Fibusa SAS is a holding company with holdings in four Romanian companies whose purpose is to develop wind power stations in Romania. In 2011, 2012, In 2011, 2012, 2013 and 2014, Fibusa granted these companies interest-free loans for a period of less than one year, renewable for the same period, with the possibility of repaying these loans at any time, for a total amount of almost 26 million euros in 2011, more than 33 million euros in 2012 and more than 35.5 million euros in 2013 and 2014, which were financed mainly by loans taken out by it. 2,086,730 for the year ended 2013 and €2,385,774 for the year ended 2014. Following an audit, an assessment of additional corporate income tax and corresponding penalties for the financial years 2011 – 2014 was issued by the tax authorities. The lack of interest on the loans was considered indirect transfers of profits abroad. Not satisfied with the assessment Fibusa filed an complaint ... Read more

The Tax Authority had made a transfer pricing adjustment for FY 2007 in the amount of €262,500.00 arising from the provision of a guarantee for payment granted under a credit agreement between a bank and its subsidiary. The adjustment had been determined using a CUP method where the pricing of the controlled transaction had been compared to the pricing of uncontrolled bank guarantees. The Court of first instance held that “it cannot be concluded that the transactions at issue here are comparable on the basis of the criterion adopted by the Tax Authorities referred to above. In fact, although the guarantee and the independent bank guarantee may share common features, the way in which the risk falls on the guarantor and on the guarantor of the independent bank guarantee potentially generates differences that significantly affect their comparability.” An appeal was filed by the tax authorities. Decision of Supreme Administrative Court The Court dismissed the appeal of the tax authorities. In ... Read more

A UK PE of the Royal Bank of Canada had (through its Canadian head office) advanced loans of CAD $540 million in the early 1980s to Sulpetro Limited (“Sulpetro”), a Canadian company, to help fund the exploitation by its group of companies of rights to drill for oil, largely in the Buchan field of the North Sea. The Sulpetro group sold its interest in the Buchan oil field to the BP group in 1986, in exchange for various sums including an entitlement to contingent royalty payments on production from the oil field (linked to the excess of the market price of the oil in question above a benchmark level) (“the Payments”). Sulpetro was already in financial difficulties at the time of the sale to BP and ultimately went into receivership in 1993, by which time some Payments had started to be made due to the rise in oil prices. After the remainder of its assets were realised, Sulpetro still owed ... Read more

US Citybank was performing activities in Italy by means of a branch/permanent establishment. The Italian PE granted loan agreements to its Italian clients. Later on, the bank decided to sell these agreements to a third party which generated losses attributed to the PE’s profit and loss accounts. Following an audit of the branch concerning FY 2003 in which the sale of the loan agreements took place, a tax assessment was issued where the tax authorities denied deduction for the losses related to the transfer of the agreements. The tax authorities held that the losses should have been attributed to the U.S. parent due to lack of financial capacity to assume the risk in the Italien PE. First Citybank appealed the assessment to the Provincial Tax Court which ruled in favor of the bank. This decision was then appealed by the tax authorities to the Regional Tax Court which ruled in favor of the tax authorities. Finally Citybank appealed this decision ... Read more

HBP is a company resident in the United Kingdom, which also carries on banking business in Italy through its Milan branch (‘HSBC Milano’), which, for income tax purposes, qualifies as a permanent establishment (‘PE’ or ‘branch’) and grants credit facilities to Italian companies and industrial groups, including (from 1996) Parmalat Spa. HBP brought separate actions before the Milan Provincial Tax Commission challenging two notices of assessment for IRPEG and IRAP for 2003 and for IRES and IRAP for 2004, which taxed interest expense (147,634 euros for 2003 and 143,302 euros for 2004) on loans to Parmalat Spa. (€ 147,634, for 2003; € 143,302, for 2004) on loans from the ‘parent company’ in favour of the ‘PE’, and losses on receivables (€ 9,609,545, for 2003, and € 3,330,382, for 2004), as negative components unduly deducted by the permanent establishment, even though they related to revenues and activities attributable to the ‘parent company’. According to the Office, the PE is considered, from ... Read more

In 2014, the tax authorities issued the Italien Bank a notice of assessment with which it reclaimed for taxation IRAP for 2009 part of the interest expense paid by the bank to a company incorporated under Irish law, belonging to the same group which, according to the tax authorities, it also controlled. In particular, the tax authorities noted that the spread on the bond was two points higher than the normal market spread. The Bank appealed the assessment, arguing that there was no subjective requirement, because at the time of the issue of the debenture loan it had not yet become part of the group of which the company that had subscribed to the loan belonged. It also pleaded that the assessment was unlawful because it applied a provision, Article 11(7) TUIR, provided for IRES purposes, the extension of which to IRAP purposes was provided for by Article 1(281) of Law 147/13, a provision, however, of an innovative nature, the ... Read more

In the INC bank case the tax administration had characterised part of the interest-bearing debt of a local branch of a Dutch bank, ING DIRECT B.V,  as “free” capital, in “accordance” with EU minimum capitalisation requirements and consequently reduced the deductible interest expenses in the taxabel income of the local branch for FY 2002 and 2003. The adjustment had been based on interpretation of the Commentaries to the OECD Model Convention, article 7, which had first been approved in 2008. Judgement of the National Court The court did not agree with the “dynamic interpretation” of Article 7 applied by the tax administration in relation to “free” capital, and ruled in favor of the branch of ING Direct. “In short, in accordance with the terms of the aforementioned DGT Consultation of 1272-98 of 13 July, “Consequently, to the extent that the branch or establishment is that of a banking institution, the interest paid to the head office will be deductible”, the ... Read more

Bayerische Hypo und Vereinsbank AG (HVB-AG), a banking institution under German law, set up a French branch under the name “HVB-AG Paris” and contributed ten million Deutschmarks to this structure. The French branch also took out loans from the company’s head office or from third-party companies Following an audit of the branch’s accounts, the tax authorities, after considering that these loans revealed an insufficiency of the contribution made by the head office, particularly in relation to the equity capital that the branch should have had if it had had legal personality, refused to allow the interest corresponding to the fraction of the loans deemed excessive to be deducted from the results taxable in France in respect of the branch’s activity and demanded that the company pay additional corporation tax for the financial year ending in 1994, together with increases In order to justify this reassessment, the tax authorities first argued, during the contradictory reassessment procedure, that the disputed interest characterized ... Read more