SAS Blue Solutions manufactures electric batteries and accumulators for electric and hybrid vehicles and car-sharing systems. In FY 2012-2014 it granted a related party – Blue Solutions Canada – non-interest-bearing current account advances of EUR 42.9 million, EUR 43 million, and EUR 39 million. The French tax authorities considered that the failure to charge the interest on these advances was an indirect transfer of profit subject to withholding taxes and reintegrated the interest into the taxable income of Blue Solutions in France. Not satisfied with the resulting assessment an appeal was filed where SAS Blue Solutions. The company argued that the loans was granted interest free due to industrial and technological dependence on its Canadian subsidiary and that the distribution of profits was not hidden. Finally it argued that the treatment of the transactions in question was contrary to the freedom of movement of capital guaranteed by Article 63 of the Treaty on the Functioning of the European Union. Judgement of the Court The court dismissed the appeal of SAS Blue Solutions and upheld the assessment issued by tax authorities. Excerpts: “7. The applicant company maintains that it was in a situation of industrial and technological dependence on its Canadian subsidiary, its sole supplier of LMP (lithium metal polymer) batteries, without which it would not have been able to meet its own contractual commitments to its main customers. However, it has not been established, as the Minister maintains, that Blue Solutions was unable to obtain supplies from other companies and that its Canadian subsidiary held patents relating to the type of batteries marketed. Nor is it established that the Canadian company was not in a position to remunerate the advances granted, although it is not disputed that it paid interest in return for the advances granted by its former shareholder, SA Bolloré, before the tax years in dispute, a period during which its situation was even less favourable, and that it is clear from the opinion of the National Commission on Direct Taxes and Turnover Taxes that its turnover had been growing since 2011. Furthermore, SAS Blue Solutions was in a more fragile situation than its Canadian subsidiary, which was exacerbated by the waiver of interest on the advances granted to its subsidiary. Under these conditions, it did not establish that the advantages it had granted were justified by obtaining the necessary consideration. The administration was therefore justified in reintegrating the interest that should have paid for these advances into Blue Solutions’ taxable income in France.” “8. Finally, even though the waiver of interest was expressly stipulated by the parties in the current account advance agreement, it does not follow from the investigation that this benefit was recorded by Blue Solution in the accounts in a manner that made it possible to identify the purpose of the expenditure and its beneficiary, nor that this recording in itself reveals the liberality in question. This advantage was therefore of a hidden nature within the meaning of c. of Article 111 of the General Tax Code. 9. Thus, the administration was able to consider that the absence of invoicing of this interest constituted an indirect transfer of profits abroad within the meaning of the aforementioned provisions of Article 57 of the General Tax Code and that the interest that should have been paid fell into the category of hidden remuneration and benefits within the meaning of c. of Article 111 of the General Tax Code, which were liable to be subject to the withholding tax referred to in 2 of Article 119 bis of the same code.” “13. However, in the present case, the remuneration and benefits are subject to withholding tax in accordance with Article 111(c) of the General Tax Code, corresponding to the interest that should have been paid by Blue Solutions Canada in respect of the advances granted by Blue Solutions. The income of the non-resident company thus taxed in France does not correspond to that of an investment made in that country by the taxpayer in the context of the exercise of the freedom of movement of capital. The applicant company cannot therefore usefully argue that the legislative provisions applied to it in its capacity as debtor of the withholding tax levied on the income deemed to have been distributed to its subsidiary are contrary to the aforementioned provisions of Article 63(1) of the Treaty on the Functioning of the European Union since they cannot be regarded, in this case, as being such as to dissuade non-residents from making investments in a Member State or to dissuade residents of that Member State from making such investments in other States.” Click here for English translation Click here for other translation ...

“M Fastfood S.A” was incorporated as a subsidiary company of an entity not resident in Portuguese territory, M Inc., a company with registered office in the United States. “M Fastfood S.A” had obtained financing from M Inc. for investment in its commercial activity, which resulted in indebtedness totalling EUR 74,000,000.00. The activity of “M Fastfood S.A” is “the opening, assembling, promotion, management, administration, purchase, sale, rental, leasing and cession of exploration of restaurants, for which purpose it may acquire or grant licenses or sub-licenses and enter into franchise contracts. It also includes the purchase, sale, rental, administration and ownership of urban buildings and the acquisition, transfer, exploitation and licensing of copyrights, trademarks, patents and industrial and commercial secrets and, in general, any industrial property rights”. “M Fastfood S.A” was in a situation of excessive indebtedness towards that entity, in light of the average equity capital presented by it in 2004, on 27 January 2005 it submitted a request to the tax authorities for the purposes of demonstrating the equivalence of indebtedness towards an independent entity. Following a tax audit concerning FY 2004 the authorities considered that the interest limitation rule should be applied, which resulted in corrections to the taxable amount in respect of excess interest paid. “M Fastfood S.A” presented a report, which intended to demonstrate that the level and conditions of indebtedness towards M Inc. were similar to those that could be obtained if it had chosen to obtain financing from an independent financial institution. According to the report “M Fastfood S.A.” was, at the time, in a period of strong expansion, which resulted in the opening of 118 fast-food outlets in recent years. That within the scope of its implementation strategy in the national market, the location of the restaurants plays a fundamental role and constitutes a decisive factor for the success of the business. That the ideal or optimum location of the establishments is very costly and therefore substantial investment has become necessary. According to “M Fastfood S.A.”, the conditions obtained were favourable, in particular the interest rates agreed with M Inc., which were lower than those that would be charged by an independent financial institution, presenting as proof financing proposals issued by B… Bank. Based on the report M Fastfood concludes are sufficient to constitute proof that the conditions of the financing considered excessive are similar, or even more favourable, to the conditions practiced by independent entities, the reason why no. 1 of article 61 of the Corporate Income Tax Code is applicable”. The tax authorities found that, the evidence submitted by “M Fastfood S.A.” was insufficient to demonstrate that the debt obtained from M Inc. is at least as advantageous as it would have been had they used an independent financial institution. Decision of Supreme Administrative Court The Supreme Administrative Court set aside the the assessment issued by the tax authorities and decided in favour of “M Fastfood S.A.”. Experts ” … Article 56 EC must be interpreted as meaning that the scope of that legislation is not sufficiently precise. Article 56 EC must be interpreted as precluding legislation of a Member State which, for the purposes of determining taxable profits, does not allow for the deduction as an expense of interest paid in respect of that part of the debt which is classified as excessive, paid by a resident company to a lending company established in a non-member country with which it has special relations, but allows such interest paid to a resident lending company with which the borrowing company has such relations, where, if the lending company established in a third country does not have a holding in the capital of the resident borrowing company, that legislation nevertheless presumes that any indebtedness of the latter company is in the nature of an arrangement intended to avoid tax normally due or where it is not possible under that legislation to determine its scope of application with sufficient precision in advance. As it is up to the national judge faced with such an interpretation to decide on its application to the specific case, it is important to mention that the situation which this review intends to decide on is identical in its contours to the one assessed by the CJEU. In fact, it is clear that the situation at issue in this review falls within the scope of the free movement of capital, and that it translates into less favourable tax treatment of a resident company that incurs indebtedness exceeding a certain level towards a company based in a third country than the treatment reserved for a resident company that incurs the same indebtedness towards a company based in the national territory or in another Member State. What is at issue is deciding whether such discrimination may be justified as a means of avoiding practices the sole purpose of which is to avoid the tax normally payable on profits generated by activities carried on within the national territory. However, although we agree with the CJEU that the provisions in question – Articles 61 and 58 of the CIRC – are appropriate as a means of preventing tax avoidance and evasion, we must agree with the Court that such a restriction is disproportionate to the intended aim. As the court in question correctly states “as article 58 of the CIRC covers situations which do not necessarily imply a participation by a third country lending company in the capital of the resident borrowing company and as it can be seen that the absence of such a participation results from the company’s being a resident borrower”, the Court agrees with the Court. in the absence of such participation, it results from the method of calculation of the excess debt provided for in Article 61(3) that any debt existing between these two companies should be considered excessive, Article 61 consecrates a discriminatory measure which limits the free movement of capital as only non-resident entities are subject to the regime of Article 61 of the CIRC when IRC tax ...

In 2010, “Write-Down KG” granted a loan to its Turkish subsidiary (“T”). The loan bore interest at 6% per annum but was unsecured. In 2011, Write-Down KG decided to liquidate T. Write-Down KG therefore wrote off its loan and interest receivable from T and claimed the write-off as a tax deduction. The German tax authorities disallowed the deduction because the loan had been unsecured which was considered not to be at arm’s length. An appeal was lodged with the local tax court, which upheld the tax authorities’ position. An appeal was then made to the Federal Tax Court. Judgement of the Court The court ruled that the waiver of security for a shareholder loan may not be at arm’s length. Such a deviation from the arm’s length principle may lead to a write-off of the loan receivable and thus to a reduction in income. This reduction in income may be reversed on the basis of the arm’s length principle contained in Section 1 of the German Foreign Tax Act. Furthermore, article 9 OECD-MTC does not prohibit such an income adjustment. Excerpts “28. (2) The loan relationship between the plaintiff and T Ltd, who are related parties within the meaning of § 1, para. 2, no. 1 AStG, is a foreign business relationship within the meaning of § 1, para. 5 AStG, the conditions of which include the non-security of the claims. In order to avoid repetitions, reference is made to the statements in the Senate’s ruling in BFHE 263, 525, BStBl II 2019, 394. The plaintiff’s objection at the oral hearing that the transactions were ultimately purely domestic commercial transactions is not comprehensible in view of the loan agreement with T Ltd, which is domiciled in Turkey. 29. (3) Furthermore, the Regional Court bindingly determined (§ 118 (2) FGO) that a third party would not have granted the loan to T Ltd. without providing collateral. 30. Even if the FG did not explicitly extend its findings to the interest claims resulting from the loan, it seems impossible on the basis of the further circumstances established that a lender not affiliated with T Ltd. would not have secured these claims. In particular, it must be taken into account that T Ltd was a newly founded company that did not have any significant fixed assets and that the collateralisation was not dispensable from the point of view of the so-called group retention (cf. again the Senate’s decision in BFHE 263, 525, BStBl II 2019, 394, as well as the Senate’s subsequent decisions in BFH/NV 2020, 183; of 19.06.2019 – I R 54/17, juris; of 14.08.2019 – I R 14/18, juris). In this situation, there is no need to refer the case back to the Fiscal Court for further clarification of the facts. 31. (4) The reduction in income within the meaning of section 1(1) sentence 1 AStG occurred due to (“as a result of”) the lack of collateralisation. In this respect, the Senate also refers to its ruling in BFHE 263, 525, BStBl II 2019, 394. 32. (5) Nor does Article 9(1) of the Agreement between the Federal Republic of Germany and the Republic of Turkey for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion in the Field of Taxes on Income of 19 September 2011 (BGBl II 2012, 527, BStBl I 2013, 374) – DBA-Türkei 2011 -, which is applicable as of 1 January 2011, preclude the correction of income.” “34. (6) Finally, Union law does not conflict with an income adjustment under section 1, paragraph 1, sentence 1 AStG. Since Turkey is not a Member State of the European Union, reference is made in this respect to the statements in the Senate rulings of 27 February 2019 – I R 51/17 (BFHE 264, 292) and of 14 August 2019 – I R 14/18 (juris). 35. The freedom of movement of capital, which is in principle also protected in dealings with third countries (Article 63 of the Treaty on the Functioning of the European Union in the version of the Treaty of Lisbon amending the Treaty on European Union and the Treaty establishing the European Community, Official Journal of the European Union 2008, no. C 115, 47 –AEUV–) is superseded by the freedom of establishment, which has priority in this respect (Senate judgements of 6 March 2013 – I R 10/11, BFHE 241, 157, BStBl II 2013, 707; of 19 July 2017 – I R 87/15, BFHE 259, 435, BStBl II 2020, 237). Moreover, it would not be applicable – despite the amendments to Article 1(1) AStG made by the UntStRefG 2008 – also because of the so-called standstill clause of Article 64(1) TFEU (cf. Senate judgment in BFHE 264, 292). Click here for English translation Click here for other translation ...

In this decision, the Conseil d’État confirms that Article 57 of the General Tax Code is applicable to any company taxable in France, including a French branch of a foreign company. Under Article 57, where the tax authorities establish the existence of a relationship of dependence and a practice falling within its scope, the presumption of an indirect transfer of profits can only be effectively rebutted by the company liable to tax in France if it proves that the advantages granted by it were justified by the receipt of a benefit. Excerpts “….4. Considering, firstly, that if the applicant company mentions supplier debts of its branch towards the head office, such debts, in normal relations between independent companies, do not generate interest, so that this circumstance has no bearing on the absence of interest stipulations on the advances granted to the head office; 5. Considering, secondly, that under the first paragraph of Article 57 of the General Tax Code, applicable to corporation tax by virtue of Article 209 of the same code: “For the purposes of determining the income tax due by companies which are dependent on or which have control over 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 (…)”; that these provisions institute the principle of the taxable income of companies located outside France. )”; that these provisions establish, as soon as the administration establishes the existence of a link of dependence and a practice falling within their provisions, a presumption of indirect transfer of profits which can only be usefully combated by the company liable to tax in France if it provides proof that the advantages it has granted were justified by the obtaining of compensation; that, on the one hand, these provisions are applicable to any company taxable in France, including a French branch of a company whose registered office is abroad, without the circumstance that the branch does not have legal personality being an obstacle to this; that, on the other hand, the advantages granted by a company taxable in France to a company located outside France in the form of interest-free loans constitute one of the means of indirect transfer of profits abroad; The tax authorities may therefore reinstate in the results of a permanent establishment, taxable in France, the interest which was not invoiced because of the recording of advances granted to the head office located outside France, provided that these advances do not correspond to after-tax profits and that the company does not establish the existence of counterparts for the development of the activity of the French branch; 6. Considering that, in its accounting records drawn up for the purposes of its taxation in France, the permanent establishment of Sodirep Textiles SA-NV recorded advances of funds granted to the Belgian headquarters of this company; that it follows from the above that, in the circumstances of the case, the administration is justified in reintegrating, in the taxable results in France of this permanent establishment, the interest which should have remunerated the advances of funds thus granted, insofar as the absence of invoicing of this interest constitutes an indirect transfer of profits within the meaning of Article 57 of the general tax code, in the absence of proof provided by the applicant company that the advantages in question had at least equivalent counterparts for its branch; 7. Considering, thirdly, that Article 5(4) of the Franco-Belgian Tax Convention of 10 March 1964 stipulates, in the version applicable to the facts of the case: “Where an enterprise carried on by a resident of one of the two Contracting States is dependent on or has control over an enterprise carried on by a resident of the other Contracting State, (…) and where one of these enterprises is dependent on or has control over the other enterprise, (…) and where the other enterprise is dependent on or has control over the other enterprise, (…) and where the other enterprise is dependent on or has control over the other enterprise, (…) ) and one of those enterprises grants or imposes conditions to the other enterprise which differ from those which would normally be accorded to effectively independent enterprises, any profits which would normally have accrued to one of those enterprises but which have thereby been transferred, directly or indirectly, to the other enterprise may be included in the taxable profits of the first enterprise. In that event, double taxation of the profits so transferred shall be avoided in accordance with the spirit of the Convention and the competent authorities of the Contracting States shall agree, if necessary, on the amount of the profits transferred. ” ; 8. Considering that the permanent establishment operated in France by the company Sodirep Textiles SA-NV is, as has been said, a branch without legal personality under the control of this Belgian company; that in the light of the above-mentioned provisions, the profits transferred by the branch to the Belgian company may be taxed in France if the branch has granted the head office interest-free cash advances under conditions different from those which would normally be made to genuinely independent enterprises; that there is no need, in order to interpret these provisions, to refer to the comments formulated by the Tax Committee of the Organisation for Economic Co-operation and Development (OECD) on Article 7 of the model convention drawn up by this organisation, since these comments were made after the adoption of the provisions in question;…” Click here for English translation Click here for other translation ...