France vs GE Healthcare Clinical Systems, December 2015, CAA de VERSAILLES, Case No 13VE00965

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During the period from 1 January 2003 to 31 December 2005 all the products marketed by GE Healthcare Clinical Systems (France), a company wholly owned by the American company GE Medical Systems Information Technologies and the exclusive distributor in France of medical equipment produced by the General Electric group, were supplied to it by its German subsidiary, GE Medical Systems Information Technologies (MSIT) GmbH, of which it held 100% of the capital. Transfer prices were determined based on the cost plus method.

Following an audit of the accounts of GE Healthcare Clinical Systems, the tax authorities dismissing the cost plus method and instead set up a sample of eight companies considered comparable to GE Healthcare Clinical Systems. The difference between the operating loss declared by this company and its arm’s length operating results, calculated on the basis of the median of the net operating margin of the eight companies deemed to be comparable, constituted an indirect transfer of profits granted without consideration by GE Healthcare Clinical Systems to its supplier, GE MSIT GmbH, within the meaning of Article 57 of the general tax code.

This transfer of profits constituted income distributed to a company established in Germany, within the meaning of the provisions of Article 111c of the General Tax Code, the administration subjected GE Healthcare Clinical Systems to the withholding tax provided for in Article 119a(2) of this code, in respect of the 2004 and 2005 financial years, at the rate provided for by the French-German tax treaty

GE Medical Systems, which took over the rights and obligations of GE Healthcare Clinical Systems following the merger of that company, is appealing against the judgment of 3 January 2013 by which the Montreuil Administrative Court dismissed the latter’s application for discharge of the withholding tax and the corresponding penalties to which it was subject in respect of the financial years ended in 2004 and 2005, which were levied on 30 April 2009;

Judgement of the Court of Appeal

The Court of Appeal upheld the assessment of the tax authorities and dismissed the appeal of GE Medical Systems

“22. Considering that the administration, which did not limit itself to noting the loss-making results, with the exception of the year 2000, of GE Healthcare Clinical Systems during the financial years 1998 to 2005, which are not attributable to salary and structural costs as the applicant company maintains, failing to provide any proof of its allegations, and to pointing out that these losses represented 60% of the turnover for the year 2005, thus provides proof of the relevance of the method derived from the study of net transactional margins; that in these circumstances, given the size of the difference between the operating losses declared by GE Healthcare Clinical Systems and the company’s arm’s length operating results resulting from the application of the transactional net margin method, which amounted to EUR 3,675,112 for 2004 and EUR 5,025,107 for 2005, it must be regarded as establishing that the company’s operating losses were in line with the net margin method, it must be regarded as establishing that in the financial years 2004 and 2005 GE Healthcare Clinical Systems, by paying GE MSIT GmbH purchase prices that were excessive in relation to an arm’s length situation, transferred to it profits in the amount of the difference recorded, respectively, in respect of each financial year, within the meaning and for the application of Article 57 of the General Tax Code ;
– As regards the justification of the advantages granted :

23. Considering that neither GE Healthcare Clinical Systems nor GE MEDICAL SYSTEMS establishes or even alleges that the advantages granted by GE Healthcare Clinical Systems to its German subsidiary were justified by the obtaining of counterparties favourable to the activity of GE Healthcare Clinical Systems or to its operating results;

24. Considering that it follows that the tax authorities were right to consider that GE Healthcare Clinical Systems indirectly transferred to its German subsidiary profits amounting to EUR 3,675,112 for the 2004 financial year and EUR 5,125,107 for the 2005 financial year;”

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France vs GE CAA de VERSAILLES, 7ème Chambre, 03_12_2015, 13VE00965

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