In 2011, J.C.I. BV took out an 800 million euro loan at an interest rate of 7.22% from J.C.L.F. Sarl (hereafter referred to as ‘J.C.L.F.’), a Luxembourg company that operates through its US branch. Both J.C.I. BV and J.C.L.F. Sarl are part of the J.C. Group. J.C.I. BV repaid the loan in December 2016. As a result, it paid J.C.L.F. interest amounting to €38,025,033.33, corresponding to an annual interest rate of 7.22%.
In 2019, J.C.I. BV received a notice of amendment to the corporation tax return for FY 2016. The tax authorities challenged several aspects of J.C.I. BV’s intra-group financing and dividend structures. With regard to transfer pricing, the tax authorities claimed that an interest rate of 7.22% on a 2011 loan exceeded the arm’s length interest rate. They also claimed that certain intra-group arrangements created abnormal advantages and that profits were funnelled through UK conduit entities to generate DBI deductions without real taxation at the subsidiary level.
J.C.I. BV filed an appeal, arguing that the 7.22% interest rate was within the arm’s length range. The company also denied the claims of abnormal or favourable advantages, and challenged the applicability of the anti-abuse provisions on temporal grounds as the relevant legislation and the EU ATAD were not yet in force for the years in question.
Judgment
The Court ruled predominantly in favour of J.C.I. BV.
Regarding the arm’s length adjustment of the interest rate on the 2011 loan, the court stated that it was primarily up to the tax authorities to demonstrate that J.C.I. BV’s method led to an interest rate that was not at arm’s length, but they had failed to do so. Even if the tax authorities had succeeded in convincing the Court that J.C.I. BV’s method produced an interest rate that was not at arm’s length, they did not demonstrate that their own method produced an arm’s length result. However, the court permitted a downward adjustment to a rate of 6.93%, meaning that some of the interest was deemed to be non-arm’s length.
Excerpt
“20. In the opinion of the court, the defendant therefore fails to meet the burden of proof incumbent upon him that the modified CUP method used by the claimant in the T. e. produced a non-market-based result (interest rate), nor that — where applicable — the method used by the defendant himself leads to a market-based result (interest rate).
21. However, abstracting from the stipulated subordinated nature of the loan, the assumed market-conform interest rate of 6.93 per cent, which is the difference between the interest rate of 7.22 per cent assumed by the claimant on the one hand and the interest rate of 6.93 per cent assumed by the court on the other hand, based on the modified CUP method used in the T. e. report, hereby disregarding the stipulated subordinated nature of the loan — can the claimant be said to have received an abnormal (or favourable) advantage within the meaning of Article 26 WIB92. The extent of the abnormal (or favourable) advantage (as demonstrated by the defendant) within the meaning of Article 26 WIB92 therefore consists of the portion of the interest expense recognised in the relevant financial year that corresponds to an interest rate of 7.22 per cent – 6.93 per cent = 0.29 per cent. Consequently, the portion of the interest deducted that corresponds to an interest rate of 0.29 per cent must be added to the disallowed expenses as an abnormal or favourable advantage in accordance with Articles 26 and 185, §2, a) WIB92.
The disputed corporation tax assessment for the 2016 tax year must therefore be waived, insofar as only the amount of interest corresponding to an interest rate of 0.29 per cent can be added to the taxable base on the basis of Articles 26 and 185, §2 WIB92. In other words, the disputed corporate income tax assessment for 2016 must be waived in the amount of the difference between the interest rate of 4.88 per cent assumed by the defendant and the interest calculated on this basis, on the one hand, and the interest rate of 6.93 per cent assumed by the court and the interest calculated on this basis, on the other.”
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