A Polish company, “H. spółka z o.o.”, is a member of a group engaged in investment activities in Europe. H had granted loans to related companies and received loans and contributions from the sole shareholder in Luxembourg. H submitted a request to the tax authorities for an opinion on the tax consequences of these financial arrangements.
The tax authority denied the request on the basis that the main purpose of the transaction and the manner in which it was carried out were artificial.
Dissatisfied, H appealed to the Administrative Court.
Judgment of the Administrative Court
The Administrative Court dismissed the appeal.
Excerpt
“In the Court’s view, the above position of the authority is reasonable and is reflected in the evidence presented by the requesting payer.
As can be seen from the evidence presented and the findings of fact based on that evidence, R. S.a.r.l. is a passive holding company with its residence in the Principality of Luxembourg and holds and manages only assets in the form of shares in subsidiaries located in Poland. The aforementioned cash flows between the taxpayer, its shareholder and its subsidiaries indicate that it conducts its activity solely as an intermediary, that it is entirely financed by its sole shareholder, the SICAV-RAIF, that it uses the loans obtained from the fund to finance investments in subsidiaries and that it grants loans to such entities – through the intermediary of the payer – and that the payer transfers the recovered capital and interest to its shareholder, the fund, either as repayment of loans granted to it or as an advance on dividends. Contrary to the applicant’s position, the above is illustrated by the data from the financial statements. Indeed, these are not cash flows of any kind, but flows correlated in time and value, which authorised the conclusions set out in the refusal. The taxpayer also has a close property and personal relationship with the fund and its management company. In the case, the taxpayer’s property and personal substrate was not shown to be sufficient in terms of the nature and scope of its business activities. The same applies to the demonstrated costs of the activity and their adequacy to the object and scope of the activity. The allegation of evidentiary deficiencies in this respect is therefore completely unjustified, since the initiating taxpayer did not present the relevant evidence in this respect.
In these circumstances, in the Court’s view, the authority’s finding that the taxpayer actually finances its activities with the funds of the sole shareholder is justified. In such a situation, he cannot be regarded as the actual owner of the interest paid by the payer in connection with the loan agreements in question. Therefore, it does not meet the condition for the application of the exemption from flat-rate income tax on interest income provided for in Article 21(3)(4)(a) of the CIT Act, i.e. the condition of being the actual owner of the interest receivable. Taking into account the facts established above and having regard to the understanding of the notion: “actual owner” resulting from Article 4a point 29 of the CIT Act, one should agree with the argumentation of the authority that the taxpayer only formally acts as a lender. Indeed, it is evident from the material on record that it obtains financing primarily intra-group and transfers the funds it receives from interest to its sole shareholder, the fund, within a short period of time. On the other hand, in order to consider a given entity as a real owner of receivables, it would have to be stated, in the light of Article 4a point 29 of the CIT Act, that it receives receivables for its own benefit (including independently deciding on their use and bearing the economic risk related to the loss of the receivables), is not an intermediary, representative, trustee or other entity obliged to transfer all or part of the receivables to another entity and conducts real economic activity in the country of its registered office. This is not, as mentioned above, about a demonstrated entitlement to receive the receivable for oneself by a formal document, but about the absence of an obligation (formal or informal) to transfer the receivable to another entity. For the assessment of the status of the actual owner of the receivable, facts indicating a certain economic reality are relevant. These facts are indicated by the authority in the contested act and their conclusions are logical. The authority was therefore justified in concluding that the taxpayer is not the real owner of the interest, which in fact – as an intermediary – he makes available to his partner. It is also not engaged in a real economic activity and its current participation in the structure of the group is of an artificial nature, aimed at achieving not so much economic and economic as tax objectives. In fact, the authority established that the SICAV-RAIF is not subject to corporate income tax (it is, as the party admitted, a tax transparent entity) and therefore does not meet the condition of taxation of the entire income it earns with CIT regardless of the place where it is earned, as stipulated in Article 21(3)(2) of the CIT Act. Thus, as it was rightly stated in the case, the inclusion of the taxpayer in the group structure was aimed at benefiting an unauthorised entity (the fund) from the exemption of interest paid by subsidiaries, including the payer, from flat-rate corporate income tax. Contrary to the applicant’s position, in a situation where the payment of interest was made bypassing the holding company, directly to the real owner (the fund), the tax exemption could not be used. In the Court’s opinion, the assessment regarding the artificiality of the taxpayer’s construction and its aiming directly at obtaining a tax advantage in the form of taking advantage of the exemption provided for in Article 21(3) of the CIT Act should therefore also be deemed to be confirmed by the evidence. There is therefore also a reasonable presumption of a decision applying Article 22c of the CIT Act, due to the assumption that taking advantage of the exemption was the main purpose of the transaction. This provision regulates the so-called “small anti-avoidance clause”, which in strictly defined cases in the law allows for the denial of the rights provided for in the given situations. Where the facts show that there is no sufficient economic justification for the actions actually performed by the taxpayer, the tax authority has the power to disregard the consequences of these actions that would result from the normal application of the tax law. What occurs, therefore, is that the taxpayer is deprived of the preferences to which he should be entitled on the basis of the provisions contained in the tax laws. In other words, the exemption from withholding tax does not apply if there is a reasonable presumption that the exercise of the exemption was contrary in the circumstances to the object or purpose of those provisions or to the main or one of the main purposes of carrying out a transaction or other act or a number of transactions or other acts, and the course of action was artificial.
This, in turn, means, as the authority rightly pointed out, that there was a basis for refusing to issue an opinion in the case, pursuant to Article 26b(3)(1) – (4) of the CIT Act.
In view of the above, and finding no grounds to question the legitimacy of the authority’s assertions regarding the justification of the position contained in the controlled act, the Provincial Administrative Court, pursuant to Article 151 p.p.s.a., dismissed the complaint”
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