In June 23, 2014 decision, the French Administrative Supreme Court confirmed and clarified the recent position taken in the Garnier Choiseul Holding (French Administrative Supreme Court decision, July 17, 2013, 9th and 10th subsect., no. 356523, and French Administrative Supreme Court Decision, April 11, 2014, 9th and 10th subsect., no. 352999), regarding the review of "coquillards" (thieves) schemes in proceedings to prevent abuses of law. Remember that these two decisions reversed the case law, which was favorable to taxpayers, handed down in recent years by various administrative courts and courts of appeal that reviewed this type of scheme.
Once again the position adopted by the Paris Administrative Court of Appeal in its decision on April 27, 2012, no. 11 PA 02237, ruling in favor of Groupement Charbonnier Montdidérien, the French Administrative Supreme Court effectively reaffirmed that the tax authorities may legally apply the system for preventing abuses of law, provided by Article L. 64 of the French Book of Tax Procedures, to challenge application of the parent companies/subsidiaries tax regime, provided by Articles 145 and 216 of the French Tax Code, to dividends received by a parent company from the acquired subsidiary, after the subsidiary has ceased its initial activity and liquidated its assets. This applies in all cases where the parent company does not prove that it has taken steps to enable its subsidiary to take over and develop its former activity or to find another activity.
The facts of the case were as follows: in 2002 and 2003, Soprinvest Immo (of which Groupement Charbonnier Montdidérien was the successor-in-interest) acquired Sud Immo Service and Remount, which then paid it dividends subject to the parent companies-subsidiaries tax regime. Simultaneously, the purchaser company deducted provisions for depreciation of the shares of the acquired companies, pursuant to Article 219-I-ter-a of the French Tax Code, in amounts close to the value of the dividends received. As a result, it received immediate tax benefits in the form of tax savings and tax loss carry-forwards. In addition, the judicial investigation found that Remount had ceased all activity when it was acquired, its assets were essentially comprised of bonds of a Luxembourg company and of financial interests, it did not employ any staff and the dividend distributions it had made effectively deprived it of the resources to be able to find another activity. Sud Immo Service had retained a portion of its assets, which, however, were essentially comprised of bonds of the same Luxembourg company and did not lead to any transfers of shares that could be characterized as a portfolio management activity.
In ruling for the company, the Paris Administrative Court of Appeal noted that, firstly, Soprinvest Immo, Sud Immo Service and Remount existed before the dividend distribution and the disputed tax benefits had not been obtained through a company specially formed for this purpose and, secondly, the relevant transactions had not violated the objectives of Article 216 of the French Tax Code, which enacted the parent companies tax regime for the purpose of eliminating double taxation of dividends.
However, the French Administrative Supreme Court reversed this position, ruling on the contrary that the two conditions for application of abuse of law by fraud were met, i.e.: (i) seeking to benefit from a literal application of regulations contrary to the objectives pursued by the regulations' authors, and (ii) the fact that the relevant acts could not have been based on any purpose other than to avoid or reduce the relevant party's taxes which, if such party had not taken such acts, given his situation or his real activities, he normally would have incurred.
Specifically as regards the first term, the French Administrative Supreme Court pointed out that it was the result of all the preparatory works for the parent companies tax regime, since the Act of July 31, 1920, and the fact that benefiting from such tax regime has always been subject to the condition of having held shares since the very beginning or for a minimum retention period and, since 1936, the condition of a minimum shareholding threshold in the issuing companies' capital, the objective of which, by seeking to eliminate or limit the succession of taxes that could be levied on proceeds that parent companies redistribute to their own shareholders, was to promote the parent companies' involvement in the economic development of subsidiaries to structure and strengthen the French economy. The French Administrative Supreme Court necessarily inferred from this that acquiring a company that had ceased its initial activity and liquidated its assets, for the sole purpose of obtaining its cash through payment of dividends, which are exempt from corporate income taxes pursuant to the parent companies preferential tax regime, without taking any steps to buy them and develop their old activity or to find another activity, was contrary to this objective.
It is interesting to note that, in this respect, the French Administrative Supreme Court did not consider relevant the fact that all the available cash had not been distributed by the subsidiary and that the subsidiary had retained a significant part of the cash, if the balance of cash had not been used either to develop any activity or to make any investment.
Lastly, the French Administrative Supreme Court also noted that the seller company and the buyer company had shared the tax benefit resulting from this scheme. Indeed, the companies' shares had been sold voluntarily at a reduced price, as the sale allowed the seller to save a large amount of taxes: without this sale to the "thief", the shell companies' members would have paid a large amount of taxes to obtain the companies' cash in the form of a liquidation surplus, net surplus on transfer or merger dividends. Hence, the discount was not based on making "financial gains" as the company had argued; rather, it was solely for tax purposes, i.e., sharing the tax savings. Consequently, the condition involving subjective abuse of law is fully met and the sharing of the tax savings by the seller and the buyer was clearly an aggravating circumstance in this case.
This new decision by the French Administrative Supreme Court indisputably emphasizes the traditional conception of the notion "abuse of law". Hence, if the benefit resulting from the scheme is purely fiscal by nature, this will necessarily constitute abuse of law.