Category: Services and Fees

Management fees are usually payments from subsidiaries for head office services. Management fees have been used to shift income from high tax to low tax jurisdictions. For transfer pricing practitioners it is important to establish the facts and supporting documentation substantiating that management services are actually being performed. The mere description of a payment as a “management fee” should not be expected to be treated as prima facie evidence that such services have been rendered.

India vs Mylan Pharmaceuticals Private, December 2022, Income Tax Appellate Tribunal, ITA No.122/Hyd/2022

India vs Mylan Pharmaceuticals Private, December 2022, Income Tax Appellate Tribunal, ITA No.122/Hyd/2022

Mylan Pharmaceuticals is engaged in the business of trading pharmaceutical products in both domestic and export markets. It also provides business support services and research and development activities to other group companies. Following an audit, the tax authorities issued a notice of assessment which partially disallowed deductions for advertising and promotional expenses for the launch of new products. Mylan appealed to the Principal Commissioner of Income Tax where the assessment was subsequently overturned. The tax authorities then appealed to the Income Tax Appellate Tribunal. Judgement of the ITAT The Income Tax Appellate Tribunal allowed the appeal and set aside the decision of the Commissioner of Income Tax. Excerpts “It has been held in various decisions that for invoking jurisdiction u/s 263 of the I.T. Act, the twin conditions namely, (a) the order is erroneous and (b) the order is prejudicial to the interest of the ... Continue to full case
Czech Republic vs. Eli Lilly ČR, s.r.o., December 2022, Supreme Administrative Court, No. 7 Afs 279/2021 - 65

Czech Republic vs. Eli Lilly ČR, s.r.o., December 2022, Supreme Administrative Court, No. 7 Afs 279/2021 – 65

Eli Lilly ČR imports pharmaceutical products purchased from Eli Lilly Export S.A. (Swiss sales and marketing hub) into the Czech Republic and Slovakia and distributes them to local distributors. The arrangement between the local company and Eli Lilly Export S.A. is based on a Service Contract in which Eli Lilly ČR is named as the service provider to Eli Lilly Export S.A. (the principal). Eli Lilly ČR was selling the products at a lower price than the price it purchased them for from Eli Lilly Export S.A. According to the company this was due to local price controls of pharmaceuticals. At the same time, Eli Lilly ČR was also paid for providing marketing services by the Swiss HQ, which ensured that Eli Lilly ČR was profitable, despite selling the products at a loss. Eli Lilly ČR reported the marketing services as a provision of services ... Continue to full case
Czech Republic vs ANITA B s.r.o., November 2022, Supreme Administrative Court, Case No 4 Afs 381/2021-40

Czech Republic vs ANITA B s.r.o., November 2022, Supreme Administrative Court, Case No 4 Afs 381/2021-40

Following an audit the tax authorities issued an assessment of additional income resulting from an adjustment of the tax deductions related to marketing expenses. According to the tax authorities the price agreed between the related parties for advertising space was excessive and not determined in accordance with the arm’s length principle. ANITA B s.r.o. filed an appeal against the assessment. The Regional Court dismissed the appeal as unfounded by judgment of 26 October 2021, No. 62 Af 70/2019-48. The Court concluded that the tax authorities had established that the price agreed between ANITA B s.r.o. and its supplier (ELAPROMO) differed from the price that would have been agreed between unrelated parties. The Court upheld the method chosen by the tax authorities and concluded that ANITA B s.r.o. had failed to prove that the advertising costs claimed were justified in full. An appeal was then filed ... Continue to full case
Denmark vs. "C-Advisory Business ApS", November 2022, Supreme Court, Case No BS-22176/2021-HJR (SKM2023.8.HR)

Denmark vs. “C-Advisory Business ApS”, November 2022, Supreme Court, Case No BS-22176/2021-HJR (SKM2023.8.HR)

A was the sole owner of “C-Advisory Business ApS” established in Denmark in 2003. The company advised and represented taxpayers in cases related to tax deductions for land improvements to immovable property. A was also the sole owner of a company established in Dubai in 2006. The Dubai company provided services for “C-Advisory Business ApS” in Denmark and a total of DKK 78,785,549 was expensed in FY 2006-2010 relating to the purchase of these services. The Danish tax authorities considered that the payments had not been at arm’s length and reduced the service fees to the Dubai company to DKK 20 million for the income years in question. This resulted in additional taxable income of “C-Advisory Business ApS” in a total amount of DKK 58,5 million. Following an unsuccessful complaint to the Tax Tribunal, “C-Advisory Business ApS” filed an appeal with the regional court where ... Continue to full case
India vs Akzo Nobel India Pvt Ltd, September 2022, High Court of Delhi, ITA 370/2022

India vs Akzo Nobel India Pvt Ltd, September 2022, High Court of Delhi, ITA 370/2022

The tax authorities had disallowed deductions for purported administrative services paid for by Akzo Nobel India to a group company in Singapore. The Income Tax Appellate Tribunal upheld the assessment in a Judgement issued in February 2022. An appeal was then filed by Akzo Nobel India with the High Court. Judgement of the High Court The High Court dismissed the Appeal of Akzo Nobel India and upheld the judgement of the Income Tax Appellate Tribunal. Excerpt “…this Court finds that all the three authorities below have given concurrent findings of fact that the Appellant had failed to furnish evidence to demonstrate that administrative services were actually rendered by the AE and the assessee had received such services. In fact, the ITAT has noted in the impugned order “….On a specific query made by the Bench to demonstrate the receipt of services from AE through cogent ... Continue to full case
Poland vs "H. LVAS Sp. z oo", September 2022, Administrative Court, Case No I SA / Go 234/22

Poland vs “H. LVAS Sp. z oo”, September 2022, Administrative Court, Case No I SA / Go 234/22

“H. LVAS Sp. z oo” had deducted expenses related to intra-group services in its taxable income. The services had been provided by its German parent company, H. GmbH. The services (supervision and management support, coordination of projects, support in accounting, controlling, IT and personnel) had been classified by the group as low value-added services. Following a inspection, the tax authority issued an assessment where these deductions had been denied resulting in additional taxable income. An appeal was filed by H with the Administrative Court. Judgement of the Administrative Court The Court found that the assessment issued by the tax authorities was incorrect and remanded the case for further considerations. Excerpts “Inaccuracies or incompleteness of documentation, and in particular its absence, may result in the necessity to estimate income (cf. the judgments of the Supreme Administrative Court of 22 October 2014, II FSK 2494/12 and of ... Continue to full case
India vs Sulzer Tech India Pvt Ltd, July 2022, Income Tax Appellate Tribunal, Case No ITAT No 633-MUM-2021

India vs Sulzer Tech India Pvt Ltd, July 2022, Income Tax Appellate Tribunal, Case No ITAT No 633-MUM-2021

Sulzer Tech India Pvt Ltd (the assessee) is in the business of providing design and engineering services. To that end Sulzer Management AG, an associated enterprise provided various IT and support services to Sulzer Tech India. The payment for these services had been determined based on a benchmark study where Sulzer Management AG was chosen as the tested party. The cost plus margin for the selected comparables ranged from 4.08% to 7.08%, with a median of 5.69%, and on that basis the payment to Sulzer Management of Rs. 2,52,49,650, which was equal to cost plus 5%, was considered to be at arm’s length. The tax authorities disagreed and held that Sulzer Tech India at arm’s length would not have paid any amount toward services which are not availed to it and have not benefited its business. Accordingly, an adjustment of additional income of Rs. 2,52,49,650, ... Continue to full case
Spain vs LA REHOS, S.L., July 2022, Supreme Court, Case No 7268/2021, ATS 10616/2022 - ECLI:EN:TS:2022:10616A

Spain vs LA REHOS, S.L., July 2022, Supreme Court, Case No 7268/2021, ATS 10616/2022 – ECLI:EN:TS:2022:10616A

The issue presented before the Spanish Supreme Court is if and how the arm’s length principle apply to the salary of the owner of a consultancy company for personal services provided to an independent company, i.e. if the price agreed for provision of these services to an independent party is a CUP in relation to the salary of the owner. “In order to determine the market value of the services provided by Mr. Primitivo to the company LA REHOS, S.L., is based on the value of the relationship between LA REHOS, S.L. and the third parties from which it obtains the income for the services rendered by Mr. Primitivo with the necessary corrections to obtain the equivalence: those derived from the expenses and costs related to the activity of Mr. Primitivo incurred by or residing in the entity LA REHOS, S. L. and those that ... Continue to full case
Greece vs "VAT Ltd.", May 2022, Tax Court, Case No 2074/2022

Greece vs “VAT Ltd.”, May 2022, Tax Court, Case No 2074/2022

This case deals with VAT treatment of disallowed deductions for intra-group services. Following an audit, an adjustment of the taxable income was issued to “VAT Ltd.” by the tax authorities where intra-group services had been disallowed and VAT had been adjusted as a result. “VAT Ltd.” disagreed with the adjustment and filed an appeal. Judgement of the Tax Court The Tax Court upheld the assessment of the tax authorities. Click here for English translation gr-ded-ath-2074_2022 ... Continue to full case
Poland vs D. Sp. z oo, April 2022, Administrative Court, Case No I SA/Bd 128/22

Poland vs D. Sp. z oo, April 2022, Administrative Court, Case No I SA/Bd 128/22

D. Sp. z oo had deducted interest expenses on intra-group loans and expenses related to intra-group services in its taxable income for FY 2015. The loans and services had been provided by a related party in Delaware, USA. Following a inspection, the tax authority issued an assessment where deductions for these costs had been denied resulting in additional taxable income. In regards to the interest expenses the authority held that the circumstances of the transactions indicated that they were made primarily in order to achieve a tax advantage contrary to the object and purpose of the Tax Act (reduction of the tax base by creating a tax cost in the form of interest on loans to finance the purchase of own assets), and the modus operandi of the participating entities was artificial, since under normal trading conditions economic operators, guided primarily by economic objectives and ... Continue to full case
Costa Rica vs British Tobacco Centroamérica S.A. March 2022, Supreme Court, Case No 750-2022

Costa Rica vs British Tobacco Centroamérica S.A. March 2022, Supreme Court, Case No 750-2022

The tax authorities had started investigating a sales contract that British Tobacco Centroamérica S.A. had with a related company abroad for the import of goods. The historical price of the imported goods was compared to the price contained in the later sales contract. In the customs forms, the company declared one value, but in its invoices it recorded another value for the same products. The tax auditor discovered that the sales contract had a clause extending its scope to the provision of consultancy services. The company reported during the audit that the supplying company played a central role in the marketing of products that the local company made by assisting it in the elaboration of marketing studies, sales campaigns and quality studies. On this background an adjustment was issued for additional withholding tax for source income in the form of consultancy services provided by the ... Continue to full case
Denmark vs Maersk Oil and Gas A/S, March 2022, Regional Court, Case No BS-41574/2018 and BS-41577/2018

Denmark vs Maersk Oil and Gas A/S, March 2022, Regional Court, Case No BS-41574/2018 and BS-41577/2018

A Danish parent in the Maersk group’s oil and gas segment, Maersk Oil and Gas A/S (Mogas), had operating losses for FY 1986 to 2010, although the combined segment was highly profitable. The reoccurring losses was explained by the tax authorities as being a result of the group’s transfer pricing setup. “Mogas and its subsidiaries and branches are covered by the definition of persons in Article 2(1) of the Tax Act, which concerns group companies and permanent establishments abroad, it being irrelevant whether the subsidiaries and branches form part of local joint ventures. Mogas bears the costs of exploration and studies into the possibility of obtaining mining licences. The expenditure is incurred in the course of the company’s business of exploring for oil and gas deposits. The company is entitled to deduct the costs in accordance with Section 8B(2) of the Danish Income Tax Act ... Continue to full case
Norway vs Fortis Petroleum Norway AS, March 2022, Court of Appeal, Case No LB-2021-26379

Norway vs Fortis Petroleum Norway AS, March 2022, Court of Appeal, Case No LB-2021-26379

In 2009-2011 Fortis Petroleum Norway AS (FPN) bought seismic data related to oil exploration in the North Sea from a related party, Petroleum GeoServices AS (PGS), for NKR 95.000.000. FBN paid the amount by way of a convertible intra-group loan from PGS in the same amount. FPN also purchased administrative services from another related party, Consema, and later paid a substantial termination fee when the service contract was terminated. The acquisition costs, interest on the loan, costs for services and termination fees had all been deducted in the taxable income of the company for the years in question. Central to this case is the exploration refund scheme on the Norwegian shelf. This essentially means that exploration companies can demand cash payment of the tax value of exploration costs, cf. the Petroleum Tax Act § 3 letter c) fifth paragraph. If the taxpayer does not have ... Continue to full case
Portugal vs "A S.A.", March 2022, CAAD - Administrative Tribunal, Case No : 213/2021-T

Portugal vs “A S.A.”, March 2022, CAAD – Administrative Tribunal, Case No : 213/2021-T

A S.A. is 51% owned by B SA and 49% by C Corp. A S.A is active in development of energy efficiency projects. In 2015 A S.A took out loans from B and C at an annual interest rate of 3.22xEuribor 12 months, plus a spread of 14%. A S.A had also paid for services to related party D. The tax authorities issued an assessment related to the interest rate on the loan and the service purportedly received and paid for. A complaint was filed by A S.A. with the Administrative Tribunal (CAAD). Judgement of the CAAD The complaint of A S.A was dismissed and the assessment upheld. Excerpts regarding the interest rate “Now, regarding the first argument, it falls immediately by the base, since the Applicant has not proved that it had made any effort to finance itself with the bank and that this ... Continue to full case
Portugal vs "A SGPS S.A.", March 2022, CAAD - Administrative Tribunal, Case No : P590_2020-T

Portugal vs “A SGPS S.A.”, March 2022, CAAD – Administrative Tribunal, Case No : P590_2020-T

A SGPS S.A. is the parent company of Group A. In 2016, a subsidiary, B S.A., took a loan in a bank, amounting to 1,950,000.00 Euros, and incurred interest costs and Stamp Tax. However, the majority of the loan, an amount of €1,716,256.60, was transferred as an interest free loan to A SGPS S.A. The tax authorities issued an assessment related to costs incurred on the loan and deducted by B S.A. The tax authorities disallowed B S.A.’s deduction of the costs as they were not intended to protect or obtain income, and therefore did not meet the requirements for deductibility under the general provisions of the Tax Code; A complaint was filed by A SGPS S.A. with the Administrative Tribunal. According to A SGPS SA the tax authorities did not justify why it considered that the expenses incurred by B S.A. to an independent ... Continue to full case
India vs Akzo Nobel India Pvt Ltd, February 2022, ITAT Delhi, ITA No. 6007/Del/2014

India vs Akzo Nobel India Pvt Ltd, February 2022, ITAT Delhi, ITA No. 6007/Del/2014

Akzo Nobel India Pvt – a subsidiary of Akzo Nobel Coatings International BV – had paid for administrative services purportedly rendered form a group company in Singapore and had claimed a deduction of INR 19,465 250. The price paid for these services had been determined by the group on an aggregate basis using the transactional net margin method to establish that all controlled transactions in Akzo Nobel India had been at arm’s length. During the audit, the tax authority requested Akzo Nobel India to justify the arm’s length nature of the payment for these administrative services. To that end Akzo Nobel India submitted a copy of the agreement and the allocations keys used. Akzo Nobel India also submitted that the group company in Singapore had provided administrative support services like supply chain management support, marketing and commercial service support, commercial vehicle support, automotive after-market support, ... Continue to full case
Korea vs Microsoft, February 2022, Supreme Court, Case no. 2019두50946

Korea vs Microsoft, February 2022, Supreme Court, Case no. 2019두50946

In 2011 Samsung signed the contract with Microsoft for use of software-patent in Android-based smartphone and tablets, and for the years 2012-2015 Samsung paid royalties to a Microsoft subsidiary, MS Licensing GP, while saving 15 percent for withholding tax. The royalties paid by Samsung to Microsoft during these years amounted to 4.35 trillion won, of which 15%, or 653.7 billion won, was paid as withholding tax. In June 2016, Microsoft filed a claim for a tax refund in a amount of 634 billion won with the Tax Office. According to Microsoft royalty paid for patent rights not registered in Korea is not domestic source income, and should not be subject to withholding tax. The request was refused by the tax authorities. Microsoft then filed a lawsuit against the tax authorities in 2017. Microsoft argued that the withholding tax imposed on income from a patent unregistered ... Continue to full case
France vs Rayonnages de France, February 2022, CAA of Douai, No 19DA01682

France vs Rayonnages de France, February 2022, CAA of Douai, No 19DA01682

Rayonnages de France paid royalties and management fees to a related Portuguese company. Following an audit for FY 2010 – 2012 the French tax authorities denied tax deductions for the payments by reference to the the arm’s length principle. The court of first instance decided in favor of the tax authorities and Rayonnages de France then filed an appeal with the CAA of Douai. Judgement of the CAA The Court of appeal upheld the decision of the court of first instance and decided in favor of the tax authorities. Excerpt “However, as the Minister points out, in order to be eligible for deduction, the management services invoiced by VJ Trans.Fer to SARL Rayonnages de France must necessarily cover tasks distinct from those relating to the day-to-day management of the latter company, which were the responsibility of Mr B. as statutory manager of SARL Rayonnages de ... Continue to full case
Spain vs Narcea Producciones y Promociones S.L., January 2022, Tribunal Superior, Case No STSJ M 122/2022 - ECLI:ES:TSJM:2022:122

Spain vs Narcea Producciones y Promociones S.L., January 2022, Tribunal Superior, Case No STSJ M 122/2022 – ECLI:ES:TSJM:2022:122

Narcea Producciones y Promociones, S.L. (Narcea S.L.) had as shareholders Mr. Emiliano and Mrs. Filomena and their son, Mr. Ismael, a professional footballer, who had an employment relationship with the football club Hércules CF SAD of Alicante. Narcea S.L. purportedly managed the economic rights, the representation fees and the image and TV rights of Mr. Ismael. In relation to the image and TV rights of Mr. Ismael, the tax authorities considered that there had been a related party transaction between Narcea S.L. and Mr. Ismael where these rights had been transferred. In consideration for the transfer, the football club Hercules had paid 40,000 euros in 2010 and 80,000 euros in 2011 to Narcea S.L. According to the tax authorities these payments should instead have been made directly to Mr. Ismael without the intermediation of Narcea S.L. Furthermore, the arrangement had resulted in a fiscal advantage ... Continue to full case
Italy vs Burckert Contromatic Italiana S.p.A., November 2021, Corte di Cassazione, Sez. 5 Num. 1417 Anno 2022

Italy vs Burckert Contromatic Italiana S.p.A., November 2021, Corte di Cassazione, Sez. 5 Num. 1417 Anno 2022

Burkert Contromatic Italiana s.p.a. is engaged in sale and services of fluid control systems. The italian company is a subsidiary of the German Bürkert Group. Following a tax audit, the Italian tax authorities issued a notice of assessment for FY 2007 on the grounds that the cost resulting from the transactions with its parent company (incorporated under Swiss law) were higher than the arms length price of these transactions. The company challenged the tax assessment, arguing that the analysis carried out by the Office had been superficial, both because it had examined accounting documents relating to tax years other than the one under examination (2007), and because the Office, in confirming that the Transactional Net Margin Method (TNMM) was the most reliable method, in order to verify whether the margin obtained by the company corresponded to the arm’s length value, had carried out a comparability ... Continue to full case