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Transfer pricing: tax judge insists on automatic reference to median of comparable panels.

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In a case brought before the Lyon CAA by our firm, the tax judge reiterated his commitment to the median of an arm's length interval for assessing an indirect profit transfer. In this case, the company's margin fell below the first quartile of an interval made up of some thirty references. This was all it took for the tax authorities to consider that a transfer pricing anomaly was affecting the company's profitability, and consequently to adjust its net margin to the median of the panel.
The Lyon Administrative Court endorsed this approach, repeating almost verbatim the operative part of the GE Medical system ruling and considering that "in the circumstances of the case, the median [...], which makes it possible to limit the margins of approximation in relation to a point situated at one or other of the extreme limits of this interval, must be regarded as the point of the interval which best reflects the facts and circumstances of the transactions concerned" (Lyon Administrative Court, June 22, 2021, N°1909917 and 1910206).

This recital continues to leave us stunned, as these two decisions are conspicuous by their failure to explain the "facts and circumstances" apparently so exceptional as to justify the administration's automatic assumption that the taxpayer must necessarily generate a higher margin than half of the companies deemed comparable. We therefore expressly asked the Lyon CAA to take a firm and explicit stance on this issue, both in our writings and at the hearing, in order to provide the clarity needed to ensure legal and tax certainty for taxpayers. However, the Lyon CAA noted that "the investigation revealed that the net margins generated on business flows with companies X and Y were not only lower than the lowest of the data in the arm's length interval, but also lower than the "extreme" minima of the sample observed. For its part, the claimant merely points out that the margins making up the first quartiles already place it above six companies in the two panels for 2010 and 2011, and that it is not clear from the investigation that the administration applied the median of the interquartile range automatically and without any assessment of the circumstances of the transactions concerned. The claimant, for its part, does not justify any specific circumstances making it possible to establish that the administration, in view of the transactions in dispute, should have deviated from this median margin".

  • We deduce the following from this decision:

    The French tax authorities are confirmed in their automatic reference to the median of arm's length panels, whenever the taxpayer's remuneration deviates from this median.
  • It is up to the taxpayer to provide any factual, statistical, economic or other evidence to show that the tax authorities should have deviated from this median, given the transactions in dispute. In practice, this reverses the burden of proof onto the taxpayer, forcing him to produce a highly subjective analysis.

The Court's recital does, however, seem to contain a positive clue: if the taxpayer's margin already falls within the arm's length (interquartile) range, the system could be reversed, as the famous "facts and circumstances" would be different. Indeed, it was because the margin fell outside the range that the Court had to retain a target.

Yes, the "IP Box" tax regime also applies to individuals.

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Introduction

Since the major overhaul introduced by the 2019 Finance Act, the so-called "IP Box" scheme has become a considerable asset working to boost business growth and competitiveness. Indeed, the renewal of this scheme and the extension of its scope to software has brought a breath of fresh air to the intellectual innovation scene. By investing in the research and development of new intangible assets, companies can now benefit from substantial tax advantages. In addition to the well-known Research Tax Credit (Crédit d'Impôt Recherche - CIR), companies subject to corporate income tax can also opt for separate taxation at a reduced rate of 10% on income derived from the granting, sub-granting or sale of certain intangible assets, provided certain conditions are met.
However, the IP Box regime is not just the prerogative of legal entities. Even if the provisions of Article 238 CGI do not apply to individual inventors, they can still benefit from this tax incentive under Article 93 quater of the CGI.
I of this article stipulates that: "the long-term capital gains or losses regime provided for in article 39 quindecies is applicable to income received by an individual inventor and his assigns from the sale or licensing of copyrighted software, a patentable invention or an intangible asset that satisfies the conditions mentioned in 1°, 2° or 4° of I of article 238. By way of derogation from the first paragraph of I of article 39 quindecies, the rate applicable to the transactions mentioned in this paragraph is 10%".
Thus, income derived from the exploitation of these intangible assets by individual inventors, their heirs or private individuals who have acquired them free of charge or for valuable consideration falls into the "non-commercial profits" category. They are, however, taxed under the long-term capital gains regime, at a reduced rate of 10%. In addition to the tax, social security contributions are levied at a rate of 17.20%, giving a total tax take of 27.20%.
However, for an individual to benefit from the "IP Box", he or she must first meet certain conditions (I) which, once met, will enable this preferential tax arrangement to be implemented (II).
Conditions for application of the IP Box to individuals
In order to benefit from the IP Box, two cumulative conditions must be met by the taxpayer. The intangible asset concerned must be eligible (A), and the transaction giving rise to the taxable profits must fall within the scope of the scheme (B).

Eligible assets

According to article 93 quater of the French General Tax Code, the following are eligible for the IP Box scheme:
Software licenses protected by copyright, i.e. works that emanate from the mind, are sufficiently elaborate and have an original character.

Patents and patentable inventions or improvements thereto. Patents are industrial property titles which grant the holder exclusive rights to exploit the patented invention by commercial means for a limited period, generally 20 years from the date of filing of the application. Patentable inventions, on the other hand, correspond to creations of the mind which meet the conditions of patentability necessary for a patent to be granted by a Receiving Office, i.e. inventions which are not expressly excluded by law and which provide an answer to a technical solution, while being new, innovative and having industrial applications. However, it is important to point out that the legislator does not require the taxpayer to present a patentability certificate when filing his application with the tax authorities. Indeed, taxpayers can always obtain approval if they can demonstrate the patentability of their invention. In practice, however, such proof is very difficult to establish, and has been since the repeal of the documentary opinion by the Finance Act 2023. Indeed, this document enabled the INPI to certify the patentability of an invention even before obtaining a final patent. That said, the individual inventor still has other options. In fact, according to some authors, in addition to filing his application with the tax authorities, he can also file a patentability application with a Receiving Office. In this case, as the examination of the patent application progresses, he will provide the tax authorities with any evidence enabling him to establish the patentability of his invention, including the search report and the preliminary opinion on patentability. However, even if these documents are of benefit to the inventor, they are merely the beginnings of proof, devoid of any definitive or binding character. They cannot therefore be relied upon by the tax authorities, especially as neither case law nor administrative doctrine has yet ruled on the subject.
Intangible assets satisfying the conditions mentioned in 1°, 2° and 4° of I of article 238 CGI. These include utility certificates, supplementary protection certificates attached to a patent, plant variety certificates and industrial manufacturing processes. However, specifically for processes, the legislator requires that they be the result of research operations, that they constitute the essential accessory to the exploitation of a patented invention, a utility certificate or a supplementary protection certificate attached to a patent, and that they are the subject of a single operating license with the invention.
Thus, as soon as the intangible asset targeted by the individual belongs to one of the above-mentioned categories, it will be considered eligible for the IP Box. However, this eligibility alone is not sufficient. In addition to this first condition, the transaction giving rise to the taxable income must also fall within the scope of this preferential tax regime.

Operations covered by the IP Box

Articles 93 quater and 39 terdecies of the French General Tax Code (CGI) stipulate that the long-term capital gains or losses regime applies to income received by individual inventors and their beneficiaries from the sale or grant of licenses to exploit the aforementioned intangible assets.
The term "assignment" refers to any transaction involving the removal of the items in question from the assets of the assignor, in return for financial consideration (in cash or in kind).
Concessions cover any leasing contract by which the owner of the intangible asset (the "licensor") grants the right to exploit all or part of his asset to a third party (the "licensee"), in return for payment of a royalty. The license may take several forms:
It may be exclusive or non-exclusive;
It may be concluded for the whole of the territory or territories for which the invention enjoys legal protection, or for part of it only;
It may relate to all the rights or to certain elements only (for example, the license may concern only certain applications of a patent).
In addition, a license to exploit refers to any contract granting the licensee the right to use the invention both for internal purposes, for its own needs, and with a view to producing and marketing goods and services.
However, the tax authorities specify that when the contract covers both items that fall within the scope of Article 39 terdecies 1 of the General Tax Code and items that do not, the regime provided for in Article 39 terdecies 1 of the General Tax Code applies only to those items that meet the conditions set out in the text. Thus, in the case of global contracts covering a set of elements, whether patentable or not, and technical assistance services, a distinction should be made between two situations:
Either the contract makes it possible to isolate the price of each element and each service covered by the contract. In this case, this price should be taken into account when calculating the proceeds from the transaction of only those elements of industrial property that fall within the scope of the scheme, i.e. the eligible intangible assets mentioned in the previous paragraph.

Or the contract stipulates a global price. In this case, since the long-term capital gains regime applies to only part of the items covered by the terms of the contract, it is necessary to break down the overall price. Consequently, it is up to the taxpayer to determine the part of the price corresponding to the remuneration of these assets according to the most appropriate method, and to be able to trace this method in the documentation made available to the tax authorities in the event of an audit. In this respect, the breakdown of the overall price must be based on objective factors. It can be based either on comparisons with transactions carried out on similar dates and relating to eligible items whose characteristics are similar to those covered by the contract, or on one or more allocation keys based on accounting data such as: the intrinsic value of the rights transferred, the value retained for the acquisition of the rights, the cost price of the various items and services covered by the contract, etc. In this case, the valuation criteria used must be based on the same criteria as those used for the contract. In this case, the valuation criteria used for each element of the contract must be consistent.

IP Box implementation

In order to implement the IP Box, it is first necessary to identify the income generated by the operation that is likely to fall within the scope of the scheme (A). Once identified, this income will serve as the basis for determining the final amount of tax due by the individual inventor or his successors (B).

Identifying taxable products

The last paragraph of Article 39 terdecies 1 of the French General Tax Code states that, in principle, the long-term capital gains regime does not apply to patents, patentable inventions or industrial manufacturing processes that do not qualify as fixed assets or were acquired for valuable consideration less than two years ago.
This principle is tempered, however, by the fact that industrial property rights held by individuals, either as independent inventors or after having acquired them for valuable consideration or free of charge, do not constitute a means of exploitation. In fact, these inventions are considered to be the very product of the inventor's creative activities. Unlike those held by industrial and commercial companies, they do not therefore have the nature of assets allocated to the exercise of a non-commercial profession.
Consequently, it is accepted that this circumstance is not such as to deprive the interested parties of the application of the long-term capital gains regime for the taxation of proceeds from the sale or licensing of these intangible assets.
Accordingly, the preferential tax regime set out in article 93 quater of the French General Tax Code applies to net income from the sale and licensing of patents or patentable inventions received by individual inventors, their heirs or private individuals who have acquired these rights, including where there is a relationship of dependence between the licensor and licensee.
Furthermore, in the case of natural persons, the tax authorities specify that there is no need to take into account the date on which the industrial property rights were acquired by the inventor, provided that they were discovered or developed by the inventor or were transferred to him free of charge. On the other hand, where industrial property rights have been acquired for valuable consideration, income derived from the sale or licensing of these rights is not eligible for the long-term capital gains regime until two years after the date of acquisition. Income received before the expiry of this period is subject to the progressive scale of income tax.
However, the determination of taxable income differs between sale and grant transactions:
Indeed, the value of the consideration received by the transferor is considered as income from a sale, i.e., the sum acquired by the seller in the case of a sale, the actual value of the goods received in the case of an exchange, and the actual value of the securities received as remuneration in the case of a contribution. These proceeds are taxable in the year in which they are received. However, individual inventors taxed as non-commercial profits who contribute a patent, a patentable invention or an industrial manufacturing process to a company responsible for exploiting it, may request deferral of taxation of the capital gain realized on this occasion.

On the other hand, the income from a concession corresponds to the results of the management of the concession, i.e. the contractual royalties received during the tax year.
Furthermore, in the case of sale or concession contracts relating to a set of items, only some of which are eligible assets, only the net results directly derived from the exploitation of these assets will qualify as taxable income.
Once the income subject to the IP Box regime has been identified, a calculation must be made to determine the amount of tax due by the taxpayer.
Determining the tax due by the taxpayer
Only net amounts are subject to tax. A deduction must therefore be made from the income generated by the operation of eligible assets in order to determine the taxable amount. However, deductible expenses differ according to whether the transaction is a transfer or a concession contract:
In the case of a transfer transaction, deductions are made for costs incurred in researching and developing the patent, or expenses paid for its acquisition, less any depreciation applied where the item was included in business assets. Secondly, costs incurred in maintaining or improving the invention. However, if the sums thus deducted exceed the sale price, the corresponding loss may be offset, where applicable, against other industrial property income received by the taxpayer during the tax year or against overall income. This loss is deductible from overall income for the year in which the patent is taken and for the following nine years, if the taxpayer receives no taxable income or receives income that is less than the costs incurred. The period begins to run in the year following that in which the patent is taken out (or the application is filed if the patent is granted at a later date). However, no deduction may be made where the above-mentioned costs have already been deducted from taxable non-trading profits as and when they are paid, or where, exceptionally, the patent has been capitalized and is fully amortized at the time of sale. In such cases, the taxable proceeds will be equal to the transfer price.

In the case of concessions, research costs are deducted from the proceeds, as are costs incurred in managing the concession, i.e., those taken into account in determining the net income of the operation, i.e., costs incurred in finding licensees, negotiating and concluding contracts, managing the licenses themselves, as well as collection and litigation costs. However, patent creation costs incurred with a view to issuing a patent are excluded, provided their counterpart is the creation of a fixed asset. In addition, where the licensee is taxable as a non-commercial business, Article 93(1)(8) of the CGI expressly recognizes that royalties derived from the sale of an eligible asset are deductible expenses. However, this principle is tempered when the grantor and the licensee are dependent on each other. In this case, the amount of the royalties is deductible only for a fraction of their amount equal to the ratio existing between the long-term capital gains rate at which they were taxed by the grantor and the normal corporate tax rate.
Once the expenses have been identified, they must be subtracted from the income derived from the sale or concession transaction in order to obtain the net result.
Thus, if the value obtained is positive, it will be treated as a long-term capital gain. Depending on the taxpayer's situation, this may then be offset against long-term capital losses for the year:

or set off franc for franc against the current year's deficit, and against losses carried forward from previous years;
or set off against long-term capital losses recognized in the previous ten years, which have not yet been set off.
The balance remaining after offset will therefore be taxed at the reduced rate of 10% provided for in I of article 93 quater of the CGI, plus social security contributions at a rate of 17.20%.
However, if the taxpayer has neither a deficit nor a capital loss to carry forward, the net income generated after deduction of expenses will serve directly as the tax base.

CARA: the new generation of tax lawyers puts client proximity at the heart of their advice

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[Interview with Terence WILHELM by Laura NORDIN for figaro Economie]

Founded in 2017, CARA has rapidly established itself as a disruptive and independent law firm, setting the benchmark in international and French tax, transfer pricing and intellectual property taxation. Offering sustainable solutions tailored to each environment, the firm embodies a new generation of lawyers committed to making their expertise available in a more agile structure with a human face to better meet their clients' needs.

A customer-focused philosophy for tailor-made solutions

It was after 15 years working for major business firms - the Big Four - that Maître Terence Wilhelm decided to set up his own tax practice in 2017.
The reason? A simple but glaring observation: by dint of processes, industrialization and the massification of offerings, the large consulting structures that traditionally concentrated cutting-edge expertise have lost their ability to offer tailor-made solutions.
In response to these shortcomings, CARA was built around a single principle: get back to the essence of the legal profession. How do we do this? By putting the customer and his or her strategy back at the heart of the process, thanks to an agile structure on a more human scale, capable of adapting solutions to each business environment and culture, while guaranteeing impartial advice.
" CARA" also means "friend" in Irish. With this symbol, the firm intends to raise the bar on its vision of consulting, always as close as possible to the customer's issues. And since it's always good to surround yourself with friends, CARA has also surrounded itself with the best. As an active member of the Goji network in France, this proximity enables CARA to complement its tax offering with other areas of business law; and as a member of the prestigious international Pride Partners International network, CARA is able to serve the interests of its clients throughout the world.
With its excellent tax lawyers, the firm is also committed to being an active player in the community. Inspired by the values of sport, particularly fighting spirit, resilience and team spirit, the firm is a business partner of LOU rugby, Lyon's Top 14 team. The firm is also a shirt sponsor of the women's team and other ambitious clubs in the Lyon region. Keen to pass on its knowledge, the Lyon-based firm is also deeply involved with the region's universities, helping to nurture local talent. Also committed to various local associations dedicated to children, CARA is firmly rooted in its region.
A commitment that was also honored by the Trophée des Solidarités awarded by the Bar, in recognition of the firm's investment in the community and various local associations.

Cutting-edge expertise in transfer pricing

Doté d’une expertise de pointe construite après 15 années dans les plus grands cabinets d’avocats fiscalistes internationaux, CARA est spécialisé dans le domaine des prix de transfert, de la fiscalité nationale et internationale et de la fiscalité de la propriété intellectuelle.
Achat, vente de biens et services, cessions, licences de propriété intellectuelle ou industrielle, prêts intragroupes, conventions de trésorerie, avances en compte courant… l’essentiel du commerce dans le monde étant réalisé par des groupements d’entreprises liées capitalistiquement, toutes les opérations à forte valeur relèvent de la question des prix de transfert.
C’est une matière prépondérante au sein de la fiscalité internationale qui permet d’appréhender la manière dont sont rémunérées les transactions économiques de toute nature intervenant entre deux entreprises d’un même groupe.
Et CARA a fait de cet incontournable sa spécialité de métier pour répondre à des enjeux extrêmement stratégiques, tant pour les entreprises que pour les États.
Pour les États, il s’agit de s’assurer que ces prix de transfert soient correctement valorisés, pour éviter le transfert de valeur et l’évasion fiscale par la surévaluation ou sous-évaluation des transactions. Les États imposent ainsi que ces prix de transfert reflètent un niveau dit « de pleine concurrence ».
De l’autre côté, pour les entreprises, raisonnant souvent de manière macro à l’échelle du groupe, il s’agit de sécuriser leurs positions fiscales, et protéger les équilibres économiques au sein du groupe pour se construire un solide business model.
CARA Avocats joue ainsi sur plusieurs fronts reposant sur un équilibre délicat entre stratégie économique, protectionnisme fiscal des États et optimisation financière des entreprises.
Sur la base de remontées clients et à travers divers classements, le cabinet peut être fier d’avoir été récompensé trois années de suite par des organismes internationaux pour son expertise sans comparaison en matière de transfert de prix. Il figure également depuis dans le prestigieux classement Legal100.
Des clients de prestige bénéficiant d’un service sur mesure
Fort d’une expertise mise à disposition sur mesure, le cabinet travaille avec une variété de clients, qu’ils soient des entreprises de petite à très grande taille. Parmi elles, il compte plusieurs grands groupes français, leaders mondiaux dans leurs secteurs respectifs, réalisant plusieurs milliards de CA.
Toujours attaché à adapter chaque service pour chacune des problématiques client, CARA Avocats accompagne les entreprises notamment en amont, dans la structuration et la sécurisation de leurs positions fiscales internationales – et donc dans leurs politiques de prix de transfert.
Main dans la main, le cabinet aide aussi ses clients dans la construction de leurs flux intragroupes, en résonance avec leur stratégie économique, tout en s’assurant de la conformité fiscale de ces structures dans tous les pays d’établissement.
Parallèlement, le cabinet peut assurer la gestion au quotidien de tout ce qui relève de la documentation ou des déclarations à produire.
En France et à l’international, toujours au plus près de ses clients, le jeune cabinet lyonnais les assiste aussi en cas de conflit avec une autorité fiscale, dans le cadre d’un contrôle fiscal ou à l’échelon supérieur, devant les juridictions.
Référent dans son domaine, CARA Avocats peut déjà se targuer d’avoir à son actif plusieurs décisions de jurisprudence gravées dans le monde du droit des affaires. Il figure aussi depuis 2020 dans le prestigieux classement Legal 100 dans la catégorie Fiscalité Internationale, qui recense les 100 meilleurs cabinets en droit des affaires.
Anticiper les changements de la fiscalité internationale
Que ce soit au niveau national, communautaire ou international, des réformes très importantes se profilent et vont radicalement changer les paradigmes de la fiscalité internationale.
Résolument tourné vers la prévention et l’adaptation à la complexité des phénomènes globaux, CARA Société d’Avocats ne cesse d’anticiper la nouvelle ère fiscale qui arrive.
Dans cet environnement changeant rapidement, le cabinet lyonnais a su se doter des meilleurs outils et des meilleurs talents pour pouvoir anticiper ces réformes. Et surtout anticiper les enjeux qu’elles vont générer pour ses clients.
En continuant à capitaliser sur son expertise et son esprit entrepreneurial intrinsèque, CARA Avocats poursuit sa croissance et compte ouvrir notamment un bureau à Paris et à Montpellier ou Nice.
De grands projets à la hauteur des besoins, sans pour autant sacrifier son modèle qui fait sa force : la proximité-client avant tout. « Small is beautiful ».

Deductibility of intra-group interest: proof becomes more flexible and precise

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THE FACTS

THE FACTS

Following an audit of GEII Rivoli Holding's accounts for the 2013 and 2014 financial years, the tax authorities questioned the deductibility of the difference between the 5.08% rate applied and the 2.79% corresponding to the value mentioned in 3° of 1 of Article 39 of the CGI.
During the litigation phase, the company produced an initial analysis based on the RiskCalc tool developed by Moody's, identifying the risk rating that could have been assigned to it, as well as a rate range established by reference to those obtained by fifteen non-financial companies, belonging to heterogeneous business sectors.
A second corroborative analysis was submitted to the Paris CAA, based on the calculation of two financial ratios, one of which, known as the "loan-to-value" (LTV) ratio, was based on bond market data taken from the Standard & Poor's Capital IQ financial database.

THE RULE

A trend in case law built up around the 2020s has redrawn the contours of proof with regard to the deductibility of rates charged to majority shareholders.
Specifically, the borrowing company may rely on the rates of bank loans granted, under arm's length conditions, to companies in the same non-financial sector, which have obtained credit ratings close to that which can be determined for it, even though these other companies may belong to heterogeneous business sectors.
The borrowing company may also take into account the yield on bonds issued by companies in comparable economic conditions, where such bonds represent a realistic alternative to an intra-group loan.

THE PROCEDURE

THE JUDGES

The TAA de Paris in 2021, then the CAA de Paris in 2022, rejected the company's claims and confirmed the rectifications made.
Firstly, the judges noted that, in order to justify the 5.08% rate applied to its parent company, GEII Rivoli Holding had produced a report using the RiskCalc tool developed by Moody's, which identified the risk rating that could have been awarded to the company, i.e. Baa1. However, this risk rating had been obtained without entering the applicant's business sector in the RiskCalc tool. Thus, the CAA was able to dismiss this method as inconclusive on this ground, without committing an error of law, since such a circumstance meant that the company's particular economic situation was not taken into account.
Secondly, in rejecting the corroborative method proposed by the company, the CAA considered that the company did not justify that a bond issue would have constituted a realistic alternative to an intra-group loan.
Finally, the CAA considered that the company had not been provided with any precisely identified comparables whose relevance it would have been able to assess.

THE CONSEIL D'ETAT'S SOLUTION

The EC accepted the first argument of the lower courts, rightly considering that the company's sector of activity is an important parameter to be taken into account when calculating the credit rating on the RiskCalc tool.
However, it rejected the rest of the arguments, thus validating the company's economic and statistical demonstration. More specifically, the EC emphasized:
- "The size of a company is not in itself such as to prevent
access to this market, and that the realistic nature, for a company having recourse to an intra-group loan, of the alternative hypothesis of a bond issue can only be assessed in the light of the specific characteristics of this company and of the transaction, with the rates observed on this market having to be adjusted if necessary".
- The arm's length rate put forward by the company as corresponding to its level of risk was based on the use of rate curves established on the basis of all the transactions recorded, for loans of the same duration contracted by companies with the same risk profile, and it was not argued that the recording of transactions in this database was unreliable".

OUR ANALYSIS

THE RISKCALC TOOL IS USEFUL, BUT NOT ALL-POWERFUL

Developed by Moody's, the RiskCalc tool has gained legitimacy among tax judges since the Studialis ruling by the Paris CAA in 2020 (n°18PA01026). This tool can be used to determine a borrower's risk rating, which is the first essential step in demonstrating that a rate charged to majority shareholders is at arm's length. However, this tool requires a detailed analysis of the borrower's intrinsic parameters, both quantitative and qualitative, including its business sector. This latter indicator has a major influence on the past and future prospects for growth, profitability - and therefore risk - of the players in a given market. If this essential criterion was not included, the analysis produced initially could not be relevant or complete, as it would necessarily misunderstand the company's economic situation.
It is interesting to note, however, that neither the contemporaneity of the analysis nor the relevance of the tools cited were discussed, thus validating, and no doubt definitively, the praetorian trend initiated by the aforementioned Studialis, BSA de la CAA de Versailles (n°20VE03249), and Willink du Conseil d'Etat (n° 446669) rulings.
Above all, it should be noted that the demonstration that finally won the support of the Conseil d'Etat was based on an alternative financial ratio known as "loan to value" (LTV), which relates the level of indebtedness to the value of the company's real estate assets. In this case, this indicator led to an estimate, based on a comparison with the ratios of listed French and European property companies, that the financial rating it could have obtained would not have exceeded BBB, i.e. a level close to that initially proposed by RiskCalc.
In this case, the LTV ratio had been calculated taking into account a financial debt corresponding exclusively to the loan whose rate had to be assessed. One might have thought that the calculation was flawed because it was circular. However, by focusing on the principal loan (the purpose and amount of which were not in dispute), without taking into account the interest (the rate of which was at the heart of the debates), the ratio was indeed relevant and valid.

THE CONSECRATION OF THE BOND MARKET

In its July 2019 Wheelabrator opinion, the Conseil d'etat paved the way for a pragmatic approach, in line with OECD practice, to the taxpayer's demonstration of the "arm's length" nature of an interest rate charged in the context of intra-group financing, enabling in particular the use of bond benchmarks.
by making reference to the bond market conditional on the demonstration that "these borrowings constitute, in the hypothesis under consideration, a realistic alternative to an intra-group loan". In other words, the taxpayer appeared to have to be able to prove that issuing bonds was a realistic alternative to taking out a conventional loan with a bank or credit institution.
the administration. The judge ruled that "the realistic nature, for a company having recourse to an intra-group loan, of the alternative hypothesis of a bond issue can only be assessed in the light of the specific characteristics of the company and the transaction, with the rates observed on this market having to be adjusted where necessary to take account of the specific features of the company in question". In order to disregard the reference to the bond market, it would seem that the tax authorities would have to demonstrate that, given its specific and intrinsic parameters, this option would be irrelevant or inappropriate. In our view, such proof is impossible.

BENCHMARKS FOR ALL?

While the two-step economic analysis now seems to be well recognized by the tax judge, both in its credit risk calculation component and in its search for comparables on bond markets, it should be remembered that this approach is only valid if the lender is a majority shareholder within the meaning of Article 212-I. Minority shareholders cannot use this analysis to justify a different rate from that referred to in article 39-1-3 of the CGI (see CAA Versailles, Sté Financière Lilas, n°19VE00546). This trend further reinforces the difference in treatment between taxpayers.

Deductibility of interest paid to affiliated companies: clarification of the arm's length relationship

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Financial interest paid by a company to its associates is constrained by a confusing legal and tax system. A quick reminder for those who like puzzle games:

Pursuant to Article 39-1-3 of the French General Tax Code, this interest is capped at an average rate set quarterly by the Treasury Department and published in the Journal Officiel.
However, article 212-I of the same code opens a loophole, by stipulating that this rate may be different, provided that it reflects market conditions and, above all, that it is applied to associates linked to the company by ties of dependence, the definition of which is referred to article 39-12.

Under article 39-12 of the same article, two companies are deemed to be dependent on one another: "a- when one of them directly or through an intermediary holds the majority of the share capital of the other, or in fact exercises decision-making power over it; "b- when both of them are placed, under the conditions defined in a, under the control of the same third party".

The combination of these articles creates a back-and-forth mechanism that can get the taxpayer lost in its maze. The Divalto group paid the unfortunate price before the Nancy CAA.
In this case, company F had issued bonds convertible into shares (OCAs) at a rate exceeding that of article 39-1-3 applicable to the same period. These bonds were held by company P, a minority shareholder in company P, but which would have become the majority shareholder once the bonds had been converted into shares. In anticipation of this, company P therefore considered it legitimate to apply the alternative rate of article 212-I, on the grounds that company F would by necessity be a majority shareholder within the meaning of article 39-12.

The Administrative Court of Appeal rejected this anticipatory application of the provision, pointing out that it must be interpreted strictly.

CAA Nancy June 20, 2024 no. 22NC01300

Russia on the EU blacklist: what are the tax consequences?

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Do the test around you: ask those around you to name several tax havens. It's more than likely that Russia doesn't feature on the list of exotic, sulphurous states or financial centres that often immediately spring to mind and (sometimes mistakenly) make the uninitiated nervous. And yet, on February 14, the Council of Europe published its blacklist of uncooperative countries and territories for tax purposes, expressly adding Russia to the list, in addition to the British Virgin Islands, Costa Rica and the Marshall Islands, bringing the total number of countries on the list to 16. Of course, the announcement's coincidence with Valentine's Day is pure coincidence (taxation doesn't bother much with love), but the decision nevertheless marks the (red) iron of disenchantment between Europe and Russia, as we sadly celebrate the first anniversary of the war in Ukraine.

To understand this insertion, it's important to remember that this blacklist sanctions three types of pitfall, defined back in 2016. Firstly, there are states that engage in harmful tax competition, seeking to attract foreign investment through tax incentives that may fall within the scope of other states' anti-abuse measures. Among these are the Marshall Islands, which offer a 0% tax rate and require no substance or nexus to transactions registered on its soil. Secondly, there are the opaque states, which have failed in their duty of transparency towards EU states, most often by preventing information exchange mechanisms, or simply by blocking diplomatic relations. Since 2020, a third category has emerged, sanctioning states or territories that refuse to implement measures stemming from the OECD's BEPS program, aimed precisely at combating the erosion of tax bases and international tax evasion.

The hardening of relations between Russia and the Council, in addition to its 2022 reforms regarding foreign holding companies in response to international sanctions, have precipitated Russia into the second category of tax havens. The Council of Europe thus deplores the fact that the Russian Federation has not honored its commitment to modify the assessment of the treatment of intellectual property income and grandfathering provisions for foreign holding companies.

This announcement is by no means anecdotal. Article 238-0 A, 2 bis of the General Tax Code extends to this blacklist the same tax effects as those reserved for the French list of uncooperative states and territories (ETNC). Without falling into the trap of a "Prévert" list, it is imperative that any taxpayer with capital, economic or financial links with one or more Soviet partners be made aware of a number of issues.

TRANSFER PRICING

Insofar as Russia is now deemed to be a non-cooperative state, any Russian company engaged in transactions with a French company is deemed to be a related company within the meaning of Article 57 of the CGI. This automatically triggers all the relevant obligations, in particular the need to justify the arm's length nature of flows that have become intra-group, in addition to reporting these flows under transfer pricing documentation and form 2257-SD if the financial thresholds are exceeded.

A first incongruity then arises: if the Russian company was until then a true third party, i.e. unrelated within the meaning of articles 57 and 39-12 of the CGI, then its relationship with the French taxpayer was necessarily at arm's length.

Henceforth, this demonstration will have to be reported by means of economic analyses, such as searches for comparables on specialized databases. Given the subjective nature of such analyses, and the current trend in legal and administrative practice towards the use of net margin methods and the median of comparable intervals, it is quite possible that the transaction will be perceived as abnormal, rather than marketable.

A second incongruity arises in the area of documentation. If the Russian company is considered to be a related party, and the thresholds set out in article L13 AA of the LPF are exceeded, the French taxpayer will have to provide full documentation of its transfer prices. Here again, the French taxpayer could find himself in an abstruse situation, where he would be required to produce formal documentation based on the OECD model, not because of the thresholds observed at his level, or that of his shareholders or subsidiaries, but because of the size of his Russian partner.

What's more, administrative doctrine explicitly states that "when transactions of any kind are carried out with one or more associated companies established or incorporated in a non-cooperative state or territory within the meaning of Article 238-0 A of the CGI, the documentation referred to in Article L. 13 AA of the LPF also includes, for each company benefiting from the transfers, additional documentation comprising all the documents required of companies liable for corporate income tax, including the balance sheet and income statement drawn up under the conditions set out in article 102 U of appendix II to the CGI and article 102 V of appendix II to the CGI". This would mean that French taxpayers would also have to produce the accounting and financial information of a third-party company, on pain of incurring penalties.

It is therefore essential to break the automaticity of the arm's length relationship caused by Russia's blacklisting. On this point, we would point out that since the reservation of interpretation by the Constitutional Council in its decision no. 2014-437 (QPC of January 20, 2015), the taxpayer has the option of making use of the safeguard clause to demonstrate the reality of operations carried out in Russia. It is to be hoped that the tax authorities will be pragmatic in this respect, and that as soon as the taxpayer demonstrates the anteriority and characteristics of the transactions carried out up to that point with the Russian third party, the exception relating to the condition of dependence in article 57 will fall by the same token.

WITHHOLDING TAX NOT CHARGED TO CORPORATION TAX

In accordance with the combined provisions of the CGI and administrative doctrine, a legal entity established in France may offset against the corporate income tax due in France the withholding taxes borne by the foreign company or entity on dividends, interest or royalties originating in third countries or territories and taxable in the hands of the French legal entity. However, this possibility is subject to two conditions: the existence of a tax treaty eliminating double taxation; and that the state or territory from which the income originates is not considered as uncooperative within the meaning of Article 238-0 A of the CGI.

Russia's inclusion on the blacklist therefore automatically makes it impossible for the withholding tax borne by the foreign company to be offset against French corporation tax. This results in double taxation of the same income, undoubtedly affecting the profitability of companies and forcing them to review their contractual conditions.

STRICTER DEDUCTIBILITY OF CHARGES IN FRANCE

Finally, there is a third significant consequence of Russia's inclusion on the blacklist. Henceforth, expenses incurred by a French company in respect of sums paid to a Russian partner may no longer be deducted from profits in France, save in exceptional circumstances.

In accordance with the third and fourth paragraphs of Article 238 A of the CGI, the rule applies whether or not the Russian beneficiary is subject to a preferential tax regime.

It should also be noted that the non-deductibility also applies to any payment made into an account held with a financial institution established in Russia.

On this point, it should be noted that the scope of the expenses concerned is broad, covering "interest, arrears and other income from bonds, debts, deposits and guarantees, royalties from the assignment or concession of operating licenses, patents, trademarks, manufacturing processes or formulas and other similar rights, or remuneration for services". However, an exception is made for interest due on loans taken out before March 1, 2010, or taken out on or after that date but treated in the same way as such loans.

For these, the principle of non-deductibility does not apply, and these charges remain deductible under the same conditions as those paid in "cooperative" states or territories.

Here again, however, the taxpayer can apply the safeguard clause and override the non-deductibility rule by providing two types of evidence: firstly, he must prove that the expenses correspond to actual transactions and are not abnormal or exaggerated. Secondly, the taxpayer must demonstrate that the transactions to which the expenses relate do not have the main purpose and effect of enabling the expenses to be localized in an ETNC. While this second condition may seem easy to meet, the first brings back the complexities of transfer pricing discussed above. Indeed, if the Russian partner is now considered a related party within the meaning of Article 57 of the CGI, then the "normal" nature of the transaction will have to be derived from an arm's length analysis.

APPLICABILITY

In accordance with the CGI, the restrictive tax measures newly applicable to Russian interests apply from the first day of the third month following publication of the decree, i.e. in this case, from May 1, 2023. French companies engaged in economic and financial transactions with partners based in Russia urgently need to assess the flows potentially at risk, and the effects of the resulting tax frictions. It remains to be seen what degree of tolerance will be adopted by the tax authorities in assessing situations that come to light during tax audits.

The author would like to thank Alison SERRIERE, student lawyer, for her research assistance.

United by Rugby Values: An inspiring meeting with Séraphine Okemba and Chloé Jacquet

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Our firm had the honor and pleasure of spending a special moment over fine cuisine with two stars of French 7-a-side rugby, Séraphine Okemba and Chloé Jacquet, as part of their preparation for the forthcoming Olympic Games. This exceptional meeting was an opportunity to show them our full support and to share our common passions.

For us, rugby is much more than a sport; it's a set of values that we cherish and share within our firm: team spirit, perseverance, respect, integrity and solidarity. These principles not only guide our players on the pitch, but also inspire our day-to-day professional approach.

To share a moment with Séraphine and Chloé is to see these values in action. Their dedication, teamwork and unwavering commitment to excellence are sources of inspiration for our entire team. Their journey reminds us that challenges are opportunities for growth, and that success is the fruit of a collective effort!

Through this meeting, we reaffirm our commitment to promoting and living by these fundamental values. We wish Séraphine, Chloé and the entire French 7-a-side rugby team all the best for the Olympic Games!

May their journey inspire each and every one of us to strive for excellence, support our teams and build a better future together.

 

Enforceability of transfer pricing documentation: shouldn't we go back to traditional methods?

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The Finance Bill for 2024 provides for the content of transfer pricing documentation to be enforceable against taxpayers. To fully appreciate the significance of this measure, it needs to be seen in the context of two other provisions.

Firstly, the bill also envisages lowering the thresholds for the documentary obligation. This will automatically bring a growing number of taxpayers and intra-group flows within the scope of this provision.

Secondly, in its current version, the documentary requirement already calls for the production of a full economic analysis, making it possible to attest to the arm's length nature of transactions between affiliated companies and affecting the taxpayer's results. In practice, these analyses take the form of searches for comparable benchmarks against which to calibrate the company's net margin generated by these intra-group flows (calculated as the ratio of operating income to sales, or operating expenses). In the jargon, this is referred to as the "transactional net margin method", coupled with a profitability indicator such as "operating margin" or "net cost plus".

However, these analyses sometimes produce a range made up of third-party, independent references, and therefore deemed to be at arm's length, in which the margin of the company under test does not fall. This is typically the case when documentation is prepared by computerized or artificial intelligence tools (whose intelligence would then have omitted common sense and pragmatism). In doing so, and given the legal enforceability that transfer pricing documentation will henceforth have, the taxpayer will de facto be in a position for immediate rectification, as he is spontaneously declaring a situation of abnormality.

In order to avoid the pitfall of producing information that would then turn against the taxpayer, one approach is to return to the so-called "traditional" methods as described by the OECD guidelines and recently reiterated in the 2023 edition of the "Guide à l'usage des PME - les prix de transfert". These methods offer the possibility of calibrating not the company's net margin, but its gross margin. Insofar as these methods do not capture aggregates included in operating expenses, they are deemed more reliable and closer to the intra-group transaction that needs to be documented and justified. They do, however, require more complex restatements, which databases often struggle to produce.

In any case, the use of these methods (Resale Price Method, or Cost Plus Method) should make it easier to extract an arm's length interval within which the margin generated by the tested party could fall. This would be the case in particular for companies whose intra-group transactions lead to gross margins falling within the interval, but generating negative operating income (and therefore, mechanically, a negative net margin).

In so doing, it seems to us that the attempt to shift the burden of proof onto the taxpayer - which the reinforcement of the documentary obligation in fact conceals - would be at least partly aborted, since it would then be up to the administration to produce a counter-analysis based on the net margin. Given the highly subjective nature of the exercise, and the current state of case law, we feel it would be easier to criticize the administration's search for alternative comparables based on net margins. After all, it's a French trait: it's always easier to challenge than to propose.

 

Transfer pricing documentation and declarations: did you really think you could get away with it?

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The heatwave that is sweeping the country is also putting a damper on upcoming tax reforms. On Wednesday August 23, ministers met for their first back-to-school council meeting, in particular to draw up the outlines of the Finance Act for 2024. Bercy is struggling to solve a seemingly impossible equation: reducing France's titanic debt, without betraying its promise not to raise taxes.
The first, immediate and easy solution is for auditors to increase the number of tax audits and reassessments. The microsphere of tax experts can testify to this: new, tougher positions are being taken in areas that were previously much less scrutinized, such as payroll tax and financial transactions.
Another, which is becoming increasingly apparent, is to reduce the thresholds for the application of certain documentary and reporting obligations, non-compliance with which attracts mechanical penalties, while at the same time providing the tax authorities with a wealth of welcome financial and economic information with which to define future control strategies. It is against this backdrop that Bercy is seriously exploring the possibility of extending the transfer pricing documentation obligation set out in article L13 AA of the French Tax Code to smaller companies than those currently concerned. As a reminder, this obligation applies:
to companies with sales or gross balance sheet assets in excess of €400 million for the last financial year;

(ii) companies owned, directly or indirectly, by another company exceeding these thresholds;

or (iii) companies that directly or indirectly own such businesses.

Small companies could already fall under this obligation if a vertical reading of the organization chart revealed a direct or indirect holding by an intermediate-sized company. The same applies if a company is part of a tax consolidation group, and one of its members falls within the scope of this obligation. By capillary action, this obligation applies to all members of the tax consolidation group. However, experience has shown that unless a company's name is well known, leaving no doubt that it belongs to a large group, many companies have escaped the documentary fork in the road. Much to the chagrin of good tax management, moreover, as the exercise often makes it possible to point out risks or shortcomings, and thus to correct them ahead of an audit.

However, in order to attract a greater number of companies to this obligation, Bercy is seriously considering lowering the threshold, currently set at €400 million.

One possibility currently under consideration is to raise the threshold to €50 million. This would realign the scope of application with that of the annual electronic declaration of transfer pricing policies (form 2257-SD), which when drafted in 2013, had already aligned its conditions of application with those of the documentary obligation of article L13 AA cited above. In so doing, the aforementioned declaration would become obsolete and redundant, and Bercy could sacrifice it on the altar of lightening the obligations weighing on companies. A fine pirouette that gymnastics fans will appreciate a year before the Olympic Games.

Lowering the threshold will, however, have a number of consequences, which companies not yet subject to the law will need to prepare for.
First and foremost, these companies will need to be able to document exhaustively and in depth the flows of all kinds that they maintain with affiliated companies located abroad, as well as the associated remuneration policies. The task is not an easy one, requiring the recovery, consolidation, review and synthesis of accounting and financial information, as well as contextual and market data, and details of the functions and risks assigned to the parties involved in the transactions.

It is also essential that this information is consistent with the accounting records, the reliable audit trail, but also with sometimes more subtle sources such as those accessible on the Internet. In particular, we have seen rectifications based on mentions on the company's website, or on the Linkedin profiles of its employees, to discredit the functional qualification described in intra-group reports.

In this respect, new taxpayers will be at a disadvantage, as audit teams have had ample time to perfect their transfer pricing documentation review skills during audits of larger companies already subject to transfer pricing.

Secondly, the extension of the documentary obligation should automatically lead to a reduction, or even the disappearance, of the administrative tolerance whereby taxpayers are exempted from drawing up such documentation when intra-group transactions represent less than 100,000 euros per category of flows. While this threshold might seem to reflect insignificant transactions for taxpayers declaring sales of over 400 million euros, the proportionality is no longer the same for companies with sales of 50 million. Documentation of intra-group flows could therefore become necessary from the very first euro of income or expense.

Last but not least, this reform in the making highlights the future areas of control and rectification that the tax authorities will be pursuing. By revisiting the contours of a specific transfer pricing obligation, Bercy is revealing its intention to tighten the noose even further on international business groups and intra-group flows. This is all the more obvious as it is part of the hunt for tax evasion, a legitimate but rather facile witch-hunt that has enabled successive governments to justify their costly economic policies.

Finally, there is no doubt that no transaction will be spared. While flows of goods and services still make up the bulk of transactions, in recent years the tax authorities have developed a particular appetite for financial flows of all kinds (intra-group loans, shareholders' current accounts, treasury agreements, guarantees, etc.) and transactions involving intangible assets (transfers and concessions of trademarks, patents, know-how). The lower thresholds should thus enable the tax authorities to considerably increase the scope of their controls, both in personal terms (the taxpayers concerned) and in material terms (intra-group flows placed under the microscope).

It remains to be seen whether Bercy will have the necessary resources to collect and review all these new reports, or whether, as with form 2257 or the CBCR (country-by-country declaration), this revised documentary obligation will mainly serve to keep private-sector tax specialists busy.

Intra-group reorganizations: social interest must be assessed over time

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THE FACTS

Howmet SAS is part of a group headquartered in Luxembourg. Together with its French subsidiary, it forms a tax consolidation group. With a view to completely overhauling its financial organization, the group undertook a succession of restructuring operations in a very short space of time, aimed at bringing a Belgian subsidiary, previously held by the Luxembourg parent company, back under the French subsidiary of Howmet SAS. To achieve this, the Luxembourg holding company first sold the shares to Howmet SAS, which in turn sold the shares to its subsidiary on the same day as the transaction. The following day, the French subsidiary, which now held the shares in the Belgian company, took out a loan with a Group entity in Switzerland, and contributed the corresponding amount to its subsidiary, which then changed its articles of association to include a financial activity. From then on, the Belgian company made loans, thereby collecting financial interest.

ADMINISTRATIVE CONTROL

The tax authorities challenged the succession of transactions under article L64 of the LFP, considering that these restructurings constituted an abuse of rights aimed at creating an artificial arrangement, the objective of which is to seek the benefit of a literal application of articles 38, 39 and 209 of the CGI. More specifically, the French tax authorities ruled out the deductibility of interest borne by the French subsidiary that had taken out a loan within the group, and instead reintegrated the interest received by the Belgian subsidiary under the guise of a capital increase into the overall result.

DECISION BY THE MONTREUIL TA

In judgment no. 1709196, 1801203 of November 19, 2020, the Montreuil Administrative Court ruled that SAS Howmet should be discharged from the additional taxes, duties and penalties incurred as a result of the reconsideration of the deduction of loan interest, on the basis of article L. 64 of the French tax code, in respect of the 2011 and 2012 financial years, and dismissed the remainder of its claims.

DECISION OF THE CAA DE PARIS

The Court upheld the Minister's request, re-establishing the characterization of abuse of rights and annulling the decision of the Montreuil Administrative Court. Firstly, it noted that the financial impact of this transaction on the French integrated companies was in fact neutral, especially when compared with the increase in the Belgian subsidiary's net assets. In addition, the CAA noted that the Belgian company acted merely as an intermediary, lacking the necessary substance to assume the role it was now supposed to play.

OUR ANALYSIS

COMPANY INTERESTS AT THE HEART OF CONSIDERATIONS

Since the transactions were accompanied by financial interest charges on the earnings of both the French company (which pays interest) and its Belgian subsidiary (which now receives interest), the question of corporate interest within the meaning of Articles 209.1 and 39.1 arose. The Group argued that the concomitant borrowings and capital increases by the Belgian subsidiary were motivated by shareholder demand for higher dividend payouts, and to this end made it possible to mobilize the capital available to the French subsidiaries, thereby helping to strengthen their weight within the Group. This argument was dismissed by the Court, on the dual grounds that, on the one hand, the shareholders' interest was not the same as that of the company; and, on the other, that the immediate effect was to impose additional costs on the French company, while at the same time housing interests abroad.

THE TIMING IS PROMODIAL

After all, the concomitance of the transactions is hardly denounced in the judgment. However, it is an essential element in assessing the fictitious nature of the overall scheme, as it blurs the economic and financial perception of the transactions. The recovery period gives the tax authorities plenty of time to assess, with hindsight, the succession of transactions and their relevance in terms of the effects generated within the group and for the French taxpayer taken individually. In the case in point, the group concentrated its transactions over a very short period of time, just a few days, without being motivated by the imminent end of the financial year, or the occurrence of an event requiring a rapid reaction. In retrospect, it was therefore easy for the administration to question the relevance of transactions on a calendar scale. In economic terms, projects are often built up progressively over time, in the same way as business plans and investments, which traditionally require a later return. In fact, economic cyclicality does not correspond to the independence of financial years, which remains a strictly accounting and tax concept. It seems to us, therefore, that in the case of intra-group reorganizations, the non-tax objective is more easily demonstrated once the operations have been quietly staggered over time.

THE LOOK IN CARA'S EYES

Corporate reorganizations generate variations in taxpayers' accounts, which are systematically detected by tax authorities' tools. On this point, it should be remembered that the interest of the group does not exist in French tax law, and that all measures to combat tax evasion echo the praetorian concept of an abnormal act of management. This ruling sheds additional light on the concept, adding a temporal dimension to the debate. An abnormal act of management is more easily recognized when the transactions impacting a company's accounts take place over a very short period of time. As economic cyclicality is traditionally a long-term process, the concentration of transactions over a period of just a few days raises doubts as to the real aim of the parties involved. In addition, it is crucial to prepare documentation in support of the transaction, and at the same time as it takes place, so as to explain years later, when control is exercised, what effects were intended by the parties, taking into account the parameters and realistic options available at the time. Otherwise, the authorities will have ample opportunity to rewrite history on the basis of the inevitably more numerous elements available.