STARTING SITUATION
WB Ambassador has taken out two loans with its parent company and another group company, bearing interest at an annual rate of 7%.
The tax authorities considered this rate to be excessive in the light of Articles 212-I and 39-1-3 of the General Tax Code, and consequently proposed a correction, reinstating a fraction of the interest incurred.
JULY 07, 2017: ADMINISTRATIVE COURT DECISION
In a ruling dated July 07, 2017, n°16007683, the Paris Administrative Court rejected WB Ambassador's request for a discharge of the additional corporate income tax assessments and reinstatement of the carry-forward of the deficit recognized on January 1, 2020.
The judges made a strict assessment of the provisions of Article 212-1 and the evidence that taxpayers could provide. The three studies provided by the company were rejected for lack of precision and detail. However, they confirmed that the taxpayer's supporting analysis need not be contemporaneous with the loan offer.
DECEMBER 31, 2018 : DECISION BY THE ADMINISTRATIVE COURT OF APPEAL
On December 31, 2018, in ruling no. 17PA0318, the Paris CAA upheld the administrative court's decision and dismissed the appeal lodged by the company.
According to the judges, the comparison used by the company was not relevant, as it was based "on rate comparables from bond financial markets" and agreed with the tax authorities' position that only a bank offer or references to the debt market were acceptable within the meaning of article 212-I of the CGI.
DECEMBER 10, 2020 : DECISION BY THE CONSEIL D'ÉTAT
In a ruling dated December 10, 2020, no. 428522, the Conseil d'Etat, seized of a power of attorney brought by the company, overturned the ruling of the Administrative Court of Appeal.
According to the Conseil d'Etat, the court erred in law by excluding the possibility for the company to justify the rates by using the yield of bond issues granted by companies in comparable conditions.
The Conseil d'Etat continues, and its 2019 "Wheelabrator" opinion, and the trend started by the "Studialis" decision, and validates the use of bond issues as comparable.
JUNE 29, 2022: DECISION BY THE ADMINISTRATIVE COURT OF APPEAL
On June 29, the 2nd chamber of the Paris Court of Appeal, on a referral from the Conseil d'Etat, overturned the decision of the Paris Administrative Court and reinstated the losses incurred by AB Ambassador.
OUR ANALYSIS: Problem posed by the ruling
THE TAXPAYER'S FREEDOM OF PROOF IS ENSHRINED
The Court of Appeal has endorsed the December 10, 2020 ruling by the Conseil d'Etat, which had adopted a position favorable to taxpayers. Indeed, this ruling confirms the opinion issued a year earlier (CE July 10, 2019, n°429426, SAS Wheelabrator), by reaffirming the principle of freedom of proof in determining the interest rate on loans concluded between companies belonging to the same group.
From now on, tax authorities and judges must genuinely debate the evidence provided by the taxpayer to justify the normal and arm's length nature of an intra-group interest rate.
It is in the context of this debate that the Administrative Court of Appeal assesses the evidence provided by AB Ambassador and confirms that the interest rates charged on bond loans can constitute proof of the arm's length nature of the rate on an intra-group loan, provided that it is proven that these loans constitute a realistic alternative to an intra-group loan (i.e. a reference to the debt market).
In this case, the evidence provided by the company was sufficiently elaborate to justify the rates applied to the intra-group loans.
THE FINAL EPISODE IN THE WB AMBASSADOR SAGA, BUT WHAT ABOUT THE SEQUEL?
The ruling handed down on June 29, 2022 brings to a close the WB Ambassador saga, which has given rise to a number of issues and questions that have fuelled a strong movement in case law on intra-group loans, as well as debate on the link between transfer pricing and Article 212-1 of the French General Tax Code.
The Administrative Court of Appeal has clarified the nature and mechanics of proving the normality of the interest rate applied in the case of an intra-group loan. This decision is in line with the analysis inspired by the Bercy guidelines on intra-group financial transactions, and by the body of case law comprising the Studialis, Wheelabrator, Appex Tool and BSA decisions.
Nevertheless, while this decision clarifies intra-group loan situations, many uncertainties remain as to how to demonstrate the arm's length rate attached to other financial vehicles, notably the Cash Pool. The decision also leaves minority shareholders still subject to the compartmentalization of Article 212-I and the strict application of the Article 39-1-3 rate, as the Trocadéro decision recently reminded us.
Finally, although the taxpayer can now refer to the bond market, he still needs to be able to demonstrate that such a reference constituted a realistic alternative given his situation. While the burden of proof on the taxpayer has been eased (somewhat), justifying a borrowing rate different from that referred to in article 39-1-3 of the CGI still remains a challenge for taxpayers. The judges have not yet given us all the keys to transfer pricing applied to financial flows.
