Cameco, together with its subsidiaries, is a large uranium producer and supplier of the services that convert one form of uranium into another form. Cameco had uranium mines in Saskatchewan and uranium refining and processing (conversion) facilities in Ontario. Cameco also had subsidiaries in the United States that owned uranium mines in the United States. The Canadian Revenue Agency found that transactions between Cameco Corp and the Swiss subsidiary constituted a sham arrangement resulting in improper profit shifting. Hence, a tax assessment was issued for FY 2003, 2005, and 2006. Cameco disagreed with the Agency and brought the case to the Canadian Tax Court. In 2018 the Tax Court ruled in favor of Cameco and dismissed the assessment. This decision was appealed by the tax authorities to the Federal Court of Appeal. The Federal Court of Appeal in 2020 dismissed the appeal and also ruled in favor of Cameco A application for leave to appeal from the judgment of the Federal Court of Appeal was then brought to the Canadian Supreme Court by the tax authorities. The application for leave to appeal was dismissed by the Supreme Court. 39368_Cameco_Judgment_on_Leave-Jugement_sur_demande ...

Cameco, together with its subsidiaries, is a large uranium producer and supplier of the services that convert one form of uranium into another form. Cameco had uranium mines in Saskatchewan and uranium refining and processing (conversion) facilities in Ontario. Cameco also had subsidiaries in the United States that owned uranium mines in the United States. In 1993, the United States and Russian governments executed an agreement that provided the means by which Russia could sell uranium formerly used in its nuclear arsenal. The net result of this agreement was that a certain quantity of uranium would be offered for sale in the market. Cameco initially attempted to secure this source of uranium on its own but later took the lead in negotiating an agreement for the purchase of this uranium by a consortium of companies. When the final agreement was signed in 1999, Cameco designated its Luxembourg subsidiary, Cameco Europe S.A. (CESA), to be the signatory to this agreement. The agreement related to the purchase of the Russian uranium was executed in 1999 among CESA, Compagnie Générale des Matières Nucléaires (COGEMA) (a French state-owned uranium producer), Nukem, Inc. (a privately owned United States trader in uranium), Nukem Nuklear GMBH and AO “Techsnabexport” (Tenex) (a Russian state-owned company). This agreement, which is also referred to as the HEU Feed Agreement, initially provided for the granting of options to purchase the uranium that Tenex would make available for sale. In the years following 1999, there were a number of amendments to this agreement. In particular, the fourth amendment in 2001, in part, obligated the western consortium (CESA, COGEMA and Nukem) to purchase a certain amount of uranium (paragraph 82 of the reasons). On September 9, 1999, CESA entered into an agreement with Urenco Limited (Urenco) (a uranium enricher) and three of its subsidiaries to purchase uranium that Urenco would be receiving from Tenex. Also in 1999, Cameco formed a subsidiary in Switzerland. This company, in 2001, changed its name to Cameco Europe AG (SA, Ltd) (CEL). In 2002, CESA transferred its business (which was described in the transfer agreement as “trading with raw materials, particularly uranium in various forms”) to CEL under the Asset Purchase and Transfer of Liabilities Agreement dated as of October 1, 2002, but executed on October 30, 2002. Therefore, CESA transferred to CEL the rights that CESA had to purchase uranium from Tenex and Urenco. CEL also purchased Cameco’s expected uranium production and its uranium inventory. It would appear that this arrangement did not include any uranium that was sold by Cameco to any customers in Canada (paragraph 40 of the Crown’s memorandum). At certain times, Cameco also purchased uranium from CEL. The profits in issue in this appeal arose as a result of the sale of uranium by CEL that it purchased from three different sources: Tenex, Urenco, and Cameco. When the arrangements with Tenex and Urenco were put in place in 1999, the price of uranium was low. In subsequent years, the price of uranium increased substantially. As a result, the profits realized by CEL from buying and selling uranium were substantial. The Canadian Revenue Agency found that the transactions between Cameco Corp and the Swiss subsidiary constituted a sham arrangement resulting in improper profit shifting.  According to the Canadian Revenue Agency, Cameco would not have entered into any of the transactions that it did with CESA and CEL with any arm’s length person, cf. paragraph 247(2) of the Act. All of the profit earned by CEL should therefore be reallocated to Cameco Corp. Hence, a tax assessment was issued for FY 2003, 2005, and 2006 where $43,468,281, $196,887,068, and $243,075,364 was added to the taxable income of Cameco Canada. Cameco disagreed with the Agency and brought the case to the Canadian Tax Court. In 2018 the Tax Court ruled in favor of Cameco and dismissed the assessment. This decision was then appealed by the tax authorities to the Federal Court of Appeal. The Federal Court of Appeal dismissed the appeal and also ruled in favor of Cameco. “In this appeal, the Crown does not challenge any of the factual findings made by the Tax Court Judge. Rather, the Crown adopts a broader view of paragraphs 247(2)(b) and (d) of the Act and submits that Cameco would not have entered into any of the transactions that it did with CESA and CEL with any arm’s length person. As a result, according to the Crown, all of the profit earned by CEL should be reallocated to Cameco. The Crown, in its memorandum, also indicated that it was raising an alternative argument related to the interpretation of paragraph 247(2)(a) of the Act. … However, subparagraph 247(2)(b)(i) of the Act does not refer to whether the particular taxpayer would not have entered into the particular transaction with the non-resident if that taxpayer had been dealing with the non-resident at arm’s length or what other options may have been available to that particular taxpayer. Rather, this subparagraph raises the issue of whether the transaction or series of transactions would have been entered into between persons dealing with each other at arm’s length (an objective test based on hypothetical persons) — not whether the particular taxpayer would have entered into the transaction or series of transactions in issue with an arm’s length party (a subjective test). A test based on what a hypothetical person (or persons) would have done is not foreign to the law as the standard of care in a negligence case is a “hypothetical ‘reasonable person’” (Queen v. Cognos Inc., [1993] 1 S.C.R. 87, at page 121, 1993 CanLII 146). … The Crown’s position with respect to this hypothetical transaction is also contradicted by its position in this case. Essentially, in this case, Cameco became aware of an opportunity to purchase Russian sourced uranium from Tenex and Urenco and chose to complete those arrangements through a foreign subsidiary rather than purchasing this uranium itself and selling it to third-party customers in other countries. This was a foreign-based business opportunity to ...

In 2008, the A Group had reorganized its internal financing function so that the Group’s parent company, A Oyj, had established A Finance NV in Belgium. Thereafter, A Oyj had transferred to intra-group long-term loan receivables of approximately EUR 223,500,000 to A Finance NV. In return, A Oyj had received shares in A Finance NV. The intra-group loan receivables transferred in kind had been unsecured and the interest income on the loan receivables had been transferred to A Finance NV on the same day. A Finance NV had entered the receivables in its balance sheet as assets. In addition, A Oyj and A Finance NV had agreed that target limits would be set for the return on investment achieved by A Finance NV through its operations. A Finance NV has reimbursed A Oyj for income that has exceeded the target limit or, alternatively, invoiced A Oyj for income that falls below the target limit. Based on the functional analysis prepared in the tax audit submitted to A Oyj, the Group Tax Center had considered that A Oyj had in fact performed all significant functions related to intra-group financing, assumed significant risks and used significant funds and that A Finance NV had not actually acted as a group finance company. The Group Tax Center had also considered that A Finance NV had received market-based compensation based on operating costs. In the tax adjustments for the tax years 2011 and 2012 submitted by the Group Tax Center to the detriment of the taxpayer, A Oyj had added as a transfer pricing adjustment: n the difference between the income deemed to be taxable and the income declared by the company and, in addition, imposed tax increases on the company. In the explanatory memorandum to its transfer pricing adjustment decisions, the Group Tax Center had stated that the transactions had not been re-characterized because the characterization or structuring of the transaction or arrangement between the parties had not been adjusted but taxed on the basis of actual transactions between the parties. The Supreme Administrative Court found that the Group Tax Center had ignored the legal actions taken by A Oyj and A Finance NV and in particular the fact that A Finance NV had become a creditor of the Group companies. It had identified the post-investment transactions between A Oyj and A Finance NV and considered that A Oyj had in fact performed all significant intra-group financing activities and that A Finance NV had not in fact acted as a group finance company. Thus, when submitting the tax adjustments to the detriment of the taxpayer, the Group Tax Center had re-characterized the legal transactions between A Oyj and A Finance NV on the basis of section 31 of the Act on Tax Procedure. As the said provision did not entitle the Group Tax Center to re-characterize the legal transactions made by the taxpayer and since it had not been alleged that A Oyj and A Finance NV had reorganized the Group’s financial activities for tax avoidance purposes, the Group Tax Center could not correct A Oyj taxes to the detriment of the taxpayer and does not impose tax increases on the company. Tax years 2011 and 2012. that A Oyj and A Finance NV had undertaken to reorganize the Group’s financial operations for the purpose of tax avoidance, the Group Tax Center could not, on the grounds presented, correct A Oyj’s taxation in 2011 and 2012 to the detriment of the taxpayer or impose tax increases on the company. Tax years 2011 and 2012. that A Oyj and A Finance NV had undertaken to reorganize the Group’s financial operations for the purpose of tax avoidance, the Group Tax Center could not, on the grounds presented, correct A Oyj’s taxation in 2011 and 2012 to the detriment of the taxpayer or impose tax increases on the company. Tax years 2011 and 2012. Click here for translation KHO-2020-35 ...

In the transfer pricing case of C J Wildbird Foods Limited the issue was whether a related party loan should be treated as such for tax purposes. There was a loan agreement between the parties and the agreement specified that there was an obligation to repay the loan and interest. However, no interest had actually been paid and a tax deduction had also been claimed by the tax payer on the basis that the debt was unlikely to be repaid. The tax authorities argued that the loan did not have the characteristics of a loan. The borrower was loss making  and did not have the financial capacity to pay any interest. The tribunal found that there was a legal obligation to repay the loan and interest. Whether the loan or interest was actually repaid was irrelevant. “The modern business world has many famous examples of companies, especially in the technology sector, with no cash and no immediate prospect of generating a profit which go on to be very successful. Clearly the appellant considers BFL potentially to be such a company and is therefore prepared to subsidise its running costs by way of loan for the time being in the hope of obtaining repayment of some or all of its loans in due course, possibly with a gain on its share investment as well. As to the “hallmarks” that Mr Baird asks me to consider, there is no requirement that for a loan relationship to exist, interest must be charged; were it otherwise, many perfectly normal intra-group loans would fall foul of that requirement (and in any event, the loans in this case include a contractual obligation to pay interest, albeit an obligation that has not yet been enforced). Nor is there any requirement that, for a loan relationship to exist, the lender must have any degree of certainty that the debt will be repaid normal commercial loans are inherently hedged about with uncertainty about whether repayment will be made and save in degree, the present situation is no different. Lack of a fixed repayment date for a loan is perfectly commonplace. Here, the money has been advanced by the appellant on terms that it is all to be repaid. The fact that such repayment has not been made and HMRC may have formed the opinion that these payments will never be repaid is beside the point. The loans have been advanced as a matter of arm’s length negotiation between the two parties, there is an obligation to repay (as recognized by both companies in their respective audited accounts and  confirmed in evidence), and the fact that the appellant may well not recover some or all of its money is neither here nor there. It has made a commercial judgment that it is in its best interests to continue to support BFL by continuing loans, and the fact that HMRC may disagree with that judgment is irrelevant to the underlying nature of the transaction. Ultimately it may turn out that the appellant’s business judgment was overly optimistic, but that is of no relevance. It follows that I find the transactions in question to amount to loan relationships…“ Hence, the tribunal found in favor of the taxpayer. TC06556 ...

A Ab had in 2009 from its majority shareholder B, based in Luxembourg, received a EUR 15 million inter-company loan. A Ab had in 2009 deducted 1,337,500 euros in interest on the loan. The loan had been granted on the basis that the banks financing A’s operations had demanded that the company acquire additional financing, which in the payment scheme would be a subordinated claim in relation to bank loans, and by its nature a so-called IFRS hybrid, which the IFRS financial statements were treated as equity. The loan was guaranteed. The fixed annual interest rate on the loan was 30 percent. The loan could be paid only on demand by A Ab. The Finnish tax authorities argued that the legal form of the inter-company loan agreed between related parties should be disregarded, and the loan reclassified as equity. Interest on the loan would therefore not be deductible for A Ab. According to the Supreme Administrative Court interest on the loan was tax deductible. The Supreme Administrative Court stated that a reclassification of the loan into equity was not possible under the domestic transfer pricing provision alone. Further, the Supreme Administrative Court noted that it had not been demonstrated or even alleged by the tax authorities that the case was to regarded as tax avoidance. The fact that the OECD Transfer Pricing Guidelines (Sections 1.65, 1.66 and 1.68) could in theory have allowed a reclassification of the legal form of the loan into equity was not relevant because a tax treaty cannot broaden the tax base from that determined under the domestic tax provisions. Consequently, the arm’s length principle included in Article 9 of the tax treaty between Finland and Luxembourg only regarded the arm’s length pricing of the instrument, not the classification of the instrument. Click here for other translation Finland-2014-July-Supreme-Administrative-Court-HFD-2014-119 ...

The dispute in this case was transactions involving distressed asset/debt transaction. The tax authorities found the DAD transactions of russian receivables under a “DBO distressed debt structure scheme” lacked economic substance, and denied the taxpayers involved tax decuctions of USD 4.5 and 12.2 million. A report provided on behalf of the government analyzed whether a rational investor would have entered into the transaction were it not for the claimed tax benefits. The Courts opinion: “there was no realistic possibility for the transactions at issue to break even absent any tax benefits.” Hence the transactions were not recognized. US Tax Court, Case No. 11051-10, 6853-12 US Tax Court 2013-253 ...

In this case, the Dutch Supreme Court further outlined the Dutch perspective on the distinction between debt and equity in its already infamous judgments on the so-called extreme default risk loan (EDR loan) L sold a securities portfolio to B for EUR 5.3 million against B’s acknowledgement of debt to L for the same amount. The debt was then converted into a 10 year loan with  an interest rate of 5% and a pledge on the portfolio. Both L and B were then moved to the Netherlands Antilles. Later on L deducted a EUR 1.2 mill. loss on the loan to B due to a decrease in value of the securities portfolio. The Dutch Tax Authorities disallowed the deduction based on the argument, that the loan was not a business motivated loan. The Dutch Supreme Court ruled that in principle civil law arrangement is decisive in regard to taxation. However there are exceptions in which a civil law loan arrangement can be disregarded. A non-business motivated loan is defined as an intercompany loan that carries an interest rate which – given the terms and conditions of the loan – is not at arm’s length, and which a third party would not have granted given the risk involved. In such cases, any losses arising from the loan are not deductible for Dutch corporate tax purposes. But at the same time, the lender still has to report an arm’s length interest which equals the interest that the borrower would have paid in case it had borrowed from a third party with a guarantee from the lender. Click here for translation Netherland-vs-Corp-25-November-2011-Supreme-Court-case-nr-08-05323 ...