Article 160 of the French General Tax Code provides that capital gains resulting from substantial sales of shareholdings, representing more than 25 % of total share capital, are taxed at a reduced rate of 19.9 % the year during which the ownership of the shares is transferred.

In a decision dated July 4, 1996, the Administrative Court of Appeal of Bordeaux ruled that a capital gain resulting from a substantial sale of shares must be taxed in the year during which the sale actually took place, despite the fact that the determination of a portion of the transfer price depended upon factors that could not be known during the year of the sale (i.e. the cash flow on December 31, 1989 for a transfer taking place on June 6, 1989). The judges justified their decision on the grounds that the terms of payment were set out precisely in the transfer agreement, and that therefore, in accordance with Article 1583 of the French Civil Code, the sale agreement was perfect in all its terms. As a result, the transfer of the ownership of the shares between buyer and seller was deemed to have taken place on June 6, 1989. The crystallized capital gains were therefore taxable with income for the year 1989.

This decision confirms the main trends in case law regarding the application of Article 160. Prior to this decision, the Supreme Court had ruled that capital gains are taxed the year of transfer, even though the price is paid at a later date (CE, October 28, 1966 ; CE, July 26, 1978 ; CE, November 30, 1990).

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