France: French Tax Update - Recently Published Noteworthy Decisions - July 2015

The present French Tax Update will focus on an overview of several noteworthy French tax court decisions issued during the past few months. 


The tax treatment of buybacks, from the shareholders' point of view, has now been simplified through a change of legislation, i.e., capital gain/loss treatment in all situations (see French Tax Update of January 2015).

In a decision dated April 1, 2015, the Conseil d'Etat ruled on a specific question regarding the tax treatment of a listed issuer that had purchased its own shares, with the initial purpose of using them for existing ESOPs, and that had subsequently decided to cancel them. This change of purpose had resulted in an accounting reclassification of the shares. In the meantime, the issuer had created a reserve, inter alia, to recognize the depreciation of the shares compared to their buyback price. The French tax authorities (FTA) were of the view that the reserve should have been reinstated once the decision was made to cancel the shares.

The Conseil d'Etat ruled in favor of the issuer by considering that the decision to cancel the shares (which was made after the shares had been purchased) should be likened to a decision to sell the same and buy them back again. Accordingly, unless the FTA could prove (under the abuse of law procedure) that the issuer knew from day one that it was going to cancel the shares, the reserve should not be reinstated.


Compliance With French Constitution

While the basic French corporate tax rate is 33.33 percent, certain corporate taxpayers are also liable to two additional contributions, one (the so-called social contribution) equal to 3.3 percent of the corporate tax liability, and the other (the so-called exceptional contribution, or EC) equal to 10.7 percent of the corporate tax liability.

The EC is due from corporate taxpayers with an annual turnover exceeding €250 million (NB: the EC is supposed to cease to apply for financial years closing as from December 31, 2016).

The relevant legislation provides that, for entities belonging to a French tax grouping (where the tax is due from the head of the group), the €250 million threshold is applied by aggregating the turnover of all members of the grouping. This provision was brought before the Conseil Constitutionnel to decide on its constitutionality, the position of the taxpayer being that it violates the constitutional principle of equality before the law. More precisely, the taxpayer argued that certain members of its tax grouping served only a function of "intermediation" (i.e., reinvoicing of intra-group charges), and, accordingly, the inclusion of their turnover (in the computation of the €250 million threshold) was creating an excessive tax charge.

The Conseil Constitutionnel sided with the FTA by arguing that (i) the EC was created to specifically target the larger groups (hence the €250 million threshold), and (ii) the criteria of the aggregate turnovers in a grouping, where the EC is due from the head of the grouping, was a rational and objective test in accordance with the purpose of the EC.

Application To Foreign Companies

In a decision dated April 13, 2015, the lower administrative court of Montreuil (TA Montreuil, April 13, 2015, n°1307960/1307971) has confirmed that, for the purposes of the computation of the annual turnover triggering the EC, only the turnover realized in France should be taken into account.

In the case at hand, the French tax authorities had denied an EC refund claim filed by a German company with a permanent establishment in France, on the basis that its consolidated turnover (i.e. German parent together with its French permanent establishment) exceeded €250 million.

The lower administrative court did not follow the French tax authorities and ruled that the relevant turnover is the one that could actually give rise to taxable income in France, in accordance with the Conseil d'Etat well-established case law in respect of other taxes. As a result, only the turnover realized by the French permanent establishment had to be taken into account. Since such turnover was below the €250 million threshold, the German company was not subject to the EC.


A special provision (known as the Charasse Amendment) of the French legislation on tax grouping provides that if an entity belonging to the grouping purchases, from a shareholder controlling the group, the shares of an entity that becomes a member of the grouping, a certain proportion of the interest paid by the group would be deemed to be related to the purchase. As such, that proportion (equal to the purchase price divided by the average borrowing of the grouping) would be nondeductible for a certain period.

In a decision dated March 11, 2015, the Conseil d'Etat ruled on a situation in which the taxpayer argued that certain banking fees and certain interest on short-term intra-group financing should not have been taken into account for the Charasse Amendment, given that they were not, in any way, related to the purchase. The Conseil d'Etat ruled in favor of the FTA on the basis that the Charasse Amendment is, by nature, based on the reinstatement of deemed interest (as opposed to actual interest paid in respect of the funding of the purchase).


The relevant provisions of the French Tax Code stipulate that, for income tax purposes, when subscription rights are detached from an equity instrument, such rights should be deemed to have a zero tax basis, i.e., if the individual were subsequently to sell the rights, the full sale price should be deemed to constitute capital gains. This situation is different from that in which the relevant corporation issues so-called autonomous warrants (i.e., securities issued independently from any simultaneous issue of any equity instruments) and the holder subscribes the warrants for a specific price, which constitutes its tax basis.

On December 18, 2014, the Appeal Court of Versailles ruled on a situation in which the relevant individuals had received, simultaneously, shares and warrants to subscribe shares from the underlying issuer as part of a merger transaction. The individuals had taken the position, upon the subsequent disposal of the warrants, that the latter should be treated as autonomous warrants, i.e., with an actual tax basis. The FTA had argued, and were supported by the Appeal Court, that the warrants were issued simultaneously with the shares and, accordingly, should be treated as being detached from them with a zero tax basis.


In a decision dated June 17, 2015, the Conseil d'Etat ruled on the question of allocation of capital by a bank, organized under French law, to its Japanese branch. The FTA had reassessed the taxable income of the bank by taking the view that the allocation of capital exceeded what was needed for the branch's activities (given the Japanese regulatory requirements), and, therefore, the bank had renounced the interest it would have received in a case in which the capital was replaced partly by a loan to the branch. The Conseil d'Etat, confirming its previous stance, ruled in favor of the taxpayer by using the following reasoning:

  • From a domestic law perspective, the FTA had no right to discuss the choice made by the bank in terms of providing capital, rather than loans, to the branch; in other words, the Conseil d'Etat confirmed the free choice of the bank in terms of capital/loan allocation. 
  • From the perspective of the Japanese–French tax treaty, specifically article 7 defining the taxable income allocated to a branch, these provisions only stipulate that such allocation should be made as if the branch were dealing with independent third parties under normal market conditions. However, the said provisions do not allow the relevant tax authorities to compute the taxable income of the branch on the basis of a capital allocation different from that actually provided to it, even if such actual allocation is in excess of what would be required under the local rules.


In a decision dated March 19, 2015, the Conseil d'Etat ruled on the exposure of the head office/foreign branch relations with regard to the so-called abnormal act of management doctrine (acte anormal de gestion), under which the FTA are entitled to reassess from a tax standpoint the consequences of corporate decisions resulting in expenses or losses not justified by the corporate interest of the company.

In the case at hand, a French bank, acting from its head office, had entered into an agreement with its UK branch, whereby the head office undertook to guarantee a reference price for the disposal of a bond portfolio held by the UK branch, equal to the market price of the portfolio the day the agreement was entered into. In return, the UK branch had to pay to its head office a fee equal to 0.25 percent of the portfolio's value, and eventually to 10 percent of any potential capital gain in case the disposal price exceeded the aforementioned reference price.

This arrangement led to the recognition of a provision and a loss in the accounts of the French bank, the deduction of which was challenged by the FTA within the course of a tax audit, based on the abnormal act of management doctrine.

The Conseil d'Etat overturned the decision of the Appeal Court of Versailles which had sided with the taxpayer, by ruling that, in order to determine whether the transaction constituted an act contrary to the French bank's corporate interest, the lower court failed to examine whether the transaction formed part of trade relations aiming at safekeeping or developing the French bank's business in France. The Appeal Court Versailles will have to reexamine this case in light of this decision.


On May 22, 2015, the Conseil d'Etat issued its second decision on one of several cases pending before it pertaining to the requests for refund of French withholding tax levied on dividends paid to foreign nonprofit organizations (NPOs).

In this decision regarding Wellcome Trust, a charity trust based in London, the Conseil d'Etat took one step forward with respect to its analysis of the "nonprofit" character of foreign NPOs in order to establish comparability with French NPOs (Nonprofit Test).

As discussed in a previous French Tax Update (see February 2015), the Conseil d'Etat had ruled in a December 30, 2014 decision regarding VZB, a Berlin-based pension fund, that the Nonprofit Test should be based on the two main criteria of distinction used under French domestic law: (i) if the NPOs' management is driven by profit-making objectives and (ii) if the services that the NPOs provide compete with commercial businesses.

In the Wellcome Trust case, the Conseil d'Etat ruled that the management of foreign nonprofit organizations, such as British charitable trusts that conform to a specific regime, should be viewed as not driven by profit-making objectives if the number of managers and manager compensation are not disproportionate compared to French domestic rules. The Conseil d'Etat noted that this test has to be performed in light of the particular obligations imposed under UK law and not only in light of the criteria set out under French domestic law.

As such, the Conseil d'Etat sided with the taxpayer based on the specifics of a UK charity trust and upheld the lower court decision, which had ruled in favor of a total withholding tax refund.

Upcoming developments by the Conseil d'Etat will still be interesting to follow, especially in respect of other foreign nonprofit organizations that are not governed by the same constraints as UK charity trusts.


On June 11, 2015, Advocate General Kokott rendered her opinion in the context of the preliminary ruling requested before the European Court of Justice (ECJ) by the Appeal Court of Versailles (CAA Versailles, July 29, 2014, n° 12VE03691, Sté Groupe Stéria) with respect to the compliance of the French tax grouping regime with the freedom of establishment principle (see French Tax Update of November 2014).

The Advocate General concluded that the French tax grouping regime infringes the freedom of establishment principle because a domestic group of companies can obtain certain tax benefits, such as the absence of a taxable 5 percent add-back on dividends distributed within a French tax grouping, which is not available to companies that are residents of other EU Member States and which cannot be included in a French tax grouping.

Interestingly, the Advocate General rejected the arguments presented by the Member States' governments and considered that such restriction to the freedom of establishment principle is not justified by (i) the fact that the 5 percent add-back results from Article 4-2 of the EU Parent Subsidiary Directive ; (ii) the preservation of the allocation of taxing powers between Member States ; or (iii) the need to preserve the coherence of the tax system.

In light of this favorable opinion, taxpayers should therefore consider preserving their positions as early as possible by filing refund claims and objections with respect to corporation taxes paid during the two last years.

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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