This article was first published on Tax@Hand, and is reproduced on this blog with the authorization of its authors.
France’s Supreme Administrative Court (SAC) held in a transfer pricing decision issued on 20 September 2022 that the 0% remuneration rate used in a cash pooling arrangement between a German company and its French subsidiary should be analyzed in light of (i) the subsidiary’s interest at the time the cash pooling agreement was signed and (ii) the subsidiary’s obligations under the agreement during the litigation period (Conseil d’Etat, n° 461639).
Article 57 of the French tax code (FTC) allows the French tax authorities (FTA) to add back “irregurlarly-shifted” profits into the taxable results of a French company. Enforcement of this provision requires the FTA to prove that (1) a dependent relationship existed between the parties involved in the transaction under review and (2) a transfer of profits occurred, i.e., an irregular advantage was granted via an increase or reduction in purchase or sale prices or via any other equivalent means.
Facts of the case
Within a multinational group of entities, the financing of EU subsidiaries was managed by a cash pool entity located in Germany. In accordance with the terms of the cash pooling agreement that had been concluded in 2009, a French subsidiary made its excess cash flow available to the German entity in exchange for a remuneration based on the Euro OverNight Index Average (EONIA) bank rate minus 0.15 basis points (“reference rate”). For fiscal years (FY) 2012 and 2013, the parties fixed this reference rate at 0% as the application of the rate formula otherwise would have led to a negative remuneration due to the change in the EONIA bank rate.
During the tax audit of the French subsidiary for FY 2012 and FY 2013, the FTA challenged the appropriateness of this nil remuneration (“irregular advantage”) and reassessed the taxable result of the French subsidiary accordingly for corporate income tax and withholding tax purposes.
Decision of the SAC
The SAC ruled that the lower administrative court of appeal had erred in finding that the 0% remuneration rate conferred an irregular advantage without seeking to determine whether the French subsidiary had acted in its own interest at the time the cash pooling agreement was concluded in 2009 and without looking at the French subsidiary’s obligations under this agreement during the litigation period.
In other words, in this case, the “irregular transfer of profit” condition required for the transfer pricing rules to apply could not be proven based solely on the fact that the remuneration rate was fixed at 0% without looking into the circumstances and the terms of the cash pooling agreement at the time it was concluded and throughout its validity period (e.g., ability to renegotiate or terminate the agreement, ability to use other types of short-term placements, etc.).
The SAC referred the case back to the administrative court of appeal, which should decide on the corporate income tax and withholding tax implications of the case by taking into account the SAC’s decision (and therefore the terms of the cash pooling agreement dated 2009).