STARTING SITUATION
SAP France is indirectly owned by the German company SAP AG. Under a contract signed in 2009, SAP France entered into a centralized cash management agreement with its parent company, under which it deposited its cash surpluses with the German company, which were remunerated on the basis of an interest rate equal to the EONIA interbank reference rate less 0.15 points. In 2012 and 2013, the application of this formula resulted in a negative interest rate, due to changes in the EONIA, and the parties to the cash management agreement agreed to set this rate at 0%.
ADMINISTRATIVE CONTROL
Following an audit of SAP France's accounts for the 2012 and 2013 financial years, the tax authorities questioned the normal nature of this nil remuneration, considering that the absence of interest on this cash flow agreement constituted a benefit in its own right. It therefore corrected the company's taxable income, and considered this benefit as income deemed distributed to the German company, subject to withholding tax.
DECISION OF THE CAA DE VERSAILLES
In ruling that SAP France had granted SAP AG a liberality by waiving the right to remuneration in return for depositing its cash surpluses with the latter, the Administrative Court of Appeal based its decision on the fact that this zero remuneration was unrelated to that to which the company would have been entitled if it had deposited its cash surpluses with a financial institution over the same period, without this absence of remuneration being offset by the possibility of financing cash requirements, which were non-existent for the years in question.
DECISION BY THE CONSEIL D'ÉTAT
The Conseil d'Etat annulled the CAA's decision and referred the parties back to the CAA. According to the tax judge, the CAA erred in law when it ruled of its own motion that the application of a zero rate constituted a liberality, on the sole grounds that it was lower than what a financial institution could have granted to SAP France. In the CE's view, the Court should have examined whether the modification by the parties of the initial terms of the contract, which led to the application of a negative rate, and the substitution of a rate which was then zero (and therefore more advantageous for SAP France), still represented an abnormal act of management for the company.
OUR ANALYSIS
IS A NEGATIVE RATE POSSIBLE UNDER A TREASURY AGREEMENT?
The case concerns the replacement of the contractual rate, which in view of market trends led to the application of a negative rate, by a 0% rate. Applying a negative rate would have led SAP France, which was in a credit position, to pay interest on the investment of its funds. The mechanics may seem abstruse, even though they reflect a market situation. In our view, the question of the applicability of negative interest rates to cash management agreements poses two major problems: (i) firstly, cash management agreements are specific to corporate groups, so there is no external comparable reflecting market conditions (at arm's length); (ii) secondly, the subject also brings into conflict two opposing visions: fiscal on the one hand, and economic on the other. Indeed, there is an economic current that recognizes the possibility of the financial market applying negative interbank rates. Earlier decisions also suggested that, in the absence of a specific clause implementing a floor rate, it could not exist implicitly (see e.g. TGI Strasbourg, January 5, 2016; CA Colmar, March 8, 2017). However, we believe that a holistic legal approach should lead us to consider that negative rates do not reflect normal management. Firstly, loans governed by the Monetary and Financial Code imply that the lender is acting for consideration (art. L 313-1 Code mon. et fin.). The lending activity must generate an economic benefit. Moreover, the commercial status of the companies involved in the transaction theoretically requires them to pursue a profit-making objective. We therefore believe that, irrespective of the state of the market, the application of a negative interest rate constitutes an abnormal act of management, unless the parties renegotiate the terms of their agreement.
WHICH REFERENCES TO USE?
It is interesting to note that to assess the deemed arm's length rate, the CAA had validated the reference used by the department to the average rate of remuneration on sight deposits calculated by the Banque de France. No reference was made to the rate referred to in article 39-1-3 of the CGI, which is the rate to which the application of article 212-I of the same code leads. In our view, the reason for this is that the rectifications were made under the sole authority of article 57 of the CGI, and not 212-I. Nonetheless, in our view, this ruling allows us to derogate from the systematic application of the Article 39-1-3 rate, insofar as a cash flow agreement is, by its very nature, necessarily liquid and short-term. Nevertheless, we believe that a more appropriate benchmark would be the yield on money-market mutual funds (Sicav monétaires) or units in money-market mutual funds (fonds communs de placement monétaires), which are used to invest cash surpluses or highly liquid capital.
PAY ATTENTION TO OPERATION QUALIFICATION!
The ruling concerns a treasury agreement, which remains a special financing tool, specific to groups of companies, and theoretically liquid and available. However, groups must ensure that the repetition of flows over time, and in a single direction, does not lead to the reclassification of all transactions as longer-term loans with successive drawdowns. Such reclassification would necessarily lead to the application of a different rate, as this would be correlated to the specific factors of the transaction (duration, currency, borrower's credit rating, etc.), all parameters which have been largely defined by recent case law (see for example CE, 29/12/21, 441357, Apex Tool).