France: Taxpayer-favorable court decisions, administrative guidance on intragroup financial transactions
France: Taxpayer-favorable court decisions
Decisions issued by French courts and administrative guidance from the French tax administration about the arm’s length nature of intragroup financial transactions reflect an evolving position.
In the last quarter of 2020, the Paris Administrative Court of Appeal and the French Supreme Administrative Court (Conseil d’Etat) issued several decisions in cases concerning the deductibility of intragroup interest charges. In general, these decisions confirm that detailed and meaningful economic analyses must be regarded as relevant proof of the arm’s length nature of intragroup interest rates.
The decisions were issued in the following cases:
- Studialis, case n°18PA01026 (Paris AC, 22 October 2020)
- WB Ambassador, case n°428522 (Conseil d’Etat, 10 December 2020)
- BSA, case n°433723 (Conseil d’Etat, 11 December 2020)
Another decision—while technically not taxpayer-favorable—similarly stressed the importance of appropriate economic analysis:
- Sté Paule Ka Holding, case n° 18PA02715 (Paris AC, 10 December 2020)
The French tax administration on 27 January 2021 published a series of eight “methodological notes” covering a broad range of technical aspects in relation to the determination of an appropriate interest rate (primarily from an Article 212-I-a perspective).
Historically, the French tax administration had increasingly relied on Article 212-I-a of the French tax law for its position that—simply put—the burden of the proof shifted to the taxpayer when financial instruments reflected an interest rate greater than a certain predefined rate set by the French tax law. The French tax administration had in practice set such high standards for establishing such proof that tax practitioners referred to this as “impossible proof.”
Recent court decisions
In the court decisions in the Studialis, WB Ambassador, and BSA cases, the Paris appellate court and the French Supreme Administrative Court held in favor of the taxpayers in each case. These decisions confirmed that:
- The proof of the arm’s length nature of the interest rate could be established by any means.
- Bonds could be used to benchmark intragroup loans if they constitute a “realistic alternative.”
- Rating software or other methodologies are useful in the absence of an official stand-alone rating of the borrower.
- The provision of corroborative material or analyses in addition to the main economic analysis is helpful.
Tax professionals view these decisions as a positive and welcomed development, given the fast-changing case law on this topic in France. Numerous court decisions issued before 2019 were favorable to the tax administration—even a 2019 judgment issued by the Conseil d’Etat had surprisingly failed to substantially change the practice of the French tax administration or lower level tax courts in that two decisions of the appeals courts of Paris (March 2020) and Nantes (October 2020) were issued in favor of the French tax administration on what were viewed to be disputable grounds.
Administrative “methodological notes”
The eight methodological notes establish the general rules for establishing the arm’s length nature of intragroup interest rates. Also, the guidance notes are based on the description of illustrative examples and discuss a broad range of issues, including: (1) the extent to which an informal bank offer must be considered; (2) the use of rating methodologies issued by rating agencies; (3) the taking into account of group implicit support; (4) comparability adjustments; and (5) the approach to determine an interest rate in practice, from a benchmark of bonds or loans, etc.
In practice, the guidance notes are largely aligned with the OECD Transfer Pricing Guidelines—and specifically new Chapter X—that are referenced by the French guidance in multiple instances. Tax professionals believe this illustrates a welcomed and important change from the prior position of the French tax administration, and the guidance notes are expected to further support the evolution of the tax administration’s position at the “field level.”
While it continues to be difficult to predict the outcome of field audits or court decisions regarding financial intragroup transactions and given that this issue will continue to be subject to challenges during tax audits, it appears that the courts are ready to continue to support and endorse a number of OECD-backed concepts as well as the use of rating tools. In any event, prudent taxpayers would exercise considerable care in securing their intragroup funding arrangements and use robust economic analyses.
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