France vs HCL Maître Pierre, September 2022, Conseil d’État, Case No. 455651 (ECLI:FR:CECHR:2022:455651.20220920)

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On 1 July 2013, HCL Maître Pierre issued a ten-year bond which were convertible into shares and bore interest at a rate of 12%, the accrued amount of which was capitalised annually until the date of redemption or conversion, together with a non-conversion premium at a rate of 3%, if applicable. This loan was subscribed by its sole partner, (SAS) HGFI Saint-Martin.

Following an tax audit of HCL Maître Pierre’s for the financial years ended 31 March 2012, 2013 and 2014, the tax authorities considered that the interest at the rate of 12% could only be deducted at a rate set at 2.82%.

Judgement of the Supreme Court

The Court dismissed the appeal of HCL Maître Pierre and upheld the assessment issued by the tax authorities.


“3. It follows from the combination of these provisions that interest relating to sums left or made available to a company by a company which directly or through an intermediary holds the majority of the share capital or in fact exercises decision-making power, or which is placed under the control of the same third party as the first company, are deductible within the limit of those calculated at a rate equal to the annual average of the average effective rates charged by credit institutions for variable-rate loans to enterprises with an initial term of more than two years or, if higher, at the rate which the borrowing enterprise could have obtained from independent financial institutions or organisations under similar conditions. The rate which the borrowing undertaking could have obtained from independent financial institutions or organisations under similar conditions shall mean, for the purposes of these provisions, the rate which such institutions or organisations would have been likely, in view of its own characteristics, in particular its risk profile, to grant it for a loan of the same characteristics under arm’s length conditions. The borrowing undertaking, which has the burden of proving the rate it could have obtained from independent financial institutions or bodies for a loan granted under similar conditions, may provide such proof by any means. In order to evaluate this rate, it may, where appropriate, take account of the yield on bonds issued by undertakings in comparable economic circumstances where such bonds constitute, in the circumstances under consideration, a realistic alternative to intra-group financing. Where the sums left or made available to the company by its members consist of the nominal amount of bonds convertible into shares subscribed to by the latter, the reference rate thus assessed should be adjusted to take account of the value of the conversion option associated with the convertible bonds issued.

In order to establish that the 12% rate of the convertible bonds in question corresponded to the remuneration of an arm’s length financing, HCL Maître Pierre relied on ten bond issues by Western European companies with comparable risk, selected from a study by PwC, which showed a median rate of 11.91%. The court noted that these companies had ratings of less than BB- on the scale of the Standard and Poor’s rating agency, whereas the rating assigned by the same study to HCL Maître Pierre was BB+. It concluded that, since the comparables cited related to companies with worse credit ratings than its own, HCL Maître Pierre did not justify the arm’s length nature of the 12 % rate by presenting such a sample.”

(10) It follows from the foregoing that HCL Maître Pierre does not provide evidence that the 12% rate at which it issued bonds convertible into shares on 1 July 2013 would be the rate it could have obtained from independent financial institutions or organisations under similar conditions, and that the tax authorities were right to limit the deduction of interest to the rate provided for by the provisions of Article 39(1)(3) of the aforementioned General Tax Code. The company is therefore not entitled to seek the annulment of the judgment by which the Strasbourg Administrative Court rejected its claim.”

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