Versailles Administrative Court of Appeal, Jul. 29, 2014, no. 12VE03691, Sté Groupe Stéria)
With its eligible French subsidiaries, the Société Groupe Stéria company forms a tax consolidated group pursuant to Articles 223 A et seq. of the French Tax Code (“FTC”). Via its tax consolidated subsidiaries, it also holds all the share capital of subsidiaries which are residents of the European Union (“EU”). The latter subsidiaries paid large dividends, for which a 5% proportion of costs and expenses was subject to the French corporate income tax and to applicable additional contributions.
Under French law, the tax consolidation regime allows a parent company, referred to as the “lead company”, to make only itself liable for the corporate income tax, for the entire group it forms with its subsidiaries, based on the total taxable income after neutralizing certain transactions performed between the group's companies. In particular, the second paragraph of Article 223 B of the FTC provides that, “the proportion of costs and expenses included in the results of a company in the group shall be deducted from total taxable income based on its shareholding in another company of the group (...)”. Société Groupe Stéria, therefore, wished to extend this measure for neutralizing the proportion of costs and expenses to dividends from its European subsidiaries, although these subsidiaries are not part of the French tax consolidation, arguing that there was a restriction to freedom of establishment. The Montreuil Administrative Court (Montreuil Administrative Court, 1st ch., Oct. 4, 2012, no. 1103063, Sté GroupeStéria: JurisData no. 2012-027817) rejected this argument, ruling that neutralizing the proportion of costs and expenses could apply only to companies that are French residents and members of the tax consolidated group.
The Versailles Administrative Court of Appeal submitted a preliminary question to the Court of Justice of the European Union (“CJEU”), asking it, “[…]must Article 43 EC (now Article 49 TFEU) on freedom of establishment be interpreted as precluding the rules governing the French tax consolidation regime from granting a tax consolidated parent company the neutralization as regards the add-back of the proportion of costs and expenses, fixed at 5 % of the net amount of the dividends received by it from tax consolidated resident companies only, when such a right is refused to it under those rules as regards the dividends distributed to it from its subsidiaries established in another Member State, which had they been resident would have been eligible in practice, if they so elected?”
Now, we have to wait for the CJEU's decision. Although Article 223 B of the FTC does effectively seem to constitute a restriction to freedom of establishment, the question of whether this restriction is justified and proportionate still remains. In an X Holding BV case (CJEU, Feb. 25, 2010, case 337/08, X Holding BV), the CJEU has already ruled that the tax consolidation regime, because it creates the possibility for a parent company to constitute a single tax entity with its resident subsidiary, but prevents constituting such a single tax entity with a non-resident subsidiary if the non-resident subsidiary's profits are not subject to this Member State's tax laws, did indeed constitute a restriction to freedom of establishment since it dissuaded the parent company from creating subsidiaries in other Member States. The CJEU also stated that this restriction was justified, due to the need to preserve the allocation of taxation power between the Member States, and proportionate. In the case here, the issue arises as to whether the particular benefit offered by Article 223 B of the FTC can be separated from the tax consolidation regime and be evaluated, as such, with respect to EU law. Those in support of an affirmative response argue that the mechanism for neutralizing the proportion of costs and expenses is not inherent in the tax consolidation regime because it does not have for effect or purpose to avoid a double deduction or double taxation that is supposedly created through the tax consolidation--a mechanism that is played by the parent-subsidiary regime. This benefit, therefore, can be separated from the tax consolidation regime and may benefit eligible European subsidiaries.
The decision to be handed down by the CJEU will be decisive for the future of Article 223 B of the FTC: in case of a conflict, to ensure compatibility, the French lawmaker could either extend this article's benefit to foreign subsidiaries satisfying the eligibility conditions--this would be the most beneficial option--or quite simply eliminate this benefit, thereby depriving the tax consolidation regime of one of its most important features.