“S-Sociedade S.A.” had received a tax assessment and later a judgment based on transfer pricing rules (and not anti-avoidance rules), where the outcome of the tax audit would have been different if the transactions had been purely domestic rather than international.
“S-Sociedade S.A.” considered that the judgment was flawed and appealed.
Judgment of the Court
The Court ruled in favour of “S-Sociedade S.A.” and annulled the tax assessment.
Experts in English
“In this regard, the following elements can be gleaned from European Union law:
“The arm’s length principle necessarily forms part of the Commission’s assessment of tax measures granted to undertakings in a group under Article 107(1) of the Treaty, irrespective of whether and in what form a Member State has incorporated this principle into its national legal system. It is used to determine whether a group company’s taxable profits for corporate income tax purposes have been determined on the basis of a methodology that produces a reliable approximation of market-based results. A tax ruling that subscribes to such a methodology ensures that such a company is not treated favourably under the general rules for the taxation of corporate profits in the Member State concerned compared to stand-alone companies that are taxed on their accounting profits, which reflects prices determined on the market negotiated under arm’s length conditions. The arm’s length principle applied by the Commission to assess transfer pricing decisions under state aid rules is therefore an application of Article 107(1) of the Treaty, which prohibits unequal treatment in the taxation of undertakings in the same factual and legal situation. This principle is binding on the Member States, and national tax rules are not excluded from its scope.” (paragraph 172).”
(…)
“To summarise, the arm’s length principle in European Union law requires the application of a transfer pricing system that guarantees equal treatment, in tax terms, of economic agents in similar situations.”
(…)
“The Tax Administration’s analysis of the successive sales of the shareholdings in question does not focus on their substance, which means that the mechanism for correcting transfer prices, in accordance with the arm’s length principle, has been obliterated, as the primary and negative adjustment on the taxpayer’s initiative is not accepted (S…………….. Engineering), based on the symmetrical (positive) adjustment to the taxable income of the linked entity (A……………) or, alternatively, the rejection of the primary adjustment at the taxpayer’s initiative would be imposed, provided that with the inherent correlative symmetrical (negative) adjustment to the taxable base of the linked entity (A……………), which the case file does not show has occurred.
In other words, given the existence of similar operations, given that the transfer of shareholdings in the company L…….. is at issue, given the existence of a market value for the operation in question, measured in the transaction between independent entities (A…………… and Y………….. Tazi), the Tax Administration rejects the deduction of the capital loss in question, without proving that the principles of full competition – the basis of the transfer pricing mechanism – economic double taxation of income, the basis of the correlative adjustment regime (14) and the principle of taxing taxable income on the basis of reliable elements provided by the market in competition, in accordance with European Union law, have or have not been observed.
The correction in question results in negative discrimination against taxable persons resident in national territory, given that, according to the Tax Administration itself, the adjustment in question would only be possible, under national legislation, if the linked operation was headed at one end by a non-resident entity. Such an application of the transfer pricing regime clashes with the applicable European and national legal framework, in the terms set out above. The correction in question cannot therefore be maintained in the legal order.
The appeal should therefore be upheld, replacing the contested decision with a decision upholding the appeal, with the consequent annulment of the contested tax act.”
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