France vs Sté Paule Ka Holding, December 2020, Paris Administrative Court of Appeal, Case No 18PA02715

CAA de PARIS, 5th chamber, 10/12/2020, 18PA02715, Unpublished in the recueil Lebon

CAA of PARIS - 5th chamber

- N° 18PA02715

- Unpublished in the Recueil Lebon

Reading of Thursday 10 December 2020

FRENCH REPUBLIC

IN THE NAME OF THE FRENCH PEOPLE

Having regard to the following procedure:

Previous contentious procedure:

The société par actions simplifiée (SAS) Paule Ka Holding requested the Paris administrative court to discharge the additional corporate tax and social security contributions on this tax to which it was subject in respect of the financial years ended in 2012 and 2013, as well as the corresponding default interest and penalties.

By judgment no. 1613999 of 7 June 2018, the Paris Administrative Court rejected its request.

Procedure before the Court:

By a petition and briefs registered on 6 August 2018, 4 February 2019, 1 August 2019 and 4 March 2020, the company Paule Ka Holding, represented by Me E..., asks the Court:

1°) to annul judgment No. 1613999 of 7 June 2018 of the Administrative Court of Paris ;

2°) to pronounce the requested discharge;

3°) to charge the State with the sum of 8,000 euros under the provisions of Article L. 761-1 of the Code of Administrative Justice.

The company Paule Ka Holding maintains that :

- the expenditure of EUR 390,227 was incurred in the interest of the company, corresponds to an actual expense and is supported by sufficient documentary evidence;

- the interest paid as remuneration for the convertible bonds subscribed by the shareholder is fully deductible, as long as it can justify that the rate applied corresponds to the market rate;

- the penalties for deliberate failure to comply are not founded.

By statements of defence, registered on 11 October 2018, 24 January 2020 and 9 April 2020, the Minister for Public Action and Accounts concluded that the application should be rejected.

The Minister maintains that the pleas raised are unfounded.

Having regard to the other documents in the file.

Having regard to :

- Order No. 2020-1402 of 18 November 2020;

- decrees n° 2020-1404 and n° 2020-1406 of 18 November 2020;

- the general tax code and the book of tax procedures;

- the Code of Administrative Justice.

The parties were duly notified of the day of the hearing.

The following were heard during the public hearing:

- the report of Mr D..,

- the conclusions of Mrs. Lescaut, public rapporteur,

- and the observations of Mr E..., lawyer for the company Paule Ka Holding.

Considering the following:

1. The company Paule Ka Holding, whose object is the activity of a holding company and which is the parent company of an integrated group, was the subject of an accounting audit at the end of which it was subject to additional corporate tax and social security contributions on this tax for the financial years ending in 2012 and 2013, together with late payment interest and the increase for deliberate failure to comply with the provisions of a) Article 1729 of the general tax code. It is appealing against the judgment of 7 June 2018 by which the Paris Administrative Court rejected its request for the discharge of these taxes and penalties.

On the merits of the taxes:

As regards the deductibility of the charge in the amount of EUR 390,227 :

2. Under the terms of Article 39(1) of the General Tax Code, applicable to corporation tax by virtue of Article 209 of the same code: "The net profit is established after deduction of all charges, including : (...) 1° General expenses of any kind (...)". In order to be deducted from taxable profits, costs and expenses must, in general, be incurred in the direct interest of the business or be related to the normal management of the company, correspond to an actual expense, be supported by sufficient evidence and be included in the expenses of the financial year during which they were incurred.

3. The company Paule Ka Holding, set up as part of a leveraged buy-out (LBO) operation to finance the acquisition and growth of the Paule Ka group, acquired the entire capital of the group on 28 July 2011 at a price of 42 million euros from Mr and Mrs A... B..., their two children and two other partners. 390,227 to Mr and Mrs A.. B..., which it recorded on the same day and deducted for the financial year ending in 2012. The tax authorities challenged this deduction on the basis of Article 39(1) of the General Tax Code, on the grounds that the payment of this sum could not be considered to have been made in the company's interest.

4. It is clear from the investigation that Mr and Mrs A.. B... By deed dated 21 November 2007, they made a gift-sharing of the bare ownership of 636 shares in the company Paule Ka in equal parts between their two children, the transfer duties being calculated after deduction of an allowance of 75% of the value of the assets, in accordance with Article 787 B of the General Tax Code, subject to a commitment to retain the assets by the donors and the donees, the allowance granted resulting from a two-year collective retention commitment registered on 28 December 2007 and a four-year individual commitment by the donees at the end of the first period. The acquisition by Paule Ka Holding on 28 July 2011 of all the shares of Paule Ka from the four members of the B... family and two thirds, caused the breach of the retention undertaking entered into by the donees, who were then required to pay to the Treasury the amount of transfer duties remaining due following the donation of bare ownership of the 636 shares, pursuant to Article 1840 G ter of the French General Tax Code. Paule Ka Holding argued that the sum of EUR 390,227 paid on the same day corresponded to compensation for the financial loss resulting for Mr A.. B... of the payment of transfer duties following the breach of the undertaking to retain the 636 shares in Paule Ka.

5. It also follows from the investigation that Paule Ka Holding was created to acquire the entire capital of Paule Ka, which the Minister does not dispute, as paragraph 2.1 of the memorandum of understanding of 6 July 2011 concerning the acquisition of the entire capital and voting rights of this company provides that the transferors undertake to transfer to the transferee all the shares in full ownership. Point 3.3 of this agreement, relating to the transfer of documents by the transferee, stipulates that "On the date of completion, the transferee shall deliver to the transferors : (...) the bank cheque or bank transfer certificate at the sole discretion of Mrs C... B... and Mr A... B..., in the amount of 390,227 euros, corresponding to the payment of the compensation agreed upon in a lump sum between the Assignee on the one hand and Mrs C... B... and Mr A... B... on the other hand, in view of the fact that the Acquisition entails the termination of the Dutreil agreement relating to 636 Shares and the abandonment of the related advantages', the reason for the payment of the sum in dispute thus resulting from the memorandum of understanding, the evidential value of which is not called into question. In addition, Paule Ka Holding produced a copy of a cheque made out by Mr A... B... 557,466, and a slip from the receiving bank mentioning the Treasury as the beneficiary and concerning the payment of additional registration fees "following non-compliance with the conditions of the donation to our children on 21/11/2007 Pacte Dutreil", the evidential value of which is not called into question, the only circumstance being that the amount stated in the memorandum of agreement, The sole fact that the amount in the agreement protocol, which was set at a lump sum, does not correspond to the amount of the additional registration fees due does not make it possible to question the reality of and reasons for the payment and the interest of Paule Ka Holding in paying the sum in dispute with a view to acquiring all of the capital of Paule Ka company. In this respect, while the Minister, who does not allege that it would have been abnormal for Paule Ka Holding, as purchaser of all the shares, to pay the transfer duties that the owners would not have had to pay if the transfer had not taken place and if they had kept their shares and respected their undertaking to retain them, argues that the payment of this sum was the responsibility of Mr. and Mrs. B.. and Mrs B., who alone were liable for the transfer duties since the breach of the undertaking to retain occurred during the period of the undertaking, it follows from the above-mentioned elements that the applicant company provides sufficiently convincing evidence that these duties were actually paid by Mr A... B... in place of his children.

6. It follows from the foregoing that the elements invoked by the administration do not provide proof that the expenditure of EUR 390,227 correctly entered in the accounts was not incurred in the interest of the company Paule Ka Holding. The latter is thus entitled to argue that the administration was wrong to refuse to deduct it in respect of the financial year ended in 2012 and, consequently, to request the reduction of the tax bases and the discharge of the corresponding taxes, including the penalties for deliberate failure to comply as provided for in a) of Article 1729 of the General Tax Code, applied by the administration to this head of rectification.

With regard to the interest paid as remuneration for the convertible bonds subscribed by the shareholder :

7. Under the terms of Article 39 of the General Tax Code: "1. The net profit is established after deduction of all expenses, these including (...) in particular : (...) 3° The interest paid to the shareholders for the sums which they leave or make available to the company, in addition to their share of the capital, whatever the form of the company, within the limit of that calculated at a rate equal to the annual average of the average effective rates applied by credit institutions for variable rate loans to companies, with an initial duration of more than two years (...)". Under the terms of Article 212(I) of the same code, as it then stood: "I. Interest on sums left or made available to a company by a directly or indirectly related company within the meaning of Article 39(12) is deductible up to the limit of that calculated on the basis of the rate provided for in the first paragraph of Article 39(1)(3) or, if it is higher, on the basis of the rate that the borrowing company could have obtained from independent financial institutions or organisations under similar conditions.

8. It follows from these provisions that interest on sums left or made available to an undertaking by an undertaking which directly or through an intermediary holds the majority of the share capital or in fact exercises the power of decision, or which is placed under the control of the same third party as the first undertaking, are deductible within the limit of those calculated at a rate equal to the annual average of the average effective rates charged by credit institutions for variable-rate loans to businesses with an initial term of more than two years or, if higher, at the rate that the borrowing company could have obtained from independent financial institutions or organisations under similar conditions. The rate which the borrowing undertaking could have obtained from independent financial institutions or organisations under similar conditions shall mean, for the purposes of these provisions, the rate which such institutions or organisations would have been likely, in view of its own characteristics, in particular its risk profile, to grant it for a loan of the same characteristics under arm's length conditions. This rate cannot, in view of the difference in nature between a loan from a financial institution or body and financing by bond issue, be the rate that the undertaking would itself have been likely to pay to subscribers if it had chosen, in order to finance itself, to issue bonds rather than take out a loan. The borrowing company, which has the burden of proving the rate it could have obtained from independent financial institutions or organisations for a loan granted under similar conditions, may provide this proof by any means. To this end, in assessing the rate, it may, where appropriate, take account of the yield on bonds issued by undertakings in comparable economic circumstances, where such bonds constitute a realistic alternative to an intra-group loan in the circumstances under consideration.

9. As mentioned above, on 28 July 2011, Paule Ka Holding, which was set up as part of an LBO to finance the acquisition and growth of the Paule Ka group, acquired the entire share capital of the group for EUR 42 million. 25.7 million through bonds convertible into shares (OCA), of which one of the subscribers, Black Tie Luxco Holding, was a 70.7% shareholder. These bonds have a term of ten years, bear interest at a rate of 8%, have a principal amount that is repayable in full at maturity, are not accompanied by any guarantee or security, bear capitalised interest and are convertible at maturity at the rate of one new share with a value of one euro for every 10 OCAs granted. Paule Ka Holding recognised interest on bonds of EUR 2 083 490 for the year ended 2012 and EUR 2 574 298 for the year ended 2013 as an expense. The department questioned the amount of these deductions for the interest paid on the bonds subscribed by Black Tie Luxco by applying the legal interest rate provided for in Article 39(1)(3) of the General Tax Code, i.e. 3.64% and 3.10% for the said financial years. He thus reintegrated into the company's results the amount corresponding to the difference between the 8% rate applied by the company and the legal interest rate, making adjustments, at the end of the procedure, in the amount of EUR 1,092,601 for the financial year ending in 2012 and EUR 908,667 for the financial year ending in 2013.

10. To justify the rate applied to the above-mentioned compulsory loans, Paule Ka Holding produced a study drawn up by the firm Dauge et associés on 30 September 2015. This firm carried out a credit rating of the company, based on an analysis of its financial structure with regard to its balance sheet situation, based on two criteria, the Banque de France rating of the borrower, based on the criteria of earning capacity, financial autonomy The Banque de France rating of the borrower, based on the criteria of earning capacity, financial autonomy, solvency and liquidity, and the estimate of the credit risk of the OCAs issued using the Standard and Poor's analysis grid, on the basis of the group's consolidated business plan, to conclude that the rating is estimated at BB-, corresponding to a satisfactory business risk profile and an aggressive financial risk. Based on this rating, it then estimated the credit margin applicable to the OCAs based on the European Commission's recommendations for estimating reference and discount rates, with margin levels based on credit rating categories. The firm concluded from these elements that the interest rate of 8% seemed appropriate given the profile of the borrower and the characteristics of the bonds issued. However, the study produced consists of generalities and the data presented in it is not documented. Indeed, the mere reference to a credit rating does not imply that all the companies concerned by this rating have identical repayment capacities, taking into account all the quantitative and qualitative factors specific to each company. Furthermore, it does not appear from this study that the internal rating of Paule Ka Holding, as described, takes sufficient account of the company's own characteristics, in particular the state of its accounts, its competitive positioning and the quality of its managers and employees. This internal rating does not take into account the possibility of the company receiving external assistance in the event of difficulties in honouring its commitments. Under these conditions, this study is insufficient to justify the rate applied to the bonds in dispute.

11. In addition, Paule Ka Holding has provided examples of companies that took out bonds in the context of LBO transactions for acquisitions dated from May 2011 to June 2012 at rates varying between 7 and 12%, which, according to the company, show that the rate of 8% was a market rate compared with those applied by other companies of comparable size and for loans of the same nature. However, the investigation shows that the bonds presented for comparison have either a shorter duration than those in dispute or are not convertible into shares. Their amount is very different from that issued by Paule Ka Holding, some of which are also associated with "senior" debts. Moreover, the issuing companies, of very different sizes, carry out their activities in different fields from that of Paule Ka Holding, a takeover structure of a group in the high-end ready-to-wear sector. There is nothing to show the conditions under which the loans presented for comparison purposes were established. Under these conditions, since the comparability of the economic conditions has not been demonstrated, the terms of comparison proposed by Paule Ka Holding do not justify the rate applied to the bond loans in dispute.

12. It follows from the foregoing that Paule Ka Holding does not justify the rate it could have obtained from independent financial institutions or organisations for a loan granted under similar conditions with regard to the yield on bond loans from undertakings in comparable economic conditions, for loans constituting a realistic alternative to an intra-group loan, taking into account its own characteristics, in particular its risk profile. It does not therefore justify the deductibility of a rate higher than the limit of those calculated at a rate equal to the annual average of the average effective rates charged by credit institutions for variable-rate loans to companies with an initial term of more than two years. Consequently, it is not entitled to maintain that the administration was wrong to call into question the interest on the bond loans in question, on the basis of 3° of 1 of Article 39 of the General Tax Code and I of Article 212 of the General Tax Code.

13. It follows from all of the above that Paule Ka Holding is only entitled to argue that it was wrongly that, by the contested judgment, the Administrative Court of Paris rejected its request for a reduction in the additional corporate tax contributions and social security contributions on that tax to which it was subject in respect of the financial year ending in 2012, in duties and increases, up to a reduction in the tax bases of EUR 390 227, and, consequently, to request the reduction of the corresponding taxes and the reversal of the judgment to that extent. The remainder of the conclusions of his application, directed against a part of the judgment which is sufficiently reasoned, must therefore be rejected.

Costs related to the dispute :

14. Under the terms of Article L. 761-1 of the Code of Administrative Justice: "In all proceedings, the judge shall order the party liable to pay the costs or, failing that, the losing party, to pay the other party the sum he determines, in respect of the costs incurred and not included in the costs. The judge shall take into account the equity or the economic situation of the party ordered to pay costs. He may, even of his own motion, for reasons based on the same considerations, declare that there are no grounds for such an order.

15. In the circumstances of the case, the State should be ordered to pay the sum of EUR 1 000 in respect of the costs incurred by Paule Ka Holding in the present proceedings.

DECIDES:

Article 1: The tax bases for corporate income tax and the social security contribution on this tax of Paule Ka Holding for the financial year ending in 2012 are reduced by the sum of EUR 390,227.

Article 2: Paule Ka Holding is discharged from the additional corporate tax and social security contributions on this tax to which it was subject for the financial year ending in 2012, in duties and increases, up to the amount of the reduction in the tax bases mentioned in Article 1.

Article 3: Judgement no. 1613999 of 7 June 2018 of the Paris Administrative Court is reversed insofar as it is contrary to the present judgement.

Article 4: The State shall pay the company Paule Ka Holding the sum of 1,000 euros pursuant to Article L. 761-1 of the Administrative Justice Code.

Article 5: The remainder of the conclusions of the request of the company Paule Ka Holding is rejected.

Article 6: The present judgment will be notified to the simplified joint stock company Paule Ka Holding and to the Minister of the Economy, Finance and Recovery.

A copy will be sent to the director of tax control for the Île-de-France region (West legal division).

Deliberated after the hearing of 12 November 2020, at which were seated :

- Mr Formery, President of the Chamber,

- Mr. D..., President of the Chamber,

- Ms Marion, First Councillor.

Delivered to the public at the registry on 10 December 2020.

The rapporteur,

F. D...The president,

S.-L. FORMERY

The Registrar,

F. DUBUY-THIAM

The Republic instructs and orders the Minister of the Economy, Finance and Recovery insofar as he is concerned, or any bailiffs required to do so in respect of the ordinary law against private parties, to provide for the execution of this decision.

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N° 18PA02715