In a decision handed down on February 15, 2016, the French Administrative Supreme Court ruled for the first time in a case where the FTA (French Tax Authorities) had challenged the transformation of a corporation into a partnership on the grounds of an abuse of law.
The facts were the following: in 1997, the Casino Group acquired all the shares of a company head of tax consolidated group that notably operated the Franprix and Leader Price brands. This company was renamed, following the acquisition, Asinco. As the company’s acquisition led to the end of the tax consolidation, the former tax consolidated group’s overall losses then became tax loss carryforwards owned by Asinco.
During fiscal year 1998, the corporation Distribution Leader Price, a 70% subsidiary of Asinco, was transformed into a general partnership. The profits generated by the general partnership in FY 1998 were transmitted to Asinco up to the shares held in the corporation. Thus, Asinco was able to offset all of the tax loss carryforwards mentioned above with its own result, which had become profitable.
In the following year, it was decided within the group to assign the development of the discount business exclusively to the sub-group Leader Price. In this context, the general partnership was transferred to the Leader Price group’s holding company in 1999.
On the grounds of an abuse of law, the FTA challenged the transformation of the company Distribution Leader Price and its transfer one year later to another company of the group because these transactions would exclusively pursue a tax purpose .
The French Administrative Supreme Court considered that the exclusive tax purpose was not established for two reasons:
- the general partnership carried out its business activity after its transformation and until its transfer to another company of the group, and
- even after this transfer, the general partnership kept its new form.
Lastly, the French Administrative Supreme Court pointed out that the FTA could not put forward the allegedly abusive nature of the delayed transfer of the shares without bringing any proof of it whereas the company stated that the decision to assign the discount activity to Leader Price had been made only in June 1999 and not at the time of the company’s transformation in 1998.
The Administrative Court of Appeal, which ruled in line with the French Administrative Supreme Court regarding the delayed transfer of the shares, had however consider that the company’s transformation could constitute by itself an abuse of law. In this case, the Court noted, based on the preparatory work for the Finance Act of June 30, 1923, that the aim of Article 8 of the French Tax Code was to allow the partners of partnerships to benefit from tax deductions for family costs and “its purpose was not to allow a partner of a general partnership, created for this sole purpose, to deduct his own losses from the profits of the partnership, thereby allowing the latter not to be subject to taxes.” Thus according to the Court of Appeal, the research of a literal application of the law contrary to the Parliament’s intent was established.
Nevertheless, the French Administrative Supreme Court reversed the decision based on a legal error. The Court considered that if taking family costs into account was notably one of the initial goal of the Parliament when the regime provided by Article 8 of the FTC was created, this goal could not be used to characterize an abuse of law when, at the date of the facts, the wording of Article 8 had been modified to authorize legal entities to own partnerships; legal entities, are not by definition concerned by family costs. On this point, according to the French Administrative Supreme Court, the application of the partnerships regime was not contrary to the intent of the authors of the law.
This unprecedented decision is of interest as it emphasizes the elements that may be used to rule out the characterization of an abuse of law in case of a transformation of a corporation into a partnership, i.e., the continuation of the company’s business activity and keeping the new form after the transformation.