An intercompany loan was granted within the Apex Tool group at an interest rate of 6%. A tax assessment was issued by the tax authorities contesting the amount of interest deducted. The case ended up at the Conseil d’Etat, where it was referred back to the CAA.
Following the referral of the case, Apex Tool Group asked the CAA to refund the amounts of €58,598, €50,099 and €653 corresponding to the excess corporation tax and social security contributions and to increase the balance of the interest deductions carried forward under the French thin cap rules from €1,435,512 to €2,401,651.
Judgment of the Court
The Court dismissed Apex Tool Group’s application. It found that the company had failed to provide evidence that the 6% interest rate on the loan was at arm’s length.
Excerpts (Unofficial English translation)
“8. It follows from the foregoing that the applicant company, which does not provide any further evidence enabling it to verify the characteristics and risk profile of Cooper Industrie France, the company to which the loan was granted, at the date on which the loan was granted, cannot be regarded as providing evidence that institutions or organisations would have been likely, given the specific characteristics of ATHF1 and in particular the risk profile it presented on the date the loan was issued, to grant it a loan with the same characteristics in July 2010 on an arm’s length basis. Consequently, the appellant company cannot be deemed to have provided the proof required of it that all of the disputed interest paid at the rate of 6% is deductible, in accordance with the provisions of I of Article 212 of the French General Tax Code referred to above. As a result, it is not entitled to claim repayment of the corporation tax and social security contributions it paid in respect of the 2011 and 2012 financial years.
On the claims based on the provisions of II of Article 212 of the French General Tax Code:
9. 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 of its directly or indirectly affiliated companies within the meaning of 12 of Article 39 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 shareholders’ equity, assessed at the company’s discretion at the beginning or end of the financial year, and the average amount of the sums left or made available by all of the directly or indirectly affiliated companies within the meaning of Article 12 of 39 during the financial year, b) 25% of the current profit before tax previously increased by the said interest, depreciation taken into account in determining that same profit and the share of lease payments taken into account in determining the sale price of the asset at the end of the contract, /c) The amount of interest paid to this company by companies that are directly or indirectly linked within the meaning of Article 12 of 39, / the fraction of interest exceeding the highest of these limits may not be deducted in respect of that financial year, unless that fraction is less than €150,000. / However, this fraction of interest that 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 deductible 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, less a discount of 5% applied at the start of each of these financial years”.
10. It is common ground that SAS Apex Tool Group reported an amount of EUR 1,380,069 in respect of its stock of interest subject to deferred deduction at the close of the 2013 financial year, pursuant to the provisions of II of Article 212 of the General Tax Code, in respect of the loan of EUR 22,656,211.20 owed to the parent company ATG LLC. The applicant, who has requested a recalculation of the excess interest, maintains that it is entitled, firstly, to request that the interest be carried forward pursuant to the provisions of Article 212-I of the French General Tax Code and, secondly, to file an amended tax return showing a balance of interest remaining to be carried forward of 2,401,651 euros as at 31 December 2013.
11 As a result of the investigation, SAS Apex Tool Group, believing that it was entitled to deduct all of the interest on the loan in question from its taxable income on the basis of Article 212(I) of the French Tax Code, consequently recalculated its stock of deferred interest. However, as stated in paragraphs 6 to 8 of this judgment, the applicant did not prove that it met the conditions laid down by the provisions of Article 212-I of the General Tax Code and was therefore able to deduct the loan interest that it had incurred. In these circumstances, the tax authorities were right not to accept the company’s recalculation of its excess interest and the stock of deferred interest. Consequently, the company’s claims in this respect can only be rejected.”
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