France: French Tax Update - Recently Published Noteworthy Publications

Last Updated: 9 November 2015
Article by Siamak Mostafavi, Nicolas André and Alexios Theologitis

Most Popular Article in France, November 2015

The present French Tax Update will focus on an overview of several noteworthy French tax court decisions issued during the past few months, as well as the European Commission decision in respect of the investigation on tax rulings granted to Fiat and Starbucks entities by the Luxembourg and Dutch tax authorities, and a parliamentary amendment proposing to change the computation of the taxable basis of the French financial transactions tax ("FTT").


During the first phase of the parliamentary discussions of the Finance Bill for 2016 (Projet de Loi de finances pour 2016), the members of the lower house (Assemblée Nationale) have adopted a change to the computation of the taxable basis of the FTT. The FTT applies to the acquisition of certain defined French listed shares, at the rate of 20 basis points applied to the acquisition cost.

The current FTT rules provide, inter alia, that if the same relevant in-scope shares are purchased and sold on the same trade date, the tax basis refers to the excess, if any, of the shares purchased over those sold; accordingly, no FTT is due if the same number of shares are purchased and sold during the same trade date.

The change voted by the lower house would result in the taxation of the acquisition of the gross number of shares purchased during a given trade date, i.e. the number of same shares sold the same day would not be taken into account.

The original intention of the lower house was to introduce the new rules as from January 1, 2016; at the request of the Government, the house agreed to defer the application to December 31, 2016. By that time, the Government hopes that the European financial transactions tax would be adopted, with the consequence that the FTT would become irrelevant.

The French Senate would probably reject, in the coming weeks, the above FTT change; however, under French constitutional rules, the final say on Finance Law matters belongs to the lower house, which should confirm the change during the second discussions in December of this year.


On October 21, 2015, the European Commission concluded, following its investigations, that the tax rulings granted to (i) a Luxembourg subsidiary of Fiat by the Luxembourg tax authorities and (ii) a Dutch subsidiary of Starbucks by the Dutch tax authorities were constitutive of illegal State aid to such companies under EU law.

The European Commission further ordered that the corresponding tax advantage (between EUR 20 million and EUR 30 million, according to the European Commission press release) be repaid by such companies to the relevant tax authorities. Notwithstanding any further court action, such decision is immediately applicable, and Luxembourg and the Netherlands thus have the obligation to compute and recover the amount of the relevant illegal tax advantage.

Neither the decisions nor the legal reasoning behind the European Commission decision are currently available.

Decisions in respect of the tax rulings granted to (i) Irish subsidiaries of Apple by the Irish tax authorities and (ii) a Luxembourg subsidiary of Amazon by the Luxembourg tax authorities remain to be issued.

Likewise, the Belgian excess profits tax rulings regime (décisions fiscales anticipées relatives aux bénéfices excédentaires) and the special tax regimes for IP income of 10 Member States are currently being investigated and could lead to additional decisions.

Please see the JD Commentary issued in October 2015 for further details on the European Commission decision and on the potential consequences for multinationals enterprises with European operations.


The issuance of the so-called "repackaged TSDIs" was very much in favor in France in the '80s and early '90s.

In essence, the structure was as follows:

  • The French issuer would issue perpetual subordinated bonds ("TSDIs") with a defined coupon for, say, 15 years.
  • The issuer would keep, say, 75 percent of the issue price, and transfer the balance of 25 percent to an offshore trust.
  • The trust would use the 25 percent to buy a sovereign zero coupon bond that would mature in 15 years for an amount enabling the trust to buy the TSDIs from their holders.
  • After the purchase by the trust, the TSDIs would remain outstanding, but would pay a de minimis coupon.

The French tax authorities ("FTA") used to issue rulings in respect of these TSDIs, whereby:

  • The issuer would not be taxed in respect of the accrual of the zero coupon bond in the hands of the trust.
  • However, only 75 percent of the coupons (in the above example) would be tax deductible.

The rulings were interesting given that the non-taxed accrual on the zero coupon bond was higher than the non-deductible coupon on the TSDIs.

Later on, the French legislation was modified, and, as a result, the repackaged TSDIs were no longer tax efficient.

On June 24, 2015, the Conseil d'Etat issued a decision related to an interest rate swap ("IRS") that was contracted by an issuer of repackaged TSDIs. In essence, the IRS, which was contracted with the financial institution placing the TSDIs, enabled the issuer to transform the variable rate paid to the TSDI holders into a fixed rate, i.e., under the IRS, the issuer was receiving the variable rate and paying the fixed rate.

The FTA had argued that since, under the ruling, only a portion of the coupon on the TSDI was deductible, the same limitation should apply to the fixed rate paid by the issuer under the IRS. The treatment of the IRS was not covered by the ruling.

The Conseil d'Etat took the view that since the payments under the IRS are fully linked to the coupons due under the TSDIs, the tax treatment of the fixed rate paid by the issuer should follow the treatment applied to the coupons on the TSDIs.

The decision of the Conseil d'Etat seems to reassure the FTA on its position that the treatment of certain IRSs should follow the treatment of interest expenses. For example, the FTA have issued regulations whereby the non-deductibility rule, applied to 25 percent of net financial expenses of French borrowers, should take into account the payments made and received by the borrower under any IRS contracted by it. This seems a very broad reading of the underlying legislation, which refers only to interest paid and received on actual sums of money provided to or lent by the borrowers, whereas IRSs generally do not imply any exchanges of principals.


The Appeal Court of Versailles had to deal with a situation where the FTA had taken the view that an interest rate paid by a financial institution to certain affiliates was abnormally high and therefore non-deductible.

For the purposes of the above challenge, the FTA argued that the above financial institution should be deemed to benefit from a certain rating from the rating agencies, because the group to which it belonged was rated as such. Accordingly, the fraction of any coupon above the one borne by a similarly rated borrower should be viewed as excessive.

In its decision dated May 28, 2015, the Appeal Court took the view that the simple fact that an entity belongs to a group with a certain rating does not mean that the credit risk of such entity (which is the basis for the computation of market rate interest charged to it) should be deemed to reflect such rating.

In this case, the FTA argued that the borrower had received an "AA" rating from a rating agency, due to the financial support of its parent company which was rated "AAA." In reality, the financial support provided by the parent was only in respect of certain long-term borrowings of the borrower in the past, i.e., the support did not cover the borrowings for which the FTA had actually challenged the rate of interest. Accordingly, the Appeal Court took the view that the FTA may not challenge the rate of interest paid by the borrower on the simple grounds that the rating of its parent would have enabled a lower financing cost; in other words, unless the parent guarantees the borrowings of its subsidiary, only the actual credit risk of the subsidiary is relevant for determining if a given interest rate is excessive or not.


As presented in our French Tax Update for January 2014, the Finance Law for 2014 (Loi de finances pour 2014) modified the personal income tax regime applicable to capital gains derived from the sale of shares realized as from January 1, 2013.

Under these rules, capital gains derived from such sales 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). Increased allowances up to 85 percent apply to the sale of shares of certain small- and medium-sized enterprises when such shares had been acquired or subscribed within the first 10 years of the company's existence.

These tax-exempt allowances also apply to earn-out payments received with respect to sales of shares made after January 1, 2013 and for which a taxable gain must be reported in the tax year the payments are received.

In a decision dated October 14, 2015, the Conseil d'Etat referred to the French Constitutional Court (Conseil Constitutionnel) a priority preliminary ruling request (Question prioritaire de constitutionnalité, "QPC") with respect to rules governing the taxation of earn-out payments relating to a sale of shares made prior to January 1, 2013.

The taxpayers argue that the fact that these earn-out payments cannot benefit from the above-mentioned tax-exempt allowances creates a breach of equality between taxpayers and thus infringes the rights and freedom guaranteed by the French constitution.

The Conseil Constitutionnel must give its ruling within three months.


The PEA (Plan d'Epargne en Actions or stock savings plan) is a specific personal income tax regime for French tax residents designed to encourage long-term holding of European securities by individuals.

In the case reviewed on October 14, 2015 by the Administrative Supreme Court (Conseil d'Etat), a French tax resident had transferred PEA-eligible securities from a non-PEA account to his PEA account through a sale to himself (vente à soi-même, "Internal Sale"). Few years later, he sold the relevant securities to a third party, claiming the tax benefits attached to the PEA regime in respect of the dividends received and the capital gains realized.

The FTA challenged the Internal Sale on the grounds of the abuse of law procedure, claiming that (i) the relevant individual taxpayer was already the owner of the securities, so the Internal Sale was purely tax motivated and contrary to the legislative intent, and (ii) the valuation of the securities used for the Internal Sale was lower to the fair market value of such securities at that time.

On the first point, the Conseil d'Etat ruled against the FTA, holding that the Internal Sale was not abusive. The Conseil d'Etat clearly confirmed that (i) the relevant individual taxpayer was allowed to sell his securities from a non-PEA account to his PEA account, (ii) such a sale could incidentally trigger a taxable capital gain, and (iii) the legislative intent (i.e., encourage long-term holding by individuals of European securities into operating companies) was not violated by such sale.

It should be noted that the Conseil d'Etat also ruled against the FTA on the second point but not on the merits themselves (i.e., whether the valuation of the securities used for the Internal Sale was correctly determined) but on procedural considerations. The Conseil d'Etat held that the FTA did not properly answer to the relevant individual taxpayer when he challenged the valuation methods used by the FTA in order to claim that the fair market value of the securities sold to the PEA account was in excess of the valuation used for the Internal Sale. As a result, the FTA were deemed to withdraw their claim in respect of the valuation method used for the Internal Sale.


In a decision dated July 8, 2015, the Appeal Court of Versailles provided an unprecedented precision in respect of the so-called generalized tax credit ("GTC") method used by certain double tax treaties entered into by France in order to eliminate double taxation situations.

Under the GTC method, a French individual with foreign-sourced income must include such income to its taxable income in France and receive a tax credit equal to the fraction of the French income tax corresponding to the relevant foreign-sourced income. The double tax treaties entered into by France generally use the GTC method for foreign-sourced income that is not subject to a withholding in the source country (i.e., income items other than dividends, interest, royalties, etc.).

In its July 8, 2015 decision, the Appeal Court held that, under the double tax treaty entered into between France and Germany on July 21, 1959 ("FR/GER Treaty"), the GTC method prevents the relevant individual from deducting its foreign-sourced tax losses from its taxable income in France.

The Appeal Court noted that, although such a deduction would be allowed under domestic law, the language of Articles 12 and 20 of FR/GER Treaty prevents any deduction insofar as only positive income (bénéfices et revenus positifs or Gewinne und andere positive Einkünfte) must be taken into account to determine the French income tax that would have been imposed on the relevant foreign-sourced income.

This decision, which is now final, should also be applicable to all double tax treaties using the GTC method and the same language as Article 20 of the FR/GER Treaty in relation to positive income.

However, double tax treaties using the GTC method but a broader language (i.e., without specifying "positive") should be regarded as allowing French individuals to deduct from their taxable income in France the foreign-sourced tax losses (provided always such losses would be deductible under domestic law), in accordance with official guidelines issued by the FTA.


French case law, be it from criminal or tax courts, generally considers that criminal law procedure and tax procedure under administrative law are autonomous.

This had led in the past the French Supreme Court (Cour de cassation) to validate criminal proceedings for tax fraud even though the tax proceedings initiated by the FTA had been found unlawful. In a decision dated June 13, 2012, the Cour de Cassation went even further in this regard by convicting the corporate officers of a Swiss company for tax fraud on the basis of the existence of a permanent establishment in France, even though such permanent establishment was not found to be characterized by the tax courts.

Conversely, French tax courts do not deem themselves bound from a tax standpoint by the analysis made by criminal courts. This was recently illustrated by a noteworthy decision dated October 14, 2015, whereby the Conseil d'Etat found that the appraisal of facts made by a criminal court does not constitute res judicata (chose jugée) before tax courts.

In the case at hand, notwithstanding the fact that a criminal judge had previously declared the nullity of a tax proceeding, the tax judge had declared it valid. The taxpayers challenged the decision of the tax court on the grounds that it did not comply with the principle of res judicata. The Conseil d'Etat took the view that assessment of facts with regards to tax law is the sole responsibility of the tax judge.

The independence between criminal and tax proceedings is an issue that will increasingly be raised before courts, as the FTA have been granted in the past years more efficient instruments for combating tax fraud.


On October 20, 2015, the FTA issued guidance on the possible reclaims of social contributions following the February 26, 2015 De Ruyter preliminary ruling (see our French Tax Update for April 2015). Under this ruling, the European Court of Justice held that France was not entitled to levy the CSG, CRDS, and other security contributions on the real estate income of taxpayers that are not domiciled in France and are affiliated to a social security in their country of residence.

In their official guidance, the FTA state inter alia the following:

  • Only individuals residing in the EU, the European Economic Area (EEA), or Switzerland are entitled to request such refund.
  • Only 13.5 out of the 15.5 percent applicable social contributions can be refunded, as the 2 percent solidarity contribution is not affected by the De Ruyter ruling.
  • Appeals submitted by December 31, 2015 will be admissible for social contributions levied from January 1, 2013.
  • Proof of the taxpayer's affiliation to a foreign social security scheme shall be attached to the reclaim.

Please note that the French Government recently announced its intention to amend the relevant legislation in order to override the De Ruyter ruling for investment income paid as from 2016.

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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