Howmet, a société par actions simplifiée (SAS), is the head of a tax group in which its subsidiary, Alcoa Holding France, now Arconic Holding France (AHF), is integrated.
Following an audit of the accounts of these two companies, the tax authorities corrected their taxable profits for the 2011 and 2012 financial years by disregarding the consequences of a contribution made to the Belgian company Alcoa Wheels Product Belgium (AWPB), now Alcoa Finance and Services Belgium (AFSB), of sums borrowed from the Swiss permanent establishment of a Luxembourg company belonging to the same economic group. It also reinstated the management fees paid by AHF to the group’s American parent company, Alcoa Inc., in AHF’s profits for the 2010 and 2011 financial years.
In a ruling handed down on 19 November 2020, the Montreuil Administrative Court upheld Howmet’s claim for discharge of the additional corporate tax resulting from the adjustments based on abuse of rights and the corresponding surcharges, and dismissed the remainder of its claim.
In a judgment of 31 March 2023 the Paris Administrative Court of Appeal, on appeal by the tax authorities set aside Articles 1 and 2 of that judgment and ordered Howmet to pay the tax, and dismissed its cross-appeal.
An appeal was then filed by Howmet to annul this Judgment.
Judgment
The Conseil d’Etat rejected the appeal and upheld the decision of the Court of Appeal, ruling that this was an artificial arrangement whose sole purpose was to allow the deduction of interest in taxable income and thereby avoid taxation.
Excerpt in English
“9. In deducing from all of these circumstances the existence of an artificial arrangement whose sole purpose, by financing the Belgian company through a capital increase rather than through a loan, was to exempt AHF from having to record, as compensation for the interest deducted, income corresponding to interest from the Belgian company, thereby constituting an abuse of rights, the Court, which gave sufficient reasons for its judgment, neither erred in law nor incorrectly characterised the facts of the case. It was therefore able to deduce that the tax authorities were right to add back to the taxable profits of Howmet and AHF interest equivalent to the amounts deducted.
10. Finally, it follows from the foregoing that the Court was also able, without giving insufficient reasons for its judgment or committing an error of law, to reject the argument raised before it to the effect that the tax authorities could, without rejecting the acts described above, have made the same reassessment on the basis that the interest rate on the loans taken out was excessive, in the light of normal commercial management, in order to call into question in part the deductibility of the related interest. In addition, the applicants’ argument that, in the absence of an increase in the capital of the Belgian company AFSB, the main shareholder of the French companies had demanded the distribution of the unused cash which they had allegedly had at their disposal, and which was in any event unjustified, was in any event inoperative, as the disputed rectification stemmed from the fact that, once the acts constituting abuse of rights had been set aside, these sums had to be regarded as having directly financed the Spanish company AIESL.”
Click here for English translation
Click here for other translation