Hungary vs Vodafone, May 2015, Appeals Court Curia No. Kfv. I. 35.550/2018/12

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The Vodafone group provided liquidity to group members using a cash pool. The balance of the group members’ short positions settled on a monthly basis was transferred to Vodafone Plc at the end of each month. (hereinafter: the Parent Company) in the main account for a long term loan between the Parent Company and the respective member company. As a member of the cash pool, Vodafone Hungary also continuously deposited funds into the main account of the Vodafone Plc and received funds from the main account. Vodafone Hungary’s transactions were partly short-term (up to 1 month) and partly long-term position payments. Some transactions were classified as “deposits” in the transfer pricing register.

Press release from the Court (Curia), December 2019

Depending on the underlying facts, the issue of transfer pricing may be a technical issue and may be a purely legal issue. The subject of the procedure is not the classification of the underlying legal relationship, but the determination of the consideration applied to the legal relationship closest to the parameters of the given transaction.

The group provided liquidity to the group members using the cash pool method. The balance of the group members’ short-term short positions at the end of each month was transferred to a long-term position between the Parent Company and the respective member company. The applicant acted in part as an intermediary between the members and the Parent Company, and in part it placed funds in the main account of the Parent Company and received funds therefrom. The applicant described each transaction as a ‘deposit’ in the transfer pricing register and took into account current account deposit interest when applying the transfer pricing rules. The first instance tax authority on 01.04.2012. – 31.03.2014. considered, inter alia, the corporate tax code to be that Act CXII of 1996 on Credit Institutions and Financial Undertakings (hereinafter: Hpt.) and Act IV of 1959 on the Civil Code. (hereinafter: the old Civil Code), the conceptual element of a deposit transaction is that the party receiving the deposit must be a financial institution (for the purposes of the Credit Institutions Act: a credit institution). The Parent Company is not a credit institution and is not entitled to collect deposits. However, during the audited period, Hpt. is familiar with parent-subsidiary group financing money lending. The transactions between the applicant and the Parent Company correspond accordingly, the normal market price being compared with the interest on the loans granted. The tax authority charged the applicant a tax difference for applying a lower interest rate than the normal market rate. Defendant reversed the first-instance decision because of the effect of other tax changes on pre-tax profit, otherwise upholding it. According to the assessment of the court of first instance, it was necessary to decide on a purely legal issue. The Parent Company is a subsidiary of Hpt. due to its rules, it is not possible to collect a deposit, the plaintiff may receive interest on a loan not on a deposit, but on a loan, the normal market price shall be determined accordingly. He therefore dismissed the action.

The Curia, acting on the applicant’s request for review, assumed that the question of transfer pricing could be a matter of professional competence and could be a matter of law, depending on the facts on which it was based. In the litigation, the defendant formed the decision into a question of law by basing it on the Hpt. However, in determining the normal market price, it is not a question of classifying the underlying legal relationship, but of determining the consideration applied to the legal relationship closest to the parameters of the given transaction. In this case, even within the framework of Section 1 (7) of the Art., It cannot be decisive whether the Parent Company has the right to collect deposits or not. Nor can the risk elements of the classic credit / deposit scheme identified by the defendant be applied in a way that governs independent credit institutions, as cash pool systems have special operating parameters, this special situation inherently necessitates the application of a transfer price. The Curia then examined whether, on the basis of the information available, the Court of First Instance could reasonably rule on the issue of transfer pricing, even with the assistance of a forensic expert, and given a negative answer provided for the annulment of the final judgment, the annulment of the defendant’s decision as regards the determination of the normal market price, including the decision at first instance, and an order that the tax authorities at first instance reopen the proceedings. from the outset, this special situation necessitates the application of a transfer pricing.”

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