Tag: Equity or Debt/Loan

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 ... Continue to full case
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 ... Continue to full case
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
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 ... Continue to full case
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 ... Continue to full case
Italy vs Edison s.p.a. April 2016, Supreme Court no 7493

Italy vs Edison s.p.a. April 2016, Supreme Court no 7493

The Italien company had qualified a funding arrangement as a non-interest-bearing contribution for future capital increase, hence part of Net Equity. The Italian Supreme Court found that intra-group financing agreements are subject to transfer pricing legislation and that non-interest-bearing financing is generally not consistent with the arm’s-length principle ... Continue to full case
Spain vs. INC Bank, July 2015, Spanish National High Court

Spain vs. INC Bank, July 2015, Spanish National High Court

In the INC bank case the tax administration recharacterised part of the interest-bearing debt of the bank branch as “free” capital, with the consequent reduction of the tax-deductible expenses for debt interest. The adjustment made in relation to year 2002 and 2003 was based on the Commentaries on the OECD Model Convention approved in 2008 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 INC Bank. Click here for translation Spain vs INC Bank 100715 Spanish National High Court ... Continue to full case
Germany vs Capital GmbH, June 2015, Bundesfinanzhof, Case No I R 29/14

Germany vs Capital GmbH, June 2015, Bundesfinanzhof, Case No I R 29/14

The German subsidiary of a Canadian group lent significant sums to its under-capitalised UK subsidiary. The debt proved irrecoverable and was written off in 2002 when the UK company ceased trading. At the time, such write-offs were permitted subject to adherence to the principle of dealing at arm’s length. In its determination of profits on October 31, 2002, the German GmbH made a partial write-off of the repayment claim against J Ltd. in the amount of 717.700 €. The tax authorities objected that the unsecured loans were not at arm’s length. The tax authorities subjected the write-down of the claims from the loan, which the authorities considered to be equity-replacing, to the deduction prohibition of the Corporation Tax Act. The authorities further argued that if this was not the case, then, due to the lack of loan collateral, there would be a profit adjustment pursuant to § 1 of the Foreign Taxation Act. Irrespective of this, the unsecured loans had ... Continue to full case
Finland vs. Corp, July 2014, Supreme Administrative Court HFD 2014:119

Finland vs. Corp, July 2014, Supreme Administrative Court HFD 2014:119

A Ab had in 2009 from its majority shareholder B, based in Luxembourg, received a EUR 15 million inter-company loan. A Ab had in 2009 deducted 1,337,500 euros in interest on the loan. The loan had been granted on the basis that the banks financing A’s operations had demanded that the company acquire additional financing, which in the payment scheme would be a subordinated claim in relation to bank loans, and by its nature a so-called IFRS hybrid, which the IFRS financial statements were treated as equity. The loan was guaranteed. The fixed annual interest rate on the loan was 30 percent. The loan could be paid only on demand by A Ab. The Finnish tax authorities argued that the legal form of the inter-company loan agreed between related parties should be disregarded, and the loan reclassified as equity. Interest on the loan would therefore not be deductible for A Ab. According to the Supreme Administrative Court interest on the loan was tax deductible. The Supreme Administrative ... Continue to full case
Netherlands vs Corp, 2011, Dutch Supreme Court, Case nr. 08/05323 (10/05161, 10/04588)

Netherlands vs Corp, 2011, Dutch Supreme Court, Case nr. 08/05323 (10/05161, 10/04588)

In this case, the Dutch Supreme Court further outlined the Dutch perspective on the distinction between debt and equity in its already infamous judgments on the so-called extreme default risk loan (EDR loan) L sold a securities portfolio to B for EUR 5.3 million against B’s acknowledgement of debt to L for the same amount. The debt was then converted into a 10 year loan with  an interest rate of 5% and a pledge on the portfolio. Both L and B were then moved to the Netherlands Antilles. Later on L deducted a EUR 1.2 mill. loss on the loan to B due to a decrease in value of the securities portfolio. The Dutch Tax Authorities disallowed the deduction based on the argument, that the loan was not a business motivated loan. The Dutch Supreme Court ruled that in principle civil law arrangement is decisive in regard to taxation. However there are exceptions in which a civil law loan arrangement can be disregarded ... Continue to full case
France vs. Banca di Roma, Dec. 2010. CAA no 08PA05096

France vs. Banca di Roma, Dec. 2010. CAA no 08PA05096

In the Banca di Roma case, the Court of Appeals reiterated that the FTA is not allowed to decide whether a business is to be financed through debt or equity. The terms of Article 57 of the French Tax Code (FTC) do not have the purpose, nor the effect, of allowing the administration to assess the ‘normal’ nature of the choice made by a foreign company to finance through a loan, rather than equity, the activity of an owned or controlled French company, and to deduce, if the need arises, tax consequences (cf. Article 212 of the FTC – thin capitalisation). Click here for translation France vs Banca di Roma 16_12_2010_CAA 08PA05096 ... Continue to full case
Norway vs. Telecomputing, June 2010, Supreme Court case nr. HR-2010-1072-A

Norway vs. Telecomputing, June 2010, Supreme Court case nr. HR-2010-1072-A

This case was about the qualification of capital transfers to a US subsidiary – whether the capital should be qualified as a loan (as done by the company) or as a equity contribution (as agrued by the tax administration). The Supreme Court concluded that the capital transfers to the subsidiary as a whole should be classified as loans. The form chosen by the company (loan) had an independent commercial rationale and Section 13-1 of the Tax Code did not allow for reclassification of the capital transfer The Supreme Court ruled in favor of Telecomputing AS. Click here for translation Norway rt-2010-s-790-Telecomputing-rentefritt-lån ... Continue to full case
Norway vs. Statoil Angola, 2007, Supreme Court, No. RT 2007-1025

Norway vs. Statoil Angola, 2007, Supreme Court, No. RT 2007-1025

Two inter-company loans were provided to Statoil Angola by it’s Norwegian parent company, Statoil Norway ASA, and a Belgian sister company, Statoil Belgium (SCC). Statoil Angola only had the financial capacity to borrow an amount equal to the loan from Statoil Belgium. Hence, no interest was paid on the loan from Statoil Norway. The tax authorities divided Statoil Angola’s borrowing capacity between the two loans and imputed interest payments on part of the loan from Statoil Norway in an assessment for the years 2000 and 2001. The Supreme Court, in a split 3/2 decision, found that Statoil’s allocation of the full borrowing capacity of Statoil Angola to the loan from the sister company in Belgium was based on commercial reasoning and in accordance with the arm’s length principle. The Court majority argued that Statoil Norway – unlike Statoil Belgium – had a 100% ownership of Statoil Angola, and the lack of interest income would therefore be compensated by an increased ... Continue to full case
US vs Laidlaw Transportation, Inc., June 1998, US Tax Court, Case No 75 T.C.M. 2598 (1998)

US vs Laidlaw Transportation, Inc., June 1998, US Tax Court, Case No 75 T.C.M. 2598 (1998)

Conclusion of the Tax Court: “The substance of the transactions is revealed in the lack of arm’s-length dealing between LIIBV and petitioners, the circular flow of funds, and the conduct of the parties by changing the terms of the agreements when needed to avoid deadlines. The Laidlaw entities’ core management group designed and implemented this elaborate system to create the appearance that petitioners were paying interest, while in substance they were not. We conclude that, for Federal income tax purposes, the advances from LIIBV to petitioners for which petitioners claim to have paid the interest at issue are equity and not debt. Thus, petitioners may not deduct the interest at issue for 1986, 1987, and 1988.” NOTE: 13 October 2016 section 385 of the Internal Revenue Code was issued containing regulations for re-characterisation of Debt/Equity for US Inbound Multinationals. Further, US documentation rules in Treasury Regulation § 1.385-2 facilitate analysis of related-party debt instruments by establishing documentation and maintenance requirements, operating ... Continue to full case
US vs Estate of Mixon, July 1972, United States Court of Appeals, Fifth Circuit, 464 F.2d 394

US vs Estate of Mixon, July 1972, United States Court of Appeals, Fifth Circuit, 464 F.2d 394

In this case the court had to decide whether advances made by a shareholder to a corporation constituted loans or capital contributions. For that purpose a list of 13 factors was established by the court. (1) the names given to the certificates evidencing the indebtedness; (2) The presence or absence of a fixed maturity date; (3) The source of payments; (4) The right to enforce payment of principal and interest; (5) participation in management flowing as a result; (6) the status of the contribution in relation to regular corporate creditors; (7) the intent of the parties; (8) “thin” or adequate capitalization; (9) identity of interest between creditor and stockholder; (10) source of interest payments; (11) the ability of the corporation to obtain loans from outside lending institutions; (12) the extent to which the advance was used to acquire capital assets; and (13) the failure of the debtor to repay on the due date or to seek a postponement. NOTE: 13 October ... Continue to full case