In 2013, DFH Haus CZ s.r.o. filed amended tax returns for 2006, 2010, and 2011, following the German tax authority’s adjustment of its transfer prices in 2006, in order to claim the resulting tax loss for 2006 and apply it against its tax liability in the Czech Republic for 2010 and 2011. The tax authorities disallowed the amendments. A complaint filed by DFH with the district court was dismissed and an appeal was then filed with the Supreme Administrative Court. Judgement of the Court The Court rejected DFH’s arguments that the tax loss must be allowed under the Czech-German income tax treaty. DFH could not reduce its tax liabilities in the Czech Republic in 2010 and 2011 with the 2006 tax loss resulting from the German transfer pricing adjustment. The Court noted that the usual purpose of double taxation treaties is to regulate the place where income is taxed, but the actual rules for taxation or the deduction of expenses remain reserved to national law. In this case, the Double Taxation Convention could not be applied because there was no international aspect of taxation and the deduction of tax losses was a matter for national legislation. Excerpts “[38] In the present case, the complainant first invoked a motion for protection against the tax authority’s failure to act in relation to the activation of conciliation proceedings on 28 October 2019 in respect of the resolution of the case by way of an agreement under Article 25 of the Double Taxation Treaty. The Appellate Financial Directorate postponed this complaint on the grounds that the alleged inaction of the tax administrator (the Tax Office for the Pilsen Region) had been eliminated, as the tax administrator had submitted the case to the defendant 2) for resolution of the case by agreement under the said treaty. Subsequently, on 15 December 2019, the complainant submitted a request for removal of the inaction pursuant to Article 38 of the Tax Code, to which defendant 2 responded on 28 January 2020 by stating that it did not find the request for resolution of the case by agreement under the Arbitration Convention justified, since the tax administrator had issued additional payment assessments for the years 2005 and 2006, thereby accepting the adjustments made by the German tax administration and thus eliminating double taxation. The defendant also stated in its reply that the activation of the double taxation convention was not an option even for the tax years 2010 and 2011, since there would have been taxation in breach of that convention. On 7 February 2020, defendant 1 responded to this complaint by stating that it did not consider it justified, since the conciliation procedure under Article 25 of the Double Taxation Treaty and the measures under Section 39q(a) and (b) of the Income Tax Act did not constitute tax administration procedures and therefore could not be invoked as a defence against inaction; at the same time, defendant 1 also referred in this reply to the opinion of defendant 2.) [39] It is clear that defendant 2), which potentially had the competence to conduct conciliation proceedings under Article 25 of the Double Taxation Treaty (in conjunction with Article 9 thereof), acted in accordance with the above-quoted conclusions expressed in judgment No 5 Afs 468/2019-65 and informed the complainant of the reasons why conciliation proceedings could not be initiated. The reasons for its action (failure to adopt a measure pursuant to Section 39q of the Income Tax Act) were also communicated to the complainant by defendant 1). Those reasons were subsequently reviewed by the Municipal Court in the judgment under appeal in that it considered the possibility of submitting the matter to conciliation under the double taxation treaty or of adopting a measure under section 39q of the Income Tax Act. In so doing, it concluded that the issue raised by the applicant, for which it seeks an order requiring the defendant to adopt the measures repeatedly referred to, is not resolved by a double taxation treaty but is purely domestic in nature. For that reason, he did not consider that there was any merit in either the requirement to submit the matter by way of an agreement under a double taxation treaty or in the requirement to take measures in relation to a foreign country by defendant 1) under the Income Tax Act. …. “[41] The appeal is not well-founded for the reasons set out above and the Supreme Administrative Court therefore dismissed it pursuant to the second sentence of Article 110(1) of the Code of Civil Procedure.” Click here for English Translation Click here for other translation ...

Union Castle Ltd. claimed a tax deduction of £ 39 million related to losses on derivative contracts. After acquiring derivative contracts, Union Castle issued bonus A shares to it’s parent company, Caledonia, which carried a dividend equal to 95% of the cash-flows arising on the close-out of the contracts. Therefore Union Castle had written off 39 million of the value of the contracts in it’s accounts. The tax authorities disagreed that a tax loss had been suffered and issued an assessment disallowing the loss. The Tribunal found in favor of the tax authorities. Capital transactions are subject of the UK transfer pricing rules. Issuing of shares meets the requirements of “making or imposing conditions in commercial and financial relations” as required by Article 9 of the OECD Model Convention. OECD TPG apply to debt financing. Share transactions, which have an effect on income taxation, must be within the UK transfer pricing rules. The Cases was then brought before the Court of Appeal where the appeals were dismissed. “The overall result, if my Lords agree, is that both appeals are dismissed. In the case of Union Castle’s appeal, I agree with the UT’s conclusions on the “loss” and “arise from” issues, but I have come to a different conclusion on the “fairly represent” issue and I would dismiss the appeal on that ground as well as on the “arise from” issue.” ...

Telenor Norway has received a tax assessment according to which the company will have to pay additional taxes in Norway of 2.5 billion Norwegian crowns for tax year 2013. A deduction expenced in 2013 for a loss suffered in 2012 due to settlement of bank guarantees given in respect of external funding in its Indian subsidiary Unitech Wireless has been disallowed for tax purposes by the Norwegian Tax Authorities Telenor decided to enter the market in India in 2008. In 2012, the Supreme Court of India revoked the licenses of the Telenor mobile company and seven other mobile companies. In the fall of 2012, Telenor paid around NOK 4.2 billion to buy back licenses in six of 22 telecommunications regions. Following a dispute with Telenor’s Indian partnership – Unitech – the parties agreed to transfer all the valuables of their joint unit company Mobile Unitech Wireless to a Telenor-controlled company – Telenor India. In the annual report for 2018, Telenor Norway writes that in 2012 the company recognized claims against Unitech Wireless after the company released its guarantee of NOK 10.6 billion for all interest-bearing debt in Unitech Wireless . – deferred tax asset of 2.5 billion Norwegian kroner has been recognized. In 2013, the business transfer from Unitech Wireless to Telenor India was completed and Telenor ASA deducted NOK 9.3 billion as a tax loss in its tax returns. Telenor later withdraw from the Indian market after losses in total of 25 billion ...

In this case, Union Castle Ltd. calimed a tax deduction of £ 39 million related to losses on derivative contracts. After acquiring derivative contracts, Union Castle issued bonus A shares to it’s parent company, Caledonia, which carried a dividend equal to 95% of the cash-flows arising on the close-out of the contracts. Therefore Union Castle had written off 39 million of the value of the contracts in it’s accounts. The tax authorities disagreed that a tax loss had been suffered and issued an assesment disallowing the loss. The Tribunal found in favor of the tax authorities. Capital transactions are subject of the UK transfer pricing rules. Issuing of shares meets the requirements of “making or imposing conditions in commercial and financial relations” as required by Article 9 of the OECD Model Convention. OECD TPG apply to debt financing. Share transactions, which have an effect on income taxation, must be within the UK transfer pricing rules. Click here for translation ...

It follows from various Supreme Court judgments in the Netherlands that a loan is commercially irrational if no interest can be determined under which an independent third party would have been willing to grant the same loan. The consequence of a loan beeing deemed commercially irrational is that a loss is not deductible. This case addresses the implications of the Umbrella Judgement, in particular the question of how that judgment relates to case laws on unsecured loans and guarantees. The Advocate General concludes that the Umbrella Judgment is not applicable in this case and that the tax authorities has failed to demonstrate that an independent third party would not have been willing to enter a similar loan agreement. Click here for translation ...

In this ruling, the Swiss Federal Supreme Court comments on the application of the arm’s length principel and the burden of proff in Switzerland. “Services, which have their legal basis in the investment relationship, are to be offset against the taxable income of the company to the extent that they would otherwise not be granted to a third party under the same circumstances or not to the same extent and would not constitute a capital repayment. This rule of the so-called third-party comparison (or the principle of “dealing at arm’s length”) therefore requires that even legal transactions with equity holders or between Group companies be conducted on the same terms as would be agreed with external third parties on competitive and market conditions.” “Swiss Law – with the exception of individual provisions – does not have any actual group law and treats each company as a legally independent entity with its own bodies which have to transact the business in the interest of the company and not in that of the group, other companies or the controlling shareholder. Legal transactions between such companies are therefore to be conducted on the same terms as they would be agreed with external third parties. In particular, the Executive Committee (or the controlling shareholder) is not allowed to distribute the profits made by the various companies freely to these companies>… ” “In the area of non-cash benefits, the basic rule is that the tax authority bears the burden of proof of tax-increasing and increasing facts, whereas the taxable company bears the burden of all that the tax abolishes or reduces. In particular, the authority is responsible for proving that the company has rendered a service and that it has no or on reasonable consideration in return. If the authority has demonstrated such a mismatch between performance and consideration, it is for the taxable company to rebut the presumption. If the company can not do that, it bears the consequences of the lack of evidence. This applies in particular if it makes payments that are neither accounted for nor documented…” Furthermore, the Federal Supreme Court disallows transfer of tax losses where the absorbed subsidiary is an empty shell. The question addressed is whether the subsidiary, at the time of its absorption, was still engaged in active contract R&D. Only if this this was the case, the deduction of losses at the level of the absorbing parent company was permissible. Click here for translation ...