Where the effect of a guarantee is to permit a borrower to borrow a greater amount of debt than it could in the absence of the guarantee, the guarantee is not simply supporting the credit rating of the borrower but could be acting both to increase the borrowing capacity and to reduce the interest rate on any existing borrowing capacity of the borrower. In such a situation there may be two issues – whether a portion of the loan from the lender to the borrower is accurately delineated as a loan from the lender to the guarantor (followed by an equity contribution from the guarantor to the borrower), and whether the guarantee fee paid with respect to the portion of the loan that is respected as a loan from the lender to the borrower is arm’s length. The conclusion of an analysis of such transactions may be, taking into account the full facts and circumstances, that the evaluation of the ... Read more

In 2005 “B Lender S.A” transferred a supplementary capital contributions to company C. The capital was to be paid back in 31 October 2009 and was provided interest-free. Tax Authorities adjusted the taxable income of “B Lender S.A” with an amount of EUR 1,586,272.23, of which EUR 1,575,958.86 was attributable to interest on capital transactions, which it reclassified as interest-bearing loan under the arm’s length provisions of article 58 of the CIRC. The assessment of additional income was upheld by a decision from the tax court. An appeal was then filed by “B Lender S.A.” Decision of Supreme Administrative Court The Supreme Administrative Court set aside the decision of the tax court and decided in favour of A “B Lender S.A.” Experts “The question translates, in short, into knowing whether the arm’s length principle requires or imposes that a transaction of performance of ancillary services, within the scope of a group of companies be taxed as if it earned interest, ... Read more