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 the tax authorities.
Interest on unpaid royalty claim
“The High Court agrees that, as a starting point, between group-related parties such as H1 and the G2 company, questions may be raised regarding the interest on a receivable arising from a failure to pay royalties, as defined in section 2 of the Tax Assessment Act. The question is whether, when calculating H1’s taxable income for the income years in question, there is a basis for fixing interest income to H1 on the unpaid royalty claim by G2, within the meaning of Paragraph 2 of the Tax Assessment Act. Such a fixing of interest must, where appropriate, be made on terms which could have been obtained if the claim had arisen between independent parties. The right to an adjustment is thus based, inter alia, on the assumptions that the failure to pay interest on the royalty claim has no commercial justification and that there is in fact a basis for comparison in the form of contractual terms between a debtor for a claim in bolivar in Venezuela and a creditor in another country independent of the debtor.”
“In the light of the very special circumstances set out above, and following an overall assessment, the Court considers that there are no grounds for finding that the failure to recover H1’s royalty claim from G2 was not commercially justified. The High Court also notes that the Ministry of Taxation has not demonstrated the existence of a genuine basis for comparison in the form of contractual terms for a claim in bolivar between a debtor in Venezuela and a creditor in a third country independent of the debtor.
The High Court therefore finds that there is no basis under Section 2 of the Tax Assessment Act, cf. Section 3B(5) of the Tax Control Act, cf. Para 8 cf. Section 5(3), there is a basis for increasing G3-A/S’s income in the income years in question by a fixed rate of interest on the unpaid royalty claim with G2 company.”
Dividend distribution in 2012 reclassified as royalty
“…the Court of Appeal, after an overall assessment, accepts that the fact that the G2 company did not waive outstanding royalty receivables was solely a consequence of the very specific currency restrictions in Venezuela, that the payment of dividends was commercially motivated and was not due to a common interest between H1 and the G2 company, and that therefore, under Article 2(2) of the Tax Code, there is no need to pay dividends to the G2 company. 1(3), there are grounds for reclassifying the dividend distribution as a taxable deduction from the royalty claim, as independent parties could not have acted as claimed by the Tax Ministry.”
Claim in respect of purchase price for shares in 2013 set-off against dividend reclassified as royalty
For the reasons given by the Tax Court and, moreover, in the light of the very special circumstances of Venezuela set out above, the Court finds that there is no basis under section 2 of the Tax Assessment Act for reclassifying the claim of the G2 company against H2, in respect of the share purchase price for the G9 company, from a set-off against dividends due to an instalment of royalties due.”