Fibusa SAS is a holding company with investments in four Romanian subsidiaries involved in the development of wind power stations in Romania. Between 2011 and 2014, Fibusa granted these subsidiaries interest-free loans, each with a term of less than one year, renewable on the same terms and repayable at any time. The total loan amounts were nearly €26 million in 2011, over €33 million in 2012, and more than €35.5 million across 2013 and 2014. These loans were primarily financed through borrowings undertaken by Fibusa, with interest expenses amounting to €2,086,730 for the year ending 2013 and €2,385,774 for 2014.
Following a tax audit, the authorities assessed additional corporate income tax and corresponding penalties for the years 2011 to 2014, treating the absence of interest on the loans as indirect distribution of profits abroad.
Fibusa challenged the assessment, but its complaint was rejected by the Administrative Court in December 2020.
The company appealed to the Administrative Court of Appeal, which on 22 November 2022 upheld the tax authorities’ position but revised the applicable interest rate on the loans, thereby adjusting the amount of additional taxable income.
An appeal was then filed by the tax authorities with the Supreme Administrative Court in which the authorities claimed that the Administrative Court of Appeal har erred in law by refraining from placing the burden on the company to prove that the interest rates applied by the administration were excessive in relation to those that its Romanian subsidiaries could have obtained from an independent lender under market conditions.
Judgment
The Supreme Administrative Court ruled in favour of the tax authorities and overturned the decision of the Administrative Court of Appeal.
Excerpt in English
“….Advantages granted by a company taxable in France to a company located outside France in the form of interest-free loans or advances constitute one of the means of indirect transfer of profits abroad. It follows that, where the tax authorities find that a loan or advance has been granted without interest by a company taxable in France to a foreign company with which it is related, it is for the taxpayer to demonstrate that the interest rate that the authorities intend to use to determine the amount of the indirect transfer of profits abroad exceeds the interest rate that the foreign borrower could have obtained from an independent lender under market conditions. Failing this, it is incumbent upon the taxpayer, in order to rebut this presumption, to prove that the advantages granted were justified by the obtaining of consideration.
4. It is apparent from the documents in the case file submitted to the judges hearing the case, as stated in point 1, that the tax authorities considered that, during the period corresponding to the financial years ending in 2011 to 2014, Fibusa had waived income in respect of sums, financed partly by loans and partly from its own funds, made available free of charge to four Romanian subsidiaries. The tax authorities regarded these waivers of revenue, the amount of which they assessed by applying to the sums in question the average interest rates at which Fibusa itself had incurred debt, namely 5.66% in 2011, 7.74% in 2012, 8.94% in 2013 and 5.85% in 2014, as indirect transfers of profits abroad within the meaning of the provisions of Article 57 of the General Tax Code, in the absence of evidence provided by the company that the advantages in question had at least equivalent value for it. The tax authorities therefore added the corresponding amounts back to the company’s declared results for the financial years ending in 2011 to 2014.
5. It is apparent from the contested judgment that the Administrative Court of Appeal, in ruling that the rates cited in point 4 should be replaced, in respect of the advances financed by Fibusa from its own funds, by the respective rates of 4.25%, 3.75%, 3% and 2.4% corresponding to the average rates for advances on securities applied by the Banque de France, which the company had relied on, held that it did not appear from the investigation that the rates of remuneration which the company could have obtained from a financial institution or similar body with which it would have placed sums of an equivalent amount under similar conditions would have been higher. By thus refraining from placing the burden on the company to prove that the interest rates applied by the administration were excessive in relation to those that its Romanian subsidiaries could have obtained from an independent lender under market conditions, the Administrative Court of Appeal erred in law with regard to the rules on the burden of proof referred to in point 3.
6. It follows from the foregoing that the Minister for the Economy, Finance and Industrial and Digital Sovereignty is entitled, without it being necessary to rule on the other grounds of his appeal, to seek the annulment of Articles 2 to 4 of the judgment of the Administrative Court of Appeal of Bordeaux of 22 November 2022, in so far as it limited the amount of indirect profit transfers reintegrated into the results of Fibusa on account of interest-free advances granted to its foreign subsidiaries and financed from its own funds, for the years 2011 to 2014, by applying interest rates set at 4.25%, 3.75%, 3% and 2.4% respectively.”
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