In 2011, Willink SAS issued two intercompany convertible bonds with a maturity of 10 years and an annual interest rate of 8%. The tax authorities found that the 8% interest rate had not been determined in accordance with the arm’s length principle. Willink appealed, but both the Administrative Court and later the Administrative Court of Appeal sided with the tax authorities. The case was then appealed to the Conseil d’Etat which in December 2022 overturned the decision and ruled predominantly in favour of Willink SAS finding that RiskCalc could be used to determine a company’s credit rating for transfer pricing purposes in a sufficiently reliable manner, notwithstanding its shortcomings and the differences in the business sectors of the comparables. On that basis the case was remanded to the Administrative Court of Appeal. Judgment After re-examination of the case, the Administrative Court of Appeal annulled the tax assessment and ruled in favour of Willink SAS. “12. It follows from the foregoing that SAS Willink provides the evidence incumbent on it that the interest rate applicable to the transactions at issue could not have been lower than that which would have been applicable to borrowing transactions of the same nature entered into by independent undertakings. It is therefore entitled to request the cancellation of the corporation tax adjustments that led to the reduction of its losses carried forward for the 2011, 2012 and 2013 financial years, and the reinstatement of those losses.” Click here for English translation Click here for other translation ...

In 2009 the English company EDF Energy UK Ltd (EDFE), a wholly-owned subsidiary of SAS Electricité de France International (SAS EDFI), issued 66,285 bonds convertible into shares (OCAs) for a unit nominal value of EUR 50,000. SAS EDFI subscribed to all of these OCAs for their nominal value, i.e. a total subscription price of EUR 3,314,250,000. The OCAs had a maturity of five years, i.e. until October 16, 2014, and could be converted into new EDFE shares at the instigation of the subscriber at any time after a three-year lock-up period, i.e. from October 16, 2012. Each bond entitled the holder to receive 36,576 EDFE shares after conversion. The annual coupon for the OCAs was set at 1.085%. In this respect, SAS EDFI determined, on the basis of a panel of bond issues of independent comparables, the arm’s length rate that should be applied to conventional bonds, i.e. 4.41% (mid-swap rate and premium of 1.70%), 490 million according to the “Tsiveriotis and Fernandes” model, so that the sum of the present value of the flows of the “debt” component of the bond and the value of the “conversion” option is equal to the subscription price of the OCAs. SAS EDFI recognised the annual interest received at a rate of 1.085% on the bonds as income, thus subject to corporate income tax, i.e. 36 million euros. The tax authorities considered that the “conversion” component had a zero value for SAS EDFI and that, given the terms of the loan – in this case, via the OCA mechanism – and the context of the issuance transaction, the reduction in the interest rate applied compared with the arm’s length rate of 4.41% to which SAS EDFI was entitled, made it possible to achieve a transfer of profits, In the case of SAS EDFI, the difference between the interest rate of 4.41% and the rate corresponding to the actual remuneration recorded had to be reintegrated in order to determine its taxable income. Before the appeal judge, the Minister of Action and Public Accounts contested any value to the “conversion” component on the double ground, on the one hand, that the OCAs issued by EDFE having been subscribed by its sole shareholder, the financial profit that SAS EDFI can hope to make by subscribing and then converting the OCAs into new shares mechanically has a value of zero, since it would be offset by a loss of the same amount on the value of the EDFE shares held prior to this conversion, and on the other hand, that since the OCAs issued by EDFE were subscribed by its sole shareholder, the financial benefit that SAS EDFI can hope to make by subscribing and then converting the OCAs into new shares has a value of zero, since it would be offset by a loss of the same amount on the value of the EDFE shares held before this conversion, on the other hand, since the objective sought by SAS EDFI was not that of a “classic” financial investor and the decision to convert or not the OCAs into new shares will not be taken solely in the interest of the subscriber with a view to maximising his profit, the valuation of the “conversion” component of the OCAs based solely on such an interest is not relevant and, since the financial impact of a conversion was then random, this component must necessarily be given a value close to zero. Not satisfied with the assessment, Electricité de France brought the case to court. The Court of first instance held in favour of the tax authorities. An appeal was then filed by Electricité de France with the Administrative Court of Appeal (CAA). In a decision issued 25 January 2022 the Administrative Court of Appeal overturned the decision from the court of first instance and found in favor of Electricité de France. “…since the Minister for Public Action and Accounts does not justify the zero value of the ‘conversion’ component he refers to, SA EDF and SAS EDFI are entitled to maintain that he was wrong to consider that, by subscribing to the OCAs issued by EDFE, for which the interest rate applied was 1.085% and not the borrowing rate for traditional bonds of 4, 41%, SAS EDFI had transferred profits to its subsidiary under abnormal management conditions, and the amounts corresponding to this difference in rates had to be reintegrated to determine its taxable results pursuant to Article 57 of the General Tax Code and, for EDFE, represented hidden distributions within the meaning of c. of article 111 of the same code which must be subject to the withholding tax mentioned in 2. of article 119 bis of the same code” An appeal was then filed by the tax authorities with the Conseil d’État, which in November 2022 annulled the decision from the CAA and found in favor of tax authorities and remanded the case to the Administrative Court of Appeal. Judgement of the Administrative Court of Appeal In accordance with the guidance provided in the 2022 Judgement of the Conseil d’État, the Court decided in favor the tax authorities. Excerpt (English translation) “On the existence of an indirect transfer of profits: Regarding the application of tax law: 2. On the one hand, under the terms of the first paragraph of article 57 of the general tax code, applicable to corporate tax matters under article 209 of the same code : ” For the establishment of the income tax due by companies which are dependent on or which have control of companies located outside France, the profits indirectly transferred to the latter, either by increase or decrease in purchase or sale prices, or by any other means, are incorporated into the results recorded by the accounts (…) “. It follows from these provisions that, when it notes that the prices invoiced by a company established in France to a foreign company linked to it – or those invoiced to it by this foreign company – are lower – or ...

In 2011, Willink SAS issued two intercompany convertible bonds with a maturity of 10 years and an annual interest rate of 8%. The tax authorities found that the 8% interest rate had not been determined in accordance with the arm’s length principle. Willink appealed, but both the Administrative Court and later the Administrative Court of Appeal sided with the tax authorities. Judgment of the Supreme Court The Conseil d’Etat overturned the decision and ruled in favour of Willink SAS. The court found that RiskCalc could be used to determine a company’s credit rating for transfer pricing purposes in a sufficiently reliable manner, notwithstanding its shortcomings and the differences in the business sectors of the comparables. Click here for English translation Click here for other translation ...

In 2009 the English company EDF Energy UK Ltd (EDFE), a wholly-owned subsidiary of SAS Electricité de France International (SAS EDFI), issued 66,285 bonds convertible into shares (OCAs) for a unit nominal value of EUR 50,000. SAS EDFI subscribed to all of these OCAs for their nominal value, i.e. a total subscription price of EUR 3,314,250,000. The OCAs had a maturity of five years, i.e. until October 16, 2014, and could be converted into new EDFE shares at the instigation of the subscriber at any time after a three-year lock-up period, i.e. from October 16, 2012. Each bond entitled the holder to receive 36,576 EDFE shares after conversion. The annual coupon for the OCAs was set at 1.085%. In this respect, SAS EDFI determined, on the basis of a panel of bond issues of independent comparables, the arm’s length rate that should be applied to conventional bonds, i.e. 4.41% (mid-swap rate and premium of 1.70%), 490 million according to the “Tsiveriotis and Fernandes” model, so that the sum of the present value of the flows of the “debt” component of the bond and the value of the “conversion” option is equal to the subscription price of the OCAs. SAS EDFI recognised the annual interest received at a rate of 1.085% on the bonds as income, thus subject to corporate income tax, i.e. 36 million euros.. The tax authorities considered that the “conversion” component had a zero value for SAS EDFI and that, given the terms of the loan – in this case, via the OCA mechanism – and the context of the issuance transaction, the reduction in the interest rate applied compared with the arm’s length rate of 4.41% to which SAS EDFI was entitled, made it possible to achieve a transfer of profits, In the case of SAS EDFI, the difference between the interest rate of 4.41% and the rate corresponding to the actual remuneration recorded had to be reintegrated in order to determine its taxable income. Before the appeal judge, the Minister of Action and Public Accounts contested any value to the “conversion” component on the double ground, on the one hand, that the OCAs issued by EDFE having been subscribed by its sole shareholder, the financial profit that SAS EDFI can hope to make by subscribing and then converting the OCAs into new shares mechanically has a value of zero, since it would be offset by a loss of the same amount on the value of the EDFE shares held prior to this conversion, and on the other hand, that since the OCAs issued by EDFE were subscribed by its sole shareholder, the financial benefit that SAS EDFI can hope to make by subscribing and then converting the OCAs into new shares has a value of zero, since it would be offset by a loss of the same amount on the value of the EDFE shares held before this conversion, on the other hand, since the objective sought by SAS EDFI was not that of a “classic” financial investor and the decision to convert or not the OCAs into new shares will not be taken solely in the interest of the subscriber with a view to maximising his profit, the valuation of the “conversion” component of the OCAs based solely on such an interest is not relevant and, since the financial impact of a conversion was then random, this component must necessarily be given a value close to zero. Not satisfied with the assessment, Electricité de France brought the case to court. The Court of first instance held in favour of the tax authorities. An appeal was then filed by Electricité de France with the Administrative Court of Appeal (CAA). In a decision issued 25 January 2022 the Administrative Court of Appeal overturned the decision from the court of first instance and found in favor of Electricité de France. “…since the Minister for Public Action and Accounts does not justify the zero value of the ‘conversion’ component he refers to, SA EDF and SAS EDFI are entitled to maintain that he was wrong to consider that, by subscribing to the OCAs issued by EDFE, for which the interest rate applied was 1.085% and not the borrowing rate for traditional bonds of 4, 41%, SAS EDFI had transferred profits to its subsidiary under abnormal management conditions, and the amounts corresponding to this difference in rates had to be reintegrated to determine its taxable results pursuant to Article 57 of the General Tax Code and, for EDFE, represented hidden distributions within the meaning of c. of article 111 of the same code which must be subject to the withholding tax mentioned in 2. of article 119 bis of the same code” An appeal was then filed by the tax authorities with the Conseil d’État Judgement of the Supreme Administrative Court The Supreme Administrative Court annulled the decision from the CAA and found in favor of tax authorities. Excerpts “(…) 4. It follows from the statements in the judgment under appeal that the court first found that the interest rate agreed between EDFI and its subsidiary in 2009 was lower than the rate that would remunerate bond financing in an arm’s length situation. Secondly, it considered that the granting to EDFI of an option to convert its shares into shares of the financed company could be valued in the same way as the granting of the same option in the context of a transaction between companies with no capital ties. The court deduced that the interest rate in dispute, including the value of this option, did not constitute an indirect transfer of profits abroad. 5. However, the situation arising from the grant to the sole shareholder of the company financed of an option to convert the bonds he has subscribed to into shares of the company is, by its very nature, not comparable to an arm’s length situation, since the value of this option, consisting exclusively in the opening of an option to acquire a fraction of the company’s capital ...

On 1 July 2013, HCL Maître Pierre issued a ten-year bond which were convertible into shares and bore interest at a rate of 12%, the accrued amount of which was capitalised annually until the date of redemption or conversion, together with a non-conversion premium at a rate of 3%, if applicable. This loan was subscribed by its sole partner, (SAS) HGFI Saint-Martin. Following an tax audit of HCL Maître Pierre’s for the financial years ended 31 March 2012, 2013 and 2014, the tax authorities considered that the interest at the rate of 12% could only be deducted at a rate set at 2.82%. Judgement of the Supreme Court The Court dismissed the appeal of HCL Maître Pierre and upheld the assessment issued by the tax authorities. Excerpts “3. It follows from the combination of these provisions that interest relating to sums left or made available to a company by a company which directly or through an intermediary holds the majority of the share capital or in fact exercises decision-making power, or which is placed under the control of the same third party as the first company, are deductible within the limit of those calculated at a rate equal to the annual average of the average effective rates charged by credit institutions for variable-rate loans to enterprises with an initial term of more than two years or, if higher, at the rate which the borrowing enterprise could have obtained from independent financial institutions or organisations under similar conditions. The rate which the borrowing undertaking could have obtained from independent financial institutions or organisations under similar conditions shall mean, for the purposes of these provisions, the rate which such institutions or organisations would have been likely, in view of its own characteristics, in particular its risk profile, to grant it for a loan of the same characteristics under arm’s length conditions. The borrowing undertaking, which has the burden of proving the rate it could have obtained from independent financial institutions or bodies for a loan granted under similar conditions, may provide such proof by any means. In order to evaluate this rate, it may, where appropriate, take account of the yield on bonds issued by undertakings in comparable economic circumstances where such bonds constitute, in the circumstances under consideration, a realistic alternative to intra-group financing. Where the sums left or made available to the company by its members consist of the nominal amount of bonds convertible into shares subscribed to by the latter, the reference rate thus assessed should be adjusted to take account of the value of the conversion option associated with the convertible bonds issued. In order to establish that the 12% rate of the convertible bonds in question corresponded to the remuneration of an arm’s length financing, HCL Maître Pierre relied on ten bond issues by Western European companies with comparable risk, selected from a study by PwC, which showed a median rate of 11.91%. The court noted that these companies had ratings of less than BB- on the scale of the Standard and Poor’s rating agency, whereas the rating assigned by the same study to HCL Maître Pierre was BB+. It concluded that, since the comparables cited related to companies with worse credit ratings than its own, HCL Maître Pierre did not justify the arm’s length nature of the 12 % rate by presenting such a sample.” (10) It follows from the foregoing that HCL Maître Pierre does not provide evidence that the 12% rate at which it issued bonds convertible into shares on 1 July 2013 would be the rate it could have obtained from independent financial institutions or organisations under similar conditions, and that the tax authorities were right to limit the deduction of interest to the rate provided for by the provisions of Article 39(1)(3) of the aforementioned General Tax Code. The company is therefore not entitled to seek the annulment of the judgment by which the Strasbourg Administrative Court rejected its claim.” Click here for English translation Click here for other translation ...

In 2009 the English company EDF Energy UK Ltd (EDFE), a wholly-owned subsidiary of SAS Electricité de France International (SAS EDFI), issued 66,285 bonds convertible into shares (OCAs) for a unit nominal value of EUR 50,000. SAS EDFI subscribed to all of these OCAs for their nominal value, i.e. a total subscription price of EUR 3,314,250,000. The OCAs had a maturity of five years, i.e. until October 16, 2014, and could be converted into new EDFE shares at the instigation of the subscriber at any time after a three-year lock-up period, i.e. from October 16, 2012. Each bond entitled the holder to receive 36,576 EDFE shares after conversion. The annual coupon for the OCAs was set at 1.085%. In this respect, SAS EDFI determined, on the basis of a panel of bond issues of independent comparables, the arm’s length rate that should be applied to conventional bonds, i.e. 4.41% (mid-swap rate and premium of 1.70%), 490 million according to the “Tsiveriotis and Fernandes” model, so that the sum of the present value of the flows of the “debt” component of the bond and the value of the “conversion” option is equal to the subscription price of the OCAs. SAS EDFI recognised the annual interest received at a rate of 1.085% on the bonds as income, thus subject to corporate income tax, i.e. 36 million euros.. The tax authorities considered that the “conversion” component had a zero value for SAS EDFI and that, given the terms of the loan – in this case, via the OCA mechanism – and the context of the issuance transaction, the reduction in the interest rate applied compared with the arm’s length rate of 4.41% to which SAS EDFI was entitled, made it possible to achieve a transfer of profits, In the case of SAS EDFI, the difference between the interest rate of 4.41% and the rate corresponding to the actual remuneration recorded had to be reintegrated in order to determine its taxable income. Before the appeal judge, the Minister of Action and Public Accounts contested any value to the “conversion” component on the double ground, on the one hand, that the OCAs issued by EDFE having been subscribed by its sole shareholder, the financial profit that SAS EDFI can hope to make by subscribing and then converting the OCAs into new shares mechanically has a value of zero, since it would be offset by a loss of the same amount on the value of the EDFE shares held prior to this conversion, and on the other hand, that since the OCAs issued by EDFE were subscribed by its sole shareholder, the financial benefit that SAS EDFI can hope to make by subscribing and then converting the OCAs into new shares has a value of zero, since it would be offset by a loss of the same amount on the value of the EDFE shares held before this conversion, on the other hand, since the objective sought by SAS EDFI was not that of a “classic” financial investor and the decision to convert or not the OCAs into new shares will not be taken solely in the interest of the subscriber with a view to maximising his profit, the valuation of the “conversion” component of the OCAs based solely on such an interest is not relevant and, since the financial impact of a conversion was then random, this component must necessarily be given a value close to zero. Not satisfied with the assessment, Electricité de France brought the case to court. The Court of first instance held in favour of the tax authorities. An appeal was then filed by Electricité de France with the CAA. Decision of the Court of Appeal The Court overturned the decision from the court of first instance and found in favor of Electricité de France. “…since the Minister for Public Action and Accounts does not justify the zero value of the ‘conversion’ component he refers to, SA EDF and SAS EDFI are entitled to maintain that he was wrong to consider that, by subscribing to the OCAs issued by EDFE, for which the interest rate applied was 1.085% and not the borrowing rate for traditional bonds of 4, 41%, SAS EDFI had transferred profits to its subsidiary under abnormal management conditions, and the amounts corresponding to this difference in rates had to be reintegrated to determine its taxable results pursuant to Article 57 of the General Tax Code and, for EDFE, represented hidden distributions within the meaning of c. of article 111 of the same code which must be subject to the withholding tax mentioned in 2. of article 119 bis of the same code” Click here for English translation Click here for other translation ...

“Shipping Investor Cyprus” was a limited liability company domiciled in Cyprus. In the financial years 2010 and 2011 it received interest income from convertible bonds subject to German withholding tax. “Shipping Investor Cyprus” had no substance itself, but an associated company, also domiciled in Cyprus, had both offices and employees. The dispute was whether “Shipping Investor Cyprus” was entitled to a refund of the German withholding tax and whether this should be determined under the old or the new version of Section 50d(3) of the German Income Tax Act (EStG). The court of first instance concluded that “Shipping Investor Cyprus” claim for a refund was admissible because the old version of the provisions in Section 50d (3) EStG was contrary to European law. The tax authorities appealed this decision. Judgement of the National Tax Court The National Tax Court found that a general reference to the economic activity of another group company in the country of residence of the recipient of the payment was not sufficient to satisfy the substance requirement. According to the court, the lower court had not sufficiently examined whether the substance requirements of Section 50d (3) EStG – in its new version – were met. On this basis, the case was referred back to the lower court for a new hearing. Click here for English translation Click here for other translation ...

This case deals with arm’s length pricing of various inter-company loans which had been granted – free of interest – by Cypriot company Ltd. to an affiliate group company. Following an audit of Cypriot company Ltd, an upwards adjustment of the taxable income was issued. The adjustment was based on a comparison of the terms of the controlled transaction and the terms prevailing in transactions between independent parties. The lack of interest on the funds provided (deposit of a remittance minus acceptance of a remittance) was not considered in accordance with the arm’s length principle. Cypriot company Ltd disagreed with the assessment and filed an appeal with the tax court. Judgement of the Tax Court The Tax Court dismissed the appeal of Cypriot company Ltd. in regards of the arm’s length pricing of the loans. Excerpt “It is evident from the above that the bond loan taken is related to the outstanding balance of the debt as at 31/12/2014 and is not an investment option. As the contracting companies are related entities, the above transaction falls within the scope of the verification of the arm’s length principle. As in the previous cases above, the independent party for the comparison of the terms of the transaction is understood to be domestic financial institutions. Therefore, the independent market interest rate for the calculation of interest is the interest rate of bank loans in euro for the interest rate category to non-financial companies “To non-financial companies – Long-term loans of regular maturity – Loans over EUR 1 million”, according to the methodology defined by the Bank of Greece. For the month of purchase of the bonds (December 2015), the applicable average market interest rate is approximately 4.86%, higher than the one specified in the contract (2%). It can therefore be seen that in the present case the principle of equal distance is not respected, since interest crediting the lender with a lower interest rate than the one applicable between independent parties is calculated. The accounting of interest on the funds granted at a lower rate of interest constitutes a derogation from the arm’s length principle. Therefore, the audit was right to calculate imputed credit interest in order to restore the arm’s length principle and in accordance with the provisions of Article 50 of the Law. 4174/2013. The applicant claims that it was not informed as to how to calculate the interest for the 2018 tax year in the note of findings, however, the reasoning and the numerical verifications are identical to the corresponding accounting differences of the previous years for which it received detailed information and therefore the allegations made as to the violation of the right to be heard in this matter lack any substantial basis. Since the applicant company also claims that the contested acts, which are unfavourable attributive acts, were adopted by the Tax Administration after the expiry of the exclusive period of one month from the submission of the observations and in breach of the provisions of Article 28 of Law No. 4174/2013 in conjunction with the provisions of Article 10 par. 5 of Law no. 2690/1999. However, this claim is rejected as unfounded as the right to control and issue tax acts is regulated exclusively by Article 36 of Law No. 4174/2013 and as it is clear from the evidence in the file, the stamp duty and income tax differences in question were charged by the issuance and notification of the contested acts within the prescribed limitation period (except for the contested stamp duty act for the tax year 2014, which was referred to above). Because the findings of the audit, as recorded in the 08/12/2020 partial audit reports of the income tax and stamp duty assessment of the C.E.M.E.P. auditor, on which the contested acts are based, are considered to be valid, acceptable and fully reasoned.” Click here for English translation Click here for other translation ...

Sté Paule Ka Holding, was set up as part of a leveraged buy-out (LBO) operation to finance the acquisition of the Paule Ka group, and in 2011 it acquired the entire capital of the group a price of 42 million euros. The acquisition was financed by issuing convertible bonds carrying an interest rate of 8%. The French tax authorities issued an assessment where deductions for certain payments related to the acquisition and part of the interest payments on the bonds were disallowed. Decision from the Administrative court of appeal The Court found in favor of the company in regards to the payment related to the acquisition and in favor of the tax administration in regards to the partially disallowed deduction of interest payments. “It follows from the foregoing that the elements invoked by the administration do not provide proof that the expenditure of EUR 390,227 correctly entered in the accounts was not incurred in the interest of the company Paule Ka Holding. The latter is thus entitled to argue that the administration was wrong to refuse to deduct it in respect of the financial year ended in 2012 and, consequently, to request the reduction of the tax bases and the discharge of the corresponding taxes, including the penalties for deliberate failure to comply as provided for in a) of Article 1729 of the General Tax Code, applied by the administration to this head of rectification.” “...These bonds have a term of ten years, bear interest at a rate of 8%, have a principal amount that is repayable in full at maturity, are not accompanied by any guarantee or security, bear capitalised interest and are convertible at maturity at the rate of one new share with a value of one euro for every 10 OCAs granted. Paule Ka Holding recognised interest on bonds of EUR 2 083 490 for the year ended 2012 and EUR 2 574 298 for the year ended 2013 as an expense. The department questioned the amount of these deductions for the interest paid on the bonds subscribed by Black Tie Luxco by applying the legal interest rate provided for in Article 39(1)(3) of the General Tax Code, i.e. 3.64% and 3.10% for the said financial years. Deductions for the difference in the calculated interest in the amount of EUR 1,092,601 for the financial year ending in 2012 and EUR 908,667 for the financial year ending in 2013 were disallowed. To justify the rate applied to the above-mentioned compulsory loans, Paule Ka Holding produced a study drawn up by the firm Dauge et associés on 30 September 2015. This firm carried out a credit rating of the company, based on an analysis of its financial structure with regard to its balance sheet situation, based on two criteria, the Banque de France rating of the borrower, based on the criteria of earning capacity, financial autonomy The Banque de France rating of the borrower, based on the criteria of earning capacity, financial autonomy, solvency and liquidity, and the estimate of the credit risk of the OCAs issued using the Standard and Poor’s analysis grid, on the basis of the group’s consolidated business plan, to conclude that the rating is estimated at BB-, corresponding to a satisfactory business risk profile and an aggressive financial risk. Based on this rating, it then estimated the credit margin applicable to the OCAs based on the European Commission’s recommendations for estimating reference and discount rates, with margin levels based on credit rating categories. The firm concluded from these elements that the interest rate of 8% seemed appropriate given the profile of the borrower and the characteristics of the bonds issued. However, the study produced consists of generalities and the data presented in it is not documented. Indeed, the mere reference to a credit rating does not imply that all the companies concerned by this rating have identical repayment capacities, taking into account all the quantitative and qualitative factors specific to each company. Furthermore, it does not appear from this study that the internal rating of Paule Ka Holding, as described, takes sufficient account of the company’s own characteristics, in particular the state of its accounts, its competitive positioning and the quality of its managers and employees. This internal rating does not take into account the possibility of the company receiving external assistance in the event of difficulties in honouring its commitments. Under these conditions, this study is insufficient to justify the rate applied to the bonds in dispute. In addition, Paule Ka Holding has provided examples of companies that took out bonds in the context of LBO transactions for acquisitions dated from May 2011 to June 2012 at rates varying between 7 and 12%, which, according to the company, show that the rate of 8% was a market rate compared with those applied by other companies of comparable size and for loans of the same nature. However, the investigation shows that the bonds presented for comparison have either a shorter duration than those in dispute or are not convertible into shares. Their amount is very different from that issued by Paule Ka Holding, some of which are also associated with “senior” debts. Moreover, the issuing companies, of very different sizes, carry out their activities in different fields from that of Paule Ka Holding, a takeover structure of a group in the high-end ready-to-wear sector. There is nothing to show the conditions under which the loans presented for comparison purposes were established. Under these conditions, since the comparability of the economic conditions has not been demonstrated, the terms of comparison proposed by Paule Ka Holding do not justify the rate applied to the bond loans in dispute. It follows from the foregoing that Paule Ka Holding does not justify the rate it could have obtained from independent financial institutions or organisations for a loan granted under similar conditions with regard to the yield on bond loans from undertakings in comparable economic conditions, for loans constituting a realistic alternative to an intra-group loan, taking into account its own characteristics, in particular its risk profile. It does not therefore ...

In 2011, Willink SAS issued two intercompany convertible bonds with a maturity of 10 years and an annual interest rate of 8%. The tax authorities found that the 8% interest rate had not been determined in accordance with the arm’s length principle. Willink appealed, but in a decision issued in 2019 the Administrative Court sided with the tax authorities. An appeal was then filed with the Court of Appeal. Judgment of the Supreme Court The Court of Appeal dismissed the appeal of Willink and upheld the decision of the Administrative Court. Excerpt “7. It is common ground that the funds Apax France VIII-A, Apax France VIII-B and the companies MidInvest and Telecom Online are linked to the company Willink, of which they are all partners, and that the rate of 8% exceeds the rate provided for in the first paragraph of 3° of 1 of Article 39 of the General Tax Code. To justify that this rate was not higher than the one it could have obtained from independent financial institutions or organisations under similar conditions, SAS Willink produced before the Court a comparative rate study carried out in 2020 using the Riskcalc software developed by Moody’s Analytics, a subsidiary of the rating agency Moody’s. This study is based on a model calculating the probability of default in the short term (one year) and the long term (five years) and then associates an implicit scoring. In order to select the most reliable and consistent scoring possible, this was determined on the basis of the applicant’s financial statements for the years 2011, 2012 and 2013. A search for comparable transactions on the open market was then carried out using the SetP Capital IQ database. Transactions were selected for which the issuing companies had a score comparable to Willink, issued by public or private companies across a range of industries during the relevant period. The sample was then refined, including transactions with a maturity close to each of the bonds to be compared. An interquartile range of arm’s length interest rates was then constructed on the basis of the bonds identified as comparables and used to identify median rates. 8. Although it is possible to assess the arm’s length rates by taking into account the yield on bonds, it is only on condition that, even if the loan is a realistic alternative to an intra-group loan, the reference companies are in comparable economic conditions. In the present case, this condition cannot be considered to be met for the companies selected in the sample of the report mentioned above. The level of risk used as a basis for comparison is based on a statistical model derived from historical quantitative data for companies that are not representative of the market, since defaulting companies are over-represented, and was determined on the basis of some ten financial data provided by the company itself. There is nothing to establish that this risk rating adequately takes into account all the factors recognised as forward-looking, and in particular the characteristics specific to the sector of activity concerned, even though this sector of activity is provided for the implementation of the model. Nor is it established that the so-called comparable companies in the study sample, which belonged to heterogeneous sectors of activity, would have presented the same level of risk for a banker as that with which the interested party was confronted at the same time. It follows that SAS Willink, which cannot usefully argue in these circumstances that the service cannot require a rating from a rating agency for each of the intra-group financing operations, cannot be regarded as providing the proof, which is incumbent on it, that it could have obtained a rate of 8 % from independent financial institutions or organisations under similar conditions. 9. It follows from all the foregoing that SAS Willink is not entitled to maintain that it was wrongly dismissed by the contested judgment of the Paris Administrative Court. Consequently, its claims for the application of Article L 761-1 of the Code of Administrative Justice can only be rejected.” Click here for English translation Click here for other translation ...