France vs Electricité de France, November 2022, Conseil d’État, Case No 462383 (ECLI:FR:CECHR:2022:462383.20221116)

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In 2009 the English company EDF Energy UK Ltd (EDFE), a wholly-owned subsidiary of SAS Electricité de France International (SAS EDFI), issued 66,285 bonds convertible into shares (OCAs) for a unit nominal value of EUR 50,000. SAS EDFI subscribed to all of these OCAs for their nominal value, i.e. a total subscription price of EUR 3,314,250,000. The OCAs had a maturity of five years, i.e. until October 16, 2014, and could be converted into new EDFE shares at the instigation of the subscriber at any time after a three-year lock-up period, i.e. from October 16, 2012. Each bond entitled the holder to receive 36,576 EDFE shares after conversion. The annual coupon for the OCAs was set at 1.085%. In this respect, SAS EDFI determined, on the basis of a panel of bond issues of independent comparables, the arm’s length rate that should be applied to conventional bonds, i.e. 4.41% (mid-swap rate and premium of 1.70%), 490 million according to the “Tsiveriotis and Fernandes” model, so that the sum of the present value of the flows of the “debt” component of the bond and the value of the “conversion” option is equal to the subscription price of the OCAs. SAS EDFI recognised the annual interest received at a rate of 1.085% on the bonds as income, thus subject to corporate income tax, i.e. 36 million euros..

The tax authorities considered that the “conversion” component had a zero value for SAS EDFI and that, given the terms of the loan – in this case, via the OCA mechanism – and the context of the issuance transaction, the reduction in the interest rate applied compared with the arm’s length rate of 4.41% to which SAS EDFI was entitled, made it possible to achieve a transfer of profits, In the case of SAS EDFI, the difference between the interest rate of 4.41% and the rate corresponding to the actual remuneration recorded had to be reintegrated in order to determine its taxable income. Before the appeal judge, the Minister of Action and Public Accounts contested any value to the “conversion” component on the double ground, on the one hand, that the OCAs issued by EDFE having been subscribed by its sole shareholder, the financial profit that SAS EDFI can hope to make by subscribing and then converting the OCAs into new shares mechanically has a value of zero, since it would be offset by a loss of the same amount on the value of the EDFE shares held prior to this conversion, and on the other hand, that since the OCAs issued by EDFE were subscribed by its sole shareholder, the financial benefit that SAS EDFI can hope to make by subscribing and then converting the OCAs into new shares has a value of zero, since it would be offset by a loss of the same amount on the value of the EDFE shares held before this conversion, on the other hand, since the objective sought by SAS EDFI was not that of a “classic” financial investor and the decision to convert or not the OCAs into new shares will not be taken solely in the interest of the subscriber with a view to maximising his profit, the valuation of the “conversion” component of the OCAs based solely on such an interest is not relevant and, since the financial impact of a conversion was then random, this component must necessarily be given a value close to zero.

Not satisfied with the assessment, Electricité de France brought the case to court.

The Court of first instance held in favour of the tax authorities. An appeal was then filed by Electricité de France with the Administrative Court of Appeal (CAA).

In a decision issued 25 January 2022 the Administrative Court of Appeal overturned the decision from the court of first instance and found in favor of Electricité de France.

…since the Minister for Public Action and Accounts does not justify the zero value of the ‘conversion’ component he refers to, SA EDF and SAS EDFI are entitled to maintain that he was wrong to consider that, by subscribing to the OCAs issued by EDFE, for which the interest rate applied was 1.085% and not the borrowing rate for traditional bonds of 4, 41%, SAS EDFI had transferred profits to its subsidiary under abnormal management conditions, and the amounts corresponding to this difference in rates had to be reintegrated to determine its taxable results pursuant to Article 57 of the General Tax Code and, for EDFE, represented hidden distributions within the meaning of c. of article 111 of the same code which must be subject to the withholding tax mentioned in 2. of article 119 bis of the same code”

An appeal was then filed by the tax authorities with the Conseil d’État

Judgement of the Supreme Administrative Court

The Supreme Administrative Court annulled the decision from the CAA and found in favor of tax authorities.

4. It follows from the statements in the judgment under appeal that the court first found that the interest rate agreed between EDFI and its subsidiary in 2009 was lower than the rate that would remunerate bond financing in an arm’s length situation. Secondly, it considered that the granting to EDFI of an option to convert its shares into shares of the financed company could be valued in the same way as the granting of the same option in the context of a transaction between companies with no capital ties. The court deduced that the interest rate in dispute, including the value of this option, did not constitute an indirect transfer of profits abroad.
5. However, the situation arising from the grant to the sole shareholder of the company financed of an option to convert the bonds he has subscribed to into shares of the company is, by its very nature, not comparable to an arm’s length situation, since the value of this option, consisting exclusively in the opening of an option to acquire a fraction of the company’s capital in repayment of the bond loan granted, is necessarily nil when the option is granted to the person who, at the date of issue, owns all of that capital. Indeed, this sole shareholder has the power to decide, at any time, on the issue of new securities and their allocation to him in repayment of the bond loan he has granted to the company and, moreover, the conversion operation is necessarily neutral for him from a property point of view, since he possesses, before as well as after the conversion, the totality of the capital of a company, the value of which is increased by the amount of the debt for which it has been discharged, up to the exact amount of the claim he had on it. It follows that, for the application of the principles recalled above in point 3, the transaction at issue must, in the absence of a comparison with a similar transaction in an arm’s length situation, be considered as an intra-group financing transaction remunerated at a rate lower than the market value of the service. In holding that the administration did not establish that this difference in remuneration was not matched by the granting of a conversion option and constituted a gift granted to EDFE, when, on the one hand, such an option had no value for EDFE at the date of its acquisition, the other hand, that the possible gain from the subsequent transfer of this bond, assuming such a transfer was possible in the case in point, has no bearing on the assessment of the advantage expected at the date of the subscription of the OCAs, the court erred in law.
6. It follows from all the foregoing, without it being necessary to examine the other grounds of appeal, that the Minister is entitled to seek the annulment of the judgments which he is challenging.”


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