“A Infrastructure S.A.” had granted loans related parties B and C. The average interest rate borne by A S.A. on its bank loans was lower than the one applied to loans passed on to B and C, but following an audit, the tax authorities observed that other financial expenses (bank commissions and stamp duty) had been deducted by A S.A as financial costs on its bank loans, but not recorded as financial income on the intra-group loans. On that basis an assessment was issued where deductions for these financial costs not passed on to B and C had been disallowed in the ratio of “loans granted to B and C” over “A S.A’s external bank loans”.
A appeal was filed by A S.A. with the Administrative Tribunal (CAAD).
Judgement of the CAAD
The Tribunal granted the appeal and declared the annulment of the income tax assessment.
“The Court is not unaware that the application of rules, such as those on transfer pricing, which are essentially anti-avoidance and whose application is very much based on the concept of “comparability” of transactions – sometimes complex to put into practice – may give rise to some reluctance to use them as grounds for tax corrections.
However, the law exists to be used in the situations to which it should apply. And, as it is true that the concept of comparability is sometimes difficult to apply, the same is true of the use of the concept of “indispensability” in Article 23 of the CIRC.
The latter (Article 23 of the CIRC) should not be applied systematically as an anti-abuse clause; it contains, above all, a general condition to be respected for the deductibility of expenses. If there are anti-abuse rules that are adapted to certain situations, they must first be the control tools used by the AT.
Within this framework, the contested assessment suffers from an error of law and factual assumptions, due to the erroneous interpretation and application of the provisions of Article 23(1)(c) of the IRC Code, which constitutes a breach of law, for which reason they must be declared illegal and, consequently, annulled.”