Pandox AB is the parent company of a hotel group active in northern Europe. Pandox AB’s business concept is to acquire hotel property companies with associated external operators running hotel operations. Pandox AB acquires both individual companies and larger portfolios, both in Sweden and abroad. Within the group, the segment is called Property Management. Pandox AB’s main income consists of dividends from the Property Management companies (PM companies), interest income from intra-group loans and compensation for various types of administrative services that Pandox AB provides to the Swedish and foreign PM companies. These services include strategic management, communication, general back-office functions and treasury. The PM companies’ income consists of rental income from the external hotel operators. Following an audit for FY 2013-2017 the Swedish tax authorities found that the affiliated property management entities were only entitled to a risk-free return and that the residual profit should be allocated to the Swedish parent. The tax authorities argued that Pandox AB had conducted all value-creating activities related to the core business, controlled and carried the financial risks, and actively managed the group’s business and operating agreements. The property management entities were merely legal parties in local agreements without any real control of the relevant risks. The property management entities had no employees and the boards consisted of one or two persons, most of whom were part of management at Pandox AB. Since Pandox AB controlled and managed major decisions and risks, the residual result should be allocated from the property management entities to Pandox AB. The property management entities should only be entitled to a risk-free return in line with their contributions to the value chain in accordance with paragraph 1.85 in the OECD transfer pricing guidelines. Paragraph 1.85 deals with the capability to make important business decisions. An appeal was filed by Pandox with the Administrative Court in Stockholm. Judgement of the Court The Court ruled in favor of Pandox AB. Excerpts “The Administrative Court finds that Pandox AB’s description of the operations of Property Management is strongly supported both by the documentary evidence in the cases and by what has emerged in interviews with Ms Liia Nõu. The Court also considers that the Swedish Tax Agency has not challenged the facts described by Pandox AB. Based on what has emerged from the investigation, the Administrative Court considers that Pandox AB must be regarded as having a limited role in the management of the hotel operations and a limited function in the value-creating core business. Nor does the investigation show anything other than that the PM companies independently make and implement decisions within the framework of the hotel property operations. Furthermore, the services that Pandox AB actually provides to the PM companies are priced in accordance with established transfer pricing documents, and there has been no indication that this pricing is not market-based. Even if Pandox AB, in its capacity as legal owner of the PM Companies, has the capacity and ability to renegotiate or enter into new operator agreements and make other crucial decisions for the hotel business, the investigation does not, according to the Administrative Court, show that this has been done to a particularly large extent. On the contrary, the investigation shows that Pandox AB is relatively passive after the shares in a PM company have been acquired. The Swedish Tax Agency has emphasised the management of the so-called Heart portfolio as a sign that Pandox AB actively manages the hotels in the PM companies. The Administrative Court considers, however, that the acquisition and how it was handled constitutes an exception in how Pandox AB otherwise conducts its Property Management business. Thus, the circumstance that the operator agreements were renegotiated in connection with the acquisition does not lend any more far-reaching or general conclusions about the business in general. The Administrative Court does not agree with the Tax Agency’s assessment of where in the Pandox Group the value-creating work is conducted. In this assessment, the Court takes into account in particular that the operations of the acquired PM companies are already established through, inter alia, ownership of hotel properties with associated operator agreements. Nor does the investigation provide support that Pandox AB would otherwise have had such control over the management of the hotels that the PM companies’ contribution to the business is limited in the manner described in the Tax Agency’s decision. Therefore, the Administrative Court finds that the Tax Agency’s investigation does not show that the Pandox group is based on commercial relationships as required by point 1.85 of the Guidelines. In such circumstances, the Tax Agency was not entitled to correct Pandox AB’s results in the manner recommended by the OECD Transfer Pricing Guidelines.” Click here for English Translation Click here for other translation ...

The business activity of A S.A. was wholesale of pharmaceutical products to external pharmacies, hospitals, wholesalers (including: to affiliated wholesalers). The tax authority had noted that the company’s name had been changed in FY 2013, and a loss in the amount of PLN […] had been reported in the company’s tax return. An audit revealed that the Company had transferred significant assets (real estate) to a related entity on non-arm’s length terms. The same real estate was then going forward made available to the company on a fee basis under lease and tenancy agreements. The tax authority issued an assessment where a “restructuring fee” in the amount of PLN […] was added to the taxable income, reflecting the amount which would have been achieved if the transaction had been agreed between independent parties. According to the company the tax authority was not entitled at all to examine the compliance of the terms of these transactions with the terms that would have been agreed between hypothetical independent entities, as the transactions in question were in fact concluded precisely between independent entities. (SKA companies were not CIT taxpayers in 2012, so they did not meet the definition of a “domestic entity” referred to in the aforementioned provision, and therefore a transaction between “related entities” cannot be said to have taken place). Moreover, the institution of “re-characterisation” of a controlled transaction into a proper transaction (according to the authority),could only be applied to transactions taking place after 1 January 2019, pursuant to Article 11e, Section 4 of the A.l.t.p. introduced (from that date). Judgement of the Court The Court decided predominantly in favor of A S.A. and remanded the case back to the tax authorities. Excerpts “The applicant in the course of the case referred to the judgment of the WSA in Warsaw of 18 December 2017, III SA/Wa 3661/16 (approved by the NSA in its judgment of 26 November 2020, II FSK 1919/18). The individual interpretation analysed there by the Court assessed a transaction (from 2012) concluded between a limited liability company and a general partnership. According to the WSA in Warsaw, the provisions of Article 11(4) in conjunction with Article 11(1) of the A.l.t.d.o.p. in the wording in force until 31 December 2014 may only be applied to transactions concluded between related parties – ‘domestic entities’ within the meaning of Article 11 of the A.l.t.d.o.p., and the tax authorities may only assess the income of related parties. The wording of Art. 11 of the A.l.t.p. indicates that it is intended to allow the tax authorities to estimate the income of related parties, if these parties, in transactions concluded between themselves, establish or impose terms and conditions that differ from those that would be established between independent parties, leading to an understatement of income. However, there are no grounds for this provision to be applied to transactions concluded by unrelated entities (a limited liability company and a general partnership) solely for the reason that tax on revenue from participation in a partnership is paid by its partners who are also members of the applicant’s management board. Indeed, it was only the provisions introduced by the Act of 29 August 2014 amending the Corporate Income Tax Act, the Personal Income Tax Act and certain other acts, which entered into force on 1 January 2015, that defined an “affiliated entity” as a natural person, a legal person or an organisational unit without legal personality that meets the conditions set out in the Act. If a contrary position were to be adopted Contrary to the authority’s assertions, these rulings do not concern a different factual situation. Although the audited interpretation concerned the necessity to prepare documentation pursuant to Art. 9a of the A.l.t.c., the applicant also directly inquired about classifying the applicant as an entity related to the general partnership. The courts of both instances were firmly in favour of the absence of such a link (dependence) between a capital company and a partnership, in terms of entering into mutual transactions, within the meaning of Article 11 of the A.l.t.p. in the wording in force until 31 December 2014. Thus, as shown above, the application of Article 11 of the A.l.t.d.o.p. in the present case was un-authorised, which makes it timely to consider the application in the analysed factual state of the general principles arising from Article 14 of the A.l.t.d.o.p. and Chapter 3 of this Act (tax deductible costs), which the authorities, for obvious reasons, have not undertaken so far.” “When reconsidering the case, the authority, taking into account the comments presented above, will issue an appropriate decision, containing in the justification of the decision all the elements referred to in Article 210 § 1 of the Polish Civil Code, including those arising from the cited resolution of the Supreme Administrative Court.” Click here for English Translation Click here for other translation ...

In 2007 real estate had been transferred from “G gestão imobiliária S.A.” to “Publicações Real Estate Lda”. The Portuguese tax authority issued an assessment, where the pricing of real estate had been adjusted in accordance with the arm’s length principle, based on the prices paid for real estate in the same area. “Publicações Real Estate Lda” filed an appeal with the Administrative Court, where the assessment was later set aside. An appeal was then filed by the tax authorities with the Administrative Court of Appeal. Judgement of the Court The Court of Appeal upheld the assessment notice issued by the tax authorities and set aside the decision of the Administrative Court. Excerpt “The defendant and the judgment in crisis consider that the transaction chosen by the Tax Authorities is not comparable to the one subject to arithmetic correction and that the burden of proving the factual assumptions that determined such correction was not observed. However, this is not correct. The AT has collected information that allows the questioned transaction and the reference transaction to be compared, such as the date of both (2007), the location of both properties (A……….-M……..-M……..), the fact that both are industrial properties as defined by the applicable Municipal Development Plan, the fact that both are industrial warehouses, the fact that there is a study by the Real Estate Association on the price per square metre of warehouses in the area, which is set at between 500.00 euros and 550.00 euros per square metre. To the referred elements, the reasons justifying the corrective action of the AT should be added, to wit (10): i) the lack of presentation by the taxpayer of the transfer pricing documentation, in spite of having been notified to that effect; ii) the Chartered Accountant was not provided with information and documentation which would allow him to assess the reasonability of the price practised in the sale of real estate to a company with which special relations exist; iii) the appellant ascertained in the financial year in question a tax loss of €1. 034,476.33, most of which arose from the tax loss of €868,309.55, inherent to the transaction at issue in the proceedings. The comparability of transactions requires reference to objective factors that arise from the circumstances of the transactions being compared. Objective elements were collected on the calculation of the sale price of the category of property in question in the area under analysis (industrial warehouses). These elements justify the correction to the taxable income imposed by the AT. In turn, there is no evidence in the case-file that allows the comparability assessment made by the AT to be mischaracterised. In view of the evidence gathered of the existence of a similar transaction, carried out between independent entities, with a price different from that of the contested disposal, it was up to the taxpayer to allege and prove, through concrete facts, that the transactions in question are different. This allegation and proof was not made in this case. Therefore, the correction of the value of the transaction and the consequent correction to the taxable income are grounded. By judging in a discrepant sense, the sentence under appeal has committed an error of judgement, for which reason it should be replaced by a decision that rejects the opposition. Accordingly, the present conclusions of appeal are upheld.” Click here for English translation. Click here for other translation ...

SARL Cosi Immobilier, is a wholly owned subsidiary of the Swiss company Compagnie de Services Immobiliers SA (Cosi SA). The group is engaged in sale of properties and real estate. Following a tax audit covering the FY 2011 and 2012, an assessment of additional corporate income tax was issued, together with penalties. According to the tax authorities service fees paid by SARL Cosi to its Swiss parent (50% of the the sales commission received) for online marketing of properties and real estates located in France had not been at arm’s length. The company requested the administrative court of Lyon to discharge the assessments, but this request was rejected by the court in a judgement issued 11 December 2018. This decision was then appealed by the company to the Supreme Administrative Court. Judgement of the Supreme Administrative Court The Appeal of Cosi Immobilier was rejected by the Court. Excerpts “In the present case, the company Cosi Immobilier concluded on 17 August 2010 a service agreement with the company Cosi SA in order, according to its preamble, to allow SARL Cosi Immobilier to promote in Switzerland its portfolio of properties located in France thanks to the development by Cosi SA of a quality internet platform, the use of qualified personnel and the provision of its network of prospects. Article 1 of this agreement stipulates that its purpose is to provide an IT platform for the purpose of putting the properties online, the promotion and marketing of the properties, as well as the acquisition and referral of clients. The exhaustive list of services that Cosi SA undertakes to provide, as set out in the appendix, includes IT, advertising, telephone, financial and banking, commercial, marketing and training services. As Cosi Immobilier acknowledges in its written submissions, the main purpose of the services thus provided for Cosi SA is to bring in new prospects in order to find buyers, consistent with the level of remuneration contractually provided for, corresponding, in accordance with the practices of the profession in the event of two agencies sharing the search mandate and the sales mandate, to 50% of the commission excluding tax received by the applicant company. However, this remuneration is due by the applicant company for each sale concluded before a notary, regardless of the origin of the purchaser.” “In order to qualify the remuneration paid on the occasion of certain transactions as an indirect transfer of profits, the administration first noted, without being contradicted on this point, that certain sales, listed exhaustively in appendices 1, 2 and 3 of the rectification proposal, gave rise to both the repayment to Cosi SA of 50% of the commission, and also to the payment to employees or partners of Cosi Immobilier of part of the commission contractually owed when the interested party provided both the sales mandate and the search mandate. The administration also noted that some sales had resulted in a sharing of the commission with third-party agencies. By merely producing a credit note from Cosi SA for commissions for 2012, which does not specify which sales it relates to, Cosi Immobilier does not usefully dispute that it received only zero or even negative remuneration on certain sales. It is not disputed either that other services contractually provided for by Cosi SA, such as telephone canvassing, were not carried out either. Finally, it is clear from the information transmitted by the Swiss tax authorities, which has not been contradicted either, that Cosi SA, which was dissolved in 2008, had only been in business for three months when Cosi Immobilier was created, and therefore could not have had a real network in Switzerland, that its turnover over the years in question consisted almost exclusively of commissions paid by its subsidiary, and that it only declared losses for these same years, that it does not have any premises in Switzerland, being domiciled at the accounting firm where its manager, who is also the manager of the subsidiary, works, that it only spent between 0.25 and 4% of its turnover on advertising and marketing during 2011 and 2012, and that its balance sheet does not show any computer equipment. The tax authorities have thus established the excessive nature of the remuneration accepted by Cosi Immobilier in relation to the reality of the services allegedly provided by Cosi SA, and consequently the reality of a practice falling within the provisions of Article 57 of the General Tax Code.” “The company Cosi Immobilier does not provide proof that the advantage thus granted is justified by favourable considerations for its own operations, merely relying on computer referencing tasks carried out on Cosi SA’s website, even supposing that they could not have been carried out by its own employees, whose agreement of 17 August 2010 provided for training in these tasks, a few e-mails between certain buyers and Cosi SA, or even mailing files, which in any case include a large number of messages from the independent service provider working with Cosi Immobilier, and not from employees of Cosi SA. The tax authorities also point out, without any useful contradiction, that the proportion of Cosi Immobilier’s clients established in Switzerland does not exceed 10%.” Click here for English translation Click here for other translation ...

At dispute was the definition of the conditions under which a reference price (i.e. a price that would be negotiated between independent persons in normal business relations under the same or similar conditions) cannot be determined and the tax administrator should therefore use the administrative price (i.e. the price determined in accordance with the legal regulation) as the arm’s length price for adjusting the income tax base. In 2013 Automotoklub Masarykův sold K. A. (a person who participated in its management) real estate for the purchase price of CZK 40 000 000. The tax authorities adjusted the tax base in accordance with Section 23(7) of Income tax Act, comparing the agreed (purchase) price with the price determined in accordance with the Act on the Valuation of Property, as amended in the version applicable to the case at hand (hereinafter referred to as the Act on the Valuation of Property), which amounted to CZK 450,786,850. The Regional Court concluded that the tax administrator failed to prove the fulfilment of the conditions under Section 23(7) of the Income Tax Act, as it failed to establish and substantiate by evidence that the agreed price could not be compared with the reference (market) price, and therefore proceeded prematurely to compare it with the administrative price (the price established pursuant to the Property Valuation Act). This decision was appealed by the tax authorties. Judgment of the Supreme Administrative Court The Court decided in favor of the tax authorities. When adjusting the tax base pursuant to Section 23(7) of the Income Tax Act, the agreed price may be compared with the price determined in accordance with the valuation regulation only if it is not possible to determine the price on the relevant market due to the absence of at least substantially comparable independent transactions that could be appropriately corrected.(According to the judgment of the Supreme Administrative Court of 29 January 2020, No. 9 Afs 232/2018 – 63) “(i)f there are real independent transactions (transactions between independent parties in normal business relations) which are fully comparable to the transaction at issue, i.e. concluded for the same (similar) commodity under the same (similar) conditions, data on the prices of these transactions will suffice to establish the reference price. If the disputed transaction is not fully comparable with the independent transactions (usually because the commodity or the terms of those transactions will be different), it is necessary to start from the independent transactions which are as close as possible in terms of their parameters and to adjust the data on these transactions appropriately to take account of the differences between them. Click here for English Translation Click here for other translation ...

Neftemash-Service LLC sold real estate (administrative and warehouse building, land plots, part of a workshop building) to two individuals that were also founders of the company and held the positions of general director and commercial director. The Company claimed the transactions were caused by an urgent need for capital, and that the reason for selling directly to the founders was that no third parties were interested in buying the properties. The Russian tax authorities held that the properties had been sold at non-arms length prices and issued an adjustment based on the market value. The court supported the position of the tax authorities. The price was lower than its market value at the time of sale, and the prices of land plots were substantially lower than their original purchase prices. Prices deviated from the market values multiple times (2-29 times). The tax authorities arguments in regard to the choice of pricing method (which was no a CUP) was found to be sufficient by the Court. The Company’s argument, that it was impossible to sell real estate at a higher price was rejected. In the opinion of the Court, the Company had no intention of selling the property to third parties. The Court also noted, that Neftemash-Service LLC continued to work in the building that was sold, but now under a lease agreements concluded with the founders. At the same time, the cost of maintaining the property continued to be carried by NefteMash-service LLC. The decision was upheld by the Court of Appeal and later the Supreme Court. A64-1247-2017 ...

This case is about deduction of certain “cost” related to sale of property and intragroup financing between an Italian company and a related group company in Luxembourg. Judgment of the Supreme Court The Court ruled partly in favour of the tax authorities and partly in favour of the PDM D srl. I regards to the deduction of the “guarantee” granted in relation to the sale of real estate the Court states: “In the present case, in the absence of proof of the above requirements in the reference financial year (2005/2006), and since the costs in question have not yet been actually incurred, but are future costs that may be incurred in subsequent financial years, following a comparison between the amount actually received from the leases and the fixed amount guaranteed by the seller company and therefore depending on the actual development of the lease relationship, the tax recovery is legitimate. ” In regards to the arm’s length nature of the interest rate the Court states: “This Court has therefore affirmed that ‘the burden of proof on the Office – in the matter of transfer pricing – is limited to demonstrating the existence of transactions between related companies and the clear deviation between the agreed consideration and the market value (abnormal value), since this burden does not extend to the proof of the elusive function of the transaction’, and that, on the other hand, ‘in the face of the evidence offered by the Administration, it is up to the taxpayer to demonstrate – by virtue of the principle of proximity of the evidence, inferable from Article 2697 of the Civil Code. – It is for the taxpayer to demonstrate – by virtue of the principle of closeness of evidence, as inferable from Article 2697 of the Civil Code – not only the existence and relevance of the deducted costs, but also any other element that allows the Office to consider that the transaction took place at market value.” “In the present case, the C.T.R. made a precise assessment, applying the concept of “economic normality of the transaction”, considering justifiable the agreement, in favour of the Luxembourg parent company, of an interest rate of 2%, taking into account the specific concrete characteristics (the fact that it was an intra-group loan but with a short term and of an amount exceeding one million euros, as well as the lower average riskiness of the borrowing company, a company under Luxembourg law, financed by a company from the South, in particular), which made the financing in any event not comparable to other financing provided by the same company or by the banking system. The statements contained in the judgment are therefore consistent with the rules governing the remuneration of intra-group financing and with the rules on transfer pricing, with reference to the appropriateness of the interest rate and its correspondence to the “normal market value”.” Click here for English translation Click here for other translation ...