SAP AG (now SAP SE) is a German multinational software corporation that develops enterprise software to manage business operations and customer relations. The company is especially known for its ERP software. SAP France, a 98% subsidiary of SA SAP France Holding, itself wholly owned by the German group, had deposited funds under a Cash Management Agreement as sight deposits carrying an interest of 0%. Following an audit for the financial years 2012 and 2013, two assessment proposals were issued in December 2015 and November 2016, relating in particular to the 0% interest rate charged on the cash deposits. The tax authorities had added interest to SA SAP France’s taxable income calculated by reference to the rate of remuneration on sight deposits. SAP France contested the adjustments and furthermore requested the benefit of the reduced rate of corporation tax on income from industrial property, pursuant to Article 39 of the French General Tax Code, with regard to the royalties from the licensing agreements relating to Business Object products and Cartesis solutions. In regards to added interest on the deposited funds under a Cash Management Agreement the Court of Appeal decided in favor of the tax authorities. An appeal was then filed by SAP France with the Supreme Court, which by decision no. 461642 of 20 September 2022 set aside the decision and referred the case back to the Court of Appeal. Judgment The Court of Appeal ruled in favour of the tax authorities. Excerpts – English translation. “4. The investigation has shown that SA SAP France has made its surplus cash available to the German company SAP SE, which indirectly holds it as described above, in very large amounts ranging from €132 million to €432 million, under a cash management agreement entered into on 17 December 2009. Under the terms of the agreement, these sums were remunerated on the basis of an interest rate equal to the Euro OverNight Index Average (EONIA) interbank reference rate less 0.15 points. The French tax authorities do not dispute the normal nature of the agreement when it was entered into in 2009, or the rate that was thus defined between the parties. During 2012 and 2013, despite the application of this formula, which resulted in negative remuneration due to changes in the EONIA, the parties agreed to set the rate at 0%. As a result, there was no remuneration at all on the sums made available to the cash centre by SAP France from August 2012. The tax authorities compared this lack of remuneration to the remuneration that SA SAP France could have received by investing its money in financial institutions, based on the average rate of remuneration on sight deposits over the period. It then considered that the difference between the two sums constituted a transfer of profits within the meaning of the aforementioned provisions. Contrary to what the company maintains, such an absence of remuneration makes it possible to establish a presumption of transfer of profits for the transactions in question. 5. The company argues that the investment of the funds with SAP SE is particularly secure and that it enables its subsidiary to obtain immediate and unconditional financing from the central treasury. However, it does not deny, as the French tax authorities point out, that its subsidiary’s software marketing business generates structural cash surpluses and that the subsidiary has never had recourse to financing from the central treasury since its inception. Nor does it report any difficulty in investing surplus cash in secure financial products. In addition, it appears from the investigation that the cash flow agreement does not provide for a defined term and stipulates, in paragraph 2 of section IX, that, subject to compliance with a one-month time limit, the parties may terminate the agreement, without condition or penalty. Section XII of the same agreement also states that it has no effect on the independence of each of its co-contractors or on their autonomy of management and administration. SA SAP France therefore had no contractual obligation to remain in the central cash pool beyond a period of one month. Furthermore, the company does not dispute that the rate of interest on advances, which results from the terms of the agreement, is not fixed, even if the aforementioned 2009 agreement does not contain a review clause, and that the parties may agree on a different rate, as they did in 2012. In addition, by simply arguing that the comparable rate used by the authorities is not relevant, when sight deposits, contrary to what it claims, do not exclude any immediate withdrawal of funds, the company, which does not offer any other comparable rate, does not seriously criticise the rates used by the authorities, between 0.15% and 0.18% over the period, which correspond to the remuneration that SA SAP France could have obtained from a financial institution and which, contrary to what it claims, are not negligible, given the amounts of cash surpluses made available. Lastly, although the company argues that the rates used by the authorities could, in any event, only be reduced by 0.15%, which corresponds to the margin of the central treasury that was applied in the 2009 agreement, this discount cannot be accepted since the comparables used by the authorities necessarily include the margin of the financial institutions. The fact that this rate has never been questioned by the authorities since the agreement was signed in 2009 has no bearing on the present analysis, which relates to different years in dispute. In these circumstances, and while SA SAP France persisted in investing its cash, without remuneration, with an affiliated company, the applicant company did not establish that the advantages it granted to the German company SAP SE were justified by the obtaining of quid pro quos favourable to its business or, at the very least, by quid pro quos at least equivalent to the revenue forgone granted. It follows that the tax authorities were right to reinstate in the results of SA SAP France the advantage granted to ...

SARL Electro Brest had deducted a loss in its taxable income as a result of a debt waiver grranted to a related party. Following an audit the tax authorities disallowed the deduction which they found to be an abnormal act of management and not in compliance with arm’s length principle contained in Article 57 of the General Tax Code. SARL Electro Brest applied to the Administrative Court for a discharge, but in December 2022, the Administrative Court dismissed its application. An appeal was then filed by SARL Electro Brest with the CAA. Judgement of the Administrative Court of Appeal The CAA upheld the assessment of the tax authorities and dismissed the appeal of SARL Electro Brest. Excerpt “5. On the one hand, it is clear from the investigation that SARL Electro Brest holds the entire capital of its subsidiary, but has no commercial relations with it. Although the two companies use some of the same suppliers, they do not have any customers in common. However, the applicant company argues that the debt waiver granted is of a commercial nature on the grounds that a default in payments by its German subsidiary, or even its receivership, would expose it to the risk of severing its commercial relations with its suppliers and in particular Siemens AG. However, neither the alleged default by this subsidiary in the absence of aid, nor the existence of a risk of deterioration in commercial relations with the suppliers of SARL Electro Brest are established by the documents in the file, while it is clear from the investigation that at the date of the assignment of the claim, the main common supplier of the applicant and its subsidiary represented only 11.5% and 9.8% respectively of their respective turnover. It is also clear from the terms of the agreement of 31 March 2017 that the debt waiver was motivated by financial considerations relating to SARL Electro Brest’s desire to balance its subsidiary’s balance sheet with its customers and suppliers. Lastly, although the company alleges that the aid in dispute was granted with regard to its subsidiary’s development prospects, it has not produced any evidence to establish that, at the date on which the debt waiver was recognised, it was intended to safeguard the prospects of an increase in its own sales. In these circumstances, the tax authorities were right to consider that the debt waiver at issue did not constitute deductible commercial assistance within the meaning and for the application of the provisions of Article 39(13) of the French General Tax Code. Consequently, the department was right to reinstate the disputed debt waiver in the applicant company’s results for the purposes of determining corporation tax for the year ended 2016. 6. Secondly, SARL Electro Brest is not entitled to rely, on the basis of Article L. 80 A of the Book of Tax Procedures, on the administrative instruction BOI-BIC-BASE-50-10 relating in particular to the tax treatment of debt waivers, which cannot be regarded as containing an interpretation of tax law different from that applied above. 7. It follows from the foregoing that SARL Electro Brest has no grounds for claiming that, by the judgment under appeal, the Rennes Administrative Court wrongly refused to grant its application. As a result, its application, including its submissions seeking application of the provisions of Article L. 761-1 of the Code of Administrative Justice, must be dismissed.” Click here for English translation Click here for other translation ...

Since 2012, the French company SASU Alchimedics has been owned by Sinomed Holding Ltd, the holding company of a group of the same name set up by a Chinese resident domiciled in the British Virgin Islands. SASU Alchimedics was engaged in the manufacture and marketing of products using electro-grafting technology for biomedical applications and the licensing and assignment of patents in the field of electro-grafting technologies. SASU Alchimedics was subject to an audit for the financial years 2014 and 2015, as a result of which the tax authorities increased its income for the financial years ended 31 December 2013, 2014 and 2015 by the price of services not invoiced to Sinomed Holding Ltd. In addition, the non-invoicing of these services was considered to be a transfer of profits abroad within the meaning of Article 57 of the French General Tax Code and the amounts were therefore also subject to withholding tax. The tax authorities considered that SASU Alchimedics had committed an abnormal act of management by not re-invoicing to its parent company the services provided in connection with the “development and defence of patents”. The price of the services reintegrated as an indirect transfer of profits was determined by applying to the amount of the expenses recorded a cost plus 5%, considered to be a normal margin. These amounts were used as the basis for calculating the withholding tax, which is the only issue in this case. SASU Alchimedics appealed against the assessment and, by judgment of 2 December 2002, the Administrative Court rejected its application for a refund of the withholding tax. An appeal was then lodged with the Administrative Court of Appeal. Judgement of the Court The Administratibe Court of Appeal set aside the decision of the Administrative Court and decided in favor of SASU Alchimedics. Excerpts in English “… 6. In order to justify the existence of an advantage to the company, constituting an indirect transfer of profits, granted to Sinomed Holding Ltd, the tax authorities note that SASU Alchimedics is the owner of patents attached to a business acquired in 2007, and of an exclusive licence on patents and other intangible rights acquired, the same year, from the French Atomic Energy Commission (CEA) and that it entered into an agreement, on 1 June 2007, with Sinomed Holding Ltd, which will become its parent company, and Beijing Sun Technologie Inc, a company incorporated under Chinese law, owned by Sinomed Holding Ltd, which will become its sister company, a patent licence and sub-licence agreement granting them a perpetual licence for the techniques developed by Sinomed Holding Ltd in return for a one-off payment of 9,530,000 euros. The French tax authorities argued that it was not normal for SASU Alchimedics, following the technology transfer agreement of 1 April 2007, to bear the cost of registering and maintaining the patents and licences alone, without any “financial guarantee in the event of successful marketing of the related products, particularly on the European and American markets”, whereas Sinomed Holding Ltd, which now controls the strategy of the companies it owns, stands to benefit from any future successes and is in a position to prevent it from transferring its assets to a third party. It deduced that by not re-invoicing its parent company, Sinomed Holding Ltd, for services provided in relation to “the development and defence of patents”, despite the fact that it had always been in a loss-making position, SASU Alchimedics had granted an undue advantage to its parent company, constituting an abnormal management practice and an indirect transfer of profits abroad. 7. However, the tax authorities do not dispute that, as SASU Alchimedics points out on appeal, the costs of maintaining and protecting the patents, which were expensed, were its responsibility under the terms of the contract entered into in 2007, which it does not claim was no longer in force. Nor does it dispute that the research expenses invoiced by Beyond and Université Paris-Diderot, and the overheads deducted as expenses, were incurred in the interests of SASU Alchimedics. The fact that this company has a chronic deficit does not, in itself, justify the increase in operating income, nor does the fact that an asset is insufficiently profitable constitute, in itself, an abnormal act of management. The tax authorities have failed to identify the “patent valuation and defence” service that they claim to have identified for the benefit of Sinomed Holding Ltd and the exact nature of the advantage that they intend to impose, and have failed to demonstrate under what obligation SASU Alchimedics should have re-invoiced this company for these expenses. The fact that SASU Alchimedics does not have control over its strategy is not, in itself, a decisive argument proving the reality of services provided for the benefit of Sinomed Holding Ltd. Moreover, the contract concluded with this company and with the company that was to become its sister company was signed in 2007 at a time when it is not alleged that SASU Alchimedics was dependent on Sinomed Holding Ltd, and the investigation shows that SASU Alchimedics did in fact benefit from the patent concessions and sub-concessions, which were remunerated in the form of a single payment in 2007. Lastly, although the French tax authorities invoke the prospect of marketing in Europe and the United States the products already developed by the Sinomed group, and in particular by the Chinese company Sino Medical, under the contract concluded in 2007, during the period in dispute there was nothing to require SASU Alchimedics to have signed a contract with its parent company to have the latter bear the costs of maintaining, registering and defending the patents and licences of which it remained the owner and which are not yet used on its continents, where they were not registered. 8. In these circumstances, the French tax authorities have not established the existence of an advantage granted by SASU Alchimedics to Sinomed Holding Ltd and, consequently, of a practice falling within the scope of Article 57 of the French General Tax Code ...

SA Compagnie Gervais Danone was the subject of an tax audit at the end of which the tax authorities questioned, among other things, the deduction of a compensation payment of 88 million Turkish lira (39,148,346 euros) granted to the Turkish company Danone Tikvesli, in which the french company holds a minority stake. The tax authorities considered that the payment constituted an indirect transfer of profits abroad within the meaning of Article 57 of the General Tax Code and should be considered as distributed income within the meaning of Article 109(1) of the Code, subject to the withholding tax provided for in Article 119a of the Code, at the conventional rate of 15%. SA Compagnie Gervais Danone brought the tax assessment to the Administrative Court and in a decision issued 9 July 2019 the Court discharged SA Compagnie Gervais Danone from the taxes in dispute. This decision was appealed by the tax authorities and in June 2021 the Administrative Court of Appeal set aside the decision of the administrative court and decided in favor of the tax authorities. An appeal was then filed by SA Compagnie Gervais Danone with the Supreme Court. Judgement of the Conseil d’État The Supreme Court set aside the decision of the Administrative Court of Appeal and decided in favor of SA Compagnie Gervais Danone. Excerpts from the Judgement “3. It is apparent from the documents in the files submitted to the trial judges that Compagnie Gervais Danone entered into an agreement with Danone Tikvesli, a company incorporated under Turkish law, granting the latter the right to use Groupe Danone’s dairy product trademarks, patents and know-how, of which it is the owner, in order to manufacture and sell dairy products on the Turkish market. In order to deal with the net loss of nearly 40 million euros recorded by Danone Tikvesli at the end of the 2010 financial year, which, according to the undisputed claims of the companies before the trial judges, should have led, under Turkish law, to the cessation of its business, Danone Tikvesli was granted the right to use Groupe Danone’s dairy product brands, patents and know-how, Compagnie Gervais Danone paid it a subsidy of EUR 39,148,346 in 2011, which the tax authorities allowed to be deducted only in proportion to its 22.58% stake in Danone Tikvesli. In order to justify the existence of a commercial interest such as to allow the deduction of the aid thus granted to its subsidiary, Compagnie Gervais Danone argued before the lower courts, on the one hand, the strategic importance of maintaining its presence on the Turkish dairy products market and, on the other hand, the prospect of growth in the products that it was to receive from its Turkish subsidiary by way of royalties for the exploitation of the trademarks and intangible rights that it holds. 4. On the one hand, it is clear from the statements in the judgments under appeal that, in ruling out the existence of a commercial interest on the part of Compagnie Gervais Danone in paying aid to its subsidiary, the Court relied on the fact that Danone Hayat Icecek, majority shareholder in Danone Tikvesli, also had a financial interest in preserving the reputation of the brand, which prevented Compagnie Gervais Danone from bearing the entire cost of refinancing Danone Tikvesli. In inferring that Compagnie Gervais Danone had no commercial interest from the mere existence of a financial interest on the part of Danone Tikvesli’s main shareholder in refinancing the company, the Court erred in law. 5. Secondly, it is clear from the statements in the contested judgments that, in denying that Compagnie Gervais Danone had its own commercial interest in paying aid to its subsidiary, the Court also relied on the fact that the evidence produced by that company did not make it possible to take as established the alleged prospects for growth of its products, which were contradicted by the fact that no royalties had been paid to it before 2017 by the Turkish company as remuneration for the right to exploit the trade marks and intangible rights which it held. In so ruling, the Court erred in law, whereas the fact that aid is motivated by the development of an activity which, at the date it is granted, has not resulted in any turnover or, as in the present case, in the payment of any royalties as remuneration for the grant of the right to exploit intangible assets, is nevertheless capable of conferring on such aid a commercial character where the prospects for the development of that activity do not appear, at that same date, to be purely hypothetical.” Click here for English translation Click here for other translation ...

SAP AG (now SAP SE) is a German multinational software corporation that develops enterprise software to manage business operations and customer relations. The company is especially known for its ERP software. SAP France, a 98% subsidiary of SA SAP France Holding, itself wholly owned by the German group, had deposited funds under a Cash Management Agreement as sight deposits carrying an interest of 0%. Following an audit for the financial years 2012 and 2013, two assessment proposals were issued in December 2015 and November 2016, relating in particular to the 0% interest rate charged on the cash deposits. The tax authorities had added interest to SA SAP France’s taxable income calculated by reference to the rate of remuneration on sight deposits. SAP France contested the adjustments and furthermore requested the benefit of the reduced rate of corporation tax on income from industrial property, pursuant to Article 39 of the French General Tax Code, with regard to the royalties from the licensing agreements relating to Business Object products and Cartesis solutions. SAP France Holding, the head of the group is appealing against the ruling of 30 January 2020 by which the Montreuil Administrative Court rejected its requests for the reconstitution of its overall tax loss carry-forward in the amount of EUR 171,373 for 2012, 314,395 in duties for 2013 and the additional contribution to corporate income tax on the amounts distributed for 2012 and 2013, for amounts of €5,141 and €14,550 respectively, and, in application of the reduced tax rate, the refund of an overpayment of corporate income tax and additional contributions for €27,461,913 for the years 2012 to 2015. In regards to added interest on the deposited funds under a Cash Management Agreement the Court of Appeal decided in favor of the tax authorities. An appeal was filed by SAP France with the Supreme Court. Judgement of the Conseil d’État The Supreme Court set aside the decision of the Court of Appeal. Excerpt “2. Under the terms of Article 57 of the same code: “For the purposes of determining the income tax due by companies that are dependent on or control companies located outside France, the profits indirectly transferred to the latter, either by way of an increase or decrease in purchase or sale prices, or by any other means, are incorporated into the results shown in the accounts. The same procedure shall be followed in respect of undertakings which are dependent on an undertaking or a group which also controls undertakings situated outside France (…) In the absence of precise information for making the adjustments provided for in the first, second and third paragraphs, the taxable income shall be determined by comparison with that of similar undertakings normally operated. It follows from these provisions that, when it finds that the prices charged by an enterprise established in France to a foreign enterprise which is related to it – or those charged to it by this foreign enterprise – are lower – or higher – than those charged by similar enterprises normally operated, In the event that the charges levied in France by a related foreign company – or those invoiced to it by that foreign company – are lower – or higher – than those levied by similar companies operating normally, i.e. at arm’s length, the administration must be considered to have established the existence of an advantage which it is entitled to reintegrate into the results of the French company, unless the latter can prove that this advantage had at least equivalent counterparts for it. In the absence of such a comparison, the department is not, on the other hand, entitled to invoke the presumption of transfers of profits thus instituted but must, in order to demonstrate that an enterprise has granted a liberality by invoicing services at an insufficient price – or by paying them at an excessive price – establish the existence of an unjustified difference between the agreed price and the market value of the property transferred or the service provided 3. In order to judge that SAP France had granted SAP AG a advantage by renouncing, for the years 2012 and 2013, to receive a remuneration in return for the deposit of its cash surpluses with the latter, the administrative court of appeal ruled that the administrative court of appeal based its decision on the fact that this zero remuneration was unrelated to the remuneration to which the company would have been entitled if it had placed its cash surpluses with a financial institution on that date, without this absence of remuneration finding its counterpart in the possibility of financing cash requirements, which were non-existent for the years in question. In holding, however, that the fact that the rate of remuneration of the sums thus deposited with SAP AG resulted from the application of the rate formula provided for in the cash management agreement, which the parties chose to limit to a non-negative result during the performance of that agreement, is irrelevant in this respect, without investigating whether SAP France had acted in accordance with its interest in concluding the agreement in these terms on 17 December 2009, or what obligations it had during the years in dispute, the Administrative Court of Appeal erred in law. 4. It follows from the foregoing, without it being necessary to rule on the other grounds of appeal, that the company SAP France Holding is entitled to request the annulment of Article 3 of the judgment which it is challenging. In the circumstances of the case, it is appropriate to charge the State with the sum of 3,000 euros to be paid to the company SAP France Holding under Article L. 761-1 of the Administrative Justice Code.” Click here for English translation Click here for other translation ...

SA Tropicana Europe Hermes is a French permanent establishment of SA Tropicana Europe, located in Belgium. The French PE carried out the business of bottling fruit juice-based drinks. In 2009, a new distribution contract was concluded with the Swiss company FLTCE, which was accompanied by a restructuring of its business. Before 1 July 2009, Tropicana was engaged in the manufacture of fresh fruit juices in cardboard packs and purchased fresh fruit juices which it pasteurised. As of 1 July 2009, its activity was reduced to that of a contract manufacturer on behalf of FLTCE, which became the owner of the technology and intellectual property rights as well as the stocks. The re-organisation led to a significant reduction in the company’s turnover and profits. Tropicana Europe was subject to two audits, at the end of which the tax authorities notified it of tax reassessments in respect of corporate income tax, withholding tax and business value added contribution (CVAE) for the years 2010 to 2013, together with penalties. It also notified the company of tax adjustments, together with penalties, in respect of the additional contribution to corporation tax for the years 2012 and 2013. According to the tax authorities Tropicana Europe’s new contract was not at arm’s length and constituted an abnormal act of management. Tropicana filed an appeal with the Administrative Court, where the assessment issued by the tax authorities was later set aside. An appeal was then filed by the tax authorities with the Court of Appeal. At issue was whether FLTCE was located in a privileged tax regime and whether there was a link of dependence between Tropicana and FLTCE and thus the basis of the tax assessment. Judgement of the Court of Appeal The court dismissed the appeal of the tax authorities and upheld the decision of the administrative court. Excerpts “As regards the existence of a privileged tax regime : 6. Before the first judges, Tropicana Europe disputed that FLTCE was established in a country with a privileged tax regime within the meaning of the second paragraph of Article 238 A of the General Tax Code. The first judges considered that by simply relying on the overall corporate tax rate of 13% in the canton of Bern, in the Swiss Confederation, where FLTCE’s head office is located, and the significant difference between this rate and the corporate tax rate of 33.33% in France, the tax authorities did not establish that FLTCE was established in a country with a privileged tax regime, the tax authorities did not establish that the amount of income tax to which FLTCE is subject is less than half the amount of income tax for which it would have been liable under the conditions of ordinary law in France, if it had been domiciled or established there, and, consequently, that FLTCE would be subject to a preferential tax regime pursuant to the aforementioned provisions of Article 238 A of the French General Tax Code. As this ground of the judgment is not contested on appeal by the Minister, the latter must be considered as renouncing to rely on the establishment of FLTCE in a country whose tax regime is privileged pursuant to the provisions of Article 238 A of the General Tax Code. Consequently, the Minister bears the burden of proof of the existence of a link of dependence between Tropicana Europe and FLTCE.” “As regards the existence of a link of dependence : 7. In order to discharge Tropicana Europe from the taxes it was contesting, the first judges noted that, in order to establish a relationship of dependence between this company and FLTCE, the tax authorities based themselves on the fact that these two companies belonged to the same multinational group, PepsiCo, and deduced that, by relying solely on this factor, the authorities, who bear the burden of proof, did not establish any relationship of dependence between the two companies within the meaning of Article 57 of the General Tax Code. 8. In order to prove the existence of a relationship of dependence between Tropicana Europe and FLTCE, the Minister noted that SA Tropicana Europe Hermes is a permanent establishment of SA Tropicana Europe, located in Belgium, which is 99.99% owned by Seven’Up Nederland BV, which in turn is wholly owned by Pepsico Inc. FLTCE, located in Switzerland in the canton of Bern, is wholly owned by Frito Lay Compagny Gmbh, also located in Switzerland in the same canton. This company has been controlled since 14 December 2011 by PepsiCo Limited located in Gibraltar. While the Minister deduces from all these facts that SA Tropicana Europe and FLTCE are sister companies under the control of the PepsiCo group, he does not provide evidence of legal dependence between SA Tropicana Europe and FLTCE, which are not linked by a capital link between them. Consequently, it is up to the Minister to provide proof of the existence of a de facto dependency link between these two companies. However, the Minister did not provide any other element or indication that would make it possible to detect a de facto dependence between these two companies other than the fact that they belong to the same group. The fact that the two companies belong to the same group does not, in the present case, constitute sufficient proof or evidence of de facto dependence between SA Tropicana Europe and FLTCE in the absence of any other element put forward by the Minister. Consequently, the Minister is not entitled to maintain that, contrary to the assessment made by the first judges, the conditions for the application of Article 57 of the General Tax Code were met in order to base the taxes for which the Administrative Court of Amiens granted discharge.” “As regards the request for substitution of legal basis : … 12. However, this reorganisation was not limited to a simple “change in the invoicing circuit” as the Minister maintains, but led to a significant change in operating conditions since, before 1 July 2009, Tropicana Europe was engaged ...

SNC Oakley Europe, a subsidiary of SAS Oakley Holding, which belonged to the American group Oakley Inc. until its takeover in 2007 by the Italian group Luxottica, carried on the business of distributing clothing, footwear, eyewear and accessories of the Oakley brand on European territory. Following the takeover SNC Oakley Europe in 2008 transferred its distribution activity on the French market to another French company, Luxottica France, and its distribution activity on the European market to companies incorporated in Ireland, Luxottica Trading and Finance and Oakley Icon, and deducted restructuring costs in an amount of EUR 15,544,267. The tax authorities qualified these costs as an advantage granted without consideration to its sister companies, constituting, on the one hand, an abnormal management act and, on the other hand, an indirect transfer of profits within the meaning of Article 57 of the General Tax Code on the grounds that its costs had not been re-invoiced to the Italian company, the head of the group, which had taken the initiative to reorganise the distribution activity. SAS Oakley Holding filed an appeal with the administrative Court which decided in favor of the tax authorities. Not satisfied with the result, an appeal was then filed with the CAA of Lyon. Judgement of the CAA The Court of appeal set aside the decision of the court of first instance and ruled in favor of SAS Oakley Holding. Excerpt “…On the basis of such considerations, and while it is up to the administration to assess whether the transactions in question correspond to acts of normal commercial management with regard solely to the company’s own interests, the administration, In such considerations, and whereas it is up to it to assess whether the transactions at issue correspond to acts of normal commercial management with regard to the company’s own interests alone, the administration, which did not have to rule on the appropriateness of SNC Oakley Europe’s choice to sell its business assets in order to retain only the activity of promoting distribution in the network of sports shops on the French market, establishes neither the existence of an abnormal act of management nor proof of the existence of a practice that falls within the provisions of Article 57 of the General Tax Code. 7. Furthermore, it appears from the investigation that, by deed dated March 19, 2008, SNC Oakley Europe sold to the Irish company Luxottica Trading and Finance Ltd the goodwill related to its distribution activity within the “optical” network on the European market, with the exception of the French market, for the sum of EUR 17,773,551.29. By deed dated April 29, 2008, it sold to the French company Luxottica France the goodwill related to its distribution activity within the “optics” network on the French market for an amount of EUR 1,222,525.59. Finally, by deed dated 30 June 2008, it sold to the Irish company Oakley Icon Ltd the goodwill related to its distribution activity within the “sports” network on the European market for the amount of 5,857,175.13 euros. The tax authorities do not dispute that these transfer prices were in line with the market price. However, the transfer of the business assets related to the activities that SNC Oakley Europe sold necessarily had as a counterpart, as it results from the transfer contracts, the assumption by this company of the costs related to the refusal of retailers, distributors and sales agents to transfer their contracts to the transferee companies as well as the costs related to the termination of the employees’ contracts, pursuant to the provisions of Article L. 122-12 of the French Labour Code, which are reproduced in the present report. 122-12 of the French Labour Code, taken over as of 1 May 2008 in Article L. 1224-1 of this code, which only requires the transfer of current employment contracts in the event of the transfer by an employer to another employer of an autonomous economic entity, retaining its identity, and whose activity is continued and taken over by the new employer. Thus, the administration cannot be considered, by the considerations related in point 6 above on the appropriateness of the restructuring, as demonstrating that the charges in dispute should not have been borne by SNC Oakley Europe. By justifying the increase by the fact that the latter did not claim any consideration or compensation “from the party that initiated the takeover and reorganisation of the business”, i.e. the Italian company Luxottica Group, it does not demonstrate either that any advantage was granted to the sister companies, the transferees of the business. 8. It follows from the foregoing that SAS Luxottica France, as successor to SAS Oakley Holding, is entitled to argue that the Grenoble Administrative Court, in the judgment under appeal, wrongly rejected its request for discharge of the additional corporate income tax assessed against it for the financial year ending in 2008 because of the reconsideration of the assumption of responsibility by SNC Oakley Europe for the costs associated with the sale of its business assets in the amount of EUR 15,544,267.” Click here for English translation Click here for other translation ...

For example, consider a situation in which Company B, a member of an MNE group, needs additional funding for its business activities. In this scenario, Company B receives an advance of funds from related Company C, which is denominated as a loan with a term of 10 years. Assume that, in light of all good-faith financial projections of Company B for the next 10 years, it is clear that Company B would be unable to service a loan of such an amount. Based on facts and circumstances, it can be concluded that an unrelated party would not be willing to provide such a loan to Company B due to its inability to repay the advance. Accordingly, the accurately delineated amount of Company C’s loan to Company B for transfer pricing purposes would be a function of the maximum amount that an unrelated lender would have been willing to advance to Company B, and the maximum amount that an unrelated borrower in comparable circumstances would have been willing to borrow from Company C, including the possibilities of not lending or borrowing any amount (see comments upon “The lender’s and borrower’s perspectives” in Section C.1.1.1 of this chapter). Consequently, the remainder of Company C’s advance to Company B would not be delineated as a loan for the purposes of determining the amount of interest which Company B would have paid at arm’s length ...

SAS Microchip Technology Rousset (former SAS Atmel Rousset) is a French subsidiary of the American Atmel group, which designs, manufactures, develops and sells a wide range of semiconductor integrated circuits. It was subject to an audit covering the FY 2010 and 2011 and as a result of this audit, the tax authorities imposed additional corporate income tax and an additional assessments for VAT. The administration also subjected SAS Atmel Rousset to withholding tax due to income deemed to be distributed to one of the Atmel group companies. The authorities invoked the provisions of Article 57 of the General Tax Code as the new legal basis for the additional corporate tax contributions and the social contribution on corporate tax, resulting from the reintegration of the capital loss arising from the sale of SAS Fabco shares and the assumption of responsibility for SAS Fabco’s social plan, instead of the provisions of Article 38(1) and Article 39(1) of the same code. The tax administration, which relies on the guidelines recommended in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Public Administrations, argued that the transfer of the production activity, materialised by the sale of the Rousset plant, is part of a global strategy. The parent company of the group will benefit from the gains made through the outsourcing of the production activity, and moreover initiated and conducted the negotiations, as demonstrated by the letter of intent to purchase dated 12 May 2009 from LFoundry GmbH, addressed to the group’s parent company. Similarly, the administration notes that the “Stock Purchase Agreement” and “Wafer Purchase Agreement” relating respectively to the transfer of shares in SAS Fabco, and to the terms of purchase of semiconductors sold by this same company, were signed by Mr A…, Atmel Corporation’s Director of Operations. It follows from all of these elements that the tax authorities must be considered as providing evidence of a practice falling within the scope of Article 57 of the General Tax Code, which establishes a presumption of indirect profit transfer. SAS Microchip Technology Rousset applied to the Marseille administrative court for a discharge of duties and penalties for the taxes to which it was thus subject for the years 2010 and 2011, and in a judgment of 21 June 2019, the administrative court decided in favor of SAS Microchip Technology Rousset and set aside the assessment. The Authorities filed an appeal to the Court of Appeal. Judgement of the Court of Appeal The court dismissed the appeal of the authorities and upheld the decision of the administrative court in favor of SAS Microchip Technology Rousset. Excerpts “…although the administration argues that this operation was entirely led by the group’s parent company’s operations manager, this circumstance, particularly because of the international scope of the project, is not such as to demonstrate that the interests of SAS Microchip Technology Rousset were not taken into account and that the transaction in question was concluded to the exclusive benefit of the American company. It follows from the above that the court was right to consider that the sum in dispute could not be considered as an indirect transfer of profits to the American company Atmel Corporation within the meaning of Article 57 of the General Tax Code. As a result, the tax authorities were not justified in increasing the profit subject to corporate income tax for the financial year ending in 2010 by EUR 72,062,567. “…Furthermore, it is also clear from the information provided by the respondent company that the cost of the additional costs generated by the Manufacturing Services Agreement was much lower than the costs that SAS Microchip Technology Rousset would have had to bear in the event of the restructuring of the Rousset manufacturing unit or its closure. It is clear from the documents in the file that the Flichy firm estimated that the redundancy costs alone would have amounted to EUR 176 800 000, while the community of the Pays d’Aix estimated at EUR 60 million the amount of business tax that would have had to be paid in the event of cessation of the activity. Finally, the fact that the director of operations of the parent company Atmel Corporation took the decisions relating to the transfer of the manufacturing activity of SAS Microchip Technology Rousset is not sufficient to establish that, by accepting the terms of the Manufacturing Services Agreement and by bearing the resulting additional costs, the respondent company did not act in the interest of the company. Consequently, the latter provided proof that the costs in dispute, which it had borne, had been justified by obtaining favourable considerations for its own operations and did not constitute an indirect transfer of profits. The administration was therefore not justified, as the administrative court ruled, in reintegrating the corresponding sum into the taxable profits of SAS Microchip Technology Rousset for the financial year ending in 2011.” Unless it establishes the existence of an abnormal act of management, the tax administration does not have to interfere in the management of companies. Under the combined provisions of Articles 38 and 209 of the General Tax Code, the profit subject to corporation tax is that which derives from operations of any kind carried out by the company, with the exception of those which, because of their purpose or their methods, are alien to normal commercial management. The assumption by an enterprise of costs for which it has no direct consideration or which are not directly incumbent on it is only normal commercial management if it appears that, in granting such advantages, the enterprise has acted in its own interest. It follows from the reasons set out in points 10 and 12, recalling the interest of SAS Microchip Technology Rousset in bearing the additional costs linked to the invoicing conditions provided for in the “Manufacturing Services Agreement” and “Wafer Purchase Agreement” relating to the purchase of wafers from LFoundry, that the administration does not establish an abnormal management act. Click here for English translation Click here for other translation ...

SAP AG (now SAP SE) is a German multinational software corporation that develops enterprise software to manage business operations and customer relations. The company is especially known for its ERP software. SA SAP France, a 98% subsidiary of SA SAP France Holding, itself wholly owned by the German group, had deposited funds under a Cash Management Agreement as sight deposits carrying an interest of 0%. Following an audit for the financial years 2012 and 2013, two assessment proposals were issued in December 2015 and November 2016, relating in particular to the 0% interest rate charged on the cash deposits. The tax authorities had added interest to SA SAP France’s taxable income calculated by reference to the rate of remuneration on sight deposits. SA SAP France contested the adjustments and furthermore requested the benefit of the reduced rate of corporation tax on income from industrial property, pursuant to Article 39 of the French General Tax Code, with regard to the royalties from the licensing agreements relating to Business Object products and Cartesis solutions. SA SAP France Holding, the head of the group is appealing against the ruling of 30 January 2020 by which the Montreuil Administrative Court rejected its requests for the reconstitution of its overall tax loss carry-forward in the amount of EUR 171,373 for 2012, 314,395 in duties for 2013 and the additional contribution to corporate income tax on the amounts distributed for 2012 and 2013, for amounts of €5,141 and €14,550 respectively, and, in application of the reduced tax rate, the refund of an overpayment of corporate income tax and additional contributions for €27,461,913 for the years 2012 to 2015. Judgement of the Court of Appeal In regards of the added interest on the deposited funds under a Cash Management Agreement the Court decided in favor of the tax authorities. Excerpt “In order to reintegrate into the taxable results of SA SAP France the interest at the monthly rate for sight deposits on the sums it made available to SAP AG under a cash management agreement concluded on 17 December 2009 between the parties, the department noted that SAP AG, now SAP SE, a company under German law, held 100% of SA SAP France Holding, SA SAP France’s parent company, and that the EONIA rate for interbank relations, reduced by 0.15% stipulated in the agreement, had led to a total absence of remuneration for the sums made available to the central treasury by SA SAP France as of August 2012, for very significant amounts ranging from 132 to 432 million euros. In these circumstances, the administration establishes the existence of an advantage consisting of the granting of interest-free advances by SA SAP France to the company SAP AG, located outside France, which controls it through SA SAP France Holding. If the latter argues that the rate stipulated is a market rate whose evolution is independent of the control of the parties, and that it was capped at 0 % whereas a strict application of the agreement would have led to a negative rate, these circumstances are inoperative, since this rate is unrelated to the remuneration to which SA SAP France could have claimed if it had placed its cash surpluses with a financial institution. Furthermore, by maintaining that the investment of its funds with SAP AG is particularly secure and that it enables it to obtain immediate and unconditional financing from the central treasury at the rate of EONIA + 30%, the applicant company does not justify an interest of its own which can be regarded as a consideration, since it is common ground that its situation vis-à-vis the central treasury was constantly in credit for very substantial amounts which greatly exceeded its working capital requirements. Finally, the monthly rate for sight deposits of between 0.15 and 0.18% applied by the department corresponds to the interest rate which SA SAP France could have obtained from a financial institution and the applicant does not propose a more relevant comparable. It follows that the administration establishes the existence during 2012 and 2013 of a transfer of profit, within the meaning of the provisions of Article 57 of the General Tax Code, from SA SAP France to the company SAP AG located outside France, for the amounts of EUR 171 373 in 2012 and EUR 484 986 in 2013, which the administration reintegrated into the results of SA SAP France.” Click here for English translation Click here for other translation ...

SA Compagnie Gervais Danone was the subject of an tax audit at the end of which the tax authorities questioned, among other things, the deduction of a compensation payment of 88 million Turkish lira (39,148,346 euros) granted to the Turkish company Danone Tikvesli, in which the french company holds a minority stake. The tax authorities considered that the payment constituted an indirect transfer of profits abroad within the meaning of Article 57 of the General Tax Code and should be considered as distributed income within the meaning of Article 109(1) of the Code, subject to the withholding tax provided for in Article 119a of the Code, at the conventional rate of 15%. SA Compagnie Gervais Danone brought the tax assessment to the administrative court. In a decision of 9 July 2019 the Court discharged SA Compagnie Gervais Danone from the taxes in dispute. This decision was appealed to Administrative Court of Appeal by the tax authorities. Judgement of the Court The Administrative Court of Appeal decided in favor of the tax authorities and annulled the decision of the administrative court. Excerpts from the Judgement “Firstly, it appears from the investigation that SA Compagnie Gervais Danone entered in its accounts for the financial year ending in 2011 a subsidy recorded under the name “loss compensation Danone Tikvesli”, paid to its Turkish subsidiary facing financial difficulties characterised by a negative net position of almost 40 million euros as at 31 December 2010, a deficit situation incompatible with Turkish regulations. The deductibility of this aid was allowed, in proportion to the 22.58% stake held by SA Compagnie Gervais Danone in this company. In view of the relationship of dependence between the applicant company and its beneficiary subsidiary, it is for SA Compagnie Gervais Danone to justify the existence of the consideration it received in return. In order to justify its commercial interest in taking over the whole of the subsidy intended to compensate for its subsidiary’s losses, Compagnie Gervais Danone argues that it was imperative for it to remain present on the Turkish dairy products market, a strategically important market with strong development potential, in order to preserve the brand’s international reputation, and that it expected to receive royalties from its subsidiary in a context of strong growth. However, the 77.48% majority shareholder, Danone Hayat Icecek, a company incorporated under Turkish law and wholly owned by Holding Internationale de boisson, the bridgehead company of the Danone group’s ‘water’ division, had an equal financial interest in preserving the brand’s reputation, so that this reason does not justify the fact that the cost of refinancing Danone Tikvesli had to be borne exclusively by SA Compagnie Gervais Danone. Although the applicant company relies on the strategic importance of the Turkish dairy products market, having regard to Turkish eating habits, its population growth, the country’s GDP growth rate and its exports to the Middle East, the extracts from two press articles from 2011 and 2015 and the undated table of figures which it produces in support of that claim do not make it possible to take the alleged growth prospects as established. Moreover, these general considerations are contradicted, as the administration argues, by the results of the exploitation by Danone Tikvesli of its exclusive licence contract for the production and distribution of Groupe Danone branded dairy products, since it is common ground that SA Compagnie Gervais Danone, which had not received any royalties from its subsidiary since the acquisition of the latter in 1998, did not benefit from any financial spin-off from this licensing agreement until 2017, the royalties received since 2017, which in any case are subsequent to the years of taxation, being moreover, as the court noted, out of all proportion to the subsidy of more than 39 million euros paid in 2011. In these circumstances, the tax authorities must be considered as providing evidence that, as the expected consideration was not such as to justify the commercial interest of SA Compagnie Gervais Danone in granting this aid to Danone Tikvesli, this subsidy constituted, for the fraction exceeding its shareholding, an abnormal act of management constituting a transfer of profits abroad within the meaning of Article 57 of the General Tax Code.” “It follows from the foregoing that the Minister for the Economy, Finance and Recovery is entitled to maintain that it was wrongly that, by the contested judgment, the Montreuil Administrative Court discharged SA Compagnie Gervais Danone from the taxes in dispute. It is therefore appropriate to annul the judgment and to make SA Gervais Danone liable for these taxes.” Click here for English translation Click here for other translation ...

Bluestar Silicones France (BSF), now Elkem Silicones France SAS (ESF), produces silicones and various products that it sells to other companies belonging to the Bluestar Silicones International group. The company was audited for the financial years 2007 – 2008 and an assessment was issued. According to the tax authorities, the selling prices of the silicone products had been below the arm’s length price and the company had refrained from invoicing of management exepences and cost of secondment of employees . In the course of the proceedings agreement had been reached on the pricing of products. Hence, in dispute before the court was the issue of lacking invoicing of management exepences and cost of secondment of employees for the benefit of the Chinese and Brazilian subsidiaries of the Group. According to the company there had been no hidden transfer of profits; its method of constructing the group’s prices has not changed and compliance with the arm’s length principle has been demonstrated by a study by the firm Taj using the transactional net margin method and the criticisms of its prices are unfounded. The results must be analyzed in the context of heavy investments made by the Bluestar Silicones International sub-group, 80% of which it financed, and which are at the root of the heavy losses recorded in the sub-group’s first fiscal years for the years 2007 to 2009. Furthermore, the business tax adjustments was considered unjustified by the company since, the transfer prices charged did not constitute transfers of profits; Decision of the Court No charge of management fees from Brazil and Hong Kong: “Under these conditions, the administration was justified in considering that BSF’s renunciation to invoice management fees to the Chinese and Brazilian companies of the Bluestar Silicones International group constituted an abnormal act of management. It was thus entitled to correct the company’s profit and also to correct the company’s added value for the determination of its business tax.” No charge of cost of provision of employees in China: “While BSF claims that it derived a direct benefit from the provision of these three expatriates through the development of sales by the Chinese subsidiary, it does not establish this, even though it has been shown that the project manager and the two technicians worked at the Jiangxi site, which was acquiring the technology needed to manufacture products similar to those previously purchased by the Chinese subsidiary from BSF and therefore potentially competing with it. The impossibility of charging such fees due to Chinese legislation has also not been demonstrated, nor has any compensation resulting from insufficient transfer pricing. Under these conditions, the applicant company does not demonstrate that the advantage granted to the Chinese company had sufficient consideration in the interest of its operations and, consequently, was justified by normal management of its own interests.” Additional withholding tax and business tax However, the Court did find that the company was “entitled to argue that the Montreuil Administrative Court wrongly refused to discharge it from the additional withholding tax contributions charged to it for the financial year ended in 2007 and the additional business tax contributions for the year 2007 resulting from the correction made by the tax authorities of its transfer prices practiced with the company BSI Hong Kong.” Click here for English Translation Click here for other translation ...

Société Générale S.A. had paid for costs from which its subsidiaries had benefited. The costs in question was not deducted by Société Générale in its tax return, but nor had they been considered distribution of profits subject to withholding tax. Following an audit for FY 2008 – 2011 a tax assessment was issued by the tax authorities according to which the hidden distribution of profits from which the subsidiaries benefited should have been subject to withholding tax in France Société Générale held that the advantage granted by the parent company in not recharging costs to the subsidiaries resulted in an increase in the valuation of the subsidiaries. It also argued that the advantages in question were not “hidden” since they were explicitly mentioned in the documents annexed to the tax return By judgment of 11 October 2018, the court of first instance discharged the withholding taxes as regards the absence of re-invoicing of costs incurred on behalf of the subsidiaries located in Mauritania, Burkina Faso and Benin. Judgement of the Court The Administrative Court of Appeal decided partially in favour of the tax authorities and partially in favour of Société Générale. It discharged Société Générale from withholding taxes relating to non-deductible expenses called “remuneration of DeltaCrédit’s managers” and to the costs incurred on behalf of its Moldovan and Georgian subsidiaries based on an interpretation of the articles on dividends in the relevant tax treaties. Excerpts “…Société Générale did not re-invoice “expenses borne by the head office for the subsidiaries”, expressly mentioned as such in the tables No. 2058 A of non-deductible expenses appended to its returns. Société Générale also assumed the costs of “personnel seconded to foreign subsidiaries”, the “remuneration of the managers of [its Russian subsidiary] Deltacrédit”, and, as mentioned in the previous point, “ITEC transfer prices”, which it spontaneously reintegrated into its taxable income, thus acknowledging the non-deductibility of these expenses. These facts reveal that Société Générale has incurred costs that are normally borne by its foreign subsidiaries. As a result, Société Générale is presumed to have made a transfer of profits to a company located outside France, within the meaning of the aforementioned provisions of Article 57 of the General Tax Code. It is therefore incumbent on it to prove that this transfer involved sufficient consideration for it and thus had the character of an act of normal commercial management.” “In this case, with regard to the “expenses borne by the head office for foreign subsidiaries”, the cost of “personnel seconded to foreign subsidiaries”, and “ITEC transfer prices”, the entries in the tables of non-deductible expenses, which do not specify the precise nature of the benefits granted, nor the beneficiary companies, do not in themselves reveal the existence of the gifts granted. On the other hand, the non-accounting mention made by Société Générale, in Table 2058 A of its income tax return, of the benefit granted to its Russian subsidiary DeltaCrédit by paying the remuneration of its managers, reveals both the purpose of the expense and its beneficiary. This advantage could not therefore be considered as a hidden advantage within the meaning of the provisions of Article 111c of the General Tax Code.” “Lastly, even though no financial transfer was made, the costs unduly borne lead to disinvestment for the company which bore them and to distributed income for the company which benefited from them. It follows that, in terms of French tax law, Société Générale is only entitled to argue that the Montreuil Administrative Court was wrong to reject its request for a discharge in respect of the non-deductible charges referred to as “remuneration of DeltaCrédit’s directors” ” Under Article 7 of the Convention between France and the former USSR, applicable to the income at issue: “1. Dividends paid by a resident of a State to a resident of the other State may be taxed in the first State. However, the tax so charged shall not exceed 15 per cent of the gross amount of such dividends. 2. The term “dividends” as used in this Article means income from shares as well as other income which is subjected to the treatment of income from shares by the laws of the State of which the person making the distribution is a resident. “These stipulations do not cover income deemed to be distributed by virtue of the provisions of Article 111 c) of the General Tax Code which is not subject to the same regime as income from shares. Société Générale is therefore entitled to argue that this income was not taxable in France, pursuant to Article 12 of the same agreement, which provides that “income not listed in the preceding articles (…) received by a resident of a State and arising from sources in the other State shall not be taxable in that other State. “.” “Under the terms of Article 13 of the Franco-Mauritanian, Franco-Beninese and Franco-Burkinabe tax treaties: “income from securities and similar income (income from shares, founders’ shares, interest and limited partnership shares, interest from bonds or any other negotiable debt securities) paid by companies (…) having their tax domicile in the territory of one of the Contracting States may be taxed in that State”. These stipulations, which refer only to the income from securities and similar income they list, do not concern income deemed to be distributed within the meaning of Article 111 c) of the General Tax Code. The Minister is therefore not entitled to argue that the first judges wrongly discharged Société Générale from the withholding taxes applied to the benefits granted to its subsidiaries located in Mauritania, Benin and Burkina Faso, which were not taxable in France.” Click here for English translation Click here for other translation ...

For example, consider a situation in which Company B, a member of an MNE group, needs additional funding for its business activities. In this scenario, Company B receives an advance of funds from related Company C, which is denominated as a loan with a term of 10 years. Assume that, in light of all good-faith financial projections of Company B for the next 10 years, it is clear that Company B would be unable to service a loan of such an amount. Based on facts and circumstances, it can be concluded that an unrelated party would not be willing to provide such a loan to Company B due to its inability to repay the advance. Accordingly, the accurately delineated amount of Company C’s loan to Company B for transfer pricing purposes would be a function of the maximum amount that an unrelated lender would have been willing to advance to Company B, and the maximum amount that an unrelated borrower in comparable circumstances would have been willing to borrow from Company C, including the possibilities of not lending or borrowing any amount (see comments upon “The lender’s and borrower’s perspectives” in Section C.1.1.1 of this chapter). Consequently, the remainder of Company C’s advance to Company B would not be delineated as a loan for the purposes of determining the amount of interest which Company B would have paid at arm’s length ...

Philips France SAS provides contract R&D to it’s Dutch parent. Compensation for the service was calculated as cost plus 10%. In the years 2003 to 2007 Philips France received government subsidies for performing R&D. These subsidies had been deducted by the company from the cost base before calculating of the cost plus remuneration. The French tax authorities issued a tax assessment where the deduction was denied and the remuneration calculated on the full cost base. The Supreme Administrative Court ruled that a deduction of subsidies from the cost base does not constitute a “transfer of profits abroad” and allowed the reduced cost base for calculation of the arm’s length remuneration. Click here for English translation Click here for other translation ...

The Supreme Administrative Court laid down the factors to be applied in determining the abnormal nature of the remuneration of intragroup loans. “The normal or abnormal nature of the remuneration of loans taken by an enterprise from another enterprise to which it is affiliated must be assessed in relation to the remuneration that the lender should pay to a financial institution or similar body to which the enterprise is not related and would borrow, under similar conditions, sums of an equivalent amount. A lender’s assessment of the default risk of the borrower, whose risk premium is the consideration, depends on the debtor’s ability to repay the debt to the obligee until maturity. The assessment of the solvency risk of the borrower, in particular summarized in the periodic ratings that the rating agencies attribute to the companies that may, where appropriate, solicit them to this effect, results from the analysis of the evolutions of a series. economic variables, both internal and external to the borrower’s environment, reflecting, inter alia, the debtor’s statement of financial position, the stability of its long-term financial policy, profitability and capital profitability; it invests, possibly compared to the average data of the sector of activity which is its, its liquidities, the room for maneuver financial which it may possibly have because of predefined circumstances, its competitive positioning or the quality of its employees and leaders. ,,, 2) The borrower’s membership in a group of companies, if it is one of the characteristics of his organization, in capital requirements, can only be taken into account for the assessment of its risk of default to the extent that it is likely to have an impact on its solvency. In this respect, if the administration, which bears the burden of proof, can presume that the bond, by a parent company, of the debts of its subsidiary has the effect of modifying the solvency risk of the beneficiary of the surety, it can not can, on the other hand, presume that belonging to a group of companies can have such an effect on its own, even though market players would be informed about the solvency risk of the parent company because of the stability of the notes, convergent and regularly updated, which are attributed to it by the different rating agencies.” The court found that the interest rate must be determined based on a stand alone credit rating of the borrowing company and that the influence of group membership on the credit rating of the borrowere can only be determined in a detailed analysis. The court ruled in favor of General Electric France. Click here for translation ...

SAS Cooper Capri’s belongs to the American group Cooper Industries. The Group carries out a parts production and sales activity in the context of two branches, a “construction” branch and an “industry” branch which produces, in particular, cable glands Cooper Capri was subject to an audit at the end of which the administration considered that it had indirectly transferred part of its profits to companies belonging to the same group located outside France and, consequently, incorporated the profits thus transferred into the result charged to the accounts for FY 2007 The company asked the Administrative Court to discharge the additional taxes. In November 2014 the request of Cooper Capri was rejected and the assessment of the tax authorities upheld. Cooper Capri then filed an appeal with the Court of Appeal. According to Cooper Capri, the tax administration had not demonstrated the granting of an advantage to related companies located abroad; in fact, if the ratio between the gross margin and sales is lower than that observed for comparable unrelated transactions, this is due, on the one hand, to the fact that the related companies bear distribution costs that normally accrue to them and, on the other hand, to the fact that these companies operate on markets with specific characteristics. Furthermore, according to Cooper Capri the tax administration could not base the disputed taxes on Article 57 of the general tax code since it had not identified with sufficient precision the companies benefiting from this advantage; Finally, the tax administration did not demonstrate that these companies were established in a foreign State or in a territory outside France with a privileged tax regime. Judgement of the Court of Appeal The court dismissed the appeal of Cooper Capri and upheld the decision of the administrative court. Excerpts “4. Considering, on the one hand, that it is common knowledge that SAS Cooper Capri was dependent on the American company Cooper Industries, a company located outside of France; that it is clear from the investigation that it manufactures goods sold on the French market and for export, either through independent distributors or through Cooper Shanghai located in China and Cooper Crouse Hinds located in Germany, Norway, Spain, the United Arab Emirates and South Korea; that all these companies were also dependent on the American company Cooper Industries; that the administration thus established the existence, which was not formally contested, of a link of dependence between the company located in France and these companies located outside France and which belonged to the same group; that the company cannot therefore usefully maintain that the administration could not apply Article 57 of the General Tax Code on the grounds that it had not established the privileged nature of the tax regimes applicable to the companies located abroad; 5. Considering, on the other hand, that it results from the investigation that, to determine the price of the products that it manufactures and that it intends to sell, the company used the method of the production cost increased by a margin; that this method, known as the “cost +”, was not disputed by the administration; that, however, and in the first place, the administration noted during the audit that, with regard to transactions concerning these products and carried out with the companies mentioned in point 4, the ratio between the gross margin and the amount of sales was 25.3% for the financial year ending in 2007, whereas, with regard to transactions concerning the same products carried out with other customers not belonging to the group, this ratio was 38.5%; that secondly, it is not disputed that the setting of prices is the responsibility of the company for all transactions carried out outside the group and of the American parent company for all intra-group transactions; that in this respect the prices are established on the basis of a “cost+” calculated on the basis of a margin of 27% and are revised continuously to take account of the valuation of raw materials; that, given the method used by the company, the finding of a lower margin results from the application of lower selling prices; that the administration was thus able to validly base itself on the margin differences found without having to analyse comparable markets and comparable functions, since it referred only to the company’s own data and did not compare them with the prices charged by other companies; that the company cannot reproach the administration for not having carried out a more detailed analysis and established a transfer of profits by company since, in response to the department’s request for documents specifying the method of determining prices by product and by client company, it confined itself, even though it was the only one to hold the documents, to providing it with overall data for the year under review without supporting documents; that, under these conditions, the differences in rates highlighted by the administration reveal that the prices invoiced by SAS Cooper Capri to companies established outside France and belonging to the same group were significantly lower than those it charged to its other clients;” Click here for English translation Click here for other translation ...

In the Rottapharm case The French “abnormal management action” principle was invoked. The Court overruled the decision of the tax administration under the principle of non-intervention, which prevents the tax administration from getting involved in company management. The fact that an advertising campaign costs more than the usual amount spent by the majority of companies in the same business area for similar products does not prove that the advertising campaign is an abnormal management action. Click here for translation ...

In the Société d’acquisitions immobilières case the interest rate charged to a subsidiary was considered comparable with the interest rate the French entity would receive from a third party bank for an investment similar in terms and risk. The Court decided that the cash advance granted by a sub-subsidiary to its ultimate parent with which it had no business relations could constitute an “abnormal act of management” if the amount lent is clearly disproportionate to the creditworthiness of the borrowing company. Click here for translation ...

In the Soladi case the court deemed it to be an “abnormal act of management” to provide an explicit financial guarantee free of charge, unless direct actual benefit for the entity providing this support can be justified. Click here for translation ...

In the case of Montlaur Sakakini the tax authorities had issued an adjustment where the arm’s length interest rate on deposits had been determined to be between 10-12%. The company held that the interest rate should be 4.5%. Judgement of the Court The court decided in favour of the company as no proof of the validity of an interest rate higher than the 4.5% had been provided by the authorities. Excerpt “…in order to justify the interest rates of 12.5%, 12.5%, 11.79% and 10.63% which the tax authorities retained, respectively for the financial years …, 1984 and 1985 respectively on the advances still in dispute with the MONTLAUR company, the Minister of the Economy and Finance refers to the rates at which certain financial establishments would have remunerated twelve-month deposits of more than 500,000 francs and three-month deposits of 100,000 francs, as well as to the average rates charged on the interbank market ; that none of these investments is directly comparable by its nature and duration to the advances granted by MONTLAUR SAKAKINI; that, in so doing, the Minister does not provide proof of the validity of an interest rate higher than the 4.5% admitted by MONTLAUR SAKAKINI; that, as a result, and without it being necessary to rule on the other pleas in law of the application, the MONTLAUR SAKAKINI company is entitled to maintain that it is wrongly that, by the contested judgment, the administrative court of Marseille rejected its application in its entirety…” Click here for English translation Click here for translation . . . Click here for translation ...

In Baker International the court concluded that if interest is not charged in respect of deferrals of payments granted to a related company, it is considered either an abnormal act of management or is subject to Section 57 of the tax code. Excerpt “…it is clear from the investigation that the share of the applicant company’s turnover corresponding to sales of equipment to its subsidiary decreased significantly during the years under investigation, as did sales to Elf; whereas, on the other hand, the above-mentioned provisions of Article 57 prevented S.A. BAKER INTERNATIONAL FRANCE from charging its subsidiary sales prices that differed from the public prices; finally, neither the operating conditions decided by the company “Bi-Gabon” with regard to stocks and the taking back of equipment, nor the fact that the financial health of this subsidiary was able to provide it with income, can suffice to justify the interest that S. A. would have had in this matter. A. BAKER INTERNATIONAL FRANCE to grant interest-free payment deadlines; that, consequently, the administration, and then the first judges, were right to consider that the disputed payment terms constituted, regardless of how they were financed by the applicant company, a financial advantage granted without consideration to the “Bi-Gabon” subsidiary and, consequently, a transfer of profits within the meaning of the provisions of Article 57 of the General Tax Code;” Click here for English translation Click here for other translation ...

In the case of Vansthal France the tax authorities had disallowed a transfer pricing policy under which a 20%-40% mark-up was added to payments to a Swiss entity because in its capacity as a billing centre the Swiss entity assumed no risk. Judgement of the Court The Court ruled in favour of the tax authorities. Excerpt “Considering, on the other hand, that it results from the investigation that the MAD company re-invoiced the goods to the VANSTHAL FRANCE company after having increased the prices by 39% for the kitchen articles and 20% for the porcelain articles and collected the corresponding payments; that, since MAD did not perform any services for the applicant company, the department considered that the latter had performed an abnormal act of management by agreeing to pay for its purchases at an unreasonably high price with full knowledge of the facts and that the payment of the excess price resulted in a transfer of profits abroad to the Nyder group, on which the applicant is dependent; Considering that if the applicant company maintains that the over-invoicing was justified by the services rendered by the company VANSTHAL INTERNATIONAL in the field of management and accounting, it was up to the latter to invoice these ‘services’ and not to the company MAD whose link with the company Z… INTERNATIONAL is solely financial; that the production of the MAD company’s operating account by the applicant company, in the absence of any official Swiss supporting document, does not have any evidential force to enable the value of the services that the MAD company allegedly rendered to the applicant to be assessed; that since the concept of ‘goodwill’ is an element used to calculate the value of the securities representing the share capital of limited companies, the relationship between the acquisition of shares in the company Nyder B. V. and the mark-ups on the price of goods charged by MAD is not established; that, consequently, the applicant company does not justify the existence of a consideration for the mark-ups on the prices invoiced by the Swiss company MAD; Considering that it follows from all the above that SARL Z… FRANCE is not entitled to maintain that it was wrongly that, by the contested judgment, the administrative court of Lille rejected its request; Article 1: The request of SARL Z.. FRANCE is rejected.” Click here for English translation Click here for other translation ...