(French Administrative Supreme Court, Nov. 5, 2014, no. 370650, SOFINA)
Last month, the French Administrative Supreme Court (Conseil d'Etat) handed down an unprecedented decision on assessing the threshold of 5% capital holdings of the issuing company required to benefit from the parent-subsidiary regime. In this decision, the Supreme Court expressly stated that a parent may benefit from the parent-subsidiary regime exemption if it holds 5% of its subsidiary's capital, regardless of the percentage of voting rights attached to the shareholding.
In this case, the shares held by the petitioner company represented more than 5% of capital, but only 3.63% and 4.29% of voting rights for the two years at issue. The tax authorities had found that the company was not eligible for the parent-subsidiary regime because its shareholding, which did indeed represent 5% of capital, was less than this threshold in terms of voting rights. The minister's arguments were first based on (i) the fact that the term “participating shares” referred to the accounting definition of shares (shares whose long-term possession is deemed useful for the company's business, notably because the possession allows it to have influence over the company issuing the shares or to control it), secondly, (ii) relying on the most recent decisions handed down in the field of abuse of the parent-subsidiary regime (notably, the French Administrative Supreme Court decision of July 17, 2013, Garnier Choiseul Holding), the legislature's intent, which was allegedly to reserve the exemption of dividends only for companies involved in the management of their subsidiaries and, therefore, holding a certain number of voting rights, and, thirdly, (iii) the exception provided in Article 145-6-b ter, which allows companies that hold shares without voting rights to exempt the proceeds of such shares, provided that they also hold shares representing at least 5% of capitaland 5% of voting rights.
In his opinion, the Public Rapporteur, Vincent Daumas, rejected the first two arguments: (i) the act does not refer to the accounting definition of participating shares, (ii) referring to the legislature's intent is useless, as the wording of Article 145-1 is clear. The Rapporteur Public pointed out that the exception provided in Article 145-6-b ter (iii) is related to shares whose dividends may be exempted, not to the definition of shares eligible for the parent-subsidiary regime.
The French Administrative Supreme Court used the latter reasoning as its grounds, ruling that the purpose and effect of the provisions of Article 145-b-6 ter of the FTC are not to reserve application of the parent-subsidiary regime only for companies holding participating shares representing at least 5% of capital and 5% of voting rights. If all shares of the issuing company include voting rights, even if very limited, subject to the other conditions, holding 5% in financial rights suffices, independently of the percentage of voting rights, to be within the scope of the parent-subsidiary regime.
This position is contrary to the tax authorities' position. In their old guidelines, they stated that the 5% rate was aimed at both financial rights and voting rights (Tax Guideline 4 H-1-01 of Jun. 20, 2001, and Tax Guideline 4 H-3-07 of Mar. 19, 2007). However, whether it was oversight or willful omission, it should be noted that this requirement was not expressly restated when the BOFIP was published. In any event, this decision provides a clear and welcome answer to companies for determining whether they will benefit from the parent-subsidiary regime.
Companies that have applied the tax authorities' literal position to financial years that are not time-barred, therefore, would be well advised to file a claim demanding application of the parent-subsidiary regime.