Tag: Economic substance

Luxembourg vs PPL-Co, July 2017, Cour Administrative, Case No 38357C

Luxembourg vs PPL-Co, July 2017, Cour Administrative, Case No 38357C

The Administrative Court re-characterised a profit-participating loan into equity for tax purposes. The court provided the following reasoning: “Compared with the criteria specified above for a requalification as a disguised contribution of capital, it should firstly be noted that the sums made available to the two subsidiaries were allocated to investments in properties intended in principle to represent investments in the medium or long term as assets of the invested assets and in the absence of a clause providing for a repayment plan or a fixed maturity, the sums were intended to remain at the disposal of the subsidiaries for a period otherwise limited. In addition, this availability of funds did not give rise to any fixed consideration from the two subsidiaries, but only to a share of the appellant in the capital gains generated by hotel disposals, this interest amounting to three quarters of the capital gains obtained by the affiliates.” “...the sums made available to the two subsidiaries ... Continue to full case
UK vs CJ Wildbird Foods Limited, June 2018, First-tier Tribunal, case no. UKFTT0341 (TC06556)

UK vs CJ Wildbird Foods Limited, June 2018, First-tier Tribunal, case no. UKFTT0341 (TC06556)

In the transfer pricing case of C J Wildbird Foods Limited the issue was whether a related party loan should be treated as such for tax purposes. There was a loan agreement between the parties and the agreement specified that there was an obligation to repay the loan and interest. However, no interest had actually been paid and a tax deduction had also been claimed by the tax payer on the basis that the debt was unlikely to be repaid. The tax authorities argued that the loan did not have the characteristics of a loan. The borrower was loss making  and did not have the financial capacity to pay any interest. The tribunal found that there was a legal obligation to repay the loan and interest. Whether the loan or interest was actually repaid was irrelevant. “The modern business world has many famous examples of companies, especially in the technology sector, with no cash and no immediate prospect of generating ... Continue to full case
US vs Wells Fargo, May 2017, Federal Court, Case No. 09-CV-2764

US vs Wells Fargo, May 2017, Federal Court, Case No. 09-CV-2764

Wells Fargo, an American multinational financial services company, had claimed foreign tax credits in the amount of $350 based on a “Structured Trust Advantaged Repackaged Securities” (STARS) scheme. The STARS foreign tax credit scheme has two components — a trust structure which produces the foreign tax credits and a loan structure which generates interest deductions. Wells Fargo was of the opinion that the STARS arrangement was a single, integrated transaction that resulted in low-cost funding. In 2016, a jury found that the trust and loan structure were two independent transactions and that the trust transaction failed both the objective and subjective test of the “economic substance” analysis. With respect to the loan transaction the jury found that the transaction passed the objective test by providing a reasonable possibility of a pre-tax profit, but failed the subjective test as the transaction had been entered into “solely for tax-related reasons.” The federal court ruled that Wells Fargo had not been entitled to ... Continue to full case
Malaysia vs Ensco Gerudi, June 2016, High Court, Case No. 14-11-08-2014

Malaysia vs Ensco Gerudi, June 2016, High Court, Case No. 14-11-08-2014

Ensco Gerudi provided offshore drilling services to the petroleum industry in Malaysia. The company did not own any drilling rigs, but entered into leasing agreements with a rig owner within the Ensco Group. One of the rig owners in the group incorporated a Labuan company to facilitate easier business dealings for the taxpayer. Ensco Gerudi entered into a leasing agreement with the Labuan company for the rigs. Unlike previous transactions, the leasing payments made to the Labuan company did not attract withholding tax. The tax authorities found the Labuan company had no economic or commercial substance and that the purpose of the transaction had only been to benefit from the tax reduction. The High Court decided in favour of the taxpayer. The Court held that there was nothing artificial about the payments and that the transactions were within the meaning and scope of the arrangements contemplated by the government in openly offering incentives. The High Court ruled that taxpayers have ... Continue to full case
US vs Buyuk LLC and Beyazit LLC, November 2013, US Tax Court, Case No. 11051-10, 6853-12

US vs Buyuk LLC and Beyazit LLC, November 2013, US Tax Court, Case No. 11051-10, 6853-12

The dispute in this case was transactions involving distressed asset/debt transaction. The tax authorities found the DAD transactions of russian receivables under a “DBO distressed debt structure scheme” lacked economic substance, and denied the taxpayers involved tax decuctions of USD 4.5 and 12.2 million. A report provided on behalf of the government analyzed whether a rational investor would have entered into the transaction were it not for the claimed tax benefits. The Courts opinion: “there was no realistic possibility for the transactions at issue to break even absent any tax benefits.” Hence the transactions were not recognized. US Tax Court, Case No. 11051-10, 6853-12 US Tax Court 2013-253 ... Continue to full case