Romania vs Lender A. SA, December 2020, Supreme Court, Case No 6512/2020

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In this case, A. S.A. had granted interest free loans to an affiliate company – Poiana Ciucas S.A.

The tax authorities issued an assessment of non-realised income from loans granted. The tax authorities established that the average interest rates charged for comparable loans granted by credit institutions in Romania ranged from 5.45% to 19.39%.

The court of first instance decided in favor of the tax authorities.

An appeal against this decision was lodged by S S.A.

According to S S.A. “The legal act concluded between the two companies should have been regarded as a contribution to the share capital of Poiana Ciucaș S.A. However, even if it were considered that a genuine loan contract (with 0% interest) had been concluded, it cannot be held that the company lacked the capacity to conclude such an act, since, even if the purpose of any company is to make a profit, the interdependence of economic operations requires a distinction to be made between the immediate purpose and the intermediate purpose of a commercial activity, both of which are the cause of any legal act.
Since company A. S.A. is the majority shareholder in Poiana Ciucaș S.A., the grant of a sum of money to the latter, at a time when it was unable to secure financing, is intended to safeguard the economic activity and, implicitly, to obtain subsequent benefits for the company.”

“The essential legal issue in this case is that for the period prior to 14 May 2010 (when the tax legislation changed) there was no legal basis for reconsidering the records of the Romanian related persons.
Art. 11 para. (1) sentence 1 of the Tax Code cannot be considered as applicable in this case, as it refers to the right of the tax authority to disregard a fictitious/unrealistic transaction, which is not the case of the operation analysed during the tax inspection, which took place between companies A. and Poiana Ciucaș.
Thus, the second sentence of Art. 11 para. (1) of the Tax Code, relating to the reclassification of the form of a transaction, becomes fully applicable to the factual situation at issue, as the tax authority considered the transaction between the two companies to be a genuine loan and not a contribution to the share capital.”

Judgement of Supreme Court

The Court set aside the appealed judgment, and refer the case back to the court of first instance.

“Consequently, the High Court finds that the objection of limitation of the authority’s right to determine tax liabilities for 2008 is well founded, since the decision of the court of first instance rejecting that objection was handed down with the incorrect application of the relevant provisions of substantive law, a ground for annulment provided for in Article 488(2) of the EC Treaty. (At the same time, from an analysis of the documents in the case-file, it is not possible to determine the amount of the sums withheld from the applicant company by the contested acts, representing corporation tax for 2008, interest and late payment penalties relating to that tax liability for the year in question, so that the Court of Appeal cannot determine with certainty the amount of those sums.”

“As regards the appellant’s criticisms concerning the contract between it and Poiana Ciucaș S.A., the judgment under appeal reflects the correct interpretation and application of the provisions of Articles 11 and 19(1)(b) of the Civil Service Code. (5) of Law No 571/2003 on the Fiscal Code, as in force at the relevant time, the provisions of Article 1266 of the Civil Code, Article 1 of Law No 31/1990 and point 1.65 of the OECD Transfer Pricing Guidelines.
Thus, in analysing the applicant’s claims concerning the classification of the contract concluded between A. S.A. and Poiana Ciucaș S.A. as representing a contribution to the share capital, the Court of First Instance correctly held that those claims were unfounded, having regard to the provisions of Articles 1266 and 1267 of the Civil Code and the content of the contractual clauses contained in the contract in question.
From an interpretation of the extrinsic and intrinsic elements of the contract, it cannot be held that the legal act between the contracting parties which occurred approximately eight years after the conclusion of the contract and the making available of the initial funds constitutes an element indicating that those funds represent a contribution to the share capital and that that was the original and real intention of the parties.
In accordance with the view expressed by the judge hearing the case, it is held that the obligation to repay the sum granted by way of a loan was extinguished between the contracting parties by a new expression of will which took place between 2015 and 2016 and which cannot have retroactive effect from the date of conclusion of the contract (1 January 2007).
That conclusion of the Court of First Instance, with which the Court of First Instance agrees, is not the result of a strictly grammatical analysis of the contractual clauses stipulated by the two parties, but is based on an analysis of the legal act which subsequently arose between the parties, taking into account the entire factual context in which it was concluded, in relation to the clauses of the loan agreement, the content of which was examined in a relevant manner by the court, holding that those clauses cannot be interpreted in the sense asserted by the applicant as regards the nature of the contract.
A further argument in support of the above conclusion also derives from the manner in which the contractual terms were performed, the subsequent conduct of the lender, which did not receive any repayment of the sum paid and did not charge any interest, being relevant in that regard.
The Court of First Instance examined the lender’s conduct both in the light of the defining features of the loan agreement and in the light of the terms of the contract at issue, finding that that conduct fully complied with the contractual terms. Without denying the customary nature of those clauses, it is observed that the absence in the contract of the stipulation of guarantees and a firm time-limit for repayment of the sum granted, or the absence of the imposition of penalties for late payment, are factual factors which are not such as to lead to the classification of the contract as a contribution to share capital, given that the contract at issue contains the defining elements of a loan contract.
In those circumstances, the expression of the will of the parties, as evidenced by the contractual terms and the economic reality, was to grant financing to the affiliated company in the form of a loan and not in the form of a contribution to the share capital. As the Court of First Instance rightly held, even if the real intention of the contracting parties had been to finance the affiliated company in fact, the parties were able to foresee that purpose from the date on which the initial sum was granted, without first concluding the loan contract.”

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Decision No 6512-2020

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