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

Mayer & Cie is one of the world’s leading suppliers of industrial knitting machines. Following an audit, the tax authorities disallowed a tax deduction of CZK 4,066,097 in FY2014, which Mayer & Cie. had incurred as a result of the disposal of unusable material. According to the tax authorities, the disposal was made on the basis of a controlled transaction in the form of an order from the parent company to cease production of certain knitting machines. Mayer & Cie. appealed to the Regional Court, which ruled in its favour. The court concluded that the Czech arm’s length principle did not apply to the transaction in question, as it did not involve a price agreed between related parties. The tax authorities then appealed to the Supreme Administrative Court. Judgement of the court The Supreme Administrative Court upheld the decision of the Regional Court and ruled in favour of Mayer & Cie. However, the Court’s reasoning was very different with regard to the application of the arm’s length principle. Excerpts “[26] Section 23(7) of the Income Tax Act or Article 9(1) of the Double Taxation Treaty apply to contractual obligations. Section 23(7) of the Income Tax Act refers to ordinary commercial relations and Article 9(1) of the Double Taxation Treaty to conditions in commercial or financial relations which are nothing other than contractual obligations. In the present case, however, in the view of the SAC, no multilateral legal transaction (commercial or financial relationship) and no fixed (agreed) price or non-standard terms can be identified in the parent company’s decision to liquidate the stock, which was made in the course of the applicant’s business management. [27] The parent company’s order against the applicant did not constitute any contractual obligation, since it was merely a decision by the parent company on the commercial management of the applicant’s subsidiary. It should be emphasised that a distinction must be drawn between ‘direct or indirect participation in the management, control or assets of an undertaking’ as a feature of associated persons and ‘a commercial or financial relationship’, or ‘a business relationship’, as the case may be. “In such a case, it is usually based on a decision by the controlling (parent) entity on the commercial management of the dependent (subsidiary) entity (this will typically be, for example, a decision on with whom and under what conditions a contractual relationship is to be entered into in the future, as in the case of the Seventh Chamber cited in paragraph [37]). A decision on the commercial management of a company does not, as a rule, in itself have the effect of creating, modifying or terminating a contractual obligation (transaction) without more. Simply put, it is an expression of the ‘internal will’ of the entity concerned, which may not, however, be fulfilled (e.g. the intended contractual transaction fails to be concluded for various reasons). The decisive transaction in this case is not, then, also seen by the tax authorities as any transaction (contractual obligations) relating to the implementation of the cessation of production or the disposal of materials (stocks). [28] The SAC observes that the tax authorities saw the parent company’s order against the subsidiary (the applicant) as something of a hypothetical service. However, it was not an obligation within the meaning of section 23(7) of the Income Tax Act, but the normal business management of the company (the applicant). It is certainly a feature of a related party relationship between a parent company and a subsidiary that the parent company decides on the production direction of its subsidiary. [29] However, as the Regional Court pointed out in paragraph [30], it should be emphasised that section 23(7) of the Income Tax Act could be applied, for example, to the assessment of the prices of inventories (materials) purchased from the parent company (and subsequently in conjunction with the parent company’s decision in question). However, this is a different transaction from the conduct now at issue, where the price of the stock transferred or other circumstances were not called into question by the tax authorities. [30] In the present case, it is also relevant to the assessment of the economic rationality of the case that the applicant, as a subsidiary, purchased stock (material) for the production of knitting machines from the parent company in 2011 and disposed of that stock in 2014 on the basis of the parent company’s decision (order), as the production of the knitting machines in question was loss-making. [31] In that connection, the SAC observes, in relation to the applicant’s cassation objections, that it is not true that the Regional Court disregarded the relationship between the parent company and the applicant and the functions and risks which they bore. The Regional Court dealt with that issue, for example, in paragraphs [29] et seq. of the judgment under appeal. [32] Furthermore, the SAC observes that throughout the proceedings no one questioned the rationality of the decisions taken by the parent company in the context of the applicant’s business management. Only in the applicant’s view was the parent company obliged to compensate the applicant for the damage suffered. The complainant also considers that the parent company made a profit by its actions. [33] It is always necessary to weigh carefully and objectively the circumstances of a particular case. In the present case, its circumstances suggest that, as a result of its decision (the order), the parent company merely avoided the negative consequences that would have been associated with the continuation of unprofitable production. Those negative consequences (increasing losses) would have been suffered by the applicant in the first place. The parent company did not receive any direct profit as a result of that decision alone. Nor is there any indication to date that the conduct of the parent company now under review constitutes conduct which would have caused the applicant damage without further delay. Furthermore, in the present case, it cannot yet be concluded that the parent company, and hence the applicant, for example, sought (unjustifiably) to reduce its tax base. Three years elapsed between the purchase of the material, the cessation of production ...

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