A Polish real estate company, “N. sp. z o.o.”, had asked the tax office for an opinion on the tax treatment of interest paid on a loan received from a related party ‘M’ in Romania.
The tax office refused the request. In its view, “M” had received the funds needed to make the loans to N from other group companies and therefore almost all of the interest income earned by “M” was ultimately transferred to “M.C.”, which was based in Malta. On this basis, the ultimate beneficiary of the interest paid by N was not “M” in Romania, but “M.C.” in Malta.
“N. sp. z o.o.” disagreed and appealed to the Administrative Court.
Decision of the Administrative Court
The Court dismissed the appeal.
Excerpts
“The company has not provided any argumentation to exclude the authority’s finding that the coincidence of dates, juxtaposed with the fact that M. did not, at the date of these agreements, have any funds of its own with which to grant the loan, justifies doubts as to whether M. is the ultimate beneficiary of the payments under Agreements 1 and 2. Thus, M.’s representation that it is the beneficial owner of such interest receivables is questionable. The authority’s conclusion that the Company’s explanation that M.’s source of financing is equity is unreliable must be considered logical. Indeed, the amount of LEI 69,287,400 (EUR 14 million) of M.’s reserve capital comes from a recapitalisation by the shareholders pursuant to a resolution of the taxpayer’s shareholders’ meeting of 14 December 2021, i.e. several months after the conclusion of Agreement 1 with the Company and the assumption of the receivables set out in Agreement 2. In addition, the amount of EUR 14 million would not have allowed for two loans totalling EUR 82,338,755 due to the fact that M. did not have its own capital in such an amount at the time it became a party to the agreements. As can be seen from the Company’s explanations of 17 July 2023, M. used the loans obtained from related parties to finance the employment and social security costs of the employees employed. This circumstance also supports the assessment that M. does not have a real economic activity in Romania, since it covers its costs from the loans.
The authority assessed the information contained in the income statement, which is an integral part of M.’s financial statements for 2022. It shows that M. earned interest income of LEI 86,796,104 (2021 – LEI 29,669,077). At the same time, it reported interest-related financial expenses of LEI 80,301,880 (2021 – LEI 29,173,040). This means that M. transferred almost all of the interest income earned on loans concluded with related parties as repayments of loans received from its associates.
Under these conditions, it is impossible to question his assessment as to the fact that M. transferred the profit to M. S. , and then to M. P. and then to M. C. based at […].
There is no dispute that M. has premises, employees and two directors, but, as the authority rightly pointed out, these facts in themselves do not prejudge the existence of a real activity. M. is the tenant of the office at the registration address under a sub-lease agreement. The only fixed assets in its possession are four laptops. The company itself explained (letter of 9 May 2023) that prior to 1 March 2022. M. was using the same registered office address free of charge. It was also established that M. leases office space from a P. company related to one of the shareholders of M. P. – P. H. based in the Isle of Man. The issue of the absence of arrangements in the contract for the furnishing of the premises is of no relevance to the assessment of the authority as a whole.
It is also significant that two members of M.’s board of directors are not remunerated by virtue of their positions (2022 financial statements, letter of 9 May 2023). The company has not disputed the authority’s finding that the board members are employed by M. P.. Thus, the assessment as to the dependence of the management board in decision-making in the conduct of M.’s affairs, including the granting of loans to related parties, the manner in which the funds received from the interest on the loans are disbursed, as well as the lack of motivation to bear the risks involved or to take responsibility for making such decisions, remains justified.
It is further to be noted that the office lease agreement was entered into on 27 May 2022 with effect from 1 March 2022. On 16 May 2022. M. hired two employees and a further two from 20 June 2022. At approximately the same time, on 28 April and 24 May 2022 respectively. M. entered the laptops in the fixed asset register. Thus, the escalation of actions taken is strongly noticeable. When these circumstances are juxtaposed with the filing of the request for an opinion on 13 October 2022 (the attorneys received authority to represent the Company 6 July 2022), indeed, the indicated temporal coincidence of the clustered actions undertaken by M. may indicate the pretence of conducting a real business activity in order to obtain exemption from income tax in Poland. This is all the more so as M. has been registered since 2018, but did not carry out business activities in Romania until 2022.
At the same time, the authority rightly pointed out that at the date of the conclusion of the loan agreements, M. did not have any asset-personal substrate, did not employ any employees, did not have any fixed assets and subleased the registration address in Bucharest free of charge from a related party. Instead, it only undertook activities to acquire premises, employees and equipment intensively from March 2022.
Contrary to the allegations of the complaint, the authority was correct in considering that M. was merely acting as an intermediary between the Company and the ultimate beneficiary entity.
In light of CJEU case law (C-115/16, C-118/16, C-119/16 and C-299/16), in order to refuse to recognise a company as the beneficial owner, the national authority is not required to identify the entity it considers to be the beneficial owner.
It is therefore impossible to agree with the plea alleging infringement of Article 26b(3)(1) and (2) in conjunction with Article 4a(29) u.p.d.o.p. through their misinterpretation by failing to take into account the nature and scale of M.’s activities and, consequently, their incorrect application, which consisted in finding that its manner of functioning and the nature of its business activities give rise to a reasonable presumption that it does not carry on genuine economic activities in Romania.
The allegation that the authority erred in finding that M. was not the beneficial owner of the interest (Article 21(3)(4) u.p.d.o.p.) also does not deserve to be upheld.
(…)
Since, for the purpose of considering the request for an opinion on the application of preferences, it is sufficient to examine whether there are reasonable doubts as to the actual owner of the receivable, it is consequently unnecessary for the tax authority to determine further whether the taxpayer is or is not the actual owner of the receivable from the point of view of the prerequisites contained in Article 21(3) of the u.p.d.o.p.. Thus, the refusal to issue an opinion on the application of preferences is already correct when the tax authority demonstrates the existence of only justified doubts as to whether the taxpayer is the actual owner of the receivable, without the need to definitively, firmly reconstruct the objective truth in this respect on such principles as strictly in tax proceedings (cf. the judgment of the WSA in Lublin of 12 July 2023, ref. I SA/Lu 269/23).
(…)
Therefore, referring to the artificiality of the action consisting in the introduction into the group structure of a company acting as a taxpayer, which criterion was included by the legislator in Article 22c of the u.p.d.o.p., it should be noted that according to the position of the CJEU in the Danish judgments, “A group of companies which has not been formed for reasons reflecting economic reality, whose structure is purely formal and whose main purpose or one of whose main objectives is to obtain a tax advantage contrary to the object or purpose of the applicable tax law, may be regarded as an artificial construction. This is the case, in particular, where the payment of interest tax is avoided thanks to an intermediary entity inserted in the group structure between the interest-paying company and the entity that owns the interest. The existence of a scheme designed to take unfair advantage of the exemption provided for in Article 1(1) of Directive 2003/49 is thus indicated by the fact that the interest in question is paid onwards, wholly or almost wholly and within a very short period after receipt, by the company which received it, to entities which do not meet the conditions for the application of Directive 2003/49, either because those entities are not established in any Member State or because they are not formed in any of the forms listed in the Annex to that Directive or because they are not subject to any of the taxes listed in Art. 3(a)(iii) of that Directive without benefit of exemption, or because they are not considered to be associated companies within the meaning of Article 3(b) of that Directive.”
It should be pointed out that in the Danish judgment, the CJEU did not share the Advocate General’s opinion (including paragraphs 83 and 84), nor did it refer to its previous judgments concerning holding companies (CJEU judgments of 7 September 2017, C-6/16, Eqiom SAS, Enka SA v Ministre des Finances et des Comptes public, EU:C:2017:641; of 20 December 2017, C-504/16 and C-613/16, Deister Holding v Bundeszentralamt für Steuern and Juhler Holding v Bundeszentralamt für Steuern, EU:C:2017:1009) by adopting that a company – the recipient of passive payments – must be subject to effective taxation in its Member State of tax residence. It justified this interpretation by stating that such an interpretation of the scope of the third condition mentioned in paragraph 147 of this judgment is confirmed, firstly, by Article 1(5)(b) of Directive 2003/49, from which it follows that a permanent establishment may be considered to be a beneficial owner within the meaning of that Directive only “if the interest [received by that permanent establishment] constitutes income in respect of which the permanent establishment is subject in the Member State in which it is situated to one of the taxes listed in Art. 3(a)(iii) [of the said Directive]” and, secondly, the purpose of that Directive, which is, as indeed recalled in paragraph 85 of this judgment, to ensure that such interest is taxed in one Member State only, once”. In this context, the CJEU equated the legal and tax situation of a permanent establishment and a company, where such a requirement is literalised in Directive 2003/49/EC only in relation to the permanent establishment. As a result, both the subjective exemption – general for the company receiving the interest and the subjective exemption – for the income from the interest received should be considered to disqualify such a company from the benefits of that directive. The artificiality of the measure in this sense is indicated by the interconnectedness of the transfer of funds between entities in the group.(…)”
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