The Q4 Opinions have also addressed two allegedly tax-optimized structured financings.

Facts. The features of the first financing ("Transaction 1") may be summarized as follows (steps 2 through 8 all took place on the same day, that is, the day after step 1 took place):

  1. A French company X ("Company X") successfully completed a takeover bid over a US company Y ("Company Y"), the holding entity of several US operating companies;

  2. A US Company Z ("Company Z") was subsequently set up in order to modify the financing of such takeover bid and issued three types of shares: preferred shares carrying increased voting rights ("A PShares"), preferred shares carrying no voting rights but entitled to cumulative priority dividend rights that may be carried forward ("B PShares"); and ordinary shares ("C Shares");

  3. Company Y contributed certain US operating companies to Company Z and received the A PShares ("Contribution");

  4. Company Z and Company Y, respectively, undertook to issue and subscribe the B PShares ("B PShares Subscription Right");

  5. A French Company TP ("Company TP") and Company Y entered into an assignment and assumption agreement pursuant to which Company Y transferred the B PShares Subscription Right to Company TP;

  6. Company TP subscribed the B PShares and the C Shares using a shareholder loan from Company X;

  7. Company TP and Company Y entered into a forward sale agreement ("FSA") pursuant to which Company TP undertook to sell, and Company Y undertook to buy, all of the B PShares held by Company TP into Company Z, within a period of five years renewable once, and for an agreed price;

  8. Company Y and Company Z entered into a guaranty agreement ("GA") pursuant to which Company Y undertook to make available to Company Z the funds needed in order to distribute the dividends attached to the B PShares;

  9. The funds contributed by Company TP to Company Z, by subscribing the B PShares, were then made available to Company Y so that its parent, Company X, could reimburse the financing debt pertaining to the aforementioned takeover bid (Company Z inter alia provided (i) a loan to certain US operating companies so that they can distribute to Company Y dividends that had been voted before the Contribution, and (ii) a loan to an affiliate of Company Y which then on-loaned the same amount to Company Y).

The features of the second financing ("Transaction 2," together with Transaction 1 the "Transactions") may be summarized as follows (steps 2 to 4 took place within the same week):

  1. Company X transferred the cash pooling activities of its group to company B, a subsidiary located in Belgium ("Company B"), inter alia by increasing the share capital of Company B (NB: Company B used the notional interest legislation in Belgium);

  2. Company B provided a loan to Company TP ("Loan");

  3. Company TP reimbursed to Company X a shareholder loan for the same amount;

  4. Company X increased the share capital of Company B by the same amount;

  5. Eighteen months later, Company TP reimbursed the Loan to Company B by using a shareholder loan from Company X, and Company B redeemed its share capital for the same amount.

The French Tax Authorities' Position. The French tax authorities challenged Transaction 1 on the ground that it amounted to a wholly artificial arrangement whose sole purpose was to allow Company TP to benefit from the French participation-exemption regime with respect to the dividends received from Company Z B PShares.

The tax authorities inter alia elaborated that the FSA essentially was a collateralized stock loan in respect of which Company TP was not exposed to any Company Z shareholder risk as (i) the reimbursement of its investment into the B PShares was guaranteed by the FSA, and (ii) the payment of the dividends was guaranteed by the GA. The tax authorities thus considered that the dividends distributed in respect of the B PShares were to be recharacterized as interest payments, and thus to be subject to corporation tax under the standard applicable regime.

The tax authorities also mentioned that Transaction 1 was treated, for US tax purposes, as an indebtedness resulting in the payment of the deductible interest.

The French tax authorities challenged Transaction 2 on the ground that it amounted to a wholly artificial arrangement whose sole purpose was to allow the deduction of interest expenses to Company TP.

The tax authorities inter alia elaborated that (i) the combination of the capital increase of Company B, the Loan, and the reimbursement of the shareholder loan essentially was a share capital increase of Company TP, (ii) Company B was not autonomous vis-à-visCompany X in terms of material means and decisional process, and (iii) Company B was not bearing any financial risk with respect to the financings provided (the risk being borne by Company X as head of the group).

The Taxpayer's Position. With respect to Transaction 1, Company TP articulated the following arguments:

  • Given the absence of third parties in the capital of Company Z, Company TP and Company Y had a common interest in jointly controlling Company Z, i.e., the investment of Company TP in the B PShares carried an actual shareholder intent;

  • As Company Z is a Delaware corporation, accordingly its corporate life and the characterization of the dividends it pays to its shareholders may be analyzed only from a Delaware corporation law perspective;

  • Under a general  French tax law principle, a given company is free to choose its financial structure (debt versus capital);

  • Transaction 1 did not amount to a collateralized stock loan as Company Y did not subscribe the B PShares and could not have remitted them as collateral;

With respect to Transaction 2, Company TP considered that the tax authorities have not demonstrated its exclusive tax motivation as Transaction 2 had no consequence on its taxable result (i.e., Company TP substituted the interest paid to Company X by the interest paid to Company B).

The AoL Committee Q4 Opinions. With respect to Transaction 1, the AoL Committee found that, while formally documented as an equity investment of Company TP into Company Z, it essentially was a contractual arrangement whose purpose was the refinancing of Company Y by Company TP through a stock loan with the B PShares posted as collateral for such loan. 

The AoL Committee consequently considered that the tax authorities rightfully applied the AoL procedure as Transaction 1 should be regarded as a wholly artificial arrangement whose sole motivation was to allow Company TP to benefit from the French participation-exemption regime with respect to the dividends received from Company Z while the same dividends were viewed as deductible for US tax purposes.

In order to justify its opinion, the AoL Committee listed the following points:

  • The Contribution actually benefitted to Company Y as a result of the various loans provided by Company Z;

  • The B PShares were (i) initially supposed to be subscribed by Company Y and (ii) eventually transferred to Company Y pursuant to the FSA;

  • Company TP undertook to sell the B PShares to Company Y within a period of five years, renewable once, pursuant to the FSA;

  • The rights attached to the B PShares, together with the FSA and the GA, effectively gave to Company TP rights similar to those that Company TP would have had under a stock loan collateralized by the B PShares;

  • There was no economic motivation to Transaction 1, whose sole purpose was to reduce the group taxable result in France while maintaining a deductible interest for US tax purposes;

  • Company Z had no employee, was not carrying out any activity, did not invest into any asset other than the US operating companies received upon the Contribution, did not receive any dividends from such companies, and was managed by Company Y directors (whereas Company TP did not have any representative at the Board of directors of Company Z).

With respect to Transaction 2, the AoL Committee found that the tax authorities could not avail themselves of the AoL procedure as the taxable result of Company TP was not reduced as a result of the operations carried out (i.e., the same amount of interest would have been deducted by Company TP with or without Transaction 2).