The VSSB Group provided liquidity to the group members by means of a cash-pool.
Under the cash pool agreement, short-term and longer-term multi-currency financing transactions were carried out, including the applicant as a member of the group; the intermediary was the group member VSSB V. Service Center Budapest Zrt. (‘VSSB’). At the end of each month, the balances of the group members’ short positions (cash pool) with monthly settlement were transferred to the long term loan between the holding company, VSSB Group Plc.
The members of the cash pool have either been continuously depositing funds or drawing on funds within the group. The Hungarian Service Center only deposited funds throughout the period under examination and had received a fixed rate of interest on the deposits.
The funds deposited by the members of the group were transferred to the main account of the VSSB Group and from there to the company at the top of the financing structure, VGP. The cash pool member companies thus had a claim on VGP (in some years, depending on the treasury policy, this was transferred to company V.2).
In the transfer pricing records of the Hungarian Service Center, each transaction was classified as a deposit. The transfer pricing rules were applied on the basis of deposit interest rates, which were taken into account as appropriate. The arm’s length price of the cash-pool transactions was determined by applying the CUP method (external). As comparables, it used deposit interest rates (published by Hungarian financial institutions, published by the MNB for demand and current account deposit transactions and for deposits committed within the year). The arm’s length price for longer-term positions was also determined by CUP method (taking into account the 1- and 12-month HUF current account deposit rates available in the Reuters database).
Following an audit an assessment was issued by the tax authorities, where the interest on the deposits had been adjusted resulting in additional taxable income.
This decision was brought before the court of first instance where the decision was set aside.
The tax authorities then filed an appeal with the Court of Appeal, claiming that the court of first instance had not provided a sufficient basis for its decision.
Judgement of the Court of Appeal
The Court allowed the appeal and remanded the case to the court of first instance for reconsideration.
“The judgment of the court of first instance was not suitable for review on the merits, therefore the Curia set aside the final judgment on the basis of § 275 (4) of the old Civil Code and ordered the court of first instance to conduct a new procedure and issue a new decision.
For the above reason for the annulment, the Court of First Instance could not take a position on the further arguments of the application for review, including the question of the legality of the first instance court’s instruction to repeat the proceedings. In a retrial, the court of first instance must proceed as the Curia has done in the present order, clarifying exactly what positions the tax authority’s finding relates to and whether the factual deficiencies in the defendant’s case exist; whether the facts of the case can be found to be such as to permit a decision on the merits of the dispute. If so, and if the court intends to accept the expert’s opinion as the basis for its judgment, the defendant will be in a position to decide on the necessary evidence if the court informs the defendant of its intention to do so, with an invitation to submit any counter-evidence or a possible motion for a declaration of proof.”Kfv.35184_2021_16