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Cross-Border Transfer of Cash Pooling Activities
A recent decision of the Administrative Court of Paris may have set a cat among the pigeons. For the first time in France, a tax judge held that the transfer of cash pooling activities from a French cash pool leader to a foreign group entity without any compensation should be considered as an indirect transfer of profits and accordingly confirmed the validity of the French tax authorities' tax reassessment. Although this decision may be superseded by a subsequent decision of the Administrative Court of Appeal or the Supreme Administrative Court, it illustrates how the French tax authorities are sensitive to business restructuring issues and not only dealing with autonomous activities but with intra-group activities as well. Taxand France takes an in-depth look at this unprecedented case and what it may mean for businesses considering restructuring in the future.
In the case at hand, at the end of the tax audit of the French cash pool leader, the French tax authorities concluded that the French entity should have received compensation (amounting to the value of the transferred business) for the transfer of the cash pooling activities to a Swiss affiliate. According to the French tax authorities, the absence of compensation could be qualified as an indirect transfer of profits to the benefit of the Swiss entity. Consequently, the tax reassessment included both an increase of the French entity's taxable result and charged withholding taxes to the transferred profits by treating it as deemed dividends.
The taxpayer challenged the French tax authorities' position, arguing that cash pooling activities were only general administration activities that did not have an intrinsic value, since they were performed by the French entity to the exclusive benefit of affiliates and at the exclusion of third-parties. In particular, the taxpayer argued that the affiliates participating in cash pooling could not be considered as equivalent to a real client since they were not free to choose whether or not to participate in the cash-pooling. Therefore, according to the taxpayer, the French entity should not have received any compensation for the transfer of cash pooling activities since this transfer did not give rise to the transfer of a real and valuable client. Consequently the related business was of no value as the French entity neither contributed to its development nor provided services to third parties.
The Administrative Court of Paris rejected the taxpayers' arguments, stating that cash pooling activities cannot be considered as general administration activities when they are performed for the benefit of other entities. Regardless of whether such entities are affiliates or third-parties, the cash pool leader is remunerated for the activities it performs. The court, therefore, held that the transfer of cash pooling activities gave rise to a real transfer of client. Also, regardless of whether such a client is composed of affiliates or third-parties, since cash-pooling activities were still performed to the benefit of the same participants by the Swiss affiliate.
Therefore, the court ruled that the absence of compensation for the French entity was considered as an indirect transfer of profits to the benefit of the Swiss affiliate.
Although this decision may be superseded by a subsequent decision of the Administrative Court of Appeal or the Supreme Administrative Court, multinationals should pay particular attention to business restructuring issues not only when dealing with autonomous activities but with intra-group activities as well. This decision seems to be consistent with OECD guidelines related to business restructuring. Indeed, in its guidelines, the OECD acknowledges that where an existing contractual relationship is terminated in the context of a business restructuring, the restructured entity might suffer detriments such as a loss of potential revenue. The OECD states that the restructured entity should receive compensation for the loss of revenue, provided that independent parties in similar circumstances would have agreed an indemnification to be paid to the restructured entity.
It is nevertheless likely that forthcoming tax audits aim to grant an indemnification to the restructured group entity for functions (eg functions related to the provision of management services) transferred to another group entity. The Administrative Court of Paris goes further than just indemnification since it rules that the restructured entity must be compensated for the transfer of a client that only includes affiliates. This decision may be the first step towards the recognition of a real transfer of "intra-group" business that would make intra-group business restructurings much less flexible than they had been so far.
Further discussions could arise as to the legal approach (qualification of a "business /clientele") which may open the door for reversal decisions at a later stage of the litigation.
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