Category: Non-Recognition and Recharacterisation

An intercompany transaction as accurately delineated may be disregarded, and if appropriate, replaced by an alternative transaction, where the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner in comparable circumstances, thereby preventing determination of a price that would be acceptable to both of the parties taking into account their respective perspectives and the options realistically available to each of them at the time of entering into the transaction. It is also relevant to consider whether the MNE group as a whole is left worse off on a pre-tax basis since this may be an indicator that the transaction viewed in its entirety lacks the commercial rationality.

Italy vs BenQ Italy SRL, March 2021, Corte di Cassazione, Sez. 5 Num. 1374 Anno 2022

Italy vs BenQ Italy SRL, March 2021, Corte di Cassazione, Sez. 5 Num. 1374 Anno 2022

BenQ Italy SRL is part of a multinational group headed by the Taiwanese company BenQ Corporation that sells and markets technology products, consumer electronics, computing and communications devices. BenQ Italy’s immediate parent company was a Dutch company, BenQ Europe PV. Following an audit the tax authorities issued a notice of assessment for FY 2003 in which the taxpayer was accused of having procured goods from companies operating in countries with privileged taxation through the fictitious interposition of a Dutch company (BenQ Europe BV), the parent company of the taxpayer, whose intervention in the distribution chain was deemed uneconomic. On the basis of these assumptions, the tax authorities found that the recharge of costs made by the interposed company, were non-deductible. The tax authorities also considered that, through the interposition of BenQ BV, the prices charged by the taxpayer were aimed at transferring most of the ... Continue to full case
Denmark vs EAC Invest A/S, October 2021, High Court, Case No SKM2021.705.OLR

Denmark vs EAC Invest A/S, October 2021, High Court, Case No SKM2021.705.OLR

In 2019, the Danish parent company of the group, EAC Invest A/S, had been granted a ruling by the tax tribunal that, in the period 2008-2011, due to, inter alia, quite exceptional circumstances involving currency restrictions in Venezuela, the parent company should not be taxed on interest on a claim for unpaid royalties relating to trademarks covered by licensing agreements between the parent company and its then Venezuelan subsidiary, Plumrose Latinoamericana C.A. The Tax tribunal had also found that neither a payment of extraordinary dividends by the Venezuelan subsidiary to the Danish parent company in 2012 nor a restructuring of the group in 2013 could trigger a deferred taxation of royalties. The tax authorities appealed against the decisions to the High Court. Judgement of the High Court The High Court upheld the decisions of the tax tribunal with amended grounds and dismissed the claims of ... Continue to full case
Israel vs Sephira & Offek Ltd and Israel Daniel Amram, August 2021, Jerusalem District Court, Case No 2995-03-17

Israel vs Sephira & Offek Ltd and Israel Daniel Amram, August 2021, Jerusalem District Court, Case No 2995-03-17

While living in France, Israel Daniel Amram (IDA) devised an idea for the development of a unique and efficient computerized interface that would link insurance companies and physicians and facilitate financial accounting between medical service providers and patients. IDA registered the trademark “SEPHIRA” and formed a company in France under the name SAS SEPHIRA . IDA then moved to Israel and formed Sephira & Offek Ltd. Going forward the company in Israel would provid R&D services to SAS SEPHIRA in France. All of the taxable profits in Israel was labled as “R&D income” which is taxed at a lower rate in Israel. Later IDA’s rights in the trademark was sold to Sephira & Offek Ltd in return for €8.4m. Due to IDA’s status as a “new Immigrant” in Israel profits from the sale was tax exempt. Following the acquisition of the trademark, Sephira & Offek ... Continue to full case

Luxembourg vs “Lux PPL SARL”, July 2021, Administrative Tribunal, Case No 43264

Lux PPL SARL received a profit participating loan (PPL) from a related company in Jersey to finance its participation in an Irish company.  The participation in the Irish company was set up in the form of debt (85%) and equity (15%). The profit participating loan (PPL) carried a fixed interest of 25bps and a variable interest corresponding to 99% of the profits derived from the participation in the Irish company, net of any expenses, losses and a profit margin. After entering the arrangement, Lux PPL SARL filed a request for an binding ruling with the Luxembourg tax administration to verify that the interest  charge under the PPL would not qualify as a hidden profit distribution subject to the 15% dividend withholding tax. The tax administration issued the requested binding ruling on the condition that the ruling would be terminate if the total amount of the ... Continue to full case
Poland vs A S.A., June 2021, Provincial Administrative Court, Case No I SA/Gl 1649/20

Poland vs A S.A., June 2021, Provincial Administrative Court, Case No I SA/Gl 1649/20

The business activity of A S.A. was wholesale of pharmaceutical products to external pharmacies, hospitals, wholesalers (including: to affiliated wholesalers). The tax authority had noted that the company’s name had been changed in FY 2013, and a loss in the amount of PLN […] had been reported in the company’s tax return. An audit revealed that the Company had transferred significant assets (real estate) to a related entity on non-arm’s length terms. The same real estate was then going forward made available to the company on a fee basis under lease and tenancy agreements. The tax authority issued an assessment where a “restructuring fee” in the amount of PLN […] was added to the taxable income, reflecting the amount which would have been achieved if the transaction had been agreed between independent parties. According to the company the tax authority was not entitled at all ... Continue to full case
Germany vs Lender GmbH, May 2021, Bundesfinanzhof, Case No I R 62/17

Germany vs Lender GmbH, May 2021, Bundesfinanzhof, Case No I R 62/17

Lender GmbH acquired all shares in T GmbH from T in 2012 (year in dispute) for a purchase price of … €. To finance the purchase price of the shares, Lender GmbH took out a loan from its sole shareholder, D GmbH, a loan in the amount of … €, which bore interest at 8% p.a. (shareholder loan). The interest was not to be paid on an ongoing basis, but only on expiry of the loan agreement on 31.12.2021. No collateral was agreed. D GmbH, for its part, borrowed funds in the same amount and under identical terms and conditions from its shareholders, among others from its Dutch shareholder N U.A. In addition Lender GmbH received a bank loan in the amount of … €, which had an average interest rate of 4.78% p.a. and was fully secured. Finally Lender GmbH also received a vendor ... Continue to full case
Germany vs A... GmbH, March 2021, BUNDESVERFASSUNGSGERICHT, Case No 2 BvR 1161/19

Germany vs A… GmbH, March 2021, BUNDESVERFASSUNGSGERICHT, Case No 2 BvR 1161/19

A GmbH provided funding in the form of a clearing account to its Belgian subsidiary. The account was unsecured and carried an interest of 6% p.a. In 2005, A GmbH and the Belgian company agreed on a debt write-off which was deducted for tax purposes. The tax authorities issued an assessment where the write-off was denied as a tax deductible expense. According to the tax authorities, independent third parties would have agreed on some kind of security. The lack thereof was a violation of the arm’s length principle. A GmbH brought the assessment to court. The Federal Fiscal Court (I R 73/16) found the assessment of the tax authorities to be lawful. This decision was then appealed to the Constitutional Court by  A GmbH, alleging violation of the general principle of equality as well as a violation of its fundamental procedural right to the lawful ... Continue to full case
Canada vs Cameco Corp., February 2021, Supreme Court, Case No 39368.

Canada vs Cameco Corp., February 2021, Supreme Court, Case No 39368.

Cameco, together with its subsidiaries, is a large uranium producer and supplier of the services that convert one form of uranium into another form. Cameco had uranium mines in Saskatchewan and uranium refining and processing (conversion) facilities in Ontario. Cameco also had subsidiaries in the United States that owned uranium mines in the United States. The Canadian Revenue Agency found that transactions between Cameco Corp and the Swiss subsidiary constituted a sham arrangement resulting in improper profit shifting. Hence, a tax assessment was issued for FY 2003, 2005, and 2006. Cameco disagreed with the Agency and brought the case to the Canadian Tax Court. In 2018 the Tax Court ruled in favor of Cameco and dismissed the assessment. This decision was appealed by the tax authorities to the Federal Court of Appeal. The Federal Court of Appeal in 2020 dismissed the appeal and also ruled ... Continue to full case
Netherlands vs X B.V., December 2020, Supreme Court (Preliminary ruling by the Advocate General), Case No 20/02096 ECLI:NL:PHR:2020:1198

Netherlands vs X B.V., December 2020, Supreme Court (Preliminary ruling by the Advocate General), Case No 20/02096 ECLI:NL:PHR:2020:1198

This case concerns a private equity takeover structure with apparently an intended international mismatch, i.e. a deduction/no inclusion of the remuneration on the provision of funds. The case was (primarily) decided by the Court of Appeal on the basis of non-business loan case law. The facts are as follows: A private equity fund [A] raised LP equity capital from (institutional) investors in its subfund [B] and then channelled it into two (sub)funds configured in the Cayman Islands, Fund [C] and [D] Fund. Participating in those two Funds were LPs in which the limited partners were the external equity investors and the general partners were Jersey-based [A] entities and/or executives. The equity raised in [A] was used for leveraged, debt-financed acquisitions of European targets to be sold at a capital gain after five to seven years, after optimising their EBITDA. One of these European targets was ... Continue to full case
India vs. M/s Redington (India) Limited, December 2020, High Court of Madras, Case No. T.C.A.Nos.590 & 591 of 2019

India vs. M/s Redington (India) Limited, December 2020, High Court of Madras, Case No. T.C.A.Nos.590 & 591 of 2019

Redington India Limited (RIL) established a wholly-owned subsidiary Redington Gulf (RG) in the Jebel Ali Free Zone of the UAE in 2004. The subsidiary was responsible for the Redington group’s business in the Middle East and Africa. Four years later in July 2008, RIL set up a wholly-owned subsidiary company in Mauritius, RM. In turn, this company set up its wholly-owned subsidiary in the Cayman Islands (RC) – a step-down subsidiary of RIL. On 13 November 2008, RIL transferred its entire shareholding in RG to RC without consideration, and within a week after the transfer, a 27% shareholding in RC was sold by RG to a private equity fund Investcorp, headquartered in Cayman Islands for a price of Rs.325.78 Crores. RIL claimed that the transfer of its shares in RG to RC was a gift and therefore, exempt from capital gains taxation in India. It ... Continue to full case
Romania vs Lender A. SA, December 2020, Supreme Court, Case No 6512/2020

Romania vs Lender A. SA, December 2020, Supreme Court, Case No 6512/2020

In this case, A. S.A. had granted interest free loans to an affiliate company – Poiana Ciucas S.A. The tax authorities issued an assessment of non-realised income from loans granted. The tax authorities established that the average interest rates charged for comparable loans granted by credit institutions in Romania ranged from 5.45% to 19.39%. The court of first instance decided in favor of the tax authorities. An appeal against this decision was lodged by S S.A. According to S S.A. “The legal act concluded between the two companies should have been regarded as a contribution to the share capital of Poiana Ciucaș S.A. However, even if it were considered that a genuine loan contract (with 0% interest) had been concluded, it cannot be held that the company lacked the capacity to conclude such an act, since, even if the purpose of any company is to ... Continue to full case
Israel vs The Barzani Brothers (1974) Ltd., Oktober 2020, Jerusalem Court of Appeal, Case No 54727-02-17

Israel vs The Barzani Brothers (1974) Ltd., Oktober 2020, Jerusalem Court of Appeal, Case No 54727-02-17

The Barzani Brothers (1974) Ltd had provided interest-free financing to affiliated Romanian group companies in the form of “capital notes”. In Israel, financing qualifying as a “capital note” releases the lender from having to report interest income in its annual tax return in relation to the funding. Certain high risk long term funding arrangements may qualify as a “capital notes”. In regards to the intra-group funding provided by the Barzani Brothers Ltd, the Israel tax authorities did not recognize the qualification thereof as “capital notes”. Instead they found the funding provided to be ordinary loans. Labeling a loan agreement “capital note” does not turn the loan agreement into a capital note. On that basis an assessment of taxable interest income was issued to the company. The Court ruled in favor of the tax authorities and rejected the explanations of Barzani Brothers Ltd that the “loan-like ... Continue to full case
Canada vs AgraCity Ltd. and Saskatchewan Ltd. August 2020, Tax Court, 2020 TCC 91

Canada vs AgraCity Ltd. and Saskatchewan Ltd. August 2020, Tax Court, 2020 TCC 91

AgraCity Canada had entered into a Services Agreement with a group company, NewAgco Barbados, in connection with the sale by NewAgco Barbados directly to Canadian farmer-users of a glyphosate-based herbicide (“ClearOut”) a generic version of Bayer-Monsanto’s RoundUp. In reassessing the taxable income of AgraCity for 2007 and 2008 the Canada Revenue Agency relied upon the transfer pricing rules in paragraphs 247(2)(a) and (c) of the Income Tax Act (the “Act”) and re-allocated an amount equal to all of NewAgco Barbados’ profits from these sales activities to the income of AgraCity. According to the Canadian Revenue Agency the value created by the parties to the transactions did not align with what was credited to AgraCity and NewAgco Barbados. Hence, 100% of the net sales profits realized from the ClearOut sales by NewAgco Barbados to FNA members – according to the Revenue Agency – should have been ... Continue to full case
Canada vs Cameco Corp., June 2020, Federal Court of Appeal, Case No 2020 FCA 112.

Canada vs Cameco Corp., June 2020, Federal Court of Appeal, Case No 2020 FCA 112.

Cameco, together with its subsidiaries, is a large uranium producer and supplier of the services that convert one form of uranium into another form. Cameco had uranium mines in Saskatchewan and uranium refining and processing (conversion) facilities in Ontario. Cameco also had subsidiaries in the United States that owned uranium mines in the United States. In 1993, the United States and Russian governments executed an agreement that provided the means by which Russia could sell uranium formerly used in its nuclear arsenal. The net result of this agreement was that a certain quantity of uranium would be offered for sale in the market. Cameco initially attempted to secure this source of uranium on its own but later took the lead in negotiating an agreement for the purchase of this uranium by a consortium of companies. When the final agreement was signed in 1999, Cameco designated ... Continue to full case
Finland vs A Group, April 2020, Supreme Administrative Court, Case No. KHO:2020:35

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
Switzerland vs "PPL AG", March 2020, Federal Supreme Court, Case No 2C_578/2019

Switzerland vs “PPL AG”, March 2020, Federal Supreme Court, Case No 2C_578/2019

“PPL AG” had been set up as a limited liability company and in addition to the ordinary share capital, “PPL AG” had issued non-voting shares (participation certificates) to its German parent company and to three German individual investors in an aggregate amount of CHF 1.82 million. “PPL AG” was later converted into a joint stock corporation and on that occasion the participation certificates were converted into Profit Participating Loans (PPL), with an annual interest rate of 7%. In 2015, the Swiss tax administration carried out a tax audit of “PPL AG” for the years 2010-2014 and issued an assessment claiming payment of CHF 94,000 in withholding taxes on constructive dividends. According to the tax administration “PPL AG” had paid excessive amounts of interest to its lenders under the PPLs, exceeding the safe harbour interest rates published by the Swiss tax administration for the years under ... Continue to full case
Taiwan vs Goodland, February 2020, Supreme Administrative Court, Case No 147 of 109

Taiwan vs Goodland, February 2020, Supreme Administrative Court, Case No 147 of 109

Goodland Taiwan had sold 7 machines to a local buyer via a related party in Hongkong thus avoiding taxes on sales profits. The transaction had been audited by the Taiwanese tax administration and an assessment issued. Goodland brought the case to court. The Supreme Administrative court dismissed the appeal and upheld the assessment. “The appeal alleges that the original judgment failed to conduct an investigation, but does not specify what the original judgment found to be wrong or what specific legal norm was violated. In fact, Article 2 of the Regulations Governing the Recognition of Income from Controlled Foreign Enterprises by Profit-making Enterprises, as cited in the appeal, states that Article 3 and Article 4, paragraph 2, of the Regulations Governing the Recognition of Income from Controlled Foreign Enterprises and the Unusual Transfer Pricing Check for Business Enterprises, as cited in the appeal, are all ... Continue to full case
Argentina vs Transportadora de Energía SA, December 2019, Supreme Court, Case No CAF 39109/2014/3/RH2

Argentina vs Transportadora de Energía SA, December 2019, Supreme Court, Case No CAF 39109/2014/3/RH2

The tax authorities had recharacterized debt to equity and disallowed deductions for interest payments etc. Decision of the Supreme Court The Court decided in favour of Transportadora de Energía SA and set aside the debt to equity re-characterisation. The court also points to the relevance of transfer pricing studies. The Court noted that the tax authorities had failed to properly review the transfer pricing documentation and benchmarking of the intra-group financing for transfer pricing purposes, and on that basis set aside the assessment. Click here for English Translation Argentina 26 dec 2FALLO CAF 039109_2014_3_RH002 ... Continue to full case
Malaysia vs Shell Services Asia Sdn Bhd, November 2019, High Court, Case No BA 25-68-08/2019

Malaysia vs Shell Services Asia Sdn Bhd, November 2019, High Court, Case No BA 25-68-08/2019

The principal activities of Shell Services Asia Sdn Bhd in Malaysia is to provide services to related companies within the Shell Group. The company is part of a contractual arrangement for the sharing of services and resources within the Shell Group as provided in a Cost Contribution Arrangement. The tax authorities conducted a transfer pricing audit, and based on the findings, issued a tax assessment for fiscal years 2011 to 2016, where the Cost Contribution Arrangement had been recharacterised as an intra-group services arrangement. The taxable income was adjusted by imposing a markup on the total costs of the company for fiscal years 2012, 2014, 2015 and 2016. Consequently, the company had to pay the additional taxes in the amount of: RM 3,474,978.44; RM 2,559,754.38; RM 7,096,984.69; RM 2,537,458.50; RM 15,669,176.01. The company did not agree with the proposal. The judgement by the High Court only relates to proceedings ... Continue to full case
Israel vs Broadcom, Aug 2019, Israeli Supreme Court, Case No 2454/19

Israel vs Broadcom, Aug 2019, Israeli Supreme Court, Case No 2454/19

In 2012 Broadcom Corporation acquired all the shares of Broadlight Inc, another US corporation which owned a subsidiary in Israel, for around $200 million. Three months later, the subsidiary in Israel sold its IP to a group company for $59.5m and then an agreement was entered according to which the subsidiary going forward would supply R&D, marketing and support services to the other group companies for a cost plus fee. Based on these facts the Israeli tax authorities issued an assessment equivalent to $168.5m. The tax authorities found that the full value of the company in Israel had been transferred. The tax assessment was brought to court where Broadcom claimed that the tax authorities had re-characterised the transaction and that the onus of proof was on the tax authorities to justify the value of $168.5m. The District Court held that all the values in the ... Continue to full case
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