France vs. Bayerische Hypo und Vereinsbank AG, April 2014, Conseil d’État, Case No. FR:CESSR:2014:344990.20140411

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Bayerische Hypo und Vereinsbank AG (HVB-AG), a banking institution under German law, set up a French branch under the name “HVB-AG Paris” and contributed ten million Deutschmarks to this structure. The French branch also took out loans from the company’s head office or from third-party companies

Following an audit of the branch’s accounts, the tax authorities, after considering that these loans revealed an insufficiency of the contribution made by the head office, particularly in relation to the equity capital that the branch should have had if it had had legal personality, refused to allow the interest corresponding to the fraction of the loans deemed excessive to be deducted from the results taxable in France in respect of the branch’s activity and demanded that the company pay additional corporation tax for the financial year ending in 1994, together with increases

In order to justify this reassessment, the tax authorities first argued, during the contradictory reassessment procedure, that the disputed interest characterized a transfer of profits to the German head office within the meaning of Article 57 of the General Tax Code, and then by way of substitution of a legal basis that the interest was not borne by an autonomous company carrying on the same or similar activities as the branch under the same or similar conditions and dealing with the company’s head office as an independent company within the meaning of the provisions of Article 209(I) of the General Tax Code in conjunction with the stipulations of Article 4 of the Franco-German tax treaty of 21 July 1959;

In 2008, the Paris administrative court discharged the disputed tax assessment.

This decision was then appealed by the tax authorities to the Supreme Administrative Court.

Judgement of the Supreme Administrative Court

The Supreme Administrative Court upheld the decision of the administrative court and dismissed the appeal of the tax authorities.


“Considering, on the other hand, that there is no need, in order to interpret the stipulations of Article 4(2) cited above, to refer to the comments formulated by the Tax Committee of the Organisation for Economic Co-operation and Development (OECD) on Article 7 of the model convention drawn up by this organisation, since these comments were made after the adoption of the stipulations in question; that, in the wording applicable to the facts of the case, these provisions must be understood as authorising the State of the branch to attribute to the branch the profits that the interested party would have made if, instead of dealing with the rest of the company, it had dealt with separate companies under ordinary market conditions and prices; that, on the other hand, these stipulations do not have the object or, consequently, the effect of allowing that State to attribute to the branch the profits which would have resulted from the contribution to the interested party of own funds of an amount different from that which, entered in the accounting records produced by the taxpayer, faithfully retraces the withdrawals and contributions made between the various entities of the company; that, in particular, the tax authorities cannot substitute for this latter amount the equity capital with which the branch should have been endowed, by virtue of the applicable regulations or with regard, in particular, to the outstanding risks to which it is exposed, if it had enjoyed legal personality;

7. Considering that it follows from this that the terms of Article 209(I) of the General Tax Code subjecting to corporation tax “profits the taxation of which is attributed to France by an international convention on double taxation” could not, any more than the terms and rules mentioned in point 3, have the effect of attributing to the French tax authorities the taxation of profits established in accordance with the disputed reassessments;

8. Considering that it follows from all the above that, without needing to rule on the objection raised by HVB-AG, the Paris Administrative Court of Appeal, which was not required to respond to all the arguments raised before it, sufficiently reasoned its decision and did not commit an error of law, nor did it distort the documents in the file submitted to it by ruling, after having dismissed the domestic law grounds on which the tax authorities intended to base the contested taxes, that the stipulations of Article 4 of the Franco-German tax treaty could not be usefully invoked for the same purpose; that, consequently, the Minister responsible for the budget is not entitled to request the annulment of the judgment he is challenging;”

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