Tag: Hidden distribution of profits

Luxembourg vs Lender Societe, July 2019, Cour Administratif, Case No 42083

Luxembourg vs Lender Societe, July 2019, Cour Administratif, Case No 42083

Lender Societe had acquired real estate in 2008 for EUR 26 million. The acquisition had been financed by a bank loan of EUR 20 million and a shareholder loan of EUR 6 million. The interest rate on the shareholder loan was set at 12%. The Tax Authorities found that the “excessive” part of the interest paid on the shareholder loan was as a hidden distribution of profit subject to dividend withholding tax. The hidden profit distribution was calculated as the difference between an arm’s length interest rate set at approximately 3% and the interest rate according to the loan agreement of 12%. Lender Societe disagreed with the assessment and brought the case before the Tribunal Administratif. The Tribunal agreed with the Tax Authorities and qualified the excessive interest payments as a hidden profit distribution subject to a 15% dividend withholding tax. The decision of the Tax Tribunal is affirmed by the Cour Administratif. Click here for translation Luxembourg vs S.A 17 July 2019 Case No 42043C ... Continue to full case
Luxembourg vs Lux SARL, December 2018, Administrative Court, Case No 40455

Luxembourg vs Lux SARL, December 2018, Administrative Court, Case No 40455

In a case on hidden distribution of profits, the Luxembourg tax authorities stated the following on the issue of valuation methods for intangible assets (a patent): “…the evaluation of an intellectual property right is a rather complex subject; that evaluation reports from “independent” experts in this field are often rather subjective; whereas, therefore, reference should be made to a neutral and recognized body for the evaluation of patents, in this case WIPO, which proposes three different methods of valuation, including (a) the cost method, (b) the revenue method, as well as (c) the market method; that the first method of evaluation is to be dismissed from the outset in view of the absence of research and development expenses reported by the Claimant; that the second method is based on the future revenues of the patent invention; therefore, there must be a large enough amount of data to predict future revenues over the life of the patent, which is not the case here, as the tax dispute ... Continue to full case
Luxembourg vs Lender Societe, November 2018, Tribunal Administratif, Case No 40348

Luxembourg vs Lender Societe, November 2018, Tribunal Administratif, Case No 40348

Lender Societe had acquired real estate in 2008 for EUR 26 million. The acquisition had been financed by a bank loan of EUR 20 million and a shareholder loan of EUR 6 million. The interest rate on the shareholder loan was set at 12%. The Tax Authorities found that the “excessive” part of the interest paid on the shareholder loan was as a hidden distribution of profit subject to dividend withholding tax. The hidden profit distribution was calculated as the difference between an arm’s length interest rate set at approximately 3% and the interest rate according to the loan agreement of 12%. Lender Societe disagreed with the assessment and brought the case before the Tribunal Administratif. The Tribunal agreed with the Tax Authorities and qualified the excessive interest payments as a hidden profit distribution subject to a 15% dividend withholding tax. Click here for translation Luxembourg vs Societe 071018 tribunal administratif du Luxembourg No 40348 ... Continue to full case
Germany vs Cyprus Ltd, June 2018, BFH judgment Case No IR 94/15

Germany vs Cyprus Ltd, June 2018, BFH judgment Case No IR 94/15

The Bundesfinanzhof confirmed prior case law according to which the provisions on hidden deposits and hidden profit distributions must be observed in the context of the additional taxation. On the question of economic activity of the controlled foreign company, the Bundesfinanzhof refers to the ruling of the European Court of Justice concerning Cadbury-Schweppes from 2006. According to paragraphs §§ 7 to 14 in the Außensteuergesetz (AStG) profits from controlled foreign companies without business activity can be taxed in Germany. In the case at hand the subsidiary was located in a rented office in Cyprus and employed a resident managing director. Her job was to handle correspondence with clients, to carry out and supervise payment transactions, manage business records and keep records. She was also entrusted with obtaining book licenses to order these sub-licenses for the benefit of three of Russia’s and Ukraine’s affiliates, which distributed the books in the Russian-speaking market. The license income earned by subsidiary was taxed at ... Continue to full case
Germany vs A Investment GmbH, June 2017, Cologne Fiscal Court , Case no 10 K 771/16

Germany vs A Investment GmbH, June 2017, Cologne Fiscal Court , Case no 10 K 771/16

A Investment GmbH, acquired all shares of B in May 2012. To finance the acquisition, A Investment GmbH took up a bank loan with a interest rate of 4.78%, a vendor loan with an interest rate of 10% and a shareholder loan with an interest rate 8% from its parent company, Capital B.V. The 8 % interest rate on the shareholder loan was determined by A Investment GmbH by applying the CUP method based on external comparables. The German tax authority, found that the interest rate of 8 % did not comply with the arm’s length principle. An assessment was issued where the interest rate was set to 5% based on the interest rate on the bank loan (internal CUP). A Investment GmbH filed an appeal to Cologne Fiscal Court. The court ruled that the interest rate of the bank loan, 4.78%, was a reliable CUP for setting the arm’s length interest rate of the controlled loan. The vendor loan was ... Continue to full case
Luxembourg vs LuxCo TM, December 2015, Administrative Court, Case No 33611

Luxembourg vs LuxCo TM, December 2015, Administrative Court, Case No 33611

LuxCo TM sold trademarks to a newly established sister company. The price had been set at €975,000. The tax authorities issued an assessment where the price had been set at €6,475,000 and the difference was considered to be hidden profit distribution. The Administrative court ruled in favor of the tax authorities. LuxCo TM’s valuation had been based on wrong facts and assumptions. Click here for translation Lux vs Luxco 10 dec 2015 33611 ... Continue to full case
Switzerland vs Corp, Oct. 2014, Federal Supreme Court, Case No. 4A_138-2014

Switzerland vs Corp, Oct. 2014, Federal Supreme Court, Case No. 4A_138-2014

Decision on the criteria for the arm’s length test of interest rates on inter-company loans. This case i about intercompany loans created by zero balancing cash pooling and the funding of group companies by a group finance company. The Swiss Federal Supreme Court states – If the terms of inter-company loans are not conforming to market conditions, then the payment qualifies as a distribution and a special reserve must be made in the balance sheet of the lender. The Court also states – It is questionable from the outset whether a participation in the cash pool, by which the participant disposes of its liquidity, can pass the market conditions test at all. Click here for translation Swiss case law 4A_138-2014 ... Continue to full case
Switzerland vs Hotel X. SA, Nov. 2013, Courts of Switzerland, Case No. 2C_291 / 2013 / 2C_292 / 2013

Switzerland vs Hotel X. SA, Nov. 2013, Courts of Switzerland, Case No. 2C_291 / 2013 / 2C_292 / 2013

A loan was granted from a swiss company to its shareholder. The interest rate was fixed at 2,5%. This was found to be a hidden distribution of profit to the shareholder, cf Art. 58 al. 1 letter. b LIFD. Click here for english translation Hotel X vs switzerland ... Continue to full case
Switzerland vs. X, Oct. 2013, Federal Supreme Court, Case No. 2C_644-2013

Switzerland vs. X, Oct. 2013, Federal Supreme Court, Case No. 2C_644-2013

X was the principal shareholder and Chairman in the Insurance Agency, Y AG. In 2003, the company went bankrupt, with the bankruptcy proceedings suspended for lack of assets and the company was removed from the commercial register in September 2003. On 12 March 2007, the tax administration initiated a subsequent taxation proceedings against X concerning monetary benefits which it was supposed to have received from Y AG in the years 1997 to 2000. On 2 May 2012, the tax administration imposed an additional tax in the amount of CHF 39’056.20 including default interest. The appeal against this decision was rejected by the Tax Appeals Commission. Before the Federal Supreme Court, X appealed the decision. Excerp from the Federal Supreme Court ruling: “3.1 According to Art. 20 para. 1 lit.c DBG Income from movable assets, in particular dividends, profit shares, liquidation surpluses and non-cash benefits arising from participations of all kinds. In the relevant economic view, this includes all payments, transfers, ... Continue to full case
Germany vs. Corp. December 2012, Federal Tax Court 11.10.2012, I R 75/11

Germany vs. Corp. December 2012, Federal Tax Court 11.10.2012, I R 75/11

A GmbH agreed at year end to accept management charges from its Dutch parent for services performed during the year. The legal question was the relationship between arm’s-length principle as included in double tax treaties and income correction norms in German tax law. The court rejected a tax office assessment attempt on the basis of a hidden distribution of profits because of a delay in agreeing management charges in writing, saying that the double tax treaty related party provision bases the arm’s length standard on amount, rather than on the reason for, or documentation, of a transaction. Click here for translation Germany-vs-Corp-October-2012-BUNDESFINANZHOF-Urteil-IR-75-11- ... Continue to full case
Switzerland vs. Corp, Juli 2012, Federal Supreme Court, Case No. 2C_834-2011, 2C_836-2011

Switzerland vs. Corp, Juli 2012, Federal Supreme Court, Case No. 2C_834-2011, 2C_836-2011

In this ruling, the Swiss Federal Supreme Court comments on the application of the arm’s length principel and the burden of proff in Switzerland. “Services, which have their legal basis in the investment relationship, are to be offset against the taxable income of the company to the extent that they would otherwise not be granted to a third party under the same circumstances or not to the same extent and would not constitute a capital repayment. This rule of the so-called third-party comparison (or the principle of “dealing at arm’s length”) therefore requires that even legal transactions with equity holders or between Group companies be conducted on the same terms as would be agreed with external third parties on competitive and market conditions.” “Swiss Law – with the exception of individual provisions – does not have any actual group law and treats each company as a legally independent entity with its own bodies which have to transact the business in ... Continue to full case
Turkey vs Lender, April 2012, Danıştay Üçüncü Dairesi, E. 2011/5165, K. 2012/1247, UYAP, 12.04.2012

Turkey vs Lender, April 2012, Danıştay Üçüncü Dairesi, E. 2011/5165, K. 2012/1247, UYAP, 12.04.2012

A Turkish company located in a tax free zone had obtained interest income based on the interest rate applied to foreign currency loans, although the company had lent money to its partner in Turkish Lira. Normally interest income is considered taxable, but within the tax free zone, income from listed activities is exempt. Click here for translation Turkey Case e-2011-5165-k-2012-1247-t-12-4-2012 ... Continue to full case
Turkey vs Pharmaceutical Industry and Trade Corporation, December 2011, Danıştay Üçüncü Dairesi, E. 2009/2352, K. 2011/7637, UYAP, 20.12.2011.

Turkey vs Pharmaceutical Industry and Trade Corporation, December 2011, Danıştay Üçüncü Dairesi, E. 2009/2352, K. 2011/7637, UYAP, 20.12.2011.

A Turkeys Pharma Company carried out drug production, import and sales operations, and had purchased different active ingredients from foreign group companies. Following an audit the tax office found that the prices paid by the Pharma Company for six ingredients had been above the market price resulting in a hidden distribution of profits. A price study was performed for similar active ingredients suggesting price deviations ranging from 167 – 975 % Table 2: Price deviation from market price Theophylline 167.26% ibuprofen 478.34% Fluoxetine 975.15% Hyoscine-N-Butilbrüm 150.13% Povidone Iodine 176.83% metamizolesodi 260.05% An assessment was issued where the cost of the ingredients – and thus taxable income of the Pharma company – was adjusted based on the price paid for similar active ingredients between unrelated parties. The Pharma Company disagreed with the assessment and brought the case before the tax court. The Tax Court issued a decision in favor of the Pharma company. In a study from the Turkish Pharmaceutical Association ... Continue to full case
Turkey vs No-Banker Corp, November 2008, Administrative Court, E. 2006/3620 K. 2008/4633 T. 18.11.2008

Turkey vs No-Banker Corp, November 2008, Administrative Court, E. 2006/3620 K. 2008/4633 T. 18.11.2008

No-banker Corp had issued an interest free loan to a related party. The Turkish tax office held that the lack of interest on the loan constituted a hidden distribution of profits and issued an assessment where additional income tax and a tax deficiency penalty was added and also banking and insurance transactions tax (BITT). The company filed a lawsuit based on the assessment. The tax court examined the case and determined that the loan to the partner had been used in the business of the company. Therefore, it was decided that the interest-free loan did not constitute a hidden distribution of profit. Hence, the tax court decided in favor of No-Banker Corp. The tax office then filed an appeal with Administrative Court. In a majority vote decision the Administrative Court rejected the appeal of the tax office and the decision of the tax court was upheld. It was emphasized that No-Banker Corp was not involved in bank or insurance business ... Continue to full case
Turkey vs Headquarter Corp, September 2007, Danıştay Üçüncü Dairesi, E. 2007/89 K. 2007/2446, T. 20.09.2007

Turkey vs Headquarter Corp, September 2007, Danıştay Üçüncü Dairesi, E. 2007/89 K. 2007/2446, T. 20.09.2007

Headquarter Corp had transaction with it’s branch in the Turkish Mersin Free Zone. The branch imported the goods subject to the transaction from abroad for $ 2,298,137.79 and these goods were then transferred from the branch to the Headquarter Corps for US $ 3,214,135.00 without any special processing, production process or added value by the branch. The tax office issued an assessment where the price of the controlled transactions were adjusted based on the import price (internal CUP). Headquarter Corp brought the assessment to court. The tax court stated, that because the branch does not have a separate legal entity from the company, profits were not transferred out of the company as a result of the high-priced transaction. Therefor there was no hidden distribution of income. However, it was also concluded that the reason behind the sale of the goods sold to the Headquarter from the branch in the free zone of Mersin, at a price that was above market prices for ... Continue to full case
Germany vs Trademark GmbH, November 2006, FG München, Case No 6 K 578/06

Germany vs Trademark GmbH, November 2006, FG München, Case No 6 K 578/06

A German company on behalf of its Austrian Parent X-GmbH distributed articles and products manufactured by the Austrian X-KG. By a contract of 28 May 1992, X-GmbH granted the German company the right to use the trade mark ‘X’ registered in Austria; According to the agreement the German company paid a license fee for the right. As early as 1991, X-GmbH had also granted X-KG a corresponding right; By a contract dated 1 July 1992, X-KG pledged to the applicant exclusive distribution rights for the Federal Republic of Germany. In the meantime, the mark ‘X’ had been registered as a Community trade mark in the Internal Market. The tax authorities dealt with the payment of royalties to X-GmbH for the years in question as vGA (hidden profit distribution). Click here for translation K 578-06 ... Continue to full case
Germany vs Clothing Distribution Gmbh, October 2001, BFH Urt. 17.10.2001, IR 103/00

Germany vs Clothing Distribution Gmbh, October 2001, BFH Urt. 17.10.2001, IR 103/00

A German GmbH distributed clothing for its Italian parent. The German tax authorities issued a tax assessment based on hidden profit distribution from the German GmbH in favor of its Italien parent as a result of excessive purchase prices, which led to high and continuous losses in Germany.  The tax authorities determined the arm’s length price based on purchase prices, which the German GmbH had paid to external suppliers. However, these purchases accounted for only 5% of the turnover. The German Tax Court affirmed in substance a vGA (hidden profit distribution) as the tax authorities had provided no proff of deviation from arm’s length prices. If a hidden profit distribution is to be accepted, the profit shall be increased by the difference between the actually agreed price and the price agreed by independent contractual parties under similar circumstances – the arm’s length price. Where a range of arm’s length prices is produced, there are no legal basis for adjustment to the ... Continue to full case
Germany vs Corp, January 1973, Bundesfinanzhof, Case No BFH, 10.01.1973 - I R 119/70

Germany vs Corp, January 1973, Bundesfinanzhof, Case No BFH, 10.01.1973 – I R 119/70

A hidden distribution of profit presupposes that a corporation grants its shareholder a pecuniary advantage outside the distribution of profits under company law which it would not have granted to a non-shareholder — under otherwise identical circumstances — if the diligence of a prudent and conscientious manager had been applied. It should be noted that a director must be allowed a certain degree of commercial discretion. 1) As was stated in the judgment of the Senate in Case I R 21/68, a hidden profit distribution presupposes that a corporation grants its shareholder a pecuniary advantage outside the distribution of profits under company law which it would not have granted to a non-shareholder — under otherwise identical circumstances — if the diligence of a prudent and conscientious manager had been applied. This means that it is not the diligence of the managing director in the event of a dispute but the diligence of a prudent and conscientious manager that is the ... Continue to full case