SASU A. Menarini Diagnostics France, a French subsidiary of the Italian Menarini Group, purchases and resells diagnostic equipment and self-diagnosis products, as well as products for laboratories. Since its inception, the company had consistently reported operating losses, despite each business line being profitable, regardless of sales trends, and even though the company was no longer in a market penetration phase.
The French tax authorities conducted an audit for fiscal years 2011 to 2013, which concluded that the intra-group transaction prices were not at arm’s length. The audit found that the company had overpaid for products purchased from two related Italian entities, resulting in an indirect transfer of profits within the meaning of Article 57 of the French General Tax Code.
A. Menarini Diagnostics France challenged the tax adjustment before the Montreuil Administrative Court, which rejected its request for relief. A subsequent appeal before the Administrative Court of Appeal was also dismissed in November 2023.
The company then appealed to the Supreme Administrative Court.
Judgment
The Supreme Administrative Court partially allowed the appeal. It annulled the portion of the tax adjustment relating to the alleged indirect transfer of profits to the Italian company Menarini IFR, while upholding the adjustment concerning the Italian company AMDI.
Excerpt in English
“On the alleged indirect transfer of profits to the Italian company Menarini IFR:
3. In order to find that the tax authorities had proved the existence of practices falling within the scope of the provisions cited in the previous point, allowing a presumption of a transfer of profits to the Italian company Menarini IFR, the court based its decision, on the one hand, on the fact that AMDF had suffered recurring operating losses since its creation in 2003, despite the profitability of its activities and even though it was no longer in the market penetration phase. It also based its decision on the fact that the net profit margins for all the products distributed by AMDF were negative due to an item of expenditure entitled “other purchases and external charges” representing 28% to 43% of its turnover for the period from 2007 to 2013, whereas it was apparent from the information gathered by the administration that, on the one hand, comparable independent companies had achieved positive net margins over the same period, except for one of them in one financial year, and, on the other hand, for those same companies, the item ‘other purchases and external charges’ represented on average only 13% of turnover.
4. By ruling thus, when the administration failed to specify which expenses recorded under the heading ‘other purchases and external charges’ had been incurred solely in the interests of the other companies in the group, the circumstances it relied on were not sufficient to establish a presumption of transfer of profits from AMDF to the Italian company Menarini IFR, the court committed an error of law.
5. It follows, without it being necessary to rule on the other grounds of appeal relating to this head of adjustment, that AMDF is entitled to seek the annulment of the judgment it is challenging in so far as it rules on the alleged transfer of profits to the Italian company Menarini IFR.
On the indirect transfer of profits to the Italian company AMDI:
6. It is apparent from the documents in the file submitted to the judges hearing the case that, in order to establish the existence of a transfer of profits to the Italian company AMDI and to measure its extent, the tax authorities highlighted the overvaluation of the purchase price paid by AMDF to AMDI for the G-IHCO range of products by applying the “open market price” method. On appeal, the applicant company criticised the tax authorities for not having used “external” comparables, i.e. comparable transactions between two independent companies, neither of which was involved in the transaction at issue, to determine the arm’s length price, and for having relied on a single “internal” comparable, i.e. involving one of the companies party to the transaction at issue, relating to the G-ECCH range of products purchased by it from an independent supplier. internal” comparable, i.e. involving one of the companies party to the transaction in dispute, relating to products in the G-ECCH range purchased by it from an independent supplier, the reliability of which it also contested on the grounds that the margin it made on the sale of products in the G-ECCH range represented 10% of its turnover, compared with 19% for the G-IHCO range, and that the rate of reimbursement by social security for the products in those two ranges differed. After finding, on grounds not vitiated by distortion, that those two product ranges were intended for the same customers in the same sector of activity, that there were noother internal comparables corresponding to products acquired directly by AMDF from third-party suppliers and that the sale of G-IHCO products constituted a sufficiently representative share of turnover within the G range, the court held that the tax authorities had been able, in this case, without altering its reliability, to apply the comparable price method by using this single internal comparable. In so ruling, the court, which did not base its decision solely on the recurring losses incurred since its creation, contrary to the applicant’s claim, assessed the facts before it without distorting them and did not err in law.
7. It follows from all the foregoing that AMDF is only entitled to seek annulment of the judgment under appeal in so far as it rules on the alleged indirect transfer of profits to the Italian company Menarini IFR.”
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