Spain vs “Group Rating SA”, November 2023, TEAC, Case No RG 8283/2020

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“Group Rating SA” was subject to an assessment in relation to intra-group loans.

The tax authorities found that the method used to determine the arm’s length interest rate was reasonable, but that the credit rating was incorrect as it did not take into account that “Group Rating SA” was part of a larger group.

According to the tax authorities, group membership may have an impact on the credit rating of the members of the group, see section 7.13 of the 2010 TPG and chapter X, paragraphs 10.81 and 10.82 of the 2022 TPG.

In the appeal, “Group Rating SA” argued that the tax authorities’ interpretation was incorrect.

Judgment of the court

The TEAC dismissed the appeal and ruled in favour of the tax authorities.

The court concluded that it was reasonable to assume that “Group Rating SA” would receive financial support from other members of the group, and that this was in fact the case. In the present case, there was no doubt as to the significance of the group membership and it was therefore appropriate to apply the credit rating of the group as a whole when determining the interest rate on the loans in question.

 
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Related Guidelines

TPG2022 Chapter X paragraph 10.82Where this is the case, the credit rating of the MNE group may also be used for the purpose of pricing the accurately delineated loan where the facts so indicate, particularly in situations such as where the MNE is important to the group as described in paragraphs 10.78 and 10.79...
TPG2022 Chapter X paragraph 10.81It is also important to note that although there are established approaches to estimate a credit rating for a particular group member or debt issuance, the considerations detailed above mean that a pricing approach based on the separate entity credit ratings that are derived from publicly available financial tools (see...
TPG2022 Chapter X paragraph 10.80The impact of an assessment of implicit support is a matter of judgment. The kind of information on which the MNE group would base a decision of whether or not to provide support to a borrower in particular circumstances may not be available to a tax administration, as is frequently...
TPG2022 Chapter X paragraph 10.79Another key consideration would be the likely consequences for other parts of the MNE group of supporting or not supporting the borrower. The criteria used to determine the status of an entity in this regard may include such considerations as legal obligations (e.g. regulatory requirements), strategic importance, operational integration and...
TPG2022 Chapter X paragraph 10.77In the context of intra-group loans, this incidental benefit that the MNE is assumed to receive solely by virtue of group affiliation, is referred to as implicit support. The effect of potential group support on the credit rating of an entity and any effect on that entity’s ability to borrow...
TPG2022 Chapter I paragraph 1.185Assume that S borrows EUR 50 million from an independent lender at the market rate of interest for borrowers with an A credit rating. Assume further that S simultaneously borrows EUR 50 million from T, another subsidiary of P, with similar characteristics as the independent lender, on the same terms...
TPG2022 Chapter X paragraph 10.108Such an approach would represent a departure from an arm’s length approach based on comparability since it is not based on comparison of actual transactions. Furthermore, it is also important to bear in mind the fact that such letters do not constitute an actual offer to lend. Before proceeding to...
TPG2022 Chapter X paragraph 10.107In some circumstances taxpayers may seek to evidence the arm’s length rate of interest on an intra-group loan by producing written opinions from independent banks, sometimes referred to as a “bankability” opinion, stating what interest rate the bank would apply were it to make a comparable loan to that particular...
TPG2022 Chapter X paragraph 10.106The reliability of economic models’ outcomes depends upon the parameters factored into the specific model and the underlying assumptions adopted. In evaluating the reliability of economic models as an approach to pricing intra-group loans it is important to note that economic models’ outcomes do not represent actual transactions between independent...
TPG2022 Chapter X paragraph 10.105In their most common variation, economic models calculate an interest rate through a combination of a risk-free interest rate and a number of premiums associated with different aspects of the loan – e.g. default risk, liquidity risk, expected inflation or maturity. In some instances, economic models would also include elements...

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