Cashpooling and 0% interest rate

The investment at a rate of 0%, resulting from the application of the contractually agreed rate formula, of a cash surplus with a cash pool leader entity does not, in itself, constitute an abnormal renunciation of revenue and a transfer of profits abroad in the meaning of Article 57 of the French Tax Code. That is the position of the French Administrative Supreme Court (Conseil d’Etat) from two recent decisions (CE, 20 Sept. 2022, n° 461639, and n° 461642) in which the Court ruled out that it was necessary to determine whether the French subsidiary had acted in its own interest in entering into the cash agreement in question and what obligations resulted for the subsidiary.

The Administrative Court of Appeal of Versailles (lower stage of the procedure) could not simply establish that the lending company (the French subsidiary being a cashpool participant) could have obtained a higher rate from independent financial institutions and that a zero interest rate had no counterpart in the financing of treasury needs, without investigating whether the company had acted in its own interest or not.

Following the conclusions of the Public Prosecutor, proposing an enlightening analysis grid, the Administrative Supreme Court did not follow the lower judger and referred back to the administrative court of appeal (on remand) the task of studying the contractual commitments made by the parties, such as whether or not the cash surpluses had to be deposited with the centralizing company, or whether it was possible to renegotiate the cash pooling contract and its financial terms.

This decision provides expected elements to solve practical issues of financings based on reference rates such as Euribor or Eonia, which have recently became zero - or even negative - following the gradual fall in key rates in recent years.

The terms of application of this analysis, which focuses on compliance with contractual commitments, are now in the hands of the Administrative Court of Appeal of Versailles.  Nevertheless, we already recommend that groups of companies having applied zero % or negative interest rates review their centralized cash flow agreements in the light of such decision.