Inland Revenue’s claim that Frucor’s capital restructuring amounted to tax avoidance was dismissed by the High Court. Tax deductions totalling $22.4 million for the 2006 and 2007 tax years were at stake with similar deductions for subsequent tax years hanging on the High Court’s ruling.
Inland Revenue took exception to a financial arrangement seeing Frucor Holdings issue a convertible note to Deutsche Bank New Zealand with a forward purchase, by holding company Danone Asia Pte Ltd, of shares Deutsche Bank could call for under the convertible note. In economic terms, this was a five year $204.42 million loan with interest at 6.5 per cent. Inland Revenue alleged $55 million of the $66 million interest paid was in fact non-deductible repayment of principal. Frucor, known as Danone Holdings NZ Ltd at the time of the transaction, is a wholly-owned subsidiary within the Danone group, owned ultimately by France-based Groupe Danone SA.
Evidence was given of Deutsche Bank touting for business in 2002 offering alternative funding sources. Danone had recently bought Frucor for $297.5 million, funded with an almost equal split between debt and equity. The commercial benefits offered through Deutsche Bank’s financing were a more economic debt:equity split at 63:37, a currency hedge with debt capital in New Zealand dollars and reduction in group liability for tax in France. There was evidence that Deutsche Bank’s pricing of the convertible note left a minimal margin on its loan. It received a $1.8 million fee for setting up the arrangement. Unusually, Deutsche Bank agreed to pay a fee to Danone to guarantee Danone’s performance of the deal.
Inland Revenue alleged the entire arrangement was artificial. A plain vanilla loan would serve the stated commercial purpose. It said the $204 million paid by Deutsche Bank for the Danone convertible note was funded in part by having Singapore-based Danone Asia immediately paying $149 million in a forward purchase of the shares to be issued in five year’s time to Deutsche Bank pursuant to the convertible note. Interest cannot be claimed on a $204 million dollar loan when in effect less than $204 million was borrowed, it said.
Justice Muir said Frucor did receive $204 million dollar cash. It attracted interest and this interest was paid over the life of the convertible note. A debt equity swap, extinguishing a debt by an issue of shares, is common commercial practice. Doing so does not amount to tax avoidance. One of the commercial benefits was to minimise tax payable by companies in the Danone group, in both France and Singapore. Reductions in group offshore tax liability does not amount to tax avoidance in New Zealand, Justice Muir said.
Tax benefits engineered by Danone have been blocked since July 2018 with new tax rules; part of a world-wide move to counteract tax base erosion and profit shifting.
Frucor Suntory New Zealand Ltd v. Inland Revenue – High Court (5.11.18)
18.221