European Union Court of Justice Case: Romanian Transfer Pricing Regulation

In this article Rosalie van de Brug and Clive Jie-A-Joen discuss an important transfer pricing case which came before the European Union Court of Justice in Luxemburg. In this case, the European Union Court of Justice found that Romanian transfer pricing regulation does not violate EU law regarding the right of establishment, because the regulation is necessary in order to create a balanced distribution of taxing rights between the different member states.

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In this case, the Italian company SC Impresa Pizzarotti & C SPA Italia
(“Impresa”) received two loans totaling EUR 13.7 million from its Romanian
branch Impresa Pizzarotti & C SPA Italia Surcursala Cluj (“Impresa Cluj”).
The Romanian branch granted the loans without receiving any interest. The
Romanian tax authorities argued that Impresa Cluj and Impresa should be
regarded as associated enterprises under Article 11(2) Codul fiscal.
Therefore, the Romanian tax authorities argue that, in accordance with
Article 29 (3) Codul fiscal, the Romanian branch should have granted the
loan to Impresa at a market-conform interest rate in accordance with transfer
pricing (“TP”) regulation.
Impresa Cluj argues that the Romanian TP regulation is violating articles 49
and 63 of the Treaty on the Functioning of the European Union (“TFEU”),
respectively the right of establishment and the free movement of capital,
insofar the Romanian TP regulation determines that TP rules are applicable
to the provision of funding between a branch located in a jurisdiction and
its mother company located in another jurisdiction, since the TP regulation
would not apply if the branch and its parent company are both located in the same jurisdiction.
The Romanian national court requested a preliminary ruling from the EU Court
of Justice regarding the following question: “Do articles 49 and 63 of the
TFEU interfere with national transfer pricing regulation if the loan between
a branch and mother company located in different member states is requalified
as a revenue-generating transaction resulting in application of mandatory
transfer pricing regulation whereas a loan between a branch and mother
company located in the same member state cannot be requalified as a revenuegenerating
transaction and thus does not imply application of transfer pricing regulation?”
According to established case-law of the EU Court of Justice, a tax provision
that is restricting Article 49 TFEU (i.e. the right of establishment) is
only acceptable if the provision is related to situations which are not
objectively comparable or in a situation in which the provision is justified by
compelling reasons recognized by Union law to serve general interest. In
addition, the provision should be proportionate to the objective pursued.
The EU Court of Justice argues that transfer pricing regulation is necessary
to ensure a balanced distribution of taxing rights between member states.
This importance justifies the difference in treatment between the situation
in which the branch and mother company are both located in the same member
state and the situation in which the branch and mother company are located
in different states. The latter situation could lead to an unbalanced
distribution of taxing rights between different members states if branches
are allowed to transfer their profits as favorable economic benefit to mother
companies in a different member state. Therefore, restriction of the right
of establishment by applying transfer pricing regulation is justified in
view of a compelling reason to serve the general interest.
The EU Court of Justice states that the application of transfer pricing
regulation is proportionate to guarantee a balanced distribution of taxing
rights. In addition, the Court argues that transfer pricing regulation does
not exceed the objective pursued since the taxpayer has the opportunity to
provide compelling reasons to justify deviation from the market-conform interest rate.
Therefore, the Romanian TP regulation does not violate the right of
establishment as laid down in Article 49 TFEU in subject case, since TP
regulation is necessary to ensure a balanced distribution of taxing rights
between different member states.