R.B. NV had entered into a loan agreement with a group company in Switzerland. The interest rate on the loan had been determined by applying the method used by the credit agency, Standard & Poor’s. Moreover, it had been concluded that R.B. NV was a “moderately strategic entity”, and a one-notch correction was applied to the “stand-alone credit rating”. Following an audit, the tax administration concluded that the company had not applied the S&P method consistently and that the company’s credit rating should have been the same as that of the group as the company was a “core entity” in the group. On that basis, the interest rate were reduced. Judgement of the Court The court ruled predominantly in favour of the tax authorities. The court found several unjustified deviations in the way R.B. NV had applied the S&P method and on that basis several adjustments were made by the court. According to the court, R.B. NV was not a “core entity” in the group whose credit rating should be the same as that of the group (as held by the tax authorities), but rather a “highly strategic entity” whose credit rating should be one notch lower than that of the group. Click here for English Translation Click here for other translation ...

Where this is the case, the credit rating of the MNE group may also be used for the purpose of pricing the accurately delineated loan where the facts so indicate, particularly in situations such as where the MNE is important to the group as described in paragraphs 10.78 and 10.79 and where the MNE’s indicators of creditworthiness do not differ significantly from those of the group. An MNE group credit rating is unaffected by controlled transactions and reflects the actual basis on which the group seeks external funding from independent lenders. In situations where an MNE group does not have an external credit rating, consideration may be given to conducting the credit rating analysis at the MNE group level for assessing the controlled transaction. In all cases, the MNE group credit rating, like any other credit rating, will be appropriate only if it is determined to be the most reliable indicator of the MNE credit rating in light of all the facts and circumstances ...

Another key consideration would be the likely consequences for other parts of the MNE group of supporting or not supporting the borrower. The criteria used to determine the status of an entity in this regard may include such considerations as legal obligations (e.g. regulatory requirements), strategic importance, operational integration and significance, shared name, potential reputational impacts, negative effects on the overall MNE group, general statement of policy or intent, and any history of support and common behaviour of the MNE group with respect to third parties. The relative relevance of those factors may vary from one industry to another ...