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

54. Shuyona is the parent company of an MNE group. Shuyona is organised in and operates exclusively in Country X. The Shuyona group is involved in the production and sale of consumer goods. In order to maintain and, if possible, improve its market position, ongoing research is carried out by the Shuyona group to improve existing products and develop new products. The Shuyona group maintains two R&D centres, one operated by Shuyona in country X, and the other operated by Company S, a subsidiary of Shuyona, operating in country Y. The relationships between the Shuyona R&D centre and the Company S R&D centre are as described in Example 14. 55. In Year 1, Shuyona sells all rights to patents and other technology related intangibles, including rights to use those intangibles in ongoing research, to a new subsidiary, Company T, organised in country Z. Company T establishes a manufacturing facility in country Z and begins to supply products to members of the Shuyona group around the world. For purposes of this example, it is assumed that the compensation paid by Company T in exchange for the transferred patents and related intangibles is based on a valuation of anticipated future cash flows generated by the transferred intangibles at the time of the transfer. 56. At the same time as the transfer of patents and other technology related intangibles, Company T enters into a contract research agreement with Shuyona and a separate contract research agreement with Company S. Pursuant to these agreements, Company T contractually agrees to bear the financial risk associated with possible failure of future R&D projects, agrees to assume the cost of all future R&D activity, and agrees to pay Shuyona and Company S a service fee based on the cost of the R&D activities undertaken plus a mark-up equivalent to the profit mark-up over cost earned by certain identified independent companies engaged in providing research services. 57. Company T has no technical personnel capable of conducting or supervising the research activities. Shuyona continues to develop and design the R&D programme related to further development of the transferred intangibles, to establish its own R&D budgets, to determine its own levels of R&D staffing, and to make decisions regarding whether to pursue or terminate particular R&D projects. Moreover, Shuyona continues to supervise and control the R&D activities in Company S in the manner described in Example 14. 58. The transfer pricing analysis begins by identifying the commercial or financial relations between the parties and the conditions and economically relevant circumstances attaching to those relations in order that the controlled transaction is accurately delineated under the principles of Chapter I, Section D. 1. Key assumptions in this example are that Company T functions as a manufacturer and performs no activities in relation to the acquisition, development or exploitation of the intangibles and does not control risks in relation to the acquisition of the intangibles or to their further development. Instead, all development activities and risk management functions relating to the intangibles are performed by Shuyona and Company S, with Shuyona controlling the risk. A thorough examination of the transaction indicates that it should accurately be delineated as the provision of financing by Company T equating to the costs of the acquired intangibles and the ongoing development. A key assumption in this example is that, although Company T contractually assumes the financial risk and has the financial capacity to assume that risk, it does not exercise control over that risk in accordance with the principles outlined in paragraphs 6.63 and 6.64. As a result, in addition to its manufacturing reward, Company T is entitled to no more than a risk-free return for its funding activities. (For further guidance see Section D. 1 of Chapter I, and in particular paragraph 1.103.) ...

When, under accurate delineation, the lender is not exercising control over the risks associated to an advance of funds, or does not have the financial capacity to assume the risks, such risks should be allocated to the enterprise exercising control and having the financial capacity to assume the risk (see paragraph 1.98 of Chapter I). For instance, consider a situation where Company A advances funds to Company B. Consider further that the accurate delineation of the actual transaction indicates that Company A does not exercise control functions related to the advance of funds but that Company P, the parent company of the MNE group, is exercising control over those risks, and has the financial capacity to assume such risks. Under Chapter I analysis, Company P will bear the consequences of the playing out of such risks and Company A will be entitled to no more than a risk-free return (see Section D.1.2.1 in Chapter I) ...

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

When, under accurate delineation, the lender is not exercising control over the risks associated to an advance of funds, or does not have the financial capacity to assume the risks, such risks should be allocated to the enterprise exercising control and having the financial capacity to assume the risk (see paragraph 1.98 of Chapter I). For instance, consider a situation where Company A advances funds to Company B. Consider further that the accurate delineation of the actual transaction indicates that Company A does not exercise control functions related to the advance of funds but that Company P, the parent company of the MNE group, is exercising control over those risks, and has the financial capacity to assume such risks. Under Chapter I analysis, Company P will bear the consequences of the playing out of such risks and Company A will be entitled to no more than a risk-free return (see Section D.1.2.1 in Chapter I) ...

54. Shuyona is the parent company of an MNE group. Shuyona is organised in and operates exclusively in Country X. The Shuyona group is involved in the production and sale of consumer goods. In order to maintain and, if possible, improve its market position, ongoing research is carried out by the Shuyona group to improve existing products and develop new products. The Shuyona group maintains two R&D centres, one operated by Shuyona in country X, and the other operated by Company S, a subsidiary of Shuyona, operating in country Y. The relationships between the Shuyona R&D centre and the Company S R&D centre are as described in Example 14. 55. In Year 1, Shuyona sells all rights to patents and other technology related intangibles, including rights to use those intangibles in ongoing research, to a new subsidiary, Company T, organised in country Z. Company T establishes a manufacturing facility in country Z and begins to supply products to members of the Shuyona group around the world. For purposes of this example, it is assumed that the compensation paid by Company T in exchange for the transferred patents and related intangibles is based on a valuation of anticipated future cash flows generated by the transferred intangibles at the time of the transfer. 56. At the same time as the transfer of patents and other technology related intangibles, Company T enters into a contract research agreement with Shuyona and a separate contract research agreement with Company S. Pursuant to these agreements, Company T contractually agrees to bear the financial risk associated with possible failure of future R&D projects, agrees to assume the cost of all future R&D activity, and agrees to pay Shuyona and Company S a service fee based on the cost of the R&D activities undertaken plus a mark-up equivalent to the profit mark-up over cost earned by certain identified independent companies engaged in providing research services. 57. Company T has no technical personnel capable of conducting or supervising the research activities. Shuyona continues to develop and design the R&D programme related to further development of the transferred intangibles, to establish its own R&D budgets, to determine its own levels of R&D staffing, and to make decisions regarding whether to pursue or terminate particular R&D projects. Moreover, Shuyona continues to supervise and control the R&D activities in Company S in the manner described in Example 14. 58. The transfer pricing analysis begins by identifying the commercial or financial relations between the parties and the conditions and economically relevant circumstances attaching to those relations in order that the controlled transaction is accurately delineated under the principles of Chapter I, Section D. 1. Key assumptions in this example are that Company T functions as a manufacturer and performs no activities in relation to the acquisition, development or exploitation of the intangibles and does not control risks in relation to the acquisition of the intangibles or to their further development. Instead, all development activities and risk management functions relating to the intangibles are performed by Shuyona and Company S, with Shuyona controlling the risk. A thorough examination of the transaction indicates that it should accurately be delineated as the provision of financing by Company T equating to the costs of the acquired intangibles and the ongoing development. A key assumption in this example is that, although Company T contractually assumes the financial risk and has the financial capacity to assume that risk, it does not exercise control over that risk in accordance with the principles outlined in paragraphs 6.63 and 6.64. As a result, in addition to its manufacturing reward, Company T is entitled to no more than a risk-free return for its funding activities. (For further guidance see Section D. 1 of Chapter I, and in particular paragraph 1.103.) ...

The application of the WEV (waarde in het economische verkeer) rule is particularly relevant if the non-corporate loan is interest-free or the agreed interest is owed. The interest to be taken into account for tax purposes is then determined on the market value of each interest period at the time it falls due. The assessment of the business nature of the money supply can take place both at the time of supply and during the term. This test must be carried out on both sides, from the perspective of the lending and borrowing company. Referring to what has been said above with regard to the perspective of the entities involved, a situation of an affiliated lender granting a loan to the borrowing group entity that subsequently is insufficiently creditworthy may also constitute a ‘non-business loan’ in the approach of the aforementioned judgment. In my opinion, the same applies to the borrower who, as a result of the linked intra-group loan, sees his creditworthiness drop to a level below BBB-. The Supreme Court considered that the level of interest on a ‘non-bankrupt loan’, a loan with a non-bankrupt default risk, should be determined by reference to the creditworthiness of the lending entity. The Supreme Court did not explain in its judgment how to deal with the creditworthiness of the lending group entity compared to the creditworthiness of the borrowing entity. In case of a higher creditworthiness of the lender compared to the creditworthiness of the borrowing entity, the interest rate that would be charged by the lending group entity itself will be considered as the appropriate interest rate to be taken into account for tax purposes. If the lending group entity does not have a better credit rating than the borrowing group entity, i.e. if it is not itself investment grade, the notional guarantee does not, in principle, add anything. In that case, no more than the risk-free interest rate on the loan can be taken into account. English translation of the opinion issued by the Attorney General – I recommend that the appeal in cassation is declared to be unfounded Judgement of the Supreme Court The Supreme court decided against the opinion of the Attorney General and concluded that the appeal of X B.V was well founded. Click here for English translation Click here for other translation ...