France for years has imposed an annual tax of 3% of the value of immovable property situated in France when that property was owned, directly or indirectly, by a legal person. France law provided an exemption from this excise  for those legal persons whose seat of management was situated in a country or territory that had a TIEA or income tax treaty containing a nondiscrimination clause, provided, however, that the identities and addresses of the legal persons’ shareholders were disclosed annually as of a certain date. The exemption also was extended to legal persons that had their effective center of management in France or another EU member state, again provided the identity and addresses of the ultimate shareholders were provided.

Prunus, a company organized under the laws of France, was a wholly owned subsidiary of a Luxembourg holding company, Polonium. Polonium was owned 50% each by two companies organized and established in the British Virgin Islands. Prunus owned, directly or indirectly, a number of properties situated in France, but under the French tax rules, Prunus and Polonium were exempt from the 3% immovable property tax. Nevertheless, the two BVI companies were subject to the 3% tax as the BVI and had not entered into a qualifying tax treaty or TIEA designed to combat tax evasion.  The French taxing authority assessed the 3% tax against the French company, Prunus,  who was, under the provision, jointly and severally liable for the tax owed by the two BVI companies. Prunus and Polonium argued that the French rules at issue were contrary to article 63 (free movement of capital) of the Treaty on the Functioning of the European Union (TFEU).

The European Court of Justice, on May 5, 2011, in its landmark decision, Prunus SARL v. France (C-384/09) held against Prunus and upheld the assessment. Noting that the companies in the BVI are not entitled to EU membership benefits derived from EU law, the French anti-avoidance rules were upheld, i.e., the tax may be imposed if the legal person is established in a country that there is no tax information exchange agreement or an income tax treaty containing a nondiscrimination provision between the BVI and France.

An English  commentator on the case noted that the decision has “major implications for similar companies established in so-called overseas countries and territories such as Bermuda and the Cayman Islands.