If the appellate court upholds the decision, it may signal that the transfer of an activity—even a routine activity—may be deemed to constitute a transfer of benefits abroad in situations when no consideration is provided.
For text of the tribunal decision (in French): Ste Nestle Finance International Ltd, n° 0902095/1-1 (11 May 2011)
Background
A French company had assumed the cash pooling function of its corporate group in Europe. This function was of an administrative nature and was performed for the sole benefit of the European companies that were part of the corporate group.
In 2002, it was decided to transfer this activity to a related entity located in Switzerland. No compensation was paid, and no consideration was given to the French company with respect to this transfer.
Position of the French tax authorities
On audit, the French tax authorities considered that by transferring the cash pooling activity to the Swiss related entity without compensation, the French company had transferred profits abroad and, in performing a function benefiting to the European companies of the group, had been generating a profit (which consisted of the interest rate spread as “booked” in the French accounts).
According to the French tax authorities, the value of compensation which would have accrued to the French company could have been estimated by applying a 0.5% factor to the average value of the amount of cash managed. Such compensation would then be subject to the French corporate income tax as a “re-assessment,” as well as to the withholding tax applicable to deemed dividends under provisions of the France-Switzerland income tax treaty.
Lower court’s decision
The French company asserted before the Administrative Court of Paris that it was not liable for income tax because no compensation accrued to it under this arrangement because: (1) the cash pooling activity transferred was of a low value-added function (i.e., administrative support); (2) the cash pooling function was performed on behalf of other related companies and did not benefit the French company; and (3) the foreign exchange risk attached to the cash pooling activity was actually borne by the parent company of the corporate group.
In a May 2011 decision, the Administrative Court of Paris rejected the arguments of the French company and decided to follow the position of the French tax authorities. The 0.5% factor, however, was reduced in order to take into account the average spread earned by the French company on previous years.
What’s next?
The case is now pending consideration by the Appeal Court of Paris. If the appeal court affirms the lower court’s decision and the “aggressive” position of the tax authorities, it would appear—according to observers—that the transfer of an activity, even of a routine nature, could be subject to a qualification of transfer of benefits abroad in instances when no compensation is provided.
For more information, contact a tax professional with the Global Transfer Pricing Services group (Fidal*) in Paris:
Pascal Luquet
33 1 55 68 15 22
Kate Noakes
33 1 55 68 16 57
Xavier Sotillos Jaime
33 1 55 68 14 65
Olivier Kiet
33 1 55 68 16 15
* FIDAL is an independent legal entity that is separate from KPMG International and its member firms and has signed a cooperation agreement with KPMG International.