In June 2010 the Supreme Administrative Court rendered its judgment regarding Diligentia. The main question in the Diligentia case was whether the fact that both lender and borrower were members of the same group of companies should influence the arm’s-length interest rate. The court found that the credit risk was lower than would have been the case had the parties been unrelated. As a consequence, the interest paid on the shareholder loans was not fully deductible. Given that the Diligentia case concerned Swedish companies only, the case’s influence on cross-border transactions has been the subject of debate. The Court of Appeal recently rendered a judgment stating that the Diligentia case was of limited importance. The company, in that case, was granted deduction for the agreed interest rate 13 %; cf. TaxNews no 16, 2012.
Originally, two loans were the subject of dispute in this second case. One was between a Swedish subsidiary and its foreign parent company, and the other between the subsidiary and a minority shareholder in the subsidiary. The Swedish Tax Agency argued in the Administrative Court that the Diligentia case was applicable also when determining arm’s-length interest rates in cross-border situations. The arm’s-length interest rate was 8 % for both loans according to the Swedish Tax Agency. The Administrative Court ruled in accordance with the view of the Swedish Tax Agency relating to the shareholder loan, but found that the Swedish Tax Agency had not met its burden of proof regarding the loan from the minority shareholder.
The company appealed the court’s judgment insofar it concerned the shareholder loan from the parent company.
In its judgment the Administrative Court of Appeal referred extensively to the OECD Guidelines and specifically notes: “According to the Guidelines a correct arm’s-length price is achieved by establishing the conditions of the commercial and financial relations that one could expect to find between independent enterprises in comparable transactions under comparable circumstances (1.3). Every individual company in a group of companies shall be treated on a stand-alone basis when reviewing their agreements with one another, the so called separate entity approach.” The court additionally stated, that it is irrelevant to compare one intra-group transaction with another intra-group transaction under the Guidelines.
In its judgment the Administrative Court of Appeal emphasized, that the Swedish Tax Agency has the burden of proof that the pricing is incorrect and has to make it likely, that the interest rate on the shareholder loan deviates from an arm’s-length interest rate. The Administrative Court of Appeal further stated that the Swedish Tax Agency’s use of an intra-group transaction as basis for its comparison is a violation of the OECD Guidelines. In addition, the court also commented that the Swedish Tax Agency has based a significant part of its reasoning on the Diligentia case and its arguments on the significance of insight and control. In this context, the Administrative Court of Appeal stated that the arguments presented by the Swedish Tax Agency mainly consist of arguments regarding why a parent company’s insight and control generally influences the credit risk on a loan to a subsidiary.
With the statement ”The Swedish Tax Agency has not presented any analysis regarding how it has arrived at the conclusion that the shareholder’s factual insight and control in the case at hand means that an arm’s-length interest rate on the shareholder loan should be 8 % instead of 15 %” the Administrative Court of Appeal concluded that the Swedish Tax Agency has failed to meet its burden of proof and that there are no grounds for making an adjustment.
This judgment is clearer than the judgment relating to Arlandabanan insofar that the Administrative Court of Appeal clearly refers to the OECD Guidelines and that the court states that the arm’s-length price is arrived at by a comparison with what two independent parties would have agreedupon .