“Caixa… S.A.” received an assessment of additional taxable income in which, among other things, the (lack of) interest on a loan granted to a subsidiary had been adjusted by the tax authorities. Caixa S.A. lodged an appeal with the Tribunal Central Administrativo Sul. Judgment of the Tribunal The Tribunal dismissed the appeal as regards the transfer pricing adjustment and upheld that part of the tax authorities’ assessment. Expert “It goes on to say that the discussion of the nature of the operation is innocuous in the context of the specific case. The fact is that “[t]here are various techniques by which practices can be employed to artificially increase interest expenses, so that they benefit from tax treatment that may be more favourable when compared to that of distributed profits. The first consists of checking the “reasonableness” of the amount of interest, refusing to deduct the excess against the objective criterion of at arm’s length interest. This is the technique used in Article 58 of the CIRC and Article 9 of the OECD Model Convention. A second technique operates at the level of the “qualification” of the underlying operation as credit or capital, given the circumstances of the specific case and is applied, for example, to “hybrid financial instruments” which have both credit and capital aspects, as is the case with profit-sharing bonds. In these circumstances, the authorities can, as part of their interpretation of treaties, laws and facts, ‘reclassify’ an apparently credit agreement as a capital contribution” [or vice versa] (9). This is what happened in this case, in which profits made by the applicant were artificially allocated to a subsidiary. The characteristic feature of indirect profit distribution is that an abnormal advantage is obtained. This presupposes, firstly, that an operation has been carried out which gives rise to an advantage and, secondly, that the advantage can be considered abnormal. “The operations do not translate into a direct, visible, apparent distribution of profits, but rather into operations that contribute to the formation of the company’s profit.” The advantage can be attributed either by the subsidiary company to another, which participates in its profits – in which case there is a hidden distribution of profits – or “be attributed, in the opposite direction, by the parent company to its subsidiary, in which case there is a hidden contribution, or it can be attributed to a third entity, linked by a triangular link”. The advantage can take two forms: it can translate into an expense or loss, or it can translate into an “unrealised gain”. The abnormal advantage of the indirect distribution of profits is “that which has no objectively equivalent counterpart”, which is measured by “comparing it with the hypothetical behaviour of two independent companies, dealing at arm’s length, i.e. with the competitive price – the open market price that would be charged, in a specific, equal or similar transaction” (10). The appellant maintains that the method adopted is not suitable for assessing transfer prices in the situation in question, given the risk involved and the specific nature of the inter-bank credit market. In this regard, it should be noted that “when analysing the transfer price of an intra-group loan, it is essential to first analyse the characteristics of the borrower in order to assess whether this entity could obtain an equal or similar level of debt from an independent creditor (e.g. bank), under the same terms and conditions as an independent entity would, given the performance of its business. In other words, the aim here is to assess and support the substance and economic rationale of the transaction, as well as its fit with the taxable person’s business purpose. Essentially, this analysis focuses on assessing the borrower’s credit risk, i.e. the risk that the borrower will not fulfil its commitments (debt) on the agreed date and whether the default requires a guarantee to be provided. // Given that credit risk is one of the main elements to be considered when determining the cost of financing (the greater the risk, the greater the cost to be borne), it may be asked to what extent a given interest rate, close to benchmarks such as Euribor, may be appropriate when there is an expectation that the debtor would not obtain that remuneration in market operations. The determination of the arm’s length remuneration for the operation in question must take into account all its specific characteristics. In particular, the date (in order to select operations with a similar context in terms of expectations and financial situation), the amount, the repayment term (longer terms imply greater uncertainty), the borrower’s credit risk (rating) and its level of indebtedness, the associated guarantees (they significantly influence credit risk), the interest rate applied (fixed or variable rate), the debtor’s sector of activity (relevant for assessing the ability to generate cash flows), the currency in which the operation was agreed and the markets involved…”. In this case, however, there is no evidence that the inspection report failed to take account of the factors in question when determining the transfer pricing method. It states that: In accordance with paragraph 199 of the 1979 OECD Committee on Fiscal Affairs Report “Transfer Pricing and Multinational Enterprises”, when determining what is meant by a comparable or similar loan, it will be necessary to take into account the following factors: the amount and duration of the loan, its nature or purpose, the currency in which it is specified, and the financial situation of the borrower. Now, as already mentioned, C…. is an eminently banking organisation, and given its importance in the national and international banking market, it is one of the financial institutions that make up the panel of institutions that contribute to setting the Euribor rate, which corresponds to the average interest rate at which European banks in the Eurozone lend funds to each other. This rate is one of the reference rates for economic agents in Europe, and is considered a risk-free rate of return, given the profile of the institutions that contribute ...