SA SACLA, which trades in protective clothing, footwear and small equipment, was the subject of a tax audit covering the financial years 2007, 2008 and 2009. In 2008, Sacla had sold a portfolio of trademarks to a related party, Involvex SA, a company incorporated under Luxembourg law, for the sum of 90,000 euros.
In a proposed assessment issued in 2011, the tax authorities increased Sacla’s taxable income on the basis of Article 57 of the General Tax Code, taking the view that Sacla had made an indirect transfer of profits in the form of a reduction in the selling price by selling a set of brands/trademarks held by it for EUR 90,000 to a Luxembourg company, Involvex, which benefited from a preferential tax regime. The tax authorities had estimated the value of the trademarks at €20,919,790, a value that was reduced to €11,288,000 following interdepartmental discussions.
In a February 2020, the Lyon Administrative Court of Appeal, after rejecting the objection of irregularity of the judgment, decided that an expert would carry out a valuation to determine whether the sale price of the trademarks corresponded to their value. The valuation was to take into account an agreed exemption from the payment of royalties for a period of five years granted by Involvex to SA SACLA.
The expert’s report was filed on 8 April 2021 and, upon receipt of the report, SA SACLA asked the court to modify the judgment by considering that the value of the transferred trademarks should be set at between EUR 1.3 million and EUR 2.1 million and that the penalties for wilful infringement should be waived.
By judgement of 19 August 2021, the court rejected SACLA’s request and set the value of the trademarks – in accordance with the expert’s report – at 5,897,610 euros.
“The value of the trademarks transferred by SACLA, initially declared by that company in the amount of EUR 90,000 excluding tax, was corrected by the tax authorities to EUR 11,288,000 excluding tax, and was then reduced by the judgment under appeal to EUR 8,733,348 excluding tax. It follows from the investigation, in particular from the expert’s report filed on 8 April 2021, that this value, taking into account the exemption from payment of royalties granted by the purchaser of the trademarks in the amount of 2,400,000 euros excluding tax and after taking into account corporate income tax, must be established at the sum of 5,897,610 euros excluding tax. The result is a difference between the agreed price and the value of the trade marks transferred in the amount of EUR 5 807 610 excluding tax, which constitutes an advantage for the purchaser. The applicant, who merely contests the amount of that advantage, does not invoke any interest or consideration of such a nature as to justify such an advantage. In these circumstances, the administration provides the proof that it is responsible for the existence of a reduction in the price of the sale of assets and the existence of an indirect transfer of profits abroad.”
SACLA then appealed to the Supreme Administrative Court, which by decision no. 457695 of 27 October 2022 set aside articles 3 and 6 of the judgement from the Administrative Court of Appeal and remanded the case for further considerations.
“2. In a judgment before the law of 13 February 2020, the Lyon Administrative Court of Appeal decided that, before ruling on the Sacla company’s request, an expert appraisal would be carried out in order to determine whether the sale price of the trademarks sold by that company corresponded to their value, taking into consideration, in particular, the waiver of payment of royalties for a period of five years granted by the purchasing company, Involvex, to the Sacla company. In order to fulfil the mission entrusted to them by the court, the expert and his assistant first considered four methods, then abandoned the method of comparables and the method of capitalisation of royalties, and finally retained only two methods, the method of historical costs and the method of discounting future flows, from which they derived a weighted average. It follows from the statements in the judgment under appeal that the court, after considering that the historical cost method did not allow the effect of corporation tax to be taken into account with any certainty and led to a valuation almost eight times lower than the discounted cash flow method, rejected the former method and adopted only the latter and considered that there was no need to carry out a weighting, since, in its view, the discounted cash flow method proved to be the most accurate.
3. It follows from the statements in the judgment under appeal that the court, after fixing the value of the trade marks transferred by Sacla at EUR 8 733 348 exclusive of tax, an amount also retained by the administrative court, intended to apply the discount recommended by the expert report of 7 April 2021 in order to take account of the exemption from payment of royalties granted for five years by the purchaser of the trade marks. In fixing the amount of that discount at EUR 2 400 000 exclusive of tax, whereas the expert report which it intended to apply estimated it, admittedly, at that amount in absolute terms, but by applying a rate of 37% to a value of the trade marks transferred estimated at EUR 6 500 000, the Court distorted that expert report and gave insufficient reasons for its judgment.”
Judgement of the Administrative Court of Appeal
The Court ruled as follows
“…by selling on 19 October 2008 a set of trademarks held by it at a reduced price to Involvex, a company incorporated under Luxembourg law, had carried out an indirect transfer of profits. In a judgment of 10 October 2017, the Lyon Administrative Court, after finding that there was no need to rule on the claims for suspension of payment submitted at first instance, granted partial discharge of the additional corporation tax and social security contributions to which the company was liable in respect of the 2008 financial year and the related penalties in respect of a reduction in the tax base of EUR 2,554,652 and dismissed the remainder of the claim.
2. In a preliminary ruling dated 13 February 2020, the Lyon Administrative Court of Appeal decided that, before ruling on Sacla’s application, an expert appraisal would be carried out to determine whether the sale price of the trademarks sold by Sacla corresponded to their value, taking into account in particular the five-year exemption from royalty payments granted by the acquiring company, Involvex, to Sacla. The expert report was submitted on 8 April 2021. In a ruling dated 19 August 2021, the Lyon Administrative Court of Appeal granted a partial discharge, up to a tax base reduction of 5,390,390 euros excluding tax, including the reduction granted by the judgment under appeal, the additional corporate income tax and social security contributions to which Sacla was liable in respect of the 2008 financial year and the related penalties, ordered Sacla to pay 91.47% of the expert’s fees and the State to pay 8.53%, and dismissed the remainder of the parties’ claims. By decision no. 457695 of 27 October 2022, the Conseil d’Etat, hearing an appeal lodged by Coverguards Sales, set aside articles 3 to 6 of the Lyon Administrative Court of Appeal’s decision of 19 August 2021 and referred the case back to the court.”
“14. As a result of the investigation, the tax authorities noted that on 19 October 2008 Sacla had sold a portfolio of trademarks to Involvex SA, a company incorporated under Luxembourg law, for the sum of 90,000 euros. In the rectification proposal, the tax authorities estimated the value of the trademarks at €20,919,790, a value that was reduced to €11,288,000 following departmental discussions. Sacla acknowledged that the sale price of 90,000 euros was undervalued and that this reduction in revenue constituted an indirect transfer of profits abroad within the meaning of Article 57 of the General Tax Code.
With regard to the method used to assess the value of the trademarks sold:
15. The value of a trademark at the time of its acquisition or at the time of the granting of its rights of use, which depends on the profits that the acquirer of the trademark or its user can expect from its use, must be assessed on the basis of the profit prospects that, at the date of acquisition, the company could reasonably expect to make.
16. The expert appointed by the Lyon Administrative Court of Appeal to determine the value of the trademarks transferred used the weighted average of the historical cost method and the discounted cash flow method. Only the discounted cash flow method should be used, as it appears to be the most reliable method for assessing the value of a trademark in relation to the future economic benefits that it confers on its owner, without taking into account the historical cost method, which leads to a valuation by the expert that is almost eight times lower than that based on the discounted cash flow method.”
“21. The value of the trademarks transferred by Sacla, initially declared by the company at EUR 90,000 excluding tax, increased to EUR 11,288,000 excluding tax by the administration at the end of the tax procedure, was set at EUR 8,733,348 excluding tax by the Lyon Administrative Court. It follows from what has been said above, and in particular from the report of the expert appointed by the court, that the value of the trademarks transferred by Sacla must be assessed at 8,297,610 euros. Taking into account the 37% discount for exemption from payment of royalties granted for five years by the purchaser of the trademarks, which should be applied to this value of 3,070,115 euros before tax, this value comes to 5,227,495 euros before tax, an amount which corresponds to the ceiling of the estimate claimed by Sacla both before the national commission for direct taxes and turnover taxes and at first instance. The result was a difference of 5,137,495 euros between the value of the trademarks transferred and the agreed transfer price of 90,000 euros excluding tax, which constituted an advantage for the purchaser. The applicant company, which merely contested the amount of this advantage, did not invoke any interest or consideration of such a nature as to justify such an advantage. In these circumstances, the tax authorities provide the proof that is incumbent on them of the existence of a reduction in the price of the sale of assets up to this amount and, consequently, of the existence of the indirect transfer of profits abroad recognised in principle by the applicant company.”
“24. As a result of the foregoing, Sacla’s taxable income for the 2018 financial year should be set at EUR 10,033,798 instead of the EUR 16,184,303 determined by the tax authorities, and the tax base for corporate income tax and social security contributions for that year should be reduced by EUR 6,150,505. Since, on the one hand, the Lyon Administrative Court of Appeal ordered a reduction of 5,390,390 euros in this tax base and discharged the taxes at issue, up to this amount, in Articles 1 and 2 of the judgment of 19 August 2021 and, on the other hand, that the result declared by Sacla included the amount of the sale price of the trademark portfolio in the amount of 90,000 euros, a further reduction in the tax base of 760,115 euros and a partial discharge, in the amount of this amount, of the taxes at issue should be ordered. Coverguard Sales is therefore only entitled to argue that the Lyon Administrative Court was wrong to refuse its request to that extent in the judgment under appeal.”
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