The transaction in question was an intra-group loan agreements that had been entered into by “Lender S.A.” under the following conditions: an amount of €47,665,500, a term of 10 years, and a fixed annual interest rate of 13%. The loans allowed early repayment only at the discretion of the borrower without penalties, and interest was calculated on the outstanding amount.
The tax authorities’ had issued an assessment of additional corporate income tax for FY 2012 and 2013, after finding that the loan did not adhered to the arm’s length principle and lowering the interest rate to 5.6%.
The adjustment resulted from the exclusion of the 7.4% risk component from the fixed interest rate, since according to the tax authorities, implicit support eliminated the additional risk in relation to the loans.
Judgment of the Tribunal
The Tribunal determined that the interest rate of 13% complied with the arm’s length principle ruled in favor of “Lender S.A.”.
The decision centered on verifying the compliance of the transaction with arm’s length principle, particularly concerning the justification of the 13% interest rate through appropriate credit risk analysis and benchmarking against market comparables.
Excerpts in English
“Without express guarantees from the parent company, an independent lender would not give mutuals of the type discussed here a senior debt rating just because the borrower is part of a group. Groups invest and divest, they have their own strategy which may involve strengthening or abandoning their presence in a given country. Macroeconomic, market, sectoral and other risks are not eliminated by belonging to a group and are felt in the interest negotiated. The opportunities detected on the world market condition the entry and exit of groups from markets such as Portugal.
Paragraph 7.13 of the OECD Guidelines is, as mentioned above, clear in distinguishing “implicit support” from “guarantees of explicit support”. In the case at hand, there are no such guarantees and the loan conditions allocate a large part of the financial risk to the parent company. The court therefore does not find it credible that an independent lender would charge the rate equivalent to a senior or guaranteed loan, in relation to the operation in question, with the contractual features that have already been explained.
The CAAD case law cited above (Case 733/T-2015) and the General Electric-Canada case are national and international references on the impact of explicit and implicit support and the need for the Tax Inspectorate to investigate the impact of such a situation on the formation of interest rates. Which, in this case, was not done because it was assumed that the parent company would not let a subsidiary become insolvent.”
“In short, the AT’s argument that simply belonging to a group would eliminate the additional risk in relation to senior or guaranteed loans, and that it would have the effect that the applicant’s rating would be seen by the banking sector as being equivalent to that of the parent company, given the implicit support of belonging to the group, is not validated by the OECD Guidelines, nor by doctrine, nor by national and international case law, nor by the economic, business and credit crunch conditions that Portugal faced in the years at issue in the case (2012 and 2013).”
“The RIT assumes that simple passive association, or implicit support, makes the risk premium, compared to a senior loan, irrelevant, which does not seem to the court to be correct without a more in-depth analysis of the two entities, especially the plaintiff; the country risk is not properly considered in terms of its impact on the interest rate, neither are the market and sector risks, and, finally, the comparable rate that AT obtains from the Bank of Portugal cannot be accepted, without more, as appropriate for the operation in question, for the reasons already expressed.
The court therefore upholds the plaintiff’s claim.”
Click here for English translation
Click here for other translation