The French Constitutional Court Has Ruled That the NonCooperative States Regime Must Include an Exemption for NonAbusive Transactions
NON-COOPERATIVE STATES REGIME
At the end of 2009, France enacted a regime applicable to transactions with non-EU Member States that do not comply with international standards on exchange of information (Non-cooperative States and Territories or “NCSTs”). The list of NCSTs, initially derived from the OECD Non-Cooperative States blacklist, is updated annually.
Transactions involving NCSTs are deemed fraudulent and are therefore subject to a highly detrimental tax regime. In particular, French parent companies having subsidiaries in NCSTs are not entitled to the benefit of the exemption regime on dividends received, nor can they benefit from the long-term capital gains exemption on gains resulting from the sale of shareholdings in such subsidiaries.
Although most of the provisions applicable to the NCSTs provide for an exemption allowing the taxpayer to escape such provisions by showing that the relevant transaction was not driven by tax fraud or tax evasion, such a provision was not included with respect to the participation-exemption regime mentioned above regarding dividends and capital gains.
A Consortium composed of the AFEP – a French association which gathers the largest French corporations – and six French public companies (Air Liquide, Lafarge, Pernod-Ricard, Technip, Total and Veolia Environnement) filed a claim challenging these provisions, arguing that the absence of an exemption allowing taxpayers to demonstrate that their investments in NCSTs are motivated by a sound business reason is contrary to the equality of treatment principle set forth by Articles 6 and 13 of the French constitution. Sullivan & Cromwell LLP represented the Consortium before the French Supreme Court and the French Constitutional Court.
THE DECISION OF THE CONSTITUTIONAL COURT
On January 20, 2015 the Constitutional Court decided in favor of the Consortium, and ruled that the relevant provisions are compliant with the French constitution only if the taxpayer is allowed to demonstrate that an investment reflects bona fide transactions that do not have the aim of evading French taxes by locating income or profits in NCSTs.
This decision is of major importance for all French multinationals making long-term active investments in countries which are or could become NCSTs. The profits generated in such countries may now benefit from the participation exemption regime, and therefore be repatriated tax free in France.
This landmark decision is also likely to pave the way for other decisions with respect to similar provisions including presumptions of tax abuse or tax fraud that do not provide for adequate safeguard provisions.