Convertible Bonds, Transfer Pricing and the Free Movement of Capital

Written by Jean-Florent Mandelbaum, Victor Camatta and François Brenner

Published in the tax law journal “Revue de Droit fiscal” – LexisNexis

“In a decision dated 17 December 2025, the Conseil d’État confirms that, where the sole shareholder subscribes to convertible bonds issued by its subsidiary, the value of the conversion option is ‘necessarily nil’. Such a transaction cannot be compared to an arm’s length situation and must therefore be regarded as intragroup financing remunerated below market value. The Conseil d’État confirms the existence of an indirect transfer of profits, constituting a deemed distribution subject to withholding tax, without the free movement of capital being capable of being invoked.

This study examines that decision as well as the areas of uncertainty it reveals. The systematic nature of the solution adopted — according to which the value of the conversion option would be ‘necessarily nil’ — continues to raise questions, particularly given the complexity of business life. Furthermore, by setting aside the Sofina case law on the ground that the deemed distribution would ‘act as a screen’ between the income and the investment, the Conseil d’État adopts a narrow conception of the free movement of capital whose compatibility with CJEU case law could be questioned.” Read more