This case concerns a Dutch treasury company with a low risk intra-group borrowing and on-lending activity.
The interested party was incorporated on 5 August 1995 by a legal person named V Limited, under Canadian law. Its subscribed and paid-up capital amounted to NLG 40,000 in the years under review. The claimant is part of the V group. Its actual activities are described in its “Declaration of data on business start-ups” submitted to the tax authorities as “intra-group financing”. It maintained a bank account with the Bank of Montreal.
In the financial years in question, the interested party lent substantial amounts of pounds sterling to its sister company Y Plc, incorporated under the laws of the United Kingdom, in the form of promissory notes and a revolving credit facility with effect from 31 January and 1 February 1996 respectively. The stakeholder obtained the necessary pounds by way of a loan from its sister company Z B.V. The funds borrowed and lent by the stakeholder were transferred to its bank account with the Bank of Montreal. The loan conditions in the relationship between the interested party (lender) and Y (borrower) ran completely parallel to the conditions under which the interested party borrowed the relevant funds from Z. The money flows – such as repayment and interest payments – also ran completely parallel. The interested party did not therefore run any interest or exchange rate risk. It did not carry out any other activities.
Before the interested party became active as such – on 31 January 1996 – loans to Y were provided by Z, which borrowed funds for that purpose within the V-group. Z has a very large own capital. For its holding and financing activities, Z concluded a ruling; with regard to the financing activities this ruling implied that there would be fees determined at arm’s length if it would declare a gross margin of at least 1% of the borrowed and on-lent funds as a contribution to its taxable profit.
In the current financial years Z has lent out the funds to the interested party at its subsidiary D N.V. established in the Netherlands Antilles.
In dispute is the manner in which the profits of the interested party should be determined.
– Does the interested party act as a finance company, and if so, should its profit, as the tax inspector primarily argues, be set at 1/8% of the borrowed and on-lent amounts, in accordance with the so-called ruling policy, or should the interest paid by it be excluded from deduction pursuant to Article 9(1)(b) of the Corporation Tax Act 1969 (the Act), as the tax inspector alternatively argues?
– If the interested party is not a finance company in the strict sense of the word, can the interested party’s profit be determined in accordance with the tax return, as the interested party primarily maintains, or at least can its profit be determined in accordance with the cost-plus method, as the interested party maintains in the alternative and the Inspector maintains in the further alternative?
– If none of the aforementioned profit determination methods is correct, is it then possible, as the interested party argues in the alternative, to use the advice of two trust offices which it obtained to determine its profit?
Judgement of the Court
According to the court, a cost-plus surcharge of 10% was appropriate in this case.
“Based on the facts established – including the circumstance that its risk-bearing capital did not exceed NLG 40,000 – the Court deems it sufficiently plausible that the interested party in fact acted as an intermediary between Z and Y, that it borrowed and lent money and received and passed on interest in this context almost without any risk, and that as such it essentially only fulfilled a cashier’s function for the benefit of Z. The applicant cannot therefore be regarded as a finance company in the proper sense of the term. The primary and subsidiary arguments of the Inspector are therefore rejected by the Court. The reason(s) why the interested party was thus engaged and the question whether the loans and interest are rightly included in its balance sheet or profit and loss account, respectively, can be left open in the context of the present dispute.
It is part of the economic function performed by the interested party – see 5.1 – that the interested party passes on its costs to Z with a profit surcharge. Since the interested party’s profit must be determined according to the cost-plus method, the Court agrees with the parties’ arguments – shared in so far as they are not unreasonable – that a mark-up of 10% must be applied, so that the taxable amount for the 1995/1996 financial year is NLG 2,350 and for the 1996/1997 financial year NLG 26,693. The Court will rule accordingly.”ECLI_NL_GHAMS_2003_AJ6865