SAS Blue Solutions manufactures electric batteries and accumulators for electric and hybrid vehicles and car-sharing systems. In FY 2012-2014 it granted a related party – Blue Solutions Canada – non-interest-bearing current account advances of EUR 42.9 million, EUR 43 million, and EUR 39 million. The French tax authorities considered that the failure to charge the interest on these advances was an indirect transfer of profit subject to withholding taxes and reintegrated the interest into the taxable income of Blue Solutions in France. Not satisfied with the resulting assessment an appeal was filed where SAS Blue Solutions. The company argued that the loans was granted interest free due to industrial and technological dependence on its Canadian subsidiary and that the distribution of profits was not hidden. Finally it argued that the treatment of the transactions in question was contrary to the freedom of movement of capital guaranteed by Article 63 of the Treaty on the Functioning of the European Union. Judgement of the Court The court dismissed the appeal of SAS Blue Solutions and upheld the assessment issued by tax authorities. Excerpts: “7. The applicant company maintains that it was in a situation of industrial and technological dependence on its Canadian subsidiary, its sole supplier of LMP (lithium metal polymer) batteries, without which it would not have been able to meet its own contractual commitments to its main customers. However, it has not been established, as the Minister maintains, that Blue Solutions was unable to obtain supplies from other companies and that its Canadian subsidiary held patents relating to the type of batteries marketed. Nor is it established that the Canadian company was not in a position to remunerate the advances granted, although it is not disputed that it paid interest in return for the advances granted by its former shareholder, SA Bolloré, before the tax years in dispute, a period during which its situation was even less favourable, and that it is clear from the opinion of the National Commission on Direct Taxes and Turnover Taxes that its turnover had been growing since 2011. Furthermore, SAS Blue Solutions was in a more fragile situation than its Canadian subsidiary, which was exacerbated by the waiver of interest on the advances granted to its subsidiary. Under these conditions, it did not establish that the advantages it had granted were justified by obtaining the necessary consideration. The administration was therefore justified in reintegrating the interest that should have paid for these advances into Blue Solutions’ taxable income in France.” “8. Finally, even though the waiver of interest was expressly stipulated by the parties in the current account advance agreement, it does not follow from the investigation that this benefit was recorded by Blue Solution in the accounts in a manner that made it possible to identify the purpose of the expenditure and its beneficiary, nor that this recording in itself reveals the liberality in question. This advantage was therefore of a hidden nature within the meaning of c. of Article 111 of the General Tax Code. 9. Thus, the administration was able to consider that the absence of invoicing of this interest constituted an indirect transfer of profits abroad within the meaning of the aforementioned provisions of Article 57 of the General Tax Code and that the interest that should have been paid fell into the category of hidden remuneration and benefits within the meaning of c. of Article 111 of the General Tax Code, which were liable to be subject to the withholding tax referred to in 2 of Article 119 bis of the same code.” “13. However, in the present case, the remuneration and benefits are subject to withholding tax in accordance with Article 111(c) of the General Tax Code, corresponding to the interest that should have been paid by Blue Solutions Canada in respect of the advances granted by Blue Solutions. The income of the non-resident company thus taxed in France does not correspond to that of an investment made in that country by the taxpayer in the context of the exercise of the freedom of movement of capital. The applicant company cannot therefore usefully argue that the legislative provisions applied to it in its capacity as debtor of the withholding tax levied on the income deemed to have been distributed to its subsidiary are contrary to the aforementioned provisions of Article 63(1) of the Treaty on the Functioning of the European Union since they cannot be regarded, in this case, as being such as to dissuade non-residents from making investments in a Member State or to dissuade residents of that Member State from making such investments in other States.” Click here for English translation Click here for other translation ...

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 ...

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 ...

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 ...

Waiver KG had an outstanding (non-interest-bearing and unsecured) trade receivable of EUR 2,560,000 from a wholly-owned subsidiary in China related to deliveries made in FY 2004 and 2005. Waiver KG had first issued a partial waiver (EUR 560,000) on the receivable and then a complete waiver in December 2008, after a partial write-down had previously been made in the commercial balance sheet. The initial partial write-down had not been given effect to the taxable income, but in the course of a tax audit Waiver AG requested that the partial write-off be taken into account for tax purposes as well. The tax office refused to do so and instead applied an interest rate of 3% on the outstanding receivable. A complaint was then filed by Waiver KG to the tax court. The tax court issued a decision in favour of Waiver KG with reference to German jurisprudence on the blocking effect of Art. 9 OECD-MA. However, at the same time, the tax court increased the interest rate on the outstanding receivable to 10.5%. This decision was appealed to the Bundesfinanzhof by the tax authorities. Judgement of the Bundesfinanzhof The Court found that Art. 9 (1) OECD-MA does not limit arm’s length adjustments within the scope of Sec. 1 (1) AStG to so-called price adjustments, but also allowed for tax adjustments based on non-recognition of a loan receivable or a partial write-downs. The Court considers that lack of collateral can be at arm’s length, depending on facts and circumstances of the transaction in question. The case was referred back to the tax court, as it had not been sufficiently clarified whether a independent party would have waived collateral in the specific case, e.g. in order to avoid the bankruptcy of a functionally important company. Click here for English translation Click here for other translation ...

The Italien company had qualified a funding arrangement in an amount of Lira 500 billion classified by the parties as a non-interest-bearing contribution reserved for a future capital increase. Judgement of the Supreme Court The Italian Supreme Court found that intra-group financing agreements are subject to transfer pricing legislation and that non-interest-bearing financing is generally not consistent with the arm’s-length principle. The court remanded the case to the lower court for further consideration. “”In conclusion, with regard to appeal r.g. no. 12882/2008, the first plea should be upheld, the second absorbed, and the third and fourth declared inadmissible; the judgment under appeal should be set aside in relation to the upheld plea and the case referred to another section of the Regional Tax Commission of Lombardy, which will comply with the principle of law set out in paragraph 3.5…” In regards to the non-interest-bearing financing the Court states in paragraph 3.5: “35… It follows that the valuation “at arm’s length” is irrespective of the original ability of the transaction to generate income and, therefore, of any negotiated obligation of the parties relating to the payment of the consideration (see OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, paragraph 1.2). In fact, it is a matter of examining the economic substance of the transaction that has taken place and comparing it with similar transactions carried out, in comparable circumstances, in free market conditions between independent parties and assessing its conformity with these (cf, on the criteria for determining normal value, Court of Cassation no. 9709 of 2015): therefore, the qualification of the non-interest-bearing financing, possibly made by the parties (on whom the relevant burden of proof is incumbent, given the normally onerous nature of the loan agreement, pursuant to article 1815 of the Italian Civil Code), proves to be irrelevant, as it is in itself incapable of excluding the application of the criterion of valuation based on normal value. It should be added that it would be clearly unreasonable, and a source of conduct easily aimed at evading the legislation in question, to consider that the administration can exercise this power of adjustment in the case of transactions with a consideration lower than the normal value and even derisory, while it is precluded from doing so in the case of no consideration.” Click her for English translation Click here for other translation ...