In 2003 Alesco NZ bought two other companies in New Zealand. Its Australian owner, Alesco Corporation, funded the acquisitions by advancing the purchase amount of $78 million. In consideration Alesco NZ issued a series of optional convertible notes (OCNs or notes). The notes were non-interest bearing for a fixed term and on maturity the holder was entitled to exercise an option to convert the notes into shares. Between 2003 and 2008 Alesco NZ claimed deductions for amounts treated as interest liabilities on the notes in accordance with relevant accounting standards and a determination issued by the Commissioner against its liability to taxation in New Zealand. In the High Court Heath the Commissioner’s treatment of the OCN funding structure as a tax avoidance arrangement under section BG 1 of the Income Tax Act of 1994 and the Income Tax Act of 2004 was upheld ...

This case concerned the Danish company, Swiss Re, Copenhagen Holding ApS, which was wholly owned by the US company, ERC Life Reinsurance Corporation. In 1999 the group considered transferring the German subsidiary, ERC Frankona Reinsurance Holding GmbH, from the US parent company to the Danish company. The value of the German company was determined to be DKK 7.8 billion. The purchase price was to be settled by the Danish Company issuing shares with a market value of DKK 4.2 billion and debt with a market value of DKK 3.6 billion. On 27 May 1999, the parent company and the Danish company considered to structure the debt as a subordinated, zero-coupon note. Compensation for the loan would be structured as a built-in capital gain in order to defer recognition of the compensation for the period 1 July 1999 to 30 June 2000. The Danish company would be unable to use a deduction in income year 1999. A built-in capital gain should be recognized in 2000 where payment of the first instalment would be made. If the compensation were structured as interest payments, the compensation should be recognized on an accrual basis. On 17 June 1999, a bank provided the Danish Company with information about market terms for a zero-coupon loan. On 21 June 1999 the acquisition ofthe German company was approved with effect from 1 July 1999. On 14 September 1999. On 15 October 1999, the parties signed the loan agreement. The principal of the loan was fixed at DKK 4.9 billion corresponding to a market value of DKK 3.6 billion. The effective interest on the loan was 6.1 % per annum. The Capital loss associated with the first instalment on 30 June 2000 was DKK 222 million, which was claimed by the Danish company as a deduction in its tax return for 2000. The Supreme Court affirmed the opinion of the High Court that section 34(5) (Danish statutes of limitation for controlled transactions) covered all types of adjustments of controlled transactions. The income years 1999 and 2000 were thus not time barred. The Court further noted the following : “The Supreme Court notes that the provision in section 2(1) of the Tax Assessment Act under which prices and terms of controlled transactions must comply with the “arm’s length principle” for tax purposes, according to the legislative history covers all relations between the parties, e.g. provision of services, loan agreements, transfer of assets, transfer for use of intangibles etc. According to the provision the tax authorities are entitled to make adjustments of transactions between related parties where a transaction does not reflect what could have been obtained between unrelated parties. The authority to make an adjustment covers all economic elements and other terms of relevance for taxation purposes including, for example, due date, recognition of interest and capital losses and the legal qualification of the transaction. A loan agreement on zero-coupon terms concluded between related parties with retroactive effect may thus be adjusted by the tax authorities on the basis of section 2(1) of the Tax Assessment Act. The Supreme Court further concurs that there is no basis to conclude that a final and binding agreement between Swiss Re Copenhagen Holding ApS and the parent company on the terms of the loan had been concluded before the signing of the loan agreement on 15 October 1999. On this basis the Supreme Court upholds the decision.” The Supreme Court thus held that the loan agreement infringed on the arm’s length principle as laid down in section 2 of the Tax Assessment Act, and that the adjustment made by the tax authorities was warranted. Click here for translation ...