Tag: Abnormal act of management

The French principle of “abnormal act of management” is based on case law. The tax administration is generally not allowed to intervene in the management of companies. However, where a company takes a decision not in its direct interest or not reflecting normal management, the tax administration can disallow the related expenses.

In French: “D’actes anormaux de gestion

France vs SA Compagnie Gervais Danone, June 2021, CAA, Case No. 19VE03151

France vs SA Compagnie Gervais Danone, June 2021, CAA, Case No. 19VE03151

SA Compagnie Gervais Danone was the subject of an tax audit at the end of which the tax authorities questioned, among other things, the deduction of a compensation payment of 88 million Turkish lira (39,148,346 euros) granted to the Turkish company Danone Tikvesli, in which the french company holds a minority stake. The tax authorities considered that the payment constituted an indirect transfer of profits abroad within the meaning of Article 57 of the General Tax Code and should be considered as distributed income within the meaning of Article 109(1) of the Code, subject to the withholding tax provided for in Article 119a of the Code, at the conventional rate of 15%. SA Compagnie Gervais Danone brought the tax assessment to the administrative court. In a decision of 9 July 2019 the Court discharged SA Compagnie Gervais Danone from the taxes in dispute. This decision was appealed to Administrative Court of Appeal by the tax authorities. Judgement of the Court ... Continue to full case
France vs Bluestar Silicones France, Feb 2021, Supreme Administrative Court (CAA), Case No 16VE00352

France vs Bluestar Silicones France, Feb 2021, Supreme Administrative Court (CAA), Case No 16VE00352

Bluestar Silicones France (BSF), now Elkem Silicones France SAS (ESF), produces silicones and various products that it sells to other companies belonging to the Bluestar Silicones International group. The company was audited for the financial years 2007 – 2008 and an assessment was issued. According to the tax authorities, the selling prices of the silicone products had been below the arm’s length price and the company had refrained from invoicing of management exepences and cost of secondment of employees . In the course of the proceedings agreement had been reached on the pricing of products. Hence, in dispute before the court was the issue of lacking invoicing of management exepences and cost of secondment of employees for the benefit of the Chinese and Brazilian subsidiaries of the Group. According to the company there had been no hidden transfer of profits; its method of constructing the group’s prices has not changed and compliance with the arm’s length principle has been demonstrated ... Continue to full case
France vs Société Générale S.A., Feb 2021, Administrative Court of Appeal, Case No 16VE00352

France vs Société Générale S.A., Feb 2021, Administrative Court of Appeal, Case No 16VE00352

Société Générale S.A. had paid for costs from which its subsidiaries had benefited. The costs in question was not deducted by Société Générale in its tax return, but nor had they been considered distribution of profits subject to withholding tax. Following an audit for FY 2008 – 2011 a tax assessment was issued by the tax authorities according to which the hidden distribution of profits from which the subsidiaries benefited should have been subject to withholding tax in France Société Générale held that the advantage granted by the parent company in not recharging costs to the subsidiaries resulted in an increase in the valuation of the subsidiaries. It also argued that the advantages in question were not “hidden” since they were explicitly mentioned in the documents annexed to the tax return By judgment of 11 October 2018, the court of first instance discharged the withholding taxes as regards the absence of re-invoicing of costs incurred on behalf of the subsidiaries located ... Continue to full case

TPG2020 Chapter X paragraph 10.13

For example, consider a situation in which Company B, a member of an MNE group, needs additional funding for its business activities. In this scenario, Company B receives an advance of funds from related Company C, which is denominated as a loan with a term of 10 years. Assume that, in light of all good-faith financial projections of Company B for the next 10 years, it is clear that Company B would be unable to service a loan of such an amount. Based on facts and circumstances, it can be concluded that an unrelated party would not be willing to provide such a loan to Company B due to its inability to repay the advance. Accordingly, the accurately delineated amount of Company C’s loan to Company B for transfer pricing purposes would be a function of the maximum amount that an unrelated lender would have been willing to advance to Company B, and the maximum amount that an unrelated borrower ... Continue to full case
France vs Philips, September 2018, Conseil d’État, Case No 405779

France vs Philips, September 2018, Conseil d’État, Case No 405779

Philips France SAS provides contract R&D to it’s Dutch parent. Compensation for the service was calculated as cost plus 10%. In the years 2003 to 2007 Philips France received government subsidies for performing R&D. These subsidies had been deducted by the company from the cost base before calculating of the cost plus remuneration. The French tax authorities issued a tax assessment where the deduction was denied and the remuneration calculated on the full cost base. The Supreme Administrative Court ruled that a deduction of subsidies from the cost base does not constitute a “transfer of profits abroad” and allowed the reduced cost base for calculation of the arm’s length remuneration.  Click here for English translation Click here for other translation CÉt_8ème_-_3ème_chambres_réunies_19_09_2018_405779 ... Continue to full case
France vs General Electric France, June 2017, Conseil d État, Case No 392543

France vs General Electric France, June 2017, Conseil d État, Case No 392543

The Supreme Administrative Court laid down the factors to be applied in determining the abnormal nature of the remuneration of intragroup loans. “The normal or abnormal nature of the remuneration of loans taken by an enterprise from another enterprise to which it is affiliated must be assessed in relation to the remuneration that the lender should pay to a financial institution or similar body to which the enterprise is not related and would borrow, under similar conditions, sums of an equivalent amount. A lender’s assessment of the default risk of the borrower, whose risk premium is the consideration, depends on the debtor’s ability to repay the debt to the obligee until maturity. The assessment of the solvency risk of the borrower, in particular summarized in the periodic ratings that the rating agencies attribute to the companies that may, where appropriate, solicit them to this effect, results from the analysis of the evolutions of a series. economic variables, both internal and ... Continue to full case
France vs. Rottapharm, Jan 2015, CE No 369214

France vs. Rottapharm, Jan 2015, CE No 369214

In the Rottapharm case The French “abnormal management action” principle was invoked. The Court overruled the decision of the tax administration under the principle of non-intervention, which prevents the tax administration from getting involved in company management. The fact that an advertising campaign costs more than the usual amount spent by the majority of companies in the same business area for similar products does not prove that the advertising campaign is an abnormal management action. Click here for translation France vs Rottapharm 23_01_2015_CE 369214 ... Continue to full case
France vs. SOCIETE D'ACQUISITIONS IMMOBILIERES, Jan 2010, CE, No. 313868

France vs. SOCIETE D’ACQUISITIONS IMMOBILIERES, Jan 2010, CE, No. 313868

In the Société d’acquisitions immobilières case the interest rate charged to a subsidiary was considered comparable with the interest rate the French entity would receive from a third party bank for an investment similar in terms and risk. The Court decided that the cash advance granted by a sub-subsidiary to its ultimate parent with which it had no business relations could constitute an “abnormal act of management” if the amount lent is clearly disproportionate to the creditworthiness of the borrowing company. Click here for translation France vs SOCIETE D'ACQUISITIONS IMMOBILIERES 22 Jan 2010 CE no 313868 ... Continue to full case
France vs. Soladi, April 1998, CAA No. 94NC00880

France vs. Soladi, April 1998, CAA No. 94NC00880

In the Soladi case the court deemed it to be an “abnormal act of management” to provide an explicit financial guarantee free of charge, unless direct actual benefit for the entity providing this support can be justified. Click here for translation France vs Soladi_30_avril_1998_CAA 94NC00880 ... Continue to full case
France vs. Montlaur Sakakini, Oct 1995, Administrative Court of Appeal, No 95LY00427

France vs. Montlaur Sakakini, Oct 1995, Administrative Court of Appeal, No 95LY00427

In the case of Montlaur Sakakini the tax authorities had issued an adjustment where the arm’s length interest rate on deposits had been determined to be between 10-12%. The company held that the interest rate should be 4.5%. Judgement of the Court The court decided in favour of the company as no proof of the validity of an interest rate higher than the 4.5% had been provided by the authorities. Excerpt “…in order to justify the interest rates of 12.5%, 12.5%, 11.79% and 10.63% which the tax authorities retained, respectively for the financial years …, 1984 and 1985 respectively on the advances still in dispute with the MONTLAUR company, the Minister of the Economy and Finance refers to the rates at which certain financial establishments would have remunerated twelve-month deposits of more than 500,000 francs and three-month deposits of 100,000 francs, as well as to the average rates charged on the interbank market ; that none of these investments is ... Continue to full case
France vs Baker International, April 1994, Court of Appeal, Case No 92BX01109

France vs Baker International, April 1994, Court of Appeal, Case No 92BX01109

In Baker International the court concluded that if interest is not charged in respect of deferrals of payments granted to a related company, it is considered either an abnormal act of management or is subject to Section 57 of the tax code. Excerpt “…it is clear from the investigation that the share of the applicant company’s turnover corresponding to sales of equipment to its subsidiary decreased significantly during the years under investigation, as did sales to Elf; whereas, on the other hand, the above-mentioned provisions of Article 57 prevented S.A. BAKER INTERNATIONAL FRANCE from charging its subsidiary sales prices that differed from the public prices; finally, neither the operating conditions decided by the company “Bi-Gabon” with regard to stocks and the taking back of equipment, nor the fact that the financial health of this subsidiary was able to provide it with income, can suffice to justify the interest that S. A. would have had in this matter. A. BAKER INTERNATIONAL ... Continue to full case
France vs Vansthal International, March 1993, CAA, No 92NC00227

France vs Vansthal International, March 1993, CAA, No 92NC00227

In the case of Vansthal France the tax authorities had disallowed a transfer pricing policy under which a 20%-40% mark-up was added to payments to a Swiss entity because in its capacity as a billing centre the Swiss entity assumed no risk. Judgement of the Court The Court ruled in favour of the tax authorities. Excerpt “Considering, on the other hand, that it results from the investigation that the MAD company re-invoiced the goods to the VANSTHAL FRANCE company after having increased the prices by 39% for the kitchen articles and 20% for the porcelain articles and collected the corresponding payments; that, since MAD did not perform any services for the applicant company, the department considered that the latter had performed an abnormal act of management by agreeing to pay for its purchases at an unreasonably high price with full knowledge of the facts and that the payment of the excess price resulted in a transfer of profits abroad to ... Continue to full case