“F-inance. Sp. z o.o.” provided loans in 2004 – 2006 to a special-purpose vehicle (SPV) which had established to finance an investment. According to the loan agreements repayment of the principal amount and incurred interest for each loan was 31 December 2007. In 2008, these deadlines were extended to 31 December 2008.
The tax authorities found that the controlled arrangement deviated from the arm’s length principle, since neither the loans nor the interest had been paid in accordance with the agreement and issued an assessment of additional income.
A complaint was filed by “F-inance. Sp. z o.o.” with the Administrative Court.
Judgement of the Court
The Administrative Court found the complaint to merited consideration. According to the Court the tax authorities had not specified the way in which the agreements was considered to differ from the arm’s length principle. Furthermore, comparable transactions had not been identified by the tax authorities.
“The applicant is right in asserting that the non-market character of the transaction cannot be proved by the lack of collateral. Indeed, it must be stated that the Appellant, holding the vast majority (and later also the entirety) of the shares in the borrower’s assets, could at any time satisfy itself from the borrower’s assets. In the present case, the asset from which the claim could be satisfied was the property of the subsidiary. In doing so, it would have been pointless to establish a mortgage on this property. Indeed, there was no risk of the property being sold without the Complainant’s consent, and the Complainant, wishing to recover its claims, could have decided at any time to sell the property and transfer the proceeds to it. If, on the other hand, the applicant had decided to sell the property by way of a bailiff’s auction, the price obtained from the sale would have been lower, as, for example, it would have included the costs of enforcement and, in addition, such proceedings would have taken considerably longer. The issuance of a promissory note would also be an inexpedient safeguard, as a promissory note in practice only allows for a faster judicial decision. However, as already indicated above, the Applicant did not have to resort to court proceedings to recover the loan and interest. Furthermore, it cannot be forgotten that the Applicant had delegated its representative to the subsidiary’s board of directors, who was able to monitor the subsidiary’s activities on an ongoing basis. It must therefore be concluded that the loan agreements concluded were duly secured without the need for traditional forms of security.
In addition, the contested decision was not adequately reasoned with regard to the adoption of the period for which the amount of interest charged and payable by the subsidiary was determined. The amount of that accrual is set out on page 17 of the decision of the authority of first instance. The amount of this interest is indicated there, consisting of the amount of PLN 140,508.84 for interest due from 2004 and 2005 and the amount of PLN 120,134.45 for interest due for 2006. However, nowhere in the decision of the authority of first instance, nor in the contested decision, is there any justification as to why the settlement was made in this way. While one could try to guess why the interest due for 2006 was accounted for in this way, the same cannot in any way be said of interest for earlier years. The tax authorities should either adopt a uniform rule for accrued and due interest for specific tax years or duly justify why interest for 2004 and 2005 was added in 2006 and interest for 2006 was also added in the same year. In addition, the problem of the addition of interest for particular years is linked to the question of the due date for interest. On the one hand, the tax authorities state that the contractually agreed repayment date of the loans with interest, set at the end of 2007, does not differ from market conditions, while on the other hand they add interest to income, which was not yet due according to the provisions of the contracts. There is therefore an internal contradiction in the claims of the tax authorities. The possibility of adding interest would have been possible if the tax authorities had shown that the repayment date of the loans deviated from market conditions. However, the tax authorities state that the parties, when setting the term for the repayment of the loans, acted under market conditions, while, on the other hand, they state that the term deviates from market conditions.
At the re-examination of the case, the tax authorities will first of all be obliged to carry out an investigation in the direction of establishing comparable transactions, in accordance with the arguments presented in the earlier part of the explanatory memorandum. Once such transactions have been established, the tax authorities will have to analyse the concluded loan agreements with the established comparable agreements and, on the basis of a comparison of such agreements, determine whether the concluded agreements deviate from the agreements concluded on the open market. If the last question is answered in the affirmative, the tax authorities will determine when the loans should be repaid with the interest due and will then add the interest to the 2006 income accordingly. Should the tax authorities intend to add the interest for earlier years to 2006 income as well, they must provide an exhaustive account of the reasons for this. In such a case, interest on loans granted in different years would be included differently in income for one tax year in which the loan was also granted. A substantial investigation will have to be carried out before the decision can be re-issued.”I SA_Kr 1188_10 - Wyrok WSA w Krakowie z 2010-10-15