Finland vs A Group, April 2020, Supreme Administrative Court, Case No. KHO:2020:35

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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 Oyj for income that falls below the target limit.

Based on the functional analysis prepared in the tax audit submitted to A Oyj, the Group Tax Center had considered that A Oyj had in fact performed all significant functions related to intra-group financing, assumed significant risks and used significant funds and that A Finance NV had not actually acted as a group finance company. The Group Tax Center had also considered that A Finance NV had received market-based compensation based on operating costs. In the tax adjustments for the tax years 2011 and 2012 submitted by the Group Tax Center to the detriment of the taxpayer, A Oyj had added as a transfer pricing adjustment: n the difference between the income deemed to be taxable and the income declared by the company and, in addition, imposed tax increases on the company. In the explanatory memorandum to its transfer pricing adjustment decisions, the Group Tax Center had stated that the transactions had not been re-characterized because the characterization or structuring of the transaction or arrangement between the parties had not been adjusted but taxed on the basis of actual transactions between the parties.

The Supreme Administrative Court found that the Group Tax Center had ignored the legal actions taken by A Oyj and A Finance NV and in particular the fact that A Finance NV had become a creditor of the Group companies. It had identified the post-investment transactions between A Oyj and A Finance NV and considered that A Oyj had in fact performed all significant intra-group financing activities and that A Finance NV had not in fact acted as a group finance company. Thus, when submitting the tax adjustments to the detriment of the taxpayer, the Group Tax Center had re-characterized the legal transactions between A Oyj and A Finance NV on the basis of section 31 of the Act on Tax Procedure. As the said provision did not entitle the Group Tax Center to re-characterize the legal transactions made by the taxpayer and since it had not been alleged that A Oyj and A Finance NV had reorganized the Group’s financial activities for tax avoidance purposes, the Group Tax Center could not correct A Oyj taxes to the detriment of the taxpayer and does not impose tax increases on the company. Tax years 2011 and 2012. that A Oyj and A Finance NV had undertaken to reorganize the Group’s financial operations for the purpose of tax avoidance, the Group Tax Center could not, on the grounds presented, correct A Oyj’s taxation in 2011 and 2012 to the detriment of the taxpayer or impose tax increases on the company. Tax years 2011 and 2012. that A Oyj and A Finance NV had undertaken to reorganize the Group’s financial operations for the purpose of tax avoidance, the Group Tax Center could not, on the grounds presented, correct A Oyj’s taxation in 2011 and 2012 to the detriment of the taxpayer or impose tax increases on the company. Tax years 2011 and 2012.

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KHO-2020-35

TP-Guidelines

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