By confirming that a foreign bank can freely choose how to finance a French branch, the Paris Administrative Court of Appeal has applied the principle established in case law, that the tax authorities cannot interfere in a company’s financial management.
In the case at hand, the tax authorities considered that the French branch of Caixa Geral de Depositos, a bank governed by Portuguese law, had been insufficiently capitalised by its head office and that as a consequence the branch had to borrow funds in excessive proportions. The tax authorities determined the insufficient capital funding with reference to the solvency ratios provided by French banking regulations and international standards, and with reference to the ratio of the branch’s Portuguese head office.
Approving the Paris Administrative Court’s decision, the Administrative Court of Appeal found that the choice made by a Portuguese banking establishment to allow its French branch to finance itself partly on the market rather than fully financing it by contributing capital, could not be disputed pursuant to Article 209, I of the French Tax Code and Article 7 of the France-Portugal Tax Treaty, insofar as the purposes or effects of these texts are not to allow the tax authorities to assess whether such choice is normal. In this respect, this decision states that the principle of territoriality resulting from these provisions could have allowed the tax authorities to challenge interest deductions on grounds, for example, that the loan’s purpose did not conform to the branch’s activity or that the loan’s remuneration was excessive. To the extent that the tax authorities did not adopt such arguments, the interest the branch paid to third parties for the loan was consequently accepted as a deduction from its earnings.
The tax authorities have appealed against the Court of Appeal’s decision to the Administrative Supreme Court.