“PT Cash Pool LDA” belonged to a multinational group headquartered in Germany. The company participated in intragroup cash pooling arrangements in euros and US dollars, and had also obtained shareholder loans from a related entity. Under these agreements, the company paid higher interest on debit balances than it received on credit balances. Similar interest expenses arose from bilateral intragroup loans. The company had prepared a benchmarking analysis to demonstrate that the interest rates applied were within an arm’s length range.
Following an audit for FY 2019 and 2020, the Tax Authority concluded that the interest rates applied under the cash pooling arrangements and shareholder loans were not at arm’s length. The Tax Authority took the view that cash pooling leaders were not credit institutions and that interest rates should therefore be the same for debit and credit positions. To determine an arm’s length rate, the Tax Authority applied the CUP method, using the weighted monthly average interest rates published in the Bank of Portugal Statistical Bulletin. Based on this approach, part of the interest expense was disallowed, resulting in additional corporate income tax and withholding tax.
“PT Cash Pool LDA” challenged the assessments, arguing that the Tax Authority had misapplied the CUP method. They contended that the Bank of Portugal’s averages were generic statistical indicators that did not ensure the highest degree of comparability required under transfer pricing rules. The company also argued that cash pooling credit and debit positions are not economically identical, and that market practice supports differentiated remuneration.
Judgment
The Tribunal ruled in favour of the taxpayer and annulled the transfer pricing adjustments. It held that the use of weighted average interest rates from the Bank of Portugal did not meet the strict comparability requirements inherent in the CUP method, since such averages do not ensure substantial similarity to the specific intragroup financing transactions under review. The Tribunal emphasised that the Tax Authority had not adequately addressed differences in contractual terms, duration, functions and risks. Consequently, the tribunal concluded that the Tax Authority had failed to demonstrate a departure from the arm’s length principle.
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