Following a tax audit for the fiscal years 2011 and 2012 the tax authorities had adjusted Axa’s taxable income based on two main issues: the application of France’s controlled foreign company (CFC) rules, taxing the profits of a UK-based affiliate, Hordle Finance BV; and the disallowance of interest expenses under Article 57, on the basis that the interest margins on loans from Axa’s foreign affiliates were above the arm’s length rates and thus constituted an indirect transfer of profits.
Judgment
The Paris Administrative Court of Appeal ruled in favor of Axa SA, overturning parts of a 2023 decision by the Montreuil Administrative Court.
Regarding the disallowed financial charges, the court found that the increased margins agreed to in the restructuring of intra-group loans were justified by an extension of loan maturity and the avoidance of early repayment obligations. These were not deemed to be gratuitous advantages or acts of abnormal management, and therefore the interest remained deductible.
As a result, Axa SA was granted a reduction in its taxable bases for the relevant years by over €224 million and €231 million respectively. The overall tax liabilities were reduced accordingly, prior losses were reinstated.
Excerpts in English
“17. It appears from the investigation, and in particular from the proposed adjustment of 23 December 2014, that, on the one hand, SA Axa issued debt securities totalling USD 700 million on 27 September 2007. These securities, which matured on 30 September 2012 and carried an interest rate of 5.4%, were subscribed by the US companies Axa Equitable Life Insurance Company (‘ELIC’) and Mony Life Insurance Company (‘MLIC’), both US tax residents. On 4 March 2011, this loan was restructured, with the parties agreeing to set the new start date as the same day, to set 30 December 2020 as the new maturity date and to increase the annual interest rate to 5.7%, corresponding to the market rate of 4.95% plus a margin of 0.75% corresponding to the ‘reinvestment’ of the market value of the initial loan. On the other hand, on 15 December 2008, SA Axa took out a loan of $500 million with Axa Financial Ltd, a Bermuda company and US tax resident, maturing on 15 December 2015 and bearing interest at a variable rate plus a margin of 3.2%. On 15 December 2010, this loan was restructured, with the parties agreeing to set the new start date as the same date, to set the new maturity date as 15 December 2020 and to replace the initially agreed variable interest rate with a fixed rate of 5.4%, corresponding to the market rate of 4.45% plus a margin of 0.95% corresponding to the ‘re-injection’ of the market value of the initial loan. The audit department considered that the financial charges borne by SA Axa and corresponding to the margins added to market rates, granted during the restructuring of these loans, should be regarded as indirectly transferred profits within the meaning of Article 57 of the General Tax Code, and on that basis, it questioned their deduction from taxable income.
18. It is not disputed that Axa Financial Ltd, ELIC and MLIC were dependent on SA Axa, which indirectly held all or almost all of their shares. The Minister argues that SA Axa granted them an advantage by agreeing, in respect of the loans taken out, to pay interest at rates higher than those it would have obtained from unrelated financial institutions or similar organisations for loans of equivalent amounts. However, as stated in paragraph 17, those rates were granted by SA Axa as part of a restructuring of existing loan agreements, which enabled it to obtain an extension of their term for additional periods of five and eight years. If, as the Minister for Defence argues, the initial loan agreements provided for the possibility of early repayment without compensation or additional payment and if the new maturity dates were taken into account when determining the market rates to which the disputed margins were applied, that restructuring nevertheless enabled SA Axa to avoid having to repay the sums borrowed and remaining to be repaid, which were particularly large, before taking out new loans. In those circumstances, and since the Minister does not seriously argue that the margins granted are excessive, SA Axa is entitled to maintain that the existence of advantages which it is alleged to have granted is not justified and, consequently, that the tax authorities were wrong to challenge, on the basis of the aforementioned provisions of Article 57 of the General Tax Code, the deduction from its results for the financial years ending in 2011 and 2012 of total sums of EUR 7,728,572 and EUR 7,579,202 respectively.
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23. The Minister relies on the aforementioned provisions of Article 39 of the General Tax Code before the Court and requests that the deduction of the sums of €7,728,572 and €7,579,202 from the results of the financial years ended in 2011 and 2012 of SA Axa, as financial expenses, be challenged on the basis of those provisions. However, it appears from the investigation that, as stated in paragraph 18, the corresponding margins, which increased the market rates of the loans taken out by SA Axa, were granted as part of a restructuring of the initial loan agreements and enabled it to obtain an extension of their term for additional periods of five and eight years without having to repay the sums borrowed, which were particularly large, prior to taking out new loans. In those circumstances, and contrary to the argument put forward by the Minister for the Defence, those margins were not, therefore, without any consideration for SA Axa.”
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