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.

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
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
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 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
Germany vs G GmbH, February 2019, Bundesfinanzhof, Case No IR 81/17

Germany vs G GmbH, February 2019, Bundesfinanzhof, Case No IR 81/17

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
Germany vs G KG, February 2019, Bundesfinanzhof, Case No IR 51/17

Germany vs G KG, February 2019, Bundesfinanzhof, Case No IR 51/17

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
Germany vs G GmbH, February 2019, Bundesfinanzhof, Case No I R 73/16

Germany vs G GmbH, February 2019, Bundesfinanzhof, Case No I R 73/16

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
India vs Aegis Ltd, January 2018, High Court of Bombay, Case No 1248 of 2016

India vs Aegis Ltd, January 2018, High Court of Bombay, Case No 1248 of 2016

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
South Africa vs Sasol Oil, November 2018, Supreme Court of Appeal, Case No 923/2017

South Africa vs Sasol Oil, November 2018, Supreme Court of Appeal, Case No 923/2017

The South African Supreme Court of Appeal, by a majority of the court, upheld an appeal against the decision of the Tax Court, in which it was held that contracts between companies in the Sasol Group of companies, for the supply of crude oil by a company in the Isle of Man to a group company in London, and the on sale of the same crude oil to Sasol Oil (Pty) Ltd in South Africa, were simulated transactions. As such, the Tax Court found that the transactions should be disregarded by the Commissioner for the South African Revenue Service, and that the Commissioner was entitled to issue additional assessments for the 2005, 2006 and 2007 tax years. On appeal, the Court considered all the circumstances leading to the conclusion of the impugned contracts, the terms of the contracts, the evidence of officials of Sasol Oil, ... Continue to full case
Luxembourg vs PPL-Co, July 2017, Cour Administrative, Case No 38357C

Luxembourg vs PPL-Co, July 2017, Cour Administrative, Case No 38357C

The Administrative Court re-characterised a profit-participating loan into equity for tax purposes. The court provided the following reasoning: “Compared with the criteria specified above for a requalification as a disguised contribution of capital, it should firstly be noted that the sums made available to the two subsidiaries were allocated to investments in properties intended in principle to represent investments in the medium or long term as assets of the invested assets and in the absence of a clause providing for a repayment plan or a fixed maturity, the sums were intended to remain at the disposal of the subsidiaries for a period otherwise limited. In addition, this availability of funds did not give rise to any fixed consideration from the two subsidiaries, but only to a share of the appellant in the capital gains generated by hotel disposals, this interest amounting to three quarters of ... Continue to full case
UK vs CJ Wildbird Foods Limited, June 2018, First-tier Tribunal, case no. UKFTT0341 (TC06556)

UK vs CJ Wildbird Foods Limited, June 2018, First-tier Tribunal, case no. UKFTT0341 (TC06556)

In the transfer pricing case of C J Wildbird Foods Limited the issue was whether a related party loan should be treated as such for tax purposes. There was a loan agreement between the parties and the agreement specified that there was an obligation to repay the loan and interest. However, no interest had actually been paid and a tax deduction had also been claimed by the tax payer on the basis that the debt was unlikely to be repaid. The tax authorities argued that the loan did not have the characteristics of a loan. The borrower was loss making  and did not have the financial capacity to pay any interest. The tribunal found that there was a legal obligation to repay the loan and interest. Whether the loan or interest was actually repaid was irrelevant. “The modern business world has many famous examples of ... Continue to full case
US vs. Hewlett Packard, November 2017, Court of Appeals, Case No 14-73047

US vs. Hewlett Packard, November 2017, Court of Appeals, Case No 14-73047

This issue in this case is qualification of an investment as debt or equity. HP bought preferred stock in Foppingadreef Investments, a Dutch company. Foppingadreef Investments bought contingent interest notes, from which FOP’s preferred stock received dividends that HP claimed as foreign tax credits. HP claimed millions in foreign tax credits between 1997 and 2003, then exercised its option to sell its preferred shares for a capital loss of more than $16 million. The IRS characterized the transaction as debt, and denied the tax credits claimed by Hewlett Packard. First the Tax Court and later the Court of Appeal agreed with the tax authorities. The eleven factors considered by the Court when qualifying an investment as debt/equity the names given to the certificates evidencing the indebtedness; the presence or absence of a maturity date; the source of the payments; the right to enforce the payment of ... Continue to full case
UK vs. BNP PARIBAS, September 2017, FIRST-TIER TRIBUNAL TAX CHAMBER, TC05941

UK vs. BNP PARIBAS, September 2017, FIRST-TIER TRIBUNAL TAX CHAMBER, TC05941

The issues in this case was: Whether the price of purchase of right to dividends were deductible. Whether the purchase and sale of right to dividends was trading transaction in course of Appellant’s trade. Whether the purchase price expenditure incurred wholly and exclusively for purposes of the trade. Whether HMRC were permitted to argue point in relation to section 730 ICTA that was not raised in closure notice and which they stated they were not pursuing Whether the price of sale of right to dividends should be disregarded for the purposes of calculating Appellant’s trading profits under section 730(3) ICTA BNP-vs-HMRC ... Continue to full case
Norway vs. IKEA Handel og Ejendom, October 2016, HRD 2016-722

Norway vs. IKEA Handel og Ejendom, October 2016, HRD 2016-722

In 2007, IKEA reorganised its property portfolio in Norway so that the properties were demerged from the Norwegian parent company and placed in new, separate companies. The shares in these companies were placed in a newly established property company, and the shares in this company were in turn sold to the original parent company, which then became an indirect owner of the same properties. The last acquisition was funded through an inter-company loan. Based on the non-statutory anti-avoidance rule in Norwegian Tax Law, the Supreme Court concluded that the parent company could not be allowed to deduct the interest on the inter-company loan, as the main purpose of the reorganisation was considered to be to save tax. The anti-avoidance rule in section 13-1 of the Tax Act did not apply in this circumstance. Click here for translation Norway vs IKEA-Handel-og-Ejendom-HRD-2016-722 ... Continue to full case
Norway vs. ConocoPhillips, October 2016, Supreme Court HR-2016-988-A, Case No. 2015/1044)

Norway vs. ConocoPhillips, October 2016, Supreme Court HR-2016-988-A, Case No. 2015/1044)

A tax assessments based on anti-avoidance doctrine “gjennomskjæring” were set aside. The case dealt with the benefits of a multi-currency cash pool arrangement. The court held that the decisive question was whether the allocation of the benefits was done at arm’s length. The court dismissed the argument that the benefits should accure to the parent company as only common control between the parties which should be disregarded. The other circumstances regarding the actual transaction should be recognized when pricing the transaction. In order to achieve an arm’s length price, the comparison must take into account all characteristics of the controlled transaction except the parties’ association with each other. While the case was before the Supreme Court, the Oil Tax Board made a new amendment decision, which also included a tax assessment for 2002. This amendment, which was based on the same anti-avoidance considerations, was on its own to the company’s advantage. Following the Supreme Court judgment, a new ... Continue to full case
Spain vs. PEUGEOT CITROEN AUTOMOVILES, May 2016, Supreme Court, case nr. 58/2015

Spain vs. PEUGEOT CITROEN AUTOMOVILES, May 2016, Supreme Court, case nr. 58/2015

The company had deducted impairment losses recognised on an investment in an Argentinean company (recently acquired from a related entity) arising from the conversion into capital of loans granted to the entity by other group companies, loans which had been acquired by the Spanish taxpayer. The tax administration argued that acquisition of such loans would not have taken place between independent parties due to the economic situation in Argentina at that time. The Supreme Court considered this conclusion to be wrong for two reasons: From a technical point of view, it was unacceptable to consider that the loans had no market value, since economic reality shows that even in situations of apparent insolvency there is an active market to purchase loans that are apparently uncollectible. If the loans acquired could have a market value, it was not possible to deny that they had such value without proving it; ... Continue to full case
Australia vs. Orica Limited, December 2015 Federal Court, FCA 1399; 2015 ATC 20-547.

Australia vs. Orica Limited, December 2015 Federal Court, FCA 1399; 2015 ATC 20-547.

The Orica case involve funding of an overseas entity or operations by an Australian entity, where the funds are subsequently provided back to the Australian entity or its Australian associate in a manner which purportedly generates Australian tax deductions while not generating corresponding Australian assessable income (Free dip). The arrangements essentially involve the “round robin” movement of funds where an entity claims income tax deductions in Australia for costs of borrowing or obtaining other financial benefits (including satisfaction of liabilities) from an overseas party the loan or other financial benefit provided by the overseas party is in substance funded, directly or indirectly, by an investment by the entity claiming the deductions or its Australian associate the return on the Australian investment, reflecting the financing costs payable to the overseas party, comes back to Australia in a non-taxable or concessionally taxed form, for example, as a distribution from an ... Continue to full case