SAS Arrow Génériques is in the business of distributing generic medicinal products mainly to the pharmacy market, but also to the hospital market in France. It is 82.22% owned by its Danish parent company, Arrow Groupe ApS, which is itself a wholly-owned subsidiary of the Maltese company Arrow International Limited. In 2010 and 2011, SAS Arrow Génériques paid royalties to its Danish parent, Arrow Group ApS, and to a related party in the UK, Breath Ltd. According to the French tax authorities, the royalties constituted a benefit in kind granted to Arrow Group ApS and Breath Ltd, since SAS Arrow Génériques had not demonstrated the reality and nature of the services rendered and had therefore failed to justify the existence and value of the consideration that it would have received from the payment of these royalties, which constitutes an indirect transfer of profits to related companies. On appeal, the Administrative Court decided in favour of SAS Arrow Génériques. The tax authorities appealed the decision to the Court of Administrative Appeal. Judgement of the Court The Court of Appeal dismissed the appeal of the tax authorities and upheld the decision of the first instance court in favour of SAS Arrow Génériques. Excerpt 5. It is common ground that SAS Arrow Génériques is not dealing at arm’s length with Arrow group ApS, a Danish company that held 82.22% of its shares during the period under review, and the UK company Breath Ltd, which is also 100% owned by Arrow group ApS. The proposed rectifications of 26 December 2013 and 19 December 2014 addressed to SAS Arrow Génériques for the years 2010 and 2011 show that during the period under review it paid royalties of 5% of net sales to Arrow group ApS for the sub-licensing of intellectual property rights relating to the technical files used to file marketing authorisations in France, which were themselves licensed to Arrow group ApS by its parent company, Arrow International Limited, a company incorporated under Maltese law. SAS Arrow Génériques also paid royalties, on similar terms, to the UK company Breath Ltd. In order to challenge the full amount of the royalties paid by SAS Arrow Génériques to Arrow Group ApS and Breath Ltd, the tax authorities took the view that the royalties in question constituted a benefit in kind granted to Arrow Group ApS and Breath Ltd, since the audited company had not demonstrated the reality and nature of the services rendered and had therefore failed to justify the existence and value of the consideration that it would have received from the payment of these royalties, which constitutes an indirect transfer of profits to related companies. However, it is clear from the investigation, as the Court held, that the royalties in question were in return for Arrow Group ApS and Breath Ltd making available to the applicant the technical files necessary for the submission of marketing authorisation applications for its business. Contrary to what the Minister maintains on appeal, the investigation did not show that SAS Arrow Génériques had the material and human resources necessary to produce these technical files itself, which required the assistance of various professionals and the performance of clinical tests, or that it used subcontractors to do so. The fact noted by the authorities that certain molecules for which the technical files essential to the company’s business had been compiled were not held in any capacity whatsoever by Arrow International Limited, Arrow group ApS or Breath Ltd, and in particular that certain molecules were not included in their list of intangible assets, is not sufficient in itself to call into question the existence of these technical files and the services rendered by Arrow group ApS or Breath Ltd, given that this entry may fall into another category of expenditure or may be the result of an error in the entry in the accounts of these molecules and the related technical files. In addition, SAS Arrow Génériques argues, without being contradicted, that the rights attached to certain files were not acquired but leased or subleased from third parties by Arrow International Limited before being licensed and then sub-licensed. Finally, if the Minister maintains that the added value created by SAS Arrow Génériques is based on the development of its commercial network and that the royalties paid deprive it of the return on investment to which it would be entitled as a result of the activity it undertakes, such an argument does not call into question the existence of services rendered by Arrow Group ApS or Breath Ltd in return for the royalties at issue but, where applicable, only the excessive nature of the royalties paid, which therefore do not constitute an advantage in kind granted by a company established in France to a company established outside France. In addition, the Minister did not produce any evidence in his defence comparing the prices charged by the said affiliated companies with those charged by similar companies operating normally in order to establish whether the amount of the royalties paid was excessive. It follows that the Minister for the Economy, Finance and Recovery is not entitled to argue that, in the judgment under appeal, the Administrative Court of Lyon wrongly held that the payment of the royalties at issue by SAS Arrow Génériques could not be regarded as an advantage in kind granted by a company established in France to a company established outside France and that the full amount of the royalties could not therefore be reintegrated into its taxable profits on the basis of the provisions of Article 57 of the General Tax Code. 6. It follows from the foregoing that the Minister for the Economy, Finance and Recovery is not entitled to maintain that it was wrongly that, by Articles 1 to 7 of the contested judgment the Lyon Administrative Court reduced the taxable income of SAS Arrow Génériques for corporation tax purposes by an amount of 4,865,767 euros in respect of the 2010 financial year and consequently discharged SAS Arrow Génériques in ...

By judgment of 13 March 2020, the Provincial Administrative Court upheld the complaint filed by K.O. and revoked a decision issued by the tax authorities on the determination of the amount of the tax liability resulting from a transfer of shares between K.O. and a related party in 2016. An appeal was filed by the tax authorities with the Supreme Administrative Court in which the authorities stated that Provincial Administrative Court incorrectly had concluded that the nominal value of shares taken up by a taxpayer is not subject to market mechanisms and, therefore, the authority should not question the revenue thus generated. According to the tax authorities the taxpayer effected a transaction with a related entity of which it was the owner and determined without justification a contribution in-kind disproportionately high in relation to the shares acquired in the related entity, while the authority, taking these circumstances into account, determined a comparable uncontrolled price that the taxpayer would have obtained in exchange for the transfer of shares in I. to an unrelated entity, verifying the proportion of the distribution of the value of the non-cash contribution in line with the purpose and function of the transfer pricing provisions Judgement of the Supreme Administrative Court The court dismissed the appeal of the tax authorities and upheld the decision of the Administrative Court. Excerpts “The taxable income in the case of taking up shares in a company in exchange for a contribution in kind in 2016 was the nominal value of such shares and not their market value, determined in any way. The court of first instance rightly emphasises that the nominal value cannot be verified. This view is also confirmed by the established judicature of the Supreme Administrative Court, which may be exemplified by the judgments of this Court: of 19 April 2006, ref. no. II FSK 558/05; of 8 December 2009, ref. no. II FSK 1149/08; of 22 May 2013, ref. no. II FSK 1838/11, or the judgments quoted above concerning the issue of application of provisions on transfer prices, which is already disputed in the case.” … “If a share is taken up at a price higher than its nominal value, the surplus of the share subscription price over its nominal value is transferred to the supplementary capital. There is no doubt that in a limited-liability company reserve capital may also be created (this follows from the wording of Article 233 § 1), but the wording of Article 154 § 3 determines that at the moment of covering the share the agio must be transferred to the reserve capital, and only secondarily may it be transferred (pursuant to a separate resolution of the shareholders’ meeting) to the reserve capital in whole or in part. The share premium is permissible irrespective of whether the shares are covered by a contribution in kind or by a cash contribution. There are no legal and accounting counter-indications that a certain part of the value of the in-kind contribution made to the company should be allocated not to the share capital, but to the supplementary or reserve capital.” … “The Supreme Administrative Court sitting in judgment does not share the view expressed in the appealed judgment that in the absence of legal definitions of transfer pricing concepts, one should refer to colloquial language. The institution of transfer pricing is primarily applicable to cross-border relations. It is subject to international regulations, its application results in the necessity of adjusting income of each party to the transaction, belonging to different tax jurisdictions. Reference in previous case-law, including in the judgment under appeal, to the dictionary meaning of the Polish language and equating the concept of a ‘transaction’ with an ‘agreement’ is unsupported by the interpretation of the transfer pricing provisions. That institution applies mainly to cross-border transactions within multinational enterprises. It is permissible to refer to the meaning of colloquial language in the course of an interpretation, but only if the meaning of the words used by the legislator cannot be deduced either from legal language or from legalese. In addition, given the international character of transfer pricing, the terms related to it should be understood universally.” “The parity (proportion) of the distribution of the value of the in-kind contribution to the company’s capitals is therefore neither a financial result nor a financial indicator within the meaning of the above concepts.” … “In summary, in the opinion of the Supreme Administrative Court, the subject of transactions between related parties covered by transfer pricing in 2016 could be: tangible and intangible goods, tangible and intangible services (including financial services), joint ventures, restructuring activities as described in Chapter 5a of the Regulation of the Minister of Finance of 2009. The division of the in-kind contribution made by a natural person into the capital of the company did not constitute the subject of the transaction within the meaning of the transfer pricing regulations.” Click here for English Translation Click here for other translation ...