(Versailles Administrative Court of Appeal, Jul. 18, 2013, no. 12VE04203 and 12VE04358, BNP Paribas)
In two decisions on July 18, 2013, the Versailles Administrative Court of Appeal, before which the French Administrative Supreme Court had remanded the claims after quashing prior decisions, made a flexible assessment of the evidence produced by taxpayers to prove that the principal purpose for its subsidiaries' operations was not to avoid French taxes.
The flexibility of the Court's in concreto analysis is welcomed considering that the regime creates a presumption of tax evasion with serious consequences and given the fact that the "negative" evidence requested is difficult for a taxpayer to provide.
BNP Paribas had subsidiaries, one (i) in Guernsey, which had a private banking business for international individuals attracted by Guernsey's banking and tax regulations, and one (ii) in Hong Kong, which managed on the Korean market the Asian currencies held by the group's entities. These entities were subject to low tax regimes within the meaning of Article 238 A of the French Tax Code.
BNP Paribas notably argued that its subsidiaries conducted a commercial business and made profits that could not have been made in France:
- in the first case, because the individual clients were attracted by Guernsey's banking and tax legislation and wished to make fiduciary deposits in Guernsey,
- in the second case, (i) because there were constraints related to the time difference given the need to intervene in real time in the Korean bonds market and, (ii) because the company needed staff established locally because of its better knowledge of the markets and of the Asian interlocutors.
The interesting lesson to be learned from these decisions is that the Court ruled in favor of BNP Paribas, notably stating that the fact that French tax residents could have been included in the subsidiary's clients and that funds could have been collected in France had no bearing on the case. The Court thereby emphasized the fact that Article 209 B's only purpose is fight against possible tax evasion by a French company and not tax evasion of the clients of one of its subsidiaries in a country or territory with a low tax regime.
These decisions will likely have the same value with the new wording of the French CFC rules (Section 209 B of the French Tax Code).
It should be noted that, in a decision handed down on December 26, 2013, the French Administrative Supreme Court retained its narrow interpretation of the notion of a "local market", which also allowed one to rebut the presumption of tax evasion when industrial or commercial transactions are performed in the local market (applicable to current legislation and to the notion of an effective business conducted in the territory of a State with a preferential tax regime where the relevant company is established).