“A-Geothermal Finance AG” (A AG) financed geothermal projects developed by the E GmbH. The sole shareholder is af A AG. Since 2012, B has also been the sole shareholder of C AG. C AG holds as a subsidiary E GmbH with developed two geothermal projects. These projects were financed by A AG, namely with loans to E GmbH, which forwarded the loan amounts to F S.p.a.
In the period from November 2010 to March 2017, A AG granted a large number of loans ranging from EUR 10,000.00 to EUR 270,000.00. At the end of 2017, loans receivable (including interest in arrears on the loan) from E GmbH, amounted to CHF 9,397,427.00.
A AG made value adjustments on this amount, namely in 2016 in the amount of CHF 7,676,057.00 and in 2017 in the amount of CHF 1,721,370.00.
The tax administration did not recognize these value adjustments as tax deductible business-related operating expenses, essentially with the argument that the granting of the loan did not stand up to the arm’s length principle.
An appeal was filed by A AG.
Judgement of the Administrative Court
The Court dismissed the appeal against the decision and the decision of the tax authorities upheld.
“The complainant argues in point 2 of its complaint that the lower courts should have clarified the complainant’s intentions and motivations in connection with the considerable advance payments and investments made – i.e. the loans granted – by examining witnesses and parties.
This is not the case, because even if the complainant’s intentions and motivations were established as alleged by the complainant, an independent third party would not have made the loans and advance payments that are the subject matter of the proceedings. Thus, even if B, as a member of the competent administrative bodies of the “geothermal group”, had tacitly or even verbally promised a third party that he would provide him with a general contractor contract with a turnover of approximately EUR 16 million if the foreign state granted the concession for the construction of the two geothermal plants, the independent third party would not have granted such loans as the complainant did.
“In points 5.3 and 5.4 of its complaint, the complainant argues that it therefore did not provide F S.p.a. and E GmbH with its own funds, because the external financing on the part of the complainant was intended to ensure that, if the project had been successful and a third party investor had entered, the complainant’s investments would have existed as a debt in F S.p.a. and would therefore have had to be satisfied first. This ensured that the complainant would be the first to get back the money it had invested if the project had been successful. The structure chosen in this case had been the best possible and only possible one for participation in the tender. The initiative for the development of geothermal projects had always come from the complainant, which was why the project had also been carried out in the complainant’s interest and at its risk. The security of the pledge of the shares in F S.p.a. would not have resulted in any additional benefit because of the complete control.
These arguments do not change the assessment that a third party would not have provided the loans and advance payments at issue in the proceedings at the conditions that the complainant provided and were promised to it.
If the complainant had participated in F S.p.a. as sole shareholder from the beginning – which it could also have done indirectly via C AG or E GmbH – it would have had the chance to obtain its profit if the geothermal projects had been successful. With such a participation, the complainant would have been free to make the loans and advance payments at issue in the proceedings as such. The complainant would therefore not have been forced to provide the amount of over EUR 7 million that was the subject of the proceedings as equity capital of the foreign company. Thus, the chosen structure, namely that B rather than the complainant holds the “geothermal group” and that the complainant grants the risk capital in the form of loans, was by no means the only and, moreover, the best possible variant.
In summary, the “structure” chosen meant that the complainant had to bear the entire risk associated with the planning and development of the two geothermal projects, at least until the concession was granted by the foreign state. In return, the complainant obtained a written guarantee of a relatively low interest rate on the loans it had granted. In addition, it hoped that after the concession was granted by the foreign state, it would be awarded a contract that it could carry out at a profit – if possible with around EUR 10 million. However, the profit opportunities associated with the geothermal projects – up to EUR 200 million – would not have been available to it, but to its sole shareholder B.
Such a structure does not stand up to the arm’s length principle: an independent third party would not have entered into the commitment that the complainant did.
From an ex post perspective, it must be noted that only the risk associated with the geothermal projects materialised and the loans and advance payments made by the complainant were lost. Because these services do not stand up to the arm’s length principle, they may not be claimed as tax reductions.
For all these reasons, the appeal of 23 September 2021 is not justified”