The present French Tax Update will discuss (i) the Draft Amending Finance Bill for 2014 (Projet de loi de finances rectificative pour 2014, 2014 PLFR) that is currently being discussed before the French Parliament (in addition to the Draft Finance Bill for 2015 (Projet de loi de finances pour 2015), (ii) noteworthy case law decisions recently issued by French tax courts, (iii) recent developments in respect of the double tax treaties entered into between France and each of China and Luxembourg, and (iv) filing obligations in respect of certain trust arrangements.



The 2014 PLFR proposes the introduction of a new provision which should enable certain non-EU funds to be eligible for the non-application of French withholding tax (WHT) to French-sourced dividends. The current position of the French tax authorities (FTA) is that only certain EU funds which are similar to French funds and which meet certain filing requirements are entitled to receive gross French dividends (or to obtain the refund of any French WHT).

The proposed provision would introduce a new rule whereby the same treatment would apply to non-EU funds if the provisions of an applicable international tax treaty signed with France effectively enables the FTA to obtain, from the relevant authorities of the jurisdiction where the non-EU fund is located, certain information with which to verify whether the fund is eligible or not for the exemption from the WHT on French-sourced dividends.


On June 12, 2014 (joined cases C 39/13, C 40/13 and C 41/13, SCA Group Holding BV and others), the European Union Court of Justice (EUCJ) ruled that the Dutch tax consolidation (fiscale eenheid) regime had to be amended as its exclusion of horizontal structures (e.g., two Dutch companies held by a non-Dutch company) constituted a restriction to the EU law freedom of establishment.

Although a French lower administrative court did not share such analysis (Cergy-Pontoise, October 3, 2012, n°1102790, Sté Zambon France), the French consolidation regime is in essence similar to the Dutch on this point. As a result, the French government decided to modify the French tax consolidation regime, and the 2014 PLFR contains several provisions which aim at allowing horizontal structures (e.g., two French companies held by a non-French company) to constitute a French tax consolidation group.

According to the draft proposal, several conditions would have to be complied with in order for two French sister companies to form a French tax consolidation group whilst their parent is a non-French company. Inter alia, it would be necessary for such parent company to be located in either a Member State of the EU, Iceland, Liechtenstein or Norway. Other usual conditions to be complied with in order to form a French tax consolidation group would also have to be complied with (e.g., the 95% holding threshold should be satisfied by all relevant companies, the parent company should not be held by a company that could itself be the head of a French tax consolidation group).

It should be noted that the non-French parent company will however not be able to elect to be the head of the French tax consolidation group. In its current form, the draft proposal indeed provides that one of the eligible French subsidiaries should be the head of the French tax consolidation group. Specific attention should consequently be paid to the choice of such head, as the French tax consequences attached thereto may be substantial (e.g., in case of an exit of the consolidation group, or in respect of intragroup reorganizations).

Additional provisions moreover adapt the specific rules which may apply under the French tax consolidation regime (e.g., so-called Charasse amendment, tax treatment of intragroup reorganizations, neutralizations and de-neutralizations of certain transactions), and provide for filing obligations which appear to be more burdensome than those applicable to standard French tax consolidation groups.

The proposed provisions would apply to fiscal years ended as from December 31, 2014. For prior fiscal years, relevant horizontal structures which have not been able to form a French tax consolidation group may nevertheless claim a refund of the relevant taxes on the basis of the EUCJ decision (e.g., claims for fiscal year 2011 would have to be filed before December 31, 2014).



Under the relevant French tax rules, when a French corporate taxpayer receives dividends in respect of its eligible participations in its subsidiaries, the dividends are 95% exempt (95% Exemption). An eligible participation represents at least 5% of the share capital (5% Threshold) and is held for a minimum period of two years; the non-voting shares are also entitled to the 95% Exemption to the extent the holding entity owns at least 5% of the share capital and of the voting rights.

In a decision dated November 5, 2014 (CE, November 5, 2014, n°370650, société Sofina), the Conseil d'Etat has shed more clarity on the meaning of the 5% Threshold. A Belgian entity holding a participation of 5% in the share capital of a French entity, but only 3.63% and 4.29% of its voting rights in two successive years, had requested that the relevant dividends not be liable to any French WHT.

Indeed, further to the Denkavit decision (EUCJ, December 14, 2006, C-170/05, Denkavit Internationaal BV), the FTA had agreed that, under certain circumstances, EU entities receiving French-sourced dividends should be exempt from the French WHT to the extent they would have been entitled to the 95% Exemption if they were French entities.

In this case, where the Belgian entity was holding less than 5% of the voting rights in the French entity, the FTA took the position that the 5% Threshold was not met, i.e., it should be understood as including at least 5% of the voting rights.

The Conseil d'Etat decided to uphold the position of the taxpayer by taking the view that no provision of the French tax code provides that the 5% Threshold should correspond also to a minimum 5% holding of the voting rights.

The current position may be then summarized as follows:

  • if the holding entity is receiving dividends in respect of voting shares, the ownership of 5% of the share capital is enough for the application of the 95% exemption, and no minimum voting rights is necessary;
  • if the holding entity is receiving dividends in respect of non-voting shares, the 95% Exemption is applicable only if it owns at least 5% of the share capital and of the voting rights.


A French entity had been holding 98.2% of the interest in a general partnership (GP) based in Delaware which, in turn, had owned more than 10% of the share capital of a US corporation. The French entity had taken the position that the dividends distributed by the US corporation, through the GP, should be eligible for the 95% Exemption. The FTA took the view that the 95% Exemption is not available when the relevant participation is held through a partnership.

The Conseil d'Etat, in a very recent decision (CE, November 24, 2014, n°363556, Artémis SA), sided with the FTA by taking the view that the 95% Exemption is based on a direct participation in the entity distributing the relevant dividends.

Given the fact that the GP would be assimilated to a transparent French partnership, rather than to a French corporation taxed on a stand-alone basis, the Conseil d'Etat took the view that the intermediation of the GP prevented the application of the 95% Exemption.

The Conseil d'Etat further took the view that Article 7 of the double tax treaty dated August 31, 1994 entered into between France and the United States (Treaty) may not be interpreted as enabling a French entity to look through a US partnership for the purposes of application of the 95% Exemption.

Article 7.4 of the Treaty provides that a partner in a partnership should be deemed to realize directly the underlying income generated by the partnership. The Conseil d'Etat took the position that this article should be interpreted only as enabling France to tax the dividends in the hands of the French entity which receives the dividends through the GP, and rejected the interpretation that the French entity should be deemed to receive directly such dividends (in which case the 95% Exemption would have been available).


A Luxembourg company (LuxCo) sold to a French company (FrenchCo) the shares it held into 7 Luxembourg companies (HoldCos), which in turn held 7 French real estate partnerships (sociétés civiles immobilières, PropCos), which in turn held real estate assets located in France.

FrenchCo subsequently wound up, under the French law TUP mechanism (transmission universelle de patrimoine, TUP, i.e., a form of dissolution that does not entail the liquidation of the dissolved entity), the 7 HoldCos, and then the 7 PropCos.

Prior to their wind-up, the 7 PropCos had performed a free revaluation of their assets (thereby giving rise to a gain amounting to the difference between the fair market value of the relevant real estate assets and their respective net accounting value).

Pursuant to the TUPs of the PropCos, the shares of the PropCos were written off the balance sheet of FrenchCo (which had received such shares pursuant to the TUPs of the HoldCos). For such purposes, FrenchCo applied the adjustments known as the Quemener adjustments (named after a Conseil d'Etat decision dated February 12, 2000, and pursuant to which capital gains arising from the disposal of shares into a French flow-through partnership must be adjusted by the profits/losses previously taxed/deducted, so that the neutrality of the tax regime applicable to flow-through partnerships is maintained).

As a result, FrenchCo (i) increased the acquisition price of the PropCos shares by the sum of (a) their taxable income (including the gain resulting from the free revaluation mentioned above) and (b) the losses arising from the TUPs of the HoldCos, and (ii) decreased such acquisition price by the amount of the profits arising from the TUPs of the PropCos.

The FTA first challenged the sale of the HoldCos to FrenchCo on abuse of law grounds. The lower tax court (Paris, July 18, 2012, n°1105856, Lupa Patrimoine France) however ruled in favor of the taxpayer.

Before the administrative court of appeal, the FTA dropped the abuse of law challenge to rather claim that the Quemener adjustments were not applicable in the contexte of a TUP. Such claim seemed somewhat surprising as the FTA has since considered, in a published ruling (2007/54/FE) subsequently incorporated within their official guidelines (Bulletin Officiel des Finances Publiques-Impôts), that the Quemener adjustments are applicable in the context of a TUP.

The administrative court of appeal (CAA Paris, February 18, 2014, n°12PA03962, min. c/ Sté Lupa Patrimoine France) rejected the FTA's claim, ruling that the gain resulting from the free revaluation mentioned above did give rise to taxable income in the hands of FrenchCo, and, as such, should increase the acquisition price of the PropCos shares pursuant to the Quemener case law. The FTA formed an appeal before the Conseil d'Etat.

Interestingly, it should be noted that this decision implicitly validates the application of the Quemener case law within an international context.


In another February decision (CE, February 12, n°358356, M. et Mme B), the Conseil d'Etat confirmed that an irregular option for a specific tax regime may not be invoked by the FTA towards the taxpayer who made such option, notwithstanding the so-called appearance theory (théorie de l'apparence).

In the case at hand, a family-owned French limited liability company (société à responsabilité limitée, SARL) opted to be treated as a flow-through partnership for tax purposes (such option being only open to SARLs that are family-owned). In order to be valid, such option had to be signed by all the shareholders. However, the option sent to the relevant tax office was signed by one shareholder only.

Being formally irregular, the option was not valid. The FTA considered that it was nevertheless binding on the signing shareholder. Prior case law (Dijon, February 6, 1996, n°93-6907, Muller) already made clear that non-signing shareholders could not be bound by an irregular option; the situation of the signing shareholder was however unclear.

The Conseil d'Etat ruled that an irregular option may not be invoked by the FTA, be it towards non-signing or signing- shareholders, inter alia because the signature of all shareholders is a condition of the validity of the option. Interestingly, the Conseil d'Etat thereby rejected the appearance theory that was put forward by the FTA on the ground that such theory does not apply to tax options which, although irregular, are expressly communicated to the FTA.

Such decision should therefore clarify the treatment applicable to certain tax options that were irregularly made.



A specific bill dated November 26, 2014, has ratified the double tax treaty signed by the People's Republic of China and France on November 26, 2013 (New DTT), which will replace the former treaty signed on May 30, 1984.

The New DTT was to become effective as from 1st January of the year following that in which the ratification procedures in each France and China have been completed. To the best of our knowledge, such reciprocal notification has been carried out on November 28, 2014, so that the New DTT should enter into force as from January 1, 2015.

We will comment the provisions of the New DTT in greater details in a future publication. 


On September 5, 2014, the Ministers of Finance of France and Luxembourg signed an amendment (Amendment) to the double tax treaty entered into between France and Luxembourg on April 1, 1958, as amended by the 1970 exchange of letters and by the 1970, 2006, and 2009 protocols.

Pursuant to Article 2 of the Amendment, the new provisions would only enter into force on the first day of the month following the completion of the reciprocal notification process attached to its ratification in each of France and Luxembourg. Further, for taxes on income that are withheld at source (i.e., such as the 33.33% withholding tax applicable under French tax law to capital gains realized by nonresident entities upon the disposal of French real estate assets or companies), the Amendment would apply to amounts that are taxable after the calendar year during which it enters into force.

The Government of Luxembourg has announced that the ratification process under Luxembourg law will take place during the first months of 2015. As a result, the Amendment will not enter into force on January 1, 2015, and aforementioned withholding taxes should thus be applicable only as from January 1, 2016 at the earliest.


A decree 2014-1372 dated November 17, 2014 on filing obligations attached to trust arrangements managed by French-resident trustees outlines the consequences of the extension of existing filing obligations attached to trust arrangements whose settlor and beneficiaries are not French resident and whose assets are not located in France but which are managed by a French-resident trustee (pursuant to the 2013 Bill against tax fraud and economic crime).

Such decree provides that any such French-resident trustees must declare, before January 31, 2015, (i) any settlement, modification or dissolution of a relevant trust arrangement between December 8, 2013 and December 31, 2014, and (ii) the market value as at January 1, 2014 of the assets held through the relevant trust arrangement.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.