“Lux Credit B.V.” took out various credit facilities from related parties [company name 2] s.a.r.l. and [company name 3] s.a.r.l. – both resident in Luxembourg. These were financings whereby “Lux Credit facility B.V.” could draw funds (facilities) up to a pre-agreed maximum amount. In doing so, “Lux Credit B.V.” owed both interest and “commitment fees”. The commitment fees were calculated on the maximum amount of the facility. Interest and commitment fees were owed. The interest payable to [company name 2] and [company name 3], respectively, was calculated by deducting the commitment fees from the interest payable on the amount withdrawn, with interest payable on the amount withdrawn, the commitment fees owed after the due date and the interest owed after the due date. In its returns for the current financial years, “Lux Credit B.V.” charged both interest and commitment fees against taxable profit. Following an audit, an assessment of additional taxable income was issued for the financial years 2012/2013 – ... Read more

On 17 April 2015, “Loan Ltd” entered into a bond loan agreement with related parties. The effective interest rate charged to “Loan Ltd” (borrowing costs) in the years under consideration (2016 and 2017) was 8.1%. The interest rate had been determined based on the CUP method and external comparable data. The tax authorities determined the arm’s length interest rate for the loan to be 4,03% and issued an assessment of the additional taxable income resulting from the lower borrowing costs. A complaint was filed by “Loan Ltd” Decision of the Board The Board dismissed the complaint and upheld the assessment of the tax authorities. Excerpt “Because the applicant claims that the audit used inappropriate/non comparable data. Because, however, the audit chose the most reliable internal data in accordance with the OECD Guidelines, namely the interest rate agreed with a third independent bank for the provision of a credit facility (2.03%), which it adjusted by the percentage of the guarantee fee ... Read more

17 January 2023 the South African Revenue Service (SARS) released an interpretation note (IN 127) titled “DETERMINATION OF THE TAXABLE INCOME OF CERTAIN PERSONS FROM INTERNATIONAL TRANSACTIONS: INTRA-GROUP LOANS” which provides guidance on how SARS will determine arm’s length pricing for intra-group loans. The Note also provides guidance on the consequences for a taxpayer if the amount of debt, the cost of debt or both are not arm’s length. According to the note an intra-group loan would be incorrectly priced if the amount of debt funding, the cost of the debt or both are excessive compared to what is arm’s length. Legal-IN-127-Determination-of-the-taxable-income-of-certain-persons-from-international-transactions-Intra-group-loans ... Read more

In 2011, Willink SAS issued two intercompany convertible bonds with a maturity of 10 years and an annual interest rate of 8%. The tax authorities found that the 8% interest rate had not been determined in accordance with the arm’s length principle. Willink appealed, but both the Administrative Court and later the Administrative Court of Appeal sided with the tax authorities. Judgment of the Supreme Court The Conseil d’Etat overturned the decision and ruled in favour of Willink SAS. The court found that RiskCalc could be used to determine a company’s credit rating for transfer pricing purposes in a sufficiently reliable manner, notwithstanding its shortcomings and the differences in the business sectors of the comparables. Click here for English translation Click here for other translation France Conseil d'État, 3ème chambre, 22_12_2022, 446669 ... Read more

“Gas-Trader KtF” – a subsidiary in the E.ON group – had entered into loan agreements with other group companies and the related parties had determined the interest rate by application of the CUP method using the Thomson Reuters LoanConnector database. Comparable transactions was extracted from the database by searching for credit rating, type of debtor party, date of loan, maturity, transactions with completed status, and spread/provision fee. An audit was conducted by the tax authorities for FY 2012-2013 and the interest rate determined by the group was found to be incompliant with the arm’s length principle. The tax authorities applied the same method as Gas-Trader but added further search criteria in the selection of comparable transactions – credit purpose and insurance coverage. This resulted in a different range and an assessment of additional taxable income was issued. An appeal was filed by Gas-Trader KtF with the National Tax and Customs Board of Appeal where a judgement in favor of the ... Read more

On 1 July 2013, HCL Maître Pierre issued a ten-year bond which were convertible into shares and bore interest at a rate of 12%, the accrued amount of which was capitalised annually until the date of redemption or conversion, together with a non-conversion premium at a rate of 3%, if applicable. This loan was subscribed by its sole partner, (SAS) HGFI Saint-Martin. Following an tax audit of HCL Maître Pierre’s for the financial years ended 31 March 2012, 2013 and 2014, the tax authorities considered that the interest at the rate of 12% could only be deducted at a rate set at 2.82%. Judgement of the Supreme Court The Court dismissed the appeal of HCL Maître Pierre and upheld the assessment issued by the tax authorities. Excerpts “3. It follows from the combination of these provisions that interest relating to sums left or made available to a company by a company which directly or through an intermediary holds the majority ... Read more

The price of a comparable uncontrolled services transaction may be derived based on indirect measures of the price charged in comparable uncontrolled services transactions, but only if – (A) The data are widely and routinely used in the ordinary course of business in the particular industry or market segment for purposes of determining prices actually charged in comparable uncontrolled services transactions; (B) The data are used to set prices in the controlled services transaction in the same way they are used to set prices in uncontrolled services transactions of the controlled taxpayer, or in the same way they are used by uncontrolled taxpayers to set prices in uncontrolled services transactions; and (C) The amount charged in the controlled services transaction may be reliably adjusted to reflect differences in quality of the services, contractual terms, market conditions, risks borne (including contingent-payment terms), duration or quantitative measure of services rendered, and other factors that may affect the price to which uncontrolled taxpayers would agree ... Read more

Company M, the parent entity of an MNE group, maintains an AAA credit rating based on the strength of the MNE group’s consolidated balance sheet. Company D, a member of the same MNE group, has a credit rating of only BBB on a stand-alone basis, and needs to borrow EUR 10 million from an independent lender ... Read more

The benefit of implicit support will be the difference between the borrowing terms attainable by the borrowing entity based on its credit rating as a member of the MNE group and those attainable on the basis of the stand-alone credit rating it would have had if it were an entirely unaffiliated enterprise. If the borrower has its own independent credit rating from an unrelated credit rating agency, this will usually reflect its membership of the MNE group and so ordinarily no adjustment would be needed to this credit rating to reflect implicit support ... Read more

A lender would benefit from the stronger credit rating of the guarantor (compared to the borrower’s credit rating) and/or the guarantor’s asset pool (in addition to the borrower’s asset pool), and the borrower accordingly may expect a benefit in the form of a lower interest rate. Thus, based on facts and circumstances, a guarantee may provide a benefit to the borrower that has the same or higher credit rating as the guarantor, if the guarantee effectively allows the lender to access wider recourse and, therefore, reduces the interest rate despite the guarantor not having a higher credit rating. In determining the credit rating of the guarantor and the borrower, the effect of implicit support must be considered as explained in Section C.1.1 ... Read more

A guarantee from another party may be used to support the borrower’s credit. A lender placing reliance on a guarantee or guarantees would need to evaluate the guarantor(s) in a similar way to that in which it evaluates the original borrower. For the lender to take a guarantee into account in setting or adjusting the terms and conditions of a loan, it would need to be reasonably satisfied that the guarantor(s) would be able to meet any shortfall resulting from the borrower being unable to meet its obligations in full in the event of a default. Guarantees are discussed in more detail in Section D ... Read more

Maintenance covenants refer typically to financial indicators which have to be met at regular, predetermined intervals during the life of a covenanted loan. Maintenance covenants can act as an early warning system so that in the event of financial underperformance by the borrower, the borrower and/or lender can move to take remedial action at an early stage. This can help to protect unrelated lenders against information asymmetry ... Read more

Incurrence covenants require or prohibit certain actions by the borrower without the consent of the lender. Incurrence covenants may, for example, prohibit the borrower from taking on additional debt, creating any charge on the assets of the entity or disposing of particular assets of the entity, thus giving some degree of certainty over the balance sheet of the borrower ... Read more

The purpose of covenants in a loan agreement is generally to provide a degree of protection to the lender and so limit its risk. That protection may be in the form of incurrence covenants or maintenance covenants ... Read more

Where 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 and where the MNE’s indicators of creditworthiness do not differ significantly from those of the group. An MNE group credit rating is unaffected by controlled transactions and reflects the actual basis on which the group seeks external funding from independent lenders. In situations where an MNE group does not have an external credit rating, consideration may be given to conducting the credit rating analysis at the MNE group level for assessing the controlled transaction. In all cases, the MNE group credit rating, like any other credit rating, will be appropriate only if it is determined to be the most reliable indicator of the MNE credit rating in light of all ... Read more

It 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 paragraph 10.72), the implicit support analysis, the difficulties of accounting for controlled transactions reliably and the presence of information asymmetry may pose challenges that, if not resolved, may result in outcomes that are not reliable ... Read more

The impact of an assessment of implicit support is a matter of judgement. 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 the case in transfer pricing examinations, and the existence of information asymmetry may affect the ability of tax administrations to establish the likelihood of support (see section B.2 in Chapter IV). Furthermore, changing facts and circumstances affecting the willingness or ability of the MNE group to provide support may mean that there is no decision by the MNE group itself until the eventuality for such support arises. This contrasts, for example, where the MNE receives a formal guarantee from another group member. The past behaviour of an MNE group as regards providing support may be a useful indicator of likely future behaviour but an appropriate analysis should be undertaken to ... Read more

Another 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 significance, shared name, potential reputational impacts, negative effects on the overall MNE group, general statement of policy or intent, and any history of support and common behaviour of the MNE group with respect to third parties. The relative relevance of those factors may vary from one industry to another ... Read more

In 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 or the interest rate paid on those borrowings would not require any payment or comparability adjustment. See Example 1 at paragraphs 1.184 – 1.186 of Chapter I and Section D.3 ... Read more

The effect of group membership is relevant for informing the conditions under which an MNE would have borrowed from an independent lender at arm’s length in two ways in particular. Firstly, the external funding policies and practices of group management will assist in informing the form and terms and conditions of the debt the MNE would have entered into with an independent lender, including the pricing (i.e. interest rate paid), and all economically relevant characteristics such as the type of loan, its term, currency, security, covenants, business strategies, and so forth. Secondly, the MNE may receive support from the group to meet its financial obligations in the event of the borrower getting into financial difficulty. Paragraph 1.178 of Chapter I of these Guidelines is relevant to analyse the effect of group membership on the terms and conditions of a borrowing when the borrowing MNE obtains an incidental benefit arising solely by virtue of group affiliation, i.e. passive association ... Read more

In conducting a credit rating analysis, it is important to note that the financial metrics may be influenced by current and past controlled transactions (such as sales, or interest expenses). If it appears that such controlled transactions are not in accordance with the arm’s length principle, the credit rating derived in light of such intra-group transactions may not be reliable. (See also guidance in section B). These considerations apply both to controlled transactions that may affect the current earnings of the MNE and to previous funding and other intra-group transactions that may have had an impact on the measures of income and capital of the MNE that are the subject of quantitative analysis ... Read more

The credit rating methodology used in publicly available financial tools may differ significantly in certain respects from the credit rating methodologies applied by independent credit rating agencies to determine official credit ratings and the impact of any such differences should be carefully considered. For instance, publicly available tools generally use only a limited sample of quantitative data to determine a credit rating. Official credit ratings published by independent credit rating agencies are derived as a result of far more rigorous analysis that includes quantitative analysis of historic and forecast entity performance as well as detailed qualitative analysis of, for instance, management’s ability to manage the entity, industry specific features and the entity’s market share in its industry ... Read more

Publicly available financial tools are designed to calculate credit ratings. Broadly, these tools depend on approaches such as calculating the probability of default and of the likely loss should default occur to arrive at an implied rating for the borrowing. This can then be compared to a market database in a search for comparables to arrive at a price or price range for the borrowing. In considering whether the application of these tools results in a reliable assessment of the credit rating of controlled transactions, potential issues that need to be borne in mind include that the results are not based on a direct comparison with transactions between independent parties but are subject to the accuracy of the input parameters, a tendency to rely more on quantitative inputs at the expense of qualitative factors, and a lack of clarity in the processes (i.e. the workings of the underlying algorithms and processes may not be transparent) ... Read more

Particular considerations should be borne in mind when determining a credit rating for a specific MNE within an MNE group for the purpose of assessing controlled transactions. Where an MNE has a publicly available credit rating published by an independent credit rating agency, that rating may be informative for an arm’s length analysis of the MNE’s controlled financing transactions. However, in most cases, publicly available credit ratings are only available for the MNE group. An approach often used for a specific MNE is to apply quantitative and qualitative analyses of the individual characteristics of the MNE using publicly available financial tools or independent credit rating agencies’ methodologies to seek to replicate the process used to determine the credit rating of the MNE group. This approach also involves taking into account improvements in creditworthiness that the specific MNE would be assumed to receive as a result of being part of the MNE group ... Read more

The credit rating of an MNE or MNE group may differ from an issue rating due to the fact that the credit risk of a financial instrument is linked to its specific features and not only to the risk profile of the borrowing MNE. On prevailing facts and circumstances, and provided there is comparability between the third party debt issuance and the controlled transaction, when both an issuer and issue ratings are available, the issue rating of the particular debt issuance would be more appropriate to use to price the controlled financial transaction ... Read more

The credit rating of a particular debt issuance (“issue rating”) is an opinion about the creditworthiness of the issuer with respect to a specific financial instrument. The issue rating considers specific features of the financial instrument, for instance, guarantees, securities and level of seniority ... Read more

It is important that the MNE group appropriately documents the reasons and selection of the credit rating used for a particular MNE when pricing intra-group loans and other controlled financial transactions ... Read more

There may be special circumstances, such as in the case of start-up entities, or those that have recently been part of a merger, that may have an impact on the credit rating of a group entity. These special situations should be taken into consideration ... Read more

The credit rating of an MNE or MNE group (usually referred to as the “issuer credit rating”) is an opinion about its general creditworthiness. Such an opinion is usually premised on the MNE or MNE group’s capacity and willingness to meet its financial obligations in accordance with the terms of those obligations. The credit rating of an MNE or MNE group is effectively a form of relative ranking of the creditworthiness in comparison to other borrowers. In general, a lower credit rating will indicate a greater risk of default and be expected to result in a higher rate of return for lenders ... Read more

Credit ratings can be determined for the overall creditworthiness of an MNE or MNE group4 or for a specific issuance of debt. As detailed in the following paragraphs, determining credit ratings requires consideration of quantitative – e.g. financial information – and qualitative factors – e.g. industry and country in which the MNE or MNE group operates ... Read more

The creditworthiness of the borrower is one of the main factors that independent investors take into account in determining an interest rate to charge. Credit ratings can serve as a useful measure of creditworthiness and therefore help to identify potential comparables or to apply economic models in the context of related party transactions. Furthermore, in the case of intra-group loans and other financial instruments that are the subject of controlled transactions, the effect of group membership may be an economically relevant factor that affects the pricing of these instruments. Accordingly, this subsection elaborates on the use of credit ratings and the effect of group membership in the context of pricing intra- group loans. Where appropriate, reference to this subsection will be made in other parts of this guidance ... Read more

Similarly, an associated enterprise should not be considered to receive an intra-group service when it obtains incidental benefits attributable solely to its being part of a larger concern, and not to any specific activity being performed. For example, no service would be received where an associated enterprise by reason of its affiliation alone has a credit-rating higher than it would if it were unaffiliated, but an intra-group service would usually exist where the higher credit rating were due to a guarantee by another group member, or where the enterprise benefitted from deliberate concerted action involving global marketing and public relations campaigns. In this respect, passive association should be distinguished from active promotion of the MNE group’s attributes that positively enhances the profit-making potential of particular members of the group. Each case must be determined according to its own facts and circumstances. See Section D.8 of Chapter I on MNE group synergies ... Read more

Assume 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 and conditions and at the same interest rate charged by the independent lender (i.e. an interest rate premised on the existence of an A credit rating). Assume further that the independent lender, in setting its terms and conditions, was aware of S’s other borrowings including the simultaneous loan to S from T ... Read more

P is the parent company of an MNE group engaging in a financial services business. The strength of the group’s consolidated balance sheet makes it possible for P to maintain an AAA credit rating on a consistent basis. S is a member of the MNE group engaged in providing the same type of financial services as other group members and does so on a large scale in an important market. On a stand-alone basis, however, the strength of S’s balance sheet would support a credit rating of only Baa. Nevertheless, because of S’s membership in the P group, large independent lenders are willing to lend to it at interest rates that would be charged to independent borrowers with an A rating, i.e. a lower interest rate than would be charged if S were an independent entity with its same balance sheet, but a higher interest rate than would be available to the parent company of the MNE group ... Read more

Apex Tool Holding France acquired all the shares of Cooper Industrie France, which has since become Apex Tool France. This transaction was financed by a ten-year vendor loan at a rate of 6%. This claim on Apex Tool Holding France was transferred on the same day by the seller to the parent company of this company, which is the head of a global group specialising in tool manufacturing and thus, from that date, the creditor of its subsidiary. Apex Tool Holding France reintegrated the fraction of interest relating to this intra-group loan exceeding the average annual effective rate charged by credit institutions for variable-rate loans granted to companies into its income for the years 2011 to 2013. Apex considered that an interest rate of 6 % was in line with that which it could have obtained from independent financial institutions or organisations under similar conditions. The analysis was set aside by the tax authorities and an assessment was issued where ... Read more

Singapore Telecom Australia Investments Pty Ltd entered into a loan note issuance agreement (the LNIA) with a company (the subscriber) that was resident in Singapore. Singapore Telecom Australia and the subscriber were ultimately 100% owned by the same company. The loan notes issued totalled approximately $5.2 billion to the subscriber. The terms of the LNIA was amendet on three occasions – the first amendment and the second amendment were expressed to have effect as from the date when the LNIA was originally entered into. The interest rate under the LNIA as amended by the third amendment was 13.2575% Following an audit the tax authorities issued an amended assessment under the transfer pricing provisions and denied interest deductions totalling approximately $894 million in respect of four years of income. According to the tax authorities the conditions agreed between the parties differed from the arm’s length principle. Singapore Telecom Australia appealed the assessment to the Federal Court. Judgement of the Federal Court ... Read more

A Oyj was the parent company of the A-group, and responsible for the group’s centralised financial activities. It owned the entire share capital of D Oy and B Oy. D Oy in turn owned the entire share capital of ZAO C, a Russian company. A Oyj had raised funds from outside the group and lent these funds to its Finnish subsidiary B Oy, which in turn had provided a loan to ZAO C. The interest charged by B Oy on the loans to ZAO C was based on the cost of A Oyj’s external financing. The interest rate also included a margin of 0,55 % in tax year 2009, 0,58 % in tax year 2010 and 0,54 % in tax year 2011. The margins had been based on the average margin of A Oyj’s external financing plus 10 %. The Tax Administration had considered that the level of interest to be charged to ZAO C should have been determined taking ... Read more

A non-interest-bearing loan had been granted by GI Group S.p.A., to a related company – Goldfinger Limited – in Hong Kong, in order to acquire a 56% shareholding in the Chinese company Ningbo Gi Human Resources Co. Limited. The Italien tax authorities had issued an assessment, where an interest rate on the loan had been determined and an amount equal to the interest calculated on that basis had been added to the taxable income of GI Group S.p.A. GI Group brought this assessment to the Regional Tax Commission where a decision was rendered setting aside the assessment. This decision was appealed to the Supreme Court by the tax authorities. Judgement of the Supreme Court The Supreme court upheld the appeal of the tax authorities and referred the case back to the Regional Tax Commission. According to the Supreme Court, the decision of the Tax Commission dit not comply with the principles of law concerning the subject matter of evidence and ... Read more

In 2011, Willink SAS issued two intercompany convertible bonds with a maturity of 10 years and an annual interest rate of 8%. The tax authorities found that the 8% interest rate had not been determined in accordance with the arm’s length principle. Willink appealed, but in a decision issued in 2019 the Administrative Court sided with the tax authorities. An appeal was then filed with the Court of Appeal. Judgment of the Supreme Court The Court of Appeal dismissed the appeal of Willink and upheld the decision of the Administrative Court. Excerpt “7. It is common ground that the funds Apax France VIII-A, Apax France VIII-B and the companies MidInvest and Telecom Online are linked to the company Willink, of which they are all partners, and that the rate of 8% exceeds the rate provided for in the first paragraph of 3° of 1 of Article 39 of the General Tax Code. To justify that this rate was not higher ... Read more

A intercompany loan had been granted within the Apex Tool group at an interest rate of 6 percent and to demonstrate the arm’s length nature of the interest rate the borrowing company provided a comparability analyses. The analysis was set aside by the tax authorities and an assessment was issued where the deduction of interest had been reduced. Apex then filed an appeal with the Administrative Court of Appeal. Judgement of the Court The Court dismissed the analyses provided by Apex and upheld the assessment of the tax authorities. Excerpts (Unofficial English translation) “9. The investigation shows that the credit rating assigned to the loan in question by Baker and McKenzie, after several adjustments, was not based on the intrinsic situation of ATHF1, particularly with regard to its lending activity and its development prospects. On the contrary, it was allocated on the basis of the aggregate financial statements of the sub-group it formed with four of its subsidiaries and sub-subsidiaries, ... Read more

“HDP Lux SA acquired a building in France and financed the acquisition with a shareholder loan at an interest rate of 12%. The tax authorities issued a tax assessment for FY 2011 and 2012 in which the market interest rate was set at 3.57% and 2.52% respectively and the excess payments were considered as hidden distribution of profit on which withholding tax was applied. Decision of the Administrative Court The court upheld the tax authorities adjustment of the interest paid on the loan and the qualification of the excess payment as a hidden distribution of profits subject to a withholding tax of 15%. In addition, the court held that the OECD Guidelines could not influence the interpretation of the provision on hidden profit distributions, as the domestic provision had been adopted long before the OECD Guidelines, while at the same time recognising that the OECD Guidelines could be used as an “element of appreciation”. Click here for English translation Click ... Read more

Similarly, an associated enterprise should not be considered to receive an intra-group service when it obtains incidental benefits attributable solely to its being part of a larger concern, and not to any specific activity being performed. For example, no service would be received where an associated enterprise by reason of its affiliation alone has a credit-rating higher than it would if it were unaffiliated, but an intra-group service would usually exist where the higher credit rating were due to a guarantee by another group member, or where the enterprise benefitted from deliberate concerted action involving global marketing and public relations campaigns. In this respect, passive association should be distinguished from active promotion of the MNE group’s attributes that positively enhances the profit-making potential of particular members of the group. Each case must be determined according to its own facts and circumstances. See Section D.8 of Chapter I on MNE group synergies ... Read more

Assume 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 and conditions and at the same interest rate charged by the independent lender (i.e. an interest rate premised on the existence of an A credit rating). Assume further that the independent lender, in setting its terms and conditions, was aware of S’s other borrowings including the simultaneous loan to S from T ... Read more

P is the parent company of an MNE group engaging in a financial services business. The strength of the group’s consolidated balance sheet makes it possible for P to maintain an AAA credit rating on a consistent basis. S is a member of the MNE group engaged in providing the same type of financial services as other group members and does so on a large scale in an important market. On a stand-alone basis, however, the strength of S’s balance sheet would support a credit rating of only Baa. Nevertheless, because of S’s membership in the P group, large independent lenders are willing to lend to it at interest rates that would be charged to independent borrowers with an A rating, i.e. a lower interest rate than would be charged if S were an independent entity with its same balance sheet, but a higher interest rate than would be available to the parent company of the MNE group ... Read more

X Sub GmbH is a German subsidiary of a multinational group. The parent company Y Par B.V. and the financial hub of the group Z Fin B.V. – a sister company to the German subsidiary – are both located in the Netherlands. In its function as a financial hub, Z Fin B.V granted several loans to X Sub GmbH. The interest rate on the loans had been determined by the group based on the CUP method. The German tax authority considered that the amount of interest on the inter-company loans paid by X Sub GmbH to Z Fin B.V. was too high. An assessment was issued where the interest rate was instead determined based on the cost-plus method. The differences in the calculated interest amounts was added to the taxable income of the German GmbH as a hidden profit distribution (vGA). X Sub GmbH filed a complaint to Münster Tax Court. Ruling of the Tax Court The tax court ruled ... Read more

Loan agreements were entered into between Cotton Naturals (I) Pvt. and a US subsidiary on 13th April, 2002, 7th May, 2003 and then on 8th September, 2003. The rate of interest had been fixed at 4% per annum on the principal sum. The CUP method had been applied to determine the rate. The tax authorities held that the arm’s length interest rate should instead be set at 14% p.a. Following an objection to the assessment, at partial relief was granted in the form of a reduction of the rate to 12,20%. An appeal was filed by Cotton Naturals with the Tax Appellate Tribunal Cotton Naturals (I) Pvt. Ltd. where in February 2013 the assessment was set aside. An appeal was then filed with the High Court by the tax authorities. Decision of the High Court The High Court decided in favor of Cotton Naturals (I) Pvt. Ltd. and set aside the tax assessment. Excerpts “Transfer pricing determination is not primarily ... Read more

The application of the WEV (waarde in het economische verkeer) rule is particularly relevant if the non-corporate loan is interest-free or the agreed interest is owed. The interest to be taken into account for tax purposes is then determined on the market value of each interest period at the time it falls due. The assessment of the business nature of the money supply can take place both at the time of supply and during the term. This test must be carried out on both sides, from the perspective of the lending and borrowing company. Referring to what has been said above with regard to the perspective of the entities involved, a situation of an affiliated lender granting a loan to the borrowing group entity that subsequently is insufficiently creditworthy may also constitute a ‘non-business loan’ in the approach of the aforementioned judgment. In my opinion, the same applies to the borrower who, as a result of the linked intra-group loan, ... Read more

In the case of General Electric Capital, Canada, the issue was if a 1% guarantee fee  paid by General Electric Capital Canada Inc. to its AAA-rated US parent company satisfied the arm’s length test. The Canadian tax administration argued  that implicit support resulted in General Electric Canada having a AAA credit rating, so that the guarantee provided by the US parent had no value. Taxpayer argued that the 1% guarantee fee did not exceed arm’s length pricing and that implicit support from the US parent should be ignored since it stemmed from the non-arm’s length relationship. The Tax Court agreed with the tax administration that implicit support should be taken into account and applied a “yield approach,” comparing the interest rate the Canadian company would have paid with and without the guarantee. The Tax Court found that credit rating of the Canadian company – with implicit support but without the guarantee – was at most BBB-/BB+ and the 1% guarantee was arm’s length. The Federal Court of Appeal approved of both the Tax Court’s yield approach and its ... Read more

“Guarantee Co. Ltd.” owned all the shares of G, a company located in the Netherlands, and had provided financial guarantees for loans – in the form of so called “keep well agreements” and guarantee agreements. The main issue in this case is whether or not it was possible to calculate an arm’s length price for the consideration for the guarantee issued. Judgement of the National Tax Tribunal The Tax Tribunal came to the conclusion that the price for the guarantees could be determined based on the CUP method and set at 0,10% of the guaranteed amounts. Excerpt “Therefore, a comparative study of the conclusion of each of the Keep Well Agreements, etc. in question and the Bank Guarantee Transactions in question shows that, as stated in (a) of (b) above, the conclusion of each of the Keep Well Agreements, etc. in question is found to have a function substantially equivalent to a guarantee, although there are differences in the contract ... Read more