French Administrative Supreme Court, 8th and 9th subsect., Feb. 26, 2016, No. 382350, SA KLE1 (1st case)
French Administrative Supreme Court, 8th and 9th subsect.., Feb. 26, 2016, No. 382364, SA Klépierre (2nd case)
French Administrative Supreme Court, 8th and 9th subsect.., Feb. 26, 2016, No. 376192, Sté Unibail-Rodamco SE (3rd case)
An unprecedented issue was recently brought before the French Administrative Supreme Court on three cases: the methods for valuing shares of “real estate oriented partnerships” for the purpose of calculating the taxation on the capital gains existing when a company fell within the scope of the tax regime for SIICs, governed by the provisions of Articles 208 C et seq. of the FTC.
In the three cases, the tax authorities had called into question the adjustments made by the SIICs in the form of discounts for calculating the capital gains on the shares of “semi-transparent” (translucide) companies that own real estate properties, which were subject to taxation when they fell within the scope of the tax regime for SIICs.
In the first two cases, the taxpayer had concluded that, to estimate the revalued net asset of the relevant subsidiaries, it was possible to deduct from the appraised value of the real estate properties held by these companies, firstly, the amount of registration duties and other applicable costs and fees if the real estate were sold directly and, secondly, a flat-rate amount corresponding to the sharing of latent taxation existing on the underlying real estate properties. In order to justify this approach, the company firstly referred to the market practice of turnkey contracts, consisting of deducting the registration duties and notary fees to be paid by the purchaser . Secondly, it explained the application of the second discount, made systematically in case of a sale of shares of a real estate company. This discount is based on the buyer’s anticipation that, in case of a sale of the underlying real estate properties, the capital gains to which he would be subject will include the latent capital gains recorded on the date of the company’s acquisition, and that, in the case where the real estate properties are kept, the owner company will suffer from a “loss of depreciable tax base”. In the third case, the taxpayer had concluded that, in addition to the first discount related to the registration duties mentioned above, to determine the tax base for calculating the taxable capital gains, he could make a second discount consisting of reducing the value of the shares corresponding to the net asset based on the amount of registration duties a future purchaser of the shares would have to pay.
The French Administrative Supreme Court rejected the lower courts’ position, ruling that the approach used by the taxpayer, consisting of applying the discounts accepted in market practice, was justified . The French Administrative Supreme Court nevertheless refused to apply the “double discount” method for the registration duties, which had been used in the third case, insofar as the company could not invoke a market practice justifying the principle of an additional discount for registration duties.
In support of its reasoning, the French Administrative Supreme Court indicated that, to determine the latent capital gains on shares of companies that own real estate properties immediately subject to taxes if the companies opt for the SIIC regime, the value of the relevant assets must be assessed, even if the assets are to be kept, as in the case of a sale. It also stated that, “the taxpayer may notably argue that it is suitable to take into consideration any discounts that may be made in the case of a sale, the relevance of which it must prove with respect to the normal course of offer and demand.” The Court concluded that, “the tax authorities, if they dispute these adjustments, must prove that the elements the taxpayer has invoked to prove such relevance, both as to their very existence and amount, are not substantiated.”
In the Unibail Rodamco case, the French Administrative Supreme Court reproached the company for having valued the value of the shares by referring to a method that was not part of the market practice. Quite to the contrary, in the Klépierre case, the Court concluded that the method was accepted in the market and that using it in valuing the subsidiaries’ shares was justified. Ruling for the first time on these subject matters, the French Administrative Supreme Court approved the fact of taking into account the real estate’s tax situation in the valuation of the shares of the (sold) owner company. Correlating the valuation methods with market practices, however, will present some difficult issues, because, by definition, practices evolve and are not systematic.