The present French Tax Update contains (i) an overview of the main provisions proposed by the draft amending finance bill for 2015 (loi de finances rectificative pour 2015, 2015 Draft Amending Finance Bill), (ii) an update of the parliamentary amendments adopted in respect of the draft finance bill for 2016 (loi de finances pour 2016, 2016 Draft Finance Bill, please see our November 2015 French Tax Update for further details), and (iii) an overview of several noteworthy decisions issued by European and French tax courts or committees during the past few months.
2015 DRAFT AMENDING FINANCE BILL
The 2015 Draft Amending Finance Bill was presented to the lower chamber (Assemblée Nationale) on November 13, 2015, where it was discussed until November 30, 2015, before going to the higher chamber (Sénat). Its final version should in principle be adopted by year-end.
AUTOMATIC EXCHANGE OF INFORMATION BY FRENCH FINANCIAL INSTITUTIONS
Article 17 of the 2015 Draft Amending Finance Bill includes
several proposals to bring the filing requirements imposed upon
French financial institutions in line with EU Directive 2014/107/EU
(dated December 9, 2014 and amending Directive 2011/16/EU as
regards mandatory automatic exchange of information in the field of
Under Article 1649 AC of the French tax code (FTC), French financial institutions are required to file a specific declaration containing the information necessary to allow the mandatory automatic exchange of information as designed by the treaties entered into by France. Such specific declaration relies on both the outcome of the Global Forum on Transparency and Exchange of Information for Tax Purposes held in Berlin on October 29, 2014 and on EU Directive 2014/107/EU.
In order to allow the first exchanges of information as from 2017, the Draft Amending Finance Bill for 2015 proposes to authorize financial institutions to (i) operate automated processes to identify the relevant taxpayers, and (ii) collect all relevant data including tax identification numbers and tax residency information for all account holders and controlling holders thereof.
PARTICIPATION EXEMPTION REGIME
The 2015 Draft Amending Finance Bill proposes a number of
modifications to the participation exemption regime (where a
qualifying French parent company is 95 percent exempt in respect of
dividends received from a qualifying subsidiary, and where
dividends distributed by a qualifying French subsidiary to a
qualifying EU parent is exempt from French withholding tax). The
proposal's aim, essentially, is to align French legislation
with the EU rules.
The first proposed change relates to the ownership of the underlying shares. The traditional position of the French tax authorities (FTA) has been that the "bare ownership" of the relevant shares is not eligible for the participation exemption regime; this position was effectively defeated before the French courts. Under the 2015 Draft Amending Finance Bill, the bare ownership would now be eligible for the participation exemption; the "usufruct" (i.e., essentially the right to receive dividends) would still not be eligible. NB: These rules would also apply to outbound dividends paid by a French subsidiary to a qualifying EU parent company (plus a parent company located in Iceland, Norway, and Liechtenstein).
The second proposal is to implement, into domestic law, the anti-abuse rules approved at EU level. The 2015 Draft Amending Finance Bill thus provides that no participation exemption would apply if the dividends are distributed as part of a non-genuine arrangement, or series of arrangements, where the principal objective, or one of the principal objectives, is to obtain a tax benefit that would be against the purpose of the participation exemption. A non-genuine arrangement (or series of arrangements) is one where the arrangement(s) has not been put in place for valid commercial reasons reflecting an economic reality. The main difference between the above proposal, and what is already available under the domestic "abuse of law" procedure, is that the latter may be used by the FTA only if they can evidence that the relevant arrangement(s) is purely (or quasi purely) tax motivated. NB: The above rules also would be applied to outbound dividends.
The 2015 Draft Amending Finance Bill also proposes that the dividends received from a subsidiary based in a so-called "non-cooperative jurisdiction" (NCJ) are not eligible for the participation exemption, unless the parent company can prove that the underlying participation is not motivated by fraud or tax evasion. Under the current rules, the dividends received from an NCJ are never eligible for the participation exemption, without any safe harbor clause.
The 2015 Draft Amending Finance Bill also proposes to include in the statutes a situation that is currently accepted by the FTA only as a tolerance: an entity based within the European Economic Area, holding between 5 to 10 percent of a French entity, would not be liable to any French withholding on any dividends received from such entity, if it could evidence that such withholding tax may not be imputed as a tax credit in the jurisdiction where it is located.
Also, under the 2015 Draft Amending Finance Bill, the so-called "branch tax" would not be applicable to entities headquartered in Iceland, Norway, and Liechtenstein. The branch tax is a levy applied to the after-tax profits generated by a French branch of a foreign entity, such profit being deemed to be distributed to the shareholders by the entity. NB: EU-based entities already benefit from the branch tax exemption.
Finally, the 2015 Draft Amending Finance Bill confirms the non-availability of the participation exemption for dividends distributed by certain entities (e.g., dividends from REITs, UCITs, etc.).
DIVIDEND WITHHOLDING TAX EXEMPTION FOR FOREIGN LOSS-MAKING COMPANIES UNDER LIQUIDATION
Article 32 of the 2015 Draft Amending Finance Bill introduces a new provision in the FTC that should allow, as from January 1, 2016, outbound dividends to benefit from a French withholding tax exemption, when paid to certain foreign companies that are:
- in a loss-making position, and
- under compulsory liquidation (liquidation judiciaire), i.e., companies that are no longer eligible to rehabilitation insolvency proceedings.
This provision follows the letter of formal notice nº
2013/4244 issued by the European Commission, under which it had
expressed to the FTA its concerns regarding the compliance of such
dividend withholding tax with the principle of free movement of
capital within the EU.
The European Commission argued that non-resident investors in such position are treated disadvantageously compared to French companies in a loss-making position and under compulsory liquidation (companies that will ultimately never be subject to French corporation income tax on these distributions).
Although final legislation may still not include this provision, it is likely the members of Parliament will confirm this specific dividend withholding tax exemption during the final vote in December 2015.
DIVIDEND DISTRIBUTIONS NO LONGER TAX EXEMPT WITHIN FRENCH TAX GROUPINGS
A late parliamentary amendment to the 2015 Draft Amending
Finance Bill was proposed by the French Government on November 30,
This amendment follows the September 2 ,2015 Steria judgment (please see our October 2015 French Tax Update for further details) in which the European Court of Justice (ECJ) ruled that the taxation of a 5 percent add-back on dividends received from EU subsidiaries under the participation-exemption regime was in certain cases not compliant with the freedom of establishment principle.
In order to end this restriction, the proposed legislation provides that dividends received within a French tax grouping will no longer be fully exempt from corporate income tax, as the 5 percent add-back will no longer be neutralized. Correlatively, dividends received by members of a French tax grouping, be it from French or from EU subsidiaries, will be subject to a reduced add-back of 1 percent.
The 5 percent add-back on dividends received under the French participation-exemption regime should, outside of a French tax grouping, remain unaffected.
2016 DRAFT FINANCE BILL
The 2016 Draft Finance Bill was adopted by the lower chamber (Assemblée Nationale) on November 17, 2015. It will now be reviewed by the higher chamber (Sénat) before going back to the lower chamber. Its final version should in principle be adopted by year-end.
TAX-EXEMPT FOREIGN PENSION FUNDS ARE NOT ENTITLED TO TREATY BENEFITS
In a decision dated November 9, 2015 (nº 370054), the Conseil d'Etat ruled that a pension fund that is exempt from tax in a contracting state, by reason of its status or activity, cannot be considered liable to taxation within the meaning of article 4 of the double tax treaty entered into between France and Germany on July 21, 1959 (FR/GER Treaty). Such fund, therefore, is not entitled to the FR/GER Treaty benefits, such as the reduced withholding tax rates.
The Conseil d'Etat ruled as such in favor of the FTA, which had denied a German pension fund the benefit of the reduced 15 percent dividend withholding tax rate under article 9 of the FR/GER Treaty, to the extent it was exempt from German corporate income tax.
In a nutshell, the reasoning of the Conseil d'Etat is that, notwithstanding the fact that "tax residency" is not conditioned by tax liability under the FR/GER Treaty, this treaty can apply only to persons effectively liable to tax, in view of its purpose—the avoidance of double taxation.
The Conseil d'Etat ruled similarly in a decision of
the same day (nº 371132) about a Spanish pension fund
requesting (i) exemption from French withholding tax on dividends
received on the basis of the free movement of capital principle,
and alternatively (ii) reduction of French withholding tax pursuant
to article 10 of the double tax treaty entered into between France
and Spain on October 10, 1995 (FR/ES
Treaty). In this second case, the Conseil d'Etat ruled (i) that
the Spanish pension fund did not meet the characteristics needed to
establish comparability with French nonprofit organizations and
(ii) that, here again, it was not entitled to the FR/ES Treaty
benefits, as it could not be considered a resident of Spain to the
extent it benefited from a 0 percent corporate income tax rate in
By providing a much-needed clarification on the scope of double tax treaties, these two decisions on the FR/GER and FR/ES treaties mark an important step in the case law of the Conseil d'Etat on tax treaty interpretation. The only downside may be the fact that the Conseil d'Etat seems to have departed from the principle of literal interpretation of tax treaties.
ABUSE OF LAW PROCEDURE AND INTRA-GROUP BORROWINGS
The Appeal Court of Nantes decided, on June 25, 2015, a case law
regarding a borrowing by a French corporation, where the lender was
a sister Dutch entity of the borrower, and the latter was fully
owned by a US parent.
The FTA, using the abuse of law procedure, took the position that, despite the formal presentation of the transaction, the actual lender was the US parent, with the consequence that certain of the (then applicable) thin cap restrictions should apply to the deduction of interest due on the borrowing.
The borrower was arguing, inter alia, that, in any case, the relevant thin cap rules were not applicable under the non-discrimination provision of the US-French tax treaty (which would be applicable if the parent was, indeed, the lender).
The Appeal Court sided with the FTA by deciding that the treaty does not prevent France from applying its thin cap rules, to the extent these rules are compatible with article 9 of the treaty (which provides that the transaction between affiliated entities must be priced on an arm's-length basis). In other words, the Appeal Court decided that the purpose of thin cap rules is different from the object of arm's-length pricing, and, therefore, the FTA may apply the thin cap if it can prove that the actual lender was the US parent (rather than the Dutch affiliate).
APPLICATION OF THE QUEMENER CASE LAW
In February 2000, the Conseil d'Etat decided a
famous case law, known as the Quemener case, where it
established the rules to define the taxable basis in the event of
the sale of participations in a tax transparent entity. In essence,
the Conseil d'Etat decided that the tax basis in such
participations should be equal to the acquisition cost, increased
by any profits of the entity taxed at the level of the holder
(through the tax transparency) and decreased by the losses of the
entity deducted by the holder (again by virtue of the tax
transparency). The idea behind Quemener was to avoid the
double taxation or double deduction that would have been otherwise
Subsequently, the FTA agreed with the Quemener principles.
In a new decision, dated July 27, 2015, the Conseil d'Etat applied the Quemener principles to a situation where a tax transparent entity (or SNC) was fully owned by a corporation, and the participation in the SNC was cancelled as a consequence of the dissolution of the SNC into the parent.
As a result of the dissolution, on the balance sheet of the parent, the participation in the SNC was replaced by the latter's assets and liabilities. The assets were registered for their accounting value in the books of the parent, with the exception of a real estate asset (recently acquired by the SNC via the exercise of an option under a finance lease) that was registered for its market value. During a tax audit, the FTA had reassessed the taxable result of the SNC on the basis of the difference between the market value of the real estate asset and its acquisition cost (i.e., the exercise price of the option).
The parent (which was supporting the reassessment as a consequence of the transparency) had asked that the acquisition cost of its participation in the SNC be increased by the amount of the reassessment. The Appeal Court had sided with the FTA on the basis that, prior to the tax audit, the parent had not recognized the above gain as part of its taxable result (in its capacity as member of the SNC).
The Conseil d'Etat decided in favor of the parent on the basis of the Quemener principle. In order to avoid any double taxation, the Conseil d'Etat held that this principle should be also applicable when the FTA has reassessed, after its dissolution, the taxable income derived by the SNC (which would have been taxed at the level of the parent, given that, at the time, the latter still owned the SNC).
PRIORITY PRELIMINARY RULING REQUEST ON PARTICIPATION EXEMPTION
On November 12, 2015, the Conseil d'Etat requested
from the French Constitutional council (Conseil
Constitutionnel) a priority preliminary ruling on the issue of
constitutionality (question prioritaire de
constitutionnalité, QPC) of the
provisions of former article 145, 6, b ter of the 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 (P-E Regime).
The facts of the case that led to the QPC were as follows:
- The French company Metro Holding France (MHF) owned 100 percent of the shares of the French company CRFP Cash (CRFP).
- CRFP in turn owned a shareholding into MHF.
- In order to terminate this cross-ownership, MHF decided to buy back its own shares from CRFP in view of their cancellation.
- CRFP was subsequently merged into MHF.
Under the French rules applicable at that date (please see Jones
French Tax Update for January 2015 for more details), gains
arising from the buyback of shares were subject to income tax as
distributed income for a certain fraction. Accordingly, CRFP
exempted the gains arising from the buyback performed by MHF under
the P-E Regime. The FTA challenged the benefit of the P-E Regime on
the grounds that the treasury shares bought back by MHF did not
carry any voting rights.
MHF argued inter alia that (i) treasury shares could not be viewed as shareholdings exempt from voting rights, excluded from the P-E Regime, and that (ii) since this condition found in former article 145, 6, b ter of the FTC was not provided for under the Parent-Subsidiary Directive, MHF was treated less favorably on dividends received from its shareholding in a French subsidiary than on those received from an EU subsidiary. Such discrimination, MHF argued, created a breach of equality between taxpayers, infringing as such the rights and freedoms guaranteed by the French constitution.
The Conseil d'Etat overruled a decision of the Administrative Court of Appeal of Versailles and allowed the QPC request of MHF on the basis that this case of reverse discrimination was indeed an issue of serious nature that should be answered by the Conseil Constitutionnel.
The Conseil Constitutionnel is expected to issue its ruling within three months.
NON-PROFESSIONAL ASSETS REMAIN ISF-EXEMPT IF HELD THROUGH SUBSIDIARY OF A COMPANY ELIGIBLE TO THE PROFESSIONAL ASSET EXEMPTION
The French wealth tax (impôt de solidarité sur
la fortune, ISF) is a yearly tax payable by
individuals on the basis of the net value of their assets as of
January 1 of the relevant year of taxation. Several types of
assets, however, are exempted from ISF. In particular, shares held
in companies in which the relevant individuals exercise their
professional activity may be exempted from ISF under the so-called
professional assets exemption (PA
In the case at hand, two individuals were holding the shares of a real estate agency company (ACo) of which there were also managers. ACo was inter alia holding the shares of an asset management company (BCo), BCo was inter alia holding the shares of a real estate investment company (CCo), and CCo was holding six real estate companies, which were each holding a real estate property located in France.
The FTA denied the PA Exemption to the taxpayers on the basis that, in their opinion, the real estate properties held by the DCos were not necessary to the activities of ACo (i.e., the company in which the taxpayers were holding shares and on which they were claiming the PA Exemption for ISF purposes).
In a decision dated October 20, 2015, the French Supreme Court (Cour de Cassation) held that, although Article 885 O ter of the FTC does provide that the PA Exemption applies only to the fraction of the value of the shares corresponding to the assets that are necessary to the professional activity of the relevant company, it must be applied in a strict manner. It follows that such Article applies only to the company in which the relevant taxpayers hold shares and on which they claim the PA Exemption, notwithstanding the activities and assets of the direct or indirect subsidiaries held by such company.
As a result, the real estate properties held by the DCos could not be taken into account by the FTA to deny the PA Exemption claimed on the shares of ACo, since they were held by an indirect subsidiary of ACo.
Such decision could furthermore be regarded as providing useful guidance in relation to the extension (currently pursuant to the official guidelines issued by the FTA, despite several legalization efforts) of the PA Exemption to the shares of a holding company (provided inter alia that such holding company actively participates in the management of the company in which the relevant individual exercises his professional activity or in the group to which such company belongs—so-called active holding or holding animatrice concept).
NOTEWORTHY ABUSE OF LAW COMMITTEE OPINIONS
Pursuant to the abuse of law procedure (AoL),
the FTA may, under certain conditions, recharacterize a given
transaction if they can prove that it is either fictitious or
exclusively tax motivated. If the tax authorities attempt to
recharacterize a given transaction under the AoL procedure, the
dispute may be forwarded (either by the taxpayer or the tax
authorities) to the committee in charge of abuse of law matters
(Comité de l'Abus de Droit Fiscal, AoL
While the AoL Committee is an independent body whose object is to issue nonbinding advisory opinions, such opinions are in practice closely followed as they (i) shift the burden of proof, for any subsequent litigation, to the party with which the AoL Committee did not agree, and (ii) are generally viewed as influential on practitioners and tax courts (inter alia because of the qualifications of the AoL Committee members (three judges from the administrative supreme court, a tax lawyer, a public notary, a chartered accountant, and a university professor).
VAT FORUM-SHOPPING FOUND ABUSIVE
In an opinion dated September 25, 2015, the AoL Committee
provided a rare illustration of how the AoL may apply to a
transaction under which VAT was avoided by combining the VAT
treatments applicable in France, Denmark, and Monaco.
The facts were the following:
- In 2000, a company (XCo) was incorporated in France to design, build, and manufacture small lightweight helicopters.
- On April 2, 2008, XCo sent an advance payment invoice to a company incorporated in Denmark (YCo) corresponding to 30 percent of the price of a small lightweight helicopter, and such advance payment was made and booked under the reference "Z."
- On April 30, 2008, a sales contract was entered into between XCo and YCo for the sale of a small lightweight helicopter (Sales Contract).
- On September 7, 2009, the helicopter was registered in Monaco by Mr. Z.
- On December 18, 2009, XCo delivered the helicopter to YCo in Denmark and issued an invoice to YCo for the full amount of the helicopter.
- On December 23, 2009, YCo handed over the helicopter in Monaco to Mr. Z.
- On January 13, 2010, the helicopter was sent back to XCo so that airfloats could be installed, test flights performed, and the flying certificate obtained.
The tax treatment was fairly straightforward. The delivery by XCo
to YCo was not subject to French VAT under French tax law, and, up
until December 31, 2009, sales of means of transportation were not
subject to Danish VAT under Danish tax law. A direct delivery of
the helicopter by XCo to Mr. Z in Monaco would have given rise to
In 2011, the Danish tax authorities informed their French counterpart, pursuant to EU Regulation 904/2010 dated October 7, 2010, that the helicopter was delivered by XCo to YCo in Denmark on December 18, 2009, and then handed over by YCo to Mr. Z in Monaco on December 23, 2009. The FTA thus considered that the Sales Contract had in fact been entered into between XCo and Mr. Z, as YCo, which was allegedly lacking economic substance, had been interposed only to avoid French VAT.
The AoL Committee issued an opinion in favor of the FTA on the basis that although the helicopter was not fully equipped, its delivery by XCo to YCo in Denmark was made a few days before a change in the law that would have made Danish VAT applicable, and it was further followed by YCo handing over the helicopter to Mr. Z in Monaco only five days later. In addition, although YCo had an import-export activity, no satisfactory evidence was provided to support that the delivery of the helicopter to Mr. Z required that the Sales Contract be entered into between XCo and YCo.
NOTEWORTHY EUROPEAN COURT OF JUSTICE CASE LAW
VAT RECOVERY RIGHTS OF MIXED HOLDING COMPANIES
On July 16, 2015, the ECJ decided a number of cases
(Beteiligungesellschaft Larentia + Minerva mbH & Co. KG)
dealing with the VAT treatment of so-called mixed holdings, i.e.,
those that, besides owning participations in the relevant
subsidiaries, also provide various services to the latter.
The question was: to what extent may these holdings recuperate the VAT charged to them? The answers provided by the ECJ are generally not new, but they have the merit of confirming the principles already laid down where, currently, the tax courts of certain Member States (e.g., France) seem to deviate from these principles.
The starting point is that the relevant holding is receiving dividends distributed by the subsidiaries (which dividends are out of VAT scope), together with the remuneration of the services (administrative, commercial, etc.) provided to the latter (which are fully VAT-able).
The historic decision of the ECJ, in this respect, is the Cibo Participations SA decision of September 2001.
Essentially, a pure holding that does not participate in the management of the subsidiaries has no economic activity and cannot recuperate any input VAT.
On the other hand, a holding that does participate in the management of the subsidiaries has an economic activity, with the consequence that the input VAT may be recuperated as follows.
The basic principle is the allocation rule, where the relevant expense (which has generated the input VAT) has a direct and immediate link with one or more specific underlying operations performed by the holding, i.e., they participate in the price/remuneration received for these operations. The second principle is the one where the expense is qualified as a "general expense," i.e., it is linked not to a specific operation but to all of the holding's operations.
Under the above principles, where the holding is involved in the management of all subsidiaries, the input VAT of the holding is fully deductible to the extent it is deemed to have an economic activity.
The ECJ also dealt with the specific case where the holding is involved in the management of certain subsidiaries, but not all of them. In such a situation, the court decided that not all of the expenses may be treated as "general expenses" and, accordingly, the relevant Member States must come up with an allocation rule that would objectively reflect the expenses that are not linked to any economic activity (and for which the input VAT would not be recoverable).