The Montreuil Administrative Court has ruled in the case of Ingram Micro that a distribution of dividends financed by a simultaneous issue of bonds redeemable in shares subscribed by the shareholder was an abuse of tax law, in line with the recent opinion issued by the Committee of Abuse of Tax Law in another case with very similar facts.
In the case at hand, Ingram Micro France had decided to make a dividend distribution to its American shareholder and simultaneously issued ORAs, for all of which the shareholder had subscribed. Apparently, the dividend did not lead to any significant movement of funds between the two companies as the debt from the ORAs issue was almost fully offset by the debt from the dividend distribution. The dividend distribution was subject to the 5 percent withholding tax then in force and the interest to remunerate the ORAs was deducted in full for tax purposes by Ingram Micro France.
The taxpayer argued in particular that it had the freedom to decide on how to finance the dividend distribution, that using another type of debt instrument would also have enabled it to deduct the interest expenses and that this transaction allowed it to maintain its cash position, its financial stability and to limit its overcapitalisation. It also argued that employees had an interest in such a transaction, as it increased the profit-share paid to them (due to the decrease in shareholders' equity).
The Court rejected these arguments and ruled that the facts in this case were an abuse of law to the extent that (i) the interest due could not exceed the accounting profit before taxes and interest, (ii) the transaction did not lead to a movement of funds in the amount of the ORAs, and (iii) the ORAs were not a debt, but were classified for accounting purposes as shareholders’ equity. Therefore their issue did not actually modify the company’s position since it did not lower the shareholders’ equity. It also rejected the argument regarding the employees’ interest in such a transaction, as the transaction was temporary in nature (capital increase in fine) and reduced profits due to the interest deducted.
The Court could have been clearer with respect to the abuse of law criteria if it had more explicitly analysed the legislature’s intent. This decision is also somewhat confusing in that it implies that its outcome could have been different had the taxpayer been able to demonstrate that the fact of choosing ORAs represented a greater economic interest than choosing other debt instruments (apparently this would not have shielded it from the Court’s re-classification of the interest as dividends, but only from being classified as an abuse of law).