rocket
Introducing the Orbitax International Tax Platform, a revolutionary suite of integrated tax solutions including research, compliance, calculations, entity management and charting. Find out more.
News Share

The Tax Hub

Daily Tax Newsletter

France-Australia-Hong Kong-Singapore

Responsive image

French Court of Appeals decision on debt waivers granted to branches of foreign subsidiary by French parent company published

In a recently published decision of 11 March 2005 (SA Guerlain, No. 01PA01206), the Court of Appeals of Paris held that the debt waivers granted by a French parent company to two branches of its 99.9%-owned Hong Kong subsidiary constituted a transfer of profits under Art. 57 of the French Tax Code (Code Général des Impôts (CGI)). The details of the decision are summarized below.

(a) Background. Under Art. 57 of the French Tax Code (CGI), the tax administration may add back to the taxable income of French companies, or branches of foreign companies, profits indirectly transferred to related companies or head offices abroad (Art. 57 CGI). This arm's length rule applies to profits transferred to: "foreign enterprises controlled by the French enterprise, or which control the latter ... or which are controlled by an enterprise or group which has control over the enterprise outside France". The provision is thus broad enough to cover virtually any transfer within a related group of companies or branches. Transfers of profits include, amongst others, interest free loans, or loans at abnormally high or low rates of interest and any other means.

(b) Facts. The French company SA Guerlain granted in 1990 and in 1991 two debts waivers, each to the Australian and Singapore branches of its 99.9%-owned subsidiary located in Hong Kong. The tax administration considered that the debt waivers constituted an abnormal transfer of profits and as result, added back to the taxable income of the French company, the amount of debt waivers. The company brought the case before the Lower Administrative Court of Paris, which accepted the claim of the taxpayer on 28 November 2000 and considered that such debt waivers did not to constitute a transfer of profits within the meaning of Art. 57 of the CGI. The tax administration appealed to the Court of Appeals, which overturned the earlier decision from the Lower Court.

(c) Issue. The issue was to determine whether or not such debt waivers directly granted by the French parent company of a 99.9%-owned Hong Kong subsidiary to two branches of that subsidiary constituted an abnormal transfer of profits under Art. 57 CGI.

(d) Decision. The Court of Appeals held that the debt waivers were justified by the financial difficulties encountered by the two branches, and by a strategic interest for the French parent company. However, the consolidated accounts of the Hong Kong subsidiary, including the financial results of the two branches, showed a positive financial result in 1990 and 1991, so that the subsidiary was able to distribute substantial dividends to the French parent company. As a result, the Court concluded that the debt waivers were abnormal and constituted an indirect transfer of profits under Art. 57 CGI.

Hence, the Court refused to take into account the respective financial situation of the branches but adopted a global approach by determining the abnormal character of such debt waivers at the subsidiary level, even if the subsidiary was not the direct shareholder.

Powerful Tax Tools

NEW

FX Rates

Global FX Rates including Tax Year Average FX Rates and Spot Rates for all Reporting Currencies.

NEW

Corporate Tax Rates

Corporate tax rates, surtaxes, and effective tax rates for the current year, as well as historical rates and approved future rates.

NEW

Country Analysis

Detailed tax guidance for companies doing business in over 100 countries, including summaries and snapshots of key tax facts and issues.

NEW

Cross Border Tax Calculator

Calculate total tax costs and benefits of a cross border transaction including withholding tax, participation exemption and foreign tax credit rules.

NEW

Cross Border Tax Rates

Provides Domestic, treaty and EU cross border tax rates for over 5,000 country combinations for 9 different payment streams.

NEW

OECD BEPS Project

Complete overview of the OECD BEPS Project, including daily BEPS news, country adoption of BEPS measures, and an overview of the 15 BEPS Actions.

NEW

Tax Calendar

Customizable calendar tool that tracks corporate income tax, value added tax and transfer pricing obligations by country or entity.

NEW

Tax Forms

English translations of key tax forms for over 80 countries, including tax return forms, treaty benefit forms, withholding tax forms, and more.

NEW

Worldwide Tax Treaties

Repository including thousands of tax treaties (in English), OECD, UN and US Models, relevant EU Directives, Technical Explanations, and more.

NEW

Worldwide Tax Planner

Calculates the worldwide tax cost of what-if scenarios based on legal entity structure, taxable income, and cross border transactions.

NEW

Certified Rates Report

Customizable Certified Rates Report providing updated corporate and withholding tax rates at the end of each month for over 100 countries.

NEW

Withholding Tax Minimizer

Enables quick calculation of tax costs and benefits of cross border transactions considering all possible transaction combinations and optimal routes.

NEW

VAT Rates

Provides value added tax (VAT) rates, goods and services tax (GST) rates and other indirect tax rates for over 100 countries.

NEW

NOL Calculator

Country specific calculator to determine how net operating losses can be utilized in carryback and carryforward years.

NEW

Transfer Pricing Calculator

Calculates TP ratios under various TP methods and calculates the difference between target ratios and actual ratios.

NEW

Individual Income Tax Rates

Individual tax rates for over 100 countries.

Play of the Day

FX Rates

Global FX Rates including Tax year Average FX Rates and Spot Rates for all Reporting Currencies.

We’re here to help

We’re here to answer any questions you have about the Orbitax products and services.

Send us a message

Who’s behind Orbitax?

We’re committed to providing high value, low cost tax research and management solutions.

Learn More