The present French Tax Update will focus on an overview of several noteworthy publications, including decisions issued during the past few months by the French Administrative Supreme Court (Conseil d'Etat) and French Constitutional Court (Conseil Constitutionnel), as well as the European Commission decision in respect of the Belgian Excess Profit Scheme, and publication of the draft anti tax-avoidance package.


On November 12, 2015, the Conseil d'Etat requested from the Conseil constitutionnel a priority preliminary ruling on the issue of constitutionality (question prioritaire de constitutionnalité) of the provisions of former article 145, 6, b ter of the French tax code (FTC), now article 145, 6, c of the FTC. Under these provisions, profits deriving from shareholdings with no voting rights were not entitled to the 95 percent exemption available under the French participation-exemption regime.

On February 3, 2016, the Conseil constitutionnel struck down the relevant provisions by ruling that the reverse discrimination so created (i.e. the taxpayer was treated less favorably on dividends received from its shareholding in a French subsidiary than on those received from an EU subsidiary, thereby infringing as such the rights and freedoms guaranteed by the French constitution) was not justified.

We will provide a full coverage of the Conseil constitutionnel decision in our upcoming update. Please see our Update for December 2015 for further details on the underlying case.


For French corporate tax purposes, the basic rule is that of a strict territoriality, i.e., a French corporate taxpayer is taxed in respect of the income generated in France, and/or in respect of any income the taxation of which is attributed to France under a given international tax treaty.

As an exception to the above principle, under the Controlled Foreign Corporation ("CFC") rules (article 209 B of the FTC) a French taxpayer may be, under certain conditions, taxed in respect of income generated by a foreign subsidiary or foreign permanent establishment; such taxation is, inter alia, conditional upon the subsidiary or permanent establishment being located in a jurisdiction where the effective tax charge is significantly lower than the equivalent French tax charge.

The CFC rules, however, enable the taxpayer to avoid taxation if, inter alia, it can be proven that the operations of the subsidiary (or the foreign permanent establishment) were not principally motivated by tax enhancement ("Safe Harbor").

In two decisions dated December 30, 2015, involving a major French banking institution, the Conseil d'Etat has provided some clarity as to the application of the Safe Harbor.

In one case, the financial institution had a subsidiary located in Hong Kong, dealing with Asian currencies; in the other case, the relevant subsidiary was based in Guernsey and dealing in private banking.

In the case of the Hong Kong subsidiary, the Conseil d'Etat decided that the Safe Harbor should be applicable given that (i) the subsidiary was, effectively, active in dealing with Asian currency assets of the financial institution, and (ii) such activity could not be organized from France because of the specificities of the functioning of the relevant Asian markets.

The French tax authorities ("FTA") were arguing that it has not been proved that some of the clients of the subsidiary were not French tax residents, and some of the funds used by it were not of French origin. However, the Conseil d'Etat ruled that any such consideration was beside the point, i.e., they had no relevance to the finality and reality of the subsidiary's operations in Hong Kong.

In the case of the Guernsey subsidiary, the Conseil d'Etat again ruled that the Safe Harbor should be applicable. The approach taken by the Conseil d'Etat was the same as in the above Hong Kong case: the financial institution has proved the effective operations of the subsidiary, and these operations were feasible because certain clients were attracted only by the specificities of the Guernsey banking and tax environment.

Again, the Conseil d'Etat rejected as non-relevant the argument of the FTA whereby certain of the clients of the subsidiary were French tax residents and some of the assets managed by it were of French origin.

In other words, the Conseil d'Etat makes it clear that the application of the Safe Harbor is based on the actual non-principally tax objectives of the relevant corporate taxpayer, and not any tax motivations of the clients of the relevant subsidiaries. Once the taxpayer has proved its business reason to be in a certain jurisdiction, it is for the FTA to prove that the tax reasons were nevertheless predominant.


Literally "not twice in the same," non bis in idem is basically a legal doctrine whereby no legal action can be initiated twice for the same course of action.

A case, currently before a French criminal court, has provided the occasion to establish whether the non bis in idem rule may be applied in a situation where a person may be potentially sanctioned under both tax and criminal rules.

The case concerns a famous art dealer family, the Wildensteins, who did not declare their full assets to the tax authorities. They are potentially liable to the relevant inheritance tax reassessment and subject to criminal prosecution.

The family's lawyers pleaded before the criminal court, and the latter agreed, that the non bis in idem question should be remitted to the Cour de Cassation to decide whether it should be then transferred to the Conseil Constitutionnel.

The case law of the Conseil Constitutionnel (EADS decision in 2015) suggests that four conditions need to be met for the non bis in idem rule to apply: (i) the relevant facts must be the same under both procedures, (here, the same facts are effectively used for the tax and criminal prosecutions and the FTA is the one initiating the criminal case), (ii) the interest protected, under the relevant underlying legislations, must be the same, (iii) the relevant sanctions must be the same under both procedures (the penalty due, under the tax reassessment, is indeed analyzed as a sanction, i.e., exceeding the financial loss of the French Treasury, and (iv) the relevant jurisdictions must be the same (inheritance tax matters are decided by judicial courts as opposed to administrative courts).

The Cour de Cassation has three months to decide whether or not to transfer the question to the Conseil Constitutionnel.

If the case is indeed referred to the Conseil Constitutionnel, and if the latter rules in favor of application of non bis in idem, it would mean that the FTA would have, potentially, to decide between a tax reassessment or the prosecution for tax fraud.


The Conseil d'Etat ruled, on November 9, 2015, in a case based on the financial dealings between a Belgian entity and its French branch. The starting point of the case was that the branch had provided cash advances to the Belgian head office without stipulating any interest on the advances. The FTA had reassessed the taxable basis of the branch (on the basis of article 57 of the FTC on transfer pricing between French and foreign affiliates) by arguing that there was no justification for the absence of interest, and, accordingly, interest should have been charged to the head office.

The head office was arguing that, in its commercial dealings with the branch, it had also claims against the latter for which no interest had been charged to the branch either; but the Conseil d'Etat took the view that, for such an ongoing normal commercial relationship, it was not customary to charge interest.

The other argument from the taxpayer was that, given the absence of a separate legal entity for the branch, the advances should be viewed as purely internal movements, within the same legal entity, which are not supposed to bear interest.

The Conseil d'Etat rejects this argument by considering that article 57 (and similar transfer pricing provisions of the French Belgian tax treaty) are applicable in all situations where the relevant persons are affiliates, including between a head office and its branch. Given that the head office and the branch were not able to justify the absence of interest on the advances (i.e. there was no reciprocal advantage provided by the head office to the branch), the Conseil d'Etat ruled in favor of the FTA.


On December 30, 2015, the Conseil d'Etat decided to request a preliminary ruling from the European Court of Justice ("ECJ") in respect of a case that is part of a series of cases involving the same group and pertaining to operation of the specific anti-abuse provision (i.e., different from the general abuse of law theory) attached to the dividend withholding tax exemption provided, in accordance with the EU Parent-Subsidiary Directive, by Articles 119 bis and 119 ter of the FTC.

Following an audit performed in 2010, the FTA challenged the withholding tax exemption applied by a French company ("FrenchCo") in respect of the dividends it distributed in 2007 to its sole shareholder, a company located in Luxembourg ("LuxCo"). All of the shares of LuxCo but one was held by a company located in Cyprus ("CypCo"), itself held by a company located in Switzerland ("SwissCo").

Under Article 119 bis of the FTC, the standard 25 percent withholding tax applicable to dividends is in essence eliminated, provided inter alia that the recipient of the dividends is not part of a holding structure that is constitutive of an artificial arrangement whose main purposes is the benefit of the withholding tax exemption. The burden of the proof is generally on the taxpayer.

As described in our Update for August 2015, the Administrative Court of Appeal of Versailles ("Versailles CAA") reviewed the elements provided by FrenchCo and ruled that they were all insufficient to demonstrate that the main purpose of the holding structure was not the benefit of the withholding tax exemption provided by Article 119 bis of the FTC. In order to deny the benefit of the official guidelines published by the FTA in respect of such withholding tax exemption, the Versailles CAA further elaborated that the interposition of LuxCo, which had neither premises nor staff in Luxembourg, and CypCo, which had no real economic activity and was an artificial arrangement aimed at concealing the identity of the actual recipient of the dividends.

The taxpayer appealed before the Conseil d'Etat, which has decided to request a preliminary ruling from the European Court of Justice as to whether the above-described anti-abuse provision complies (i) with Article 1-2 of Directive 90/435/CE (to the extent that such compatibility may be reviewed), and (ii) EU freedoms.

Interestingly, the ECJ ruling could provide guidance not only in respect of the above-described anti-abuse provision (i.e. in relation to withholding exemption) but also in respect of the new anti-abuse provision (i.e., in relation to the parent-subsidiary regime, please see our Update for January 2016).


The FTC sets forth an elective regime pursuant to which under certain conditions the taxation of capital gains resulting from corporate reorganizations such as mergers, contributions of businesses and demergers/spin-offs, is deferred (i.e., a Tax-Neutral Regime). This regime is applicable to contributions made to foreign companies, but prior approval from the FTA is required in any situation where the absorbing entity is foreign.

Pursuant to article 210 C of the FTC, such approval is granted if the following conditions are met : (i) the transaction has a valid business purpose, (ii) the main objective of the transaction is not tax evasion or tax avoidance, and (iii) the structure of the transaction preserves the French treasury's ability to tax, at a future date, deferred capital gains (which implies the existence of a permanent establishment in France of the foreign "absorbing" entity after the completion of the transaction).

On December 30, 2015 the Conseil d'Etat decided to request a preliminary ruling from the ECJ with respect to the compliance of the prior approval requirement set out under article 210 C of the FTC with European Union ("EU") law.

The case involved a French real estate company ("French SCI") which had been dissolved without being liquidated (so-called dissolution sans liquidation French law mechanism under article 1844-5 of the French Civil code) into its sole shareholder, a Luxembourg company ("HoldCo"). The dissolution without liquidation of the French SCI into HoldCo was carried under the Tax-Neutral Regime, without prior approval from the FTA. This transaction was followed by the sale of the real estate assets of the now-dissolved French SCI to a third company.

The FTA challenged the eligibility of this transaction to the Tax-Neutral Regime on the grounds (i) that the French SCI had not requested prior approval from the FTA and (ii) that such request would have, in any case, been denied, as the dissolution without liquidation did not have a valid business purpose and was mainly motivated by tax evasion or tax avoidance.

The Administrative Court of Appeal of Paris ("Paris CAA") dismissed the taxpayers' arguments that the French SCI would have benefited from the Tax-Neutral Regime without prior approval from the FTA had HoldCo been a French company, by ruling that: (i) the prior approval requirement is not incompatible with the freedom of establishment principle set forth under EU law, and (ii) that the transaction had for main objective tax evasion or tax avoidance.

Hearing an appeal against the decision of the Paris CAA, the Conseil d'Etat stayed the proceedings and decided to refer to the ECJ the question whether the prior approval requirement under article 210 C of the FTC, which solely applies in cases where the contribution is made to a foreign company, is compliant with EU law.

Interestingly, it is pointed out by the Conseil d'Etat that article 210 C of the FTC implements into French law article 11 of the EU Merger Directive which states that a Member state may refuse to apply the benefit of the Tax-Neutral Regime where it appears that the transaction has as its principal objective or as one of its principal objectives tax evasion or tax avoidance.

As such, the first question submitted to the ECJ, prior to the review of article 210 C of the FTC in light of the freedom of establishment principle, is whether a domestic provision adopted by a Member State for the implementation of a EU directive can be reviewed in light of the principles set out under EU primary law, such as the freedom of establishment principle found in article 49 of the Treaty on the Functioning of the EU.


In a decision issued on December 17, 2015, the Versailles CAA ruled that the interposition of a Luxembourg company in order to carry out the sale of French real estate assets without triggering capital gains taxation in France falls under the abuse of law ("AoL") doctrine.

Pursuant to the AoL doctrine, the FTA may, subject to court review, re-characterize a given transaction on the basis of its substance where they can establish that such transaction is either (i) fictitious, or (ii) if, by seeking the benefit of a literal application of texts or decisions, against the initial objective pursued by their authors, it was inspired by no other reason than to avoid or reduce the tax burden which would have normally been borne by the taxpayers─due to their situation or to their real activities─if this transaction had not been entered into.

It is often debated whether a given taxpayer may abuse a double tax treaty, and in particular how French tax courts would analyze the objective pursued by the authors of a double tax treaty.

In the case at hand, a French tax resident ("FTR") held 99,99 percent of the share capital of a French company ("F1"). FTR undertook to purchase French real assets from French resident individuals. On the same day, FTR incorporated a Luxembourg company ("F2") by contributing its shares of F1. On the day of the closing of the sale, FTR substituted F2 as purchaser. At a later point in time, F2 on-sold the real estate assets to a French company managed by a relative of FTR. The capital gains so realized by F2 were not subject to capital gains taxation in France under Article 4 of the France/Luxembourg double tax treaty ("Treaty").

The FTA challenged the application of the Treaty on the basis of the AoL doctrine. The lower court sided with the FTA. The taxpayers appealed before the Versailles CAA. The Versailles CAA confirmed that the AoL doctrine was applicable as both its conditions were satisfied: (i) the sole purpose of the transaction steps was to lower or eliminate the taxpayers' liabilities, and (ii) the taxpayers sought the benefit of a literal application of texts or decisions, against the initial objective pursued by their authors.

On the first condition, it is interesting to note that the Versailles CAA did not analyze the substance of F2 in Luxembourg, but rather the rationale behind its interposition. The Versailles CAA even concludes that, even though F2 had been an active holding with an actual financing activity (and would thus not qualify as a wholly artificial scheme), its interposition is not justified by any non-tax considerations.

On the second condition, which was the most uncertain given the lack of public preliminary or negotiation documents around double tax treaties, the Versailles CAA followed the generally accepted interpretation principles (including the 1969 Vienna treaty, although not ratified by France), and concluded, in line with prior case law, that the intention of the authors of the France/Luxembourg double tax treaty could not be to grant its benefit to an artificial scheme.

Whilst, in the Bank of Scotland case decided by the Conseil d'Etat in 2006, treaty shopping had fallen under the AoL doctrine by virtue of the general fraud principle, the provisions then at stake were specific provisions of the France/U.K. double tax treaty. In the case at hand, the AoL doctrine is applied in respect of a general provision (i.e. business profits) of the France/Luxembourg double tax treaty.


Employers established in France which have less than 90 percent of their turnover liable to Value Added Tax ("VAT") are subject to a payroll tax (taxe sur les salaires) imposed at rates up to 20 percent. This tax is in practice mostly due by financial institutions and holding companies which are likely to receive revenue either VAT exempt or outside the scope of VAT (e.g., dividends).

Pursuant to article 231 of the FTC, the payroll tax applies to "sums paid as compensation to employees". A literal interpretation of this provision led many taxpayers to challenge the FTA's position in their official guidelines which states that any compensation paid to non-employee corporate officers of French limited liability companies, such as the société anonyme (SA) and société par actions simplifiée (SAS) is also subject to payroll tax. The taxpayers argued that executive compensation could not be subject to payroll tax since corporate officers could not be viewed as "employees" within the meaning of French labor law.

In two decisions dated January 21, 2016 the Conseil d'Etat ruled by reference to the parliamentary debates, that the tax basis of the payroll tax was intended to be identical to the tax basis of French social security contributions as defined under the French social security code, which includes compensation paid to non-employee corporate officers of French limited liability companies.

These two decisions ruling on the actual and former wording of article 231 of the FTC settle this much debated issue which had led to opposing decisions of lower tax courts, and put an end to any hopes of payroll tax recovery on these grounds.


As discussed in our Update for November 2015, the Conseil d'Etat had referred in a decision dated October 14, 2015, to the French Constitutional Court (Conseil Constitutionnel) a priority preliminary ruling request (Question prioritaire de constitutionnalité) with respect to rules governing the taxation of earn-out payments relating to a sale of shares made prior to January 1, 2013, the date on which a new personal income tax regime applicable to capital gains was introduced.

Under these rules found at article 150-0 D of the FTC, capital gains derived from the sale of shares are subject to the progressive scale of personal income tax (up to 45 percent) but can also benefit from tax-exempt allowances of either 50 or 65 percent depending on the holding period (between two and eight years for the first deduction, and more than eight years for the second). These tax-exempt allowances also apply to earn-out payments, but only to payments made with respect to sales of shares made after January 1, 2013.

In the case at hand the taxpayers argued before the Conseil Constitutionnel that the fact that earn-out payments relating to sales of shares made prior to January 1, 2013 cannot benefit from the above-mentioned tax-exempt allowances infringes the rights and freedom guaranteed by the French constitution.

In a decision dated January 14, 2016 the Conseil Constitutionnel ruled that even though no infringement could be characterized on the grounds of the taxpayers' legitimate expectations or the entrepreneurial freedom principle, article 150-0 D of the FTC creates a breach of equality between taxpayers having received earn-out payments with respect to sales of shares made prior to January 1, 2013 and those made after that date, and with respect to sales of shares that gave rise to a taxable gain and those that did not. As such, individuals receiving earn-out payments made with respect to a sale of shares made prior to January 1, 2013 will now be able to benefit from the favorable tax-exempt allowances.


Since 2005, the Belgian so-called excess profit tax scheme ("EPS") is a tax regime allowing certain international groups to pay substantially less corporate taxes in Belgium. In practice, the Belgian tax authorities issue a ruling allowing the relevant Belgian corporate taxpayer to reduce its corporate tax base by 50 to 90 percent, to discount for the deemed excess profits resulting from being part of an international group. According to the European Commission ("EU Comm"), the rulings were typically valid for four years and could be renewed.

In February 2015, the EU Comm launched an investigation on the basis that the EPS derogated from standard Belgian corporate tax rules and could thus constitute illegal state aid under EU law. Following this investigation, Belgium has put the EPS on hold. Belgian corporate taxpayers benefitting from an EPS ruling have however continued to benefit from it.

On January 11, 2016, the EU Comm published a press release indicating that its conclusion is that the EPS is illegal under EU state aid rules as it provides the relevant Belgian corporate taxpayers with a preferential tax treatment derogating from both (i) standard Belgian corporate tax rules and (ii) the arm's length principle (without being justified by the fact the corporate tax base reduction was necessary to prevent double taxation, as claimed by Belgium).

Interestingly, the EU Comm has inter alia highlighted the facts that the EPS (i) was heavily "marketed" by the Belgian authorities under an "Only in Belgium" logo, (ii) only benefitted certain international groups whilst stand-alone companies could not obtain similar benefits, and (iii) was always granted within the frame of a ruling procedure.

The EU Comm thus requires that Belgium (i) stops applying the EPS, and (ii) recovers the tax savings obtained by the relevant Belgian corporate taxpayers from them, and estimates the total amount to be around EUR 700m. The Belgian tax authorities now have to determine which companies have benefitted from the EPS, the amount of the corresponding tax savings, and the procedure under which the corresponding amounts may be recovered.


On January 28, 2016, the EU Comm has published several draft measures to combat aggressive tax planning, increase tax transparency and create a tax level playing field within the European Union ("Anti Avoidance Package").

The Anti Avoidance Package inter alia includes what appears to be minimum required standards (i.e., the member States could go beyond) towards: (i) a general anti-abuse rule ("GAAR"), (ii) provisions to prevent hybrid mismatches, (iii) a formulaic limit on interest deductions (e.g. the higher of 30 percent of EBITDA or EUR 1m), (iv) a generalized exit tax, (v) a so-called switch-over clause (i.e. taxing certain flows in the recipient State with a credit for taxes paid in the source State in order to prevent the localization of certain income items in low-taxed entities), and (vi) an harmonization of CFC rules.

It is currently scheduled that the Anti Avoidance Package will be discussed by the European Council by May 25, 2016. It will need to be unanimously approved by all 28 member States in order to be adopted.

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.