Category: Financial Transactions

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

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

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

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

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

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

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

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

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

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

The European Commission has published a non-confidential version of the decision to open a state aid investigation into tax rulings granted by the Luxembourg tax authorities to the Huhtamaki Group in relation to the treatment of interest-free loans granted by an Irish group company to a Luxembourg group company, Huhtalux S.a.r.l. The investigation will focus on three rulings obtained by a Luxembourg subsidiary of a group from the Luxembourg tax administration in 2009, 2012 and 2013. The Luxembourg subsidiary which carried out intra-group financing activities was granted interest-free loans from an Irish group subsidiary and used the funds to grant interest bearing loans to other group companies. In the rulings the tax authorities in Luxembourg confirmes that the financing subsidiary can deduct an amount of deemed interest on the interest-free loans corresponding to interest payments that an independent third party would have demanded for the loans ... Continue to full case

A Spanish subsidiary – SGL Carbon Holding SL – had significant financial expenses derived from an intra-group loan granted by the parent company for the acquisition of shares in companies of the same group. The taxpayer argued that the intra-group acquisition and debt helped to redistribute the funds of the Group and that Spanish subsidiary was less leveraged than the Group as a whole. The Spanish tax authorities found the transactions lacked any business rationale other than tax avoidance and therefor disallowed the interest deductions. The Court held in favor of the authorities. The court found that the transaction lacked any business rationale and was “fraud of law” only intended to avoid taxation. The Court also denied the company access to MAP on the grounds that Spanish legislation determines: Article 8 Reglamento MAP: Mutual agreement procedure may be denied, amongst other, in the following cases: ... Continue to full case

At issue in this case was UK loan relationship rules – whether a note issued as part of a structure for refinancing the US sub-group without generating net taxable interest income in the UK had an unallowable purpose and the extent of deductions referable to the unallowable purpose considered. The Court ruled in favor of the tax administration: “Did the $140m Promissory Note secure a tax advantage? 110.     In my view, the $140m Promissory Note secured a tax advantage for OIOH 2008 Ltd in that all of the interest arising in respect of the note (apart from 25% of the interest on $94m of the principal amount of the note) was set off against the taxable income of OIOH 2008 Ltd.  Those interest deductions were accordingly a “relief from tax” falling within Section 1139(2)(a) of the CTA 2010. 111.     I consider that that would be the case ... Continue to full case

A new version of the UN Practical Manual on Transfer Pricing for Developing Countries is due by 2021. According to the mandate the new manual will make further improvements in usability and practical relevance, updates and improvements to existing text, including on Country Practices (Part D) and will have new content, in particular, on financial transactions; profit splits, centralized procurement functions and comparability issues. A draft paper was published 8 April 2019 containing further guidance on: • Financial Transactions (Attachment A); • Profit Splits (Attachment B); and • Establishing Transfer Pricing Capability, Risk Assessment and Transfer Pricing Audits (Attachment C). 2019 Update-UN-Practical-Manual-on-Transfer-Pricing ... Continue to full case

The Third Circuit of Appeal upheld the tax courts prior decision i a $377 million dispute involving the affiliate of a US based commodities trader. The Court found that SIH Partners LLLP, an affiliate of Pennsylvania-based commodities trader Susquehanna International Group LLP, owed taxes on approximately $377 million in additional income. The extra earnings stemmed from a $1.5 billion loan from Bank of America brokerage Merrill Lynch, which was guaranteed by SIH’s subsidiaries in Ireland and the Cayman Islands. The Tax Court’s ruling was based on regulations under Section 956 of the Internal Revenue Code, which states that U.S. shareholders must include their controlled foreign corporations’ applicable earnings, up to the amount of such a loan, in their own income when the foreign units invest in U.S. property. US vs SIH Partners LLLP181862p ... Continue to full case

The European Commission has now opened an in-depth investigation to examine whether tax rulings granted by Luxembourg to Finnish food and drink packaging company Huhtamäki may have given the company an unfair advantage over its competitors, in breach of EU State Aid rules. Margrethe Vestager, Commissioner in charge of competition policy, said: “Member States should not allow companies to set up arrangements that unduly reduce their taxable profits and give them an unfair advantage over their competitors. The Commission will carefully investigate Huhtamäki’s tax treatment in Luxembourg to assess whether it is in line with EU State aid rules.” The Commission’s formal investigation concerns three tax rulings issued by Luxembourg to the Luxembourg-based company Huhtalux S.à.r.l. in 2009, 2012 and 2013. The 2009 tax ruling was disclosed as part of the “Luxleaks” investigation led by the International Consortium of Investigative Journalists in 2014. Huhtalux is ... Continue to full case

A German company, G GmbH, owned 50% of A GmbH resident in Austria. The remaining 50% were held by non related shareholders, who at the same time acted as managing directors of A GmbH. G GmbH granted A GmbH a total of five loans with a duration of between nine and 362 days for a total amount of EUR …. The loans each bore interest at 5.5% pa. For security, different machines were assigned. In addition, by a contract dated 9 April 2003, G GmbH assumed a guarantee of EUR … for a loan from B Bank in Austria to A GmbH. On 22 January 2002 A GmbH made a partial payment in the amount of … EUR and on 16 June 2002 a further partial payment in the amount of … EUR back to G GmbH. Due to negative development in A GmbH, G ... Continue to full case

G KG, in which G GmbH a limited partner, was the sole shareholder of the Chinese A Ltd. In 2007 and 2008, a claim in the amount of EUR …, which still came from deliveries in the years 2004 and 2005, was open to this company. The claim was unsecured and interest-free. On December 20, 2007, the plaintiff waived EUR 1.00 against its debtor warrant against debtor warrants and, to this extent, booked these off in its trade balance. On 30 June 2008, the plaintiff wrote off the claim for continued worthlessness in its trade balance by EUR … and finally declared a debt waiver on 6 December 2008. The defendant and appellant (the Finanzamt – FA–) did not take into account the value adjustments in the context of the separate and uniform determination of the taxable amount and increased the profit due to the ... Continue to full case

A German GmbH managed an unsecured clearing account for a Belgian subsidiary. After financial difficulties in the Belgian subsidiary, the GmbH waived their claim from the clearing account and booked this in their balance sheet as a loss. However, the tax office neutralized the loss according to § 1 Abs. 1 AStG.  Up until now, the Bundesfinanzhof has assumed for cases that are subject to a double taxation agreement (DTA), that Art. 9 para. 1 OECD was limited to so-called price corrections, while the non-recognition of a loan claim or a partial depreciation was excluded (so-called Blocking effect). The Bundesfinanzhof has now overturned the previous judgment of the FG. It is true that it was no longer possible to clarify in the appeal instance whether it was really a tax credit or the equity of the Belgian subsidiary. However, this could be left out, since the profit-reducing waiver by ... Continue to full case

Aegis Ltd had advanced money to an assosiated enterprice (AE)  and recived preference shares carrying no dividend in return. The Indian Transfer Pricing Officer (TPO) held that the “acqusition of preference shares” were in fact equivalent to an interest free loan advanced by Aegis Ltd to the assosiated enterprice and accordingly re-characterised the transaction and issued an assessment for 2009 and 2010 where interest was charged on notional basis. Aegis Ltd disagreed with the assessment of the TPO and brought the case before the Tax Tribunal. The Tribunal did not accept the conclusions of the TPO. “The TPO cannot disregard the apparent transaction and substitute the same without any material of exceptional circumstances pointing out that the assessee had tried to conceal the real transaction or that the transaction in question was sham. The Tribunal observed that the TPO cannot question the commercial expediency of the ... Continue to full case