CFE ECJ Task Force: Opinion Statement ECJ-TF 1/2019 on the ECJ Decision of 31 May 2018 in Hornbach-Baumarkt (Case C-382/16), Concerning the Application of Transfer Pricing Rules to Transactions between Resident and Non-Resident Associated Enterprises

CFE Tax Advisers Europe welcomes the Court’s decision in Hornbach-Baumarkt (Case C-382/16) (Hornbach ) as an important clarification of the conditional compatibility of arm’s length-based domestic transfer pricing legislation with the freedom of establishment. Hornbach follows and confirms the previous doctrine formulated in SGI (Case C-311/08). It did not adopt the Advocate General’s approach, which would have denied comparability of domestic and cross-border situations in transfer pricing cases and, hence, prevent scrutiny of domestic transfer pricing legislation under the fundamental freedoms.
CFE Tax Advisers Europe welcomes the requirement that Member States have to grant taxpayers the opportunity to provide evidence “of any commercial justification” for non-arm’s length transactions, with the result that a denial of that opportunity through automatic transfer pricing adjustments would render these incompatible with EU Law. In that context, it is further welcomed that “commercial justifications” may include “economic reasons resulting from its position as a shareholder of the non-resident company”. The Hornbach decision, at least in cases of non-arm’s length transactions, such as interest-free loans or gratuitous guarantees aimed at replacing equity, clearly suggests that such a shareholder interest in the financial success of the foreign subsidiary may serve as such justification.