(Douai Administrative Court of Appeal, Sep. 18, 2014, no. 13DA01806, 3rd chamber, SARL Michaël)
Regarding the tricky issue of assessing the notion of “complete line of business” (“CLB”), the Douai Administrative Court of Appeal has just made a radical practical application of the position laid down by the French Administrative Supreme Court (Conseil d'Etat) in a decision on July 13, 2012, handed down involving a similar case, ruling that the refusal by all employees to have their employment agreement transferred was not an obstacle to benefit from the business capital gains exemption provided by Article 238 quindecies of the French Tax Code (“FTC”), if such employees were not essential to continuing the transferred business.
Although the Court of Appeal's decision of September 18, 2014, only concerns Article 238 quindecies of the FTC, it appears to be much broader in scope, as the specifications provided on assessing a CLB will probably also apply to other favorable tax regimes, such as the partial contribution of assets regime provided by Article 210 B of the FTC.
In the SARL Michaël case, SARL Michaël had sold to another company its men's clothing business in the “Serge Blanco” franchise, in 2006, without transferring its staff because the only two employees in the business had preferred to be dismissed before the sale. The tax authorities had considered that the sale did not involve a CLB and refused to apply the business capital gains exemption regime. The tax authorities' reassessment for the capital gains resulting from the sale had been upheld by the Rouen Administrative Court on January 1, 2010, and then rejected by the Douai Administrative Court of Appeal in its decision on March 13, 2012. The tax authorities hence appealed the latter decision to the French Administrative Supreme Court. In a decision on October 23, 2013, the Supreme Court overturned the Court of Appeal's decision based on legal error - the Court of Appeal merely noted that the benefit of the exemption in Article 238 quindecies of the FTC could not be denied because it had not been established that the buyer could not continue the business autonomously without the staff transfer.
The Supreme Court remanded the case to the Court of Appeal, which made another ruling involving SARL Michaël. The Court of Appeal restated the analysis recommended by the Supreme Court in its aforementioned opinion handed down in a similar case involving a sale of a business (French Administrative Supreme Court decision, Jul. 13, 2012, no. 358931, SAS Ondupack).
The Court of Appeal first pointed out that, given the legislature's intent, the exemption benefiting business capital gains resulting from sales of CLBs is notably subject to the effective transfer of the staff necessary for continuing the business's autonomous operation based on the nature of the business and the specificity of the requisite jobs assigned to it. Then, like the Supreme Court in its opinion, the Court of Appeal stated that, as a general rule, the automatic transfer of employment agreements in force, on the terms provided by Article L. 1224-1 of the French Labor Code provides for this effective transfer of staff.
However, there is no requirement that all the employment agreements in force be systematically transferred to the buyer. The Court of Appeal pointed out the Supreme Court's position, which was that, in the event certain members of staff refuse to be transferred, an assessment must be made on a case-by-case basis to determine whether such refusals are likely to serve as an obstacle to deeming as complete the transfer of the business's essential components.
Consequently, the Douai Administrative Court of Appeal performed an analysis of the facts in the case and found that the continued operation of a clothing business essentially depended on the right to use the commercial trademarks, premises and facilities. It further found that the fact that the staff was not transferred was not an obstacle to deeming the sale of these assets as involving a CLB.
Therefore, the Douai Administrative Court of Appeal's decision puts an end to the twists and turns in the SARL Michaël case. It gives SARL Michaël the benefit of the business capital gains exemption of Article 238 quindecies of the FTC. More generally, this decision confirms that application of the favorable tax regimes to sales or contributions of complete lines of business requires previously to identify, on a case-by-case basis, the business components that are objectively necessary for the buyer to continue the business - only these components must be transferred in the sale or contribution.