France: Intragroup Reorganization And Abuse Of Law Theory

In the context of the intragroup reorganization of a multinational automobile manufacturer, the Conseil d'Etat recently restated its position in favor of the freedom of choice (CE, July 8, 2015, n°365850).

In 2000, the head of the French tax grouping (Parent) sold to its subsidiary in charge of financial matters and inactive participations (FinCo) the shares of an inactive subsidiary (Sub). One year later, Sub was merged into FinCo.

Under the French tax grouping rules, the losses arising from the sale of the Sub shares were neutralized, as was the recapture of the depreciation provision booked by Parent in respect of the Sub shares. The merger of Sub led to its exit from the tax grouping, thereby giving rise to tax-deductible (against long-term gains) losses.

The FTA attempted to challenge such reorganization under the abuse of law theory, arguing that the combination of the sale and the merger was purely tax-motivated as it allowed the recognition of tax-deductible losses (whereas a mere merger of Sub into Parent would not have given rise to such losses).

In order to defend its choice to first sell the Sub shares to FinCo and then have FinCo absorb Sub, Parent provided two main arguments: (i) the sale of the Sub shares allowed Parent to restore its cash position and to prepare the financing of a pending acquisition (thereby reducing its external debt), and (ii) the rationale of the group holding structure was to (a) have only Parent directly hold subsidiaries heading a business line of the group, and (b) transfer inactive participations under the subsidiary in charge of financial matters, i.e., FinCo.

Both the Lower Tax Court (TA Cergy-Pontoise, July 29, 2010, n°0211303) and the administrative Court of Appeals (CAA Versailles, November 22, 2012, n°10VE03850) ruled in favor of the taxpayer.

The Conseil d'Etat ruled that, even though the same goals could have been reached by Parent by merely absorbing Sub, the FTA did not demonstrate that the reorganization was purely tax-motivated. The Conseil d'Etat thus upheld its long-standing position under which a given taxpayer is not required to choose the most heavily taxed route.

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