This is an appeal against a decision of the First-tier Tribunal which had found the place of effective management (POEM) of Mauritius trusts to be in the UK. The first and second appellants are the settlors of separate family trusts which engaged in a tax planning arrangement known as the “round the world” scheme. They hoped that the trustees of the family trusts would avoid capital gains tax on disposals of shares on the flotation of a company called TeleWork Group Plc. It is now common ground that the scheme was effective to achieve the capital gains tax savings if, amongst other things, the family trusts became resident in Mauritius by the time of disposal. The scheme would only be effective if the place of effective management (the “POEM”) of the trusts was in Mauritius. Judgement of the Court The Court upheld the decision of the First-tier Tribunal and decided in favour of the tax authorities. Excerpts: “We have described above the test for POEM applied by the FTT. The FTT stated that it was applying the general approach of the SpC in Smallwood, without reference to the test for central management and control described in Wood v Holden. We are satisfied that the FTT applied the test for POEM described by the SpC at [130]. It considered “in which state the real top level management (or the realistic, positive management) of the trustee qua trustee is found”. In applying that test the FTT did not use the tool of Wood v Holden and in light of the judgment of Hughes LJ in Smallwood it was entitled to take that approach. We are satisfied therefore that the FTT made no error of law in the test it applied. The FTT at [361] found that the POEM of the trusts was the UK in the relevant period. It based that conclusion on its findings of fact summarised at [362]. Those findings mirror the findings which Hughes LJ held entitled the SpC in Smallwood to find that the POEM of the trust in that case was the UK. Mr Rivett accepted that if the FTT did apply the right test then the appeal must be dismissed. The application of the test is acutely fact sensitive and there was no Edwards v Bairstow challenge on this appeal. Conclusion For the reasons given above we are satisfied that the FTT made no error of law in the test it applied to identify the POEM of the trusts. The appeals must therefore be dismissed.” ...

A sales, marketing and management service agreement entered into in 1993 between Asian Hotels Limited and Hyatt International-Southwest Asia Limited had been replaced by various separate agreements – a Strategic Oversight Services Agreements, a Technical Services Agreement, a Hotel Operation Agreement with Hyatt India, and trademark license agreements pursuant to which Asian Hotels Limited was permitted to use Hyatt’s trademark in connection with the hotel’s operation. In 2012, the tax authorities issued assessment orders for FY 2009-2010 to FY 2017-2018, qualifying a portion of the service payments received by Hyatt as royalty and finding that Hyatt had a PE in India. Hyatt appealed the assessment orders to the Income Tax Appellate Tribunal, which later upheld the order of the tax authorities. Aggrieved with the decision, Hyatt filed appeals before the High Court. Judgement of the High Court The High Court set aside in part and upheld in part the decision of the Tribunal. The court set aside the decision of the Tribunal in regards of qualifying the service payments as royalty. The court found that the strategic and incentive fee received by Hyatt International was not a consideration for the use of or the right to use any process or for information of commercial or scientific experience. Instead, these fees were in consideration of the services as set out in SOSA. The fact that the extensive services rendered by Hyatt in terms of the agreement also included access to written knowledge, processes, and commercial information in furtherance of the services could not lead to the conclusion that the fee was royalty as defined under Article 12 of the DTAA. The court upheld the findings of the Tribunal that Hyatt had a permanent establishment in India. According to the court “It is apparent from the plain reading of the SOSA that the Assessee exercised control in respect of all activities at the Hotel, inter alia, by framing the policies to be followed by the Hotel in respect of each and every activity, and by further exercising apposite control to ensure that the said policies are duly implemented. The assessee’s affiliate (Hyatt India) was placed in control of the hotel’s day-to-day operations in terms of the HOSA. This further ensured that the policies and the diktats by the Assessee in regard to the operations of the Hotel were duly implemented without recourse to the Owner. As noted above, the assessee had the discretion to send its employees at its will without concurrence of either Hyatt India or the Owner. This clearly indicates that the Assessee exercised control over the premises of the Hotel for the purposes of its business. Thus, the condition that a fixed place (Hotel Premises) was at the disposal of the Assessee for carrying on its business, was duly satisfied. There is also little doubt that the Assessee had carried out its business activities through the Hotel premises. Admittedly, the Assessee also performed an oversight function in respect of the Hotel. This function was also carried out, at least partially if not entirely, at the Hotel premises.” The Court also confirmed the direction of the Tribunal asking Hyatt to submit the working regarding apportionment of revenue, losses etc. on a financial year basis so that profit attributable to the PE can be determined judicially. According to the High Court profits attributable to a PE are required to be determined considering the permanent establishment as an independent taxable entity, and prima facie taxpayers would be liable to pay tax in India due to profits earned by the permanent establishment notwithstanding the losses suffered in the other jurisdictions. This matter was to be decided later by a larger bench of the Court ...

In 2001 “POEM B.V.” was incorporated in the Netherlands under Dutch law by its shareholder X, and has since then been registered in the Dutch trade register. In 2010 its administrative seat was moved to Malta where it was also registered as an ‘Oversea Company’. X was from the Netherlands but moved to Switzerland in 2010. In “POEM B.V.”‘s Maltese tax return for the year 2013, the entire income was registered as ‘Untaxed Account’ and no tax was paid in Malta. “POEM B.V.” distributed dividend to X in FY 2011-2014. Following an audit the Dutch tax authorities issued an assessment where corporate income tax and withholding tax over the dividend had been calculated. The assessment was based on Article 4 (4) of the Dutch-Maltese DTA under which “POEM B.V.” was deemed to be a resident of the Netherlands. Not satisfied with the assessment “POEM B.V.” filed an appeal arguing that it was a resident of Malta (or alternatively Switzerland) and that the Netherlands therefore has no taxing right over the profits or the dividends. Judgement of the Court The Court decided in favour of the tax authorities and upheld the assessment of taxable income in the Netherlands. Excerpts: “5.38. In view of the aforementioned facts and circumstances, taken together and weighed up, the Court sees no evidence to suggest that, in the years in question, core decisions were prepared in substance in Malta and that substantive discussions took place there, let alone to rule that the core decisions were taken there. The interested party has thus failed to rebut the presumption of proof. This leads to the conclusion that the actual management of interested party was exercised from the Netherlands. Interested party was therefore resident in the Netherlands for the purposes of the Netherlands-Malta Convention in the years in question. For that case, it is not in dispute between the parties – rightly so – that the treaty does not impede the Dutch right of taxation and that the tax assessments in question were rightly imposed to that extent.” “5.40. Pursuant to Article 4(1) of the Netherlands-Switzerland Convention 2010, the interested party was a resident of the Netherlands if, under the laws of the Netherlands, she was subject to tax there by reason of her residence, stay, place of management or any other similar circumstance. The second sentence of that provision makes it clear that a person who is subject to tax only in respect of income from sources in the Netherlands is not deemed to be a resident of the Netherlands. For the application of this residence provision, the Court has previously held that in order to be a resident of one of the countries, a person must be fully subject to the tax in that country (‘full tax liability’) (see Court of Appeal of The Hague 24 June 2020, ECLI:NL:GHDHA:2020:1044, r.o. 5.63-5.65). 5.41. By virtue of the residence fiction in Article 2(4) of the Vpb Act, the interested party was a resident of the Netherlands within the meaning of Article 4(1) of the Netherlands-Switzerland Treaty 2010. Having held above in 5.38 that the interested party was a resident of the Netherlands for the purposes of the Netherlands-Malta Convention, the full subjection of the interested party in the Netherlands under Article 4(1) of the Netherlands-Switzerland 2010 Convention is not limited by the application of that Convention.” “5.47. In the opinion of the Court of Appeal, in the face of the substantiated challenge by the Inspector, the interested party, which argued that it is actually managed in a country other than the country in which the formal management sits, has the burden of demonstrating facts and circumstances that justify the conclusion that its actual management is in Switzerland. The mere circumstance that its sole shareholder and co-director resides in Switzerland is insufficient for that purpose – also in view of his varying places of residence (cf. HR 2 July 2021, ECLI:NL:HR:2021:1044, BNB 2021/156). Since the interested party did not put forward anything else to substantiate its claim, the conclusion is that the interested party is a resident of the Netherlands for the purposes of the Netherlands-Switzerland Convention 2010. For that case, it is not in dispute between the parties – rightly so – that the treaty does not impede the Dutch right of taxation and that the tax assessments in question were also rightly imposed to that extent.” Click here for English translation Click here for other translation ...

“Uniclick B.V.” had performed all the important DEMPE functions with regard to intangible assets as well as managing all risks related to development activities without being remunerated for this. Royalty-income related to the activities had instead been received by a foreign group company incorporated in Ireland and with its place of management in Luxembourg. In 2012, the administration sent notices of amendment to the tax return to the respondent for assessment years 2006 and 2010. The tax administration stated that “Uniclick B.V.”, through its director B.T. and employees M.C. and S.M., invented and developed the Uniclic technology in 1996 and continued to exploit it, and that the subsequent transfer of rights to the Uniclic invention to U.B. BV was simulated. The administration added the profits foregone annually by the “Uniclick B.V.”, i.e. the royalties received by F. from third party licensees less the costs borne by F., to “Uniclick B.V’s” taxable base. “Uniclick B.V.” disagreed with this and argued, among other things, that the tax administration had failed in demonstrating that the transfer of the Uniclic invention and the right to patent had been recognised by various third parties and was not fiscally motivated. “Uniclick B.V.” further disputed the existence of tax evasion and raised a number of breaches of procedural rules – including retrospective application of the DEMPE concept introduced in the 2017 Transfer Pricing Guidelines. The tax administration maintained its position and sent the notices of assessment. The assessment was appealed by “Uniclick B.V.” and the court of first instance found the appeal admissible and dismissed the assessment. This decision was then appealed by the tax authorities. Judgement of the Court of Appeal The Court of Appeal concluded that the administration failed in its burden of proof that the transfer prices applied between F. and Uniclick B.V for assessment year 2010 were not in accordance with the arm’s length principle. The administration did not show that Uniclick B.V. granted an abnormal or gratuitous advantage to F. in income year 2009, which should be added to its own profit by virtue of Article 26 WIB92. Since the existence of the abnormal or gratuitous advantage was not proven, it was not necessary to discuss the claim of the tax administration, put forward in secondary order, to determine what an arm’s length remuneration would be in respect of the functions performed, assets owned and risk born by “Uniclick B.V.” Excerpt “The discussion between the parties regarding the applicability of the OECD TPG 2017 is legally relevant notwithstanding the question whether it is decisive in the factual assessment (see factual assessment in section 4.3.3 below). The OECD guidelines are intended to provide insight into how the at arm’s length principle can be applied in practice and contain recommendations for determining transfer pricing policy. The OECD guidelines as such have no direct effect in Belgium but are used as a starting point in the area of transfer pricing. From the conclusion of the Belgian State supporting the filed subsidiary assessment, it is clear that the administration bases the valuation of the abnormal or gratuitous benefit at least partially on the 2017 version of the OECD TPG. However, the 1995, 2010 and 2017 versions of the OECD TPG differ in a number of respects and to varying degrees. These differences range from mere clarifications that do not impact on the content of previous versions to completely newly developed parts, namely recommendations that were not included, even implicitly, in previous versions. One of these completely newly developed parts that have only been included in the 2017 OECD TPG concerns the DEMPE functional analysis method as well as the method of ex post outcomes of hard-to-value intangibles, on which the Belgian State bases the subsidiary assessment at issue at least in part. The subsidiary assessment relates to the 2010 tax year/the 2009 income year in which the economic context and the regulatory framework applicable in 2009 had to be taken into account. The only OECD TPG available at the time were the 1995 OECD TPG. In the light of this, the administration is permitted to base the valuation on the 1995 OECD TPG (which, moreover, as stated above, are merely a non-binding instrument). The administration is also permitted to base the valuation on later versions of the OECD TPG (such as those of 2010), but only to the extent that these contain useful clarifications, without further elaboration, of the 1995 OECD TPG. The 2017 OECD TPG were published after 2009 and to the extent that the recommendations contained therein have evolved significantly since the 1995 OECD TPG, they cannot be applied in the current dispute. In particular, the DEMPE functional analysis method and the method of a posteriori results of intangibles that are difficult to value cannot be usefully applied in the present dispute from a temporal point of view, as these are tools that are only set out in the 2017 OECD TPG. Moreover, this position is also confirmed in Circular 2020/C/35 of 25 February 2020, which summarises and further interprets the 2017 OECD TPG, in which the administration explicitly states in para. 284 that the provisions of the Circular are in principle only applicable to transactions between related companies taking place as of 1 January 2018 (see also EU General Court judgment, 12 May 2021, cases T-816/17 and T-318/18, Luxembourg-lreland-Amazon v. Commission, para. 146- 155).” Click Here for English Translation Click here for other translation ...

S GmbH was an Austrian trading company of a group. In the course of business restructuring, the real estate division of the Austrian-based company was initially separated from the “trading operations/brands” division on the demerger date of 31 March 2007. The trademark rights remained with the previous trading company, which was the parent company of the group, now M GmbH. On 25 September 2007, M GmbH transferred all trademark rights to a permanent establishment in Malta, which was set up in the same year, to which it also moved its place of management on 15 January 2008. Licence agreements were concluded between S GmbH and M GmbH, which entitle S GmbH to use the trademarks of M GmbH for advertising and marketing measures in connection with its business operations in return for a (turnover-dependent) licence fee. The tax authorities (re)assessed the corporate income tax for the years 2008 and 2009. The audit had shown that the licence fees were to be attributed in their entirety to S GmbH as the beneficial owner of the trade marks, which meant that the licence payments to M GmbH were also not to be recognised for tax purposes. S GmbH had created the trademark rights, which had been valued at a total value of €383.5 million in the course of its spin-off; the decisions regarding the use, creation, advertising and licensing of the trademark rights continued to lie with the decision-makers of the operational company advertising the revisions at the Austrian group location. The Maltese management was present at meetings with advertising agencies in Austria, but its activities did not actually go beyond support and administration. The aim of the chosen structure had been a tax-saving effect, whereby the actual taxation of the licence income in Malta had been 5%. A complaint filed by S GmbH was dismissed by the Bundesfinanzgericht. S GmbH then filed an appeal with the Verwaltungsgerichtshof. Judgement of the Court The Court dismissed the appeal of S GmbH and upheld the decision of the tax authorities Excerpts: “In the appeal case, the BFG found that the trademark rights had been created before the separation of the companies. No new trademarks had been registered during the audit period. The advertising line was determined by a two-year briefing of the group and was based on the requirements of the licensees. The brand managers of M GmbH participated in the process, but the decisions were made by the organs of the appellant, which spent over €56 million in 2008 and almost €68 million in 2009 on advertising and marketing.. In contrast, M GmbH had hardly incurred any advertising expenses, and its salary expenses were also disproportionate to the tasks of a company that was supposed to manage corporate assets of almost €400 million in trademark rights and to act as the (also economic) owner of these assets. The minimal salary expenditure, which amounted to a total of € 91,791.0 in 2008 and € 77,008.10 in 2009 and was distributed among eight persons (most of whom were part-time employees), could only be explained by the fact that all relevant trademark administration, maintenance and management tasks were, as in the past, handled either by group companies (by way of group-internal marketing activities) or by specialists commissioned by the group (trademark lawyer, advertising agency) and that M GmbH only acted in a supporting capacity. If, against this background, the BFG assumes, despite the formal retention of the legal ownership of the trademark rights, that the economic ownership of the trademark rights, which had already been created at that time, was also transferred to the appellant at the time of the spin-off, this cannot be seen as an unlawful act which the Administrative Court should take up. If, in the case at hand, the appellant nevertheless concluded licence agreements with M GmbH, the reason for this cannot have been the acquisition of the right of use to which it was entitled from the outset as the beneficial owner. The BFG was therefore correct in denying that the amounts paid by the appellant under the heading of “licence payments” were business expenses. …” Click here for English translation Click here for other translation ...

India’s Supreme Court found that Formula One World Championship which conducts Formula One racing events, has a permanent establishment (PE) for its business in India and income accruing from it is taxable. “We are of the opinion that the test laid down by the Andhra Pradesh High Court in Visakhapatnam Port Trust case fully stands satisfied. Not only the Buddh International Circuit is a fixed place where the commercial/economic activity of conducting F-1 Championship was carried out, one could clearly discern that it was a virtual projection of the foreign enterprise, namely, Formula-1 (i.e. FOWC) on the soil of this country. It is already noted above that as per Philip Baker, a PE must have three characteristics: stability, productivity and dependence. All characteristics are present in this case. Fixed place of business in the form of physical location, i.e. Buddh International Circuit, was at the disposal of FOWC through which it conducted business. Aesthetics of law and taxation jurisprudence leave no doubt in our mind that taxable event has taken place in India and non-resident FOWC is liable to pay tax in India on the income it has earned on this soil.” “We have held that FOWC has PE in India and income that is attributable in India will be taxed. The amount that is to be taxed is to be assessed by an assessing officer,” a bench of Justices A K Sikri and Ashok Bhushan said ...