Hidden benefit: does withholding tax apply?
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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 charges. They had been recorded by the parent company but had not been reinvoiced, or only partially, to the subsidiaries concerned.
The tax administration considered that this assumption of costs constituted an advantage granted to the subsidiaries, liable to be qualified as a hidden advantage.
The procedure
Following an audit, 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 French General Tax Code (CGI).
It should be noted that no adjustment was made with respect to corporate income tax. Indeed, the expenses had been recorded and then added back extra-accounting wise into the declared taxable income.
The dispute was first examined by the Administrative Court, and then by the Administrative Court of Appeal of Versailles.
The case was finally brought before the Conseil d'État (Council of State), which was asked to clarify under what conditions the payment 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 hidden remuneration 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 constitutes the foundation of the rules relating to transfer pricing.
Issue
The question before the judge was therefore to determine whether the payment of expenses for the benefit of foreign subsidiaries, in the absence of recharging, could be qualified as a hidden benefit within the meaning of Article 111 c), leading to 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 should normally be borne by its subsidiaries is likely to constitute a benefit within the meaning of Article 111 c) of the CGI (French General Tax Code).
In particular, when the parties have a mutual interest relationship, the absence of invoicing or under-invoicing of services creates a presumption of a transfer of value without consideration (libéralité). It is then up to the company to demonstrate that it acted in its own interest.
In the present case, Société Générale invoked in particular:
support for the solvency of its subsidiaries in the context of the financial crisis;
increasing the value of its holdings;
the international mobility policy for its executives.
However, the Conseil d’État considers that, in the absence of precise and individualised justification, these elements are not sufficient to establish an actual consideration for the parent company.
The indirect valuation of a holding does not, on its own, constitute a sufficient self-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 classified as a hidden benefit when no real economic counterpart is demonstrated.
The French Council of State (Conseil d'État) also clarifies the conditions for characterizing the hidden nature of a benefit: a benefit is of a hidden nature when it is not explicitly revealed by the accounting, as the accounting must inherently show the existence of the liberality.
It further specifies that the simple global reintegration of expenses into the tax profit is not sufficient to rule out the hidden character if the benefit, its beneficiary, and its amount are not clearly identified.
An extra-accounting 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 the beneficiary subsidiaries or the corresponding amounts. The hidden character is therefore upheld.
The Council of State also points out that treaty provisions relating to dividends only apply to distributed income when the treaty expressly refers to them.
However, in this case, the Franco-Chinese tax treaty of 1984 does not mention income subject to the internal distribution regime. Hidden 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 use the concept 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.
