Romania: Transfer pricing adjustment, interest rate on intercompany loans (CJEU judgment)
Romania: Transfer pricing adjustment
The Court of Justice of the European Union (CJEU) issued a judgment in a case concerning loans that did not include a rate of interest when made between a Romanian branch and its Italian parent company.
The Romanian tax authorities proposed a transfer pricing adjustment for the difference between the loans’ market price and the price actually applied by the parties. The CJEU, noting that taxpayers are afforded an opportunity to demonstrate that there were objective reasons for concluding a transaction at a price that did not reflect the market price, found that Romanian tax law did not go beyond what is necessary to reach a legitimate objective and that the EU freedom of establishment does not preclude this treatment in Romanian tax law.
The case is: Impresa Pizzarotti & C SPA Italia Sucursala Cluj v. Agenţia Naţională de Administrare Fiscală – Direcţia Generală de Administrare a Marilor Contribuabili (C-558/19, 8 October 2020)
The case concerns two loan agreements concluded by the Romanian branch with its Italian parent company. The loans did not contain a clause concerning interest.
During a tax audit of the Romanian branch, the Romanian tax authorities looked to Romanian tax law and specifically with regard to provisions that transactions between Romanian taxpayers and non-resident related parties are subject to transfer pricing rules. The tax authorities concluded that the interest rate on the loans would be set at market price (i.e., as if the loans had been made under normal conditions of competition). A transfer pricing adjustment was made, giving rise to a tax assessment.
The taxpayer challenged the assessment and argued that that the provisions of Romanian tax law infringed the two EU principles of freedom of establishment and free movement of capital because the transfers of money between a domestic branch and its Romanian parent company (instead of a non-resident parent company) are not subject to transfer pricing rules in Romania—in other words, different treatment depending on whether resident or non-resident companies were involved. The issue was referred by a Romanian court to the CJEU.
The CJEU concluded that the Romanian tax law measures at issue did not go beyond what is necessary to attain a legitimate objective and that the EU freedom of establishment does not preclude these Romanian tax law provisions.
The CJEU first dismissed the relevance of the EU free movement of capital standard, noting that the CJEU had previously held that a permanent establishment such as a branch, established in one EU Member State but situated in another, falls within the scope of the EU freedom of establishment. The CJEU then observed that under the Romanian tax law, a branch of a non-resident company does encounter less favorable treatment than a branch of a resident company conducting similar transactions with its parent company and that such a difference in treatment may constitute a restriction on the freedom of establishment. However, the CJEU explained that such a difference in treatment is justified by the need to maintain a balanced allocation of the power or ability to tax between EU Member States. The purpose of the Romanian legislation was to prevent profits generated in Romania from being transferred outside its tax jurisdiction, by means of transactions that are not in accordance with market conditions, and without being subject to tax.
Next, with regard to the question of whether the Romanian tax law goes beyond what is necessary to attain the legislative objective, the CJEU noted that the income adjustment concerned only the difference between the market price of the transactions (loans in this case) and the price actually applied by the parties and that taxpayers are given an opportunity to demonstrate that there were objective reasons for concluding the transactions at a price that did not reflect the market price.
The CJEU therefore concluded that the Romanian tax law measures did not go beyond what is necessary to attain this legitimate objective and that the EU freedom of establishment does not preclude these measures in Romanian tax law.
Read an October 2020 report prepared by KPMG’s EU Tax Centre
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