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.
Judgment 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.
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