• Market Rate Interest
  • November 12, 2015 | Authors: Nicolas Andre; Siamak Mostafavi
  • Law Firm: Jones Day - Paris Office
  • The Appeal Court of Versailles had to deal with a situation where the FTA had taken the view that an interest rate paid by a financial institution to certain affiliates was abnormally high and therefore non-deductible.

    For the purposes of the above challenge, the FTA argued that the above financial institution should be deemed to benefit from a certain rating from the rating agencies, because the group to which it belonged was rated as such. Accordingly, the fraction of any coupon above the one borne by a similarly rated borrower should be viewed as excessive.

    In its decision dated May 28, 2015, the Appeal Court took the view that the simple fact that an entity belongs to a group with a certain rating does not mean that the credit risk of such entity (which is the basis for the computation of market rate interest charged to it) should be deemed to reflect such rating.

    In this case, the FTA argued that the borrower had received an "AA" rating from a rating agency, due to the financial support of its parent company which was rated "AAA." In reality, the financial support provided by the parent was only in respect of certain long-term borrowings of the borrower in the past, i.e., the support did not cover the borrowings for which the FTA had actually challenged the rate of interest. Accordingly, the Appeal Court took the view that the FTA may not challenge the rate of interest paid by the borrower on the simple grounds that the rating of its parent would have enabled a lower financing cost; in other words, unless the parent guarantees the borrowings of its subsidiary, only the actual credit risk of the subsidiary is relevant for determining if a given interest rate is excessive or not.