Debt-Push-Down Challenged Under Abuse Of Law Theory

Author:Mr Siamak Mostafavi, Nicolas André and Alexios Theologitis
Profession:Jones Day

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 motivated.

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...

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