Bulgaria vs CBS, March 2022, Supreme Administrative Court, Case No 3012

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By judgment of 22 May 2020, the Administrative Court set aside a tax assessment in which CBS International Netherlands B.V. had been denied reimbursement of withholding tax in the amount of BGN 156 830,27 related to royalties and license payments.

An appeal was filed by the tax authorities with the Supreme Administrative Court.

In the appeal the tax authorities held that the beneficial owner of the licence and royalty payments was not CBS International Netherlands B.V. but instead CBS CORPORATION, a company incorporated and domiciled in New York, USA. According to the tax authorities the main function of CBS International Netherlands B.V. was that of an intermediary between the end customers and the beneficial owner. This was further supported by the transfer pricing documentation, according to which the US company that bears the risk of the development activity, the market risk is borne equally by the two companies, and the only risks borne by the Dutch company are the currency, operational and credit risks, which in turn are not directly related to the development activity.

Judgement of the Supreme Administrative Court

The court upheld the decision of the court of first instance and decided in favour of CBS International Netherlands B.V.

Excerpt

“The activity from which the income is derived is that of granting rights under underlying television licence contracts. Corresponding to this activity is the risk identified in the transfer pricing documentation – development risk, market risk, currency risk, operational risk, credit risk. Neither CBS International Netherlands B.V. nor the Administration have alleged that the Dutch company was involved in the creation of the rights from the grant of which the income arose. Nor did the tax authorities deny that company’s right to grant the Bulgarian company the use of the copyright objects in return for consideration constituting the income on which the withholding tax was levied. To the contrary, there would be an assertion that there was no basis for the exchange of property and, accordingly, no object of taxation.
“CBS International Netherlands B.V. is not a company for the purpose of channelisation of income under section 136A(2) of the ITA. It has not been shown to be controlled by a person not entitled to the same type or amount of relief on direct receipt of income. Control of CBS International Netherlands B.V. is exercised by another Dutch company which is within the personal scope of the Netherlands DTT. There are no sources of information that control is exercised by the ultimate parent company, CBS Corporation, based in New York, USA.
The trial court was correct in finding that C.B.S. International Netherlands B.V. had assets, capital, and its own specialized personnel, and a comparison of the 2016 and 2017 C.B.S. figures showed that the company’s employees, offices, and profits were increasing, and therefore it was not a company that did not have assets, capital, and personnel consistent with its business. The existence of control over the use of the rights from which the income was earned is indicated by the content of the underlying contracts, which provide for penalties for non-performance and Fox Networks’ obligation to submit monthly reports.
Insofar as the grounds under Article 136 of the VAT Code for the application of the Netherlands DTT are met, CBS International Netherlands B.V. is also entitled to the relief under Article 12(1) of the Netherlands DTT. 1 of the Royalty Income Tax Treaty in its country of residence. There is therefore also a right to a refund of the withholding tax under Art. 195 para. In concluding that the refusal to refund the tax withheld and paid by the contested APV was unlawful, the first instance court made a correct decision which should be upheld.”

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Bulgaria vs CBS March 2022 SAC 3012

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