EURO AGRI s.r.o., which was part of a group of related companies, entered into several intra-group loan agreements. In three cases, EURO AGRI acted as a lender to related companies, and in two cases, it acted as a borrower. These agreements were broadly framed, with no fixed loan amounts or maturities and no clearly defined repayment schedules. Interest was charged at a rate of 0.6 per cent, derived from the cost of funds obtained from an Italian group company plus a small risk premium. EURO AGRI also claimed a deductible expense relating to the transfer of a business share.
The tax authorities concluded that the interest income and interest expenses arising from the loan agreements did not comply with the arm’s length principle applicable to transactions between related parties. They found that an independent lender would not provide funds on such vague terms or at such a low interest rate, particularly given the borrowing group companies’ weak financial position and high credit risk. The tax administrator rejected bank deposits as a comparable alternative and conducted its own financial and economic analysis of the borrowers. Based on National Bank of Slovakia sector averages and an assessment of borrower credit risk, the authorities adjusted the interest rates, increased the tax base and recalculated corporate income tax. They also disallowed the expense relating to the transfer of the business share.
EURO AGRI challenged the assessment, arguing that the interest rates had been correctly calculated using the cost-plus approach set out in its transfer pricing documentation, and that the tax authorities had incorrectly substituted their own methodology. The company also disputed the comparability analysis, the rejection of internal funding costs as a benchmark and the conclusion that the contractual terms were unacceptable from an arm’s length perspective. EURO AGRI also objected to the adjustment of the tax base and the resulting tax liability.
Judgment
The Administrative Court ruled in favour of the tax authorities and dismissed the case. It held that the tax authorities had lawfully assessed the transactions under the rules governing related party dealings and the arm’s length principle. The court accepted the conclusion that the loan agreements lacked terms that independent parties would normally include, and that the applied interest rate did not reflect the risk borne by EURO AGRI as the lender. The court also found the use of National Bank of Slovakia sector data and borrower credit risk analysis to be justified, concluding that the tax assessment and adjustments were sufficiently reasoned and lawful.
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