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.

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 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
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
Netherlands vs Lender BV, June 2019, Tax Court, Case No 17/871

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
The Kering Group - owner of Gucci, Bottega Veneta, Saint Laurent and Pomellato - has settled an Italian Tax Case for an Amount of 1.250 Billion Euro

The Kering Group – owner of Gucci, Bottega Veneta, Saint Laurent and Pomellato – has settled an Italian Tax Case for an Amount of 1.250 Billion Euro

The Kering group – owner of Gucci, Bottega Veneta, Saint Laurent and Pomellato –  has settled a case with the Italian tax agency for an amount of euro 1.250 billion in taxes and penalties relating to fiscal years 2011-2017. The case was started by the Italian tax police in 2017 and resulted in a recommendation to charge the president and chief executive officer of the Italian company Guccio Gucci S.p.A. with the crimes of tax evasion and failure to file Italian income tax return. Guccio Gucci S.p.A., the Italian operating company of the group and owner of the GUCCI brand, had licensed the brand to a Swiss affiliate company, Luxury Goods International S.A., together with the rights to exploit and manage the brand for the purpose of the global marketing, commercialization and sale of GUCCI products in Italy and worldwide. However, most of the marketing ... Continue to full case

Finland vs Borealis OY, March 2019, Administrative Court, Decisions not yet published

On 19 March 2019, the Helsinki Administrative Court issued two decisions in a tax dispute between the Finnish tax authorities and Borealis Polymers Oy and Borealis Technology Oy. The decisions have not been published. Borealis Polymers Oy and Borealis Technology Oy are subsidiaries of Borealis AG. The Austrian Group is a leading provider of polyolefin compounds for the global wire and cable industry, plastic materials for the automotive industry and for used in consumer products. The group also produces a wide range of base chemicals such as melamine, phenol, acetone, ethylene and propylene, as well as fertilizers and technical nitrogen products. The decisions cover fiscal years 2008, 2009 and 2010 and – according to Borealis’ public statement – relates to re-characterisation of intra group licence agreements. Additional information is providedIn Borealis’ Annual report for 2018: Borealis Technology OY, Finland, for 2008 and 2010: The reassessment ... Continue to full case
US vs SIH Partners LLLP, May 2019, US Third Circuit of Appeal, Case No 18-1862

US vs SIH Partners LLLP, May 2019, US Third Circuit of Appeal, Case No 18-1862

The Third Circuit of Appeal upheld the tax courts prior decision in 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
Loading...