G.K. Ktf was a subsidiary of a company registered in the United Kingdom. On 29 December 2010 G.K. Ktf entered into a loan agreement with a Dutch affiliate, G.B. BV, under which G.B. BV, as lender, granted a subordinated unsecured loan of HUF 3 billion to G.K. Ktf. Interest was set at a fixed annual rate of 11.32%, but interest was only payable when G.K. Ktf earned a ‘net income’ from its activities. The maturity date of the loan was 2060. The loan was used by G.K. Ktf to repay a debt under a loan agreement concluded with a Dutch bank in 2006. The bank loan was repaid in 2017/2018. The interest paid by G.K. Ktf under the contract was deducted as an expense of HUF 347,146,667 in 2011 and HUF 345,260,000 in 2012. But, in accordance with Dutch tax law – the so called participation exemption – G.B BV did not include the interest as taxable income in its tax return. The tax authorities carried out an audit for FY 2011-2012 and by decision of 17 January 2018 an assessment was issued. According to the assessment G.K. Ktf had underpaid taxes in an amount of HUF 88,014,000. A penalty of HUF 43,419,000 and a late payment penalty of HUF 5,979,000 had been added. According to the tax authorities, a contract concluded by a member of a group of companies for a term of more than 50 years, with an interest payment condition other than that of a normal loan and without capitalisation of interest in the event of default, does not constitute a loan but a capital contribution for tax purposes. This is indicated by the fact that it is subordinated to all other creditors, that the payment of interest is conditional on the debtor’s business performance and that no security is required. The Dutch tax authorities have confirmed that in the Netherlands the transaction is an informal capital injection and that the interest paid to the lender is tax exempt income under the ‘participation exemption’. Hence the interest paid cannot be deducted from the tax base. The parties intended the transaction to achieve a tax advantage. Not agreeing with the decision G.K. Ktf took the case to court. The Court of first instance upheld the decision of the tax authorities. The case was then appealed to the Court of Appeal which resulted in the case being remanded to the court of first instance for reconsideration. After reconsidering the case, a new decision was issued in 2019 where the disallowed deduction of interest was upheld with reference to TPG 1995 para. 1.64, 1.65 and 1.66. The Court of first instance also found that the interest rate on the loan from BV was several times higher than the arm’s length interest rate. G.K Ktf then filed a new appeal with the Court of appeal. Judgement of the Court of Appeal. The Court held that the contested part of the tax authority’s decision and the final judgment of the court of first instance were unlawful and decided in favor of G.K. Ktf. For the years in question, legislation allowing for recharacterisation had still not been enacted in Hungary, and the conditions for applying the “abuse of rights” provision that was in force, was not established by the tax authorities. Click here for English translation Click here for other translation ...

“Shipping Investor Cyprus” was a limited liability company domiciled in Cyprus. In the financial years 2010 and 2011 it received interest income from convertible bonds subject to German withholding tax. “Shipping Investor Cyprus” had no substance itself, but an associated company, also domiciled in Cyprus, had both offices and employees. The dispute was whether “Shipping Investor Cyprus” was entitled to a refund of the German withholding tax and whether this should be determined under the old or the new version of Section 50d(3) of the German Income Tax Act (EStG). The court of first instance concluded that “Shipping Investor Cyprus” claim for a refund was admissible because the old version of the provisions in Section 50d (3) EStG was contrary to European law. The tax authorities appealed this decision. Judgement of the National Tax Court The National Tax Court found that a general reference to the economic activity of another group company in the country of residence of the recipient of the payment was not sufficient to satisfy the substance requirement. According to the court, the lower court had not sufficiently examined whether the substance requirements of Section 50d (3) EStG – in its new version – were met. On this basis, the case was referred back to the lower court for a new hearing. Click here for English translation Click here for other translation ...

Nidera S.A. exported commodities (cereals, oilseeds etc.) via group traders domiciled on the British Virgin Islands. In the absence of evidence to the contrary, in transactions involving entities domiciled in low-tax jurisdictions, it was presumed that prices had not been agreed in accordance with the arm’s length principle. The tax authorities issued an adjustment by applying the “CUP” method (Sixth method), considering the statistical average prices set as a reference value by the National Secretariat of Agriculture, Livestock and Fisheries, corresponding to the date of shipment (and not to the date of agreement as claimed by the claimant). However adjustments were only made to those transactions where the quoted price was higher than the one agreed by Nidera S.A. An appeal was filed with the National Court by Nidera S.A. In 2016 the National Court of Appeals issud ist decision in the case. The decision was in favour of Nidera S.A. in regards to the approach of the tax authorities were only the unfavorable pricing were being adjusted whereas the favorable pricing were not, and referred the case back to the lower court. In all other regards the appeal of Nidera was dismissed and the assessment upheld. Both the tax authorities and Nidera S.A filed an appeal against this decision. Nidera complained about the incorrect use of the “comparable uncontrolled price” method, as it considers that this only allows a comparison between controlled and uncontrolled “agreement” prices, but not the use the prices at the date of “shipment”, as the Treasury did. The tax authorities appealed the part of the judgment under appeal which revoked the ex officio assessment on the grounds that it was unreasonable that, in order to calculate Nidera’s income tax for the 2001 tax period, the tax authority had adopted as valid the “comparable uncontrolled” price only in those transactions in which it was higher than the “agreed” price, whereas it did not do so when it was lower than the price declared by the exporter.” Judgement of the Supreme Court The Supreme Court decided in favour of the tax authorities and amended the 2016 decision National Court of Appeals. The court considers that the tax authorities’ adjustment-criterion does not appear to be contrary to the system adopted by Law 25.063, which is intended to challenge transfer prices only when they are lower than those obtained in “normal market practices between independent parties”, in order to safeguard the integrity of Argentine source income. On the contrary, it is clear that when the price of the transaction declared by the exporter is higher than the price agreed in normal market practices between independent parties, the Tax Authorities should not object, since the Argentine source income is not, in that case, compromised. This does not imply granting retroactive validity to the provisions of Law 25.784, but rather a logical application of the mechanism established by the legislator when enacting Law 25.063 to challenge transfer prices in order to protect, as stated above, the integrity of Argentine source income. Click here for English Translation Click here for other translation ...

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

At issue in the case of India vs. Engineering Analysis Centre of Excellence Private Limited, was whether payments for purchase of computer software to foreign suppliers or manufacturers could be characterised as royalty payments. The Supreme Court held that such payments could not be considered payments for use of the underlying copyrights/intangibles. Hence, no withholding tax would apply to these payments for the years prior to the 2012. Furthermore, the 2012 amendment to the royalty definition in the Indian tax law could not be applied retroactively, and even after 2012, the definition of royalty in Double Tax Treaties would still override the definition in Indian tax law. Excerpt from the conclusion of the Supreme Court “Given the definition of royalties contained in Article 12 of the DTAAs mentioned in paragraph 41 of this judgment , it is clear that there is no obligation on the persons mentioned in section 195 of the Income Tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright. The provisions contained in the Income Tax Act (section 9(1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases. Our answer to the question posed before us, is that the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act. The answer to this question will apply to all four categories of cases enumerated by us in paragraph 4 of this judgment.” ...

Whether the rule applicable to the specific situation had to be in force at the time the taxable event – in this case to the sales of the land, which were made during 2008 , 2009, 2010 and 2011, The time when the former Article 17 No. 8 of the Income Tax Law was in force – or at the later time when the tax assessment was being carried out, according to Article 64 of the Tax Code, when the rule modified by Law 20 was in force. Only once the tax authorities exercised the power to assess under Article 64 of the Tax Code, and determined that the sale was made at a value significantly higher than the commercial value of properties with similar characteristics and locations in the respective locality, was the right of the authority to collect the taxes established by the same provision born”. (Supreme Court, paragraph 7). “That, consequently, the rate of 35% should be applied to the amounts determined by virtue of the provisions of Article 64 of the Tax Code -as occurred in this case-, in accordance with Law No. 20,630, which, given its time of entry into force, governed the facts of the settlements known in these proceedings.(Supreme Court, paragraph 8). “That from the above reasoning, it can be concluded that the appealed judgment has not incurred in the errors of law attributed to it by the arbitration, which, therefore, must be dismissed. (Supreme Court, ninth recital). Click here for English translation ...

The Spanish Tax administration made an income adjustment of Citresa (a Spanish subsidiary of the Schweeps Group) Corporate Income Tax for FY 2003, 2004, 2005 and 2006, resulting in a tax liability of €38.6 millon. Citresa entered into a franchise agreement and a contract manufacturing agreement with Schweppes International Limited (a related party resident in the Netherlands). The transactions between the related parties were not found to be in accordance with the arm’s length principle. In the parent company, CITRESA, the taxable income declared for the years 2003 to 2005 was increased as a result of an adjustment of market prices relating to the supply of certain fruit and other components by Citresa to Schweppes International Limited. In the subsidiary, SCHWEPPES, S.A. (SSA), the taxable income declared for the years 2003 to 2006 was increased as a result of adjustment of market prices relating to the supply of concentrates and extracts by the entity Schweppes International Limited, resident in Holland, to SSA. The taxpayer had used the CUP method to verify the arm’s length nature of the transaction while the Spanish Tax administration – due to lack of comparable transactions – found it more appropriate to use the transactional net margin method (TNMM). Prior to 1 December 2006, the Spanish Corporate Income Tax Act (CIT) established three methods of pricing related transactions (the “Comparable Uncontrolled Price Method”, the “Cost Plus Method” and the “Resale Price Method”) and if none were applicable it established the application of the “Transactional Profit Split Method”. Thus, the “Transactional Net Margin Method” was not included at the time the market value of related transactions was established. However, as the Tax Treaty between Spain and the Netherlands was applicable, the Spanish Tax Authorities considered that the OECD Transfer Pricing Guidelines could be directly applicable. Consequently, as the “Transactional Net Margin Method” was envisaged in the above-mentioned Guidelines, the Spanish Tax Authorities understood that this method could be used as a valid pricing method. The case ended up in Court where Citresa argued that the assessment was in breach of EU rules on freedom of establishment and that the TNM method had been applied by the authorities without any legal basis in Spain for the years in question. Judgement of the Court In regards to the claimed violation of the principle of freedom of establishment cf. TFEU article 49, the Court stated: “….the mere purposes of argument, that there can be no doubt as to the conformity with European Union Law of the regime of related-party transactions in Spain, in the terms in which this infringement is proposed to us, which is what is strictly speaking being postulated in cassation for the first time, it being sufficient to support this assertion to record some elementary considerations, such as that the censure is projected indiscriminately on the whole of the law (that is to say, on the legal regime of related-party transactions), which is to say, on the legal regime of related-party transactions, on the legal regime of related-party transactions regulated by Article 16 of Law 43/1995, of 27 December 1995, on Corporate Income Tax, and then Article 16 of Royal Legislative Decree 4/2004, of 5 March 2004, which approves the revised text of the Law on Corporate Income Tax – TRLIS), while, at the same time and in open contradiction, it advocates the application of the precept to resolve the case, thus starting from its compliance with European Union Law.” In regards to application of the transactional net margin method, the Court stated: “…tax years cover the period from January 2003 to February 2006. Article 16.3 of Law 43/1995, in the wording applicable to the case, and the same provision of the TRLIS, in its original version, established the following: “In order to determine the normal market value, the tax authorities shall apply the following methods: Market price of the good or service in question or of others of similar characteristics, making, in this case, the necessary corrections to obtain equivalence, as well as to consider the particularities of the transaction. The following shall be applicable on a supplementary basis: The sale price of goods and services calculated by increasing the acquisition value or production cost of the goods and services by the margin normally obtained by the taxable person in comparable transactions entered into with independent persons or entities or by the margin normally obtained by companies operating in the same sector in comparable transactions entered into with independent persons or entities. Resale price of goods and services established by the purchaser, reduced by the margin normally obtained by the aforementioned purchaser in comparable transactions arranged with independent persons or entities or by the margin normally obtained by companies operating in the same sector in comparable transactions arranged with independent persons or entities, considering, where applicable, the costs incurred by the aforementioned purchaser in order to transform the aforementioned goods and services. Where none of the above methods are applicable, the price derived from the distribution of the joint result of the transaction in question shall be applied, taking into account the risks assumed, the assets involved and the functions performed by the related parties”. This hierarchical list exhausts the possible methods available to the administration for establishing the market value of the transactions to which it has been applied. It consists of four methods: one of them, which we can call direct or primary, that of the market price of the good or service in question (art. 16.3.a) LIS); two others that the law itself declares to be supplementary, that of the increase in acquisition value and that of the resale price (art. 16.3.b) of the legal text itself); and finally, as a residual or supplementary second degree method, that of the distribution of the joint result of the operation in question (art. 16.3.c) LIS). These obviously do not include the valuation method used by the tax inspectorate in this case, that of the net margin of all transactions, introduced ex novo by Law 36/2006, of 29 November, on measures for the ...

Nidera S.A. exported commodities (cereals, oilseeds etc.) via group traders domiciled on the British Virgin Islands. In the absence of evidence to the contrary, in transactions involving entities domiciled in low-tax jurisdictions, it was presumed that prices had not been agreed in accordance with the arm’s length principle. The tax authorities issued an adjustment by applying the “CUP” method (Sixth method), considering the statistical average prices set as a reference value by the National Secretariat of Agriculture, Livestock and Fisheries, corresponding to the date of shipment (and not to the date of agreement as claimed by the claimant). However adjustments were only made to those transactions where the quoted price was higher than the one agreed by Nidera S.A. Judgement of the Court The Supreme Court accepted Nidera S.A.’s appeal in regards to the approach of the tax authorities were only the unfavorable pricing were being adjusted whereas the favorable pricing were not, and referred the case back to the lower court. In all other regards the appeal of Nidera was dismissed and the assessment upheld. Click here for English Translation ...