Two nonrelated French companies ("French Co 1" and "French Co 2") and a Monaco company have created a third French company ("French Sub"). Pursuant to a shareholder agreement entered into on the same day, French Co 1 undertook to sell its shares into French Sub to French Co 2 in accordance with a certain timetable and for an amount contingent upon the then-net financial result of French Sub ("Call"). French Co 2 was then merged within and into another related French company ("French Co 3").

Few months later, a Luxembourg company ("Lux Co") was created by two limited liability British Virgin Islands companies ("BVI Cos"), the individual shareholder of French Co 1 being appointed as executive manager of Lux Co, with the power to represent Lux Co in its day-to-day operations and to contractually commit Lux Co.

Few weeks later, French Co 1 sold to Lux Co most of its shares into French Sub for an amount equal to the acquisition price of such shares ("Lux Sale"). Lux Co then sold to French Co 3 a portion of the shares of French Sub so acquired, for an amount giving rise to substantial capital gains. The year after, Lux Co sold the remainder of its French Sub shares to French Co 3, for an amount also giving rise to substantial capital gains. All such capital gains were tax-exempt in Luxembourg.

The FTA took the position that the sole purpose of the Lux Sale was to avoid any taxation in France of the capital gains to be realized by French Co 1 during the subsequent years (i.e., had the Lux Sale not happened) as Lux Co was not subject to any taxation on its capital gains under Luxembourg domestic tax laws. The FTA thus disregarded the Lux Sale and considered that French Co 1 had sold its French Sub shares directly to French Co 3, thereby triggering the taxation in France of the corresponding capital gains.

As in the previous opinion above, the AoL Committee ruled in favor of the FTA, on the basis of the following arguments:

  • The Call was already agreed upon between French Co 1 and French Co 2 on the day French Sub was created.
  • French Co 1 and Lux Co had common interests given the powers of the individual shareholder of French Co 1 toward Lux Co (interestingly, it seems that neither the FTA nor the AoL Committee was provided with evidence that French Co 1 and Lux Co were related entities, possibly through the BVI Cos).
  • The price agreed upon between French Co 1 and Lux Co for the Lux Sale was substantially lower than the price agreed under the Call.
  • The Lux Sale effectively allowed French Co 1 to avoid the realization of any capital gains in France; on the basis of the elements provided to the AoL Committee, the Lux Sale therefore had to be regarded as an artificial scheme exclusively motivated by a tax purpose, and in breach of the intent of the legislator (when it enacted the capital gains taxation regime).

As in the previous opinion above, the AoL Committee decided that French Co 1 had the principal initiative to set up the structure challenged under the AoL procedure and, accordingly, should be liable to the 80 percent penalty.