The tax authorities had issued an assessment in which the value of shares transfered between related parties had been adjusted by application of the arm’s length principle. The assessment was appealed to the Administrative Court, which upheld the assessment. An appeal was then filed with the Administrative Court of Appeal. Judgement of the Court The Administrative Court of Appeal upheld the judgement issued by the Administrative Court and decided in favour of the tax authorities. Excerpt “It should be remembered here that at the time of the facts the law did not provide for the use of any method, although there were already some guidelines from the OECD to this effect, and the Tax and Customs Authority researched and used a methodology close to the “comparable price” of the sale of shares closest to a shareholder to the company, making reference to the fact that this shareholder tried to sell the shares on the market. In its appellate submissions and conclusions, the appellant puts forward arguments for its dismissal based on the unreliability of the values thus obtained, giving reasons for not taking into account the values set in the deal with the shareholder M…, concluded in the same year, 1997, namely due to the animosity of relations between this partner, the company and the members of the management bodies, but the truth is that it does not effectively rule out the fact that the shareholder had previously tried to sell the shares in a fully competitive market or that this had an influence on the price reached. In fact, although the Appellant emphasises the differences between the deals concluded, the first with the shareholder M…and the others at issue here, with the Carreira C…and M… families, the truth is that both acquired their own shares and for very different amounts, but it is true that, contrary to what the Appellant argues, the objects of the deals are in themselves comparable: the sale of shares. Therefore, the judgement under appeal does not deserve censure when it disregards the values ascertained in the expert report carried out more than 25 years after the facts, in a context of significant time lagsand which uses the equity method and validates the result calculated using the methodology used by the Tax and Customs Authority, for the reasons described above. In fact, in addition to not really calling into question the conclusions and methods used by the Tax and Customs Authority, the figures found in the expert’s report are not intended to replace the reasoning behind the corrections it made, nor to lead to new formulas for determining the tax base. The truth is that the factual situation described in the STA judgement cited by the Appellant is very different from the case under consideration in the present proceedings, since in addition to the fact that the existence of relationships different from those that would normally be agreed between independent peopleIn addition, the values that served as the basis for the contested settlement were not corrected on the basis of the application of the coefficient of monetary correction to the acquisition price of shares. Thus, and with greater assertiveness or development, we cannot see how the interpretation accepted violates the principle of taxing companies on their real income (article 104/2 of the Constitution), given that the law, in the aforementioned article 57/1 CIRC, allowed the Tax Authority to make corrections to the declaration [see conclusion Y) of the pleadings on appeal]. In fact, this is not about the presumption of veracity enjoyed by the Impugnant’s and now Appellant’s accounts, but rather about preventing the erosion of the tax base and tax avoidance through price manipulation by verifying the existence of special relationships between the people involved in the deal with the ability to influence the conditions and the way in which the price was determined. The Appellant is therefore wrong on these points.” Click here for English translation. Click here for other translation ...

The subject-matter of the dispute was deduction of cost for the advertisement on Czech Television. The advertisements had been resold by a chain of entities, with the prices for the individual advertisements being multiplied in relation to the prices charged by Czech Television. The Second Chamber of the Supreme Administrative Court referred the case to the Extended Chamber for a ruling on the question whether the finding that the price of the subject-matter of the contract was significantly higher than the normal price, without a satisfactory explanation of the difference, is a sufficient condition for the conclusion that there is a combination of persons for the purpose of reducing the tax base or increasing the tax loss pursuant to Section 23(7)(b)(5) of Act No 586/1992 Coll. on Income Taxes, or whether the tax authorities must prove other facts in the conduct of the taxpayer which indicate that the transaction is unusual. Furthermore, according to the Second Chamber, there was a contradiction in the case-law of the Supreme Administrative Court concerning the relationship required for an adjustment to be issued under the arm’s length provision in Section 23(7)(b)(5) of the Income Tax Act. Decision of the Supreme Administrative Court The Extended Chamber of the Supreme Administrative Court did not agree that there was a contradiction in the case law, and refered the case back to the Second Chamber. Excerpts “The Second Chamber submits that there is a conflict between the VJB PARTNER II judgment and the D.D.D. SERVIS OPAVA I judgment on the question whether the finding of the existence of a significantly increased price of the subject matter of the contract compared to the normal price without a satisfactory explanation of the difference is sufficient to prove a relationship between otherwise related persons under Section 23(7)(b)(5) of the Income Tax Act, or whether other non-standard facts must be proved by the tax administrator. However, the Full Court concludes that, at least for the moment, it is not clear whether this issue is relevant to the assessment of the appeal in the present case, for the reasons set out below.” “[26] It thus follows from the above that the subject matter of the dispute in the present case, which is intertwined with the administrative and judicial proceedings, is in particular the questions whether the administrative authorities have sufficiently justified the conclusion that the complainant was part of otherwise connected persons pursuant to section 23(7)(b)(5) of the Income Tax Act and whether the tax authorities must prove that the complainant knowingly engaged in a contractual relationship intended to reduce the tax base or increase the tax loss.” “[38] There is no inconsistency between the VJB PARTNER II judgment and the D.D.D. SERVIS OPAVA I judgment. The case before the Second Chamber also differs from the case dealt with in the judgment in D.D.D. SERVIS OPAVA I. The subject-matter of the dispute is, first of all, the question of the reviewability of the conclusions of the defendant and, consequently, of the Regional Court as to whether the complainant can be regarded as an otherwise connected person. At the same time, the complainant was, in most of the advertisements under examination, part of a longer chain of entities in which services were resold. However, the First Chamber based its conclusion on the fact that the complainant was not part of a chain. At the same time, the complainant argues that the tax authorities must prove that the chain was established mainly for the purpose of reducing the tax base or increasing the tax loss and that the entity knowingly joined it. However, the referring Chamber did not dispute the premise of the EWE judgment that the subjective aspect is not relevant. The question of price was only expressly raised in the appeal, together with the other objections to the judgment of the Regional Court. [39] The Second Chamber must therefore first consider whether the defendant’s decision and the judgment under appeal are reviewable. If it concludes that it is, it must then consider on what grounds the administrative authorities and the Regional Court regarded the applicant as a person otherwise connected. If that ground is merely the increased cost of the transaction and if it finds a conflict in the preliminary ruling or wishes to depart from it, it may refer the case back to the Grand Chamber for a decision. Alternatively, it may refer the case to the extended Chamber if it concludes that it wishes to depart from the EWE judgment as regards knowledge of the taxpayer’s involvement in a chain of companies and whether the existence of the chain is material. In such a case, it will be for the ECJ to give proper reasons for its different legal opinion. [40] In the absence of jurisdiction, it is not for the extended Chamber to address the question whether, in the absence of a chain of entities, the fact that there has been an increase in price over the normal price is sufficient to conclude that there is a concentration of persons under s 23(7)(b)(5) of the Income Tax Act. [41] Since the Extended Chamber found that it did not have jurisdiction to rule on the matter, it referred the case back to the Second Chamber without considering the merits of the question referred to it.” Click here for English Translation Click here for other translation ...

A public medical university “W” had submitted a request for a written interpretation (binding ruling) to the tax authorities asking whether it was considered a related entity under the Polish arm’s length provisions to a public health care institution it had established. The tax authorities replied in the affirmative. Not satisfied with the ruling, an appeal was filed with the Regional Court, which rejected the binding ruling and concluded that the parties were not related. The tax authorities then appealed to the Supreme Administrative Court. Judgement of the Supreme Administrative Court. The Supreme Administrative Court ruled in favor of the tax authorities and overturned the decision of the Regional Court. Excerpt “It is not possible to agree with the assertion of the Court of First Instance that it is possible to assume a priori that the funds received under the agreement by the SPZOZ do not constitute a typical remuneration, established under market conditions, for making the infrastructure available for teaching activities, but a specific financing of the activities (covering of costs) that the university performs with the use of the therapeutic entity created by it. Also, the establishment in the u.d.l. “strictly”, according to the WSA in Warsaw, defined rules related to the adaptation and provision of infrastructure by a teaching hospital for the purposes of teaching activities of a medical university, in conjunction with the financing of these activities by universities, cannot result in the recognition of the accuracy of the thesis that this makes them incomparable to market transactions. As indicated above with regard to the contracting of services, apart from the obligation related to the adaptation and provision by the teaching hospital of the infrastructure for the teaching activities of the medical university, there are no rigid, specific rules, and potentially comparable market may be transactions between medical universities other than W. and the therapeutic entities created by them. 4.5 Given the specific nature of medical market services, it would be desirable to exempt transactions between medical universities and the medical entities they create from the transfer pricing rules. This has been the case since 24 June 2020 as a result of the amendment of Article 11b of the u.p.d.o.p. Pursuant to the newly amended provision in this article, i.e. point 3, the provisions of the chapter on transfer pricing shall not apply to transactions between a medical university within the meaning of Article 2(1)(13) of the Act of 15 April 2011 on medical activity and a medical entity referred to in Article 6(6) of that Act (i.e. between a forming entity and a medical entity). As aptly pointed out in the grounds of the cassation appeal, since the newly introduced provision excludes transactions between the entities indicated therein from the obligation to apply the transfer pricing provisions, it should be assumed that, until the date of its introduction, in accordance with the will of the legislator, universities as forming entities and established medical entities were subject to such obligation as related entities within the meaning of Art. 11(4) of the u.p.d.o.p. in the wording in force until 31 December 2018 and Article 11a(1)(4) of the u.p.d.o.p. in the wording in force from 1 January 2019. 4.6 In view of the above, the Supreme Administrative Court, pursuant to Article 188 in conjunction with Article 151 of the A.P.S.A., repealed the appealed judgment and dismissed the complaint, as the merits of the case had been sufficiently clarified.” Click here for English translation Click here for other translation ...

Stora Enso Wood Products Ždírec s.r.o. is the Czech subsidiary of the Stora Enso Group, a multinational manufacturer of packaging and building products. In the years in question, Enso Wood Products Ždírec s.r.o. provided manufacturing services to its parent company and made losses. An audit was initiated by the tax authorities focusing on the method of determining transfer prices between related parties as defined in Article 23(7) of the Income Tax Act (which contains the Czech arm’s length principle). On the basis of a functional and risk analysis (in which it examined the extent to which the applicant depended on the decision-making mechanisms of another entity in the group), the tax administration concluded that Stora Enso Wood Products Ždírec s.r.o. did not act as a fully-fledged independent entity in its production and related activities, but as a producer with a limited functional and risk profile, since its production activities were influenced by transactions and relationships with its parent company, SEWP, which provided direct direction, coordination and management, both in terms of personnel and in terms of the competences and decision-making powers which it, as a superior entity to the applicant, possessed. The business model set up by the parent company SEWP did not therefore allow the applicant to negotiate contractual terms with its customers, nor was the applicant directly responsible for the purchase and delivery of goods. In the proceedings, the tax authorities did not dispute that the production and sale of lumber by the applicant was made both to related parties and to unrelated third parties (hereinafter referred to as ‘independent customers’). However, what was relevant in the present case was the finding that the sales to independent customers were also influenced by the ‘orders’ of SEWP’s parent company. The tax authorities made a transfer pricing adjustment based on the transactional net margin method and issued an assessment of additional income. Stora Enso Wood Products Ždírec s.r.o. filed an appeal, and in 2021 the regional court decided in favor of the company. An appeal was then filed by the tax authorities with the Supreme Administrative Court. Judgement of the Court The Supreme Administrative Court overturned the lower court’s decision and ruled in favour of the tax authorities. Excerpts “…the tax authorities took the legal view that the principle that a company should not be forced to carry out transactions which are disadvantageous to it applies in a group. If a controlling person (typically the parent company) exerts its influence to implement a transaction which causes the company to suffer a pecuniary loss, the controlling person is obliged to compensate the company for the relevant loss by the end of the accounting period at the latest, or, at least within the same period, to conclude an agreement with the company in which the manner and time limit for compensating such loss are agreed. In the present case, since the applicant did not prove how the loss incurred in the determination of the sales prices applied between the applicant and its business partners (related and unrelated parties) was compensated by the parent company, nor did it explain why it was not adequately compensated for its service to the multinational Stora Enso group in its income, the tax authorities proceeded to determine the normal price and to increase the income tax base by the difference found. [18] In the light of the above, the Court finds that, in so far as the Regional Court held in the judgment under appeal that the tax authorities had unlawfully applied Section 23(7) of the Income Tax Act or Article 9 of the double taxation treaty to the applicant’s transactions with its independent customers, who were not demonstrably connected persons, that argument cannot be upheld. “ “…Since the applicant, on the instructions of its parent company, was selling its products below its operating costs and thus losing profit, the applicant should, according to the tax authorities, have received a payment from its parent company to compensate for the loss thus incurred (the difference between its profitability and that of independent comparable operators). Therefore, on the basis of the relevant evidence, the tax authorities concluded that a service was provided between the applicant and its parent company SEWP, thereby creating a relationship between them to which Section 23(7) of the Income Tax Act could be applied. The complainant then defined the service in question as ‘a service consisting in bearing risks which are beyond the control of the taxable person and which are determined by related parties’ (see paragraph 99 of the contested decision). [19] With regard to the Regional Court’s assertion that the tax authorities should have distinguished whether the business transactions were made with related parties or with unrelated third parties, since the applicant’s sales to unrelated parties amounted to 60 % in terms of both production and revenue, the Supreme Administrative Court, in agreement with the complainant, states that this issue may be relevant at the stage of determining the price of the service performed by the applicant for the parent company. In the present case, however, the Regional Court did not assess whether the price of the service was correctly set, but only whether the first condition was met, i.e. whether Section 23(7) of the Income Tax Act was applied to the relationship of related parties.” Click here for English Translation Click here for other translation ...

LAKUM KTL, a. s. had deducted from its taxable income costs for the purchase of advertising and promotional services from PRESSTEX MEDIA and PAMBROKE Media. Following an audit, the tax authorities concluded that LAKUM had entered into a legal relationship with PRESSTEX and PAMBROKE for the purpose of reducing the tax base. The tax authorities established reference prices on the basis that LAKUM could have entered into the contract for advertising and promotional services directly with the club concerned and, from the price range thus established, determined the arm’s length price for the services and increased the tax base accordingly. Decision of the Regional Court The Regional Court ruled in favour of the tax authorities on the pricing issue. Excerpts “37. The applicant first argued that the conditions for the application of the first sentence of Article 23(7) of the Income Tax Act were not met. According to that provision, if the prices agreed between related parties differ from the prices which would have been agreed between unrelated parties in normal commercial relations under the same or similar conditions, and if that difference is not satisfactorily substantiated, the taxpayer’s tax base is adjusted by the difference found. The concept of connected persons is defined in paragraph (b)(5) of the same provision as meaning that, for the purposes of this Act, connected persons are otherwise connected persons who have formed a legal relationship principally for the purpose of reducing the tax base or reducing a tax loss. 38. The applicant argued that a finding that the price obtained differs from the normal price is not sufficient to conclude that there are connected persons, otherwise the question of otherwise connected persons would be superfluous. At the same time, the applicant’s knowledge of that unreasonable increase must be established. He also argued that there was no profit on the part of the applicant, since he had actually spent the sums on advertising and the savings in the form of a reduced tax base were much smaller in relation to the costs incurred. 39. The Regional Court did not find any merit in this objection in its previous judgment. It has reached the same conclusion now. It did not consider it necessary to await the decision of the Extended Chamber in Case No 2 Afs 132/2020-56 of 22 December 2021 on the question whether ‘the finding of a significantly increased price of the subject-matter of the contract compared to the normal price without a satisfactory explanation of the difference is a sufficient condition for concluding that there is a combination of persons for the purpose of reducing the tax base or increasing the tax loss, or whether other facts in the conduct of the taxpayer indicating the unusual nature of the commercial transaction must be proved by the administration’. The reason for this is that the tax authorities based their conclusion that the parties were connected not only on the finding of an exorbitant price but also on other circumstances which suggest that the transaction was unusual. In its previous judgment, the Regional Court did not deal with them in detail, as it relied on the view, held by case law at the time, that the finding of an exorbitant price without a satisfactory reason was sufficient for the conclusion of connected persons within the meaning of Section 23(7)(b)(5) of the Income Tax Act (e.g. Supreme Administrative Court judgments of 13 June 2013, no. 7 Afs 47/2013-30, 28 January 2021, no. 3 Afs 393/2019-43 or 20 August 2021, no. 2 Afs 313/2019-43). The Court therefore found the applicant’s objection with regard to them irrelevant. In view of the question submitted to the Extended Chamber, its irrelevance is no longer apparent and the Regional Court will comment on them below, but there is no reason to wait for the decision of the Extended Chamber; even if it were to prevail that the definition of connected persons includes, in addition to the exorbitant price, the presence of such facts in the conduct of the tax entity as to indicate the unusual nature of the transaction, that could not have a favourable effect on the applicant’s procedural success in the case now under consideration. 40. In the case at hand, the tax authority raised doubts about the claimed costs, finding that the total costs incurred by the applicant’s suppliers PRESSTEX and PAMBROKE for advertising and promotional services for the year 2013 for the applicant amounted to CZK 56 104, while the applicant booked costs of CZK 6 000 000, representing 107 times the price paid by the suppliers PRESSTEX and PAMBROKE. The tax administrator’s doubts were also raised by other “non-standard circumstances” mentioned in the Tax Audit Report on pages 23-25, which are: – a change in the contractual terms, as the documents on the performance of the subject matter of the contract were delivered to the applicant after the end of the contractual relationship – discrepancies between the contract and the invoice and between the photographic documentation and the invoice (different size of the banner, failure to indicate advertising in the Golf Arena Ostrava, invoicing for advertising services even for months when no matches were played) – the applicant’s failure to comply with the payment terms – failure to verify the effectiveness of advertising costs – non-standardisation of the applicant’s suppliers PRESSTEX and PAMBROKE (non-contactability of PRESSTEX, virtual headquarters, cash withdrawals of large sums, company without a statutory body) – the failure to verify the price quotation, since the applicant accepted the price proposed by PRESSTEX without further investigation of the more advantageous quotation, even though the applicant could have recognised the overestimation of the price because it has long been active in the sports and business environment. 41. On the basis of the foregoing, the tax administration found that there was a relationship between the applicant and PRESSTEX and PAMBROKE corresponding to Article 23(7)(b)(5) of the Income Tax Act, and the defendant agreed with its assessment (see paragraph 90 of the contested decision). 42. The ...

The US group, Avery Dennison, manufactures and distributes labelling and packaging materials in more than 50 countries around the world. The remuneration of the distribution and marketing activities performed Avery Dennison Chile S.A. had been determined to be at arm’s length by application of a “full range” analysis based on the resale price minus method. Furthermore, surplus capital from the local company had been placed at the group’s financial centre in Luxembourg, Avery Management KGAA, at an interest rate of 0,79% (12-month Libor). According the tax authorities in Chile the remuneration of the local company had not been at arm’s length, and the interest rate paid by the related party in Luxembourg had been to low, and on that basis an assessment was issued. A complaint was filed by Avery Dennison with the Tax Tribunal and in March 2021 the Tribunal issued a decision in favour of Avery Dennison Chile S.A. “Hence, the Respondent [tax authorities] failed to prove its allegations that the marketing operations carried out by the taxpayer during the 2012 business year with related parties not domiciled or resident in Chile do not conform to normal market prices between unrelated parties..” “Although the OECD Guidelines recommend the use of the interquartile range as a reliable statistical tool (point 3.57), or, in cases of selection of the most appropriate point of the range “the median” (point 3.61), its application is not mandatory in the national tax administration…” “the Claimant [taxpayer]carried out two financing operations with its related company Avery Management KGAA, domiciled in Luxembourg, which contains one of the treasury centres of the “Avery Dennison” conglomerate, where the taxpayer granted two loans for US $3.200.000.- in 2010 and another for US $1.1000.000.- in 2011.” “In relation to the financial transactions, the transfer pricing methodology used and the interests agreed by the plaintiff have been confirmed. Consequently, Assessment No. 210, dated 30 August 2016, should be annulled and, consequently, this Tax and Customs Court will uphold the claim presented in these proceedings.” An appeal was then filed by the tax authorities. Judgement of the Court of Appeal The Court upheld the decision of the Tax Tribunal and set aside the assessment issued by the tax authorities. Excerpts “(…) Fourth: That the OECD regulations – while article 38 of the LIR was in force – should be understood as a guide with indications or suggestions for determining prices assigned between related parties with respect to those charged between independent parties. The aim is to eliminate distortions that may arise between companies with common ownership and to respect market rules. Notwithstanding the above recognition, Article 38 of the LIR regulated transfer prices and even though its normative content was minimal and insufficient to provide an adequate response on the matter, its text must be followed for the purposes of resolving the conflict in question, especially if one considers that the third paragraph of the provision states that when prices between related companies are not in line with the values charged between independent companies for similar transactions, “the Regional Directorate may challenge them, taking as a reference basis for such prices a reasonable profitability for the characteristics of the transaction, or the production costs plus a reasonable profit margin. The same rule shall apply with respect to prices paid or owed for goods or services provided by the parent company, its agencies or related companies, when such prices do not conform to normal market prices between unrelated parties, and may also consider the resale prices to third parties of goods acquired from an associated company, minus the profit margin observed in similar operations with or between independent companies”. The following paragraph adds that if the company does not carry out the same type of operations with independent companies, the Regional Directorate “may challenge the prices based on the values of the respective products or services on the international market (…) for this purpose (…) it shall request a report from the National Customs Service, the Central Bank of Chile or the bodies that have the required information”. It can be inferred from the transcribed rule that the use of external comparables is only authorised if the company does not carry out any type of transaction of goods and services with independent companies; that the challenge must be well-founded; and that the taxpayer and the SII are free to use the method that seems most appropriate to them as long as the legal requirements are met. It is also relevant to note that the domestic regulations at that date did not contemplate all the methods included in the OECD guidelines and it is inappropriate, under article 38 of the LIR, to resort directly to such guidelines in respect of situations not provided for in the domestic regulations, i.e., in relation to methods not included in the aforementioned provision. An interpretation contrary to the above would infringe the principle of legality of taxes or legal reserve, according to which only the law can impose, eliminate, reduce or condone taxes of any kind or nature, establish exemptions or modify existing ones and determine their form, proportionality or progress. Fifth: That the contested act shows that the method used by the SII for the entire period under review, business year 2012, corresponds to the so-called “Transactional Net Margin Method” for marketing operations, and the ” Comparable Uncontrolled Price Method” for financial operations, The Court therefore agrees with the findings of the lower court in grounds 22 to 25 of the judgment under review regarding the lack of the necessary grounds for the administrative act, in that the tax authority, although obliged to do so, omitted to analyse the transactions in accordance with the legislation in force at the date on which they were carried out…” Click here for English translation Click here for other translation ...

Following an audit the tax authorities issued an assessment of additional income resulting from an adjustment of the tax deductions related to marketing expenses. According to the tax authorities the parties to the transactions were “otherwise related” within the meaning of the Czech arm’s length provisions in § 23 par. b) point 5 of the Income Tax Act. SERVIS OPAVA filed an appeal against the assessment claiming that the tax authorities did not established the existence of a relationship between the parties and therefore had no legal basis for the adjustment. The Regional Administrative Court dismissed the appeal and upheld the decision of the tax authorities. An appeal was then filed against this decision with the Supreme Administrative Court Judgement of the Supreme Administrative Court The court decided in favour of SERVIS OPAVA. The prerequisite for the adjustment of the tax base pursuant to Section 23(7) of Act No. 586/1992 Coll., on Income Taxes, is the determination that the relationship is between related persons. Only after the tax administration has carried the burden of proof in relation to this condition may it proceed to assess whether the prices agreed between related parties differ from the prices that would have been agreed between unrelated parties in normal commercial relations under the same or similar conditions. Therefore, the conclusion that the parties to the legal relationship are otherwise connected persons within the meaning of section 23(7)(b)(5) of the Act cannot be drawn solely from the fact that in the case under examination there is a difference between the agreed price and the normal price. The tax administrator is obligated to examine the possible existence of other circumstances which would indicate that such a relationship was established mainly to reduce the tax base or increase the tax loss, i.e. that the companies are otherwise related as defined by § 23 para. 7 b) of the Czech Income Tax Act. Click here for English Translation Click here for other translation ...

LCN Group had deducted costs in its taxable income for marketing services provided by related parties – PRESSTEX MEDIA SE and TARDEM Media s.r.o. and PAPILIO. The claimed advertising costs from PRESSTEX in FY 2012 was produced and implemented by PAPILIO and subsequently invoiced to LCN Group, virtually unchanged, at a price 23 times higher than the price of the advertising, without the corresponding value added being justified. In relation to FY 2013, LCN Group claimed advertising costs from TARDEM in a similar pattern where the price was increased by up to 56 times. In both tax periods, LCN Group’s advertising/promotion costs were related to sporting events (gymnastics world cup, tennis tournament and golf tournaments). The tax authorities concluded that the prices agreed between the parties was not at arm’s length and issued an assessment. The Regional Court annulled the assessment. It argued that the tax authorities had not sufficiently dealt with the identification and description of the conditions under which the prices of the controlled transactions had been agreed. The tax authorities had not considered the “commercial strength” and “advertising capacity” of the parties. The tax authorities brought this decision to the Supreme Administrative Court. Judgement of the Supreme Administrative Court. The Supreme Administrative Court set aside the decision of the Regional Court and refered the case back to that court for further proceedings. The arm’s length price is the price applied between independent entities or, if no such data exists or is not available, a hypothetical estimate based on logical and rational considerations and economic experience. As regards the “commercial strength” of the parties, the Regional Court did not specify that concept, did not indicate what aspects should be taken into account in the context of that condition, or how that condition affects the prices for advertising services. With regard to the alleged lack of consideration of advertising capacity at the time the contracts were concluded, it may be noted that this aspect may be relevant in assessing the reasons for the difference in prices between the related parties and those agreed in normal commercial relations. However, the possible proof of this fact falls within the scope of the assessment of whether the tax payer has satisfactorily substantiated the price difference. The Regional Court did not deal with this issue. Click here for English Translation Click here for other translation ...

In 2013 “Related Party B.V” entered into an agreement with “X BV” for the provision of transportation- and support services. The Dutch tax authority suspected that the parties were affiliated within the meaning of Section 8b of the Corporate Income Tax Act 1969. Decision of Court The Court decided in favor of the tax authority. Based on the documents in the case, the tax authority rightly suspected that there was an affiliation within the meaning of Section 8b of the Corporate Income Tax Act. The tax authority was therefore entitled to reasonably issue information decisions for the Vpb for 2013 to 2016 inclusive. Nemo Tenetur Principle – self incrimination “Related Party B.V” argued that it’s right not to incriminate itself had been violated because the information decision(s) had been issued to examine the possibility of imposing a fine. In this regard, the court observed that pursuant to the law a taxpayer is obliged to provide the Inspector with all data and information that may be relevant to his taxation and that it is ultimately up to the court, which decides on the fine or punishment, to ensure that a taxpayer can effectively exercise his right not to cooperate in self-incrimination. Now that in the present proceedings no tax fine has been imposed yet, the appeal to the nemo tenetur principle does not succeed. 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 ...

The US group, Avery Dennison, manufactures and distributes labelling and packaging materials in more than 50 countries around the world. The remuneration of the distribution and marketing activities performed Avery Dennison Chile S.A. had been determined to be at arm’s length by application of a “full range” analysis. Furthermore, surplus capital from the local company had been placed at the group’s financial centre in Luxembourg, Avery Management KGAA, at an interest rate of 0,79% (12-month Libor). According the tax authorities in Chile the remuneration of the local company had not been at arm’s length, and the interest rate paid by the related party in Luxembourg had been to low. Judgement of the Tax Tribunal The Tribunal decided in favour of Avery Dennison Chile S.A. “Hence, the Respondent [tax authorities] failed to prove its allegations that the marketing operations carried out by the taxpayer during the 2012 business year with related parties not domiciled or resident in Chile do not conform to normal market prices between unrelated parties..” “Although the OECD Guidelines recommend the use of the interquartile range as a reliable statistical tool (point 3.57), or, in cases of selection of the most appropriate point of the range “the median” (point 3.61), its application is not mandatory in the national tax administration…” “the Claimant [taxpayer]carried out two financing operations with its related company Avery Management KGAA, domiciled in Luxembourg, which contains one of the treasury centres of the “Avery Dennison” conglomerate, where the taxpayer granted two loans for US $3.200.000.- in 2010 and another for US $1.1000.000.- in 2011.” “In relation to the financial transactions, the transfer pricing methodology used and the interests agreed by the plaintiff have been confirmed. Consequently, Assessment No. 210, dated 30 August 2016, should be annulled and, consequently, this Tax and Customs Court will uphold the claim presented in these proceedings.” Click here for English translation Click here for other translation CH vs Avery Dennison 16-9-0001493-0 ...

Following an audit the tax authorities issued an assessment of additional income resulting from an adjustment of the tax deductions related to marketing expenses. According to the tax authorities the parties to the transactions were “otherwise related” within the meaning of the Czech arm’s length provisions in § 23 par. b) point 5 of the Income Tax Act. SERVIS OPAVA filed an appeal against the assessment claiming that the tax authorities did not established the existence of a relationship between the parties and therefore had no legal basis for the adjustment. Judgment of the Regional Court The Court dismissed the appeal and upheld the decision of the tax authorities. The court first dealt with the interpretation of § 23 par. b) point 5 of the Income Tax Act. In this regard the court stated that was clear from the content of the administrative file that the applicant had a duly concluded contract with the supplier. The court therefore rejected the argument that the tax administrator should have proved the existence of a contractual relationship between economically or personally or otherwise connected persons. In this connection, the court referred to the judgment of the Supreme Administrative Court of 13 June 2013 No. 7 Afs 47 / 2013-30. The court did not consider the objection that there was no so-called “profit spillover” in the plaintiff’s case. He inferred this from the fact that he had increased his tax burden because, while the advertising supplier was required to pay value added tax on the supply, he himself was required to pay personal income tax. The Court emphasized that the applicant was ultimately the which reduced the tax base by amounts many times higher than the current price for similar services. The court described the allegation that the tax authorities were influenced by the publicity of certain court decisions in the case of PAMBROKE’s advertising in assessing the case as speculative and unsubstantiated. Last but not least, the court found the objection concerning the evaluation of the contracts submitted by the plaintiff to the defendant also unfounded. It stated that the defendant had duly justified its conduct in the contested decision, stating that the contracts submitted were not comparable to the conditions on the part of the applicant as regards the scope of the services provided or in terms of time. In those circumstances, it was superfluous for the defendant to consider comparing the contract prices in those contracts with the price of the service provided to the applicant. Click here for English Translation Click here for other translation ...

LCN Group s.r.o. had deducted costs in its taxable income for marketing services provided by related parties. Following an audit, the tax authorities concluded that the prices agreed between the parties was not at arm’s length and issued an assessment. Decision of the Regional Court The Regional Court annulled the assessment and decided in favor of the LNC Group. The court held that the tax authorities had not sufficiently dealt with the identification and description of the conditions under which the prices of the controlled transactions had been agreed. The tax authorities had not considered the “commercial strength” and “advertising capacity” of the parties. Click here for English Translation Click here for other translation ...

Goodland Taiwan had sold 7 machines to a local buyer via a related party in Hongkong thus avoiding taxes on sales profits. The transaction had been audited by the Taiwanese tax administration and an assessment issued. Goodland brought the case to court. The Supreme Administrative court dismissed the appeal and upheld the assessment. “The appeal alleges that the original judgment failed to conduct an investigation, but does not specify what the original judgment found to be wrong or what specific legal norm was violated. In fact, Article 2 of the Regulations Governing the Recognition of Income from Controlled Foreign Enterprises by Profit-making Enterprises, as cited in the appeal, states that Article 3 and Article 4, paragraph 2, of the Regulations Governing the Recognition of Income from Controlled Foreign Enterprises and the Unusual Transfer Pricing Check for Business Enterprises, as cited in the appeal, are all specific to the income tax law and may not be consistent with the judgment of related parties under the business tax law. In addition, in this case, the U.S. and local companies are at least covered by the fact that the income tax of the business is not in compliance with the requirements of Article 3 and Article 4(2) of the regular transfer pricing audit. The method of recognizing the income of a controlled foreign enterprise is based on the premise that there is a difference between domestic and foreign income tax liabilities, and is not related to the determination of related parties under business tax law. It is difficult to argue that the original decision did not apply these provisions and that the application of the law was incorrect or that the reasons for the decision were inadequate.As to the statement in the appeal that “the factual findings of the original judgment are contrary to the law of civil contracts”, the reasoning of the appeal is that “the original judgment is contrary to the law of civil contracts”.It is not clear what the specific breach of the law is, as the argument is brief and vague and lacks a complete legal reasoning.3. In conclusion, the original decision is clear and detailed and there is nothing that can be said to be unlawful. The grounds of appeal, as set forth in the original judgment, are only general allegations of the application of the law, but not specific allegations of “inapplicability of the law”, “improper application of the law”, or “the circumstances listed in Article 243, Paragraph 2 of the Administrative Procedure Law”. In accordance with the preceding provisions and explanations, the appeal should be considered unlawful.” Click here for English Translation ...

For FY 2007, 2008 and 2009, JV had deducted expenses consisting in the payment for services pursuant to invoices issued by BP Property s.r.o. and TOP ZONEVIEW. The services consisted in the provision and implementation of an advertising campaign. Following an audit the tax authorities adjusted JV’s taxable income by the difference found, since pursuant to Article 23(7)(b)(5) of the Income Tax Act, the prices agreed differed from the prices which would have been agreed between unrelated parties in normal commercial relations under the same or similar conditions. JV contested the decision of the tax authorities but the appeal was dismissed by the Regional Court. The Regional Court held that the applicant’s objection – that he did not know and could not have known about the chain because he had dealt only with the managing director of Property Praha or B.V. – was unfounded. Section 23(7)(b)(5) of the Income Tax Act does not require proof of active conduct of all the entities and unifying intent. It is sufficient that the defendant has proved and demonstrated, on the basis of the invoicing of the advertising campaign prices and the flow of funds, as well as the negotiation, provision, collection and payment of the amount in each tax period, that the applicant was involved in the chain and that there was a flow of funds in connection with the supply to the applicant. The applicant’s involvement in the chain of trade conferred an advantage on the applicant in that it reduced its tax base by substantially increasing its expenditure. The decision of the regional court was appealed by JV to the Supreme Administrative Court. Judgement of the Supreme Administrative Court. The Supreme Administrative Court dismissed the appeal of JC and decided in favor of the tax authorities. Excerpts “The Financial Office for the Central Bohemian Region, by letter dated 24 August 2015, asked the complainant to prove and document the difference between the price claimed in the tax costs and the price established by the tax administrator. In its statement of 31 August 2015, the complainant justified the difference in prices by the increase in the company’s turnover in subsequent tax periods and emphasised its choice of a corporate promotion strategy, the success of which can only be assessed ex post. The defendant did not consider the complainant’s allegations to be economically rational and proven and the reasons why the prices between otherwise related parties differed from the reference price to be substantiated… At the hearing before the Regional Court on 23 March 2018, the complainant only noted that ‘the advertisement had the desired effect’ (see Minutes of the hearing, sheet number 103 of the Court file). However, he did not explain in detail how this claim rationally justified the difference between the agreed price and the reference price and did not offer any evidence for his claims, although he could have done so…” “However, a null and void decision is not an ‘ordinary’ unlawful decision, but a ‘decision’ which, because of its defects, cannot be regarded as a decision of an administrative authority with public authority at all and which is not capable of producing public law effects. Whereas, in the case of ‘ordinary’ defects in administrative decisions, those decisions are regarded, in view of the application of the principle of the presumption of validity and correctness of administrative acts, as existing and capable of producing the relevant legal consequences and thus affecting the sphere of rights and obligations of their addressees, that principle does not apply in the case of void administrative decisions. The nature of the defects giving rise to the nullity also gives rise to the relevant legal consequences. The most serious defects are thus necessarily associated with the most serious consequences. Therefore, no one is obliged to respect and comply with a null and void administrative decision. It is regarded as if it did not exist at all and is therefore an irremediable legal nullity. Nullity cannot be cured even by the lapse of time.” (Judgment of the Enlarged Chamber of 13 May 2008, no. 8 Afs 78/2006 – 74). Pursuant to Article 109(4) of the Code of Civil Procedure, the Supreme Administrative Court is entitled to declare an administrative decision void of its own motion, i.e. even without an express cassation objection. However, it found that the contested decisions do not meet the characteristics described above, do not lack a legal basis or factual basis, do not lack jurisdiction or the most serious defects of jurisdiction, do not suffer from an absolute lack of form, do not contain an absolute mistake as to the addressee, do not contain a requirement of criminal or factually impossible performance, are not vague or meaningless, so that, according to the settled case-law of the Supreme Administrative Court, they cannot be considered null and void.” Click here for English Translation Click here for other translation ...

In 2014, the tax authorities issued the Italien Bank a notice of assessment with which it reclaimed for taxation IRAP for 2009 part of the interest expense paid by the bank to a company incorporated under Irish law, belonging to the same group which, according to the tax authorities, it also controlled. In particular, the tax authorities noted that the spread on the bond was two points higher than the normal market spread. The Bank appealed the assessment, arguing that there was no subjective requirement, because at the time of the issue of the debenture loan it had not yet become part of the group of which the company that had subscribed to the loan belonged. It also pleaded that the assessment was unlawful because it applied a provision, Article 11(7) TUIR, provided for IRES purposes, the extension of which to IRAP purposes was provided for by Article 1(281) of Law 147/13, a provision, however, of an innovative nature, the retroactivity of which was considered to be in conflict with the Community principles of legitimate expectations and with Articles 23, 41, 42 and 53 of the Italian Constitution. Decision of the Court The Court dismissed the appeal and decided in favor of the tax authorities. Click her for English translation Click here for other translation ...

The Tax Court accepted a claim filed against an assessments resulting from the application of transfer pricing rules. MMM Limitada indicated that the Internal Revenue Service was unable to exercise its powers to challenge the prices of exports made, since the companies participating in the disputed transactions were not related. It added that the Revenue Service had not used the system of reasonable profitability, nor that of reasonable margin on production costs, nor the comparison with international prices, lacking a logical analysis in the determination of prices, since these did not consider the factors that differentiate the quality of the chips, thus violating the rule of Article 38 of the Income Tax Law. The Revenue Service based its analysis on a comparison of the terms of an intercompany transaction with the terms of a transaction between independent companies, using factors including the characteristics of the good being traded, the functions performed by the companies involved in the transaction, the contractual terms and the economic circumstances or market in which the transaction takes place. The Court found in favor of MMM Limitada, concluding that the “relationship” required by Article 38 of the Income Tax Law between the claimant and the Japanese company was not established. Furthermore the Court determined that the transfer pricing method used to measure the alleged tax differences by the tax authorities was not admissible, specifying that such lack of foundation left the plaintiff in a situation of defenselessness, thus violating Article 38 paragraph 3 of the Income Tax Law, which requires that the challenge be founded. The Court added that, although the Revenue Service did not make it explicit, it sought the application of some elements of the Comparable Unrelated Price Method, and some elements of the Net Operating Margin Method, which would have been a good idea, since this is precisely one of the two methods that measure profitability proposed by the OECD, which would be, in accordance with the legal limitation of the provision in question, which uses the expression “Reasonable Profitability”. However, insufficient details were provided to establish how this method was applied. Click here for English translation ...

JFC Ecuador is active in coordination and logistic operations for the transfer of Ecuadorian fruit to related parties in the Russian JFC Group. Following an audit the tax authorities issued an assessment where the prices of these transactions had been determined based on quoted prices issued by the authorities in the SOPISCO NEWS database. However, according to JFC Ecuador, SOPISCO NEWS does not correspond to a publicly available international trade exchange or price database. On the contrary, it is a bulletin that lists quotations that involve price estimates, established through unidentified sources. The price quotations listed by SOPISCO NEWS correspond to prices that the bulletin presumes were agreed upon by companies that have carried out the management and marketing and sales for the placement of the product, while JFC Ecuador did not carry out such activities. Judgment of the Court The Court concludes that the use of the SOPISCO NEWS database by the Tax Administration, as it is an internationally recognized source of price information used by international organizations as a source of information, is appropriate depending on the method applied. In conclusion, this Chamber considers that the Tax Administration acted in accordance with its determining power as set forth in Article 68 of the Tax Code and Article 23 of the Internal Tax Regime Law, and that its acts are subject to the presumption of legitimacy and enforceability as set forth in Article 82 of the same law…”. Click here for English Translation Click here for other translation ...

EWE s.r.o first criticised the Regional Court for the lack of logical reasoning in the grounds of the judgment, based on evidence that it had established a legal relationship with another person mainly for the purpose of reducing the tax base. Although the facts adduced by the administrative court show that ‘some third parties’ created a relationship between them for that purpose, it does not indicate which evidence shows that it was she who created such a relationship for the purpose of reducing the tax base, as is intended by section 23(7)(b)(5) of the Income Tax Act. This defect in the court’s decision is all the more serious since she herself argued that no evidence was adduced in the administrative proceedings (in the tax inspection report) to show that she was knowingly involved in a chain of otherwise connected persons. It is thus merely the unproven assumptions of the tax authorities. No such evidence was presented by the Police of the Czech Republic in its complaint to the tax administrator. In so far as the Regional Court subsequently found such findings to be correct, its judgment is based on insufficient or incorrect findings of fact. If the administrative court accepted the conclusions of the administrative authorities that the conditions for the application of Section 23(7) of the Income Tax Act were met, it was obliged to state on what evidence it agreed with the conclusion of the Tax Directorate. However, the Regional Court failed to do so and its judgment is therefore unreviewable. This is also because no such evidence exists and was not adduced by the tax administrator, the Tax Directorate or the Regional Court. As far as it is aware, in other cases – for example, in the case of the appeal of STECOMTRA s.r.o., Tax Registration No:26847469 (another end customer of the chain in question), the Tax Directorate in Ostrava stated in its decision on the appeal that the tax administrator had failed to collect such evidence to show that the appellant knew or could have known that it was part of the chain (while it had the same documents from the police as the administrative authorities in its case). Since in her case it was not established that she was a person otherwise connected within the meaning of section 23(7) of the Income Tax Act, there was no legal reason for the tax authorities to ask her to prove the difference between her purchase price and the normal price. She was, therefore, not required to satisfactorily prove the alleged price difference. The tax authorities were therefore not legally entitled to adjust the tax base by the difference found. Any determination of the normal price was therefore irrelevant. The taxpayer’s normal price was the price at which it purchased the services from its supplier (Property). That company also offered its services to others at the prices paid to it. The price invoiced in her case was also the price for similar advertising in other media. The Regional Court therefore not only misinterpreted Section 23(7) of the Income Tax Act, but also incorrectly considered her burden of proof. If there were no material doubts on the part of the tax authority, there was no obligation on the tax authority to prove the differences between the prices. It cannot therefore be concluded that, as a taxable person, it did not satisfactorily document and prove the difference in prices between the services it purchased and similar services contracted between unrelated parties. The Regional Court thus erred in its consideration of the issue of the taxpayer’s burden of proof (Article 92(5)(d) of the Tax Code). Since the Regional Court, without giving any further reasons, merely followed the legal opinion of the Tax Directorate, thereby approving, inter alia, the unlawful procedure of the administrative authorities, its judgment is also unreviewable. By that defective procedure, the administrative court also infringed the applicant’s right to seek protection of her rights before an independent and impartial tribunal. In its written observations on the appeal, the Directorate of Appeal considers that the extraordinary appeal is unfounded. The judgment of the Regional Court is factually correct and not unreviewable. The objection that the Regional Court, like the administrative authorities, does not indicate which evidence shows that the appellant established a legal relationship with another person mainly for the purpose of reducing the tax base is entirely unfounded. Both the Regional Court and the administrative authorities have dealt with the question of otherwise connected persons and have duly established that fact. The complainant was at the end of the chain when it purchased advertising at 22 times the price charged by the first link in the chain, which provided the service at the normal price. Both the existence of this chain and the amounts invoiced in this chain were proven. The administrative authorities have thus met their burden of proof under Article 23(7) of the Income Tax Act and have established the objective situation, namely that the complainant was part of a chain of otherwise connected persons. The applicant therefore requests the Supreme Administrative Court to dismiss the appeal. Judgement of the Court The Court dismissed the appeal of EWE s.r.o. Excerpt “The Supreme Administrative Court notes that a person under section 23(7)(b)(5) of the Income Tax Act is any person who benefits from the actions of persons in a chain whose effect and purpose is predominantly to reduce the tax base or increase the tax loss (here, a 22-fold increase in the tax-effective expenditure). This does not change the complainant’s assumption that the Tax Directorate is obliged to prove the subjective aspect of such unfair conduct, i.e. her knowledge of such conduct (intent), i.e. that she entered into the contractual relationship with knowledge of a possible reduction in her tax base. The question of fault is relevant in criminal law, but not in the tax administration proceedings (tax law). Moreover, the fact that a possible expense originated with persons who are otherwise related does not in itself ...

Asset management Gmbh was a subsidiary of a Luxembourg investment fund management company. The German company paid substantial fees to a Luxembourg service company. Both companies in Luxembourg were wholly-owned by a Luxembourg holding company. Asset management Gmbh was obliged to follow the policies of the fund. These could only be revised by a two-thirds majority resolution of the investors. The German company argued that this restriction meant that its Luxembourg shareholder could not be forced to follow a common business policy with the service provider. Accordingly the two were not related parties within the meaning of the Foreign Tax Act and there was no requirement for it to furnish the extensive transfer pricing documentation in support of its transactions with associated enterprises as required by the Tax Management Act. In any case, the fact that these transfer pricing documentation requirements only applied to cross-border transactions was a restriction on the freedom to provide (receive) services and thus contrary to EU community law. The Supreme Tax Court rejected both contentions and declined bringing the case before the ECJ. The Court found no doubt as to the German transfer pricing documentation provisions. The Foreign Tax Act defines a related party relationship by shareholding at a capital share of more than one-quarter. There is no mention of voting rights or of restrictions on the right of a shareholder to act in respect of its investment. Other parts of the related party definition, such as a relationship by contract, complemented the shareholding criterion, but did not restrict it. Accordingly, an obligation not to set management policy for the German subsidiary against the wishes of the members of the fund did not eliminate a shareholding-based relationship. Even if such an obligation did exist, a breach would not invalidate the measure at issue; it would merely make the Luxembourg shareholder liable for damages. The court emphasised that the reason for the shareholding was also irrelevant; even if the shares were held in trust for the investors in the fund, the company remained the related party of the service provider and was subject to German transfer pricing documentation rules. The court agreed that the application of the transfer pricing documentation rules to foreign relationships was restricting the freedom to provide services. However, this restriction was justified by the need to protect the public revenue from abuses to the tax system. The court also pointed out that 26 of the 28 member states of the EU (Croatia and Cyprus being the exceptions) had introduced comparable rules into their own systems (though, it should be noted, not always exclusively in respect of foreign transactions) without apparent legal problems and that the European Commission had published its own summary explaining and supporting such schemes. Hence, transfer pricing documentation rules were to be regarded as generally acceptable. Click here for English translation Click here for other translation ...

According to the tax authorities, the prices agreed between the P.S. and her husband, as lessors, and Long Wave, s.r.o. (‘Long Wave’), as lessee, differed from the prices which would have been agreed between independent persons in normal commercial relations under the same or similar conditions. According to the tax authorities, P.S., together with her husband and Long Wave, are persons who have created a legal relationship mainly for the purpose of reducing the tax base. According to the appellant, P.S, the conditions laid down in the judgment of the Supreme Administrative Court of 31 March 2009, No 8 Afs 80/2007-105, were not met and the tax administrator’s procedure for determining the normal price was seriously flawed. Judgement of the Court The Supreme Administrative Court concluded that the appeal as a whole was unfounded and therefore dismissed it Excerpt “In the present case, the complainant was informed of the difference in the agreed prices and at the same time asked to explain or provide reliable evidence of the difference (notice of 27 February 2009, No 21645/09/228933601143). It responded to the tax authority’s doubts about the low rental price by submitting the above-mentioned medical report or by offering the testimony of the above-mentioned persons. However, these means of evidence do not prove the difference in prices (see above for their assessment) and the complainant did not offer any other relevant evidence in the evidentiary proceedings. The Supreme Administrative Court therefore concludes at this point that the complainant has failed to demonstrate to its satisfaction the reasonableness of the price difference established by the tax authorities. Lastly, the complaint that the complainant was deprived of its procedural rights in the hearing of the results of the tax audit pursuant to Section 16(8) of the Tax Administration Act must also be regarded as unfounded. As stated in the judgment of the Regional Court, it does not appear from the minutes of the oral hearing of 7 September 2010 that the tax administrator did not respond to the complainant’s objections and questions, or that he did not explain to her the reasons why he proceeded to apply Section 23(7) of the Income Tax Act. The Supreme Administrative Court agrees with that view and adds that the tax administrator dealt with the complainant’s objections in detail and recorded the individual statements and objections. It also communicated its views on them, as well as on the newly raised views, to the complainant. The mere fact that the complainant did not agree with the conclusions communicated to her cannot constitute a prejudice to her rights; nor can the infringement of the relevant provisions of the Tax Administration Act or the illegality of the tax administrator’s decision, alleged by the complainant, be inferred from that procedure for the termination of the tax audit. The Supreme Administrative Court did not find any fundamental errors in the procedure of the tax administrator or the Tax Directorate. The administrative authorities correctly applied Section 23(7)(b)(5) of the Income Tax Act to the sufficiently established facts, since it was established in the tax proceedings that the complainant was otherwise a person connected with the person to whom she provided the supply in the form of a lease, i.e. in an attempt, mainly for the purpose of reducing the tax base, she undervalued the supplies received in agreement with her business partner by negotiating rental prices outside the range of normal prices. Similar conclusions apply to that part of the 2006 tax year in which the complainant was to be regarded as a person linked by capital to Long Wave within the meaning of Article 23(7)(a)(2) of the Income Tax Act.” Click here for English Translation Click here for other translation ...

The subject-matter of the dispute was the exclusion of the rent for lease of machinery and equipment. It referred to the lease and sublease agreements for non-residential premises, machinery and equipment with the companies B.p., s.r.o. and M.-T., s.r.o., by which the parties agreed that the objects of the lease agreements would be used free of charge for a certain period of time – during the trial period. Bp s.r.o. disputed the use of transfer prices in accordance with the arm’s length principle and the question of the tenant’s payment behaviour. It argued economic aspects – the possibility of making a real profit over a longer period of time. According to the taxpayer the tax authority should have examined the possibility of obtaining a total profit for the taxpayer over a five-year period and not simply applied ‘the most ideal course of market economics (i.e. the business partners are always solvent and the market situation is optimal)’. It also supplemented the application with a profit forecast, from which it concluded that ‘from a long-term profitability point of view, it was therefore worthwhile to support the related parties during the transitional period’. According to the tax authorities, although the procedures and methods set out in the OECD Directive are not directly enshrined in domestic tax law (nor is there a direct reference to the OECD Directive), the binding nature of the OECD Directive in the interpretation of arm’s length under double taxation treaties derives from the Vienna Convention on the Law of Treaties, Article 31 of which contains rules of interpretation. In this respect, the OECD Directive is an interpretative document on double taxation treaties. Judgement of the Court The Court dismissed the appeal and decided in favour of the tax authorities. Excerpt “In addition to the above, the Supreme Administrative Court notes that the above-mentioned guidelines (Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations) are part of the OECD Declaration of 21 June 1976 on International Investment and Multinational Enterprises (available, for example, at www.oecd.org) , which is only a recommendation by governments to multinational companies; it is therefore not a legal regulation (soft law). With regard to the objection to the application of section 23(7) of the Income Tax Act, it should be noted that the complainant does not dispute that the rent is subject to that tax in accordance with sections 18(1) and 22(1)(e) and (g)(5) of the Income Tax Act, nor does it dispute the court’s conclusion that the parties were personally and economically linked, nor the notion of consideration in rental and sublease agreements. In other words, the complainant does not refute the legal conclusions of the court and the tax authorities, which formed the basis for the application of Article 23(7) of the Tax Code. of the Act. The conceptual features of the contracts concluded by the complainant are precisely the aforementioned consideration. Therefore, the dispute as to whether a ‘foreign’ entity would have been willing to conclude a contract on the same terms, including the argumentation of economic aspects, is inappropriate. Hypothetical circumstances (relating, moreover, to third parties), which have no direct connection with the grounds on which the Regional Court based its decision, cannot lead to the conclusion that the appeal is well-founded. The objection concerning the need to take account of the applicant’s costs of further renting of premises, machinery and equipment is not admissible under Article 104(4) of the Code of Civil Procedure, since the applicant did not raise it in the proceedings before the Regional Court whose decision is under review, nor does it claim that it could not have done so. Therefore, the Court could not deal with that objection. For the reasons set out above, the Supreme Administrative Court concludes that the complainant’s cassation complaint is unfounded and therefore dismisses it…” Click here for English Translation Click here for other translation ...