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 ...

Fibusa SAS is a holding company with holdings in four Romanian companies whose purpose is to develop wind power stations in Romania. In 2011, 2012, In 2011, 2012, 2013 and 2014, Fibusa granted these companies interest-free loans for a period of less than one year, renewable for the same period, with the possibility of repaying these loans at any time, for a total amount of almost 26 million euros in 2011, more than 33 million euros in 2012 and more than 35.5 million euros in 2013 and 2014, which were financed mainly by loans taken out by it. 2,086,730 for the year ended 2013 and €2,385,774 for the year ended 2014. Following an audit, an assessment of additional corporate income tax and corresponding penalties for the financial years 2011 – 2014 was issued by the tax authorities. The lack of interest on the loans was considered indirect transfers of profits abroad. Not satisfied with the assessment Fibusa filed an complaint which was rejected by the Administrative Court in December 2020. An appeal was then filed by Fibusa with the Administrative Court of Appeal. Judgement of the Court The court upheld the assessment but made adjustments to the applicable interest rate on the loans and thus the amounts of additional taxable income calculated by the tax authorities. Excerpts (Unofficial English translation) “8. Under the terms of Article 57 of the General Tax Code, which is applicable to corporation tax by virtue of Article 209 of the same Code: “For the purposes of calculating the income tax due by companies that are dependent on or control companies located outside France, 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 (…)”. 9. These provisions establish, as soon as the administration establishes the existence of a link of dependence and a practice falling within the provisions of Article 57 of the General Tax Code, a presumption of indirect transfer of profits which can only be usefully challenged by the company liable to tax in France if it provides proof that the advantages it granted were justified by the obtaining of consideration.” “11. As the court held, in view of the relationship of dependence between the applicant company and its subsidiaries and its waiver of the right to receive interest in return for the advances granted, the presumption of indirect transfer of profits established by the provisions of Article 57 of the General Tax Code can be rebutted by Fibusa only if it proves that the advantages thus granted were justified by the obtaining of consideration.” “Although the applicant company refers to the situation of financial difficulty in which these companies found themselves, there is no evidence in the investigation to confirm the reality of these difficulties before 2014, the year in which the companies were admitted to insolvency proceedings under Romanian law. Furthermore, the accounting information produced by the applicant company, while showing investments made by those subsidiaries, also shows that they did not achieve any turnover and the information provided by the Romanian authorities indicates that the investments made are, for the most part, not related to wind farm projects and that the companies do not have any of the administrative authorisations required for such installations. In those circumstances, in the absence of any evidence to corroborate the reality of the activity of the beneficiary companies or of financial difficulties as from 2011, the applicant company, which invoked at first instance the financial difficulties of the subsidiaries and invokes on appeal the prospects of dividends which it expected to receive by granting the loans granted, does not justify any consideration for those interest-free loans. Thus, the administration was right to consider that the advantages granted by the applicant company to its subsidiaries constituted indirect transfers of profits.” “14. With regard to the sums borrowed by Fibusa to finance the advances granted to its subsidiaries, i.e. EUR 21 004 750 in 2011, EUR 26 309 187 in 2012, EUR 24 047 500 in 2013 and EUR 27 257 711 in 2014, it follows from what has been said above that it is appropriate to retain 1,188,828 in 2011, EUR 2,036,937 in 2012, EUR 2,418,713 in 2013 and EUR 1,594,425 in 2014, corresponding to the interest actually borne by Fibusa during each financial year in respect of the loans it took out. 15. With regard to the sums made available to Fibusa’s subsidiaries but not borrowed by it, namely EUR 4 981 250 in 2011, EUR 6 813 313 in 2012, EUR 11 487 500 in 2013 and EUR 8 332 789 in 2014, the applicant company relied at first instance on the rates of 4.25%, 3.75%, 3% and 2.4%, corresponding to the average interest rates for advances on securities applied by the Banque de France. It is not contested by the administration and there is nothing in the investigation to show that the rates of remuneration that the company could have obtained from a financial institution or similar body with which it would have placed sums of an equivalent amount under similar conditions would have been higher. In these circumstances, these rates should be retained and the company should be relieved of the amount of the taxes in dispute corresponding to the difference between the taxes to which it was subject and those resulting from the application of these rates to the sums of EUR 4,981,250 in 2011, EUR 6,813,313 in 2012, EUR 11,487,500 in 2013 and EUR 8,332,789 in 2014.” Click here for English translation Click here for other translation ...

Apex Tool Holding France acquired all the shares of Cooper Industrie France, which has since become Apex Tool France. This transaction was financed by a ten-year vendor loan at a rate of 6%. This claim on Apex Tool Holding France was transferred on the same day by the seller to the parent company of this company, which is the head of a global group specialising in tool manufacturing and thus, from that date, the creditor of its subsidiary. Apex Tool Holding France reintegrated the fraction of interest relating to this intra-group loan exceeding the average annual effective rate charged by credit institutions for variable-rate loans granted to companies into its income for the years 2011 to 2013. Apex considered that an interest rate of 6 % was in line with that which it could have obtained from independent financial institutions or organisations under similar conditions. The analysis was set aside by the tax authorities and an assessment was issued where the deduction of interest had been reduced. Apex filed an appeal with the Administrative Court of Appeal. The Court found in favor of the tax authorities in a decision issued in March 2020. An appeal was then filed by Apex with the Supreme Court. Judgement of the Court The Supreme Court set aside the decision of the Court of Appeal and issued a decision in favor of Apex Tool Group. Excerpts (Unofficial English translation) “3. It is clear from the documents in the file submitted to the trial judges that in order to establish that the rate of 6% at which ATFH1 had paid the loan granted to it by its parent company, which was higher than the rate provided for in the first paragraph of 3° of 1 of Article 39 of the General Tax Code, was not higher than the rate that this company would have obtained from an independent financial institution, the applicant company relied on an initial study drawn up by its counsel. In the absence of previous loans obtained by ATFH1 in 2010, this study first determined the credit rating of the intra-group loan in dispute according to the methodology published by the rating agency Moody’s for the analysis of industrial companies, which took into account the company’s profile, in particular with regard to market data, its size, its profitability, the leverage effect and its financial policy. The rating was set at “BB+”. The study then compared ATHF’s interest rate of 6% with the rates of bond issues over the same period with comparable credit ratings, using data available in the Bloomberg database. The company also relied on an additional study that analysed the arm’s length rate in a sample of bank loans to companies in the non-financial sector with credit ratings ranging from ‘BBB-‘ to ‘BB’. 4. Firstly, in holding that the credit rating assigned to the intra-group loan granted to ATFH1 by the first study in accordance with the methodology set out in point 3 did not reflect the intrinsic situation of that company on the grounds that it had been determined by taking into account the aggregate financial statements of the group that ATHF1 formed with its subsidiaries and sub-subsidiaries whereas, as stated in point 2, for the application of the provisions of Articles 39 and 212 of the General Tax Code, the profile of the borrowing company must in principle be assessed in the light of the financial and economic situation of the group that this company forms with its subsidiaries, the Court erred in law. 5. Secondly, it is clear from the documents in the file submitted to the court that the sample of comparable companies used in the supplementary study, the relevance of which had not been contested by the administration, concerned companies in the non-financial sector such as ATFH1 and which had obtained credit ratings ranging from “BBB-” to “BB”, i.e. one notch above and below the “BB+” credit rating determined for the loan in question in the first study. In dismissing this additional study on the sole ground that the companies in the sample belonged to heterogeneous sectors of activity and that, consequently, it was not established that, for a banker, they would have presented the same level of risk as that of ATFH1, whereas the credit rating systems developed by the rating agencies aim to compare the credit risks of the rated companies after taking into account, in particular, their sector of activity, the Court erred in law. “ Click here for English translation Click here for other translation ...

A intercompany loan had been granted within the Apex Tool group at an interest rate of 6 percent and to demonstrate the arm’s length nature of the interest rate the borrowing company provided a comparability analyses. The analysis was set aside by the tax authorities and an assessment was issued where the deduction of interest had been reduced. Apex then filed an appeal with the Administrative Court of Appeal. Judgement of the Court The Court dismissed the analyses provided by Apex and upheld the assessment of the tax authorities. Excerpts (Unofficial English translation) “9. The investigation shows that the credit rating assigned to the loan in question by Baker and McKenzie, after several adjustments, was not based on the intrinsic situation of ATHF1, particularly with regard to its lending activity and its development prospects. On the contrary, it was allocated on the basis of the aggregate financial statements of the sub-group it formed with four of its subsidiaries and sub-subsidiaries, only one of which, in any event, carried out the industrial activity that Apex Tool Group claims was the only relevant basis for comparison, in the absence of a basis for holding companies other than investment companies and conglomerates. Furthermore, although it is not excluded that the arm’s length rates can be evaluated by taking into account the yield of bond loans, this is only on condition, even supposing that the loan taken out constitutes a realistic alternative to an intra-group loan, that the companies serving as references are in comparable economic conditions. In the case in point, this condition cannot be considered to have been met for the companies in the Baker and McKenzie sample, for which it is only argued, firstly, that they have credit ratings close to that attributed to the ATHF1 loan and, secondly, that they had recourse to the bond market for transactions of the same duration and maturity. Lastly, although the additional study produced by Apex Tool Group shows arm’s length rates close to those obtained by ATHF1 from its parent company, it has not been established that the so-called comparable companies in the study sample, belonging to heterogeneous sectors of activity, would have presented the same level of risk for a banker as that which ATHF1 faced at the same time. Under these conditions, Apex Tool Group, which did not submit to the judge any offer of a loan from a banking establishment, does not provide the proof that ATHF1 was entitled to deduct the interest on the disputed loan up to the rate of 6% that it had actually paid.” “10. Under the terms of 1. of II of Article 212 of the General Tax Code: “When the amount of interest paid by a company to all directly or indirectly related companies within the meaning of Article 39(12) and deductible in accordance with I simultaneously exceeds the following three limits in respect of the same financial year: / a) The product corresponding to the amount of the said interest multiplied by the ratio existing between one and a half times the amount of the equity capital, assessed at the choice of the company at the opening or at the closing of the financial year and the average amount of the sums left or made available by all of the companies directly or indirectly linked within the meaning of Article 12 of Article 39 during the course of the financial year, b) 25% of the current result before tax previously increased by the said interest, the depreciation taken into account for the determination of this same result and the share of leasing rentals taken into account for the determination of the sale price of the asset at the end of the contract, /c) The amount of interest paid to this company by companies directly or indirectly linked within the meaning of Article 12 of Article 39, / the fraction of interest exceeding the highest of these limits cannot be deducted in respect of this financial year, unless this fraction is less than 150,000 . / However, this fraction of interest which is not immediately deductible may be deducted in respect of the following financial year up to the amount of the difference calculated in respect of that financial year between the limit mentioned in b and the amount of interest allowed for deduction under I. The balance not deducted at the end of this financial year is deductible in respect of subsequent financial years under the same conditions, subject to a discount of 5% applied at the beginning of each of these financial years. 11. Since ATHF1 was unable to benefit from the deductibility of the financial expenses arising from the loan taken out on 4 July 2010 beyond the rates of 3.91% and 3.39% set for the financial years ending in 2011 and 2012 respectively, it was not eligible for the extension of the deductibility limits set by II of Article 212 of the General Tax Code. Consequently, Apex Tool Group’s request that the calculation of ATHF1’s thin capitalisation interest be adjusted so that the balance of its interest subsequently carried forward at 31 December 2013 is increased from EUR 1,435,512 to EUR 2,401,651 can only be rejected. 12. It follows from all the foregoing that Apex Tool Group SAS is not entitled to argue that the Administrative Court of Melun wrongly rejected the remainder of its claim. 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 ...

A French subsidiary, SAS Groupe Lagasse Europe, of the Canadian Legasse Group had paid service fees to another Canadian group company, Gestion Portland Vimy. The French tax authorities held that the basis for the payments of service fees had not been established, and that there was no benefit to the French subsidiary. The payments constituted an indirect transfer of profits within the meaning of the ‘article 57 of the general tax code; Excerps from the judgement of the Court: “11. Under the terms of article 57 of the general tax code, applicable in matters of corporate tax under article 209 of the same code: “For the establishment of income tax due by the companies which are dependent or have control of companies located outside of France, the profits indirectly transferred to the latter, either by increasing or decreasing the purchase or sale prices, or by any other means, are incorporated into the results recognized by the accounts (…) “. These provisions, which provide for the taking into account, for the establishment of the tax, of the profits indirectly transferred to a foreign enterprise which is linked to it, establish, as soon as the administration establishes the existence of an arm’s length and from a practice included in their forecasts, a presumption of indirect transfer of profits which can usefully be opposed by the taxable business in France only if this provides proof that the benefits which it has granted have been justified by obtaining counterparties. 12. In addition, under the terms of article 39 of the general tax code, applicable in matters of corporate tax under article 209 of the same code: “1. The net profit is established after deduction of all charges, these comprising, subject to the provisions of 5, in particular: 1 ° General expenses of any kind (…) “. If, under the rules governing the allocation of the burden of proof before the administrative judge, applicable unless otherwise provided, it is in principle for each party to establish the facts which it invokes in support of its claims, evidence that only a party is able to hold can only be claimed from that party. It is therefore up to the taxpayer, for the purposes of the abovementioned provisions of the General Tax Code, to justify both the amount of the charges he intends to deduct from the net profit defined in Article 38 of the General Tax Code as well as the correction of their accounting entry, that is to say the very principle of their deductibility. The taxpayer provides this justification by producing all sufficiently precise elements relating to the nature of the charge in question, as well as to the existence and the value of the consideration which he has derived from it. … 14. Secondly, SAS GROUPE LAGASSE EUROPE and Gestion Portland Vimy (the service provider), signed, on May 17, 2005, a service agreement which provides that “the service provider undertakes towards the beneficiary, who accepts it, to provide its assistance and advice in the performance of the services listed below, it being specified that this list is not exhaustive “. The services provided by Gestion Portland Vimy to SAS GROUPE LAGASSE EUROPE are defined in article 2 of the agreement and concerned assistance and advice in the areas of commercial prospecting and marketing, IT, finance, business development for the subsidiaries of SAS GROUPE LAGASSE EUROPE and the general administration. 15. The tax authorities questioned the deductibility of the sums paid within the framework of the execution of this agreement to the company GPV by the SAS GROUPE LAGASSE EUROPE by noting that this company, which has no turnover that the “management fees” paid by its French and German subsidiaries, the companies LCetI and LCetI GmbH and for financial products that the dividends distributed by the company LCetI, achieved respective operating results of 604,239 euros and 1,394,256 euros during 2009 and 2010, due to the very high cost of the fees invoiced by the company GPV, up to 937,901 euros in 2009 and 1,237,526 euros in 2010, even though it partially invoiced these fees to its subsidiaries, without the reality of the services billed by GPV being really established. 16. If the applicant has produced a certain number of invoices issued by the company GPV and relating either to services of the nature of those provided for in the aforementioned agreement of May 17, 2005, or to travel or subsistence expenses which would have been exposed for the provision of these services, it does not however provide any information, such as, for example, diaries, meeting minutes, legal acts relating to the management and administration of the subsidiaries concerned or more generally any other document relating to the services in question, which would be such as to justify their actual performance. The materiality of these services is not more established by the certificate obtained from the tax services of the province of Quebec and the terms of the memorandum and the report written, after the period verified, by the consulting firm, “Cinq Mars Conseil “, Which only relate to the relationships maintained by SAS GROUPE LAGASSE EUROPE with its French subsidiary, the company LCetI without justifying the existence of services rendered for the benefit of this subsidiary by the company GPV and the assumption of responsibility of the cost of such services by SAS GROUPE LAGASSE EUROPE. In these conditions, the existence of a real counterpart to the sums paid by this company to the company GPV cannot be regarded as demonstrated. 17. Consequently, the tax authorities were right to regard the sums paid to the company GPV as having the nature of an indirect transfer of profits within the meaning of article 57 of the general tax code and the has been reintegrated into the taxable income of SAS GROUPE LAGASSE EUROPE in application of these provisions and those of article 39 of the same code.” Click here for translation ...

In the French Nestlé water case, the following arguments were made by the company: The administration, which bears the burden of proof under the provisions of Article 57 of the General Tax Code, of paragraphs 38, 39 and 42 of the Instruction 13 l-7-98 of 23 July 199 8 and case law, does not establish the presumption of indirect transfer of profits abroad that would constitute the payment of a fee to the Swiss companies A … SA, company products A … SA and Nestec SA. The mere fact that the association of the mark A … with the mark Aquarel also benefits company A … SA, owner of the mark A …, does not allow to prove the absence of profit and thus of consideration for NWE. The latter company also benefited from the combination of the two brands. Advertising alone are not enough to characterize an indirect transfer of profits abroad; in any case, the administration does not provide any quantified data and in particular no comparable study to assess the amount of the benefit that A … SA derives from the “co-branding” operation. In any event, and assuming that the Court considers that the administration has provided a presumption of proof of indirect transfer of profits abroad, it justifies that NWE benefited from an effective and sufficient counterpart in payment of the royalty to the company A … SA because the global economy of the royalty agreement perfectly respects the interests of the company NWE. The fee mainly pays for the use of the A brand, which has a value in the global agri-food market, of which bottled water is a sub-category; the European Commission notes in its decision of 22 July 1992 (Case No IV / M.190 -A …- Perrier) that the European bottled water market is extremely competitive. Only well-known brands can reasonably expect to survive in the medium to long term and, especially in France, it is important to associate bottled water with notions of health and healthy living during actions. Advertising; Although the A mark was not directly associated with the bottled water market at the time, it is recognized in the food industry as a quality brand, embodying health and lifestyle values, at a reasonable price and should, by associating it with the Aquarel brand, facilitate NWE’s access to the market. The Danone group also chose to join the Taillefine brand when it launched a new brand of water on the market. In this regard, the interview of the Chief Executive Officer of Perrier-Vittel, now A … Waters, carried out in 2001 on Group A’s strategy …, is taken out of context and can not be accepted by the Court. The fee also remunerates the costs of technical assistance and know-how under Article 26 of the contract, which is provided by A … Waters Management and Technology. Finally, the fee also remunerates the risks taken by the owner of the brand A … by associating the name A … with bottled water. The court ruled in favor of Nestlé. Click here for translation ...