On April 11, 2014, the Conseil d'Etat (French Supreme Court in most tax matters) ruled, in three separate cases, on the tax implications of the financing of the French branches of three foreign financial institutions (Banca di Roma Spa (now Unicredit), Bayerische Hypo und Vereinsbank AG, and Caixa Geral de Depositos).
In each of the three cases, the Conseil d'Etat decided that the foreign head office had no obligation to allocate a minimum amount of capital to the operations of the relevant French branch. Accordingly, subject to other standard limitations (arm's-length rate of interest, etc.), the interest paid by the branch on its indebtedness should be fully tax deductible.
The traditional position of the FTA has been that if the capital allocation to a French branch is not sufficient, then the interest paid by the branch, on the debt financing such insufficiency, should not be tax deductible. In the FTA's view, whether or not a given capital allocation is sufficient should be determined on the basis of the relevant solvency rules applicable to the branch treated on a stand-alone basis.
Technically, the FTA was referring to Article 209-I of the French General Tax Code and Article 7 of the relevant tax treaty between France and the jurisdiction where the head office is located (i.e., Italy, Germany, and Portugal in the cases at hand); these domestic and international rules essentially provide that the operations of the French branch of a foreign entity should be taxed in France to the extent of the profit that is imputable to the branch.
The Conseil d'Etat ruled that while the above provisions indeed enable France to tax the branch's profits, they could not be interpreted as allowing the FTA to discuss and challenge the choice made by the foreign office to allocate or not a certain amount as capital of the branch. Specifically, the Conseil d'Etat stipulated that none of the above provisions allows the FTA to consider that any allocation of capital to the branch should be computed on the basis of the relevant solvency ratios as if the branch were organized on a stand-alone basis (i.e., as a subsidiary).
While the decisions of the Conseil d'Etat went in favor of the relevant taxpayers, it is important to note that the latest OECD comments (published in July 2010) instead support the FTA's view that, for the purposes of the relevant international treaties, the branches should be treated as stand-alone entities.