Category: Tax Avoidance Schemes

Tax avoidance schemes generally refer to complex tax arrangements setup by multinational enterprices to shift profits from high-tax jurisdiction to low-tax jurisdictions.
A difficult destinction has to be made between legal tax planning, abusive tax avoidance schemes which may or may not be legal, and illegal tax evation/sham transactions and arrangements.
It is generally the case that abusive/agressive tax avoidance schemes and arrangements, “colourable devices”, “dubious methods” and “fully artificial arrangements” set up with the primary or sole purpose of avoiding taxes are not permissible – even if the transactions are otherwise individually within the letter of the law.
Illegal tax evasion – fraud or sham transactions and arrangements – are usually considered criminal and prosecuted as such.

US vs GSS HOLDINGS (LIBERTY) INC., September 2023, U.S. Court of Appeals, Case No. 21-2353

US vs GSS HOLDINGS (LIBERTY) INC., September 2023, U.S. Court of Appeals, Case No. 21-2353

GSS Holdings had claimed a loss of USD 22.54 million which the IRS disallowed. In disallowing the loss, the IRS claimed that the loss was not an ordinary business loss, but was incurred as part of a series of transactions that resulted in the sale of capital assets between related parties. The trial court upheld the IRS’s adjustment and GSS Holdings appealed to the Court of Federal Claims. The Court of Federal Claims applied a combination of substance over form and step transaction doctrines to combine two transactions and dismissed GSS Holdings’ claims on that basis. GSS Holdings then appealed to the US Court of Appeals. Opinion of the Court The Court of Appeals found that the Federal Claims Court had misapplied the step transaction doctrine and remanded the case for reconsideration under the correct legal standard. Excerpt “As part of this examination, the Claims ... Continue to full case
UK vs JTI Acquisitions Company (2011) Ltd, August 2023, Upper Tribunal, Case No [2023] UKUT 00194 (TCC)

UK vs JTI Acquisitions Company (2011) Ltd, August 2023, Upper Tribunal, Case No [2023] UKUT 00194 (TCC)

JTI Acquisitions Company Ltd was a UK holding company, part of a US group, used as an acquisition vehicle to acquire another US group. The acquisition was partly financed by intercompany borrowings at an arm’s length interest rate. The tax authorities disallowed the interest expense on the basis that the loan was taken out for a unallowable purpose. Judgement of the Upper Tribunal The Court upheld the decision and dismissed JTI Acquisitions Company Ltd’s appeal. According to the Court, a main purpose of the arrangement was to secure a tax advantage for the UK members of the group. The fact that the loans were at arm’s length was relevant but not determinative. UK vs JTI ACQUISITIONS COMPANY (2011) LIMITED ... Continue to full case
Netherlands vs "POEM B.V.", June 2023, Court of Appeal, Case No. BKDH-21/01014 to BKDH-21/01020 (ECLI:NL:GHSHE:2023:2393)

Netherlands vs “POEM B.V.”, June 2023, Court of Appeal, Case No. BKDH-21/01014 to BKDH-21/01020 (ECLI:NL:GHSHE:2023:2393)

In 2001 “POEM B.V.” was incorporated in the Netherlands under Dutch law by its shareholder X, and has since then been registered in the Dutch trade register. In 2010 its administrative seat was moved to Malta where it was also registered as an ‘Oversea Company’. X was from the Netherlands but moved to Switzerland in 2010. In “POEM B.V.”‘s Maltese tax return for the year 2013, the entire income was registered as ‘Untaxed Account’ and no tax was paid in Malta. “POEM B.V.” distributed dividend to X in FY 2011-2014. Following an audit the Dutch tax authorities issued an assessment where corporate income tax and withholding tax over the dividend had been calculated. The assessment was based on Article 4 (4) of the Dutch-Maltese DTA under which “POEM B.V.” was deemed to be a resident of the Netherlands. Not satisfied with the assessment “POEM B.V.” ... Continue to full case
Canada vs Deans Knight Income Corporation, May 2023, Supreme Court, Case No. 2023 SCC 16

Canada vs Deans Knight Income Corporation, May 2023, Supreme Court, Case No. 2023 SCC 16

In 2007, Forbes Medi-Tech Inc. (now Deans Knight Income Corporation) was a British Columbia-based drug research and nutritional food additive business in financial difficulty. It had accumulated approximately $90 million of unclaimed non-capital losses and other tax credits. Non-capital losses are financial losses resulting from carrying on a business that spends more than it makes in a given year. Under the Income Tax Act (the Act), a taxpayer can reduce their income tax by deducting non-capital losses from its taxable income. If the taxpayer does not use all, or a portion, of the loss in the year it incurred it, they may carry the loss back three years, or forward 20 years. However, under section 111(5) of the Act, when another entity acquires control of the company, the new owners may not carry over those non-capital losses and deduct them from its future taxes, unless the company ... Continue to full case
Portugal vs "A..., Sociedade Unipessoal LDA", May 2023, Supremo Tribunal Administrativo, Case No 036/21.8BALSB

Portugal vs “A…, Sociedade Unipessoal LDA”, May 2023, Supremo Tribunal Administrativo, Case No 036/21.8BALSB

“A…, Sociedade Unipessoal LDA” had taken out two intra group loans with the purpose of acquiring 70% of the shares in a holding company within the group. The tax authorities disallowed the resulting interest expenses claiming that the loan transactions lacked a business purpose. The assessment was later upheld by the tax court in decision no. 827/2019-T. An appeal was then filed by “A…, Sociedade Unipessoal LDA” with the Supreme Administrative Court. Judgement of Supreme Administrative Court The Court dismissed the appeal and upheld the decision of the tax court and the assessment issued by the tax authorities. Experts “35. In general, a transaction is considered to have economic substance when it significantly alters the taxpayer’s economic situation beyond the tax advantage it may generate. Now, the analysis of the relevant facts leads to the conclusion that neither A… nor the financial position of the ... Continue to full case
Denmark vs Takeda A/S (former Nycomed A/S) and NTC Parent S.à.r.l., May 2023, Supreme Court, Cases 116/2021 and 117/2021

Denmark vs Takeda A/S (former Nycomed A/S) and NTC Parent S.à.r.l., May 2023, Supreme Court, Cases 116/2021 and 117/2021

The cases concerned in particular whether Takeda A/S under voluntary liquidation and NTC Parent S.à.r.l. were obliged to withhold tax on interest on intra-group loans granted by foreign group companies. The cases were to be assessed under Danish tax law, the EU Interest/Royalty Directive and double taxation treaties with the Nordic countries and Luxembourg. In a judgment of 9 January 2023, concerning dividends distributed to foreign parent companies, the Supreme Court has ruled on when a foreign parent company is a “beneficial owner” under double taxation treaties with, inter alia, Luxembourg, and when there is abuse of rights under the EU Parent-Subsidiary Directive. In the present cases on the taxation of interest, the Supreme Court referred to the judgement of January 2023 on the general issues and then made a specific assessment of the structure and loan relationships of the two groups. The Supreme Court ... Continue to full case

Denmark vs Copenhagen Airports Denmark Holdings ApS, February 2023, High Court, Case No SKM2023.404.OLR

A parent company resident in country Y1 was liable to tax on interest and dividends it had received from its Danish subsidiary. There should be no reduction of or exemption from withholding tax under the Parent-Subsidiary Directive or the Interest and Royalties Directive or under the double taxation treaty between Denmark and country Y1, as neither the parent company nor this company’s own Y1-resident parent company could be considered the rightful owner of the dividends and interest within the meaning of the directives and the treaty, and as there was abuse. The High Court thus found that the Y1-domestic companies were flow-through companies for the interest and dividends, which were passed on to underlying companies in the tax havens Y2-ø and Y3-ø. The High Court found that there was no conclusive evidence that the companies in Y2 were also flow-through entities and that the beneficial ... Continue to full case
US vs Skechers USA Inc., February 2023, Wisconsin Tax Appeals Commission, Nos. 10-I-171 AND 10-I-172

US vs Skechers USA Inc., February 2023, Wisconsin Tax Appeals Commission, Nos. 10-I-171 AND 10-I-172

Skechers US Inc. had formed a related party entity, SKII, in 1999 and transferred IP and $18 million in cash to the entity in exchange for 100 percent of the stock. Skechers then licensed the IP back from SKII and claimed a franchise tax deduction for the royalties and also deductions for management fees and interest expenses on the unpaid balance of royalty fees. The Wisconsin tax authorities held that these were sham transaction lacking business purpose and disallowed the deductions. Judgement of the Tax Appeals Commission The Tax Appeals Commission ruled in favor of the tax authorities. Excerpt “(…) The burden of proof is on Petitioner to prove that the Department’s assessment is incorrect by clear and satisfactory evidence. In this case, Petitioner must prove that it had a valid nontax business purpose for entering into the licensing transaction that generated the royalty deductions ... Continue to full case
Italy vs Engie Produzione S.p.a, January 2023, Supreme Court, Case No 6045/2023 and 6079/2023

Italy vs Engie Produzione S.p.a, January 2023, Supreme Court, Case No 6045/2023 and 6079/2023

RRE and EBL Italia, belonged to the Belgian group ELECTRABEL SA (which later became the French group GDF Suez, now the Engie group); RRE, like the other Italian operating companies, benefited from a financing line from the Luxembourg subsidiary ELECTRABEL INVEST LUXEMBOURG SA (“EIL”). In the course of 2006, as part of a financial restructuring project of the entire group, EBL Italia acquired all the participations in the Italian operating companies, assuming the role of sub-holding company, and EIL acquired 45 per cent of the share capital of EBL Italia. At a later date, EBL Italia and EIL signed an agreement whereby EIL assigned to EBL Italia the rights and obligations deriving from the financing contracts entered into with the operating companies; at the same time, in order to proceed with the acquisition of EIL’s receivables from the operating companies, the two companies concluded a ... Continue to full case
Denmark vs NetApp Denmark ApS and TDC A/S, January 2023, Supreme Court, Cases 69/2021, 79/2021 and 70/2021

Denmark vs NetApp Denmark ApS and TDC A/S, January 2023, Supreme Court, Cases 69/2021, 79/2021 and 70/2021

The issue in the Danish beneficial ownership cases of NetApp Denmark ApS and TDC A/S was whether the companies were obliged to withhold dividend tax on distributions to foreign parent companies. The first case – NetApp Denmark ApS – concerned two dividend distributions of approximately DKK 566 million and DKK 92 million made in 2005 and 2006 to an intermediate parent company in Cyprus – and then on to NETAPP Bermuda. The second case – TDC A/S – concerned the distribution of dividends of approximately DKK 1.05 billion in 2011 to an intermediate parent company in Luxembourg – and then on to owner companies in the Cayman Islands. In both cases, the tax authorities took the view that the intermediate parent companies were so-called “flow-through companies” which were not the real recipients of the dividends, and that the real recipients (beneficial owners) were resident in ... Continue to full case
Germany vs A Corp. (S-Corporation), November 2022, Finanzgericht Cologne, Case No 2 K 750/19

Germany vs A Corp. (S-Corporation), November 2022, Finanzgericht Cologne, Case No 2 K 750/19

It is disputed between the parties whether the A Corp. resident in the USA – a so-called S corporation – or its shareholders are entitled to full exemption and reimbursement of the capital gains tax with regard to a profit distribution by a domestic subsidiary of A Corp. (S-Corporation). A Corp. (S-Corporation) is a corporation under US law with its registered office in the United States of America (USA). It has opted for taxation as an “S corporation” under US tax law and is therefore not subject to corporate income tax in the USA; instead, its income is taxed directly to the shareholders resident in the USA (Subchapter S, §§ 1361 to 1378 of the Internal Revenue Code (IRC)). The shareholders of A Corp. (S-Corporation) are exclusively natural persons resident in the USA as well as trusts established under US law and resident in the ... Continue to full case
India vs Google India Private Limited, Oct. 2022, Income Tax Appellate Tribunal, 1513/Bang/2013, 1514/Bang/2013, 1515/Bang/2013, 1516/Bang/2013

India vs Google India Private Limited, Oct. 2022, Income Tax Appellate Tribunal, 1513/Bang/2013, 1514/Bang/2013, 1515/Bang/2013, 1516/Bang/2013

Google Ireland licenses Google AdWords technology to its subsidiary in India and several other countries across the world. The Tax Tribunal in India found that despite the duty of Google India to withhold tax at the time of payment to Google Ireland, no tax was withheld. This was considered tax evasion, and Google was ordered to pay USD 224 million. The case was appealed by Google to the High Court, where the case was remanded to the Income Tax Appellate Authority for re-examination. Judgement of the ITAT After re-examining the matter on the orders of the Karnataka High Court, the Income Tax Appellate Authority concluded that the payments made by the Google India to Google Ireland between 2007-08 and 2012-13 was not royalties and therefore not subject to withholding tax. Excerpts “30. On a consideration of all the above agreements and the facts on record, ... Continue to full case
New Zealand vs Frucor Suntory, September 2022, Supreme Court, Case No [2022] NZSC 113

New Zealand vs Frucor Suntory, September 2022, Supreme Court, Case No [2022] NZSC 113

Frucor Suntory (FHNZ) had deducted purported interest expenses that had arisen in the context of a tax scheme involving, among other steps, its issue of a Convertible Note to Deutsche Bank, New Zealand Branch (DBNZ), and a forward purchase of the shares DBNZ could call for under the Note by FHNZ’s Singapore based parent Danone Asia Pte Ltd (DAP). The Convertible Note had a face value of $204,421,565 and carried interest at a rate of 6.5 per cent per annum. Over its five-year life, FHNZ paid DBNZ approximately $66 million which FHNZ characterised as interest and deducted for income tax purposes. The tax authorities issued an assessment where deductions of interest expenses in the amount of $10,827,606 and $11,665,323 were disallowed in FY 2006 and 2007 under New Zealand´s general anti-avoidance rule in s BG 1 of the Income Tax Act 2004. In addition, penalties ... Continue to full case
Argentina vs Empresa Distribuidora La Plata S.A., September 2022, Tax Court, Case No 46.121-1, INLEG-2022-103065548-APN-VOCV#TFN

Argentina vs Empresa Distribuidora La Plata S.A., September 2022, Tax Court, Case No 46.121-1, INLEG-2022-103065548-APN-VOCV#TFN

The issue was whether the benefits provided by the Argentina-Spain DTC were available to Empresa Distribuidora La Plata S.A., which was owned by two Spanish holding companies, Inversora AES Holding and Zargas Participaciones SL, whose shareholders were Uruguayan holding companies. The Argentine Personal Assets Tax provided that participations in Argentine companies held by non-resident aliens were generally subject to an annual tax of 0.5% or 0.25% on the net equity value of their participation. However, under the Argentina-Spain DTC, article 22.4, only the treaty state where the shareholders were located (Spain) had the right to tax the assets. On this basis, Empresa Distribuidora La Plata S.A. considered that its shares held by Spanish holding companies were not subject to the Personal Assets Tax. The tax authorities disagreed, finding that the Spanish holding companies lacked substance and that the benefits of the Argentina-Spain DTC were therefore ... Continue to full case
Luxembourg vs "Lux SARL", September 2022, Administrative Tribunal, Case No 44902

Luxembourg vs “Lux SARL”, September 2022, Administrative Tribunal, Case No 44902

In 2016 “Lux SARL” had – via the immediate parent company – been granted funds by a related company on Cayman Islands, in the form of a profit participating loan. In 2018, after looking into the arrangement, the tax authorities informed “Lux SARL” that it intended to adjust its tax return for the year 2016 insofar as it “(…) does not accept the deduction of notional interest in relation to a capital gain realised on the sale of securities, and after dismissing an objection by Lux SARL, a final assessment was issued in 2019”. Lux SARL then filed an appeal with the Administrative Tribunal. Judgement of the Administrative Tribunal The Tribunal found the appeal of Lux SARL unjustified and upheld the decision of the tax administration. The Tribunal agreed with the approach taken by the tax authorities disregarding the classification of the financing received and ... Continue to full case
Netherlands vs "Owner B.V.", July 2022, District Court, Case No. ECLI:NL:RBNHO:2022:6584

Netherlands vs “Owner B.V.”, July 2022, District Court, Case No. ECLI:NL:RBNHO:2022:6584

Owner B.V. was set up by a number of investors to acquire a Belgian entity with Dutch subsidiaries. After the acquisition the Dutch subsidiaries were merged into a fiscal unity with Owner B.V. Interest in an amount of EUR 1.7 million due on the debt related to the acquisition was considered by the court not deductible under section 10a of the Vpb Act. In addition, Owner B.V.’s profit had been reduced by EUR 6.0 million by interest on shareholder loans. The court deemed that 4.5 million of this amount was not deductible by virtue of fraus legis. The court further ruled that part of the costs charged to the Dutch company qualified as financing costs and could be deducted. Excerpts “5.8. The defendant has argued that under Section 8b of the Vpb Act, a full recharacterisation of the loans can and should take place, which ... Continue to full case
UK vs BlackRock, July 2022, Upper Tribunal, Case No [2022] UKUT 00199 (TCC)

UK vs BlackRock, July 2022, Upper Tribunal, Case No [2022] UKUT 00199 (TCC)

In 2009 the BlackRock Group acquired Barclays Global Investors for a total sum of $13,5bn. The price was paid in part by shares ($6.9bn) and in part by cash ($6.6bn). The cash payment was paid by BlackRock Holdco 5 LLC – a US Delaware Company tax resident in the UK – but funded by the parent company by issuing $4bn loan notes to the LLC. In the years following the acquisition Blackrock Holdco 5 LLC claimed tax deductions in the UK for interest payments on the intra-group loans. Following an audit in the UK the tax authorities disallowed the interest deductions. The tax authorities held that the transaction would not have happened between independent parties. They also found that the loans were entered into for an unallowable tax avoidance purpose. A UK taxpayer can be denied a deduction for interest where a loan has an ... Continue to full case
Italy vs BASF Italia s.p.a., June 2022, Supreme Court, Cases No 19728/2022

Italy vs BASF Italia s.p.a., June 2022, Supreme Court, Cases No 19728/2022

The German BASF group is active in the chemical industry and has subsidiaries all over the world including Italy. In FY 2006 BASF Italia s.p.a. was served with two notices of assessment by the tax authorities. The tax assessments formulated three findings. 1. non-deductibility of the cancellation deficit – arising from the merger by incorporation of Basf Agro s.p.a. into Basf Italia s.p.a., resolved on 27 April 2004 – which the acquiring company had allocated to goodwill, the amortisation portions of which had been deducted in tenths and then, from 2005, in eighteenths. The Office had denied the deductibility on the ground that the company, in the declaration submitted electronically, had not expressly requested, as required by Article 6(4) of Legislative Decree No. 358 of 8 October 1997, the tax recognition of the greater value of goodwill recorded in the balance sheet to offset the ... Continue to full case
Netherlands vs "Dividend B.V.", May 2022, District Court, Case No AWB-21_2426 (ECLI:NL:RBZWB:2022:2432)

Netherlands vs “Dividend B.V.”, May 2022, District Court, Case No AWB-21_2426 (ECLI:NL:RBZWB:2022:2432)

“Dividend B.V.” is the legal successor of a BV that has made (dividend) distributions. With respect to the distributions to a Luxembourg company (LuxCo), no Dutch dividend tax was withheld on the basis of the withholding tax exemption. Prior to the first distribution, the relevant shares in the BV were held by a limited partnership established in the Cayman Islands. This limited partnership transferred the shares in the BV to LuxCo in view of the first distribution. In the light of the T-Danmark judgment, the Court found that the tax authorities had proved that there had been an abuse of EU law, on the basis that without the use of LuxCo, a 15% withholding tax would have been due in the Netherlands, and after the use of LuxCo, this was not the case – based only on the formal conditions. The use of letter shares ... Continue to full case
Sweden vs Swedish Match Intellectual Property AB, May 2022, Supreme Administrative Court, Case No Mål: 5264--5267-20, 5269-20

Sweden vs Swedish Match Intellectual Property AB, May 2022, Supreme Administrative Court, Case No Mål: 5264–5267-20, 5269-20

At issue was whether the acquisition value of an inventory acquired from a related company should be adjusted on the basis of Swedish arm’s length provisions or alternatively tax avoidance provisions According to the arm’s length rule in Chapter 18, Section 11 of the Income Tax Act, the acquisition value is to be adjusted to a reasonable extent if the taxpayer or someone closely related to the taxpayer has taken steps to enable the taxpayer to obtain a higher acquisition value than appears reasonable and it can be assumed that this has been done in order to obtain an unjustified tax advantage for one of the taxpayer or someone closely related to the taxpayer. Company (A) acquired a trademark from another company (B) in the same group for a price corresponding to its market value and used the acquisition value as the basis for depreciation ... Continue to full case