Tag: Equity or Debt/Loan

Luxembourg vs "Lux SARL", September 2022, Administrative Tribunal, Case No 44902

Luxembourg vs “Lux SARL”, September 2022, Administrative Tribunal, Case No 44902

In 2016 “Lux SARL” had – via the immediate parent company – been granted funds by a related company on Cayman Islands, in the form of a profit participating loan. In 2018, after looking into the arrangement, the tax authorities informed “Lux SARL” that it intended to adjust its tax return for the year 2016 insofar as it “(…) does not accept the deduction of notional interest in relation to a capital gain realised on the sale of securities, and after dismissing an objection by Lux SARL, a final assessment was issued in 2019”. Lux SARL then filed an appeal with the Administrative Tribunal. Judgement of the Administrative Tribunal The Tribunal found the appeal of Lux SARL unjustified and upheld the decision of the tax administration. The Tribunal agreed with the approach taken by the tax authorities disregarding the classification of the financing received and denying deductions of a notional interest. According to the Tribunal, the choice of financing was ... Read more
Netherlands vs "Owner B.V.", July 2022, District Court, Case No. ECLI:NL:RBNHO:2022:6584

Netherlands vs “Owner B.V.”, July 2022, District Court, Case No. ECLI:NL:RBNHO:2022:6584

Owner B.V. was set up by a number of investors to acquire a Belgian entity with Dutch subsidiaries. After the acquisition the Dutch subsidiaries were merged into a fiscal unity with Owner B.V. Interest in an amount of EUR 1.7 million due on the debt related to the acquisition was considered by the court not deductible under section 10a of the Vpb Act. In addition, Owner B.V.’s profit had been reduced by EUR 6.0 million by interest on shareholder loans. The court deemed that 4.5 million of this amount was not deductible by virtue of fraus legis. The court further ruled that part of the costs charged to the Dutch company qualified as financing costs and could be deducted. Excerpts “5.8. The defendant has argued that under Section 8b of the Vpb Act, a full recharacterisation of the loans can and should take place, which the claimant disputes. According to the claimant, only an interest adjustment can be made under ... Read more
Norway vs Petrolia Noco AS, May 2022, Court of Appeal, Case No LB-2022-18585

Norway vs Petrolia Noco AS, May 2022, Court of Appeal, Case No LB-2022-18585

In 2011, Petrolia SE established a wholly owned subsidiary in Norway – Petrolia Noco AS – to conduct oil exploration activities on the Norwegian shelf. From the outset, Petrolia Noco AS received a loan from the parent company Petrolia SE. The written loan agreement was first signed later on 15 May 2012. The loan limit was originally MNOK 100 with an agreed interest rate of 3 months NIBOR with the addition of a margin of 2.25 percentage points. When the loan agreement was formalized in writing in 2012, the agreed interest rate was changed to 3 months NIBOR with the addition of an interest margin of 10 percentage points. The loan limit was increased to MNOK 150 in September 2012, and then to MNOK 330 in April 2013. In the tax return for 2012 and 2013, Petrolia Noco AS demanded a full deduction for actual interest costs on the intra-group loan to the parent company Petrolia SE. An assessment was ... Read more
Norway vs Fortis Petroleum Norway AS, March 2022, Court of Appeal, Case No LB-2021-26379

Norway vs Fortis Petroleum Norway AS, March 2022, Court of Appeal, Case No LB-2021-26379

In 2009-2011 Fortis Petroleum Norway AS (FPN) bought seismic data related to oil exploration in the North Sea from a related party, Petroleum GeoServices AS (PGS), for NKR 95.000.000. FBN paid the amount by way of a convertible intra-group loan from PGS in the same amount. FPN also purchased administrative services from another related party, Consema, and later paid a substantial termination fee when the service contract was terminated. The acquisition costs, interest on the loan, costs for services and termination fees had all been deducted in the taxable income of the company for the years in question. Central to this case is the exploration refund scheme on the Norwegian shelf. This essentially means that exploration companies can demand cash payment of the tax value of exploration costs, cf. the Petroleum Tax Act § 3 letter c) fifth paragraph. If the taxpayer does not have income to cover an exploration cost, the company receives payment / refund of the tax ... Read more
Austria vs C-Group, March 2022, Bundesfinanzgericht, Case No RV/7102553/2021

Austria vs C-Group, March 2022, Bundesfinanzgericht, Case No RV/7102553/2021

C is the parent company of the C-group which is involved in the construction business. C is part of a joint venture and for the expansion of these activities a framework agreement on shareholder loans was concluded. Under the agreement two shareholder loans were granted: ***loan*** II totalling 212,935,716.33 euros and ***loan*** III totalling 446,000,000 euros. At issue is whether (***loan*** II and ***loan*** III) are to be regarded as hidden equity capital or debt capital. In regards of loan II a binding ruling had previously been issued stating that the loan was hidden equity. C took the position that both loan II and loan III were to be treated for tax purposes as equity capital. Following an audit the tax authorities assessed both shareholder loans as debt capital and added interest income to the taxable income of C. In regards of the binding ruling previously issued, the authorities stated that the underlying facts had changed to such an extend ... Read more
Italy vs Mauser S.p.A., February 2022, Supreme Court, Case No 6283/2022

Italy vs Mauser S.p.A., February 2022, Supreme Court, Case No 6283/2022

Following an audit, Mauser S.p.A. received four notices of assessment relating to the tax periods from 2004 to 2007. These notices contested, in relation to all tax periods, the elusive purpose of a financing operation of Mauser S.p.A. by the non-resident parent company, as it was aimed at circumventing the non-deductibility of interest expense pursuant to Article 98 pro tempore of Presidential Decree No. 917 of 22 December 1986 (TUIR) on the subject of thin capitalisation. The loan, which began in 2004, had resulted in the recognition of €25,599,000.00 among other reserves, indicated as a payment on account of a future capital increase, as well as €55,040,474.29 as an interest-bearing shareholder loan, the latter of which was subsequently partly waived and also transferred to reserves. The loan had also contributed to the generation of losses in the years in question, which had been covered through the use of the aforementioned reserve (as a reserve), whose interest paid to the parent ... Read more

TPG2022 Chapter X paragraph 10.13

For example, consider a situation in which Company B, a member of an MNE group, needs additional funding for its business activities. In this scenario, Company B receives an advance of funds from related Company C, which is denominated as a loan with a term of 10 years. Assume that, in light of all good-faith financial projections of Company B for the next 10 years, it is clear that Company B would be unable to service a loan of such an amount. Based on facts and circumstances, it can be concluded that an unrelated party would not be willing to provide such a loan to Company B due to its inability to repay the advance. Accordingly, the accurately delineated amount of Company C’s loan to Company B for transfer pricing purposes would be a function of the maximum amount that an unrelated lender would have been willing to advance to Company B, and the maximum amount that an unrelated borrower ... Read more

TPG2022 Chapter X paragraph 10.12

In accurately delineating an advance of funds, the following economically relevant characteristics may be useful indicators, depending on the facts and circumstances: the presence or absence of a fixed repayment date; the obligation to pay interest; the right to enforce payment of principal and interest; the status of the funder in comparison to regular corporate creditors; the existence of financial covenants and security; the source of interest payments; the ability of the recipient of the funds to obtain loans from unrelated lending institutions; the extent to which the advance is used to acquire capital assets; and the failure of the purported debtor to repay on the due date or to seek a postponement ... Read more

TPG2022 Chapter X paragraph 10.11

Particular labels or descriptions assigned to financial transactions do not constrain the transfer pricing analysis. Each situation must be examined on its own merits, and subject to the prefatory language in the previous paragraph, accurate delineation of the actual transaction under Chapter I will precede any pricing attempt ... Read more

TPG2022 Chapter X paragraph 10.10

Although countries may have different views on the application of Article 9 to determine the balance of debt and equity funding of an entity within an MNE group, the purpose of this section is to provide guidance for countries that use the accurate delineation under Chapter I to determine whether a purported loan should be regarded as a loan for tax purposes (or should be regarded as some other kind of payment, in particular a contribution to equity capital) ... Read more

TPG2022 Chapter X paragraph 10.8

Although this guidance reflects an approach of accurate delineation of the actual transaction in accordance with Chapter I to determine the amount of debt to be priced, it is acknowledged that other approaches may be taken to address the issue of the balance of debt and equity funding of an entity under domestic legislation before pricing the interest on the debt so determined. These approaches may include a multi-factor analysis of the characteristics of the instrument and the issuer ... Read more

TPG2022 Chapter X paragraph 10.7

Where it is considered that the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner in comparable circumstances, the guidance at Section D.2 of Chapter I may also be relevant ... Read more

TPG2022 Chapter X paragraph 10.6

In the context of the preceding paragraphs, this subsection elaborates on how the concepts of Chapter I, in particular the accurate delineation of the actual transaction under Section D.1, may relate to the balance of debt and equity funding of an entity within an MNE group ... Read more

TPG2022 Chapter X paragraph 10.5

Commentary to Article 9 of the OECD Model Tax Convention notes at paragraph 3(b) that Article 9 is relevant “not only in determining whether the rate of interest provided for in a loan contract is an arm’s length rate, but also whether a prima facie loan can be regarded as a loan or should be regarded as some other kind of payment, in particular a contribution to equity capital.” ... Read more

TPG2022 Chapter X paragraph 10.4

It may be the case that the balance of debt and equity funding of a borrowing entity that is part of an MNE group differs from that which would exist if it were an independent entity operating under the same or similar circumstances. This situation may affect the amount of interest payable by the borrowing entity and so may affect the profits accruing in a given jurisdiction ... Read more
Hungary vs G.K. Ktf, December 2021, Court of Appeals, Case No. Kfv.V.35.306/2021/9

Hungary vs G.K. Ktf, December 2021, Court of Appeals, Case No. Kfv.V.35.306/2021/9

G.K. Ktf was a subsidiary of a company registered in the United Kingdom. On 29 December 2010 G.K. Ktf entered into a loan agreement with a Dutch affiliate, G.B. BV, under which G.B. BV, as lender, granted a subordinated unsecured loan of HUF 3 billion to G.K. Ktf. Interest was set at a fixed annual rate of 11.32%, but interest was only payable when G.K. Ktf earned a ‘net income’ from its activities. The maturity date of the loan was 2060. The loan was used by G.K. Ktf to repay a debt under a loan agreement concluded with a Dutch bank in 2006. The bank loan was repaid in 2017/2018. The interest paid by G.K. Ktf under the contract was deducted as an expense of HUF 347,146,667 in 2011 and HUF 345,260,000 in 2012. But, in accordance with Dutch tax law – the so called participation exemption – G.B BV did not include the interest as taxable income in its ... Read more
Kenya vs Dominion Petroleum Dkenya Ltd, November 2021, High Court of Kenya, TAX APPEAL NO. E093 OF 2020

Kenya vs Dominion Petroleum Dkenya Ltd, November 2021, High Court of Kenya, TAX APPEAL NO. E093 OF 2020

Dominion Petroleum Dkenya’s principal activity was exploration of oil and gas. The tax authorities carried out an in-depth audit of Dominion’s operations and tax affairs for the years of income 2011 to 2016, which resulted in the following taxes being raised: Withholding Income Tax (WHT) on imported services – KES 114,993,666.00; WHT on deemed interest – KES 504,643,172.00 and; Reverse Value Added Tax(VAT) on imported services– KES 714,258,472.00 all totaling KES 1,333,895,311.00. An appeal was filed by Dominion with the Tax Appeals Tribunal where, in a judgment dated 24th July 2020, the Tribunal set aside the Commissioner’s Objection decision on Reverse VAT and WHT on Deemed Interest to the extent of the period prior to 1st January 2014. Further, it upheld the Commissioner’s Objection Decision on WHT on local services on condition that the amount of KES 656,892,892.00 paid by Dominion Petroleum to Apache Kenya Limited for seismic data be excluded from the assessment as it was not subject to ... Read more
Italy vs Pompea S.p.A., October 2021, Supreme Court, Case No 27636/2021

Italy vs Pompea S.p.A., October 2021, Supreme Court, Case No 27636/2021

This case deals with a non-interest bearing intragroup loan granted by Pompea S.p.A. to a foreign subsidiary and deductibility of interest expenses incurred by Pompea S.p.A. to obtain the funding needed to grant this loan to the subsidiary. The company was of the opinion that interest free inter-company loans were not covered by the Italien arm’s length provision at the time where the loan in question was established. The Italien tax authorities claimed that the arrangement was covered by the transfer pricing regulations art. 110 paragraph 7, and that an arm’s length interest had to be paid on the loan. They also found that interest on the bank loan was not deductible. Judgement of the Supreme Court The Court found that non-interest-bearing loan, was covered by the rules laid down in Article 110(7) of the TUIR (the Italien arm’s length provisions). Furthermore, the court found that the OECD 2010 TP Guidelines were unambiguous in clarifying (Chapter VII of the 2010 Guidelines, paras. 7.14 ... Read more
India vs Times Infotainment Media Ltd, August 2021, Income Tax Appellate Tribunal - Mumbai, TIA No 298/Mum/2014

India vs Times Infotainment Media Ltd, August 2021, Income Tax Appellate Tribunal – Mumbai, TIA No 298/Mum/2014

Times Infotainment Media Ltd (TIML India), is in the entertainment business, including running an FM Broadcasting channel in India. It successfully participated in the auction of the radio business of Virgin radio in March 2008 in the United Kingdom. To complete the acquisition, it acquired two SPV companies, namely TML Golden Square Limited and TIML Global Limited. TIML India wholly held TIML Global which in turn wholly held TIML Golden. TIML India received funding from its parent Bennet Coleman & Co. Limited and remitted money primarily as an interest-free loan to TIML Global on 27 June 2008. TIML Global, on behalf of TIL Golden, paid UKP 53.51 million for the acquisition of Virgin Radio Shares. The acquisition of shares in Virgin Radios by TIML Golden was completed on 30 June 2008. TIML India booked the transaction in its accounts as a loan to TIML Global Limited, but the arm’s length interest rate on the loan was claimed at zero percent ... Read more

Luxembourg vs “Lux PPL SARL”, July 2021, Administrative Tribunal, Case No 43264

Lux PPL SARL received a profit participating loan (PPL) from a related company in Jersey to finance its participation in an Irish company. The participation in the Irish company was set up in the form of debt (85%) and equity (15%). The profit participating loan (PPL) carried a fixed interest of 25bps and a variable interest corresponding to 99% of the profits derived from the participation in the Irish company, net of any expenses, losses and a profit margin. After entering the arrangement, Lux PPL SARL filed a request for an binding ruling with the Luxembourg tax administration to verify that the interest charged under the PPL would not qualify as a hidden profit distribution subject to the 15% dividend withholding tax. The tax administration issued the requested binding ruling on the condition that the ruling would be terminate if the total amount of the interest charge on the PPL exceeded an arm’s length charge. Later, Lux PPL SARL received a dividend ... Read more
Peru vs. Perupetro, June 2021, Tax Court, Case No 05562-1-2021

Peru vs. Perupetro, June 2021, Tax Court, Case No 05562-1-2021

A foreign group had transferred funds to one of its branches, Perupetro, in Peru and claimed that the transfer was a capital contribution – and not a loan. Following an audit the tax authorities issued an assessment, where the funds transferred were considered a loan and withholding taxes on the interest payments had been lifted. An appeal was filed by Perupetro. Perupetro held that the transfers of funds made by its non-domiciled parent company in its favour in the financial year 2014 constitute assigned capital (capital contributions) and not loans as considered by the Administration. It pointed out that the tax authorities has not followed the procedure established by the Income Tax Law and the OECD Guidelines to delineate the operation observed, a situation that would have allowed it to note that it does not qualify as a loan. Perupetro further claimed that the tax authorities had not carried out a correct comparability analysis for the transaction subject to assessment, ... Read more
Germany vs Lender GmbH, May 2021, Bundesfinanzhof, Case No I R 62/17

Germany vs Lender GmbH, May 2021, Bundesfinanzhof, Case No I R 62/17

Lender GmbH acquired all shares in T GmbH from T in 2012 (year in dispute) for a purchase price of … €. To finance the purchase price of the shares, Lender GmbH took out a loan from its sole shareholder, D GmbH, a loan in the amount of … €, which bore interest at 8% p.a. (shareholder loan). The interest was not to be paid on an ongoing basis, but only on expiry of the loan agreement on 31.12.2021. No collateral was agreed. D GmbH, for its part, borrowed funds in the same amount and under identical terms and conditions from its shareholders, among others from its Dutch shareholder N U.A. In addition Lender GmbH received a bank loan in the amount of … €, which had an average interest rate of 4.78% p.a. and was fully secured. Finally Lender GmbH also received a vendor loan from the vendor T in the amount of … €, which bore an interest ... Read more
European Commission vs Luxembourg and Engie, May 2021, EU General Court, Case No T-516/18 and T-525/18

European Commission vs Luxembourg and Engie, May 2021, EU General Court, Case No T-516/18 and T-525/18

Engie (former GDF Suez) is a French electric utility company. Engie Treasury Management S.à.r.l., a treasury company, and Engie LNG Supply, S.A, a liquefied natural gas trading company, are both part of the Engie group. In November 2017, Total has signed an agreement with Engie to acquire its LNG business, including Engie LNG Supply. In 2018 the European Commission has found that Luxembourg allowed two Engie group companies to avoid paying taxes on almost all their profits for about a decade. This is illegal under EU State aid rules because it gives Engie an undue advantage. Luxembourg must now recover about €120 million in unpaid tax. The Commission’s State aid investigation concluded that the Luxembourg tax rulings gave Engie a significant competitive advantage in Luxembourg. It does not call into question the general tax regime of Luxembourg. In particular, the Commission found that the tax rulings endorsed an inconsistent tax treatment of the same structure leading to non-taxation at all ... Read more
Italy vs GI Group S.p.A., May 2021, Supreme Court, Case No 13850/2021

Italy vs GI Group S.p.A., May 2021, Supreme Court, Case No 13850/2021

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
Norway vs Petrolia Noco AS, March 2021, Court of Appeal, Case No LB-2020-5842

Norway vs Petrolia Noco AS, March 2021, Court of Appeal, Case No LB-2020-5842

In 2011, Petrolia SE established a wholly owned subsidiary in Norway – Petrolia Noco AS – to conduct oil exploration activities on the Norwegian shelf. From the outset, Petrolia Noco AS received a loan from the parent company Petrolia SE. The written loan agreement was first signed later on 15 May 2012. The loan limit was originally MNOK 100 with an agreed interest rate of 3 months NIBOR with the addition of a margin of 2.25 percentage points. When the loan agreement was formalized in writing in 2012, the agreed interest rate was changed to 3 months NIBOR with the addition of an interest margin of 10 percentage points. The loan limit was increased to MNOK 150 in September 2012, and then to MNOK 330 in April 2013. In the tax return for 2012 and 2013, Petrolia Noco AS demanded a full deduction for actual interest costs on the intra-group loan to the parent company Petrolia SE. Following an audit ... Read more
Portugal vs "B Lender S.A", January 2021, Supremo Tribunal Administrativo, Case No JSTA000P26984

Portugal vs “B Lender S.A”, January 2021, Supremo Tribunal Administrativo, Case No JSTA000P26984

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
Israel vs The Barzani Brothers (1974) Ltd., Oktober 2020, Jerusalem Court of Appeal, Case No 54727-02-17

Israel vs The Barzani Brothers (1974) Ltd., Oktober 2020, Jerusalem Court of Appeal, Case No 54727-02-17

The Barzani Brothers (1974) Ltd had provided interest-free financing to affiliated Romanian group companies in the form of “capital notes”. In Israel, financing qualifying as a “capital note” releases the lender from having to report interest income in its annual tax return in relation to the funding. Certain high risk long term funding arrangements may qualify as a “capital notes”. In regards to the intra-group funding provided by the Barzani Brothers Ltd, the Israel tax authorities did not recognize the qualification thereof as “capital notes”. Instead they found the funding provided to be ordinary loans. Labeling a loan agreement “capital note” does not turn the loan agreement into a capital note. On that basis an assessment of taxable interest income was issued to the company. The Court ruled in favor of the tax authorities and rejected the explanations of Barzani Brothers Ltd that the “loan-like agreements” had been executed by mistake, and that the intention had always been to provide ... Read more
Switzerland vs "PPL AG", March 2020, Federal Supreme Court, Case No 2C_578/2019

Switzerland vs “PPL AG”, March 2020, Federal Supreme Court, Case No 2C_578/2019

“PPL AG” had been set up as a limited liability company and in addition to the ordinary share capital, “PPL AG” had issued non-voting shares (participation certificates) to its German parent company and to three German individual investors in an aggregate amount of CHF 1.82 million. “PPL AG” was later converted into a joint stock corporation and on that occasion the participation certificates were converted into Profit Participating Loans (PPL), with an annual interest rate of 7%. In 2015, the Swiss tax administration carried out a tax audit of “PPL AG” for the years 2010-2014 and issued an assessment claiming payment of CHF 94,000 in withholding taxes on constructive dividends. According to the tax administration “PPL AG” had paid excessive amounts of interest to its lenders under the PPLs, exceeding the safe harbour interest rates published by the Swiss tax administration for the years under review. According to the tax administration, the portion of the interest payments exceeding the published ... Read more
Netherlands vs Hunkemöller B.V., January 2020, AG opinion - before the Supreme Court, Case No ECLI:NL:PHR:2020:102

Netherlands vs Hunkemöller B.V., January 2020, AG opinion – before the Supreme Court, Case No ECLI:NL:PHR:2020:102

To acquire companies and resell them with capital gains a French Investment Fund distributed the capital of its investors (€ 5.4 billion in equity) between a French Fund Commun de Placement à Risques (FCPRs) and British Ltds managed by the French Investment Fund. For the purpose of acquiring the [X] group (the target), the French Investment Fund set up three legal entities in the Netherlands, [Y] UA, [B] BV, and [C] BV (the acquisition holding company). These three joint taxed entities are shown as Fiscal unit [A] below. The capital to be used for the acquisition of [X] group was divided into four FCPRs that held 30%, 30%, 30% and 10% in [Y] respectively. To get the full amount needed for the acquisition, [Y] members provided from their equity to [Y]: (i) member capital (€ 74.69 million by the FCPRs, € 1.96 million by the Fund Management, € 1.38 million by [D]) and (ii) investment in convertible instruments (hybrid loan ... Read more

TPG2020 Chapter X paragraph 10.13

For example, consider a situation in which Company B, a member of an MNE group, needs additional funding for its business activities. In this scenario, Company B receives an advance of funds from related Company C, which is denominated as a loan with a term of 10 years. Assume that, in light of all good-faith financial projections of Company B for the next 10 years, it is clear that Company B would be unable to service a loan of such an amount. Based on facts and circumstances, it can be concluded that an unrelated party would not be willing to provide such a loan to Company B due to its inability to repay the advance. Accordingly, the accurately delineated amount of Company C’s loan to Company B for transfer pricing purposes would be a function of the maximum amount that an unrelated lender would have been willing to advance to Company B, and the maximum amount that an unrelated borrower ... Read more

TPG2020 Chapter X paragraph 10.12

In accurately delineating an advance of funds, the following economically relevant characteristics may be useful indicators, depending on the facts and circumstances: the presence or absence of a fixed repayment date; the obligation to pay interest; the right to enforce payment of principal and interest; the status of the funder in comparison to regular corporate creditors; the existence of financial covenants and security; the source of interest payments; the ability of the recipient of the funds to obtain loans from unrelated lending institutions; the extent to which the advance is used to acquire capital assets; and the failure of the purported debtor to repay on the due date or to seek a postponement ... Read more

TPG2020 Chapter X paragraph 10.11

Particular labels or descriptions assigned to financial transactions do not constrain the transfer pricing analysis. Each situation must be examined on its own merits, and subject to the prefatory language in the previous paragraph, accurate delineation of the actual transaction under Chapter I will precede any pricing attempt ... Read more

TPG2020 Chapter X paragraph 10.10

Although countries may have different views on the application of Article 9 to determine the balance of debt and equity funding of an entity within an MNE group, the purpose of this section is to provide guidance for countries that use the accurate delineation under Chapter I to determine whether a purported loan should be regarded as a loan for tax purposes (or should be regarded as some other kind of payment, in particular a contribution to equity capital) ... Read more

TPG2020 Chapter X paragraph 10.8

Although this guidance reflects an approach of accurate delineation of the actual transaction in accordance with Chapter I to determine the amount of debt to be priced, it is acknowledged that other approaches may be taken to address the issue of the balance of debt and equity funding of an entity under domestic legislation before pricing the interest on the debt so determined. These approaches may include a multi-factor analysis of the characteristics of the instrument and the issuer ... Read more

TPG2020 Chapter X paragraph 10.7

Where it is considered that the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner in comparable circumstances, the guidance at Section D.2 of Chapter I may also be relevant ... Read more

TPG2020 Chapter X paragraph 10.6

In the context of the preceding paragraphs, this subsection elaborates on how the concepts of Chapter I, in particular the accurate delineation of the actual transaction under Section D.1, may relate to the balance of debt and equity funding of an entity within an MNE group ... Read more

TPG2020 Chapter X paragraph 10.5

Commentary to Article 9 of the OECD Model Tax Convention notes at paragraph 3(b) that Article 9 is relevant “not only in determining whether the rate of interest provided for in a loan contract is an arm’s length rate, but also whether a prima facie loan can be regarded as a loan or should be regarded as some other kind of payment, in particular a contribution to equity capital.” ... Read more

TPG2020 Chapter X paragraph 10.4

It may be the case that the balance of debt and equity funding of a borrowing entity that is part of an MNE group differs from that which would exist if it were an independent entity operating under the same or similar circumstances. This situation may affect the amount of interest payable by the borrowing entity and so may affect the profits accruing in a given jurisdiction ... Read more
Argentina vs Transportadora de Energía SA, December 2019, Supreme Court, Case No CAF 39109/2014/3/RH2

Argentina vs Transportadora de Energía SA, December 2019, Supreme Court, Case No CAF 39109/2014/3/RH2

The tax authorities had recharacterized debt to equity and disallowed deductions for interest payments etc. Decision of the Supreme Court The Court decided in favour of Transportadora de Energía SA and set aside the debt to equity re-characterisation. The court also points to the relevance of transfer pricing studies. The Court noted that the tax authorities had failed to properly review the transfer pricing documentation and benchmarking of the intra-group financing for transfer pricing purposes, and on that basis set aside the assessment. Click here for English Translation Argentina 26 dec 2FALLO CAF 039109_2014_3_RH002 ... Read more
2019: ATO draft on compliance approach to the arm’s length debt test

2019: ATO draft on compliance approach to the arm’s length debt test

The draft Guideline provides guidance to entities in applying the arm’s length debt test in Division 820 of the Income Tax Assessment Act 19972 and should be read in conjunction with draft Taxation Ruling TR 2019/D2 Income tax: thin capitalisation – the arm’s length debt test. This Guideline also provides a risk assessment framework that outlines our compliance approach to an application of the arm’s length debt test in certain circumstances that are identified as low risk. The arm’s length debt test is one of the tests available to establish an entity’s maximum allowable debt for thin capitalisation purposes. The test focuses on identifying an amount of debt a notional stand-alone Australian business would reasonably be expected to borrow, and what independent commercial lenders would reasonably be expected to lend on arm’s length terms and conditions. An entity’s debt deductions are reduced to the extent that its adjusted average debt exceeds its maximum allowable debt. The arm’s length debt test ... Read more
India vs TMW, August 2019, Income Tax Tribunal, Case No ITA No 879

India vs TMW, August 2019, Income Tax Tribunal, Case No ITA No 879

The facts in brief are that TMW ASPF CYPRUS (hereinafter referred to as ‘assessee’) is a private limited company incorporated in Cyprus and is engaged in the business of making investments in the real estate sector. The company in the year 2008 had made investments in independent third-party companies in India (hereinafter collectively known as ‘investee companies’) engaged in real estate development vide fully convertible debentures (FCCDs). It was these investments that made the investee companies an associated enterprise of the assessee as per TP provisions. The assessee had also entered agreements, according to which the assessee was entitled to a coupon rate of 4%. Further, after the conversion of the FCCDs into equity shares, the promoter of Indian Companies would buy back at an agreed option price. The option price would be such that the investor gets the original investment paid on subscription to the FCCDs plus a return of 18% per annum. During the impugned assessment year, the ... Read more
Austria vs Shareholder, July 2019, Bundesfinanzgericht, Case No RV/1100628/2016

Austria vs Shareholder, July 2019, Bundesfinanzgericht, Case No RV/1100628/2016

A taxpayer with a 98% shareholding in a joint stock company, CH AG, based in Switzerland had provided EUR 30 million as an interest-free shareholder loan to the company. There was no written agreement. CH AG used this capital to provide loans to two affiliated companies in Austria and Germany, each with an interest rate of 2%. The tax authorities added a 2% interest to the the shareholder loans – based on the interest on the loans passed on by CH AG to its affiliated companies. EXCURSION: In the present case, the argumentation of the taxpayer or the tax representative against interest on the loan was also interesting: In the complaint – with reference to the so-called “relatives’ case law” – it was stated that due to a lack of sufficiently clear agreements, lack of collateral, etc., not at all a “loan” in the tax sense is to be assumed, but that the financing in question is rather a question ... Read more
Switzerland vs "PPL AG", May 2019, Federal Court, Case No A-6360/2017

Switzerland vs “PPL AG”, May 2019, Federal Court, Case No A-6360/2017

“PPL AG” had been set up as a limited liability company and in addition to the ordinary share capital, “PPL AG” had issued non-voting shares (participation certificates) to its German parent company and to three German individual investors in an aggregate amount of CHF 1.82 million. “PPL AG” was later converted into a joint stock corporation and on that occasion the participation certificates were converted into Profit Participating Loans (PPL), with an annual interest rate of 7%. In 2015, the Swiss tax administration carried out a tax audit of “PPL AG” for the years 2010-2014 and issued an assessment claiming payment of CHF 94,000 in withholding taxes on constructive dividends. According to the tax administration “PPL AG” had paid excessive amounts of interest to its lenders under the PPLs, exceeding the safe harbour interest rates published by the Swiss tax administration for the years under review. According to the tax administration, the portion of the interest payments exceeding the published ... Read more
India vs Aegis Ltd, January 2018, High Court of Bombay, Case No 1248 of 2016

India vs Aegis Ltd, January 2018, High Court of Bombay, Case No 1248 of 2016

Aegis Ltd had advanced money to an assosiated enterprice (AE)  and recived preference shares carrying no dividend in return. The Indian Transfer Pricing Officer (TPO) held that the “acqusition of preference shares” were in fact equivalent to an interest free loan advanced by Aegis Ltd to the assosiated enterprice and accordingly re-characterised the transaction and issued an assessment for 2009 and 2010 where interest was charged on notional basis. Aegis Ltd disagreed with the assessment of the TPO and brought the case before the Tax Tribunal. The Tribunal did not accept the conclusions of the TPO. “The TPO cannot disregard the apparent transaction and substitute the same without any material of exceptional circumstances pointing out that the assessee had tried to conceal the real transaction or that the transaction in question was sham. The Tribunal observed that the TPO cannot question the commercial expediency of the assessee entered into such transaction.” The Indian Revenue Service then filed an appeal to the High ... Read more
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 ... Read more
Engie graph

European Commission vs Luxembourg and Engie, June 2018, EU State Aid Decision by the EU Commission

Engie (former GDF Suez) is a French electric utility company. Engie Treasury Management S.à.r.l., a treasury company, and Engie LNG Supply, S.A, a liquefied natural gas trading company, are both part of the Engie group. In November 2017, Total has signed an agreement with Engie to acquire its LNG business, including Engie LNG Supply. The European Commission has found that Luxembourg allowed two Engie group companies to avoid paying taxes on almost all their profits for about a decade. This is illegal under EU State aid rules because it gives Engie an undue advantage. Luxembourg must now recover about €120 million in unpaid tax. Commissioner Margrethe Vestager, in charge of competition policy, said “Luxembourg gave illegal tax benefits to Engie. Its tax rulings have endorsed two complex financing structures put in place by Engie that treat the same transaction in an inconsistent way, both as debt and as equity. This artificially reduced the company’s tax burden. As a result, Engie paid ... Read more
US vs. Hewlett Packard, November 2017, Court of Appeals, Case No 14-73047

US vs. Hewlett Packard, November 2017, Court of Appeals, Case No 14-73047

This issue in this case is qualification of an investment as debt or equity. HP bought preferred stock in Foppingadreef Investments, a Dutch company. Foppingadreef Investments bought contingent interest notes, from which FOP’s preferred stock received dividends that HP claimed as foreign tax credits. HP claimed millions in foreign tax credits between 1997 and 2003, then exercised its option to sell its preferred shares for a capital loss of more than $16 million. The IRS characterized the transaction as debt, and denied the tax credits claimed by Hewlett Packard. First the Tax Court and later the Court of Appeal agreed with the tax authorities. The eleven factors considered by the Court when qualifying an investment as debt/equity the names given to the certificates evidencing the indebtedness; the presence or absence of a maturity date; the source of the payments; the right to enforce the payment of principal and interest; participation and management; a status equal to or inferior to that of ... Read more
September 2017: Transfer Pricing Risk Assessment in the Mining Industry

September 2017: Transfer Pricing Risk Assessment in the Mining Industry

The African Tax Administration Forum (ATAF) and the German Federal Ministry for Economic Cooperation and Development (BMZ), through the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH, have developed this toolkit for African tax authorities seeking to assess transfer pricing risk in the mining industry. The purpose is to strengthen authorities’ capacity to determine whether they should audit particular high-risk “related party transactions.” The toolkit employs a specific risk review approach, which focuses on particular transfer pricing issues that present a high risk to revenue (as distinct from a comprehensive risk review, which tax authorities use when they cannot detect where transfer  pricing issues are likely to arise). A loss of even 1 percent of the value of these transactions is likely to be significant for developing country revenues. These issues are also very prevalent: many African tax authorities report corporate services, including procurement and management, as common causes of tax loss. The four issues of focus are: 1. Marketing arrangements ... Read more
July 2017: ATO guidance on related party financing arrangements

July 2017: ATO guidance on related party financing arrangements

The Practical Compliance Guideline (Guideline) from the ATO outlines the compliance approach to the taxation outcomes associated with a ‘financing arrangement’, as defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997), or a related transaction or contract, entered into with a cross border related party. Such an arrangement, transaction or contract is referred to in this Guideline as a ‘related party financing arrangement’. This Guideline does not cover financing arrangements characterised as equity in accordance with Division 974 of the ITAA 1997. The framework in these Guideline and the accompanying schedules are used to assess risk and tailor engagement according to the features of the related party financing arrangement, the profile of the parties to the related party financing arrangement and the choices and behaviours of the group. The tax risk associated with the related party financing arrangement is assessed having regard to a combination of quantitative and qualitative indicators. If the related party financing arrangement ... Read more
European Commission has opened investigation into Luxembourg's tax treatment of the GDF Suez group (now Engie), September 2016

European Commission has opened investigation into Luxembourg’s tax treatment of the GDF Suez group (now Engie), September 2016

The European Commission has opened an in-depth investigation into Luxembourg’s tax treatment of the GDF Suez group (now Engie). The Commission has concerns that several tax rulings issued by Luxembourg may have given GDF Suez an unfair advantage over other companies, in breach of EU state aid rules. The Commission will assess in particular whether Luxembourg tax authorities selectively derogated from provisions of national tax law in tax rulings issued to GDF Suez. They appear to treat the same financial transaction between companies of GDF Suez in an inconsistent way, both as debt and as equity. The Commission considers at this stage that the treatment endorsed in the tax rulings resulted in tax benefits in favour of GDF Suez, which are not available to other companies subject to the same national taxation rules in Luxembourg. As from September 2008, Luxembourg issued several tax rulings concerning the tax treatment of two similar financial transactions between four companies of the GDF Suez ... Read more