In its decision dated January 28, 2016, the Administrative Court of Appeal of Versailles provided some interesting details about the consequences of the characterization of a transaction under foreign law in order to determine the applicable French tax regime.
In this case, the French Parfums Christian Dior's company granted a debt waiver to LVMH Perfumes & Cosmetics Inc., its wholly-owned US subsidiary. Pursuant to the applicable law at the time of the facts, the parent company deducted the amount of the debt waiver from its taxable results. However, the US subsidiary allocated the debt waiver to its equity and was not taxed on it.
Regarding the characterization of the transaction under US tax law, the French tax authorities ("FTA") concluded that this financial assistance constituted a contribution and, therefore, challenged the deduction of the debt waiver.
The FTA's position relied on the SNC Immobilière GSE decision, in which the French Administrative Supreme Court had examined the nature of the relevant transaction under foreign law to characterize it under French tax law (French Administrative Supreme Court, 8th and 3rd subsect., Sep. 7, 2009, No. 303560).
The Administrative Court of Appeal of Versailles nevertheless rejected the tax authorities’ position on the following grounds:
- the debt waiver did not lead to the attribution of new shares or to an increase of the par value of the existing shares and, therefore, it cannot be characterized as a contribution;
- the accounting of the debt waiver in the subsidiary's equity did not lead to an increase of the value of the shares held by the company because the subsidiary was in a negative net position at the end of the fiscal year during which the debt waiver was granted;
- the fact that, for application of US tax law, the beneficiary of the debt waiver declared the disputed transaction as a contribution, and not as a debt waiver, which led to the payment of the disputed debt without any increase in taxable income, shall not have any consequences on the issue.
In order to characterize the transaction under French tax law, the Administrative Court of Appeal of Versailles limited itself, without being influenced by the characterization of the transaction under US tax law, to an analyze of the transaction’s civil characteristics.
However, it should be pointed out that, in this case, characterizing the disputed transaction was much easier than in the SNC Immobilière GSE case, which involved to determine the French tax treatment of a foreign transaction that was unknown under French civil law.