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Romania-European Union

12 October 2020

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CJEU Holds Romania May Apply Transfer Pricing Rules to Cross-Border Loans Between a Branch and its Parent

On 8 October 2020, the Court of Justice of the European Union (CJEU) issued a judgment concerning whether Romania may apply its transfer pricing rules on bank transfers (loans) from a branch to its parent in another Member State. The case involved Impresa Pizzarotti, which is the Romanian branch of SC Impresa Pizzarotti & C SPA Italia (Pizzarotti Italia), established in Italy.

During the period between 29 July 2016 and 11 September 2017, Romania's tax authority carried out an inspection at Impresa Pizzarotti, revealing that the branch had concluded, as lender, two loan agreements with its parent company, Pizzarotti Italia: one dated 6 February 2012 for EUR 11,400,000 and another dated 9 March 2012 for EUR 2,300,000. The loan agreements provided that the sums were borrowed for an initial period of one year, which could be extended, and did not contain any clause concerning the charging of interest by Impresa Pizzarotti. The outstanding amount as on 1 January 2013 was EUR 11,250,000, with both loans repaid in full by 9 April 2014.

In respect of the loans, the tax authority determined that Impresa Pizzarotti and Pizzarotti Italia were related and that the interest rate on the loans should have been set at market price, in accordance with the transfer pricing rules. As such, a tax assessment was issued on 20 September 2017 imposing a tax increase on Impresa Pizzarotti. Impresa Pizzarotti submitted a complaint to the tax office, which was rejected, and subsequently brought an action before the national court, the Tribunalul Cluj (Regional Court, Cluj, Romania)

In the main proceedings, Impresa Pizzarotti argued that the national provisions relied on by the tax office infringe Articles 49 and 63 TFEU (freedom of establishment and free movement of capital), in so far as they provide that transfers of money between a branch established in one Member State and its parent company established in another Member State constitute transactions that may be subject to the rules on transfer pricing, whereas those rules do not apply where the branch and its parent company are established in the territory of the same Member State. The Tribunalul Cluj decided to stay the proceedings and refer the following question to the Court of Justice for a preliminary ruling:

'Do Articles 49 and 63 [TFEU] preclude national legislation such as [Articles 11(2) and 29(3) of the Tax Code], which provides that a bank transfer of money from a company branch resident in one Member State to the parent company resident in another Member State may be reclassified as a revenue-generating transaction, with the consequent obligation to apply the rules on transfer pricing, whereas, if the same transaction had been effected between a company branch and a parent company, both of which were resident in the same Member State, that transaction could not have been reclassified in the same way and the rules on transfer pricing would not have been applied?'

In its judgment, the CJEU found in favor of Romania's tax authority. With respect to the free movement of capital, the CJUE determined that any restrictive effects would have to be seen as an unavoidable consequence of any restriction on freedom of establishment and they do not justify an examination of that regime in the light of Article 63 TFEU. As such, the CJEU focused on the freedom of establishment, noting that although the application of the transfer pricing rules may deter a parent company from acquiring, creating, or maintaining a branch in another Member State, this may be permitted if it relates to situations which are not objectively comparable or if it can be justified by overriding reasons in the public interest recognized by EU law.

In this respect, the CJEU found that the application of the transfer pricing rules, which seeks to prevent profits generated in the Member State concerned from being transferred outside the tax jurisdiction of that Member State via transactions that are not in accordance with market conditions, without being taxed, is appropriate for ensuring the preservation of the allocation of the power to tax between Member States. Further, the CJEU found that the Romanian legislation at issue in the main proceedings does not go beyond what is necessary to attain the legitimate objective underlying that legislation. As such, the application of Romania's transfer pricing rules on the bank transfers/loans between Impresa Pizzarotti and Pizzarotti Italia does not violate the freedom of establishment (or the free movement of capital).

In particular, the CJEU ruled the following:

Article 49 TFEU must be interpreted as not precluding, in principle, legislation of a Member State under which a transfer of money from a resident branch to its parent company established in another Member State may be reclassified as a 'revenue-generating transaction', with the consequent obligation to apply the rules on transfer pricing, whereas, if the same transaction had been effected between a company branch and a parent company, both of which were established in the same Member State, that transaction would not have been classified in the same way and the rules on transfer pricing would not have been applied.

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