France: The SAP Case - The Difficulty for Tax Courts when Handling Negative Interest Rates

Facts

SAP France, a French affiliate of the German group SAP, signed a cash pooling contract with SAP SE (German-based parent company), according to which all cash advances would be remunerated at EONIA -0.15%. During the years 2012 and 2013, which were audited by the French Tax Administration, SAP France deposited between EUR 132 million and EUR 432 million into the cash pool. However, at that time, EONIA was such that EONIA -0.15% would have been a negative rate – meaning that SAP France would have had to pay interest on the amounts deposited. To prevent this, the contract contained a flooring mechanism, by which interest rates would be floored at 0%. SAP France therefore deposited its cash at 0%.

This was challenged by the French Tax Administration, which considered that SAP France should have perceived interest on the amounts deposited. The reassessment was subse­quently confirmed by both the administrative court of Montreuil and the administrative court of appeal of Versailles¹.

A debatable reassessment

The reassessment appears debatable on at least two grounds: in principle to begin with, and in how it was calculated too.

Generally speaking, the administrative court of appeal of Versailles acknowledged that the 0% interest applied should be viewed as an uncompensated advantage granted by SAP France to SAP SE. By acknowledging that the 0% interest rate constituted an uncompensated advantage granted by SAP France to SAP SE, the administrative court of appeal of Versailles is concluding that the FTA has correctly furnished the required proof. This is debatable for several reasons, mainly in that:

• the 0% rate is actually an exception to the contractual rule, according to which a negative rate should have been applied: flooring the rate at 0% is therefore an advantage granted by SAP SE to SAP France, and not the other way round;
• even though SAP France is not remunerated on its deposits, the fact remains that it draws several advantages by participating in the cash pool and depositing its excess cash, such as better cash management and better access to funds should the need arise. Therefore, even if the 0% rate were to be seen as an advantage (which it should not), it is hardly uncompensated.
   

Moreover, the way the reassessment was calculated also seems highly debatable: the French Tax Administration considered that the proper remuneration for these cash deposits was the official rate for overnight deposits as published by the Banque de France, which was between 0.15% and 0.18% during the audited years. This is also questionable insofar as, to the best of our knowledge, this rate is not used by any major financial institutions in calcu­lating market rates for loans or advances, whereas the EONIA rate is a widely-used refer­ence for this exact purpose. It is therefore unclear why the Banque de France rate, which is mainly used for individual persons (e.g.: for an overdraft fee if a person’s banking account goes negative) would be judged as more relevant than EONIA for an intragroup loan.

While it is not clear yet if other courts will take similar positions, it can only be recommend­ed that any company having dealt with similarly floored rates should prepare an in-depth justification of them. Moreover, this may lead to complicated situations of double taxation as it seems doubtful whether, in this case for example, the German tax authorities would agree that the German company should have paid interest to the French company when the contractually agreed interest rates were negative.

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