In two decisions dated 5 July 2013, the French Administrative Supreme Court has ruled that tax consolidation agreements under which a parent company assumes the final tax burden, without contribution from the group’s member companies, are enforceable, provided that the parent does not commit an abnormal management act and that the allocation does not infringe the companies’ interests or minority shareholders’ rights.
In Sté Kingfischer International France Ltd and Sté Décathlon, tax consolidation agreements had been concluded between the parent company and its subsidiaries under which the parent company assumed all the corporate income tax liabilities and additional contributions based on the corporate income taxes that the group owed and, in consideration, the parent company benefited from the resulting tax savings if the subsidiaries left the tax consolidated group. In the Décathlon case, after the tax audit, the 5 per cent penalty was applied to the parent company for having failed to declare, on the specific form the indirect subsidy consisting of the full assumption of the tax burden owed by the tax consolidated group. The parent company then asked for a full discharge of this penalty. In the Kingfischer case, when the tax consolidated group came to an end the parent company added back the indirect subsidy corresponding to the taxes paid on behalf of its subsidiaries’ and then requested a refund of this amount. This request was turned down by the French tax authorities. The Supreme Court granted both companies’ requests and ruled that the free allocation of the tax burden as provided in the tax consolidation agreement does not reflect the payment of an amount that could be regarded as an indirect subsidy to members of the tax consolidated group and did not constitute in principle an abnormal management act.
As established in its earlier decision in Sté Wolseley Centers France, the Supreme Court noted that, to the extent that the allocation of the tax burden members of a tax consolidated group is not governed by any provision of the tax consolidation regime, the companies may freely provide the terms of the allocation among them in the tax consolidation agreement or, if applicable, the tax savings resulting from the application of the tax consolidation regime. However, this free allocation of the tax burden is acceptable only if it does not infringe each company’s corporate interests and the rights of minority shareholders. Otherwise, it constitutes an abnormal management act.
In the two cases, all these conditions were satisfied. With respect to the subsidiaries’ interests, they were not subject to higher taxes than would have applied had there been no tax consolidated group and, if they left the group, they were compensated for the additional taxes due because they were unable, when they were members of the tax consolidated group, to set off their tax losses against their taxable income.
With respect to the parent company, its interests are also preserved to the extent it was able to benefit from deducting the carried-forward tax losses of its subsidiaries from the overall taxable profits. However, although in the Décathlon tax consolidation agreement the parent company could ask its subsidiaries when they left the tax consolidated group for a refund of the tax savings obtained from the application of the tax consolidation regime, the tax consolidation agreement of the Kingfischer group was silent on this issue.
Despite this notable difference, the Supreme Court reached the same conclusion, namely that the parent company did not commit an abnormal management act. In the Kingfischer decision, the Supreme Court noted that the final assumption of the group’s taxes by the parent company added value to its shareholding in its subsidiaries up to the amount of the share capital held. This last argument, which is rather new, would presume that minority shareholders’ interests in the subsidiaries are negligible. However, one cannot exclude the possibility that the Supreme Court wishes to make a general argument of this, regardless of the minority stake in subsidiaries, in order to adopt a more flexible and pragmatic approach to the issue of allocating taxes in the context of a tax-consolidated group, thereby increasing the attractiveness of the tax consolidation regime. Tax-consolidated groups should, therefore, be able to freely choose the model of tax consolidation agreement (I, II, III or IV) that best corresponds to their own situation