France: Twin cases reduce the scope of taxing capital gains on sale of French shares
Nicolas Duboille and Alexia Dal Ponte of Sumerson analyse recent case law concerning the application of the French capital gain tax applicable to non-resident entities on the transfer of a significant shareholding in a French entity.
When enacted in 1978, Article 244 bis B of the French Tax Code (FTC) provided for thetaxation of capital gains recognised upon the disposal by non-French natural persons or look-through partnerships of a significant shareholding (more than 25%) in a French entity. This tax mechanism was later modified to include the capital gains realised by non-resident companies subject to a tax that is comparable to French corporate income tax (CIT), by the French Amending Finance Law dated December 30 1993, which came into force on January 2 1994.
As an exception to the principle of taxation of capital gains on movable properties in the state of residence provided in double tax treaties (DTTs), this tax only applies to taxpayers established in countries that have not concluded a DTT with France, or in countries having concluded a DTT which expressly allows the source state to apply such tax (e.g. Austria, Italy, Spain, or Sweden).
Under this tax, a parent company established abroad, selling a participation in a French subsidiary is subject to French CIT at the standard rate. While, under the French participation exemption regime applicable to capital gains recognised upon the disposal of qualifying participations, a similar French parent company, implementing the same transaction, benefits from a partial tax exemption (12% of the gain remains taxable, as an addback to the tax result of non-deductible expenses).
Article 244 bis B FTC: European entities
Aware of this discrimination, the French tax authorities (FTA) provided in their guidelines that parent companies established in another EU/EEA member state can benefit from a tax refund mechanism, up to what would have been paid by a French entity in the same situation.
In a remarkable case, the French Supreme Court (Conseil d’Etat, October 14 2020, n°421524) considered that the provisions of Article 244 bis B FTC constitute a restriction to the freedoms of establishment and of capital movements, enshrined respectively in Article 43 and 63 of the Treaty on the Functioning of the European Union (TFEU).
The Conseil d’Etat further issued that, even if the FTA are allowed to interpret legal provisions when they are contrary to EU law, this ability is given only when the legal provisions are unclear, which is not the case of Article 244 bis B FTC. In order to not infringe the principle of legality, the FTA must refrain from applying, in its entirety, the discriminatory taxation.
As a result, parent companies incorporated in another EU/EEA member state are thus entitled to obtain the complete restitution of the tax paid until the French legislator intervenes on this issue. It should be noted that this decision creates a reverse discrimination for French parent companies, as they are now in a less advantageous situation than other European companies (since the French parent companies continue to bear CIT on 12% of the capital gains).
Article 244 bis B FTC: Companies incorporated in third countries
The freedom of capital movements was extended to third countries by the Maastricht Treaty. It also included a standstill clause, pursuant to which a restriction to this freedom of capital movements toward third countries may subsist, if the discrimination was in force on December 31 1993 and continuously since then, and if it concerns direct investment.
The Versailles Administrative Court of Appeal (CAA Versailles, October 20 2020, n°18VE03012)drew the logical consequences of the entry into force on January 2 1994 of the aforementioned law extending the provisions of Article 244 bis B FTC to companies subject to a tax that is comparable to French CIT. The Court of Appeal ruled that the discrimination at hand cannot be saved by the standstill clause as the temporal condition is not fulfilled.
However, it is important to point out that the tax on capital gain remains applicable if the foreign company holds a significant shareholding that allows it to influence the management and to have control over the French entity whose shares are sold (e.g. if the foreign entity holds more than 50% of the share capital and voting rights of the French subsidiary). Indeed, in such a case, the company is not protected by the freedom of capital movements (since the investment does not fall within the scope of indirect investment), nor by the freedom of establishment, which does not apply to relations with third countries.
These two important decisions considerably reduce the scope of Article 244 bis B of the FTC. While waiting for a legislative intervention, the non-resident entities, which fulfil the conditions mentioned supra, are no longer subject to a tax on capital gains recognised upon the disposal of a significant shareholding in a French entity and, as a result, are entitled to claim for the refund of the whole amount of the tax paid on the capital gains realised since 2019.
Alexia Dal Ponte