Structured financial transactions used to finance purchase of Frucor Beverages by French food and drinks giant Danone in 2003 were struck down by the Court of Appeal as tax avoidance, reducing Frucor’s claimed tax deductions by $55 million.
The Court of Appeal was told of investment banks falling over themselves in the early 2000s offering customers funding deals with a side serving of juicy tax benefits. Danone went with Deutsche Bank and the deal on offer for its $294 million purchase of then-listed Frucor. Deutsche Bank was so keen to get the work that it cut its margin to nearly zero and let Danone set the Bank’s fee: $1.8 million.
Funding for Frucor’s purchase came from Danone Singapore. Inland Revenue challenged tax deductions claimed by Frucor. It said what was in effect a five year Deutsche Bank $204 million loan at 6.5 per cent was dressed up as an equity investment through use of a convertible note issue. Nominally, Deutsche Bank was agreeing to take an equity stake in Frucor. In fact, it had had already onsold these shares in a forward sale to Danone. A banking expert said in evidence this was a ‘pretend’ convertible note transaction. No corporate head office in its right mind would be completing an acquisition by taking shares in its target acquisition with an intermediary investment bank acting as conduit being the holder of convertible notes issued by the company being acquired. The deal made no commercial sense, other than tax benefits accruing.
The Court of Appeal ruled the transaction was ineffective for tax purposes. Deutsche Bank’s purchase of convertible notes to finance Danone’s acquisition of the company issuing the convertible note was contrived and artificial. Convertible notes are commonly used to raise working capital.
Frucor is required to redraw its tax accounts for the five year period of the Deutsche Bank convertible note. Danone sold Frucor to Japan’s Suntory in 2009.
Inland Revenue v. Frucor Suntory New Zealand Ltd – Court of Appeal (3.09.20)
20.149