17 January 2023 the South African Revenue Service (SARS) released an interpretation note (IN 127) titled “DETERMINATION OF THE TAXABLE INCOME OF CERTAIN PERSONS FROM INTERNATIONAL TRANSACTIONS: INTRA-GROUP LOANS” which provides guidance on how SARS will determine arm’s length pricing for intra-group loans. The Note also provides guidance on the consequences for a taxpayer if the amount of debt, the cost of debt or both are not arm’s length. According to the note an intra-group loan would be incorrectly priced if the amount of debt funding, the cost of the debt or both are excessive compared to what is arm’s length ... Read more

In the course of the income tax audit conducted on Hanácká, the tax authorities found that interest expenses had been in its calculation of taxable income, corresponding to a rate of 8.5%. The tax authorities determined the arm’s length interest rate to be 2.46% and an adjustment was issued amounting to the difference between the interest deducted (8,5%) and the interest calculated (2,46%). The adjustment was later upheld in court where the court agreed with the tax authority’s conclusion – Hanácká had not discharged the burden of proof under Article 92(3) of the Tax Code by failing to prove, in response to a request for the removal of doubts, that the interest in the two tax periods in question, amounting to CZK 6 040 000, which represented the difference between the interest on the 8,5 % bonds subscribed by persons associated with the applicant within the meaning of Article 23(3) of the Tax Code and the interest on the bonds ... Read more

HPI – CZ spol. s r.o. is a subsidiary in the Monier group which is active in the production, sales and services of roofing and insulation products. In June 2012 the Monier group replaced an existing cash pool arrangement with a new cash pool arrangement. The documents submitted show that on 1 April 2009 HPI concluded a cash pool agreement with Monier Group Services GmbH , which consisted in HPI sending the balance of its bank account once a week to the group’s cash pooling account – thus making those funds available to the other members of the group, who could use them to ‘cover’ the negative balances in their accounts. The companies that deposited funds into the cash pooling account received interest on these deposits at 1M PRIBOR + 3%; loans from the shared account bore interest at 1M PRIBOR + 3.75%. With effect from 1 June 2012, HPI concluded a new cash pooling agreement with a newly established ... Read more

HPI – CZ spol. s r.o. is a subsidiary in the Monier group. In June 2012 the group replaced an existing cash pool arrangement with a new cash pool arrangement. Following an audit of HPI the tax authorities issued an assessment of additional income for FY 2012 resulting from HPI’s participation in the new cash pool. According to the tax authorities the interest rates applied to HPI’s deposits in the new cash pool (1M PRIBOR + 0.17%) had not been at arm’s length. The tax authorities determined the arm’s length interest rates to be the same rates that had been applied in the previously cash pool arrangement (1M PRIBOR + 3%) from 1 January 2012 to 31 May 2012. HPI filed an appeal and in January 2019 the Regional court set aside the assessment issued by the tax authorities. The Regional Court held that the tax authority’s view, which determined the arm’s length interest rate by taking it to be ... Read more

On 1 July 2013, HCL Maître Pierre issued a ten-year bond which were convertible into shares and bore interest at a rate of 12%, the accrued amount of which was capitalised annually until the date of redemption or conversion, together with a non-conversion premium at a rate of 3%, if applicable. This loan was subscribed by its sole partner, (SAS) HGFI Saint-Martin. Following an tax audit of HCL Maître Pierre’s for the financial years ended 31 March 2012, 2013 and 2014, the tax authorities considered that the interest at the rate of 12% could only be deducted at a rate set at 2.82%. Judgement of the Supreme Court The Court dismissed the appeal of HCL Maître Pierre and upheld the assessment issued by the tax authorities. Excerpts “3. It follows from the combination of these provisions that interest relating to sums left or made available to a company by a company which directly or through an intermediary holds the majority ... Read more

SAP AG (now SAP SE) is a German multinational software corporation that develops enterprise software to manage business operations and customer relations. The company is especially known for its ERP software. SAP France, a 98% subsidiary of SA SAP France Holding, itself wholly owned by the German group, had deposited funds under a Cash Management Agreement as sight deposits carrying an interest of 0%. Following an audit for the financial years 2012 and 2013, two assessment proposals were issued in December 2015 and November 2016, relating in particular to the 0% interest rate charged on the cash deposits. The tax authorities had added interest to SA SAP France’s taxable income calculated by reference to the rate of remuneration on sight deposits. SAP France contested the adjustments and furthermore requested the benefit of the reduced rate of corporation tax on income from industrial property, pursuant to Article 39 of the French General Tax Code, with regard to the royalties from the ... Read more

Assume that A and B are commonly controlled taxpayers and that the applicable Federal rate is 10 percent, compounded semiannually. On June 30, 1986, A sells property to B and receives in exchange B’s purchase-money note in the amount of $2,000,000. The stated interest rate on the note is 9%, compounded semiannually, and the stated redemption price at maturity on the note is $2,000,000. Assume that the other applicable Code section to this transaction is section 1274. As provided in section 1274A(a) and (b), the discount rate for purposes of section 1274 will be nine percent, compounded semiannually, because the stated principal amount of B’s note does not exceed $2,800,000. Section 1274 does not apply to this transaction because there is adequate stated interest on the debt instrument using a discount rate equal to 9%, compounded semiannually, and the stated redemption price at maturity does not exceed the stated principal amount. Under paragraph (a)(3)(iii) of this section, the district director may apply ... Read more

X and Y are commonly controlled taxpayers. At a time when the applicable Federal rate is 12 percent, compounded semiannually, X sells property to Y in exchange for a note with a stated rate of interest of 18 percent, compounded semiannually. Assume that the other applicable Code section to the transaction is section 483. Section 483 does not apply to this transaction because, under section 483(d), there is no total unstated interest under the contract using the test rate of interest equal to 100 percent of the applicable Federal rate. Under paragraph (a)(3)(iii) of this section, section 482 and paragraph (a) of this section may be applied by the district director to determine whether the rate of interest under the note is excessive, that is, to determine whether the 18 percent stated interest rate under the note exceeds an arm’s length rate of interest ... Read more

The facts are the same as in Example 2 except that the amount lent by Z to B is $9,000, and that amount is the aggregate outstanding amount of loans between Z and B. Under the $10,000 de minimis exception of section 7872(c)(3), no adjustment for interest will be made to this $9,000 loan under section 7872. Under paragraph (a)(3)(iii) of this section, the district director may apply section 482 and paragraph (a) of this section to this $9,000 loan to determine whether the rate of interest charged is less than an arm’s length rate of interest, and if so, to make appropriate allocations to reflect an arm’s length rate of interest ... Read more

B, an individual, is an employee of Z corporation, and is also the controlling shareholder of Z. Z makes a term loan of $15,000 to B at a rate of interest that is less than the applicable Federal rate. In this instance the other operative Code section is section 7872. Under section 7872(b), the difference between the amount loaned and the present value of all payments due under the loan using a discount rate equal to 100 percent of the applicable Federal rate is treated as an amount of cash transferred from the corporation to B and the loan is treated as having original issue discount equal to such amount. Under paragraph (a)(3)(iii) of this section, section 482 and paragraph (a) of this section may also be applied by the district director to determine if the rate of interest charged on this $15,000 loan (100 percent of the AFR, compounded semiannually, as adjusted by section 7872) is an arm’s length rate of interest. Because ... Read more

An individual, A, transfers $20,000 to a corporation controlled by A in exchange for the corporation’s note which bears adequate stated interest. The district director recharacterizes the transaction as a contribution to the capital of the corporation in exchange for preferred stock. Under paragraph (a)(3)(i) of this section, section 1.482-2(a) does not apply to the transaction because there is no bona fide indebtedness ... Read more

The principles of paragraph (a)(3) of this section may be illustrated by the following examples: ... Read more

If the stated rate of interest on the stated principal amount of a loan or advance between controlled entities is subject to adjustment under section 482 and is also subject to adjustment under any other section of the Internal Revenue Code (for example, section 467, 483, 1274 or 7872), section 482 and paragraph (a) of this section may be applied to such loan or advance in addition to such other Internal Revenue Code section. After the enactment of the Tax Reform Act of 1964, Pub. L. 98-369, and the enactment of Pub. L. 99-121, such other Internal Revenue Code sections include sections 467, 483, 1274 and 7872. The order in which the different provisions shall be applied is as follows – (i) First, the substance of the transaction shall be determined; for this purpose, all the relevant facts and circumstances shall be considered and any law or rule of law (assignment of income, step transaction, etc.) may apply. Only the rate of interest ... Read more

The safe haven interest rates prescribed in paragraph (a)(2)(iii)(B) of this section do not apply to any loan or advance the principal or interest of which is expressed in a currency other than U.S. dollars ... Read more

If the lender in a loan or advance transaction to which paragraph (a)(2) of this section applies is regularly engaged in the trade or business of making loans or advances to unrelated parties, the safe haven rates prescribed in paragraph (a)(2)(iii)(B) of this section shall not apply, and the arm’s length interest rate to be used shall be determined under the standards described in paragraph (a)(2)(i) of this section, including reference to the interest rates charged in such trade or business by the lender on loans or advances of a similar type made to unrelated parties at and about the time the loan or advance to which paragraph (a)(2) of this section applies was made ... Read more

For purposes of paragraph (a)(2)(iii)(B) of this section, the term applicable Federal rate means, in the case of a loan or advance to which this section applies and having a term of – (1) Not over 3 years, the Federal short-term rate; (2) Over 3 years but not over 9 years, the Federal mid-term rate; or (3) Over 9 years, the Federal long-term rate, as determined under section 1274(d) in effect on the date such loan or advance is made. In the case of any sale or exchange between controlled entities, the lower limit shall be the lowest of the applicable Federal rates in effect for any month in the 3-calendar- month period ending with the first calendar month in which there is a binding written contract in effect for such sale or exchange (lowest 3-month rate, as defined in section 1274(d)(2)). In the case of a demand loan or advance to which this section applies, the applicable Federal rate means the Federal short-term rate ... Read more

Except as otherwise provided in this paragraph (a)(2), in the case of a loan or advance between members of a group of controlled entities, an arm’s length rate of interest referred to in paragraph (a)(2)(i) of this section shall be for purposes of chapter 1 of the Internal Revenue Code – (1) The rate of interest actually charged if that rate is – (i) Not less than 100 percent of the applicable Federal rate (lower limit); and (ii) Not greater than 130 percent of the applicable Federal rate (upper limit); or (2) If either no interest is charged or if the rate of interest charged is less than the lower limit, then an arm’s length rate of interest shall be equal to the lower limit, compounded semiannually; or (3) If the rate of interest charged is greater than the upper limit, then an arm’s length rate of interest shall be equal to the upper limit, compounded semiannually, unless the taxpayer establishes a more appropriate compound rate of interest ... Read more

The safe haven rates prescribed in paragraph (a)(2)(iii)(B) of this section shall not apply, and the safe haven rates prescribed in § 1.482-2(a)(2)(iii) (26 CFR part 1 edition revised as of April 1, 1985), shall apply to – (i) Term loans or advances made before May 9, 1986; and (ii) Term loans or advances made before August 7, 1986, pursuant to a binding written contract entered into before May 9, 1986 ... Read more

Except as otherwise provided in paragraph (a)(2) of this section, paragraph (a)(2)(iii)(B) applies with respect to the rate of interest charged and to the amount of interest paid or accrued in any taxable year – (i) Under a term loan or advance between members of a group of controlled entities where (except as provided in paragraph (a)(2)(iii)(A)(2)(ii) of this section) the loan or advance is entered into after May 8, 1986; and (ii) After May 8, 1986 under a demand loan or advance between such controlled entities ... Read more

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Notwithstanding the other provisions of paragraph (a)(2) of this section, if the loan or advance represents the proceeds of a loan obtained by the lender at the situs of the borrower, the arm’s length rate for any taxable year shall be equal to the rate actually paid by the lender increased by an amount which reflects the costs or deductions incurred by the lender in borrowing such amounts and making such loans, unless the taxpayer establishes a more appropriate rate under the standards set forth in paragraph (a)(2)(i) of this section ... Read more

For purposes of section 482 and paragraph (a) of this section, an arm’s length rate of interest shall be a rate of interest which was charged, or would have been charged, at the time the indebtedness arose, in independent transactions with or between unrelated parties under similar circumstances. All relevant factors shall be considered, including the principal amount and duration of the loan, the security involved, the credit standing of the borrower, and the interest rate prevailing at the situs of the lender or creditor for comparable loans between unrelated parties ... Read more

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Notwithstanding the first-in, first-out payment application rule described in paragraph (a)(1)(iv)(A) of this section, the taxpayer may apply payments or credits against amounts owed in some other order on its books in accordance with an agreement or understanding of the related parties if the taxpayer can demonstrate that either it or others in its industry, as a regular trade practice, enter into such agreements or understandings in the case of similar balances with unrelated parties ... Read more

(i) Facts. X and Y are members of a group of controlled entities within the meaning of section 482. Assume that the balance of intercompany trade receivables owed by X to Y on June 1 is $100, and that all of the $100 balance represents amounts incurred by X to Y during the month of May. During the month of June X incurs an additional $200 of intercompany trade receivables to Y. Assume that on July 15, $60 is properly credited against X’s intercompany account to Y, and that $240 is properly credited against the intercompany account on August 31. Assume that under paragraph (a)(1)(iii)(B) of this section interest must be charged on X’s intercompany trade receivables to Y beginning with the first day of the third calendar month following the month the intercompany trade receivables arise, and that no alternative interest-free period applies. Thus, the interest-free period for intercompany trade receivables incurred during the month of May ends on July 31, and the ... Read more

Except as otherwise provided in this paragraph (a)(1)(iv), in determining the period of time for which an amount owed by one member of the group to another member is outstanding, payments or other credits to an account are considered to be applied against the earliest amount outstanding, that is, payments or credits are applied against amounts in a first-in, first-out (FIFO) order. Thus, tracing payments to individual intercompany trade receivables is generally not required in order to determine whether a particular intercompany trade receivable has been paid within the applicable interest-free period determined under paragraph (a)(1)(iii) of this section. The application of this paragraph (a)(1)(iv)(A) may be illustrated by the following example: ... Read more

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(i)Facts. X and Y use the calendar year as the taxable year and are members of the same group of controlled entities within the meaning of section 482. For Y’s 1988 calendar taxable year X and Y intend to use the interest-free period determined under this paragraph (a)(1)(iii)(E) for intercompany trade receivables attributable to X’s purchases of certain products from Y for resale by X in the ordinary course of business to unrelated persons in country Z. For its 1987 calendar taxable year all of X’s sales in country Z were of products within a single product group based upon a three-digit SIC code, were not manufactured, produced, or constructed (within the meaning of § 1.954-3(a)(4)) by X, and were sold in the ordinary course of X’s trade or business to unrelated persons located only in country Z. These sales and the month-end accounts receivable balances (for such sales and for such sales uncollected from prior months) are as follows: Month Sales Accounts receivable ... Read more

The interest-free period provided under paragraph (a)(1)(iii)(E) of this section may be illustrated by the following example: ... Read more

An average collection period for purposes of this paragraph (a)(1)(iii)(E) is determined as follows – (i) Step 1. Determine total sales (less returns and allowances) by the related purchaser in the product group to unrelated persons located in the same foreign country during the related purchaser’s last taxable year ending on or before the first day of the related seller’s taxable year in which the intercompany trade receivable arises. (ii) Step 2. Determine the related purchaser’s average month-end accounts receivable balance with respect to sales described in paragraph (a)(1)(iii)(E)(2)(i) of this section for the related purchaser’s last taxable year ending on or before the first day of the related seller’s taxable year in which the intercompany trade receivable arises. (iii) Step 3. Compute a receivables turnover rate by dividing the total sales amount described in paragraph (a)(1)(iii)(E)(2)(i) of this section by the average receivables balance described in paragraph (a)(1)(iii)(E)(2)(ii) of this section. (iv) Step 4. Divide the receivables turnover rate determined under paragraph (a)(1)(iii)(E)(2)(iii) of this section into 365, and round the result to the nearest whole number ... Read more

The interest-free period under this paragraph (a)(1)(iii)(E), however, shall in no event exceed 183 days. The related purchaser does not have to conduct business outside the United States in order to be eligible to use the interest-free period of this paragraph (a)(1)(iii)(E). The interest-free period under this paragraph (a)(1)(iii)(E) shall not apply to intercompany trade receivables attributable to property which is manufactured, produced, or constructed (within the meaning of § 1.954-3(a)(4)) by the related purchaser. For purposes of this paragraph (a)(1)(iii)(E) a product group includes all products within the same three-digit Standard Industrial Classification (SIC) Code (as prepared by the Statistical Policy Division of the Office of Management and Budget, Executive Office of the President.) ... Read more

If in the ordinary course of business one member of the group (related purchaser) purchases property from another member of the group (related seller) for resale to unrelated persons located in a particular foreign country, the related purchaser and the related seller may use as the interest-free period for the intercompany trade receivables arising during the related seller’s taxable year from the purchase of such property within the same product group an interest-free period equal the sum of – (i) The number of days in the related purchaser’s average collection period (as determined under paragraph (a)(1)(iii)(E)(2) of this section) for sales of property within the same product group sold in the ordinary course of business to unrelated persons located in the same foreign country; plus (ii) Ten (10) calendar days ... Read more

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If the creditor member or unrelated persons in the creditor member’s industry, as a regular trade practice, allow unrelated parties a longer period without charging interest than that described in paragraph (a)(1)(iii)(B) or (C) of this section (whichever is applicable) with respect to transactions which are similar to transactions that give rise to intercompany trade receivables, such longer interest-free period shall be allowed with respect to a comparable amount of intercompany trade receivables ... Read more

In the case of an intercompany trade receivable arising from a transaction in the ordinary course of a trade or business which is actively conducted outside the United States by the debtor member, interest is not required to be charged until the first day of the fourth calendar month following the month in which such intercompany trade receivable arises ... Read more

Interest is not required to be charged on an intercompany trade receivable until the first day of the third calendar month following the month in which the intercompany trade receivable arises ... Read more

This paragraph (a)(1)(iii) is effective for indebtedness arising after June 30, 1988. See § 1.482-2(a)(3) (26 CFR Part 1 edition revised as of April 1, 1988) for indebtedness arising before July 1, 1988. Except as otherwise provided in paragraphs (a)(1)(iii)(B) through (E) of this section, the period for which interest shall be charged with respect to a bona fide indebtedness between controlled entities begins on the day after the day the indebtedness arises and ends on the day the indebtedness is satisfied (whether by payment, offset, cancellation, or otherwise). Paragraphs (a)(1)(iii)(B) through (E) of this section provide certain alternative periods during which interest is not required to be charged on certain indebtedness. These exceptions apply only to indebtedness described in paragraph (a)(1)(ii)(A)(2) of this section (relating to indebtedness incurred in the ordinary course of business from sales, services, etc., between members of the group) and not evidenced by a written instrument requiring the payment of interest. Such amounts are hereinafter referred to as intercompany trade receivables. The period for which interest is not ... Read more

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This paragraph (a) does not apply to so much of an alleged indebtedness which is not in fact a bona fide indebtedness, even if the stated rate of interest thereon would be within the safe haven rates prescribed in paragraph (a)(2)(iii) of this section. For example, paragraph (a) of this section does not apply to payments with respect to all or a portion of such alleged indebtedness where in fact all or a portion of an alleged indebtedness is a contribution to the capital of a corporation or a distribution by a corporation with respect to its shares. Similarly, this paragraph (a) does not apply to payments with respect to an alleged purchase-money debt instrument given in consideration for an alleged sale of property between two controlled entities where in fact the transaction constitutes a lease of the property. Payments made with respect to alleged indebtedness (including alleged stated interest thereon) shall be treated according to their substance. See § 1.482-2(a)(3)(i) ... Read more

Paragraph (a) of this section applies only to determine the appropriateness of the rate of interest charged on the principal amount of a bona fide indebtedness between members of a group of controlled entities, including – (1) Loans or advances of money or other consideration (whether or not evidenced by a written instrument); and (2) Indebtedness arising in the ordinary course of business from sales, leases, or the rendition of services by or between members of the group, or any other similar extension of credit ... Read more

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Where one member of a group of controlled entities makes a loan or advance directly or indirectly to, or otherwise becomes a creditor of, another member of such group and either charges no interest, or charges interest at a rate which is not equal to an arm’s length rate of interest (as defined in paragraph (a)(2) of this section) with respect to such loan or advance, the district director may make appropriate allocations to reflect an arm’s length rate of interest for the use of such loan or advance ... Read more

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Meat Processing KtF recorded “advance receivables” from related companies in FY 2016. The tax authority found that the invoices received by Meat Processing KtF did not contain any reference to the advance payment, the creation and repayment of the receivables were not linked to the ordering or receipt of specific goods, the payment and repayment of the “advances” had no connection with the value and purchase date of the goods purchased, the value and opening balance of the advances in 2016 and the amount deducted from the receivables exceeded the purchases made from the partner in 2016. The advance receivables were paid by bank transfers. At the beginning of 2016, Meat Processing KtF reclassified an item as an advance payment which was still recorded as a loan in its accounts at the end of 2015. Meat Processing KtF recognised an impairment loss on the advances. According to Meat Processing KtF’s statement, the purpose of the payments was related to expenses ... Read more

The US group, Avery Dennison, manufactures and distributes labelling and packaging materials in more than 50 countries around the world. The remuneration of the distribution and marketing activities performed Avery Dennison Chile S.A. had been determined to be at arm’s length by application of a “full range” analysis based on the resale price minus method. Furthermore, surplus capital from the local company had been placed at the group’s financial centre in Luxembourg, Avery Management KGAA, at an interest rate of 0,79% (12-month Libor). According the tax authorities in Chile the remuneration of the local company had not been at arm’s length, and the interest rate paid by the related party in Luxembourg had been to low, and on that basis an assessment was issued. A complaint was filed by Avery Dennison with the Tax Tribunal and in March 2021 the Tribunal issued a decision in favour of Avery Dennison Chile S.A. “Hence, the Respondent [tax authorities] failed to prove its ... Read more

Since Arnoldo Mondadori Editore SpA’s articles of association prevented it from issuing bonds, financing of the company had instead been archived via an arrangement with its subsidiary in Luxembourg, Mondadori International S.A. To that end, the subsidiary issued a bond in the amount of EUR 350 million, which was subscribed for by US investors. The funds raised were transferred to Arnoldo Mondadori Editore SpA via an interest-bearing loan. The terms of the loan – duration, interest rate and amount – were the same as those of the bond issued by Mondadori International S.A. to the US investors. The Italian tax authority denied the withholding tax exemption in regards of the interest paid on the loan. According to the tax authorities Mondadori International S.A. had received no benefit from the transaction. The interest paid by Arnoldo Mondadori Editore SpA was immediately and fully transferred to the US investors. Mondadori International S.A. was by the authorities considered a mere conduit company, and ... Read more

“HQ Lender GmbH” is the sole shareholder and at the same time the controlling company of A GmbH. The latter held 99.98% of the shares in B N.V., a corporation with its seat in Belgium. The remaining shares in B N.V. were held by HQ Lender GmbH itself. A GmbH maintained a clearing account for B N.V., which bore interest at 6% p.a. from 1 January 2004. No collateralisation was agreed in regards of the loan. In the year in dispute (2005), the interest rate on a working capital loan granted to the plaintiff by a bank was 3.14%. On 30 September 2005, A GmbH and B N.V. concluded a contract on a debt waiver against a debtor warrant (… €). The amount corresponded to the worthless part of the claims against B N.V. from the clearing account in the opinion of the parties to the contract. Although it was deducted from the balance sheet of A GmbH to reduce ... Read more

At issue in the case of „RĪGAS DZIRNAVNIEKS” was if the interest rates charged on loans between related parties were at arm’s length. Judgement of the Court of Appeals The Court remanded the case to the Regional Court for a new hearing. Excerpts “As already indicated above, paragraphs 84, 91 and 92.3.1 and 92.3.2 of Regulation No 556 deal with the need for adjustments and mathematical calculations when significant differences in the comparable data and their material effects are established. The need for adjustments is also underlined in point 1.35 of the Guidelines. Guidance on how differences between comparables are to be addressed is provided, inter alia, in paragraph 3.57 of the Guidelines. It may be the case that, although every effort is made to exclude items with a lower level of comparability, the result is a series of figures for which it is considered that, given the process used to select the comparables and the information available on the ... Read more