Structure: EDFI (France) subscribed to convertible bonds issued by its 100 per cent UK subsidiary EDFE. The coupon was set at 1.085 per cent p.a. The French tax authority assessed the arm’s length rate at 4.41 per cent, treating the conversion option as having zero value in a wholly-owned structure.
The facts
Électricité de France International (EDFI), a French simplified joint-stock company and wholly-owned subsidiary of EDF SA, subscribed in 2009 to the entirety of convertible bonds (obligations convertibles en actions — OCA) issued by EDF Energy Limited (EDFE), its 100 per cent UK subsidiary, for a total consideration of €3,314,250,000. The OCA carried an annual coupon of 1.085 per cent and a conversion ratio set at a nominal share value of €1.367.
In September 2014, at maturity, EDFI exercised its conversion right and received EDFE shares with a market value of €1.76 per share — realising a conversion gain of €945,750,000. From EDFI’s perspective, the transaction had appeared straightforward: a below-market coupon accepted in exchange for a valuable conversion option, priced consistently with third-party convertible bond market conventions.
Following a tax audit, the Direction générale des finances publiques (DGFiP) disagreed. It determined that the arm’s length rate for the OCA was 4.41 per cent — the prevailing market rate for a plain straight bond — and that the difference between 1.085 per cent and 4.41 per cent constituted an indirect profit transfer from EDFI to EDFE under Article 57 of the Code général des impôts (CGI). Corporate tax adjustments were assessed against EDF SA as head of the French tax group for the years 2009 to 2013, and a 15 per cent withholding tax under Article 119bis CGI was assessed against EDFI on the deemed distribution to its UK subsidiary for the same period and for 2014.
The litigation
Tribunal administratif de Montreuil
EDFI and EDF SA challenged the assessments before the Tribunal administratif de Montreuil, which rejected the primary claims in July 2019 and January 2020 but granted relief on certain late payment interest.
Cour administrative d’appel de Versailles
The Cour administrative d’appel de Versailles initially ruled in favour of the taxpayers in January 2022, but the Conseil d’État annulled both appeal judgments in November 2022 and remitted the cases. On remittal, the Versailles court again largely rejected the taxpayers’ claims in November 2023, granting only limited relief on late payment interest for 2014.
Conseil d’État — 17 December 2025 — authority prevails
EDFI and EDF SA brought a further cassation appeal, challenging the withholding tax assessments and the late payment interest ruling. The DGFiP cross-appealed on the interest point. In its judgment of 17 December 2025, the Conseil d’État dismissed the taxpayers’ principal appeal and upheld the minister’s cross-appeal — leaving the assessments in full and reinstating the late payment interest for 2014.
ajiho commentary
The conversion option has zero value when the holder already owns everything
The Conseil d’État’s reasoning is precise and worth stating clearly. In a third-party convertible bond, the issuer accepts a below-market coupon because the conversion option it grants has positive value — the holder acquires an upside right in the issuer’s equity, and that value justifies the coupon discount. Here, EDFI already held 100 per cent of EDFE at the date of issuance. As sole shareholder, it could already direct new share issuances to itself at any time; the conversion option gave it nothing it did not already possess. The conversion was also economically neutral: before conversion EDFI held 100 per cent of EDFE plus a receivable of €3.314 billion; after conversion it held 100 per cent of a company whose net asset value had increased by exactly €3.314 billion through the discharge of the debt. Net patrimony: unchanged. The option had zero value, the coupon discount was unjustified, and the instrument had to be priced as a plain intra-group loan.
Instrument characterisation, not benchmarking
This case is not about which database was used or whether the comparables were appropriate. It is about a prior question: what is the correct instrument category against which to benchmark? EDFI argued, not unreasonably, that the 1.085 per cent coupon was consistent with third-party convertible bond market rates. The Conseil d’État accepted that this was true — but held it irrelevant. Because the conversion option had zero value in this configuration, the benchmark class was plain bonds, not convertible bonds. The arm’s length analysis must reflect economic substance, not legal form.
The conversion gain cannot offset the annual underpayment
EDFI argued that the €945 million conversion gain realised in 2014 exceeded the cumulative interest shortfall across 2009 to 2013, and that the transaction should therefore be viewed as economically whole. The Conseil d’État rejected this. The annual underpayment of interest in each of 2009 to 2013 constituted a separate taxable event in each year; a gain realised in a later year on a different instrument characteristic cannot retroactively compensate for income not recognised in prior years. This is a straightforward application of annual accounting principles, but worth noting for groups that seek to argue economic equivalence across instrument features.
Withholding tax and EU freedom arguments
The withholding tax assessment under Article 119bis CGI was upheld on the basis that the interest shortfall constituted a deemed hidden distribution (avantage occulte) to EDFE. EDFI’s arguments that this breached EU free movement of capital (invoking the Sofina line) and freedom of establishment were both rejected. The free movement argument failed because the deemed distribution arose not from the exercise of that freedom but from the grant of a covert advantage — a profit transfer, not a capital movement. The freedom of establishment argument failed because EDFE had in fact deducted interest at 4.41 per cent for UK tax purposes, meaning there was no net double disadvantage to compare against a hypothetical domestic group.
What this means for your business
Any group that has used convertible instruments in intra-group financing should ask whether the conversion feature has genuine economic substance in the intra-group context. If the subscriber already owns all or substantially all of the issuer’s shares, the conversion option may have zero or negligible value — and pricing the instrument using convertible bond market conventions will be difficult to defend.
The practical exposure is significant. If the coupon discount attributable to the conversion option is treated as an indirect profit transfer, both the underpaid interest (corporate tax) and the deemed distribution (withholding tax) are in scope. In France, the withholding tax rate under the 1968 and 2008 Franco-British treaties was 15 per cent; in other jurisdictions and treaty contexts the combined exposure could be higher.
Groups should also note that this analysis applies at the date of issuance. If the conversion option had positive value at issuance — because the subsidiary had external shareholders at that point, or because genuine optionality existed around future ownership — the pricing argument is stronger. But that case requires careful contemporaneous documentation. Retrospective arguments about option value will face the same evidential burden that EDFI faced here.
Case reference
Électricité de France International (EDFI) and Électricité de France (EDF) v Direction générale des finances publiques · Conseil d’État · N° 491165, ECLI:FR:CECHR:2025:491165.20251217 · 17 December 2025
Rapporteure: Mme Ophélie Champeaux. Rapporteur public: M. Romain Victor. Primary source: official judgment, Conseil d’État (conseil-etat.fr).