ST Dupont is a French luxury manufacturer of lighters, pens and leather goods. It is majority-owned by the Dutch company D&D International, which is wholly-owned by Broad Gain Investments Ltd, based in Hong Kong. ST Dupont is the sole shareholder of the distribution subsidiaries located abroad, in particular ST Dupont Marketing, based in Hong Kong. Following an audit, an adjustment was issued where the tax administration considered that the prices at which ST Dupont sold its products to ST Dupont Marketing (Hong Kong) were lower than the arm’s length prices. “The investigation revealed that the administration found that ST Dupont was making significant and persistent losses, with an operating loss of between EUR 7,260,086 and EUR 32,408,032 for the financial years from 2003 to 2009. It also noted that its marketing subsidiary in Hong Kong, ST Dupont Marketing, in which it held the entire capital, was making a profit, with results ranging from EUR 920,739 to EUR 3,828,051 for the same years.” Applying a CUP method the tax administration corrected the losses declared by ST Dupont in terms of corporation tax for the financial years ending in 2009, 2010 and 2011. Not satisfied with the adjustment ST Dupont filed an appeal with the Paris administrative Court where parts of the tax assessment in a decision issued in 2019 were set aside by the court (royalty payments and resulting adjustments to loss carry forward) An appeal was then filed with the CAA of Paris, where in April 2022 the Court dismissed the appeal and upheld the decision of the court of first instance. Finally an appeal was filed with the Conseil d’État. Judgement of the Conseil d’État The Conseil d’État dismissed the appeal of ST Dupont and upheld the decision of the Court of Appeal. Excerpt “ 15. It is clear from the documents in the file submitted to the lower courts that, in order to assess whether the prices at which ST Dupont sold its finished products to its distribution subsidiary ST Dupont Marketing constituted a transfer of profits abroad, it compared them to the prices at which the same products were sold to the independent South Korean company SJ Duko Co and to a network of duty-free sellers in South-East Asia. It considered that this comparison revealed the existence of an advantage granted by ST Dupont to its subsidiary, which it reintegrated into the parent company’s profits. However, in its response to the taxpayer’s comments, this adjustment was reduced by a “reduction” in the arm’s length prices used by the tax authorities, which consisted of aligning the margin on transactions with duty free shops with the margin on sales to SJ Duko, and then, in accordance with the opinion issued by the departmental commission for direct taxes and turnover taxes, by a further reduction of 50% of the amounts reintegrated into the company’s results. 16. In the first place, the company criticised the method used by the tax authorities on the grounds that ST Dupont Marketing and the Korean company SJ Duko Co were not comparable, since the former operated as a wholesaler and retailer while the latter only operated as a wholesaler. In rejecting this criticism on the grounds, firstly, that SJ Duko’s wholesale activity had been supplemented by that of exclusive sales agent and retailer and, secondly, that the applicant had not provided any evidence making it possible to assess the nature and cost of the differences in functions between ST Dupont Marketing and SJ Duko Co, taking into account in particular the assets used and the risks borne, and consequently to assess the existence, if any, of differences such that they would render the comparison irrelevant if they could not be appropriately corrected, the Court did not err in law. Although the company also argued that the differences in the functions performed by ST Dupont and the duty free shops prevented the duty free shops from being considered comparable, this criticism is new in the appeal and is therefore inoperative. 17. Secondly, in order to dismiss the criticism of the administration’s method based on the failure to take account of the difference in the geographical markets in which ST Dupont Marketing and SJ Duko Co operated, respectively, the Court was able, without committing an error of law, by disregarding the rules governing the allocation of the burden of proof or distorting the documents in the file submitted to it, to rely on the fact that ST Dupont’s transfer pricing documentation itself specified that retail prices were set uniformly by continental zone. 18. Thirdly, the Court noted, in a sovereign assessment not vitiated by distortion, on the one hand, that it did not follow either from the tables attached to the rectification proposal, or from the method of determining the selling prices of finished products to the various Asian subsidiaries, that the prices charged by ST Dupont to its customers depended on the quantities sold and, secondly, that the document produced by ST Dupont showing an overall statistical correlation between volume sold and unit price, which did not guarantee that the products compared were homogeneous, did not make it possible to establish this either. In relying on these factors to dismiss the company’s criticism based on the difference in the volume of transactions with ST Dupont Marketing and SJ Duko Co respectively, the Court did not err in law. 19. Fourthly, although the company criticises the grounds of the judgment in which the Court rejected its argument that the alignment of the mark-up applied to sales to duty-free shops with that applied to sales to SJ Duko Co meant that only one term of comparison was used, it is clear from other statements in the judgment, not criticised by the appeal, that the court also based itself on the fact that the tax authorities had, as an alternative, in their response to the taxpayer’s observations, applied a 27% reduction to the prices granted to duty-free shops in order to take account of the fact that these were ...

In 2007, Forbes Medi-Tech Inc. (now Deans Knight Income Corporation) was a British Columbia-based drug research and nutritional food additive business in financial difficulty. It had accumulated approximately $90 million of unclaimed non-capital losses and other tax credits. Non-capital losses are financial losses resulting from carrying on a business that spends more than it makes in a given year. Under the Income Tax Act (the Act), a taxpayer can reduce their income tax by deducting non-capital losses from its taxable income. If the taxpayer does not use all, or a portion, of the loss in the year it incurred it, they may carry the loss back three years, or forward 20 years. However, under section 111(5) of the Act, when another entity acquires control of the company, the new owners may not carry over those non-capital losses and deduct them from its future taxes, unless the company continues to operate the same or a similar business. Deans Knight wanted to use its non-capital losses but did not have sufficient income against which to offset them. In early 2008, it entered into a complex investment agreement with venture capital firm Matco Capital Ltd, to help it become profitable. The agreement was drafted in a way that ensured Matco did not acquire control of Deans Knight by becoming the majority shareholder because that would trigger the restriction on carrying over losses under section 111(5) of the Act. However, in effect, Matco gained considerable influence over Deans Knight’s business affairs. It found a separate mutual fund management company that would use Deans Knight as a corporate vehicle to raise money through an initial public offering. That money would then be used to transform Deans Knight into an investment business. This was attractive to Deans Knight because it could make use of its non-capital losses to shelter most of the new business’ portfolio income and capital gains. When Deans Knight filed its tax returns for 2009 to 2012, it claimed nearly $65 million in non-capital losses and other tax credits, thereby reducing its tax liability. The tax authorities reassessed Deans Knight’s tax returns and denied the deductions. The company appealed that decision to the Tax Court of Canada. The Tax Court found that Deans Knight gained a tax benefit through a series of transactions that it concluded primarily for tax avoidance purposes, but that the transactions did not amount to an abuse of the Act, namely section 111(5). The tax authorities appealed to the Federal Court of Appeal, which held that the transactions were abusive. It applied the “general anti-avoidance rule” (GAAR) under the Act to deny Deans Knight’s tax deductions. The GAAR operates to deny tax benefits flowing from transactions that comply with the literal text of the Act, but that nevertheless constitute abusive tax avoidance. Deans Knight appealed to the Supreme Court. Judgement of the Supreme Court The Court dismissed the appeal of Deans Knight and upheld the decision from the Court of Appeal. It found the transactions were abusive and the GAAR applied to deny the tax benefits. Despite complying with the literal text of a provision in the Act, a transaction is abusive if it frustrates its rationale. The rationale behind section 111(5) of the Act is to prevent corporations from being acquired by unrelated parties in order to deduct their unused losses against income from another business for the benefit of new shareholders. Deans Knight was fundamentally transformed through a series of transactions that achieved the outcome that the Act sought to prevent, while narrowly circumventing the restriction in section 111(5). Excerpt “the appellant was gutted of any vestiges from its prior corporate ‘life’ and became an empty vessel with [unused deductions]”.  ...

In 2013, DFH Haus CZ s.r.o. filed amended tax returns for 2006, 2010, and 2011, following the German tax authority’s adjustment of its transfer prices in 2006, in order to claim the resulting tax loss for 2006 and apply it against its tax liability in the Czech Republic for 2010 and 2011. The tax authorities disallowed these amendments. A complaint filed by DFH with the regional court was dismissed and an appeal was then filed with the Supreme Administrative Court. Judgement of the Court The Supreme Administrative Court rejected DFH’s appeal and upheld the decision of the tax authorities. Excerpts “[34] On the basis of the foregoing, the Supreme Court of Justice, like the Regional Court, considers that the complainant’s tax loss for 2006, as a relevant fact in terms of the reopening of proceedings, was incurred, assessed and could be deducted from the tax base pursuant to Section 34(1) of the ITA only on 8 July 2013, when it was decided upon or determined by the aforementioned additional payment assessment for 2006. Therefore, the Supreme Administrative Court fully agrees with the Regional Court’s conclusion that it was only on that date that the corporate income tax loss for the tax year 2006, which the applicant claims to apply for the tax years 2010 and 2011 pursuant to Article 34(1) of the ITA, was determined (increased). The assessment of the tax loss for the year 2006 in 2013 cannot, therefore, be regarded as a new fact from the point of view of the reopening of the proceedings, which came to light after the assessment proceedings for the tax years 2010 and 2011 had been concluded and which already existed at the time of the tax administrator’s decision in those original assessment proceedings. Therefore, the condition for the authorisation of the reopening of proceedings under Section 117(1)(a) of the Tax Code, consisting in the existence of a new fact already existing at the time of the decision, which has newly come to light and was not known to the taxpayer or the tax administrator at the time of the decision, despite its existence, was not met in the case under consideration. Therefore, the complainant cannot claim, by way of a retrial, a reduction of the corporate income tax base for 2010 and 2011 by the tax loss assessed for 2006 in 2013. [35] The fact mentioned by the complainant that the tax loss for 2006 stems from the adjustment of transfer prices in the context of the tax audit for the years 2005-2007 does not change the above conclusion that the condition for the reopening of proceedings has not been met, since in the present case the decisive factor in terms of the reopening of proceedings for the tax years 2010 and 2011, which were closed by final payment assessments (assessment of the novelty of the facts), is when the tax loss for 2006 was assessed, not when the fact giving rise to the tax loss occurred. In the present case, it was the tax loss that could be deducted from the tax base in certain circumstances, not the overvalued transfer prices in 2006, that was the fact that could affect the amount of the complainant’s tax liability. [36] Given that the complainant became aware of the transfer price adjustment giving rise to the tax loss on 19 July 2013, it can be accepted that, without fault on the part of the complainant or the tax authorities, the tax loss for 2006 could not have been claimed earlier. However, the complainant’s knowledge of the transfer price adjustment does not alter the fact that the assessment of the tax loss for 2006 in 2013 cannot be regarded as a new fact for the purposes of the reopening of the proceedings, which came to light after the end of the assessment proceedings for the tax years 2010 and 2011. [37] As regards the complainant’s reference to the judgment of the Municipal Court in Prague of 19 August 2020, no. 10 A 30/2020 63, and the proceedings on the complainant’s cassation complaint against that judgment (terminated against the complainant by the judgment of the Supreme Administrative Court of 11 November 2022, no. 4 Afs 287/2020 49), the Supreme Administrative Court states that the case in question does not affect the assessment of the present case, which, in brief, concerns whether the assessment of the tax loss for 2006 on 8 July 2013 constitutes a new fact in terms of fulfilling the conditions for the renewal of the corporate income tax assessment proceedings for 2010 and 2011. [38] The arguments raised by the complainant in relation to the fact that it did not take the opportunity to challenge the tax authorities’ decisions of 13 September 2013, nos. 819339/13 and 819349/13, by which the tax authorities discontinued proceedings in respect of the supplementary tax returns for 2010 and 2011 submitted on 27 June 2013, in which the complainant claimed the tax loss for 2006 in instalments, are not relevant to the fulfilment of the conditions for the authorisation of the reopening of proceedings. The Supreme Administrative Court therefore did not consider it further. If the complainant argued that he had fulfilled the condition expressed in Section 117(2) of the Tax Code, i.e. that it was not possible to file additional tax returns for the years 2010 and 2011 due to the reasons for the reopening of the proceedings, this also does not change the above conclusion that in the case under consideration the condition for the authorisation of the reopening of the proceedings pursuant to Section 117(2) of the Tax Code was not fulfilled. (1)(a) of the Tax Code, consisting in the existence of a fact already existing at the time of the decision, which had newly come to light and which, despite its existence, was not known to the taxpayer or the tax administrator at the time of the decision. The complainant’s reference to the judgment of the Regional Court in Brno No 29 Af ...

In 2013, DFH Haus CZ s.r.o. filed amended tax returns for 2006, 2010, and 2011, following the German tax authority’s adjustment of its transfer prices in 2006, in order to claim the resulting tax loss for 2006 and apply it against its tax liability in the Czech Republic for 2010 and 2011. The tax authorities disallowed the amendments. A complaint filed by DFH with the district court was dismissed and an appeal was then filed with the Supreme Administrative Court. Judgement of the Court The Court rejected DFH’s arguments that the tax loss must be allowed under the Czech-German income tax treaty. DFH could not reduce its tax liabilities in the Czech Republic in 2010 and 2011 with the 2006 tax loss resulting from the German transfer pricing adjustment. The Court noted that the usual purpose of double taxation treaties is to regulate the place where income is taxed, but the actual rules for taxation or the deduction of expenses remain reserved to national law. In this case, the Double Taxation Convention could not be applied because there was no international aspect of taxation and the deduction of tax losses was a matter for national legislation. Excerpts “[38] In the present case, the complainant first invoked a motion for protection against the tax authority’s failure to act in relation to the activation of conciliation proceedings on 28 October 2019 in respect of the resolution of the case by way of an agreement under Article 25 of the Double Taxation Treaty. The Appellate Financial Directorate postponed this complaint on the grounds that the alleged inaction of the tax administrator (the Tax Office for the Pilsen Region) had been eliminated, as the tax administrator had submitted the case to the defendant 2) for resolution of the case by agreement under the said treaty. Subsequently, on 15 December 2019, the complainant submitted a request for removal of the inaction pursuant to Article 38 of the Tax Code, to which defendant 2 responded on 28 January 2020 by stating that it did not find the request for resolution of the case by agreement under the Arbitration Convention justified, since the tax administrator had issued additional payment assessments for the years 2005 and 2006, thereby accepting the adjustments made by the German tax administration and thus eliminating double taxation. The defendant also stated in its reply that the activation of the double taxation convention was not an option even for the tax years 2010 and 2011, since there would have been taxation in breach of that convention. On 7 February 2020, defendant 1 responded to this complaint by stating that it did not consider it justified, since the conciliation procedure under Article 25 of the Double Taxation Treaty and the measures under Section 39q(a) and (b) of the Income Tax Act did not constitute tax administration procedures and therefore could not be invoked as a defence against inaction; at the same time, defendant 1 also referred in this reply to the opinion of defendant 2.) [39] It is clear that defendant 2), which potentially had the competence to conduct conciliation proceedings under Article 25 of the Double Taxation Treaty (in conjunction with Article 9 thereof), acted in accordance with the above-quoted conclusions expressed in judgment No 5 Afs 468/2019-65 and informed the complainant of the reasons why conciliation proceedings could not be initiated. The reasons for its action (failure to adopt a measure pursuant to Section 39q of the Income Tax Act) were also communicated to the complainant by defendant 1). Those reasons were subsequently reviewed by the Municipal Court in the judgment under appeal in that it considered the possibility of submitting the matter to conciliation under the double taxation treaty or of adopting a measure under section 39q of the Income Tax Act. In so doing, it concluded that the issue raised by the applicant, for which it seeks an order requiring the defendant to adopt the measures repeatedly referred to, is not resolved by a double taxation treaty but is purely domestic in nature. For that reason, he did not consider that there was any merit in either the requirement to submit the matter by way of an agreement under a double taxation treaty or in the requirement to take measures in relation to a foreign country by defendant 1) under the Income Tax Act. …. “[41] The appeal is not well-founded for the reasons set out above and the Supreme Administrative Court therefore dismissed it pursuant to the second sentence of Article 110(1) of the Code of Civil Procedure.” Click here for English Translation Click here for other translation ...

In February 2016 the Regional Tax Commission rejected an appeal filed by the Revenue Agency against the first instance judgment, which had upheld an appeal brought by Italian car manufacturer, Ferrari S.p.A. against a notice of assessment issued by the Revenue Agency in which the company was accused of having applied prices lower than the ‘normal value’ in transactions with its foreign subsidiaries, in particular with the US company Ferrari NA (North America). In determining the arm’s length price of the relevant controlled transactions Ferrari had applied the CUP method. The Revenue Agency considered the TNMM to be the most appropriate method. The Regional Tax Commission observed that “for verifying the “normal value”, the Revenue Agency itself, in Circular No. 32 of 22/09/1980, had suggested the use of the CUP method instead of the less reliable TNMM method “which is not advisable due to its considerable approximation and arbitrariness’ for which reason the Office’s objection must be considered inadmissible”. On that basis the Regional Tax Commission determined that the CUP method should be applied in the case. Furthermore, the Regional Tax Commission found that the Revenue Agency had not discharged the burden of proof of tax avoidance attributed to the appellant company, for having charged prices to foreign subsidiaries that were lower than the normal value. An appeal was filed by the Revenue Agency with the Supreme Court. Judgement of the Supreme Court The Supreme Court set aside the decision of the Regional Tax Commission and upheld the Revenue Agency’s adjustments to the taxable profits of Ferrari Spa. According to the Court a transfer pricing adjustments does not require the Revenue Agency to prove the existence of tax avoidance, as stated by the Regional Tax Commission, but rather the mere existence of ‘transactions’ between related companies at a price apparently lower than the normal one. The taxpayer, by virtue of the principle of proximity of evidence, bears the burden of proving that such “transactions” took place in accordance with the arm’s length principle. Excerpts “8.5.2. In this, the contested decision ignored the fact that the development of the jurisprudence of this Court, already at the time of the issuance of the judgment rendered by the CTR, had abandoned the consideration of the nature of Article 110, paragraph 7, TUIR, as an anti-avoidance clause (see Cass. sez. 5, 18 September 2015, no. 18392; hereinafter see also Cass. sez. 5, 15 April 2016, no. 7493; Cass. sez. 5, 30 June 2016, no. 13387; Court of Cassation, section 5, 15 November 2017, no. 27018; Court of Cassation, section 5, 19 April 2018, no. 9673; most recently, while awaiting the publication of this decision, Court of Cassation, section 5, 17 May 2022, no. 15668), which leads to the further principle, affirmed by the case law of this Court, according to which “[i]n the matter of determining business income, the rules set forth in Article 110, paragraph 7, Presidential Decree no. 917 of 1986, aimed at taxing the income of a company, are not applicable to the taxable person. 917 of 1986, 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 price, while it is for the taxpayer, by virtue of the principle of proximity of proof under Article 2697 e.g. and on the subject of tax deductions, the burden of proving that such ‘transactions’ took place for market values to be considered normal within the meaning of Art. 9, paragraph 3, of the same decree, such being the prices of goods and services practiced in conditions of free competition, at the same stage of marketing, at the time and place where the goods and services were purchased or rendered and, failing that, at the nearest time and place and with reference, as far as possible, to price lists and rates in use, therefore not excluding the usability of other means of proof” (cf, more recently, Cass. sez. 5, orci. 19 May 2021, no. 13571 and already, in a conforming sense, Cass. sez. 5, 8 May 2013, no. 10742). 8.5.3. It should also be noted, in relation to the concluding passage of the grounds of the contested judgment, how the same Tax Administration had already specified in Circular No. 42/IIDD/1981 that the adequacy of a transfer pricing method must be assessed on a case-by-case basis. 8.6. In conclusion, it should be recalled how the aforementioned Court of Cassation No. 15668/2022, with specific reference to the Transactional Net Margin Method or TNMM, in referring to Section B of Part III of Chapter II of the OECD Guidelines of 2010 which regulates it, as well as, similarly, the subsequent edition of 2017, had the opportunity to affirm the principle, which must be given further continuity herein, according to which “[i]n the matter of determining business income, the rules under Article 110, paragraph 7, of Presidential Decree No. 917 of 1986, aimed at determining the transfer price of a company, are not applicable to the transfer pricing method. 917 of 1986, aimed at repressing the economic phenomenon of “transfer pricing”, i.e., the shifting of taxable income following transactions between companies belonging to the same group and subject to different national regulations, requires the determination of the weighted transfer prices for similar transactions carried out by companies competing on the market, for which purpose it is possible to use the method developed by the OECD that is based on the determination of the net margin of the transaction (so-called “TNM”), which is the basis for the determination of the net margin of the transaction. “TNMM”), provided that the period of investigation is selected, the comparable companies are identified, the appropriate accounting adjustments are made to the financial statements of the tested party, due account is taken of the ...

ST Dupont is a French luxury manufacturer of lighters, pens and leather goods. It is majority-owned by the Dutch company D&D International, which is wholly-owned by Broad Gain Investments Ltd, based in Hong Kong. ST Dupont is the sole shareholder of distribution subsidiaries located abroad, in particular ST Dupont Marketing, based in Hong Kong. Following an audit, an adjustment was issued where the tax administration considered that the prices at which ST Dupont sold its products to ST Dupont Marketing (Hong Kong) were lower than the arm’s length prices. “The investigation revealed that the administration found that ST Dupont was making significant and persistent losses, with an operating loss of between EUR 7,260,086 and EUR 32,408,032 for the financial years from 2003 to 2009. It also noted that its marketing subsidiary in Hong Kong, ST Dupont Marketing, in which it held the entire capital, was making a profit, with results ranging from EUR 920,739 to EUR 3,828,051 for the same years.” Applying a CUP method the tax administration corrected the losses declared by ST Dupont in terms of corporation tax for the financial years ending in 2009, 2010 and 2011. Not satisfied with the adjustment ST Dupont filed an appeal with the Paris administrative Court where parts of the tax assessment in a decision issued in 2019 were set aside by the court (royalty payments and resulting adjustments to loss carry forward) Still not satisfied with the result, an appeal was filed by ST Dupont with the CAA of Paris. Judgement of the CAA The Court of appeal dismissed the appeal of ST Dupont and upheld the decision of the court of first instance. Excerpt “It follows from the above that the administration provides proof of the existence and amount of an advantage granted to ST Dupont Marketing that it was entitled to reintegrate into ST Dupont’s results, pursuant to the provisions of Article 57 of the General Tax Code, before drawing the consequences on the amount of the deficits declared by this company in terms of corporation tax, on the liability of the sums thus distributed to the withholding tax and on the integration in the base of the minimum contribution of professional tax and the contribution on the added value of companies. 29. It follows from all the foregoing that ST Dupont is not entitled to maintain that it was wrongly that, by the contested judgment, the Paris Administrative Court rejected the remainder of its claim. Its claims for the annulment of Article 4 of that judgment, for the discharge of the taxes remaining in dispute and for the restoration of its declared carry-over deficit in its entirety must therefore be rejected.” Click here for English translation Click here for other translation ...

The Mahou (SAN MIGUEL) S.A Group is active in brewing and sale of beers. Penibética de cervezas y bebidas SL and Andaluza de cervezas y bebidas SL are wholly owned by Cervezas Alhambra SL, which again is owned by MAHOU (SAN MIGUEL) S.A. The main activity of Cervezas Alhambra SL is the distribution and marketing under its own brands of the beer produced by its subsidiaries; that of Penibética de Cervezas y Bebidas SL is the production of beers which, without its own brand, are mainly distributed and marketed by Alhambra and the core activity of Andaluza de Cervezas y Bebidas S.L. is the manufacture of beers which, without its own brand, are distributed and marketed by Alhambra. In 2014, the tax authorities issued two tax assessments to the group: one in relation to FY 2008 and 2009, in the amount of €12,303,526.50 an another in relation to FY 2010, 2011, in the amount of €4,951,701.39. Among the issues raised in these assessments was transfer pricing. The CUP method used by the company was rejected by the tax authorities who instead applied the TNMM method. The tax authorities considered that the pricing of the sales made by Penibética de Cervezas y Bebidas S.L and Andaluza de Cervezas y Bebidas S.L to Cervezas Alhambra SL had been below market price, which could be due to fiscal reasons as the higher taxable income in Cervezas Alhambra SL could be offset by losses from previous years. Dissatisfied with the tax assessment Mahou S.A. filed a complaint which resulted in a decision in favour of the tax authorities. This decision was then appealed to the Audiencia Nacional. Judgement of the Court The National Court dismissed the appeal of Mahou in regards of transfer pricing and upheld the assessment of the tax authorities. Excerpts “As mentioned above, Cervezas Alhambra SL had significant BINs pending offsetting; they were generated in 1996 and subsequent years and at the start of the verification period amounted to 47,485,324.63 euros. And in the years 2010 and 2011 the declared tax bases of Cervezas Alhambra SL amounted to 8,953,184.43 euros and 8,213,717.51 euros. Tax Group 612/09, in which the related parties are taxed, has made the following offsets of tax losses from Cervezas Alhambra SL in years prior to its inclusion in the consolidated group: 2,884,427.23 euros (year of generation: 1996) 6,068,757.20 euros (year of generation. 1997) 2011: 6,781,618.18 euros (year of generation: 1997). Well, in the settlement, as a result of applying the TNMM to the transactions between related parties, the declared operating results are readjusted, increasing the results and bases declared by Penibética de Cervezas y Bebidas SL and Andaluza de Cervezas y Bebidas S.L in 2010 by €1,314,040 and €1,556,860 respectively, and correspondingly reducing the operating result and taxable base of Cervezas Alhambra SL in 2010 by €2,870,900. And here the problem lies in determining which is the (most appropriate) method for establishing the price of related-party transactions. Of the methods regulated in Article 16.4 TRLIS, the dichotomous positions in conflict here are, on the one hand, the CUP method, maintained by the appellant, and, on the other, the TNMM method applied by the Inspectorate. First of all, in the financial year prior to 2010, the TNMM was used to determine the transfer prices between related parties, although it is fair to recognise that in that year the transactions between Cervezas Alhambra and its subsidiaries were not included, since the fiscal group 612/09 had its first financial year in 2010. Be that as it may, Mahou, S.A. provided the Inspectorate with a series of transfer pricing reports of the companies of the group prior to the financial year 2010 carried out by Ernst & Young (manufacture of Cervezas Alhambra S.L. by Mahou S.A. and with San Miguel, Penibética de Cervezas y Bebidas S.L. with San Miguel, Cervezas Anaga S.A. with Mahou and San Miguel, purchase of Mahou branded beers and other brands manufactured by San Miguel and Cervezas Anaga and sale of beers manufactured by Mahou under the San Miguel brand to San Miguel and purchase of own branded beers manufactured by related entities and other brands manufactured by San Miguel and Cervezas Anaga and sale of own branded beers to related entities and sale of Mahou branded goods manufactured by Mahou S. A.) and in all of them the sale of Mahou branded goods manufactured by Mahou S. A. to San Miguel and sale of Mahou branded goods to San Miguel and sale of Mahou branded goods manufactured by San Miguel and Cervezas Anaga S.A. to San Miguel. A.) and in all of them the TNMM was used as it was considered the most appropriate to assess whether the brewing activities are in line with the arm’s length principle, using as an indicator of profitability the operating margin on total costs, selecting the brewing companies as the tested party. As regards the comparables used, Alhambra and Penibética use the AMADEUS and SABI databases, selecting five comparable European brewing companies, using data for 2006, 2007 and 2008. Well, even hypothetically admitting that the use of the TNMM in previous years cannot condition the valuation of the transactions between Cervezas Alhambra and its subsidiaries because in those years they were not included and therefore were not analysed in the reports, we must agree with the Inspectorate that with the information available this is the methodology that allows the transfer prices of brewing operations to be assessed, while the use of the CUP method is unacceptable. In fact, in the report A-02 (in section A.3.d) as well as in the non-conformity report (3.3 d/) and in section 4 of the pricing report of the operations of Penibética, Andaluza and Alhambra, the reasons for opting for this method are sufficiently justified, having used to select the comparable samples those that meet the requirements of activity and independence in accordance with the OECD guidelines obtained from the internationally accredited AMADEUS database. At the same time, the Inspectorate rejects the CUP method in ...

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 ...

The Holmen case dealt with tax deduction of losses arising in indirectly held Spanish subsidiaries would be deductible upon liquidations of the Spanish companies. The Court clarified that final losses arising in an indirectly held subsidiary, should not be deductible for the parent company, unless all the intermediate companies between the parent company and the loss-making subsidiary are resident in the same member state as the loss-making subsidiary. In the Holmen case the facts suggest that a loss could be deductible in Sweden, as all intermediate companies were from Spain. The mere fact that the legislation of the subsidiary’s state of establishment does not allow the transfer of losses in the year of liquidation can’t, in itself, be sufficient to deem the losses as “final”. The Court also stated, that losses in foreign subsidiaries can’t be characterized as “final” if there is a possibility of deducting those losses economically in the subsidiary’s state of residence, for example by transferring them to a third party ...

The Memira Holding case was about a crossborder merger between a loss-making German subsidiary and a Swedish parent company. The CJEU was asked to clarify whether the German losses would be deductible in Sweden after the merger had been finalized. In the Court’s view, Memira Holding may deduct the foreign losses in Sweden, but only if the Swedish parent company can demonstrate that it is impossible to use the losses in Germany in future periods. The fact that Germany does not allow losses to be taken over through a merger is thus not decisive in itself. Further possibilities to take over the losses must be assessed. The CJEU states that losses in subsidiaries can’t be characterized as “final” if there is a possibility of deducting those losses economically in the subsidiary’s state of residence, for example by transferring them to a third party. If, on the other hand, the parent company can adduce evidence to the contrary, then the losses of the German subsidiary would be deemed as final and it would then be disproportionate not to allow Memira Holding to take them into account in Sweden ...

ST Dupont is a French luxury manufacturer of lighters, pens and leather goods. It is majority-owned by the Dutch company, D&D International, which is wholly-owned by Broad Gain Investments Ltd, based in Hong Kong. ST Dupont is the sole shareholder of distribution subsidiaries located abroad, in particular ST Dupont Marketing, based in Hong Kong. Following an audit, an adjustment was issued for FY 2009, 2010 and 2011 where the tax administration considered that the prices at which ST Dupont sold its products to ST Dupont Marketing (Hong Kong) were lower than the arm’s length prices, that royalty rates had not been at arm’s length. Furthermore adjustments had been made to losses carried forward. Not satisfied with the adjustment ST Dupont filed an appeal with the Paris administrative Court. Judgement of the Administrative Court The Court set aside the tax assessment in regards to license payments and resulting adjustments to loss carry forward but upheld in regards of pricing of the products sold to ST Dupont Marketing (Hong Kong). Click here for English translation Click here for other translation ...

The Danish company Bevola had a PE in Finland. The PE incurred a loss when it was closed in 2009 that could not be utilized in Finland. Instead, Bevola claimed a tax deduction in its Danish tax return for 2009 for the loss suffered in Finland. A deduction of the loss was disallowed by the tax authorities because section 8(2) of the Danish Corporate Tax Act stipulates that the taxable income does not include profits and losses of foreign PEs (territoriality principle). Bevola would only be entitled to claim a tax deduction for the Finnish loss in the Danish tax return by making an election of international joint taxation under section 31 A. However, such an election means that all foreign entities must be included in the Danish tax return and the election is binding for a period of 10 years. The decision of the tax authorities was confirmed by the National Tax Tribunal on 20 January 2014. The taxpayer filed an appeal with the Eastern High Court claiming that section 8(2) was incompatible with the EU principle of freedom of establishment, because Bevola would have been entitled to claim a tax deduction if the loss had been suffered by a domestic Danish PE. A reference was made to the ECJ decision in case C-446/03, Marks & Spencer. The High Court asked the European Court of Justice if Article 49 TFEU preclude a national taxation scheme such as that at issue in the main proceedings under which it is possible to make deductions for losses in domestic branches, while it is not possible to make deductions for losses in branches situated in other Member States, including in circumstances corresponding to those in the Court’s judgment [of 13 December 2005] in Marks & Spencer, C 446/03, EU:C:2005:763, paragraphs 55 and 56, unless the group has opted for international joint taxation on the terms as set out in the main proceedings? The Court held that section 8(2) causes losses of foreign PEs to be treated less favorable compared to losses of domestic PEs. The fact that a taxpayer could opt for international joint taxation did not make a difference because this scheme was subject to two strict conditions. Comparability of the situations should be evaluated based on the purpose of the relevant legislation. The purpose of the Danish law was to prevent double taxation of profits and double deduction of losses. With regard to losses suffered by a PE in another Member State which has ceased activity and whose losses cannot be deducted in that Member State, the situation of a company having such a PE was held not to be different from that of a company with a domestic PE, from the point of view of the objective of preventing the double deduction of losses. The Court added that the aim of section 8(2) more generally is to ensure that the taxation of a company with such a PE is in line with its ability to pay tax. Yet the ability to pay tax of a company with a foreign PE which has definitively incurred losses is affected in the same way as that of a company whose domestic PE has incurred losses. On this basis, the Court concluded that the difference in treatment concerned situations that were objectively comparable. According to the Court, section 8(2) could be justified by overriding reasons in the public interest relating to the balanced allocation of powers of taxation between Member States, the coherence of the Danish tax system, and the need to prevent the risk of double deduction of losses ...

A tax assessment based on Japanese CFC rules (anti-tax haven rules) had been applied to a “TH Corp”‘s, subsidiary in Singapore. According to Japanese CFC rules, income arising from a foreign subsidiary located in a state or territory with significantly lower tax rates is deemed to arise as the income of the parent company when the principal business of the subsidiary is holding shares or IP rights. However, the CFC rules do not apply when the subsidiary has substance and it makes economic sense to conduct business in the subsidiary in the low tax jurisdiction. Judgement of the court. According to the court, total revenue, number of employees, and fixed facilities are relevant in this determination. The Court held that the Singapore subsidiary had conducted a broad range of businesses – including finance and logistics – with the economically rational purpose of streamlining its ASEAN operations, and thus set aside the CFC taxation. Excerpt “Satisfaction of the substance and control criteria (a) According to the above-mentioned findings, A1 rents an office in Singapore and uses it for the regional control business. Therefore, it can be said that A1 has fixed facilities in Singapore, the country where its head office is located, which are deemed to be necessary for the conduct of its main business, the regional control business. Therefore, it satisfies the substantive criteria (Article 6-6(4) and (3) of the Act). (b) According to the facts certified above, A1 holds general meetings of shareholders and meetings of the board of directors, executes the duties of officers, and prepares and keeps accounting books in Singapore. Therefore, it can be said that A1 manages, controls and operates its own business in the country where its head office is located, and therefore, the management control standard (Article 66-6 Article 66-6, paragraphs 4 and 3). Conclusion According to the above, A1 satisfies all of the requirements for exemption from application, namely, the business criterion, the country of domicile criterion, the substance criterion and the control criterion. Therefore, the plaintiff is exempted from the application of Article 66-6(1) of the Measures Act in each of the fiscal years in question.” Click here for English translation Click here for other translation ...

In 1996, X BV acquired the right to commercially exploit an intangible asset (Z) for a period of 15 years for $ 63.5 million. X BV then entered a franchise agreements with group companies for the use of Z, including a Spanish PE of Y BV. According to the franchise agreement Y BV paid X BV a fee. According to X, in the calculation of the loss carry forward in Spain the franchise fee should not be fully attributed to the PE in Spain due to existing rules on internal roaylties. X states that the loss carry forward amounts to € 13.1 million. The tax authorities increases the loss carry forward with the fee paid to X, for the use of Z by the Spanish PE. According to the tax authorities, the loss carry forward is € 16.1 million. The District Court finds that no amount needs to be taken of the fees that Y BV paid to X BV for the use of Z by the Spannish PE. However, the court finds that financing costs have to be taken into account. The District Court sets the total loss carry forward from Spanish PE to € 14 million. The Supreme Court ruled that the calculation of the District court was not correct. According to the Supreme Court the starting point must be the actual amount paid for the use of Z in Spanish market at the time. It must then be determined which part of the purchase price can be attributed to the use of Z on the Spanish market. Furthermore, the Supreme Court finds that the District Court was right not to take into the fees owed by the Spanish PE to X. The Supreme Court refered the case back to the District Court. Case No 2016:1031 Click here for translation Click here for translation ...