Following an audit of Otis Servizi s.r.l. for FY 2007, 2008 and 2009 an assessment of additional taxable income was issued by the Italian tax authorities. The first part of the assessment related to interest received by OTIS in relation to the contract called “Cash management service for Group Treasury” (hereinafter “Cash Pooling Contract”) signed on 20 March 2001 between OTIS and the company United Technologies Intercompany Lending Ireland Limited (hereinafter “UTILI”) based in Ireland (hereinafter “Cash Pooling Relief”). In particular, the tax authorities reclassified the Cash Pooling Agreement as a financing contract and recalculated the rate of the interest income received by OTIS to be between 5.1 and 6.5 per cent (instead of the rate applied by the Company, which ranged between 3.5 and 4.8 per cent); The second part of the assessment related to of the royalty paid by OTIS to the American company Otis Elevator Company in relation to the “Licence Agreement relating to trademarks and company names” and the “Agreement for technical assistance and licence to use technical data, know-how and patents” signed on 1 January 2004 (hereinafter referred to as the “Royalty Relief”). In particular, the tax authorities had deemed the royalty agreed upon in the aforesaid contracts equal to 3.5% of the turnover as not congruous, recalculating it at 2% and disallowing its deductibility to the extent of the difference between the aforesaid rates. Not satisfied with the assessment an appeal was filed by OTIS. The Regional Tax Commission upheld the assessments and an appeal was then filed with the Supreme Court. Judgment of the Supreme Court The Court decided in favour of OTIS, set aside the assessment and refered the case back to the Regional Tax Commission in a different composition. Excerpt related to interest received by OTIS under the cash pooling contract “In the present case, the Agenzia delle Entrate redetermined the rate of the interest income received by the OTIS in relation to the contract between the same and UTILI (cash pooling contract) concerning the establishment of a current account relationship for the unitary management of the group treasury. UTILI, as pooler or group treasurer, had entered into a bank account agreement with a credit institution in its own name, but on behalf of the group companies. At the same time, OTIS had mandated that bank to carry out the various tasks in order to fully implement the cash pooling agreement. Under this contract, all participating companies undertook to transfer their bank account balances (assets or liabilities) daily to the pooling company, crediting or debiting these balances to the pool account. As a result of this transfer, the individual current account balances of each participating company are zeroed out (‘zero balance cash pooling’). Notwithstanding the fact that the tax authorities do not dispute that this is a case relating to “zero balance cash pooling” (a circumstance that is, moreover, confirmed by the documents attached to the appeal), it should be noted that the same practice documentation of the Revenue Agency leads to the exclusion that, in the hypothesis in question, the cause of the transaction can be assimilated to a loan. In particular, in Circular 21/E of 3 June 2015, it is stated (p. 32) that “with reference to the sums moved within the group on the basis of cash pooling contracts in the form of the so-called zero balance system, it is considered that a financing transaction cannot be configured, pursuant to Article 10 of the ACE Decree. This is because the characteristics of the contract – which provides for the daily zeroing of the asset and liability balances of the group companies and their automatic transfer to the centralised account of the parent company, with no obligation to repay the sums thus transferred and with accrual of interest income or expense exclusively on that account – do not allow the actual possibility of disposing of the sums in question in order to carry out potentially elusive transactions’. These conclusions are confirmed in the answer to Interpretation No. 396 of 29 July 2022 (p. 5) where it is specified that ‘cash pooling contracts in the form of the so-called zero balance stipulated between group companies are characterised by reciprocal credits and debits of sums of money that originate from the daily transfer of the bank balance of the subsidiary/subsidiary to the parent company. As a result of this contract, the balance of the bank account held by the subsidiary/subsidiary will always be zero, since it is always transferred to the parent company. The absence of the obligation to repay the remittances receivable, the reciprocity of those remittances and the fact that the balance of the current account is uncollectible and unavailable until the account is closed combine to qualify the negotiated agreement as having characteristics that are not attributable to a loan of money in the relationship between the companies of the group’. That being so, the reasoning of the judgment under appeal falls below the constitutional minimum in so far as the CTR qualified the cash pooling relationship as a loan on the basis of the mere assertion that “the obligation to repay each other by the closing date of the account is not found in the case”. In so doing, the Regional Commission identified a generic financing contract function in the cash pooling without distinguishing between “notional cash pooling” and “zero balance cash pooling”, instead excluding, on the basis of the same documentation of practice of the Tax Administration, that in the second case (“zero balance”), a loan contract can be configured. The reasoning of the contested decision does not therefore make the basis of the decision discernible, because it contains arguments objectively incapable of making known the reasoning followed by the judge in forming his own conviction, since it cannot be left to the interpreter to supplement it with the most varied, hypothetical conjectures” (Sez. U. no. 22232 of 2016), the trial judge having failed to indicate in a congruous manner the elements from which he drew ...

“LT Loan AG” had entered into a cash pool agreement with two related parties, A Ltd. and C Ltd. According to the agreement, the interest rate on deposits in the cash pool were negative, and LT Loan AG therefor paid interest to A and C on the deposits it had in the cash pool. Following an audit the tax authority issued an assessment of additional taxable income in the form of interest on “LT Loan AG” deposits in the cash pool, set according to the Swiss Safe Harbour interest rates. “LT Loan AG” lodged a complaint or appeal with the Tax Appeals Court, which was dismissed. An appeal was then filed by “LT Loan AG” with the Administrative Court. Decision The Administrative Court upheld the decision of the Tax Appeals Court and dismissed “LT Loan AG”‘s appeal. The Swiss safe harbour rates only apply to long term loans (12 month or more). However, based on the facts of the case, the deposits in the cash pool could not be considered short term. The Safe harbour interest rates therefore applied, since “LT Loan AG” was unable to prove that the negative interest on its deposits in the cash pool were at arm’s length. Excerpt in English “6.2 As the lower court considered, the cash pooling at issue here is in principle a legal relationship that is not objectionable under civil and tax law (cf. E. 2 of the contested decision), which is reflected in the accounts in (loan) receivables of the tax payer from the cash pool or C Ltd. These receivables were recognised by the tax payer in the tax periods at issue in fixed assets (“non-current assets”); from this – expressly endorsed by the auditor of the tax payer (cf. E. 4d/ee of the contested decision) and confirmed as compliant with commercial law (cf. E. 4d/gg of the contested decision) – the lower court concluded that the accounting was in accordance with commercial law, referring to the principle of authoritativeness (see E. 4f/bb of the contested decision) that the loan receivables were acquired with the intention of long-term use or long-term holding, i. e. a period of more than twelve months (Art. 959 para. 3 sentence 2 i. V. m. Art. 960d para. 1 and 2 of the Swiss Code of Obligations [CO]; see E. 3e and 4c/aa of the contested decision). According to the lower court, the intention to hold for the long term manifested itself not only in the accounting method, but also in other respects: Firstly, it should be noted that the loans from the tax payers to C Ltd. had already existed since the 2009 financial year; in the notes to the balance sheet for the 2016 financial year, it was expressly stated with regard to the loans that the tax payer had already been participating in the cash pool system of the entire A-Group since the 2009 financial year and had receivables from the group-internal cash pools due to the “zero cash pooling principle”; In addition, it was stated there that the agreements regarding the cash pool (i.e. i.e. the legal bases under civil law) had been concluded for an indefinite period (see E. 4d/aa of the contested decision). At the end of the 2014 tax period, the cash pool holdings of the tax payers amounted to CHF …; in the 2015 financial year, a receivable from group companies of CHF … was then recognised in the balance sheet (of which CHF … from group companies). … to C Ltd. and Fr. … to A Ltd.), and in the 2016 financial year a receivable of Fr. … (of which Fr. … to C Ltd. and Fr. … to A Ltd.) (see E. 4d/cc of the contested decision). The receivables from the cash pool leaders had therefore existed for more than twelve months at the balance sheet dates for the 2015 and 2016 financial years – in line with the intentions of the tax payers – and had also existed during the year – in relation to C Ltd. with one one-day exception (see E. 4f/oo of the contested decision) – showed a consistently positive balance (see E. 4d/dd and E. 4d/ff of the contested decision). According to the lower court, the fact that a short notice period of 45 days had been agreed in the contracts between the tax payer and C Ltd. and that funds could be withdrawn at any time within three days did not change the qualification as a long-term investment. The allocation of an asset to fixed assets does not depend on its actual condition or the possibility of obtaining it under civil law through cancellation or withdrawal; rather, the purpose or the intentions of the tax payer must be taken into account. In the present case, these were aimed at long-term use, which was expressly confirmed by the auditor/auditor of the tax payer (see E. 4f/rr of the contested decision). 6.3 First of all, with regard to the considerations of the lower court, it must be pointed out that the principle of the authority of the commercial balance sheet for the question, whether a short or long-term loan exists in a specific case and whether – subsequently – the interest rates agreed between two group companies can withstand a third-party comparison. If an overall consideration of the contractual basis and the purpose of a loan suggests it, the tax authorities can and must assume a short-term loan (or, conversely, a long-term loan despite this loan being recognised in the balance sheet under fixed assets) without having to make a balance sheet amendment or balance sheet correction (in this respect, the complaint is correct, p. 11). However, since it can be assumed that an annual financial statement (certified by an auditor as compliant with commercial law) fulfils the principles of completeness, truth and verifiability (Art. 957a para. 2 items 1 and 5 CO), there must be valid reasons for such a deviation. If a company recognises a loan granted within ...

Bunge Iberica SA participates in the Group’s cash pooling system, both as a borrower and as a provider of funds. The tax authorities had issued a notice of assessment in which the interest rates on deposits and withdrawals were adjusted and determined on the basis of a group credit rating. Bunge Iberica SA filed a complaint with the Tax Court, which was rejected in a decision issued in October 2019, and an appeal was then filed with the National Court. Decision of the Court. The National Court rejected the appeal of Bunge Iberica SA and confirmed the tax assessment. Excerpt “As the ONFI report states, and the Board agrees, the management and administration functions performed are not comparable to those performed by a financial institution, “which borrows money in order to invest it for its own account, either through loans or any other operation, the interest spread being its financial margin. This margin does not justify [see the Reports transcribed on pp. 6 et seq. of the ONFI report] the remuneration of the functions carried out by the leading entities…which should be remunerated as befits a provider of low value-added services, applying a margin on their costs”. It should also be noted that the assets belong to the contributors and that BUNGE FINANCE BV has no staff of its own. The risks are assumed by BUNGE SPAIN, in fact, when it acts as borrower, the risk of non-payment is borne by the contributing or lending entities and when it acts as depositary or contributor, BUNGE SPAIN assumes the risk of insolvency of the borrowers, in the event that they do not repay what they have received. In other words, the leading entity “does not assume any risk of non-payment as it does not have the control or financial capacity that lies with the participating entities”. As explained on p. 29, “in the cash pooling system of which BUNGE IBERICA is a part, the leading entity does not assume the same position as a bank, but simply administrative and management tasks, but does not assume the risk of non-payment either from the economic or contractual point of view (in fact in the report of BUNGE FINANCE BV there is no mention of this question, nor is it included in the current account contract), but this risk is assumed by all the participating entities. The leading entity centralises the cash and grants financing to cash pooling entities, but on behalf of the contributing entities, which are the ones that actually have the funds to lend and assume the risk of default”. D.- As explained on p. 31, it is logical that cash pooling produces a “mutual” advantage. Indeed, “the advantages must be shared among all the participants in the operation: just as all the members of the cash pooling bring solvency to the group as a whole, the overall savings must also be shared. This is not the case here, in which the benefit is located in the …leading entity, without it having been proven throughout the verification period that it was deserving of such benefit”. And he adds, which seems to us to be very relevant, it is true that the interest rate is based on the risk assumed by the lender – as stated in the expert report provided – and that, in a context in which two parties intervene, the solvency and liquidity of the borrower will be decisive; but in ‘a cash pooling system involving many more participants – usually all the companies in the group – and all of them holding debtor and creditor positions without distinction, this mutual design generates synergies which should be to the benefit of the whole group’. It is therefore logical to start from the rating of the group, in fact “the role played by the so-called “The Bunge Master Trust” in the material execution of the cash pooling operations has been highlighted, as the sole interlocutor with third party entities for the purpose of obtaining for the group the financing that it cannot obtain via the cash pooling operations of the different entities that make up the group. Likewise, it has been indicated that when the group turns to third parties the credential it displays is the group’s credit ratio, to which the credit ratio of the different entities that make up the group contributes. This is the reason why, in the determination of the interest rate, the Inspectorates have taken the group ratio as a reference”. As argued on p. 33, if the asymmetry criterion were to be applied “there could be a perverse effect for the member entities. [It is possible that in a certain period in which the amounts withdrawn from the pool by an entity were lower than those contributed, the overall result for this entity, in net terms, would result in a financial expense, precisely because of this asymmetrical remuneration”, so that the entity would obtain disadvantages. As stated on pp. 34 and 35 of the ONFI report, “from an operational point of view, given the spirit of improvement of the group as a whole, an element present in any commercial transaction, it would make no sense to obtain financing at a higher price than that which could result from acting as a whole. Nor would it make any particular sense to resort to external financing when cash requirements can easily be met with that which derives from the activity itself, even when it comes from other entities. Both considerations lead to the conclusion that taking into account the qualification of the group is the most approximate way of reconstructing the comparability of operations such as those under study and that this also implies a certain degree of prudence. On the basis of the above premises, which the Board considers to be correct, the Administration explains the specific methodology applied – the comparable free price method” Click here for English translation Click here for other translation ...

HPI – CZ spol. s r.o. is a subsidiary in the Monier group which is active in the production, sales and services of roofing and insulation products. In June 2012 the Monier group replaced an existing cash pool arrangement with a new cash pool arrangement. The documents submitted show that on 1 April 2009 HPI concluded a cash pool agreement with Monier Group Services GmbH , which consisted in HPI sending the balance of its bank account once a week to the group’s cash pooling account – thus making those funds available to the other members of the group, who could use them to ‘cover’ the negative balances in their accounts. The companies that deposited funds into the cash pooling account received interest on these deposits at 1M PRIBOR + 3%; loans from the shared account bore interest at 1M PRIBOR + 3.75%. With effect from 1 June 2012, HPI concluded a new cash pooling agreement with a newly established company in Luxembourg, Monier Finance S.á.r.l. Under the new agreement, deposits were now remunerated at 1M PRIBOR + 0,17 % and loans at 1M PRIBOR + 4,5 %. HPI was in the position of a depositor, sending the funds at its disposal to the cash pooling account (but also having the possibility to draw funds from that account). Following an audit of HPI the tax authorities issued an assessment of additional income resulting from HPI’s participation in the new cash pool. According to the tax authorities the interest rates applied to HPI’s deposits in the new cash pool had not been at arm’s length. The tax authorities determined the arm’s length interest rates to be the same rates that had been applied by the parties in the previously cash pool arrangement from 1 January 2012 to 31 May 2012. HPI filed an appeal and in February 2022 the Regional court set aside the assessment issued by the tax authorities. The Regional Court held that the tax authority’s view, which determined the arm’s length interest rate by taking it to be the rate agreed in the old cash pool arrangement from 1 January 2012 to 31 May 2012, was contrary to the meaning of section 23(7) of the Income Tax Act. According to the Court it was for the tax authority to prove that the prices agreed between related parties differed from those agreed in normal commercial relations. In the absence of comparable market transactions between independent persons, the tax authority may determine the price as a hypothetical estimate based on logical and rational reasoning and economic experience. However, according to the Court the tax authorities did not even examine the normal price for the period from 1 January 2012 to 31 December 2012 but merely applied the interest rate from the cash pooling agreement in force until 31 May 2012. An appeal was then filed by the tax authorities with the Supreme Administrative Court. Judgment of the Supreme Administrative Court The Court decided in favour of HPI and upheld the decision from the Regional Court. Excerpt “….The applicant described the operation of the cash pool until 31 May 2012. Monier Group Services GmbH was the managing member and the applicant sent the balance of the account to the cash pool after assessing its cash flow. As from 1 June 2012, Monier Finance S.a.r.l. became the managing member and the balance was automatically sent to the cash pool account on a daily basis. The balance in the applicant’s bank account was thus zero every day. In the event of a negative balance, the applicant would balance the cash pool account. As regards the sharp drop in the interest rates in the cash pool, she stated that they were set according to the interest rates provided for deposits by local banks. In order to encourage members to join the cash pool, the managing member of the group offered them a rate equivalent to 1M EURIBOR or IBOR + 0,17 % (or 0,174 % in 2016). Thanks to the automatic sending of funds to the cash pool, the applicant saved approximately CZK 100-150 thousand per year in bank charges. In the end, the members set the rate as 1M PRIBOR + 0.17%. The 0,17 % corresponds to the margin of the banks, which, however, deducted it from the reference rate of 1M PRIBOR. The members of the cash pool thus obtained a rate 0.34% higher than the conventional banks. Thanks to the interest rate on a daily basis, the appreciation was higher, and this is what made the new contract from 1 June 2012 different from the original contract. Monier Finance acted as an “in-house bank” for the members of the Group and charged a premium in the form of higher interest for the risks associated with lending money to the members of the cash pool and administrative costs. [19] The tax authorities have not demonstrated a difference between the interest rate agreed between the applicant and the managing member of the cash pool on the one hand and the benchmark rate on the other. Nor did the tax authority prove the reference price (rate) and, on the contrary, required the applicant to explain the difference itself. In short, the applicant’s profit from the interest on the cash pool deposits had decreased, the tax authorities saw no reason for such a decrease and therefore considered the rate which was higher (the rate agreed until 31 May 2012) to be in line with the arm’s length principle. However, it completely refrained from establishing the price that would have been agreed between independent parties and instead asked the applicant to explain the decrease in the agreed interest rate. … —The tax administrator required the applicant to explain the difference between the rates, without having even ascertained the comparative rate itself. Indeed, the tax authorities merely assumed that the original cash pooling agreement provided for a deposit rate of 1M PRIBOR + 3 %. The fact that the new rate was significantly lower could be a ...

HPI – CZ spol. s r.o. is a subsidiary in the Monier group. In June 2012 the group replaced an existing cash pool arrangement with a new cash pool arrangement. Following an audit of HPI the tax authorities issued an assessment of additional income for FY 2012 resulting from HPI’s participation in the new cash pool. According to the tax authorities the interest rates applied to HPI’s deposits in the new cash pool (1M PRIBOR + 0.17%) had not been at arm’s length. The tax authorities determined the arm’s length interest rates to be the same rates that had been applied in the previously cash pool arrangement (1M PRIBOR + 3%) from 1 January 2012 to 31 May 2012. HPI filed an appeal and in January 2019 the Regional court set aside the assessment issued by the tax authorities. The Regional Court held that the tax authority’s view, which determined the arm’s length interest rate by taking it to be the rate agreed in the old cash pool arrangement from 1 January 2012 to 31 May 2012, was contrary to the meaning of section 23(7) of the Income Tax Act. According to the Court it was for the tax authority to prove that the prices agreed between related parties differed from those agreed in normal commercial relations. In the absence of comparable market transactions between independent persons, the tax authority may determine the price as a hypothetical estimate based on logical and rational reasoning and economic experience. However, according to the Court the tax authorities did not even examine the normal price for the period from 1 January 2012 to 31 December 2012. It merely took the rate from the cash pooling agreement in force until 31 May 2012. An appeal was then filed by the tax authorities with the Supreme Administrative Court. Judgment of the Supreme Administrative Court The Court decided in favour of HPI and upheld the decision from the Regional Court. Excerpt (…) “[55] The defendant’s task was to show that, had the applicant not been a related party, it would have obtained a comparable product on the market on different terms. And since a cash pooling account is different from a current account (this type of account is, by its very nature, agreed between related parties who have sufficient knowledge of their economic situation), it was appropriate to adjust the accounts provided by the banks (or the interest rates provided on those accounts) accordingly (to take account of the claimed advantages of a cash pooling account). Simply put, the defendant should have asked the banking entities what interest rate they would be willing to provide an account with similar terms to the applicant’s cash pooling account; alternatively, it should have asked an expert to adjust the rates provided by the banks accordingly if the products offered by the banks worked in a similar way to the cash pooling account. [56] In the tax audit report, the tax administrator stated that the price negotiated by the applicant was also unsustainable in view of the fact that the external provider of the funds was granted a rate of 1M PRIBOR + 3.22%, while Monier Group S.á.r.l. and MGS also obtained higher rates (+ 3.45% and + 3.35%), as the complainant also argued in its appeal. However, the applicant has repeatedly stated that these rates cannot be regarded as a ‘benchmark’ with the rates granted to members of the cash pool, since these rates did not relate to deposits of funds into the cash pool for the purpose of matching the balances of individual members, but were a revolving credit facility granted to the newly established managing member of the cash pool as an intercompany bank at its inception. The 3,22 % margin then represented, according to the applicant, MGS’s costs, to which it added a profit margin of 13 basis points – MGS’s total margin on the establishment of the new managing member of the group was thus the 3,35 % referred to above – at which rate MGS lent EUR 150 million to Monier Group S.á.r.l., which in turn lent those funds to the newly established MF at a rate of 3,45 %. The tax authorities’ assertion that other members of the group (or external providers of funds) received substantially higher interest rates for deposits into the cash pool is thus not consistent with the content of the file, in particular the content of the applicant’s statements, which repeatedly (three times in total) explained to the tax authorities during the tax audit how the new cash pooling system worked. [57] The Regional Court also correctly concluded that the tax authorities failed to take into account all the circumstances of the case, in particular by completely disregarding the applicant’s claim that the new system was also more advantageous for all members of the group – on the basis of the new cash pooling agreement, the applicant saved approximately CZK 100-150 thousand per year in bank charges, as the new cash pooling was automatic. According to the applicant, the tax base increased by that amount. The complainant’s claim that the gross profit of the managing member of the group increased from 0,75 % to 4,33 % without any significant change in the functions and risks borne by the managing member of the group cannot therefore be accepted. The reasons for that change were repeatedly described by the applicant to the tax authorities but were not sufficiently taken into account by the tax authorities. Instead, the tax authority proceeded without further consideration from the fact that until 31 May 2016 the applicant’s deposits in the cash pool were remunerated at 1 M PRIBOR + 3 %, which it considered to be the market rate, without, however, demonstrating the difference between the negotiated price (rate) and the benchmark rate. [58] Nor was it sufficient to find that the applicant had the right under the original cash pooling agreement to request an adjustment of the interest rates in line with market conditions, ...

A Group had established a physical cash-pool where funds from participants was transferred to and from a consolidating account (cash pool). The Polish Supreme Administrative Court concluded that every agreement in which the lender is obligated to transfer ownership of a specified amount of funds to the borrower, and the borrower is obligated to return the amount and pay interest, even if obligations of the parties to the agreement are implicit, constitutes a loan agreement. 2016 Decision Click here for translation 2015 Decision Click here for translation ...

Decision on the criteria for the arm’s length test of interest rates on inter-company loans. This case i about intercompany loans created by zero balancing cash pooling and the funding of group companies by a group finance company. The Swiss Federal Supreme Court states – If the terms of inter-company loans are not conforming to market conditions, then the payment qualifies as a distribution and a special reserve must be made in the balance sheet of the lender. The Court also states – It is questionable from the outset whether a participation in the cash pool, by which the participant disposes of its liquidity, can pass the market conditions test at all. Click here for translation ...