SA Tropicana Europe Hermes is a French permanent establishment of SA Tropicana Europe, located in Belgium. The French PE carried out the business of bottling fruit juice-based drinks. In 2009, a new distribution contract was concluded with the Swiss company FLTCE, which was accompanied by a restructuring of its business. Before 1 July 2009, Tropicana was engaged in the manufacture of fresh fruit juices in cardboard packs and purchased fresh fruit juices which it pasteurised. As of 1 July 2009, its activity was reduced to that of a contract manufacturer on behalf of FLTCE, which became the owner of the technology and intellectual property rights as well as the stocks. The re-organisation led to a significant reduction in the company’s turnover and profits. Tropicana Europe was subject to two audits, at the end of which the tax authorities notified it of tax reassessments in respect of corporate income tax, withholding tax and business value added contribution (CVAE) for the years 2010 to 2013, together with penalties. It also notified the company of tax adjustments, together with penalties, in respect of the additional contribution to corporation tax for the years 2012 and 2013. According to the tax authorities Tropicana Europe’s new contract was not at arm’s length and constituted an abnormal act of management. Tropicana filed an appeal with the Administrative Court, where the assessment issued by the tax authorities was later set aside. An appeal was then filed by the tax authorities with the Court of Appeal. At issue was whether FLTCE was located in a privileged tax regime and whether there was a link of dependence between Tropicana and FLTCE and thus the basis of the tax assessment. Judgement of the Court of Appeal The court dismissed the appeal of the tax authorities and upheld the decision of the administrative court. Excerpts “As regards the existence of a privileged tax regime : 6. Before the first judges, Tropicana Europe disputed that FLTCE was established in a country with a privileged tax regime within the meaning of the second paragraph of Article 238 A of the General Tax Code. The first judges considered that by simply relying on the overall corporate tax rate of 13% in the canton of Bern, in the Swiss Confederation, where FLTCE’s head office is located, and the significant difference between this rate and the corporate tax rate of 33.33% in France, the tax authorities did not establish that FLTCE was established in a country with a privileged tax regime, the tax authorities did not establish that the amount of income tax to which FLTCE is subject is less than half the amount of income tax for which it would have been liable under the conditions of ordinary law in France, if it had been domiciled or established there, and, consequently, that FLTCE would be subject to a preferential tax regime pursuant to the aforementioned provisions of Article 238 A of the French General Tax Code. As this ground of the judgment is not contested on appeal by the Minister, the latter must be considered as renouncing to rely on the establishment of FLTCE in a country whose tax regime is privileged pursuant to the provisions of Article 238 A of the General Tax Code. Consequently, the Minister bears the burden of proof of the existence of a link of dependence between Tropicana Europe and FLTCE.” “As regards the existence of a link of dependence : 7. In order to discharge Tropicana Europe from the taxes it was contesting, the first judges noted that, in order to establish a relationship of dependence between this company and FLTCE, the tax authorities based themselves on the fact that these two companies belonged to the same multinational group, PepsiCo, and deduced that, by relying solely on this factor, the authorities, who bear the burden of proof, did not establish any relationship of dependence between the two companies within the meaning of Article 57 of the General Tax Code. 8. In order to prove the existence of a relationship of dependence between Tropicana Europe and FLTCE, the Minister noted that SA Tropicana Europe Hermes is a permanent establishment of SA Tropicana Europe, located in Belgium, which is 99.99% owned by Seven’Up Nederland BV, which in turn is wholly owned by Pepsico Inc. FLTCE, located in Switzerland in the canton of Bern, is wholly owned by Frito Lay Compagny Gmbh, also located in Switzerland in the same canton. This company has been controlled since 14 December 2011 by PepsiCo Limited located in Gibraltar. While the Minister deduces from all these facts that SA Tropicana Europe and FLTCE are sister companies under the control of the PepsiCo group, he does not provide evidence of legal dependence between SA Tropicana Europe and FLTCE, which are not linked by a capital link between them. Consequently, it is up to the Minister to provide proof of the existence of a de facto dependency link between these two companies. However, the Minister did not provide any other element or indication that would make it possible to detect a de facto dependence between these two companies other than the fact that they belong to the same group. The fact that the two companies belong to the same group does not, in the present case, constitute sufficient proof or evidence of de facto dependence between SA Tropicana Europe and FLTCE in the absence of any other element put forward by the Minister. Consequently, the Minister is not entitled to maintain that, contrary to the assessment made by the first judges, the conditions for the application of Article 57 of the General Tax Code were met in order to base the taxes for which the Administrative Court of Amiens granted discharge.” “As regards the request for substitution of legal basis : … 12. However, this reorganisation was not limited to a simple “change in the invoicing circuit” as the Minister maintains, but led to a significant change in operating conditions since, before 1 July 2009, Tropicana Europe was engaged ...

A second example relates to the purported transfer of credit risk as part of a business restructuring. The analysis under Section D. 1.2.1 of Chapter I would take into account the contractual terms before and after the restructuring, but would also examine how the parties operate in relation to the risk before and after the restructuring. The analysis would then examine whether the party that contractually assumes the risk controls the risk in practice through relevant capability and decision-making as defined in paragraph 1.65 and has the financial capacity to assume such risk as defined in paragraph 1.64. It is important to note that a party that before the restructuring did not assume a risk under the analysis of Section D. 1.2.1 of Chapter I cannot transfer it to another party, and a party that after the restructuring does not assume a risk under the analysis of Section D. 1.2.1 of Chapter I should not be allocated the profit potential associated with that risk. For example, suppose that before a business restructuring, a full-fledged distributor contractually assumes bad debt risks, which is reflected in the balance sheet at year end. However, the analysis described above establishes that before the business restructuring, decisions about the extension of credit terms to customers and debt recovery were taken by an associated enterprise and not by the distributor, and the associated enterprise reimbursed the costs of irrecoverable debts. It is also determined that the associated enterprise is the only entity that controlled the risk and had the financial capacity to assume the bad debt risk, leading to the conclusion that, before the business restructuring, the risk was not assumed by the distributor. In such a case there is no bad debt risk for the distributor to transfer as part of the business restructuring. In other circumstances it may be found that before the business restructuring the distributor controlled the bad debt risk and had the financial capacity to assume the risk it contractually assumed, but mitigated its risk through indemnification arrangements or debt factoring arrangements with an associated enterprise in exchange for appropriate compensation. Following the business restructuring, the bad debt risk is contractually assumed by that associated enterprise which, as determined under the analysis described above, now controls the risk and has the financial capacity to assume the risk. The risk has, therefore been transferred but the impact on the profits of the distributor going forward compared with the past resulting from the transfer of this risk alone may be limited, because before the restructuring steps had been taken and costs incurred to mitigate the risk outcomes of the distributor ...

A second example relates to the purported transfer of credit risk as part of a business restructuring. The analysis under Section D. 1.2.1 of Chapter I would take into account the contractual terms before and after the restructuring, but would also examine how the parties operate in relation to the risk before and after the restructuring. The analysis would then examine whether the party that contractually assumes the risk controls the risk in practice through relevant capability and decision-making as defined in paragraph 1.65 and has the financial capacity to assume such risk as defined in paragraph 1.64. It is important to note that a party that before the restructuring did not assume a risk under the analysis of Section D. 1.2.1 of Chapter I cannot transfer it to another party, and a party that after the restructuring does not assume a risk under the analysis of Section D. 1.2.1 of Chapter I should not be allocated the profit potential associated with that risk. For example, suppose that before a business restructuring, a full-fledged distributor contractually assumes bad debt risks, which is reflected in the balance sheet at year end. However, the analysis described above establishes that before the business restructuring, decisions about the extension of credit terms to customers and debt recovery were taken by an associated enterprise and not by the distributor, and the associated enterprise reimbursed the costs of irrecoverable debts. It is also determined that the associated enterprise is the only entity that controlled the risk and had the financial capacity to assume the bad debt risk, leading to the conclusion that, before the business restructuring, the risk was not assumed by the distributor. In such a case there is no bad debt risk for the distributor to transfer as part of the business restructuring. In other circumstances it may be found that before the business restructuring the distributor controlled the bad debt risk and had the financial capacity to assume the risk it contractually assumed, but mitigated its risk through indemnification arrangements or debt factoring arrangements with an associated enterprise in exchange for appropriate compensation. Following the business restructuring, the bad debt risk is contractually assumed by that associated enterprise which, as determined under the analysis described above, now controls the risk and has the financial capacity to assume the risk. The risk has, therefore been transferred but the impact on the profits of the distributor going forward compared with the past resulting from the transfer of this risk alone may be limited, because before the restructuring steps had been taken and costs incurred to mitigate the risk outcomes of the distributor ...