an external comparison, it used a so-called risk premium model based on the rating of the debtor party and the terms and conditions of the loan, taking into account publicly available data. For the credit rating of the related company, it used the risk model of the name, on the basis of which it classified the company between A1 and A3. It defined the range of interest rates to be applied in the loan terms and conditions, then the default rate and the rate of return, and finally, by substituting these data into the risk premium model formula, it defined the risk premium rates for each risk rating. In doing so, it used subordinated bonds. The benchmark interest rate range was defined as the sum of the risk-free rate and the risk premium. As an internal comparison, the applicant requested quotations from various commercial banks, as independent parties, before granting the loan, as to the amount of profit it could expect to obtain if it deposited its money with them (Bank1, Bank2) The Tax tax authorities carried out an audit of Lender Kft for FY 2009, 2010 and 2011. In the view of the tax authority at first instance, the CUP method, although appropriate for determining the arm’s length price, was not the method used by the applicant. According to the tax authorities the rating of a debtor using public rating models may differ greatly from the rating carried out by the rating agency which created the model, which results in a high degree of uncertainty as to the method used by the applicant. A further problem was that Lender Kft had based its pricing on a rate for subordinated bonds, whereas a bank loan and a bond are two different financial instruments and cannot be compared. In this context, it was stated that the transaction under examination was a loan contract and not a bond issue. The tax authorities explained that the unit operating costs are the lowest in the banking market and that it had not been demonstrated that the cost of the applicant’s lending was lower than that of a bank loan. It also stated that the mere existence of information through a relationship does not imply a lower risk exposure. In relation to the internal comparables, it stressed that the loan granted by Lender Kft could not be classified as a deposit transaction and that the comparison with the deposit rate was therefore incorrect. According to the tax authority, for the purposes of determining the normal market price, the … banking market best reflects the conditions under which the related undertaking would obtain a loan under market conditions, and therefore the so-called “prime rate” interest rate statistics calculated by the Central Bank of the country in question are the most appropriate for its calculation. This statistic shows the average interest rate at which commercial banks lend to their best customers. Accordingly, the tax authority at first instance took this rate as the basis for determining the difference between the interest rate applied to the transaction at issue and the normal market rate. As a result, the applicant’s corporate tax base was increased by HUF 233,135,000.00 in the financial year 2009, HUF 198,638,000.00 in the financial year 2010 and HUF 208,017,000.00 in the financial year 2011, pursuant to Article 18(1) of Act LXXXI of 1996 on Corporate Tax and Dividend Tax (‘Tao Law’). Lender Kft. filed a complaint against the decision and requested that the decision be altered or annulled and that the defendant be ordered to commence new proceedings. In the complaint it stated that the method used by the tax authorities did not comply with points 1.33, 1.35 and 2.14 of the OECD TPG, nor with Article 7(d) of the PM Regulation. By judgment of 20 April 2018, the Court of First Instance annulled the tax authorities first assessment and ordered the authority to initiate new proceedings in that regard. The court stated that the tax authority must determine whether the pricing of the loan at issue in the case was in line with the arm’s length price, taking into account the OECD Transfer Pricing Guidelines and the expert’s opinion in this context. Under the revised audit process the tax authorities found other issued which were added to the new assessment. Lender Kft. then filed an appeal with the Administrative Court. Judgement of the Administrative Court The Administrative court found the appeal well founded. Excerpts “The tax authority was only legally able to implement the judgment of the court in the retrial ordered by the court. The subject-matter of the action was the finding of the tax authority as a result of the audit ...

New TPG Chapter X on Financial Transactions (and additions to TPG Chapter I) released by OECD

In February 2020, OECD released the report Transfer Pricing Guidance on Financial Transactions. The guidance in the report describes the transfer pricing aspects of financial transactions and includes a number of examples to illustrate the principles discussed in the report. Section B provides guidance on the application of the principles contained in Section D.1 of Chapter I of the OECD Transfer Pricing Guidelines to financial transactions. In particular, Section B.1 of this report elaborates on how the accurate delineation analysis under Chapter I applies to the capital structure of an MNE within an MNE group. It also clarifies that the guidance included in that section does not prevent countries from implementing approaches to address capital structure and interest deductibility under their domestic legislation. Section B.2 outlines the economically relevant characteristics that inform the analysis of the terms and conditions of financial transactions. Sections C, D and E address specific issues related to the pricing of financial transactions (e.g. treasury functions, intra-group loans, cash pooling, hedging, guarantees and captive insurance). This analysis elaborates on both the accurate delineation and the pricing of the controlled financial transactions. Finally, Section F provides guidance on how to determine a risk-free rate of return and a risk-adjusted rate of return. Sections A to E of this report are included in the OECD Transfer Pricing Guidelines as Chapter X. Section F is added to Section D.1.2.1 in Chapter I of the Guidelines, immediately following paragraph 1.106. transfer-pricing-guidance-on-financial-transactions-inclusive-framework-on-beps-actions-4-8-10 ...