Is there a history in your jurisdiction of financing structures being challenged by tax authorities, and if so, can you give examples.
Lending & Secured Finance
There are no relevant examples of financing structures being challenged by tax authorities in Croatia.
No, there is no history of financing structures being challenged by tax authorities.
Certain branch structures with double interest deduction possibilities have been successfully challenged by the tax authorities. Also, debt push-down structures where debt is being pushed down post-acquisition should be carefully examined prior to execution.
If Germany has the right to tax interest income (e.g. in case of profit-participating interest paid to foreign lenders) it cannot be ruled out that the German tax authorities will try to challenge financing structures that, for example, are designed to generate “white income” or a “double-dip” and are based on qualification conflicts or questionable beneficial ownership situations.
The following two financing structures were challenged by the Spanish tax authorities:
• Profit participating loan:
Until 2013, interest from profit participating loans were deductible for tax purposes. Nevertheless, the Spanish Supreme Court issued on 27 September 2013 a decision which denies the deductibility of such interest payments, since they are deemed as equity payments and the loan was granted by related parties.
In order to regulate this issue more clearly, the new corporate income tax act, in force since 2015, establishes expressly the non-deductibility of interest accrued as a consequence of a profit participating loan entered into between companies which form part of the same corporate group.
• Brazilian interest payments on net equity (juros sobre o capital própio):
This special investment instrument is used by the Brazilian companies in order to distribute profit to their shareholders. Such payments are deductible for tax purposes, although they are deemed as dividends according to Brazilian corporate and accounting regulations.
The above-mentioned instrument has been widely used by international investors in Spain. In this regard, the administrative tax court (Tribunal Económico-Administrativo Central) in a decision issued on 13 April 2011, confirmed the participation exemption was not applicable to this case at hand, the interest paid on equity by Brazilian subsidiaries to their Spanish shareholders should be treated as interest by the latter.
Nevertheless, on 16 March 2016, the Spanish Supreme Court issued a decision stating that the interest payments on net equity received by Spanish companies were assimilated to dividend distributions. Therefore, they were eligible to apply the participation exemption.
It is not uncommon for financing arrangements to be challenged by local tax authorities in the Philippines. Such challenges have included related company advances and withholding issues on tax interest income. These challenges which commonly arise from examinations conducted in the course of a BIR tax audit come in the form of tax assessments.
Interest Income. In a case decided by the Court of Tax Appeals (CTA), a company extended advances to its affiliates without charging interest. The BIR challenged the arrangement and applying the principle of arms’ length pricing, imputed interest on the advances using the BSP's schedule of prevailing interest rates and assessed income tax on the imputed interest. The CTA affirmed the BIR’s assessment for interest income.
Timing of Withholding. In another case, the BIR assessed a company deficiency final withholding tax on interest in year 2000 for a loan agreement it executed with a lender on 5 January 2000 where the borrower undertakes to repay the loan in semi-annual installments commencing on 1 June 2002. The loan agreement provides that interest shall accrue from the date of the loan but fails to state the period for payment of interest. The assessment was eventually cancelled as the court ruled that, since the borrower’s liability for interest payment became due and demandable only on 1 June 2002, the BIR may not assess deficiency final withholding tax on income in 2000. However, this rule has been overturned by subsequent regulations issued by the BIR providing that the withholding of final tax commences "at the time an income payment is paid or payable, or the income payment is accrued or recorded as an expense or asset, whichever is applicable in the payor’s book, whichever comes first."
We are not aware of financing structures being challenged by tax authorities. However, limitations regarding the right to deduct interest expenses on debt owed to affiliated companies was introduced some years ago which has given rise to tax challenges by the tax authorities.
There is not a landmark tax investigation or penalty imposed on financing structures. However, tax authorities impose penalties on the banking sector from time to time. In 2017, the Ministry, imposed total of TRY 30 million on two major Turkish banks for breaching RUSF obligations. However, those tax penalties were cancelled by tax courts.
U.S. tax authorities have broad powers to audit non-U.S. taxpayers and assess tax liabilities against them. Having said that, outside of the related-party arrangements or highly structured transactions, assessments against foreign persons related to the acquisition of U.S. loans are relatively rare, although not unheard of. These tend to occur in circumstances where the terms of the loan significantly depart from the standard, or the foreign person has not observed normal practices regarding the way in which it acquires U.S. loans.
Some U.S. state and local tax jurisdictions, New York City in particular, have been considering whether certain non-bank lending structures constitute a business in that jurisdiction under circumstances that may not constitute a U.S. trade or business for federal income tax purposes.
Although not challenged per se, certain financing structures are to be closely looked at from a Swiss tax perspective, such as:
1. a financing granted to, or bonds issued by, a non-Swiss borrower and secured/guaranteed by its Swiss subsidiary (up-stream) or Swiss sister-company (cross-stream), with proceeds of the financing/bond issuance being made available to such Swiss entity or otherwise used in Switzerland may be considered to be a circumvention of the Swiss Non-Bank Rules and trigger Swiss withholding tax on interest payments (see question 15 above);
2. the issuing of bonds by a non-Swiss borrower and secured/guaranteed by its Swiss parent (down-stream), with bond proceeds being on-lent to Swiss group companies in excess of the permissible amount according to the equity method and the offsetting method would trigger Swiss withholding tax on interest payments (see question 15 above); and
3. intra-group financing may be subject to restrictions (i) on the maximum interest rates (so-called safe harbour rates) chargeable on loans granted to or by Swiss group entities and (ii) in light of thin capitalisation rules, the breach of which could trigger Swiss withholding tax.
The UK tax authorities have not tended to challenge financing structures, as such, outside of a tax avoidance context. Rather, the UK has various specific rules which limit the availability of deductions for interest expense for UK corporation tax purposes, such as the corporate interest restriction rules, the anti-hybrid rules and transfer pricing. The nature and characteristics of a foreign lender and the terms of the loan may affect the availability of deductions for interest expense for UK tax purposes (see question 17 above).
Jersey is an offshore international finance centre which has been at the forefront of the global finance industry for over 50 years. Jersey is economically stable, politically independent and tax neutral with a sophisticated legal, regulatory and technological infrastructure. It has recently (12 March 2019) been formally confirmed by the EU Finance Ministers (ECOFIN) as a cooperative jurisdiction following an extended period of screening.
Jersey has evolved into one of the best regulated international finance centres and has been acknowledged by independent assessments from some of the world’s leading bodies, including the World Bank and IMF, as well as scoring top marks from the OECD on tax transparency. Jersey was also subject to a Mutual Evaluation by MONEYVAL in 2016 and found to be ‘compliant’ or ‘largely compliant’, with 48 out of 49 of the FATF Recommendations, the highest score amongst all states assessed.
We are not aware.
There is a general anti-avoidance rule in Austrian law, which is used by tax authorities in order to challenge all kinds of structures designed for tax avoidance purposes.
Although no specific financing structure has been historically challenged, tax authorities and tribunals are prone to bring a lack-of-business-purpose argument to challenge structures implemented by taxpayers. Financing structures that have been subject to recent close scrutiny by Mexican tax authorities are those involving financial multipurpose entities (sociedades financieras de objeto múltiple or SOFOM) to reduce withholding tax rates when interests are paid abroad.
Bosnia & Herzegovina
To our knowledge, the cases challenged by tax authorities were mainly due to transfer pricing issues, in case when lender is related party to the borrower.