In a decision issued few weeks ago (CAA Versailles, April 14,
2015, SAS Ingram Micro), the Versailles Administrative Court of
Appeals (CAA) took position on a debt-push-down
financing which has been challenged by the French tax authorities,
as from 2008, under the abuse of law theory (abus de
droit). Such financing has already been reviewed by the
advisory committee in charge of abuse of law matters
(Comité de l'abus de droit fiscal,
CADF) in 2010 and by the lower court in 2012 (TA
Montreuil, March 15, 2012, n°10098952).
The main facts were the following:
In September 2004, the shares of the French subsidiary
(FCo) were transferred by its US shareholder
(USCo 1) to a related US company (USCo
2), and then on-transferred by USCo 2 to another related
US company (USCo 3), both transfers being
presumably financed through vendor loans.
A few days later, FCo simultaneously (i) made a dividend
distribution to USCo 3, and (ii) issued redeemable bonds
(obligations remboursables en actions, French-law bonds
that may be redeemed in shares) to USCo 3 (ORAs)
in order to finance the dividend distribution. The conditions of
the ORAs inter alia provided that (i) their yearly 8.58
percent interest rate could not be in excess of the sum of (a) the
taxable income of FCo plus (b) the interest payments to be made to
USCo under the ORAs, and (ii) at maturity, the ORAs were to be
redeemed in FCo shares.
The day after, USCo 3 transferred the ORAs to USCo 2 as
compensation for the transfer of the FCo shares.
A year later, in 2005, USCo 3 transferred the FCo shares back
to USCo 1.
The French tax authorities challenged, under the abuse of law
doctrine, the tax deduction of the interest payments made by FCo,
on the grounds that the issuance of the ORAs was purely tax
FCo inter alia argued that (i) it had the freedom to
decide on its financial structure and on how its dividend
distributions should be financed, (ii) the financing at hand
allowed it to maintain its cash position and credit ratings and to
monitor its capitalization, and (iii) its employees benefited from
this form of financing as the drop in equity increased the amounts
to be paid by FCo under the French mandatory profit-sharing scheme
(participation des salariés aux résultats de
The CAA, as did the CADF and the lower court, ruled in favor of
the French tax authorities, rejecting all of the justifications of
the taxpayer and interestingly noting that:
The simultaneous dividend distribution and ORAs issuance
produced the same result as a capitalization of its retained
earnings, except for the tax deduction of the interests paid under
Neither the dividend distribution nor the ORAs issuance gave
rise to actual financial flows between the relevant companies.
The fact that other types of financing could have resulted in
the same tax consequences was irrelevant for the purposes of the
abuse of law analysis.
The PSRE argument should essentially be regarded as a windfall
effect since (i) the benefits for the employees were out of
proportion with the tax savings resulting from the interest
deduction, (ii) such benefits were temporary as the ORAs were to be
redeemed into shares upon maturity, and (iii) the involvement of
the employees was not clearly demonstrated.
Once the dust had settled, the reorganization generally carried
out by the group did not modify the ownership chain of FCo so that
FCo was not in a position to demonstrate that the financing at hand
was a necessary step within the reorganization of the European
activities of USCo 1.
It should nevertheless be noted that, as it was the case
for the lower court decision, and despite the clear methodology set
out by the Supreme Administrative Court (Conseil
d'Etat) in several recent cases in the field of the abuse
of law theory, the CAA did not explicitly analyze the
legislator's intent in order to qualify the so-called
subjective condition of the abuse of law theory.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Jonathan Sheehan gives an Irish perspective in the October 2016 edition of The American Lawyer on the European Commission's decision that Ireland granted undue tax benefits of up to EUR13 billion, plus interest, to Apple.
Three of my favourite topics feature in this issue of the Denton Briefing – tax, Bond and beer. But not necessarily in that order and not necessarily for the right reasons.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).