The French Supreme Court (Conseil d'Etat) rules that foreign banks are free to choose between equity and debt for the purpose of financing their French branches.

In recent years, the French Tax Administration (FTA) has tentatively rejected all or part of foreign banks French branches' interest payments to the head office, pursuant to thin cap rules resulting from both the French tax code and OECD comments on the attribution of profits to permanent establishments.

Lower French courts had overturned those reassessments on the grounds that nothing in French law nor in the arm's length principle precludes banks from favoring debt over equity, but there was no clear definitive case law yet on this issue.

On 11 April 2014, the French Supreme Court upholds lower courts decisions in 3 cases (Société UniCredit representing the rights of Banco di Roma, Société Caixa Geral. de Depôsitos and Hypo und Vereinsbank) and rules that relevant treaty provisions (article 7.1 read in conjunction with OECD comments released when the treaty entered into force) do not allow the FTA to apply to French branches equity requirements that would have applied had the branch been a separate French entity.

Accordingly, foreign banks are free to finance their French branches by debt or equity as long as remuneration served is arm's length. This solution mitigates the risk of double taxation resulting from a reassessment made in France. One may wonder to which extent this court case could be extended to other financial industries such as insurance which is facing the same types of issues.

It results from the above that for the time being the French Supreme Court does not follow the OECD's economic approach set out in its Report on the Attribution of corporate income to permanent establishments dated 22 July 2010. This report considers that branches should receive enough equity to cover their functions, assets and risks, etc. (with no specific reference to a given ratio). One may wonder to which extent in the medium or long term, French courts will have no other choice but following the economic approach for capital allocation advocated by the OECD.