(Administrative Court of appeal of Versailles, February 18, 2014, n°11VE03460, SAS Nestlé Entreprises)

The company Aquarel Europe (now known as Nestlé Waters Europe "NEW"), had production and distribution activities of mineral water bottled under the brand "Nestlé Aquarel". It paid royalties to three Swiss associated companies in particular for the use of the Nestlé brand. Thus, NEW was entitled to combine the brands "Nestlé" and "Aquarel" on its bottles of water in order to promote a positive image of its products and improve its sales in the European market.

After a tax audit for fiscal years 2001 and 2002, the French Tax Administration ("FTA") considered that the payment of these royalties involved an indirect transfer of profits abroad under Article 57 of the French Tax Code ("FTC"). The two main arguments of the FTA were the following:

  • Absence of use value of the brand Nestlé in the bottled water market because the "Nestlé" brand, historically linked with dried products, did not have any recognition in the water market.
  • Commercial failure of the launch of the "Nestlé Aquarel" water by NEW with a revenue over the audited period which was always far below the advertising and promotional expenses.

The FTA concluded that there had been no return for the payment, by NEW, of these royalties. It added that the advertising and marketing expenses for the "Nestlé Aquarel" brand only had the effect of strengthening the "global power" of the Nestlé brand to the benefit of Nestlé S.A.

The lower administrative Court of Cergy-Pontoise ruled in favor of the FTA on July 8, 2011.

NEW, in its brief before the administrative Court of Appeal of Versailles, argued that the fact that the association of the brands "Nestlé" and "Aquarel" was beneficial to Nestlé S.A did not prove the absence of benefit and thus of return for NEW. Incidentally, the FTA did not provide any benchmarking studies enabling it to value the amount of the advantage obtained by Nestlé S.A. from the "co-branding". NEW also asserted that the fact that it did not and was not intended to make any profit, because it was in the process of market penetration, was insufficient to characterize an indirect transfer of profits abroad.

The administrative Court of appeal, in its decision dated February 18, 2014, ruled in favour of the taxpayer. The Court first decided on some of the specific facts of the case such as the use value of the "Nestlé" brand, given the water market saturation in Europe, and the brand image of Nestlé products, which according to the FTA, was limited to the sole dried and chocolate products.

Secondly, the Court ruled that the fact that the association by NEW of the brand "Nestlé" with the brand "Aquarel" did not procure any benefit to NEW, due to the costs of the necessary investments and low sales was insufficient to demonstrate  the lack of use value of the "Nestlé" brand in a market penetration phase. Thus, the Court considered that the lack of profitability of the exploitation of a brand does not necessarily lead to the conclusion that it lacks use value.

This decision is final as no appeal was submitted to the administrative supreme Court. This decision is especially interesting in the case where a brand license is granted to a subsidiary for the development of existing brands in new geographical zones or market segments, as well as in situations where the brand licensee is loss making due to a market penetration strategy.