“Control Premium A”, hereinafter referred to as “company (AB)” is part of the Portuguese group (CD) and its entire share capital was held by the public limited company (EF). In 2014 (EF) sold 45% of the shares in (AB) to the following companies incorporated under Portuguese law: company (GH), shares representing 17,74% of the capital and voting rights of company (AB) ; company (IJ), shares representing 18,16% of the capital and voting rights of company (AB); company (KL), shares representing 9,10% of the capital and voting rights of company (AB). On the same day, (AB) acquired by share purchase and sale agreement 48,726,550 shares for a sale price of … € per share from the Portuguese company (MN), representing 55,06 % of the share capital of the companies (EF), (GH), (IJ) and (KL), so that it became the majority shareholder of the company (MN), the said sale price still being subject to review in the event that a higher or lower price resulted from a public takeover bid, hereinafter “takeover bid”, on 12 February 2014. By amendments to the aforementioned contract of sale on 19 March 2014, and following the takeover bid of 12 February 2014 for the remaining 39,773,450 shares in the company (MN), the price of one share was revised downwards, to …. and a capital increase took place with the creation of 7,042,254 new shares subscribed to by the general public, so that the final total acquisition price of the shares of company (MN) by company (AB) was ….-€ (… x 48,726,550), representing 51% of the share capital of company (MN). On 15 October 2014, company (AB) sold its 51% shareholding in company (MN), corresponding to 48,726,550 shares, to a Portuguese subsidiary of the Chinese group …, at a price of …. -€ per share, namely for a total amount of ….-€ (… x 48,726,550), with the result that company (AB) realised a gross book gain of ….-€ on the sale of the shares in question, which was recognised in the profit and loss account of the business accounts for the 2014 financial year. On 15 April 2015, company (AB) submitted a request for an advance ruling to the tax office, with a view to the recognition of a hidden contribution at the time of the acquisition of the shares in company (MN) on 23 January 2014, in that the value of the shares in company (MN) would in fact have been higher than the price paid by it – due to an added “control premium” – so that the capital gain realised for accounting purposes would be non-existent from a tax point of view. On 10 July 2018, the tax office informed company (AB) that it intended to deviate from the tax return as filed. The letter was worded as follows: ” (…) The Sociétés 6 tax office is of the opinion that the price initially paid, i.e. € … per share, does indeed reflect the arm’s length principle. Indeed, at the time of the IPO on 12 February 2014 involving 49% of the share capital of (MN), the value of these shares, intended to be sold to the general public [sic], was set at € … per share, i.e. at a price that a third party was prepared to pay without a control premium. As a result, the tax balance sheet submitted was rejected and tax was levied on the commercial balance sheet in accordance with article 40 of the amended law of 4 December 1967 on income tax (L.I.R.). The capital gain realised, which does not fall within the scope of the Grand-Ducal regulation of 21 December 2001 implementing Article 166, paragraph 9, number 1 L.I.R., is therefore fully taxable. (…)”. Company (AB) lodged a complaint with the Director of Direct Taxes, which by a decision dated 17 July 2019 rejected the claim as unfounded. An appeal was then filed by Company (AB) with the Administrative Tribunal. In March 2022 the Tribunal rejected the claims in the appeal as unfounded and upheld the decision of the Director of Direct taxes. An appeal was then filed with the Administrative Court. Judgement of the Administrative Court The Court rejected the claims in the appeal as unfounded and upheld the decision of the Administrative tribunal. Excerpt “The Court’s analysis First of all, the court was right to point out that the burden of proof in tax matters is governed by Article 59 of the amended Act of 21 June 1999 laying down rules of procedure before the administrative courts, which provides that “proof of the facts triggering the tax liability lies with the administration, proof of the facts releasing the taxpayer from the tax liability or reducing the tax assessment lies with the taxpayer”. The lower courts were again right to hold that, under the aforementioned article, the burden of proving that a control premium had been applied to the purchase price of the shares in the company (MN) rested with the appellant. Next, the Court noted that the parties were in general agreement as to the existence of the concept of a control premium in the context of an acquisition of a holding of securities in a company conferring control over the latter, but disagreed as to the application of such a premium in the case in point. Although there is no commonly accepted definition of a control premium, a number of legal and economic publications refer to it, such as the Guide issued by the French tax authorities. In addition, French case law has accepted the application of this concept of control premium by the French tax authorities, notably in the judgment handed down by the French Court of Cassation on 3 February 2015 (Appeal No. 13-25.306). It is therefore clear from the definitions proposed by the appellant and the French tax authorities that a control premium is an additional price, in relation to the market value of a company, that a purchaser agrees to pay in order to obtain control of the acquired company ...

“Control Premium A”, hereinafter referred to as “company (A)”, is part of a Portuguese group and all of its share capital was held by the limited company (B), hereinafter referred to as “company (B)”. Company (B) sold 45% of the shares in company (A) to the following companies incorporated under Portuguese law: – company (C), representing 17.74% of the capital and voting rights of company (A) ; – company (D), representing 18.16% of the capital and voting rights of company (A); – company (E), representing 9.10% of the capital and voting rights of company (A). On the same day, company (A) acquired 48,726,550 shares under share purchase and sale agreements for a sale price of ….. -per share of the Portuguese company (F), representing 55.06% of the share capital, of companies (B), (C), (D) and (E), so that it became the majority shareholder of company (F), the said sale price still being subject to revision in the event that a higher or lower price resulted from a public takeover bid on 12 February 2014. By amendments to the aforementioned contract of sale on 19 March 2014, and following the takeover bid of 12 February 2014 for the remaining 39,773,450 shares in the company (F), the price of one share was revised downwards, to …. and a capital increase took place with the creation of 7,042,254 new shares subscribed to by the general public, so that the final total acquisition price of the shares of company (F) by company (A) was ….-€ (… x 48,726,550), representing 51% of the share capital of company (F). On 15 October 2014, company (A) sold its 51% shareholding in company (F), corresponding to 48,726,550 shares, to the third-party company (G) SA, hereinafter referred to as “company (G)”, a Portuguese subsidiary of the Chinese group …, at a price of …. -€ per share, namely for a total amount of ….-€ (… x 48,726,550), with the result that company (A) realised a gross book gain of ….-€ on the sale of the shares in question, which was recognised in the profit and loss account of the business accounts for the 2014 financial year. On 15 April 2015, company (A) submitted a request for an advance ruling to the tax office, with a view to the recognition of a hidden contribution at the time of the acquisition of the shares in company (F) on 23 January 2014, in that the value of the shares in company (F) would in fact have been higher than the price paid by it – due to an added “control premium” – so that the capital gain realised for accounting purposes would be non-existent from a tax point of view. On 10 July 2018, the tax office informed company (A) that it intended to deviate from the tax return as filed. The letter was worded as follows: “The tax office … is of the opinion that the price initially paid, i.e. … per share, does indeed reflect the arm’s length principle. Indeed, at the time of the IPO on 12 February 2014 of 49% of the share capital of (F) S.A., the value of these shares, intended to be sold to the general public, was set at € …per share, i.e. at a price that a third party was prepared to pay without a control premium. As a result, the tax balance sheet submitted was rejected and tax was levied on the commercial balance sheet in accordance with article 40 of the amended law of 4 December 1967 on income tax (L.I.R.). The capital gain realised, which does not fall within the scope of the Grand-Ducal regulation of 21 December 2001 implementing Article 166, paragraph 9, number 1 L.I.R., is therefore fully taxable. […] “. Company (A) lodged a complaint with the Director of Direct Taxes, which by a decision dated 17 July 2019 rejected the claim as unfounded. An appeal was then filed by Company (A) with the Administrative Tribunal. Judgement of the Tribunal The Tribunal rejected the claims in the appeal as unfounded and upheld the decision of the Director of Direct taxes. Excerpt “Considering that it should be emphasised that the … group had already held the majority of the share capital of the company (F) prior to the transfer of the shares on 23 January 10 2014; that following the sale on 23 January 2014, there was no change in the majority of the shares held by the … group, the only difference being that the … group held the majority of the share capital of the company (F) prior to the transfer of the shares on 23 January 10 2014. group, the only difference being that the claimant has since held the majority of the shares in company (F) in place of companies (B), (C), (D) and (D); that in view of the majority control of company (F) within the … group, even well before 23 January 2014, there is no reason why, all of a sudden, a control premium should be recognised as a hidden contribution for the claimant, unless it is for purely tax reasons; Considering that, in the present case, the production of a transfer price study with an estimate of a control premium is to be declared irrelevant given that the … group was already the majority shareholder in the company (F) before the transfer of the 48,726,550 shares on 23 January 2014; Considering that, on the contrary, the claimant’s assertion that “a control premium should be taken into account in calculating the acquisition price” is even contradicted by the fact that when the 48,726,550 shares were resold to a company that was a third party to the … group, no control premium was charged by the claimant; Considering that it sold to a Chinese investor, through the intermediary of the Portuguese company (G), all the shares in the company (F), thus representing the majority of the capital of the company (F), at the stock market price without, however, requesting any control premium; ...

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 ...