Ioannis Psarakis, Lecturer, LL.M (III), PhD Cand.
Summary: The topic of finance is one of the most important and recurring issues facing businesses globally. Thus, the purpose of this note (Part A and Part B) is to provide a roadmap on which the entrepreneur can rely in order to gain a very good first overview of the options available, both from the perspective of corporate and tax law.
1. The utility
The topic of finance is one of the most important and recurring issues facing businesses worldwide. Ideas and business opportunities will be constantly coming forward; but the necessary capital will always be needed to move from the realm of ideas to practice. Also, sometimes liquidity will often exist, for example, within the group, but not in the very entities that need it. What happens in these cases? What are the possibilities and which is ultimately the most "financially" painless?
The purpose of the note (Part A and Part B) is to provide a roadmap on which the entrepreneur can rely in order to gain a very good first overview of the available options, both from the perspective of company law and tax law. As we shall see, the latter is not at all unimportant, since it can impose significant transactional costs on the whole project. Each case is different, needs vary and the specific characteristics of each entity differ; nevertheless, the following development can be a very good starting point for choosing the way of financing a business, choosing among some of the most popular financing methods in the business world. In particular, we will analyse simple and bond loans, the cash-pooling variant, the cash facility and payment against a future increase in share capital. Also, while the article is written from the perspective of intra-group financing, many of the issues discussed can be applied to the usual environment of operating outside a group.
In today's article (Part A) we will follow the case of the loan, the case of the cash facility, as well as the cash pooling variant, all in the light of the relatively recent case law of the Council of State regarding the imposition of stamp duty on contracts with loan elements.
2. The simple loan option
On a simple loan between a subsidiary and a parent company (and if no transaction account is kept - we will see below what its characteristics are), stamp duty of 2.4% is levied on each loan transaction.
However, if a current account (i.e. a mutual account) is maintained, stamp duty of 2.4% is levied on the largest balance of each transaction. The amount which is carried over to the next financial year, if it is not moved at all (or moved only minimally - e.g. €5,000 out of a total carried over debt of €2,000,000), a 1.2% simple deposit stamp duty is levied. At the same time, in each (meth)subsequent use, no stamp duty is levied (these were for example ruled in TEN 891/2020).
It follows from the above that in many cases providing a loan through a dormant account (2.4% on the highest balance of the fiscal year) will be an attractive solution.
On the typological characteristics of a transaction account, with the help of a negative and a positive definition, the following can be noted: according to the position of the BPA, the account cannot be classified as a transaction account when, continuously, during the financial year, it is only credited or only debited (BPA Athens 743/2019 - So and Reppas, Stamp Tax: "[I]t is not necessary that the transaction account changes at least once during the financial year from debit to credit or vice versa [...] it is sufficient for the transaction account to show continuous movement of deposits and withdrawals, even if its balance throughout the financial year remains debit or credit"). Therefore, if the account does not show deposits and withdrawals, it is not a transaction account. The above is supported by case law.
But please be careful: in some cases the requirements for the classification of the account as a transaction account (and thus the imposition of stamp duty only on the largest balance of the use) are stricter. For example, in TEN 1458/2020, it was considered that the account is not transactional (and therefore 2.4% stamp duty is levied on each separate transaction) as long as the balance is always a debit or a credit regardless of whether there are transactions in both directions. We note that this position has been supported in articles and by an AADE auditor in a legal journal.
It is also worth mentioning the following: according to the case law of the civil courts - the relevant case law of the Supreme Court is settled - for an account to be classified as a joint account it is sufficient (but also required) that there is a real possibility that either of the two parties may be in the position of the creditor and the debtor. This position is intermediate between the positions mentioned above, in so far as it is not satisfied with the occurrence of deposits and withdrawals (it is required that there is the actual possibility of either party being in the position of lender or debtor at any time), but it does not require that the situation be such that both parties have actually existed in both positions. The possibility is sufficient. This position is, in our opinion, the one that should prevail, besides constituting an intermediate compromise of both views at the tax and BPA level.
3. The case of the cash facility
As we will see below, the classification of a transaction as a loan comes with certain conditions. If these are not met - i.e. if it is not a loan - the audit is most likely to classify the transaction as a cash facility. What is the difference?
So if the transfer of liquidity between trading companies is classified as a cash facility, then a stamp duty of 1.2% is levied on each individual transaction (see e.g. 73/2020 BPA ATHENS).
So depending on the case - we now know both the regime on loan provision in a current account environment (or not) and the regime of a simple deposit (cash facility) - it may end up being more advantageous to set up a current account (stamp duty of 2.4% on the higher balance), instead of a simple deposit (1.2% on each transaction - non-discretionary account). This will happen, for example, if partial transfers are made from the parent to the subsidiary, but also with interim payments (revolving credit), so that the maximum balance is less than the sum of the payments.
However, if payments are made in the year of use without interim repayments, the cash facility solution (1,2 % paper charge) is considered to be more advantageous.
4. Loan or simple deposit?
But how do we know whether the transaction will be treated as a loan or a cash facility? How the particular transaction is classified is very important for stamp duty purposes. The difference between 1.2% (simple deposit - cash facility) and 2.4% (loan), when the amounts are really large, can make it a prohibitive option for the business. When to speak of a loan is a question of proof; the burden of proof is on the tax audit.
Trying to briefly understand a large number of cases, the audit will usually have no room to establish the existence of a loan (or if it finds one, the assessment act will be invalid) if:
Α) There is a document (even an entry in the books of the company about the deposit of money by the partners, shareholders, etc. - some decisions also consider the bank book as a document), with the word "deposit" and not "loan" explicitly mentioned; or
B) No documents; or
C) If there are documents, but no reference is made to an obligation to repay the amount.
Attention: the fact that the amount was returned does not necessarily mean that it is a loan agreement - the amount "returned" is not excluded that it was given under another legal relationship (thus the Delfath 3771/2017) - the burden of proof is, as we said, on the tax authority.
As a general observation, we could hold back the conclusion that the conditions for establishing a loan are much stricter than those for a simple cash facility. In many cases of appeals before the BCC, the decision will "downgrade" the transaction from a loan to a simple cash facility, precisely because it will have been held that the elements required to consider a loan to exist have not been identified. The consequence of this will of course be a reduction in the amount of the corrective measure.
5. The issue of interest deductibility
The issue of interest deductibility will always be a concern in a group environment. This, in particular, is investigated at two levels:
Α. At the level of the parent company, which may be borrowing funds to finance its subsidiaries (and this borrowing gives rise to interest charges).
Β. At the Subsidiary level, which, by borrowing from the Parent, will incur interest on the loan received.
5.1. Interest deductibility at the Parent level
In the first case, the following should be noted. 49 par. 1 of the Tax Code is exempt from income tax (also applicable between residents), in Art. 49 par. 4 of the CCT states that: "If the distribution of profits referred to in paragraphs 1 and 2 results from a participation in another legal entity, the taxpayer may not deduct business expenses related to such participation".
This provision has been interpreted by DEAF B 1131644 EX 2016/7.9.2016 as follows: "[...] cases are covered where the relevant expenses (e.g. interest on loans) are incurred not only for the acquisition of the participation, but also for the financing of an already existing subsidiary, and indeed regardless of whether this financing expands the possibility of obtaining tax-free income (intra-group dividend) or not" and indeed "regardless of whether a distribution of profits by the legal entity in which it participates takes place in that year".
Examples of non-deductible expenses include notary fees, taxes, third-party fees, etc., as well as any financial expenses (interest on loans), etc.
5.2. Interest deductibility at Subsidiary level
At the level of the Subsidiary, which receives the loan and pays interest to the Parent, guidance is provided by POL.1113/2.6.2015. 4172/2013 and provided that the criteria of Article 22 are cumulatively met, only the more specific provisions of Article 50 of the Tax Code on the application of the principle of equal distances and the OECD guidelines on intra-group transactions are applicable and not the provisions of paragraph a' of paragraph 1 of this Article. Moreover, according to the circular POL.1037/2.2.2015, in the case of associated enterprises after the application of Article 50, the provisions of Article 49 on thin capitalisation apply". Therefore, crucial for the deduction of interest is the receipt of the loan in an equal distance environment (for the meaning of the equal distance principle see immediately below).
For the purposes of applying Art. 49 CCC guidance is provided by POL.1037/2.2.2015. In the usual case (to the analysis of which we will limit ourselves) in which interest expenses from intragroup borrowing will be less than € 3,000,000€ these are deductible from the gross income of the companies, to the extent that they have a fair interest rate.
So we come to the following conclusion: it is absolutely crucial to agree on an interest rate on an equidistance principle (in very simple terms we ask what interest rate the lender would have agreed if the debtor was a third party and not an affiliate - Guidance is provided mainly based on the OECD Guidelines - OECD Transfer Pricing Guidance on Financial Transactions [ed. 2020]). We note that in the case of bank and bond loans the treatment differs (recall that in our case we are talking about intra-group lending).
6. Legislative developments on stamp duty on loans: a great opportunity?
According to the a. 63 par. 1 (b) of the Act. 2859/2000 (VAT Code), "[...] the provisions [...] on the imposition of stamp duties on the transactions provided for in the provisions of Article 2 of this Law and their ancillary provisions shall be repealed". This has the effect of establishing a basic 'rule of the ring-fence': anything that falls under the CFCA - even if it is ultimately exempt from tax (VAT) under the CFCA itself - is not subject to stamp duty.
Indeed, with regard to the granting of loans, according to Article 22(2) of the VAT Code, even if the tax on the granting of loans is not subject to VAT. 1 para. (c) the granting and negotiation of credit and its management by the person granting it'.
To date, there has been considerable doubt (perhaps even today, to be honest) as to whether and under what conditions the loan was subject to VAT, whether only the interest or the total debt (and therefore the capital was subject to stamp duty) was subject to VAT, whether only the lender was exempt and not the recipient. Whether it was included, as we have explained, was and is crucial: it would mean no stamp duty.
What happens in practice is the following: stamp duty is levied both on the provision of the loan by the lender to the debtor at the time the relevant loan agreement is drawn up and on the interest (consideration) arising from these loans, which is paid by the debtor to the lender. In other words, it is as if they were subject to the stamp duty regime.
However, in two decisions, the Council of State seems to provide the doctrinal basis for a different tax treatment, which makes the loan option a very attractive financing solution (these are in particular SCE 2163/2020 and SCE 2323/2020).
Specifically, it was held that "The granting of an interest-bearing money loan against which (capital) the appropriate fee is paid in the form of interest, constitutes a supply of services for an imputable reason and is in principle included among the transactions of Article 2 of the VAT Code as a supply of services subject to value added tax, except exempted from it under Article 22 para. 1 para. kc'. In the case of persons who are already subject to VAT on their main economic activities, it is sufficient for the supply of capital to be an activity carried out only occasionally'.
From the new case law of the CoE we can summarise the following:
- The provision of a loan falls within the scope of Art. 2859/2000 (CFR) regardless of whether the granting of credit is of an occasional nature and regardless of whether it constitutes the main economic activity of the subject.
- The mere fact that the person is subject to VAT on his principal activity, combined with the fact that he makes funds available, even occasionally, for the purpose of obtaining profits through interest, is sufficient for the granting of an interest-bearing loan to be regarded as a supply of services subject to VAT.
- Applies to the total (principal and interest). Specifically, the CoE held that the subject of VAT is the granting of the loan as a whole, as a single supply, stressing that no distinction should be made between principal and interest (a position that was previously upheld).
- The absence of an obligation to pay stamp duty applies to both the lender and the debtor.
In conclusion, in the light of the above ruling of the Council of State, it is clear that businesses now have a significant advantage in terms of their ability to obtain financing outside the banking system, making it more flexible in terms of enhancing their liquidity.
7. The arm's length principle as a common denominator
The 'arm's length principle' is a concept central not only to the application of the favourable case law of the CoE (an agreement on an appropriate interest rate is required, otherwise there is a risk that it will not be considered onerous and therefore not be covered by VAT legislation; hence a paper stamp will be imposed), but also for the deduction of the subsidiary's interest (the debtor will not be able to deduct interest which is not in line with the principle of equivalence - a condition for the deduction of interest - so ideally a loan should not be granted at an interest rate higher than the normal rate).
However, compliance with the principle of equidistance is also important for the taxation of the parent company. In particular, in the event of an audit, income tax will be imposed on the lender based on the arm's length interest rate even if it received less interest (IAC Athens 1780/2019), hence the agreement for a loan with an interest rate lower than that of the "market", will not ultimately favour the Group, since both the Parent will be taxed as if it had received the interest at the appropriate interest rate, but the subsidiary will also deduct less interest compared to that for which the Parent was ultimately taxed.
Although the case law of the CoE seems to set clear conditions for the non-imposition of stamp duty on non-banking loans, we could, based on the case law of the CJEU (then CJEU, C-77/01 (EDM), para 67), propose the following additional safeguard: adding a statutory purpose of providing credit for the purpose of profitability from the invested funds.
Otherwise, the business will have to claim that it is an (admittedly occasional but also) direct, permanent and necessary extension of the activity already subject to VAT, but not ancillary to it. For example, it was held (direct, continuous, necessary and not ancillary) that 'the collection by a manager of interest on deposits received from his clients in connection with the management of their properties constitutes a direct, continuous and necessary extension of the taxable activity' in the case before the Court of Justice, C-306/94 (Régie dauphinoise - par. 18).
8. The case of Cash-Pooling
In the case of cash-pooling, the same considerations apply as for ordinary loans. It could be argued, on the basis of the above-mentioned case law of the Council of State, that it is subject to VAT but exempt; and since it is subject to VAT legislation (but ultimately exempt, since the exemption comes from a specific provision of Law No. 2859/2000), no stamp duty is levied.
However, we identify, especially in the case of cash pooling, an additional argument for not imposing stamp duty. According to the EU VAT Committee (Guidelines Resulting From Meetings of the VAT Committee - 5 March 2021) on the application of VAT legislation: 'In the case of a cash pooling agreement involving actual transfers of funds between its participants, the VAT Committee almost unanimously agrees that in accordance with settled case-law of the Court of Justice of the European Union (CJEU) a cash pooling participant in a credit position transferring funds to the consolidated account and receiving remuneration in the form of interest shall be regarded as carrying out an economic activity with the meaning of Article 9(1) of the VAT Directive. The VAT Committee almost unanimously confirms that such an activity shall qualify as a taxable supply of services in accordance with Article 2(1)(c) of the VAT Directive [...] The VAT Committee further almost unanimously agrees that such a supply of services shall be exempted in accordance with Article 135(1)(b) of the VAT Directive because of it being a transaction concerning credit".
Finally, we note that the specific issue of interest and the pool leader's fee in the case of cash pooling and the principle of equidistance is dealt with in a separate chapter in the OECD Transfer Pricing Guidance on Financial Transactions (ed. 2020).