Hidden benefit: does the withholding tax apply?
News
Published
Between 2008 and 2011, Société Générale covered various expenses for the benefit of several of its foreign subsidiaries.
These expenses notably concerned IT services, support services, as well as certain staff-related costs. They had been recorded by the parent company but had not been re-invoiced, or only partially, to the subsidiaries concerned.
The tax administration considered that this assumption of costs constituted an advantage granted to the subsidiaries, which could be qualified as a hidden benefit.
The procedure
Following an audit of the accounts, the tax administration considered that these benefits should be regarded as income distributed to foreign companies and, as such, subject to the withholding tax provided for in Article 119 bis of the General Tax Code (CGI).
It should be noted that no adjustment was made with regard to corporate income tax. Indeed, the expenses had been recorded and then reintegrated extra-accountingwise into the declared taxable income.
The dispute was first examined by the administrative court, then by the Administrative Court of Appeal of Versailles.
The case was finally brought before the Conseil d'u00c9tat, which was asked to specify under what conditions the assumption of expenses for the benefit of foreign subsidiaries can be characterized as an undisclosed benefit.
The applicable legal framework
Several provisions of the General Tax Code were at issue.
Article 111 c) of the CGI qualifies undisclosed compensation and benefits granted by a company as distributed income.
Article 119 bis of the CGI provides that income distributed to beneficiaries established outside of France may be subject to a withholding tax.
Finally, Article 57 of the CGI allows the administration to adjust the profits of a French company when it indirectly transfers benefits to a related company located abroad under conditions different from those that would have been practiced between independent enterprises. This provision forms the basis of transfer pricing rules.
Issue
The question put to the judge was therefore to determine whether the payment of expenses for the benefit of foreign subsidiaries, in the absence of reinvoicing, could be qualified as a hidden benefit within the meaning of Article 111 c), resulting in the application of the withholding tax provided for in Article 119 bis.
The decision of the Council of State
The Conseil d’État (French Administrative Supreme Court) rules that the assumption of expenses by a parent company that normally fell to its subsidiaries is likely to constitute an advantage within the meaning of Article 111 c) of the CGI (General Tax Code).
In particular, when the parties have mutual interests, the absence of billing or under-billing for services creates a presumption of a transfer without consideration (libéralité). It then falls to the company to demonstrate that it acted in its own interest.
In this case, Société Générale relied in particular on:
supporting the solvency of its subsidiaries in the context of the financial crisis;
the valuation of its equity holdings;
the international mobility policy for its executives.
However, the Conseil d’État considers that these elements are not sufficient, in the absence of precise and individualized justification, to establish an effective benefit for the parent company.
The indirect valuation of an equity holding does not, on its own, constitute a sufficient benefit of its own interest.
The scope of the decision
This decision serves as a reminder that the assumption by a parent company of expenses normally borne by its subsidiaries can be qualified as an undisclosed benefit when no real economic consideration is demonstrated.
The Council of State (Conseil d'État) also clarifies the conditions for characterizing the undisclosed nature of a benefit: a benefit is of an undisclosed nature when it is not explicitly revealed by the accounting records, as the accounting records must, by themselves, show the existence of the gratuity.
It further specifies that the simple global reintegration of expenses into the taxable income is not sufficient to rule out the undisclosed nature if the benefit, its beneficiary, and its amount are not clearly identified.
An out-of-books reintegration may be taken into account for this purpose, provided that it explicitly reveals:
the existence of the benefit;
the identity of the beneficiary;
the individualized amount.
In this case, the reintegrations carried out were aggregated and did not allow for the precise identification of either the beneficiary subsidiaries or the corresponding amounts. The undisclosed character is therefore upheld.
The Council of State also points out that treaty provisions relating to dividends apply to distributed income only when the treaty expressly refers to them.
However, in this case, the 1984 Anglo-French (strictly, French-Chinese) treaty does not mention income subject to the internal regime of distributions. Undisclosed benefits therefore do not fall under the treaty article relating to dividends and remain taxable in France.
Finally, the ruling confirms that the tax administration can rely on the basis of distributed income to qualify certain intra-group flows, independently of the rules relating to transfer pricing.
For international groups, this decision illustrates the particular attention that the tax administration may pay to unbilled or insufficiently justified intra-group flows.
