On 8 October 2020 the European Court of Justice (ECJ) ruled on Romania’s transfer pricing rules in relation to bank transfers from a branch to a head office that is located in another EU Member State.
Impresa Pizzarotti concluded two loan agreements with its Italian parent without any provision for interest. The tax authority therefore increased the taxable income for the interest at market rates on the loans. Impresa Pizzarotti appealed, on the grounds that the Romanian national provisions were contrary to Article 49 (freedom of establishment) of the Treaty on the Functioning of the European Union (TFEU) and Article 63 TFEU (free movement of capital). The taxpayer noted that transfers of money from a branch in one EU Member State to its parent company established in another Member State were subject to transfer pricing rules, whereas the transfer pricing rules did not apply if the branch and its head office were both located in the same EU member state.
The Romanian Court referred a question to the ECJ in relation to whether Articles 49 and 63 TFEU preclude national legislation providing that a bank transfer of money from a branch resident in one Member State to the parent company resident in another Member State may be treated as a revenue-generating transaction, subject to the transfer pricing rules; whereas if the same transaction had taken place between a branch and a parent company located in the same Member State the transaction would not have been treated in the same way and the transfer pricing rules would not apply.
The ECJ ruled in favour of Romania’s tax authority. In relation to the freedom of establishment, although the application of the transfer pricing rules could deter a parent company from acquiring, or maintaining a branch in another EU Member State, this could be justified where there are overriding reasons in the public interest.
The ECJ held that the application of the transfer pricing rules is appropriate to ensure the allocation of taxing powers between EU Member States. The Romanian legislation did not go beyond what was necessary achieve the objective of the legislation. Romania’s transfer pricing rules in relation to the bank transfers representing loans between Impresa Pizzarotti and its Italian parent were not contrary to freedom of establishment or the free movement of capital.
The Court therefore held that Article 49 TFEU must be interpreted as not precluding 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 treated as a revenue-generating transaction subject to the transfer pricing rules, whereas the same transaction between a branch and parent in the same Member State would not have been treated in the same way and the transfer pricing rules would not apply.
