France: French Tax Update - Recent Noteworthy French Tax Court Decisions

Last Updated: 7 May 2015
Article by Nicolas André and Alexios Theologitis

The present French Tax Update will focus on an overview of several noteworthy French tax court decisions issued during the past few months, in particular in relation with VAT, the 3 percent tax on distributed income, and some long-awaited corporation tax disputes.


For French corporation tax purposes, a French permanent establishment (PE) of a non-French tax resident corporation is treated as a separate taxable person including, generally, in its dealings with its head office. International tax treaties, signed by France, define how income and expenses (including those borne by the head offices for the purposes of the PE) should be allocated to the PE.

For VAT purposes, the French case law generally considers that the "transactions" between a head office and its PE are not within the scope of the tax (i.e., because they take place within the same legal entity). The French tax authorities (FTA) generally follow the same approach. The European Union case law (FCE Bank, September 23, 2006) arrives at the same conclusion when the PE lacks autonomy vis-à-vis the head office. There is, also, one recent EU law case (Skandia, September 17, 2014) where it was decided that if the head office or the PE belongs to a "VAT group", then the internal dealings between the head office and the PE should be treated as in scope (NB: France has not introduced the VAT grouping in its legislation). Also, in a separate EU law case (Crédit Lyonnais, September 12, 2013), the concept of a worldwide pro-rata (i.e., a computation of the aggregate VATable activities of the head office and its PEs) was rejected.

In a decision dated January 27, 2015, the Administrative Appeal Court of Versailles (Appeal Court) deals with the situation of a French PE (of a UK law-governed entity) with two separate activities: financial transactions with French clients where the PE has elected to be liable to VAT, and services provided to the UK head office regarding certain "equity and fixed income sales". The PE had decided to deduct the full VAT charged to it on its own expenses, whether the expenses were borne for the clients' activities or for the dealings with the head office.

The FTA had challenged the position of the PE by taking the view that the expenses borne exclusively for the dealings with the head office may not, in principle, result in a deductible VAT, although the FTA had accepted to take into account the pro-rata of the head office (i.e., the percentage of its VATable transactions) as a reference for the VAT deduction of the PE regarding the dealings with the head office. As for the mixed expenses of the PE (i.e., borne for both clients' activities and head office's dealings), the FTA had taken the view that the related VAT was partially deductible, again based on the head office's pro-rata corrected by the VATable turnover of the PE. The bank had appealed after losing at the administrative tribunal level.

The Appeal Court starts its reasoning by referring to the FCE Bank case law and the related conclusion that the dealings between a head office and a PE should be disregarded in the absence of autonomy of the PE. Thus, the Appeal Court observes that since the taxpayer does not argue for the autonomy of the PE vis-à-vis the UK head office, the amounts received from the latter (i.e., as remuneration for the equity and fixed income sales) may not be treated as in scope, and, accordingly (i) the VAT borne on the related exclusive expenses is not deductible, and (ii) the VAT borne on the "mixed" expenses is deductible for the pro-rata of the sum of the underlying services and goods and for the VATable activities of the PE. The Appeal Court thus confirms the FTA's position in respect of the "exclusive" expenses, adding that the latter has taken a liberal view by accepting that the PE could, nevertheless, use the pro-rata of the UK head office to obtain a partial VAT deductibility.

In respect of the "mixed" expenses, given the Crédit Lyonnais case law, the Appeal Court takes the view that the FTA has no legal grounds to compute the VAT deductibility on the basis of the head office's pro-rata corrected by the VATable turnover of the PE. This being said, the Appeal Court observes that the PE has not been able to evidence that the method used by the FTA has resulted in less deductible VAT compared to the lawful method where such deductibility would have been computed simply on the basis of the VATable activities of the PE. Accordingly, it sides again with the FTA. 


On January 23, 2015, the Conseil d''Etat issued a decision on whether the turnover attributable to the recharge to other entities of a group of acquisition costs generated within the course of a corporate reorganization could be taken into account for the purposes of the determination of a holding company's VAT recovery rights.

The facts of the case were, in summary, as follows:

  • The holding company of a French media group (HoldCo) qualified as a so-called mixed holding company (i.e. a company that, aside from its VAT-exempt activities, performs activities subject to VAT such as the provision of advisory and managerial services to its subsidiaries) ;
  • Within the course of a corporate reorganization of the group, HoldCo charged back without margin to its subsidiaries the legal and advisory fees pertaining to acquisitions that were finally carried out by its subsidiaries (Chargeback) ;
  • HoldCo included the turnover attributable to the Chargeback in order to determine its VAT recovery ratio.

The FTA challenged HoldCo's VAT position by considering that the turnover attributable to the Chargeback should not be taken into account within the course of the computation of the company's VAT recovery ratio, insofar for the purposes of the latter one should take into account only the turnover generated by the taxpayer itself within the course of its own operations.

The Appeal Court of Versailles had sided with the FTA by ruling that the turnover attributable to the Chargeback could not be taken into account in order to compute the VAT recovery ratio since the acquisition costs were borne only on a temporary basis, notwithstanding the fact that the turnover attributable to the Chargeback was (i) found to be within the scope of VAT, and (ii) generated within the course of a corporate reorganization initiated and designed by HoldCo.

In its January 23, 2015 decision, the Conseil d'Etat took a different view and ruled in favor of the taxpayer by considering that nothing precludes a taxpayer from including the turnover attributable to the recharge without margin of acquisition costs in the computation of the VAT recovery ratio. 


The Conseil d'Etat has already had the opportunity to rule on the recoverability of the input VAT attached to the costs pertaining to an acquisition of shares.

In a 2010 decision, the Conseil d'Etat had distinguished between (i) costs pertaining to an acquisition that does not occur (the corresponding VAT being recoverable as a general expense), and (ii) costs pertaining to an acquisition that does occur (the corresponding VAT then being entirely or partially recoverable, except where (a) the profits arising from the sale of the shares are upstreamed to the seller's holders, or (b) the corresponding costs are incorporated into the acquisition price).

In a 2013 case, the Conseil d'Etat ruled that acquisition costs borne by a non-passive holding company form part of its general costs, and the corresponding input VAT is recoverable in proportion to the company's general VAT recovery ratio, provided inter alia that the company is able to demonstrate that the acquisition was part of a strategy to increase the profits arising from the services provided to the newly acquired subsidiaries.

In a decision dated March 31, 2015, the Appeal Court of Versailles reviewed several invoices sent by service providers to the taxpayer in connection with several sales of shares. The Appeal Court applied both the principles provided by the Conseil d'Etat decisions above and the general so-called direct link principle whereby (i) input VAT may be recovered to the extent that it pertains to expenses that are directly linked to operations that are subject to VAT, although (ii) input VAT pertaining to general expenses remains recoverable notwithstanding the absence of a direct link.

As a result, the Appeal Court reviewed each invoice together with the context of the relevant sale of shares, and inter alia ruled:

  • Legal fees invoices that do not specify the nature of the legal services provided: The corresponding input VAT may not be recovered by the taxpayer to the extent that it does not demonstrate that the corresponding costs have not been incorporated into the sale price;
  • Consulting fees invoices pertaining, according to other contextual elements, to the preparation and analysis of the conditions and consequences of the sale (i.e., services that would have also been rendered had the sale not occurred): The corresponding input VAT was recoverable to the extent of the fraction of the sale that was subject to VAT (i.e., the fraction of the sale corresponding to the sale of assets, excluding shares and real estate assets whose transfer was not subject to VAT), on a pro rata basis;
  • Legal fees invoices sent to a subsidiary of the taxpayer: The corresponding VAT was recoverable provided that the taxpayer was able to demonstrate that (i) the relevant sale of shares allowed a reorganization of its own subject-to-VAT activities (i.e., thereby making the corresponding fees general expenses) and (ii) the FTA did not evidence that the profits arising from the sale of shares were upstreamed to the seller's holders.


For distributions paid out from 2012 onward, France has introduced a 3 percent tax due, with certain exceptions, by corporate taxpayers (including under certain conditions French branches of foreign companies) that distribute dividends. Given that the French corporate tax is based on a territorial basis (rather than a worldwide basis), the introduction of the 3 percent tax was a way for the government to effectively tax income that would otherwise have been out of its reach. NB: No 3 percent tax is due, inter alia, on distributions made within the members of a French tax grouping or if (subject to certain anti-evasion rules) the relevant dividends are paid in the form of additional shares of the distributing entity.

The European Commission has launched an infringement procedure against the 3 percent tax as being noncompliant with the relevant EU rules.

The two potential grounds of breach are as follows: 

(i) Violation of the EU parent-subsidiary rules: If the 3 percent tax may be assimilated to a withholding tax (which the 3 percent tax is not formally), or as a form of additional taxation of a French parent company on the dividends received from an EU subsidiary. 

(ii) Violation of the freedom of establishment: Given that the intra-group dividends, within a French tax grouping, are exempt from the 3 percent tax, the application of the 3 percent tax to distributions made by a French entity to an EU entity (which would be eligible to be part of the French grouping if it were not for its non-French tax residency and establishment) may be discriminatory.

As with any infringement procedure, the Commission may, eventually, request France to amend its 3 percent legislation, and, in case of noncompliance, refer the case before the European Union Court of Justice. 


On April 15, 2015, the Conseil d'Etat ruled on the French treatment of the tax losses incurred by a non-French subsidiary of a French parent.

The basic facts were as follows:

  • The French parent was the head of a French tax grouping with French subsidiaries;
  • The French parent was requesting (on the basis of EU Marks & Spencer case law) that the tax losses of Polish and Italian subsidiaries could be imputed against the taxable results of the French grouping; the argument for such a request was that the relevant Polish and Italian legislations did not allow their subsidiaries to carry forward their losses any further locally;
  • The administrative court and the appeal court had sided with the FTA on the basis that the French tax grouping is limited to French qualifying entities.

The Conseil d'Etat first reminds that, under the X Holding BV case law (dated February 25, 2010), the principles of free establishment and equal treatment of domestic and foreign entities do not prevent a Member State from establishing legislation where the tax grouping is reserved to entities which are residents of such jurisdiction, and where the entities which are not liable to tax in the jurisdiction are not eligible for such grouping.

Accordingly, the Conseil d'Etat decided that the system of the French tax grouping is not violating the EU principles. The Conseil d'Etat also took the view that if the legislation of other countries (in this case Poland and Italy) include provisions whereby the local subsidiaries are no longer in a position to carry forward their losses locally, it is not for the French legislation (jurisdiction where the parent company is based) to accommodate the consequences of such foreign legislations. 


Pursuant to the French tax code, corporation income tax is applied on the net accounting profits, as adjusted for French tax purposes. Tax losses available for carry-forward are deemed to constitute an expense for corporation income tax purposes, even though they do not constitute an expense from an accounting standpoint.

Under certain specific circumstances, and in particular since the introduction of a limitation to the amount of tax losses available for carry-forward (whereby, in a nutshell, tax losses may be used only to the extent of 50 percent of the relevant profits that are in excess of 1 million euros), several disputes thus arose between taxpayers and the FTA as to when tax losses available for carry-forward could be deducted from the net accounting profits.

Taxpayers argued that, on the basis that tax losses available for carry-forward were deemed to constitute an expense for corporation income tax purposes, they could be deducted from the net accounting profits before other similar tax adjustments are made to such net accounting profits (such as amortizations and depreciations). The FTA however considered that tax losses available for carry-forward could be deducted (subject, where relevant, to any limitation applicable) only once all expenses have been deducted, including those arising from the French tax code (such as amortizations and depreciations).

In an April 2015 decision (Conseil d'Etat, April 10, 2015, Fayat), the Conseil d'Etat has confirmed the position taken by the Appeal Court of Versailles in an April 2013 decision: Carried-forward losses may be offset against the net accounting profits only once all expenses, including those provided for by the French tax code (such as amortizations and depreciations), have been deducted. As a result, amortizations and depreciations must be deducted from the net accounting profits before finalizing that amount and offsetting (subject, where relevant, to any limitation applicable) any tax losses available for carry-forward. 


Pursuant to article 81 A of the French tax code, a favorable tax regime applies to temporary expatriation allowances paid out to French employees sent abroad for business trips exceeding 24 hours. This regime is inter alia subject to the condition that these allowances do not exceed 40 percent of the employees' base compensation (40 Percent Cap).

If the relevant conditions are met, these allowances are not subject to personal income tax but are taken into account only to determine the average tax rate applicable to the employees' other income fully taxable in France.

The FTA took the view in their official guidelines that for the purposes of the computation of the 40 Percent Cap, the employees' base compensation should be prorated by reference to the actual number of days spent abroad on eligible temporary assignments, thus considerably restricting the scope of this regime.

The Conseil d'Etat ruled in an April 10, 2015, decision that the 40 Percent Cap of temporary expatriation allowances must be computed by reference to the employees' global base compensation.

It will be interesting to follow whether the relevant French tax legislation will be amended in the near future in order to either confirm the historical position of the FTA or to uphold the favorable interpretation of the Conseil d'Etat.

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.

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Nicolas André
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