An assessment was issued for FY 2017, whereby additional income tax was imposed on “GSS Ltd” in the amount of 843.344,38 €, plus a fine of 421.672,19 €, i.e. a total amount of 1.265.016,57 €. Various adjustments had been made and among them interest rates on intra group loans, royalty payments, management fees, and losses related to disposal of shares. Not satisfied with the assessment, an appeal was filed by “GSS Ltd.” Judgement of the Tax Court The court dismissed the appeal of “GSS Ltd.” and upheld the assessment of the tax authorities Excerpts “Because only a few days after the entry of the holdings in its books, it sold them at a price below the nominal value of the companies’ shares, which lacks commercial substance and is not consistent with normal business behaviour. Since it is hereby held that, by means of the specific transactions, the applicant indirectly wrote off its unsecured claims without having previously taken appropriate steps to ensure its right to recover them, in accordance with the provisions of para. 4 of Article 26 of Law 4172/2013 and POL 1056/2015. Because even if the specific actions were suggested by the lending bank Eurobank, the applicant remains an independent entity, responsible for its actions vis-à-vis the Tax Administration. In the absence of that arrangement, that is to say, in the event that the applicant directly recognised a loss from the write-off of bad debts, it would not be tax deductible, since the appropriate steps had not been taken to ensure the right to recover them. Because on the basis of the above, the audit correctly did not recognise the loss on sale of shareholdings in question. The applicant’s claim is therefore rejected as unfounded.” “Since, as is apparent from the Audit Opinion Report on the present appeal to our Office, the audit examined the existence or otherwise of comparable internal data and, in particular, examined in detail all the loan agreements submitted by the applicant, which showed that the interest rates charged to the applicant by the banks could not constitute appropriate internal comparative data for the purpose of substantiating the respective intra-group transactions, since the two individual stages of lending differ as to the nature of the transactions. (a) the existence of contracts (the bank loans were obtained on the basis of lengthy contracts, unlike the loans provided by the applicant for which no documents were drawn up, approved by the Board of Directors or general meetings), (b) the duration of the credit (bank loans specify precisely the time and the repayment instalments, unlike the applicant’s loans which were granted without a specific repayment schedule), (c) the interest rate (bank loans specify precisely the interest rate on the loan and all cases where it changes, unlike the applicant’s loans, (d) the existence of collateral (the bank loans were granted with mortgages on all the company’s real estate, with rental assignment contracts in the case of leasing and with assignment contracts for receivables from foreign customers (agencies), unlike the applicant’s loans which were granted without any collateral), (e) the size of the lending (the loans under comparison do not involve similar funds), (f) security conditions in the event of non-payment (the bank loans specified precisely the measures to be taken in the event of non-payment, unlike the applicant’s loans, for which nothing at all was specified), (g) the creditworthiness of the borrower (the banks lent to the applicant, which had a turnover, profits and real estate, unlike the related companies, most of which had no turnover, high losses and negative equity), (h) the purpose of the loan (83 % of the applicant’s total lending was granted to cover long-term investment projects as opposed to loans to related parties which were granted for cash facilities and working capital). Since, in the event that the applicant’s affiliated companies had made a short-term loan from an entity other than the applicant (unaffiliated), then the interest rate for loans to non-financial undertakings is deemed to be a reasonable interest rate for loans on mutual accounts, as stated in the statistical bulletin of the Bank of Greece for the nearest period of time before the date of the loan (www.bankofgreece.gr/ekdoseis-ereyna/ekdoseis/anazhthsh- ekdosewn?types=9e8736f4-8146-4dbb-8c07-d73d3f49cdf0). Because the work of this audit is considered to be well documented and fully justified. Therefore, the applicant’s claim is rejected as unfounded.” Click here for English translation Click here for other translation Greece 4450-2021 ...

In 2007, the majority of the shares in the company Villa d’Este S.p.A. (53% of the capital) was held by a Luxembourg company Regina S.A. of which Felofin S.p.A. was a shareholder. Three “families” each held 29.41% of Regina S.A, for a total of 88.23% (while the remaining 11.77% was held by three other minority shareholders), and they also held direct stakes in the capital of Villa d’Este S.p.A. (Felofin S.p.A., in particular, held 5.09% of the shares in Villa d’Este S.p.A.). In 2007, Felofin S.p.A. sold its 5.09% stake in Villa D’Este S.p.A. to Finanziaria Lago S.p.A. for a total of 303,369 shares and a consideration of Euro 8,565,000.00, i.e. at the price of € 28.23 per share. On the same date, Regina S.A. sold the majority shareholding (53%) in Villa d’Este S.p.A. to Finanziaria Lago S.p.A (holding company of the Fontana family, which in the meantime had left the shareholding structure of Regina S.A.). The sale of the shareholding provided for the payment of € 240,000,000.00 (price per share equal to € 76.26). In 2012, the tax authorities determined that the capital gain in Felofin S.p.A. from sale of the shares in Villa d’Este S.p.A in FY 2007 should have been € 9,781,785.00 higher and issued an assessment. The additional capital gain had been calculated based on a “normal value” of the shareholding which, according to the Office, would have been € 61.00 per share. The “normal value” of €61.00 per share had been obtained by reducing the price agreed (€76.26) by Regina S.A. by a percentage equal to 25% which, according to the tax authorities, would usually be recognised as a “majority premium” for shareholders who transfer a controlling stake. Felofin S.p.A. appealed against this tax assessment to the Varese Provincial Tax Commission, requesting its annulment. The Tax Commission of the Province of Varese upheld the appeal and cancelled the notice of assessment. This decision was then appealed to the Regional Tax Commission by the tax authorities The Regional Tax Commission upheld the appeal filed by the Tax authorities and set aside the decision of the Provincial Tax Commission. The Court stated that it appeared “improbable and uneconomic that Felofin S.p.A. could sell its shareholding to Finanziaria Lago S.p.A. at the price of Euro 28.23 per share, i.e. at a price three times lower (Euro 48.03) than the price agreed on the same day by Regina S.A. of Euro 76.26. Such sale cannot appear to represent a “normal value”, given that, contrary to what was held by the first judges, the company Felofin S.p.A., with the exit from the shareholding of Regina S.A., held 41.67% and not 29.41% in Villa d’Este S.p.A. This decision was then appealed to the High court by Felofin S.p.A. Judgement of the High Court The Court upheld the decision of the Regional Tax Commission and dismisses the appeal of Felofin S.p.A. Excerpt “In the present case, as we have seen, the appellate court held that the Revenue Agency’s analytical assessment was legitimately founded, in light of the significant difference in the price of the shares sold to the financial company Lago S.p.A., which was excessive considering that the appellant, at the time of the sale to the finance company of the portion of shares it held directly in Villa D’Este S.p.A., did not have to pay, like any other minority shareholder, the price imposed by Finanziaria Lago S.p.A..” The judgement on the uneconomic nature of the sale and the correctness of the value attributed to the shares sold is also left exclusively to the judge of merit, except for the examination of the failure to examine a decisive fact, which is the subject of discussion between the parties, pursuant to Article 360, first paragraph, no. 5, of the Code of Civil Procedure.” “The fourth plea in law, alleging failure to state reasons on account of failure to examine decisive facts, which were the subject of discussion between the parties, and incorrect assessment of the relevant documents, is likewise inadmissible. In fact, “the complaint for failure to state reasons with regard to the use or non-use of presumptive reasoning cannot be limited to affirming a different belief from that expressed by the judge of merit, but must bring out the absolute illogicality and inconsistency of the decisive reasoning, it being excluded that the mere failure to assess a circumstantial element can give rise to the fault of failure to examine a decisive point” (Cass. Ord. no. 5279 of 2020). In the present case, therefore, the plea is inadmissible, since the appellant complains of the failure to examine circumstantial evidence, such as the strained relations within the corporate structure, the advantageousness of the sale in relation to the original purchase price of the shares and the non-applicability of the Pex regime to the sale of the direct minority shareholding only, considered by the appellate court to be recessive in comparison with the evidence put forward by the office as the basis for the assessment and, in any event, lacking adequate proof.” Click here for English translation Click here for other translation ITA 20211123 ...

Key End Es Energy concluded a share purchase and sale agreement of 20.12.2012 with a related party LUKERG BULGARIA GmbH, under which KEY END EU ENERGY transferred to its parent company LUKERG BULGARIA GmbH the ownership of the shares in eight subsidiaries. The subsidiaries owned a total of 15 wind turbines for the production of electricity and operated them on the Bulgarian energy market. According to the Purchase and Sale Agreement the price of the shares were BGN 20 935 937,75. Following an audit of the transaction the tax authorities issued an assessment of additional taxable income for FY 2012 related to the sale of shares. According to the authorities the arm´s length value of the shares were BGN 38 609 215,00. This value was determined based on a CUP/CUT method. As support/sanity check for the valuation the DCF method and the DuPont Analysis was also applied. The additional value was added to the taxable income of Key End Es Energy. A complaint was filed by Key End Es Energy with the Administrative court where, by decision No. 5477 of 09.09.2019, the assessment was annulled. The tax authorities then filed appel with the Supreme Administrative Court. In the appeal the tax authorities argued that the court erred in ignoring the valuation of the independent valuer, Raiffeisen Investment AG, on which the transaction was based and erred in holding that the agreed price was a market price. Further, it is submitted that the court erred in holding that the market price of the controlled sale and purchase transaction dated 20.12.2012 was as set out in the 2013 Share Transfer Pricing Documentation prepared by KPMG Bulgaria after the 20.12.2012 transaction. It also contested the court’s conclusions that the expert prepared in the course of the audit only formally used the CUP/CUT method, while in reality it used the discounted cash flow method, which was not provided for in Regulation No. N-9 of 14.08.2006. In view of the tax authorities, the priority should not be the formal application of the transfer pricing methods in Regulation N-9/2006, but instead arriving at actual values by means of the mechanisms of the various methods. Judgement of the Supreme Administrative Court The Supreme Administrative Court set aside the decision of the Administrative Court and remanded the case to another panel of the court of first instance for reconsideration. Excerpt “Since the burden of proving the substantive grounds for the issuance of the RA rests with the revenue administration, in the presence of a material difference between the conclusions of the valuation experts appointed in the course of the audit and the court proceedings, the defendant in the first instance proceedings has requested by an application filed in open court on 21.02.2018 the appointment of a valuation expert, which, having familiarized itself with all the evidence in the case, to give a conclusion under item 13 of the application in three options for the market. By admitting only the appellant’s questions and refusing to admit the questions formulated by the respondent in the proceedings at first instance to the appointed expert examination by order of 18.04.2018, the court violated a fundamental principle under Article 8(1) of the APC – the arm’s length principle and at the same time limited the right of the respondent to engage evidence in support of the thesis it defends. The infringement constitutes a material breach of the rules of court procedure and a ground for cassation under Article 209(3) of the Code of Civil Procedure and, in so far as the dispute has not been clarified from the factual point of view, the case must be referred back to another formation of the court of first instance. In the new hearing, the court should appoint a expert, which independently, using one of the applicable rules under Regulation No H-9 of 14.08.2006. The court should, in accordance with the provisions of Article N-9 of the Law on the procedure and methods for the application of methods for determining market prices, derive the market value of the shares of the eight subsidiaries owned by the audited entity, the subject of the sale both under the transaction of 20.12.2012 between related parties and as part of the subject of the sale under the transaction of 14.06.2012 concluded between unrelated parties.” Click here for English Translation Click here for other translation ulgarie vs KEY END ES ENERGY April 2020 SAC case no 4972 ...

The Supreme Tax Court has held that the costs incurred by a taxpayer in connection with a tax treaty mutual agreement proceeding are not costs of earning the relevant income, but has left open a possible deduction as “unusual expenses”. A US resident realised a gain on the sale of a share in a GmbH. The German tax office sought to tax the gain, but the taxpayer objected on the grounds that it was taxable in the US under the double tax treaty. This tax office did not accept this objection, so a mutual agreement proceeding was initiated in an effort to clear the issue. Ultimately, the two competent authorities agreed to split the taxing right in the ratio 60:40 in favour of Germany. However, the taxpayer had incurred various consultancy and legal costs in the course of the process and these should, he claimed, be deducted from the taxable gain, as they would not have arisen without it. The tax office refused this, too. The Supreme Tax Court held that the costs at issue were not direct costs of making the capital gain. They were incurred in the course of resolving a dispute over the right to tax it and thus did not arise until after it had been made. Admittedly, without the gain, they would not have been incurred at all, although this connection was too remote to allow classification as direct costs. The court explicitly left the question open as to whether they might have been allowable against total income as “unusual expenses”, as that deduction is only available to German residents. Click here for English translation Click here for other translation Germany-vs-Corp-October-2013-BUNDESFINANZHOF-Urteil-vom-9-IX-r-25-12 ...

The first rulings where the IRS proposed recharacterizing transactions that could be considered abusive through use of transfer pricing provisions. Judgement of the Supreme Court The court instead applied the general anti-abuse doctrine. “It is earnestly contended on behalf of the taxpayer that, since every element required by the foregoing subdivision (B) is to be found in what was done, a statutory reorganization was effected, and that the motive of the taxpayer thereby to escape payment of a tax will not alter the result or make unlawful what the statute allows. It is quite true that, if a reorganization in reality was effected within the meaning of subdivision (B), the ulterior purpose mentioned will be disregarded. The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted. United States v. Isham, 17 Wall. 496, 84 U. S. 506; Superior Oil Co. v. Mississippi, 280 U. S. 390, 280 U. S. 395-396; Jones v. Helvering, 63 App.D.C. 204, 71 F.2d 214, 217. But the question for determination is whether what was done, apart from the tax motive, was the thing which the statute intended. The reasoning of the court below in justification of a negative answer leaves little to be said. When subdivision (B) speaks of a transfer of assets by one corporation to another, it means a transfer made “in pursuance of a plan of reorganization” [§ 112(g)] of corporate business, and not a transfer of assets by one corporation to another in pursuance of a plan having no relation to the business of either, as plainly is the case here. Putting aside, then, the question of motive in respect of taxation altogether, and fixing the character of the proceeding by what actually occurred, what do we find? Simply an operation having no business or corporate purpose — a mere device which put on the form of a corporate reorganization as a disguise for concealing its real character, and the sole object and accomplishment of which was the consummation of a preconceived plan, not to reorganize a business or any part of a business, but to transfer a parcel of corporate shares to the petitioner. No doubt, a new and valid corporation was created. But that corporation was nothing more than a contrivance to the end last described. It was brought into existence for no other purpose; it performed, as it was intended from the beginning it should perform, no other function. When that limited function had been exercised, it immediately was put to death. In these circumstances, the facts speak for themselves, and are susceptible of but one interpretation. The whole undertaking, though conducted according to the terms of subdivision (B), was in fact an elaborate and devious form of conveyance masquerading as a corporate reorganization, and nothing else. The rule which excludes from consideration the motive of tax avoidance is not pertinent to the situation, because the transaction, upon its face, lies outside the plain intent of the statute. To hold otherwise would be to exalt artifice above reality and to deprive the statutory provision in question of all serious purpose.” Click here for translation US Supreme Court Gregory v Helvering 293 U.S. 465 (1935) ...