The legal practice on the obligation to stamp loans concluded abroad, the criticism and the contribution of A. 38 CFR

Legal Insight    

April 2021

The article is an enriched version of a publication (Bulletin of Tax Legislation, 2017, Vol. 1604) for the needs of the author's presentation at the 1st Conference on Tax Law of the Athens Law School - MSc Tax Law (September 2018 - last update)

Ioannis Psarakis, Lecturer, LL.M (III), PhD Cand.

Ι. A PREVIOUS NOTION

In 1999, the company under the name 'Agrotiki Symmetochon S.A.' (a subsidiary of the Agricultural Bank of Greece), received a loan from ALPHA Bank of Credit S.A. in the amount of DEM 200 000 000 000. The following amounts were charged to the company for this loan, following an audit: 

Α. For stamp duty on the loan, an amount of EUR 11 738 811. 

Β. For OGA stamp duty, an amount of EUR 2 347 762 .

Since it was considered that no stamp duty was due on the loan in question - and therefore never paid - additional stamp duty was charged:

C. Stamp duty surcharge for non-reporting, amounting to EUR 8 217 167.

D. OGA stamp duty surcharge for failure to declare, amounting to EUR 1 643 433 433.  

The total amount to be paid amounts to EUR 23 947 173. It is therefore perfectly reasonable that stamp duty should be a factor of serious concern when deciding whether to grant a loan to a company. For the correct design of the method of obtaining the credit will rule out the possibility of the issuance of imputations - following an audit. But even if they were to be issued, 'preventive law' would have made it easier for them to be annulled by the courts (or, more rarely, administratively revoked).

II. CASES OF STAMP DUTY ON LOAN AGREEMENTS AND THE CRITICAL PROVISION 

II.1. WHAT TYPE OF LOANS, IN PARTICULAR, ARE WE REFERRING TO?

The quantitatively most important area of application of the stamp tax provisions is that of loans which, although concluded abroad, create obligations enforceable (only/and) in the country. Not all loans concluded abroad without exception, but those which, moreover, are concluded abroad:

a. are non-banking and

b. are concluded between traders.

For the sake of completeness, the following brief recapitulation is worth making: before 2004, non-banking loans concluded abroad and bank loans were treated in the same way: they were all subject to stamp duty. Only bank loans taken out in the country were exempt from stamp duty. This created problems, since this arrangement gave the domestic banking market an obvious advantage (lower borrowing costs) over the foreign market. In order to solve this, and for reasons of unification of the (banking) market, Article 36 of Law No. 3220/2004 extended the exemption from stamp duties to all banks, irrespective of their place of establishment and operation. 

II.2. THE LETTER OF THE CRITICAL ORDER

Article 8(8)(a)(ii)(i) of the Regulation states that the Bank shall not be subject to the provisions of Article 32(1) of the Regulation. 1 of the CCT: 'Documents having as their object movable or immovable property situated in Greece or obligations enforceable therein, but drawn up abroad, but not before a Greek authority on payment of the relevant fee, shall be subject to the fee provided for in this Law under the following subheadings [...]'.

For many - who, after all, wants to pay when they can (legally) choose not to - the avoidance of a rule that would establish an obligation to pay a certain amount will be attractive. Particularly, when already from a reading of the provision it seems that avoiding the fulfilment of the actual rule which gives rise to the legal consequence in question is not a difficult task.

Indeed, in the vast majority of the cases that we are able to follow in the minor sentence of the judgments, we observe that it is sought to devise an action in order to avoid the actual fulfilment of the provision in question. However, the jurisprudence usually diagnoses the existence of such, interpreting the condition, in particular, of the "obligation enforceable in the country" in an extremely broad manner and fishing for one, that is, an obligation enforceable in the country. Thus, while the fact that the object of the loan agreement must be movable or immovable property in Greece seems, in principle at least, clear (e.g. securing a mortgage), the cases in which the obligations arising from the agreement (the disbursement and payment of the loan, the repayment of interest payments; these are entirely indicative) will be considered enforceable in Greece, seems to be less clear in the end, according to the case-law. 

It is worth following, through two decisions of the CoE, the most typical cases in which case law "sees" an obligation enforceable in Greece. Obligations, which, however, do not undoubtedly show that they are such; that is why, perhaps, the companies did not take care to take action in order to avoid this characterisation (and consequently the relevant imputations). It is, of course, legitimate, but the question is whether it is also legal and - in this connection and ultimately - on what legal basis it will be achieved.

For a smoother transition to the reality of the cases that follow, it is noted that the action of the traders is usually as follows. 

1) creation of a borrower's account in a foreign country 

2) taking out a loan abroad 

3) payment of the loan into that account 

4) transfer of the loan already paid, in Greece.

The purpose, it should be recalled, is not to create an enforceable obligation in the country.

III. THE CASE-LAW PRACTICE

In the following, we set out a number of cases in which case law has held that there was an enforceable domestic obligation, although, I believe, this was far from obvious (and therefore expected).

ΙΙΙ.1. ST 3639/2013 (LAW)

"[...] Such an obligation is the debtor's obligation under the relevant contract to transfer to Greece, by order of the debtor to the foreign bank, the agreed amount of the loan deposited by the lender in his name in the foreign country [... In this case, since, as expressly stated in the contested agreement, the contract in question provided for the loan in question to be paid into a bank account to be opened for that purpose at a London bank in the name of the debtor, with the debtor instructing the bank to transfer the amount to a bank account in Greece, it was, as stated in the preceding paragraph, an obligation enforceable in Greece'. 

In this case, the CoE found an 'obligation' on the part of the borrower to transfer the loan to Greece (an obligation enforceable in Greece). The following criticism can be made of this position:

1. Before anything else, we recall that POL 1027/10.1.1990 circular of the Ministry of Economy, 10.10.10.10.10 of the Ministry of Foreign Affairs of the Republic of Lithuania, which states that the Ministry of Foreign Affairs of the Republic of Lithuania, the Ministry of Foreign Affairs of the Republic of Poland, states that the following: "[... The fact that the money from the loan (loan proceeds), which was received in the foreign country where the relevant loan agreement was executed, is subsequently imported into Greece by the debtor who received it, where it is then denominated in drachmas, or that the loan, which was contracted in the foreign country in which the obligations arising therefrom will be fulfilled, will ultimately benefit, directly or indirectly, an undertaking developing in Greece to meet its needs or that the competent Greek authorities grant authorisation to export foreign currency for the purpose of fulfilling the obligations arising from the loan abroad'. It follows, therefore, that the criterion of sending the money on the debtor's instructions to the bank - even on the same day - should not, according to the Polish legislation in question, be regarded as 'enforceable in the country'. 

2. The debtor's instruction to the Bank to transfer the amount from his account in a foreign country to another account in the country is, however, conceptually impossible to be considered as "fulfilling an obligation". This is because, even if the contract in question provides for the future transfer of the money from the debtor to the country, it is not an obligation of the debtor. The creditor derives no benefit from this transfer, and the reference to the future transfer was made more in narrative terms, and without any particular significance, than in order to establish a voluntary and genuine obligation. In this context, and upon an interpretation of the intentions of the parties, it cannot be held that the sending of the amount by the debtor himself constitutes an obligation on his part and, accordingly, a claim on the part of the creditor. According to Art. 173 CC, the interpretation of legal declarations must be based on the true meaning, without attachment to the words.

One remark: even in the case where a prima facie clear obligation appears to be enforceable in the home country - the obligation to pay money is fulfilled in the home country - perhaps this should not be taken for granted. In particular: the loan agreement is standardised, in a. 806 of the Civil Code, as a re-filing (traditional) . Therefore, it is considered to be concluded (and therefore any obligations arising from it) only with the transfer of ownership of the loan in accordance with 1034 CC . Therefore, we can safely say that the surname loan agreement does not contain the obligation to pay the loan, since its payment coincided in the same legal second as the conclusion of the agreement. To the extent, however, that there is also the a. 361 CC, which allows the parties to create their own contracts - provided they are not prohibited by a provision of mandatory law - a consensual loan agreement is by all means possible. Once it has been concluded, it will normally establish both the obligation to pay the interest by the debtor and - and this is the additional element compared with the traditional loan contract - the obligation to pay the loan by the lender: the conclusion of the contract has already been completed, and in any event before the loan is paid, by the simple agreement of the parties. Therefore, the payment of the loan will be a dischargeable obligation under the contract; and if it is therefore discharged in the country, stamp duty will be due.

"In view of the fact that, as regards the specific legal question which, as stated above, is raised in the present case, namely, whether it is an enforceable obligation in Greece, and, therefore, whether the relevant contract is subject to stamp duty, the deposit [i.e. by the lender] to an account of the debtor in a foreign bank of the amount due from a loan contracted abroad with a further instruction by the debtor to transfer the amount to a bank account in Greece, there is no case law of the Council of State, the application in question is, according to the appellant's main claim in this regard, admissible in this respect'. 

In this particular paragraph, there is an attempt to conceive of a complex (objectively and subjectively - deposit by a creditor and further instruction by the debtor to transfer money to his account in Greece) action as an 'enforceable obligation' in Greece. This is an embarrassing arrest, which is perhaps also indicative of the "anxious search" for a way of imposing stamp duty in obvious cases of circumvention of the spirit of the law. 

III.2. ST. 124/2014 (LAW)

"[...] since, in accordance with the first and second clauses of the loan agreement, the lending company was obliged to deposit the proceeds of the loan in an account of the appellant, which [i] was opened for that purpose in the aforementioned bank abroad, and the bank, always in accordance with the terms of the loan, was obliged to transfer [ii] the same day the amount of the loan to an account maintained by the appellant in the same bank in Greece [... ] the proceeds of that loan could not be made available to the company concerned abroad but only in Greece and therefore, irrespective of whether the contract was signed abroad, it is a contract executed in Greece and subject to stamp duty'.

It is clear from that passage that the CoE considered it crucial that the situation should be such that the loan proceeds should be made available to the borrower first in Greece. In this respect, two questions, I think, arise. Firstly, is the major proposal of a court decision which in fact recognises the fact that the contract was executed in Greece, if the loan was first made available to the debtor in Greece, whereas - in accordance with the legal terms - the contract was executed abroad, lawful?

At a second level, even assuming that the interpretation of the relevant provision can lead to that conclusion, the question arises as to whether, in those cases, the loan is actually made available to the borrower, first in Greece?

On the first question, it must be accepted that the concept of obligation is not a vague legal concept. Technically legally, any obligations under the loan agreement are fulfilled abroad. It is also not legally consistent for the case law to construct 'creatures of law' without the legislator (or the administration, on its authority), who is, after all, democratically legitimised, having made this assessment.

With regard to the second question: in this particular case, the case-law has identified the creation of an account in a foreign country, specifically for the purpose of servicing the practice in question, in conjunction with the same-day transfer of the loan to Greece, as indicators of the critical situation of 'the loan being made available to the borrower, first in Greece'. In reality, however, the debtor company was in fact fully able to manage the (now its own) money, already when it was paid into its account in the foreign country, and could revoke the order to the Bank to transfer the money to Greece and take it first to a foreign territory. Moreover, even that transfer order itself is nothing more than an act of management of its assets, just as it would be if it were to make a traditional withdrawal. The loan is therefore, from the outset, at the disposal of the borrower.

IV. JUDGMENT

A general observation on the criteria that (rather unexpectedly) our case law links to the establishment of an enforceable obligation in the country is, I think, that they are not provided for in the provisions of Decree 28/1931 (KTH) cited by the Council of State as fulfilling the actual imposition of stamp duty. I have the impression that that is an interpretation which is outside the bounds of stricto sensu interpretation. It is a finding which, if one agrees with it, should be of concern to us, in so far as the principle of strict interpretation of provisions applies in tax law.

I believe that the case-law's attitude is explained by the following: a correct interpretation of the provision in question, and in particular of the condition of the obligation being enforceable in the country, would, in the vast majority of cases, lead to the impossibility of imposing stamp duty. This would be because traders taking out such loans would very rarely plan their activities in such a way as to reduce - as far as possible - their transactional costs. Stamp duty is one such cost. Therefore, their action will not fall within the scope of the provision in question, but will usually circumvent it by 'describing' it.

The case law, in choosing to conceive of such methods, has led to solutions of doubtful correctness, with the ultimate aim, however, of considering that the critical provision is fulfilled, which will subsequently open up the possibility of imposing stamp duty. Of course, the criteria which it has formulated, apart from being legally - in my view - weak, do not ultimately lead to the capture of all the cases it intends to capture. In particular, it is logical that there should be cases which do not fall within the criteria, which, moreover, were established on a case-by-case basis, and which were necessarily formulated in order to save stamp duty. The impossibility stems from the inverted mechanics of the matter: instead of starting from the facts and arriving at the appropriate operative provision, the case law, in fact, rather starts from the operative provision which it senses is (morally) just and, to this end, proceeds to the appropriate legal characterisation of the facts.

Thus, strategic plans which are devised on the basis of the aforementioned (not legally correct, I believe) criteria of case law (and therefore even more "careful" and therefore diligent) will remain outside the regulatory reach of stamp duty, which is contradictory. 

In particular, even under the extremely broad interpretation of the stamp duty conditions in the case law, it (i.e. stamp duty) can still be circumvented, subject to the following formulations:

i. The following conditions apply.

ii. Avoiding mention in the loan agreement document of the future remittance.

ii. Making remittances gradually and in any case not on the same day (e.g. after a month).

At the same time, however, a new possibility of circumvention through the issuance of a bond loan is opened up by the provisions of Law no. 3156/2003. In particular, the legislator, seeking to pursue a policy through taxation, created a favourable tax environment (Article 14 of Law 3156/2003) for bond loans in order to make them more attractive to the market (because they had advantages such as risk spreading, easier to find lenders, creation of a secondary market and ultimately market movement, etc.). Among these advantages was the exemption from stamp duty. Thus, by taking out a bond loan, by issuing a single bond which is assigned to the lender, who cannot then spread the risk, the obligation to pay stamp duty will be avoided, even though it will be a method which does not provide the economic system with the positive aspects of the bond loan, which were the justification for the favourable tax treatment.

V. THE PROPOSED SOLUTION

The provision of Article 6(1)(a)(b) of Regulation (EC) No 659/1999. 38 of the CCCTB captures, not clumsily but with a solid legal basis, any such 'artificial arrangement' (substance over form principle). According to the explanatory memorandum to the CCCTB, this provision was introduced into the legal system in order to prevent the circumvention of tax provisions. It is applicable to those loan agreements from 1.1.2014 which contain such artificial arrangements.

It stands to reason that the 1931 legislature - and the legislature of the day - cannot foresee "what is to come" and, in particular, how the provisions it enacts will be circumvented. But by cutting a provision containing an indefinite legal meaning (and thus giving it adaptability and duration in time and in the diversity of life and life situations), he gives the judge the right to interpret it, and the judge is entitled to interpret it, capturing cases which he would otherwise be unable to 'legally touch'. We therefore await with anticipation the response of the case law to this new possibility.