The Court of Appeal of Paris recently held that French tax haven holding company rules (set forth in section 209 B of the French Tax Code, "FTC") violate the tax treaty entered into between France and Switzerland1. Aside from its impact on the relationship between France and Switzerland, the decision – if confirmed by the French Supreme Court – may severely weaken section 209 B of the FTC by rendering it inapplicable in the face of a tax treaty (based on the OECD model), which does not expressly provide for its application.
Section 209 B of the FTC provides that a French company which (i) has an establishment or (ii) holds 25% of the shares, or 10% of the shares, financial or voting rights (or an interest, which basis is at least equal to FF 150 000 000, i.e., € 22 800 000) in a foreign company located in a tax haven country, is subject to tax in France on the income realized by such entity. For French tax purposes a country is deemed to be a tax haven either when there is no income tax in that country or when such income tax is less than at least one third of the tax burden such entity would have borne, had it been established in France.
Section 209 B of the FTC is not applicable if the French company proves that such establishment or such holding company is not aimed at shifting profits to a low taxed country, but rather that it carries on an industrial or commercial activity in that country, and that most of its transactions are made in such country.
Ever since the implementation of this anti-abuse measure in January 19802 French legal authors have widely and vehemently criticized it as contrary to (i) most tax treaties entered into by France and (ii) section 52 of the Treaty of Rome – founding the European Union – since section 209 B prevents French companies from freely establishing a business in an EU member state. The French tax administration has adopted a twofold position with respect to the contradiction with tax treaties. On the one hand it has strongly stated that the tax treaties entered into by France do not prevent the application of section 209 B of the GTC, since (1) section 209 B and the tax treaties have the same goal which is to fight tax evasion and tax fraud, and (2) tax treaties are only applicable in case of double taxation (i.e. when a taxpayer is taxed twice on the same income) which is not the case when section 209 B is applied. On the other hand since 1991, the French tax administration has always negotiated to insert a clause in new tax treaties, which expressly states that section 209 B of the FTC is compatible with such treaty. For example, this is the case with the tax treaties entered into by France with the United States, Mexico, South Africa, Bolivia, Spain, Japan, Venezuela and Zimbabwe.
Schneider SA, a French company, held 100% of the shares of Paramer, a Swiss company holding and managing bonds and securities. The French tax administration reassessed the profits realized in 1986 by Schneider, arguing that it should have included in its French tax return the profits realized by Paramer, on the basis of section 209 B of the FTC. Schneider challenged the position of the French tax administration up to the Court of Appeal of Paris on the ground that section 7 § 1 of the tax treaty entered into between France and Switzerland on September 9, 1966 provides that income realized by a company located in a contracting state shall be taxed only in that contracting state.
On January 30, 2001, the Court of Appeal of Paris sustained such reasoning and ruled in favor of Schneider SA. It dismissed the above-mentioned reasoning of the French tax administration on the ground that the principle of fight against tax fraud and tax evasion was too general to justify the application of section 209 B of the FTC, since the tax treaty was applicable in this case.
The future of such decision is however still difficult to determine at this stage. First, the French tax administration has lodged an appeal with the Supreme Court ("Conseil d’Etat"). Second, as far as France and Switzerland are concerned, the French tax administration has recently restated in a written reply to a question raised by a Member of Parliament3 that since the entry into force of the July 22, 1997 amendment to the tax treaty, section 209 B of the FTC is not contrary to such tax treaty.
Assuming the Conseil d’Etat confirms it, the decision will be of great value in countries which have tax treaties with France, based on the OECD model, which do not expressly provide for the possible application of section 209 B of the FTC. Thus, we eagerly await the Conseil d’Etat’s decision on this hot topic.
1The decision was rendered on the basis of the tax treaty entered into between France and Switzerland before its latest amendment on July 22nd, 1997.
2Act n°80-30 dated January 18, 1980 created such measure, which was amended successively in 1990 and 1992.
3Minsterial reply Souvet, February 8, 2001.
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