France vs. Caterpillar, October 1989, CE No 65009

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In Caterpillar, a 5% royalty was found to be an arm’s-length rate for the manufacturing and assembling operations. The court did not accept that there should be different rates for the two different activities.

Excerpt from the Judgement

“…According to the administration, the rate of the royalty paid by the company “Caterpillar France” is admissible only when it applies to the selling price of equipment entirely manufactured by the company, but not when it affects the gross margin made on equipment that the company has only assembled, since the assembly operations make less use of the technology and know-how acquired by the American company than the machining operations themselves; that, however, the details provided and the documents produced in this respect by the company do not make it possible to make such a distinction between the operations that successively contribute to the production of the finished products; that the uniform rate of the fee cannot, in the circumstances of the case, be regarded as excessive; that, consequently, the Minister is not justified in maintaining that the Administrative Court was wrong to hold that, as regards the tax years 1969 to 1972, the company ‘Caterpillar France’ provided proof that, contrary to what the departmental commission considered, the amount of the royalty paid by it to the company ‘Caterpillar Tractor’ was justified in the light of the rights granted and the services rendered, that, as regards the tax years 1973 to 1976, the administration did not establish that the royalty could have constituted a means of transferring profits, and that, for all these years, the disputed increases could not find a legal basis in the provisions of Article 57 of the General Tax Code;”

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France vs Caterpillar Oct 1989 CE No 65009