(French Administrative Supreme Court, Jul. 27, 2015 no. 362025, SA MEA)
In a decision on July 27, 2015, the French Administrative Supreme Court reaffirmed the application of the principles laid down in the Quemenercase to a dissolution without liquidation through a merger of assets, stating that these principles apply to a situation where the assets were revalued by the tax authorities after an audit.
In this case, a société anonyme - a public limited company - (the "SA") merged its assets with a société en nom collectif - a general partnership - (the "SNC"), which had a property leasing business.The SA had previously acquired all the shares in the SNC.In its accounts, the SA posted the assets held by the SNC at their book value, with the exception of a building leased under a lease with option to purchase agreement, which the SNC acquired by exercising its option.It then revalued the building when the SNC was dissolved.For the fiscal year ended after the merging of assets, the SA did not declare any short-term capital losses or gains on these transactions.After the tax audit, the tax authorities increased the SNC's taxable income, arguing as follows:
- (i) firstly, the fact that the SNC exercised the option to purchase had created short-term capital gains for the SA, which was equal to the difference between the revalued property's value and the property's purchase cost; and
- (ii) secondly, the fact that the SNC was dissolved made the tax on the capital gains realized by the SA, which was the sole shareholder, fall due.
The SA accepted this increase, but requested that these capital gains be taken into account in the cost price of its participating interest in the SNC to determine the taxable income related to the merger.The tax authorities refused to do so.
Unlike the Court of Appeal (Marseille Administrative Court of Appeal, Jun. 19, 2012 no. 09MA00508), the French Administrative Supreme Court ruled that the tax authorities' refusal was unfounded.Indeed, the Administrative Supreme Court held that the principles laid down by theQuemener case apply to the calculation of the capital gains resulting from a partnership's dissolution without liquidation, which thereby brings about a merger of assets with its sole shareholder, a company subject to the corporate income tax.The Court stated that this principle notably applies when the tax authorities have performed a revaluation of corporate assets within the framework of its auditing powers and when the effect of such revaluation is that it retroactively increases the company's tax base for the fiscal year in which the dissolution without liquidation takes place.The Court reversed the Court of Appeal's decision, which had refused to take into account the amount of the capital gains realized in the property's revaluation into the cost price of the dissolved SNC's shares, on the grounds that such capital gains had not been taken into account in the SA's taxable income it had declared prior to the SNC's dissolution and the assets merger.The Court remanded the case to the Marseille Administrative Court of Appeal.
This new decision involving the application of the Quemener case is of interest in two respects:
- it reaffirms that the rules laid down by the Quemener case apply to assets mergers involving the shares of a company that has previously revalued a property.The Court of Appeal (Paris Administrative Court of Appeal, Feb. 18, 2014, no. 12PA03962, Sté Lupa Patrimoine France) had already reached this conclusion, merely adopting the position staked out by the tax authorities themselves in a preliminary tax ruling on December 11, 2007, in which they accepted to apply the Quemener case to an SCI's (real estate holding company) dissolution without liquidation after the voluntary revaluation of its real estate assets [RES (Advance Tax Ruling) no. 2007/54 (FR) - BOI-BIC-PVMV-40-30-20-20140428]; and
- however, although in the case handed down on February 18, 2014, substantively the tax authorities took the opposite position of what they had stated in the above premliminary tax ruling, in the case at hand, they did not directly call this position into question. Instead, they refused to apply the Quemener case because the taxation of the capital gains on the building resulted from the upward adjustment performed by the tax authorities themselves. The French Administrative Supreme Court rightfully found that this did not prevent application of the Quemenercase.