Category: Arm’s Length Principle

The authoritative statement of the arm’s length principle as used in transfer pricing is found in paragraph 1 of Article 9 of the OECD Model Tax Convention, which forms the basis of bilateral tax treaties involving OECD member countries and an increasing number of non-member countries.

Article 9 provides: [Where] conditions are made or imposed between the two [associated] enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.

The analysis required to apply the arm’s length principle on controlled transactions is referred to in the transfer pricing guidelines as a comparability analysis. See TPG 1.6.

Poland vs "W", October 2023, Supreme Administrative Court, Case No II FSK 358/21

Poland vs “W”, October 2023, Supreme Administrative Court, Case No II FSK 358/21

A public medical university “W” had submitted a request for a written interpretation (binding ruling) to the tax authorities asking whether it was considered a related entity under the Polish arm’s length provisions to a public health care institution it had established. The tax authorities replied in the affirmative. Not satisfied with the ruling, an appeal was filed with the Regional Court, which rejected the binding ruling and concluded that the parties were not related. The tax authorities then appealed to the Supreme Administrative Court. Judgement of the Supreme Administrative Court. The Supreme Administrative Court ruled in favor of the tax authorities and overturned the decision of the Regional Court. Excerpt “It is not possible to agree with the assertion of the Court of First Instance that it is possible to assume a priori that the funds received under the agreement by the SPZOZ do ... Continue to full case
Brazil, October 2023, Superior Tribunal de Justiça (Second Chamber), Case No REsp 1.787.614-SP

Brazil, October 2023, Superior Tribunal de Justiça (Second Chamber), Case No REsp 1.787.614-SP

The Second Chamber of the Supreme Court of Brazil issued an interpretation of Normative Instruction SRF n. 243/2002 concerning the legal basis for application of the sixth method – RPL60 – under the Brazilianarm’s length provision contained in art. 18 of Law no. 9430/1996. The Second Champer of the Supreme Court concluded that the interpretation adopted by the Brazilian Federal Revenue Service through Normative Instruction SRF n. 243/2002 did not violate art. 18 of Law n. 9.430/1996. Excerpts “This is a writ of mandamus filed for the purpose of ensuring the right to calculate transfer prices using the PRL method according to the criteria established by art. 18 of Law no. 9430/1996, excluding those contained in SRF Normative Instruction no. 243/2002. The main objective of the transfer pricing methodology is to ensure that taxable events do not escape the state’s taxing power due to the ... Continue to full case
Czech Republic vs Mayer & Cie. CZ, s.r.o., August 2023, Supreme Administrative Court, Case No.  10 Afs 162/2021 - 50

Czech Republic vs Mayer & Cie. CZ, s.r.o., August 2023, Supreme Administrative Court, Case No. 10 Afs 162/2021 – 50

Mayer & Cie is one of the world’s leading suppliers of industrial knitting machines. Following an audit, the tax authorities disallowed a tax deduction of CZK 4,066,097 in FY2014, which Mayer & Cie. had incurred as a result of the disposal of unusable material. According to the tax authorities, the disposal was made on the basis of a controlled transaction in the form of an order from the parent company to cease production of certain knitting machines. Mayer & Cie. appealed to the Regional Court, which ruled in its favour. The court concluded that the Czech arm’s length principle did not apply to the transaction in question, as it did not involve a price agreed between related parties. The tax authorities then appealed to the Supreme Administrative Court. Judgement of the court The Supreme Administrative Court upheld the decision of the Regional Court and ruled ... Continue to full case
Italy vs Cidiverte S.p.A., June 2023, Supreme Court, no 18206/2023

Italy vs Cidiverte S.p.A., June 2023, Supreme Court, no 18206/2023

Cidiverte S.p.A. is an Italian distributor of video-games. Following an audit, the tax authorities issued Cidiverte S.p.A an assessment of additional income resulting from a reduction of the pricing of costs it had paid to its Italian sister company. Appeals were filed by Cidiverte with the local and regional courts, but the objections were dismissed by reference to a previous judgement of the Supreme Court in Case no. 11949/2012 concerning disallowed costs in the same group. The regional court found that, Cidiverte had failed to prove the existence, pertinence and conformity of the price shown on the invoice with the arm’s length value. A study carried out by Price Waterhouse Coopers on behalf of Cidiverte was considered to be a mere “opinion” and therefore not sufficient evidence to support the deductions in question. An appeal was then filed by Cidiverte with the Supreme Court. Judgement ... Continue to full case
Poland vs "V-Tobacco S.A.", May 2023, Administrative Court, Case No SA/Po 112/23

Poland vs “V-Tobacco S.A.”, May 2023, Administrative Court, Case No SA/Po 112/23

V. sp. z o.o. was part of the E group, in which the parent company was E. S.A.. V.’s principal activity was wholesale of tobacco products. The authority issued an assessment based on finding of irregularities consisting in the company’s overstatement, in its VAT purchase registers and tax returns for the periods indicated, of the net purchase value and input VAT resulting from invoices issued to it by: 1) L. sp. z o.o. and I. sp. z o.o. for marketing services for e-cigarettes, 2) E. S. sp. z o.o. for data processing services, 3) E. S. sp. z o.o. concerning re-invoicing of purchases incurred by E. S. sp. z o.o.. The tax authorities did not find that V. sp. z o.o. was entitled to reduce output tax by the input tax shown on the disputed invoices issued to it by: L. sp. z o.o. and ... Continue to full case
Brazil vs Janssen-Cilag Farmaceutica LTDA, May 2023, Superior Tribunal de Justiça (First Chamber), Case No AREsp 511.736/SP

Brazil vs Janssen-Cilag Farmaceutica LTDA, May 2023, Superior Tribunal de Justiça (First Chamber), Case No AREsp 511.736/SP

Janssen-Cilag Farmaceutica LTDA filed a request for clarification with the Superior Tribunal de Justica concerning the sixt method – PRL60 – applied in Brazil in the years in question. Accordcing to the the company, there were no legal basis for applying the method. Judgement of the Supreme Court The Court dismissed the complaint. Excerpts “The appellant has failed to demonstrate any omission or contradiction in the judgment, which was expressed in a clear and reasoned manner with regard to the issues relevant to the resolution of the dispute. According to the case law of this Court, “the purpose of a motion for clarification is simply and solely to complete, clarify or correct an omitted, obscure or contradictory decision. They are not intended to adjust the decision to the understanding of the embattled party, nor to accept claims that reflect mere nonconformity, and even less to ... Continue to full case
Czech Republic vs ESAB CZ, s. r. o., May 2023, Regional Court , Case No 31 Af 21/2022 - 99

Czech Republic vs ESAB CZ, s. r. o., May 2023, Regional Court , Case No 31 Af 21/2022 – 99

ESAB CZ was a contract manufacturer for ESAB Europe. The contract set ESAB CZ’s target profit margin for 2014 and 2015 at between 2,5 % and 3,5 %, with an adjustment to 3 % if the actual profit margin achieved was outside that range. Those values were determined on the basis of a benchmarking analysis which produced a minimum profit margin of 0,41 % and an interquartile range of profit margins between 2,14 % and 5,17 %. The benchmarking analysis were not disputed, but the tax authorities held that the cost base on which the markup was calculated should have included annual amortisations/depreciations. ESAB CZ disagreed and filed a complaint with the Regional Court. Judgement of the Court The court ruled in favour of the tax authorities. Excerpts “51. Furthermore, it should be emphasised that the applicant has not demonstrated that the asset allowance does ... Continue to full case
Italy vs Autocentro Pavese S.R.L., April 2023, Supreme Court, Case No 10422/2023

Italy vs Autocentro Pavese S.R.L., April 2023, Supreme Court, Case No 10422/2023

Autocentro Pavese S.R.L., a company engaged in the purchase and sale of cars, had rented a showroom to another company with the same shareholding structure and director for a fee of only 5,000 euro per year. Following a tax audit an assessment of additional taxes was issued. The audit had resulted in several findings, one of which concerned the failure to issue invoices in accordance with market prices for renting of showrooms. The Court of Appeal upheld the assessment and an appeal was then lodged by Autocentro Pavese S.R.L. with the Supreme Court. Judgement of the Supreme Court The Supreme Court upheld the judgement and dismissed the appeal of Autocentro Pavese S.R.L. “On the subject of the determination of business income, the deviation from the “normal value” of the transaction price pursuant to Article 9 of Presidential Decree No. 917 of 1986 may in fact ... Continue to full case
Mauritius vs Innodis Ltd, February 2023, Supreme Court, Case No 2023 SCJ 73

Mauritius vs Innodis Ltd, February 2023, Supreme Court, Case No 2023 SCJ 73

Innodis granted loans to five wholly-owned subsidiaries between 2002 and 2004. The loans were unsecured, interest-free and had a grace period of one year. The subsidiaries to which the loans were granted were either start-up companies with no assets or companies in financial difficulties. The tax authorities (MRA) had carried out an assessment of the tax liability of Innodis Ltd in respect of the assessment years 2002 – 2003 and 2003 – 2004. In the course of the exercise, a number of items were added to the taxable income, including income from interest-free loans to subsidiaries and overseas passage allowances to eligible employees, which had been earmarked but not paid. The tax authorities were of the opinion that the grant of the interest-free loans was not on arm’s length terms in accordance with section 75 of the Income Tax Act 1995 (ITA) and was clearly ... Continue to full case
Italy vs Arditi S.p.A., December 2022, Supreme Administrative Court, Case No 37437/2022

Italy vs Arditi S.p.A., December 2022, Supreme Administrative Court, Case No 37437/2022

Arditi S.p.A. is an Italian group in the lighting industry. It has a subsidiary in Hong Kong which in turn holds the shares in a Chinese subsidiary where products are manufactured. Following an audit the tax authorities held that the entities in Hong Kong and China had used the trademark owned by the Italian parent without paying royalties, and on the basis of the arm’s length principle a 5% royalty was added to the taxable income of Arditi S.p.A. Arditi appealed against this assessment alleging that it had never received any remuneration for the use of its trademark by the subsidiary, and in any case that the tax authorities had not determined the royalty in accordance with the arm’s length principle. The Court of first instance upheld the appeal of Arditi and set aside the assessment. An appeal was then filed by the tax authorities ... Continue to full case
Italy vs Prinoth S.p.A., December 2022, Supreme Administrative Court, Case No 36275/2022

Italy vs Prinoth S.p.A., December 2022, Supreme Administrative Court, Case No 36275/2022

Prinoth S.p.A. is an Italian manufacturer of snow groomers and tracked vehicles. For a number of years the parent company had been suffering losses while the distribution subsidiaries in the group had substantial profits. Following an audit the tax authorities concluded that the transfer prices applied between the parent company and the distributors in the group had been incorrect. An assessment was issued where the transfer pricing method applied by the group (cost +) was rejected and replaced with a CUP/RPM approach based on the pricing applied when selling to independent distributors. An appeal was filed by Prinoth S.p.A. which was rejected by the Court of first instance. The Court considered “the assessment based on the price comparison method to be well-founded, from which it emerged that in the three-year period from 2006 to 2008 the company had sold to its subsidiaries with a constant ... Continue to full case
Germany vs "Import GmbH", October 2022, FG München, Case No 14 K 588/20

Germany vs “Import GmbH”, October 2022, FG München, Case No 14 K 588/20

The customs value declared by “Import GmbH” of the goods imported from related parties X, Y and Z was in dispute. In the course of a customs audit, the customs office (Hauptzollamt, HZA) found that Y had invoiced “Import GmbH” for subsequent debit amounts of EUR (…) for 2015, EUR (…) for 2016 and EUR (…) for 2017. These were based on a Distribution Agreement of (…) concluded between “Import GmbH” and Y, according to which “Import GmbH” undertook to purchase products from the latter and to sell them in the defined distribution area. With the 1st Supplementary Agreement of (…), supplies from affiliated companies of the group company were also included in this agreement and thus, inter alia, also the supplies from Z. With the second supplementary agreement of the same date, it was stipulated that “Import GmbH” should receive an “agreed margin” which ... Continue to full case
Germany vs "H-Customs GmbH", May 2022, Bundesfinanzhof, Case No VII R 2/19

Germany vs “H-Customs GmbH”, May 2022, Bundesfinanzhof, Case No VII R 2/19

H-Customs GmbH – the applicant and appellant – is a subsidiary of H, Japan. In the period at issue, from 17 October 2009 to 30 September 2010, H-Customs GmbH imported more than 1,000 consignments of various goods from H, which it had cleared for free circulation under customs and tax law at the defendant HZA (Hauptzollamt – German Customs Authorities). H-Customs GmbH declared the prices invoiced to it by H Japan as the customs value. Some of the imported articles were duty-free; for the articles that were not duty-free, the HZA imposed customs duties of between 1.4 % and 6.7 % by means of import duty notices. In 2012, H-Customs GmbH applied to the HZA for a refund of customs duties for the goods imported during the period at issue in the total amount of… €. It referred to an Advance Pricing Agreement (APA) concluded ... Continue to full case
Germany vs "C GmbH", June 2022, Finanzgericht Köln, Case No 10 K 1406/18

Germany vs “C GmbH”, June 2022, Finanzgericht Köln, Case No 10 K 1406/18

In 2014 a profit transfer agreement was effectively concluded between the plaintiff, C GmbH (controlled company), and its sole shareholder A. The profits to be transferred and interest to be paid for the disputed years 2009-2011 were subsequently booked to a “liabilities to shareholders” clearing account, but counterclaims or lump sum payments were not booked. The tax Authorities did not recognize the profit transfer agreement for 2009-2011 on the grounds that the agreement had not actually been implemented before 2014. Merely posting a liability to the clearing account is not sufficient. An appeal was filed by C GmbH. Judgement of the FG The FG dismissed the appeal. The court agreed with the tax authorities and concluded that the 2014 profit transfer agreement had not actually been carried out for 2009-2011. Click here for English translation Click here for other translation 10_K_1406_18_Urteil_20220621 ... Continue to full case
Italy vs Vincenzo Zucchi Spa, May 2022, Supreme Court, Cases No 13718/2022

Italy vs Vincenzo Zucchi Spa, May 2022, Supreme Court, Cases No 13718/2022

Vincenzo Zucchi spa is an Italian company that operates in the textile sector. Following an audit an assessment was issued related to various controlled transaktions – deductions for bad debt, deductions for costs, lack of income on a loan, income from sale of goods to foreign subsidiaries, cost of goods and services purchased from subsidiaries in non EU countries, costs of employees VAT etc. The adjustment was partially upheld and partially dismissed by the Court of Appeal. An appeal and cross appeal was then filed with the Supreme Court by the tax authorities and Vincenzo Zucchi. Among the objections in the cross appeal filed by Vincenzo Zucchi was a claim stating that transfer pricing rules were not applicable in the case since the group was using global tax consolidation. Judgement of the Supreme Court The Supreme Court upheld the second plea in the main appeal ... Continue to full case
Poland vs M.P. sp. z o.o., March 2022, Administrative Court, Case No I SA/Bd 30/22

Poland vs M.P. sp. z o.o., March 2022, Administrative Court, Case No I SA/Bd 30/22

The Administrative Court found that a voluntary redemption of shares was not a controlled transaction covered by arm’s length provisions. A redemption is a corporation’s repurchase of all or a portion of the shares held by a shareholder at an amount not in excess of the amount stated in the articles or calculated according to a formula stated in the articles. A redemption of shares can only take place between a company and its shareholders. Hence, terms and pricing of the transaction cannot be determined based on unrelated transactions. The purpose of the redemption of shares is not to modify the amount of income achieved by the related parties by applying a non-arm’s length price. Click here for English Translation Click here for other translation Poland case I SA_Bd 30_22 - Wyrok WSA w Bydgoszczy z 2022-03-22 ... Continue to full case
Poland vs K.O., February 2022, Supreme Administrative Court, Case No II FSK 1544/20

Poland vs K.O., February 2022, Supreme Administrative Court, Case No II FSK 1544/20

By judgment of 13 March 2020, the Provincial Administrative Court upheld the complaint filed by K.O. and revoked a decision issued by the tax authorities on the determination of the amount of the tax liability resulting from a transfer of shares between K.O. and a related party in 2016. An appeal was filed by the tax authorities with the Supreme Administrative Court in which the authorities stated that Provincial Administrative Court incorrectly had concluded that the nominal value of shares taken up by a taxpayer is not subject to market mechanisms and, therefore, the authority should not question the revenue thus generated. According to the tax authorities the taxpayer effected a transaction with a related entity of which it was the owner and determined without justification a contribution in-kind disproportionately high in relation to the shares acquired in the related entity, while the authority, taking ... Continue to full case
Poland vs A. Sp. z o. o., February 2022, Supreme Administrative Court, Case No II FSK 1475/19

Poland vs A. Sp. z o. o., February 2022, Supreme Administrative Court, Case No II FSK 1475/19

A. Sp. z o.o. was established to carry out an investment project consisting in construction of a shopping center. In order to raise funds, the company concluded a loan agreement. The loan agreement was guaranteed by shareholders and other related parties. By virtue of the guarantees, the guarantors became solitarily liable for the Applicant’s obligations. The guarantees were granted free of charge. A. Sp. z o.o. was not obliged to pay any remuneration or provide any other mutual benefit to the guarantors. In connection with the above description, the following questions were asked: (1) Will A. Sp. z o.o. be obliged to prepare transfer pricing documentation in connection with the gratuitous service received, and if so, both for the year in which the surety is granted to the Applicant or also for subsequent tax years during the term of the security? (2) Will A. Sp ... Continue to full case
Belgium, December 2021, Constitutional Court, Case No 184/2021

Belgium, December 2021, Constitutional Court, Case No 184/2021

By a notice of December 2020, the Court of Appeal of Brussels referred the following question for a preliminary ruling by the Constitutional Court : “ Does article 207, second paragraph, ITC (1992), as it applies, read together with article 79 ITC (1992), in the interpretation that it also applies to abnormal or gratuitous advantages obtained by a Belgian company from a foreign company, violate articles 10, 11 and 172 of the Constitution? “. The Belgian company “D.W.B.”, of which Y.S. and R.W. were the managers, was set up on 4 October 2006 by the Dutch company “W.”. On 25 October 2006, the latter also set up the Dutch company “D.W.” On 9 November 2006, bv “W.” sold its shareholdings in a number of subsidiaries of the D.W. group to its subsidiary nv ” D.W. “. It was agreed that 20 % of the selling ... Continue to full case
Czech Republic vs TIMA, spol. s ro, December 2021, Supreme Administrative Court, Case No 2 Afs 132/2020 - 58

Czech Republic vs TIMA, spol. s ro, December 2021, Supreme Administrative Court, Case No 2 Afs 132/2020 – 58

In this case, the question was whether the finding of a difference between the agreed price and the normal price without a satisfactory reason was sufficient to establish a relationship between two or more parties, or whether facts in the taxable entity’s behaviour indicating that the commercial transaction was unusual had to be proven further. Judgement of the Supreme Administrative Court The Court referred the case to the extended panel for a decision. Excerpts “[10] The case law on this provision is extensive. The Regional Court relied on the judgment of the Supreme Administrative Court (SAC) of 13 June 2013, No. 7 Afs 47/2013-30, according to which “(d)iction 5 of Section 23(7)(b) of Act No. 586/1992 Coll., on Income Taxes, does not apply ‘solely and exclusively’ to persons who have actually and directly created a legal relationship for the purpose of reducing the tax base ... Continue to full case