Confirmation of Constant Praetorian Solution for Article 238 A of the CGI
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Article 238 A, CGI, tax-advantaged regimes, remuneration, third parties, Council of State, proof, real transactions, non-excessive remuneration
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Abstract
This document outlines the conditions for applying Article 238 A of the CGI when remunerating a third party residing in a country with a tax-advantaged regime. The Council of State's judgment provides a constant and pragmatic approach to proof, emphasizing the importance of real transactions and non-excessive remuneration. A specific tax analysis and advice are recommended to document and consolidate the contractual approach chosen by the group or contributing company.
Extract
[...] Council of State, 3rd and 8th sub-sections August 2005, n° 275983, Min. v. Sté Électromécanique du Nivernais The question raised before the Council of State relates to the conditions of application of article 238 A of the CGI. In this case, the Société Électromécanique du Nivernais (SELNI), which manufactures electromagnetic components, wishes to deduct from its results the commissions equal to of the amount of its sales on the Italian market, which it has paid to a company established on the Isle of Man, where it benefits from a tax-advantaged regime. [...]
[...] Therefore, the Administration considered that these commissions constituted a hidden remuneration within the meaning of article 111 c of the CGI. It therefore imposed the Société Électromécanique du Nivernais to withhold at source, in accordance with the provisions of article 119 bis of the CGI. In a judgment delivered on 28 October 2004, the Administrative Court of Appeal of Lyon refused to recognize the hidden nature of the commissions paid to the SELNI company. Consequently, it granted it a discharge of withholding tax. [...]
[...] A pragmatic evaluation of the proportionality of remuneration The application of Article 238 A of the CGI requires not only the existence of real transactions justifying the payment of the remuneration(s), but also that these remunerations be deemed not excessive. In this case, the Council of State considers that the commission, whose rate was of the sales amount on this market, is not excessive. This assessment is in line with the case law, which has already considered commissions to be proportionate with rates of up to or even 10% (see, for example, CE Dec n° 55790; CE Feb n° 220732; CE Nov n° 60836 and n° 103023). [...]
[...] Presenting the interest of recalling a constant and pragmatic jurisprudence The originality of the Min. Sté Électromécanique du Nivernais judgment of August lies in the precision brought to the assessment of the proportionate nature of the remuneration paid (II.). I. Conditions of application of Article 238 A of the CGI In the judgment of August the Council of State recalls a well-established solution since 2001 As for the probative conditions of the application of Article 238 A of the CGIB.). [...]
[...] Indeed, it had concluded an agreement for the development of sales on the Italian market, on which a significant increase in deliveries had been observed. The Council of State notes that the company Électromécanique du Nivernais produces the agreement concluded on 17 August 1988 with the Fleet Electrical Components Limited for the purpose of developing its sales on the Italian market, in exchange for the payment of a commission based on the turnover achieved. In addition, the Council of State checks for the absence of a community of interests between the two parties. [...]
