In the Nestlé Finance case, a cash pool/treasury activity was transferred to a related Swiss entity.
The function had been purely administrative and carried out exclusively for the benefit of parties related to the French company. The French company did not receive any compensation for the transfer of the cash pooling activity.
The tax authorities issued an assessment where profit for the transfer of the activity had been determined under article 57 – the French arm’s length provision.
Administrative Court concluded that the transfer of an internal administrative function to a foreign entity – even if the function only involved other affiliated companies ‘captive clientele’ – required the payment of arm’s-length compensation.
Not satisfied with the decision, Nestlé filed an appeal with the Court of Appeals.
Judgment of the Court of Appeals
The decision of the Administrative Court was overturned by the Administrative Court of Appeal. The Court found that the tax authorities had failed to use a valid comparable, as secret comparables cannot be used under Article 57.
Excerpt
“5. Considering that, in order to assign the withholding tax at issue to Société Nestlé Finance International ltd, the tax authorities based themselves on the fact that the transfer to the Swiss company Nestlé Treasury Center Europe, carried out in October 2002, of the central treasury activity hitherto carried out for the benefit of the French companies of the Nestlé group by the company Nestlé Finance France, to whose rights the company Nestlé Finance International came, was to be considered as the transfer of an operational activity likely to be affected by a market value; It estimated this value on the basis of the average profit made by this activity by applying a gross margin rate of 0.5% to the average cash flow recorded in the year in which the transfer was made and in the two previous years;
6. Whereas the Minister for the Budget, Public Accounts and State Reform argues that this gross margin rate was determined on the basis of the average margin rates applied by the central treasury departments of three other groups of companies whose parent company’s shares are included in the “CAC 40″ index, but he does not provide any details either on the identity of these groups or on the operating conditions of their central treasury departments; Nor does it establish, in particular, that the latter benefited from a loan guarantee equivalent to that granted by the Swiss company Nestlé SA to Nestlé Finance France; Thus, even assuming that the transfer of activity in question falls within the scope of the aforementioned provisions and stipulations, the tax authorities, which did not base themselves on a comparison between the price of the disputed transaction and the prices charged for such transactions between similar companies operating normally, Nor can it be considered to have demonstrated that Nestlé Finance France granted a liberality by conceding the transfer to Nestlé Treasury Center Europe of the cash pooling activity carried out by it at a price lower than the market value of this activity;”
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