At issue in this case was whether or not it is possible to regularize transactions between companies by directly applying art. 9.1 of DTA between Spain and French, without resorting to the transfer pricing methods provided for in local Spanish TP legislation. Application of article 9 and taxing according to local tax legislation is often a question of determining the arm’s length price. But sometimes other rules will apply regardless of the value – for instance anti avoidance legislation where the question is not the price but rather the justification and substance of the transaction. In the present case the arm’s length price of the relevant transaction was not discussed, but rather whether or not transaction of shares had sufficient economic substance to qualify for application of Spanish provisions for tax depreciation of the shares in question. The National Court understood that the share acquisition lacked substance and only had a tax avoidance purpose. It could not be understood that the appellant company has undergone a actual depreciation of its shares to the extent necessary to make a tax deduction. Judgement of the supreme Court The Supreme Court dismissed the appeal and upheld the decision of the National Court. The court pointed out that the regularization of transactions between Spanish and French companies, through the application of art. 9.1 in the DTA, can be carried out without the need to resort to the methods provided for in local legislation for determining the arm’s length value of transactions between related parties. Excerpts “IV.- What has just been stated are the abstract terms of the regulation contained in the aforementioned Article 9.1; and this shows that its individualisation or practical application to some singular facts will raise two different problems. The first will be to determine whether the specific commercial or financial transactions concluded between these two legal persons, Spanish and French, have an explanation that justifies them according to the legal or economic logic that is present in this type of relationship. The second problem will have to be tackled once the first one just mentioned has been positively resolved, or when it has not been raised; and it will consist of quantifying the tax scope of the singular commercial or financial operation whose justification has been recognised or accepted. V.- The above shows that the application of this Article 9.1 Tax Treaty must be accompanied by the application of internal rules; and these may be constituted by Article 16 of the TR/LISOC or by other different internal rules, for the reasons expressed below. Thus, Article 10 TR/LISOC shall be applied when, without questioning the justification of the transactions concluded between entities or persons that deserve to be considered as “associated enterprises”, only the quantification or the value, in market terms, of the object or price of these transactions is in dispute. But other internal rules will have to be applied when what is disputed with regard to these transactions is not the amount of their object but the justification of the legal transaction that materialises them, because this externalises a single purpose of fiscal avoidance and is not justified by circumstances or facts that reveal its legal or economic logic. And these rules, as the Abogado del Estado argues in his opposition to the cassation, may be embodied by those which regulate the powers recognised by the LGT 2003 to the Administration in order to achieve a correct application of the tax rules, such as those relating to assessment, the conflict in the application of the tax rule and simulation (Articles 13, 15 and 16 of that legal text). VI.- The answer which, on the basis of what has just been set out, must be given to the question of objective appeal, defined by the order which agreed the admission of the present appeal, must be that expressed below. That the regularisation of transactions between Spanish and French companies, by means of the application of Article 9.1 of the Agreement between the Kingdom of Spain and the French Republic for the avoidance of double taxation and the prevention of evasion and avoidance of fiscal fraud in the field of income tax and wealth tax of 10 October 1995, can be carried out without the need to resort to the methods provided for determining the market value in related transactions and to the procedure established for that purpose in the internal regulations. ELEVENTH – Decision on the claims raised in the appeal. I.- The application of the above criterion to the controversy tried and decided by the judgment under appeal leads to the conclusion that the infringements alleged in the appeal are not to be assessed. This is for the following reasons. The main question at issue was not the amount or quantification of the transactions which resulted in the acquisition by the appellant SARA LEE SOUTHERN EUROPE SL (SLSE) of shares in SLBA Italia. It was the other: whether or not the acquisition of those shares was sufficiently justified to be considered plausible and valid for making the allocations which had been deducted for the depreciation of securities of SARA LEE BRANDED APPAREL, SRL. The tax authorities and the judgment under appeal, as is clear from the foregoing, understood that this acquisition lacked justification and only had a tax avoidance purpose, because this was the result of the situation of economic losses that characterised the investee company in the years preceding the acquisition. They invoked Article 9.1 of the DTA to point out that, in those circumstances of economic losses, the parameter of comparability with normal or usual transactions between independent companies, which that article establishes in order to accept that a related-party transaction actually existed, could not be assessed in the transactions in question. And they reached the final conclusion that, in those particular circumstances, it cannot be understood that the appellant company has undergone a depreciation of its shares to the extent necessary to make a deduction based on those shares.” Click here for English translation Click here ...

Following a restructuring of the Italien Piaggio group, SAS Piaggio France by a contract dated January 2 2007, was changed from an exclusive distributor of vehicles of the “Piaggio” brand in France to a commercial agent for its Italian parent company. The tax authorities held that this change resulted in a transfer without payment for the customers and applied the provisions of article 57 of the general tax code (the arm’s length principle). A tax assessment was issued whereby the taxable income of SAS Piaggio France was added a profit of 7.969.529 euros on the grounds that the change in the contractual relations between the parties had resultet in a transfer of customers for which an independent party would have been paid. In a judgement of October 2019, Conseil dÉtat, helt in favor of the tax authorities and added an additional profit of 7.969.529 to the taxable income of Piaggio France for the transfer of customers to the Italian parent company. Since the French agent had received no payment for the transfer, an assessment of withholding tax (dividend – hidden distribution of profit) was issued in accordance with the French-Italien Double tax treaty. An appeal filed by Piaggio on this additional issue. Piaggio claimed, that only risk but no intangibles had been transferred. Hence there was no basis for withholding taxes on hidden distribution of profits. Decision of the Administrative Court of Appeal. The Court held in favor of the tax authorities and dismissed the appeal. “…It results from the very terms of the contract produced by the administration on appeal, that SAS PIAGGIO FRANCE has become, as of January 2007, the commercial agent of its parent company, the latter’s agent and, as such, without its own clientele and without the right to hold the business. The applicant company claims to have continued the same activity in another form, by continuing to develop and commercially animate the French dealer network in exactly the same way as it did before the change in status, while acknowledging that the legal changes of change in status led to a transfer of risks, these factors do not prove that the brand’s dealer clientele in France, which it now lacks, would not have been transferred to its parent company, which succeeded it in the distribution of the brand’s products in France and took over all the risks associated with this operation and the brand’s development. Moreover, it follows from the very terms of the agency agreement that, contrary to what it maintains, the applicant company, which must obtain the agreement of its parent company in order to enter into a new distribution contract, does not directly choose and manage the scope of the approved dealers. Moreover, if it claims not to have transmitted its know-how, it does not establish it. Finally, even supposing that the applicant company’s operating income had not deteriorated, that the number of its employees would have been maintained, and that no other distributor would have been compensated, these circumstances are not such as to establish the absence of transfer of its own clientele to its parent company. It follows from this, and while the change in status in 2007 did not result in any compensation for SAS PIAGGIO FRANCE, the management was entitled to consider that by transferring its clientele and know-how to it, the latter had granted an advantage to the Italian company Piaggio et C Spa. In view of the foregoing and since SAS Piaggio France is indirectly owned by the Italian company Piaggio et C Spa, it is presumed, contrary to what it claims, to have made a profit transfer, within the meaning of the aforementioned provisions of Article 57 of the General Tax Code. It was thus for it to prove, which it did not do, that that transfer involved, for it, sufficient consideration and did not depart from normal commercial management. It is therefore rightly, in application of the aforementioned provisions and stipulations, that the administration has charged the withholding tax, the additional corporate income tax contribution and the corresponding social contribution on corporate income tax.” Click here for English translation Click here for other translation CAA de VERSAILLFrance vs Piaggio ES, 1ère chambre, 06_07_2020, 19VE03376-19VE03377, Inédit au recueil Lebon ...