Category: Financial Transactions
In transfer pricing financing transactions includes inter-company loans, treasury activity (eg. cash pooling), and guarantees within MNEs.
![New Zealand vs Frucor Suntory, September 2020, Court of appeal, Case No [2020] NZCA 383](http://c9r4v5v2.stackpathcdn.com/wp-content/plugins/pt-content-views-pro/public/assets/images/lazy_image.png)
New Zealand vs Frucor Suntory, September 2020, Court of appeal, Case No [2020] NZCA 383
Frucor Suntory (FHNZ) had deducted purported interest expenses that had arisen in the context of a tax scheme involving, among other steps, its issue of a Convertible Note to Deutsche Bank, New Zealand Branch (DBNZ), and a forward purchase of the shares DBNZ could call for under the Note by FHNZ’s Singapore based parent Danone Asia Pte Ltd (DAP). The Convertible Note had a face value of $204,421,565 and carried interest at a rate of 6.5 per cent per annum. Over its five-year life, FHNZ paid DBNZ approximately $66 million which FHNZ characterised as interest and deducted for income tax purposes. The tax authorities issued an assessment where deductions of interest expenses in the amount of $10,827,606 and $11,665,323 were disallowed in FY 2006 and 2007 under New Zealand´s general anti-avoidance rule in s BG 1 of the Income Tax Act 2004. In addition, penalties ... Continue to full case
UK vs General Electric, July 2020, High Court, Case No RL-2018-000005
General Electric (GE) have been routing financial transactions (AUS $ 5 billion) related to GE companies in Australia via the UK in order to gain a tax advantage – by “triple dipping” in regards to interest deductions, thus saving billions of dollars in tax in Australia, the UK and the US. Before entering into these transactions, GE obtained clearance from HMRC that UK tax rules were met, in particular new “Anti-Arbitrage Rules” introduced in the UK in 2005, specifically designed to prevent tax avoidance through the exploitation of the tax treatment of ‘hybrid’ entities in different jurisdictions. The clearance was granted by the tax authorities in 2005 based on the understanding that the funds would be used to invest in businesses operating in Australia. In total, GE’s clearance application concerned 107 cross-border loans amounting to debt financing of approximately £21.2 billion. The Australian Transaction was ... Continue to full case
Netherlands vs X B.V., July 2020, Supreme Court (Preliminary ruling by the Advocate General), Case No ECLI:NL:PHR:2020:672
X bv is part of the worldwide X group, a financial service provider listed on the US stock exchange. At issue is deductibility of interest payments by X bv on a € 482 million loan granted by the parent company, US Inc. In 2010 the original loan between X bv and US Inc. was converted into two loans of € 191 million and € 291 million granted by a Luxembourg finance company in the X group, to two jointly taxed subsidiaries of X bv. According to the Dutch Tax Authorities, the interest payments on these loans falls under the provisions in Dutch art. 10a of the VPB Act 1969 whereby interest deductions are restricted. The Court of appeal disagreed and ruled in favor of X bv. This decision was appealed to the Supreme Court by the tax authorities. In a preliminary ruling, the Advocate General ... Continue to full case
Canada vs Loblaw Financial Holdings Inc., April 2020, Federal Court of Appeal, Case No 2020 FCA 79
In the case of Canadian grocery chain Loblaw, the Canadian Tax Court in 2018 found that using an offshore banking affiliate in a low tax jurisdiction – Barbados – to manage the groups investments did not constitute tax avoidance. However, the Tax Court’s interpretation of a technical provision in the Canadian legislation had the consequence that Loblaw would nonetheless have to pay $368 million in taxes and penalties. This decision has now been overturned by the Canadian Court of Appeal where a judgement in favor of Loblaw was delivered. Canada vs Loblaw April 2020 SC ... Continue to full case
UK vs Union Castle Ltd, April 2020, UK Court of Appeal, Case No A3/2018/3003 and 3004
Union Castle Ltd. claimed a tax deduction of £ 39 million related to losses on derivative contracts. After acquiring derivative contracts, Union Castle issued bonus A shares to it’s parent company, Caledonia, which carried a dividend equal to 95% of the cash-flows arising on the close-out of the contracts. Therefore Union Castle had written off 39 million of the value of the contracts in it’s accounts. The tax authorities disagreed that a tax loss had been suffered and issued an assessment disallowing the loss. The Tribunal found in favor of the tax authorities. Capital transactions are subject of the UK transfer pricing rules. Issuing of shares meets the requirements of “making or imposing conditions in commercial and financial relations” as required by Article 9 of the OECD Model Convention. OECD TPG apply to debt financing. Share transactions, which have an effect on income taxation, must ... Continue to full case
Finland vs A Group, April 2020, Supreme Administrative Court, Case No. KHO:2020:35
In 2008, the A Group had reorganized its internal financing function so that the Group’s parent company, A Oyj, had established A Finance NV in Belgium. Thereafter, A Oyj had transferred to intra-group long-term loan receivables of approximately EUR 223,500,000 to A Finance NV. In return, A Oyj had received shares in A Finance NV. The intra-group loan receivables transferred in kind had been unsecured and the interest income on the loan receivables had been transferred to A Finance NV on the same day. A Finance NV had entered the receivables in its balance sheet as assets. In addition, A Oyj and A Finance NV had agreed that target limits would be set for the return on investment achieved by A Finance NV through its operations. A Finance NV has reimbursed A Oyj for income that has exceeded the target limit or, alternatively, invoiced A ... Continue to full case
Netherlands vs [X] B.V., legal successor to [Y] U.A., March 2020, Pending before the Supreme Court, Case No ECLI:NL:PHR:2020:102
To acquire companies and resell them with capital gains a French Investment Fund distributed the capital of its investors (€ 5.4 billion in equity) between a French Fund Commun de Placement à Risques (FCPRs) and British Ltds managed by the French Investment Fund. For the purpose of acquiring the [X] group (the target), the French Investment Fund set up three legal entities in the Netherlands, [Y] UA, [B] BV, and [C] BV (the acquisition holding company). These three joint taxed entities are shown as Fiscal unit [A] below. The capital to be used for the acquisition of [X] group was divided into four FCPRs that held 30%, 30%, 30% and 10% in [Y] respectively. To get the full amount needed for the acquisition, [Y] members provided from their equity to [Y]: (i) member capital (€ 74.69 million by the FCPRs, € 1.96 million by the ... Continue to full case
UK vs Smith & Nephew, March 2020, Court of Appeal, Case No A3/2019/0521
In the case of HMRC v Smith & Nephew Overseas Ltd, consideration was given to the “fairly represent” requirement in the loan relationship code. The dispute concerns each of the Smith & Nephew’s entitlement to set off foreign exchange losses against their liability to corporation tax. The exchanges loss arose as a result of Smith & Nephews changing their functional accounting currencies from sterling to US dollars on 23 December 2008 at a time when the only asset on their balance sheets was a very substantial inter-company debt owed to them by their parent company. The debts were denominated in sterling but then had to be converted into dollars when the companies’ accounts were restated in dollars. The next day, the debts were disposed of as part of a group restructuring. The exchange losses arose from Smith & Nephew’s ‘loan relationships’ as that term is ... Continue to full case
New TPG Chapter X on Financial Transactions (and additions to TPG Chapter I) released by OECD
Today, the OECD has released the report Transfer Pricing Guidance on Financial Transactions. The guidance in the report describes the transfer pricing aspects of financial transactions and includes a number of examples to illustrate the principles discussed in the report. Section B provides guidance on the application of the principles contained in Section D.1 of Chapter I of the OECD Transfer Pricing Guidelines to financial transactions. In particular, Section B.1 of this report elaborates on how the accurate delineation analysis under Chapter I applies to the capital structure of an MNE within an MNE group. It also clarifies that the guidance included in that section does not prevent countries from implementing approaches to address capital structure and interest deductibility under their domestic legislation. Section B.2 outlines the economically relevant characteristics that inform the analysis of the terms and conditions of financial transactions. Sections C, D ... Continue to full case
Poland vs Cash Pool B sp z.o.o., November 2019, Supreme Administrative Court, Case No II FSK 3798/17
At issue in this case was whether a deposit in a cash pool constituted a loan. According to the company, cash transfers made as part of cash pooling cannot be considered a loan agreement because they do not contain elements that are material to the content of such contracts. In 2018 the provincial court issued a decision stating that a cash pool deposit constituted the granting of a loan irrespective of lacking written contracts. This decision was then appealed to the Supreme Administrative Court by the company. From the decision of the Supreme Administrative Court From an economic point of view, the financial system presented in the application involves the granting of loans because, as a result of financing the negative balance shown by the contractual participant by a surplus of funds accumulated by other participants, the participant is not obliged to pay interest to ... Continue to full case
UK vs Irish Bank Resolution Corporation Limited and Irish Nationwide Building Society, October 2019, UK Upper Tribunal, UKUT 0277 (TCC)
This case concerned deductibility of notional interest paid in 2003-7 by two permanent establishments in the UK to their Irish HQs. The loans – and thus interest expenses – had been allocated to the PEs as if they were separate entities. The UK tax authorities held that interest deductibility was restricted by UK tax law, which prescribed that PE’s has such equity and loan capital as it could reasonably be expected to have as a separate entity. The UK taxpayers, refered to Article 8 of the UK-Ireland tax treaty. Article 8 applied the “distinct and separate enterprise” principle found in Article 7 of the 1963 OECD Model Tax Convention, which used the language used in section 11AA(2). Yet nothing was said in the treaty about assumed levels of equity and debt funding for the PE. In 2017, the First-tier Tribunal found in favour of the ... Continue to full case
British American Tobacco hit by £902 million tax assessments in the Netherlands
According to the 2018 financial statement, British American Tobacco group has been hit by a £902 million tax assessments in the Netherlands. “The Dutch tax authority has issued a number of assessments on various issues across the years 2003-2016 in relation to various intra-group transactions. The assessments amount to an aggregate net liability across these periods of £902 million covering tax, interest and penalties. The Group has appealed against the assessments in full. The Group believes that its companies have meritorious defences in law and fact in each of the above matters and intends to pursue each dispute through the judicial system as necessary. The Group does not consider it appropriate to make provision for these amounts nor for any potential further amounts which may be assessed in relation to these matters in subsequent years. While the amounts that may be payable or receivable in relation to tax disputes ... Continue to full case
European Commission vs. Luxembourg and Fiat Chrysler Finance Europe, September 2019, General Court of the European Union, Case No. T-755/15
On 3 September 2012, the Luxembourg tax authorities issued a tax ruling in favour of Fiat Chrysler Finance Europe (‘FFT’), an undertaking in the Fiat group that provided treasury and financing services to the group companies established in Europe. The tax ruling at issue endorsed a method for determining FFT’s remuneration for these services, which enabled FFT to determine its taxable profit on a yearly basis for corporate income tax in the Grand Duchy of Luxembourg. In 2015, the Commission concluded that the tax ruling constituted State aid under Article 107 TFEU and that it was operating aid that was incompatible with the internal market. It also noted that the Grand Duchy of Luxembourg had not notified it of the proposed tax ruling and had not complied with the standstill obligation. The Commission found that the Grand Duchy of Luxembourg was required to recover the ... Continue to full case
France, Public Statement related to deduction of interest payments to a Belgian group company, BOI-RES-000041-20190904
In a public statement the French General Directorate of Public Finance clarified that tax treatment of interest deductions taken by a French company on interest payments to a related Belgian company that benefits from the Belgian notional interest rate scheme. According to French Law, interest paid to foreign group companies is only deductible if a minimum rate of tax applies to the relevant income abroad. Click here for translation BOI-RES-000041-20190904 ... Continue to full case
India vs TMW, August 2019, Income Tax Tribunal, Case No ITA No 879
The facts in brief are that TMW ASPF CYPRUS (hereinafter referred to as ‘assessee’) is a private limited company incorporated in Cyprus and is engaged in the business of making investments in the real estate sector. The company in the year 2008 had made investments in independent third-party companies in India (hereinafter collectively known as ‘investee companies’) engaged in real estate development vide fully convertible debentures (FCCDs). It was these investments that made the investee companies an associated enterprise of the assessee as per TP provisions. The assessee had also entered agreements, according to which the assessee was entitled to a coupon rate of 4%. Further, after the conversion of the FCCDs into equity shares, the promoter of Indian Companies would buy back at an agreed option price. The option price would be such that the investor gets the original investment paid on subscription to ... Continue to full case
Luxembourg vs Lender Societe, July 2019, Cour Administratif, Case No 42083
Lender Societe had acquired real estate in 2008 for EUR 26 million. The acquisition had been financed by a bank loan of EUR 20 million and a shareholder loan of EUR 6 million. The interest rate on the shareholder loan was set at 12%. The Tax Authorities found that the “excessive” part of the interest paid on the shareholder loan was as a hidden distribution of profit subject to dividend withholding tax. The hidden profit distribution was calculated as the difference between an arm’s length interest rate set at approximately 3% and the interest rate according to the loan agreement of 12%. Lender Societe disagreed with the assessment and brought the case before the Tribunal Administratif. The Tribunal agreed with the Tax Authorities and qualified the excessive interest payments as a hidden profit distribution subject to a 15% dividend withholding tax. The decision of the Tax Tribunal is affirmed by the ... Continue to full case
Portugal vs Galeria Parque Nascente-Exploração de Espaços Comerciais SA, July 2019, ECJ Case C-438/18
The Portuguese Tribunal Arbitral Tributário (Centro de Arbitragem Administrativa) requested a preliminary ruling from the European Court of Justice. The request related to the common system of taxation applicable to mergers, divisions, partial divisions, transfers of assets and exchanges of shares concerning companies of different Member States — Directive 90/434/EEC — Articles 4 and 11 — Directive 2009/133/EC — Articles 4 and 15 — So-called ‘reverse’ merger In the event of a ‘reverse’ merger, costs which are incurred by the parent company relating to a loan taken out by that parent company for the purchase of shares of the subsidiary and which are deductible for that parent company, are considered non-deductible for that subsidiary. Click here for translation Portugal vs Galeria Parque Nascente-Exploração de Espaços Comerciais SA ... Continue to full case
France vs SAS Wheelabrator Group, July 2019, Conseil d’Etat Opinion, No 429426
In an Opinion issued on 10 July 2019 on request from the Administrative Court of Versailles, the Conseil d’Etat states as a principle that the arm’s length nature of intra-group interest rate can be demonstrated by reference to comparable unrelated transactions, when these loans constitutes realistic alternatives to the intra-group loan. Excerpt from the Opinion “… 5. The rate that the borrowing enterprise could have obtained from independent financial establishments or organizations under similar conditions means, for the purposes of these provisions, the rate that such establishments or organizations would have been susceptible, account given its own characteristics, in particular its risk profile, to grant it for a loan with the same characteristics under arm’s length conditions. 6. This rate cannot, having regard to the difference in nature between a loan from a financial institution or body and financing by bond issue, be that which this ... Continue to full case
Poland vs L S.A, June 2019, Supreme Administrative Court, Case No. II FSK 1808/17 – Wyrok NSA
A Polish subsidiary in a German Group had taken out a significant inter-company loan resulting in a significantly reduced income due to interest deductions. At issue was application of the Polish arm’s length provisions and the arm’s length nature of the interest rate on the loan. The tax authorities had issued an assessment where the interest rate on the loans had been adjusted and the taxable income increased. On that basis, a complaint was filed by the company to the Administrative Court. The administrative court rejected the complaint and ruled in favor of the tax authorities. An appeal was then brought before the Supreme Administrative Court. The Supreme Administrative Court rejected the appeal, although it did not share some of the conclusions and statements of the Court of first instance. The key issue in the case was to determine is whether the provisions of Art ... Continue to full case
Netherlands vs Lender BV, June 2019, Tax Court, Case No 17/871
A Dutch company, Lender BV, provided loans to an affiliated Russian company on which interest was paid. The Dispute was (1) whether the full amount of interest should be included in the taxable income in the Netherlands, or if part of the “interest payment” was subject to the participation exemption or (2) whether the Netherlands was required to provide relief from double taxation for the Russian dividend tax and, if so, to what amount. The Tax court found it to be a loan and the payments therefor qualified as interest and not dividend. The participation exemption does not apply to interest. In addition, the court ruled that the Russian thin-capitalization rules did not have an effect on the Netherlands through Article 9 of the Convention for the avoidance of double taxation between the Netherlands and Russia. Application of the participation exemption was not an issue. In the opinion ... Continue to full case
