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Austria vs “Lamps AG”, June 2022, Bundesfinanzgericht, Case No RV/7102082/2021

Posted on June 2, 2022 | By Courts of Austria | No comments

Category: Financial Transactions, Transfer Pricing Methods | Tag: Comparable Uncontrolled Price method (CUP), Cost plus method, Guarantee fee, Hidden distribution of profits, Interest free loan, Late payment interest, Loan guarantee, Payment terms, Taxpayer cooperation, Trade receivable

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“Lamps AG” had various transactions with related parties. These included outstanding trade receivables from a sister company for which no interest was charged, product transactions for which the price had been adjusted, and guarantee commissions paid to the parent company in connection with a shareholder loan.

Following an audit, the tax authorities issued a notice of additional taxable income for the years 2002 to 2004. According to the tax authorities, the above transactions had not been priced at arm’s length and resulted in hidden distribution of profits.

“Lamps AG” filed an appeal with the Tax Court.

Judgment of the court.

The Tax Court overturned the assessment with respect to the product pricing and the guarantee commission, but upheld the assessment with respect to the lack of interest on the outstanding trade receivables. The court concluded that the failure to pay interest was a consequence of the parties being under common control.

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Related Guidelines

TPG2022 Chapter X paragraph 10.187Consider the same fact pattern as described in Example 1, but in this case assume that under the guidance in Section D.2, comparable uncontrolled transactions can be identified showing that the arm’s length price of a comparable guarantee would be in the range of 1% to 1.5%....

TPG2022 Chapter I paragraph 1.187The facts relating to S’s credit standing and borrowing power are identical to those in the preceding example. S borrows EUR 50 million from Bank A. The functional analysis suggests that Bank A would lend to S at an interest rate applicable to A rated borrowers without any formal guarantee....

TPG2022 Chapter II paragraph 2.13This part provides a detailed description of traditional transaction methods that are used to apply the arm’s length principle. These methods are the comparable uncontrolled price method or CUP method, the resale price method, and the cost plus method....

TPG2022 Chapter VII paragraph 7.31The method to be used to determine arm’s length transfer pricing for intra-group services should be determined according to the guidelines in Chapters I, II, and III. Often, the application of these guidelines will lead to use of the CUP or a cost-based method (cost plus method or cost-based TNMM)...

TPG2022 Chapter X paragraph 10.173An independent entity providing a financial guarantee would expect to receive a fee to compensate it for the risk it is taking in accepting the contingent liability and to reflect any value it is providing to the borrower in respect of the guarantee. However, it must be borne in mind...

TPG2022 Chapter X paragraph 10.172The difficulty with using the CUP method is that publicly available information about a sufficiently similar credit enhancing guarantee is unlikely to be found between unrelated parties given that unrelated party guarantees of bank loans are uncommon....

TPG2022 Chapter X paragraph 10.171In considering whether controlled and uncontrolled transactions are comparable, regard should be had to all the factors which may affect the guarantee fee including: the risk profile of the borrower, terms and conditions of the guarantee, term and conditions of the underlying loan (amount, currency, maturity, seniority etc.), credit rating...

TPG2022 Chapter X paragraph 10.170The CUP method could be used where there are external or internal comparables; independent guarantors providing guarantees in respect of comparable loans to other borrowers or where the same borrower has other comparable loans which are independently guaranteed....

TPG2022 Chapter X paragraph 10.161Where the effect of a guarantee is to permit a borrower to borrow a greater amount of debt than it could in the absence of the guarantee, the guarantee is not simply supporting the credit rating of the borrower but could be acting both to increase the borrowing capacity and...

TPG2022 Chapter X paragraph 10.95Whereas it is unlikely that an MNE group’s average interest rate paid on its external debt meets the comparability requirements to be considered as an internal CUP, it may be possible to identify potential comparable loans within the borrower’s or its MNE group’s financing with an independent lender as the...

Supplemental Guidance

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