The present French Tax Update will focus on an overview of several noteworthy French tax court decisions issued during the past few months, in particular in relation with double tax treaty conditions to benefit from a tax credit, abuse of law challenges, increased amortization rates, and priority preliminary ruling requests (questions prioritaires de constitutionnalité,QPC) currently pending before the Constitutional Court (Conseil constitutionnel).


A French bank, acting from its head office, had advanced loans to various branches located in China, Philippines, India, Singapore, and Thailand. In certain cases, the interest paid on the loans was subject to WHT in the source country, and the head office took the position that it was entitled to a tax credit (TC) under the relevant treaties between France and the source jurisdictions. In other instances, no effective foreign WHT was applied to the interest, and the head office had taken the position that it was entitled to a TC under the "tax sparing" mechanism of the relevant applicable treaties. During a tax audit, the FTA took the view that no TC was available to the head office in either case.

The lower court has decided in favor of the FTA with a reasoning which is somewhat confusing and not very convincing (TA Montreuil, February 9, 2015, n°1303525 and 1308999).

The court's starting point was the traditional method of application of international tax treaties by French courts: a given situation is first analyzed under the relevant French domestic tax rules, and then it is ascertained whether the applicable treaty (if any) modifies the solution provided under the domestic rules.

In respect of the loan made by the head office to the Philippines branch, the court took the view that the treaty was not applicable (because the branch is not a Philippines tax resident), and therefore no TC was available, given that French domestic rules do not provide any TC in the absence of an applicable treaty. While it is true that the branch was not a tax resident, the more relevant question would have been whether the interest paid by the branch was of Philippines source.

In the case of the other jurisdictions and the relevant treaties between them and France (China, Singapore, India, and Thailand) the court started its analysis with a reminder of the basic applicable rules: a resident of jurisdiction A which receives interest from a source in jurisdiction B is liable to tax in A in respect thereof, unless such interest is attached to a permanent establishment (PE) A may have in B (in which case the interest is taxable in B).

In this case, the court seemed to take the view that, while the bank did have a PE in each of the relevant jurisdictions and the loans were attached to the relevant PEs, the profits made on the loans could not be attached to these PEs, i.e. the interest was taxable only in France. The court concluded that the exclusive taxation in France meant that no TC was available in respect of any WHT. Again, it is difficult to follow the reasoning used by the court: i) either the loan claim was attached to the PE as per the court's suggestion, in which case it is not clear why the related interest was taxable in France, or ii) the interest was taxable in France, as per the court's conclusion, and it is not clear why the TC was not available.

The situation should be, hopefully, clarified at the Appeal Court level. 


As discussed in previous French Tax Updates (see June 2014 and February 2015), the treatment of French source dividends paid to foreign nonprofit organizations (NPOs) raises the issue of comparability of NPOs with French nonprofit organizations. The practical impact of the analysis is that, in the case of noncomparability, NPOs would not benefit from the treatment applied to French nonprofit organizations. NB: Currently, French nonprofit organizations are liable to a 15 percent French corporate tax in respect of French dividends. Under the prior legislation, applicable to the below case law, French nonprofit organizations were exempt from taxation in respect of French dividends. 

A US law governed pension plan (USPP) suffered French WHT at the rate of 15 percent by application of the US–French treaty. The USPP argued before a French lower court that it should benefit from the exemption provided to French nonprofit organizations given their similarities. The lower court decided in favor of the USPP (TA Montreuil, December 16, 2014, n° 1207668) by using the below reasoning:

  • The relevant provisions of the European Union law provide for the principle of free movement of capital, including with non-Member States.
  • In its Santander decision, the EUCJ decided that, for purposes of comparing the different tax treatments applied to different persons, only the pertinent criteria should be taken into account to establish whether such differences reflect an objective difference of situations.
  • The exemption provided to a French nonprofit organization is based on the criteria that its management is not driven by profit-making objectives, and that its nonprofit activities are preponderant.
  • The application of the 15 percent French WHT to the USPP is valid only to the extent its activities are not comparable with those of the French nonprofit organization.
  • The USPP is a pension plan trust within the meaning of section 401(a) of the Internal Revenue Code and, as such, is exempt from tax in the US; under article 18 of the US–French tax treaty, a 401(a) plan is generally considered to be recognized as such in France, i.e. it is managed for the exclusive benefit of the relevant employees, and the management of the plan does not benefit from any profit made within the plan.
  • Thus, the USPP should be viewed as providing services which are identical to those provided by a French pension plan.
  • Therefore, the difference of tax treatment is not justified by an objective difference of situation, and the French WHT should not apply. 

The decision of the lower court confirms that the comparability of French and non-French nonprofit organizations should not be based on the detail of the rules applicable in French domestic case law (e.g. the maximum remuneration of the managers, etc.); rather, as per the Santander case, only the "pertinent criteria" should be used for purposes of the comparison. 


In a decision issued few weeks ago (CAA Versailles, April 14, 2015, SAS Ingram Micro), the Versailles Administrative Court of Appeals (CAA) took position on a debt-push-down financing which has been challenged by the French tax authorities, as from 2008, under the abuse of law theory (abus de droit). Such financing has already been reviewed by the advisory committee in charge of abuse of law matters (Comité de l'abus de droit fiscalCADF) in 2010 and by the lower court in 2012 (TA Montreuil, March 15, 2012, n°10098952).

The main facts were the following:  

  • In September 2004, the shares of the French subsidiary (FCo) were transferred by its US shareholder (USCo 1) to a related US company (USCo 2), and then on-transferred by USCo 2 to another related US company (USCo 3), both transfers being presumably financed through vendor loans.
  • A few days later, FCo simultaneously (i) made a dividend distribution to USCo 3, and (ii) issued redeemable bonds (obligations remboursables en actions, French-law bonds that may be redeemed in shares) to USCo 3 (ORAs) in order to finance the dividend distribution. The conditions of the ORAs inter alia provided that (i) their yearly 8.58 percent interest rate could not be in excess of the sum of (a) the taxable income of FCo plus (b) the interest payments to be made to USCo under the ORAs, and (ii) at maturity, the ORAs were to be redeemed in FCo shares.
  • The day after, USCo 3 transferred the ORAs to USCo 2 as compensation for the transfer of the FCo shares.
  • A year later, in 2005, USCo 3 transferred the FCo shares back to USCo 1. 

The French tax authorities challenged, under the abuse of law doctrine, the tax deduction of the interest payments made by FCo, on the grounds that the issuance of the ORAs was purely tax motivated. 

FCo inter alia argued that (i) it had the freedom to decide on its financial structure and on how its dividend distributions should be financed, (ii) the financing at hand allowed it to maintain its cash position and credit ratings and to monitor its capitalization, and (iii) its employees benefited from this form of financing as the drop in equity increased the amounts to be paid by FCo under the French mandatory profit-sharing scheme (participation des salariés aux résultats de l'entreprisePSRE).

The CAA, as did the CADF and the lower court, ruled in favor of the French tax authorities, rejecting all of the justifications of the taxpayer and interestingly noting that:

  • The simultaneous dividend distribution and ORAs issuance produced the same result as a capitalization of its retained earnings, except for the tax deduction of the interests paid under the ORAs.
  • Neither the dividend distribution nor the ORAs issuance gave rise to actual financial flows between the relevant companies.
  • The fact that other types of financing could have resulted in the same tax consequences was irrelevant for the purposes of the abuse of law analysis.
  • The PSRE argument should essentially be regarded as a windfall effect since (i) the benefits for the employees were out of proportion with the tax savings resulting from the interest deduction, (ii) such benefits were temporary as the ORAs were to be redeemed into shares upon maturity, and (iii) the involvement of the employees was not clearly demonstrated.
  • Once the dust had settled, the reorganization generally carried out by the group did not modify the ownership chain of FCo so that FCo was not in a position to demonstrate that the financing at hand was a necessary step within the reorganization of the European activities of USCo 1.

It should nevertheless be noted that, as it was the case for the lower court decision, and despite the clear methodology set out by the Supreme Administrative Court (Conseil d'Etat) in several recent cases in the field of the abuse of law theory, the CAA did not explicitly analyze the legislator's intent in order to qualify the so-called subjective condition of the abuse of law theory. 


An application for a priority preliminary ruling on the issue of constitutionality (Question prioritaire de constitutionnalitéQPC) is the right of any person who is involved in legal proceedings before a court to argue that a statutory provision infringes rights and freedoms guaranteed by the French Constitution. 

Three conditions must be met for an application to be ultimately referred by the Conseil d'Etat or the Cour de cassation to the French Constitutional Council (Conseil Constitutionnel):

  • The challenged statutory provision must apply to the litigation or proceedings involved or be the basis of such proceedings.
  • The challenged statutory provision must have not been previously found to be compliant to the French Constitution by the Conseil Constitutionnel.
  • The issue raised must be a new one or of a serious nature. 

The Conseil Constitutionnel must give its ruling within three months and, if need be, repeal the challenged statutory provision, after referral made by the French Supreme Courts, which have ensured that the abovementioned conditions of admissibility have been complied with. 

The Conseil d'Etat recently referred to the Conseil constitutionnel three interesting QPC in the field of taxation. 


On May 7, 2015, the Conseil d'Etat requested from the Conseil constitutionnel, on behalf of a French bank, a QPC on the conformity to the French Constitution of Article 18 of the Amending Finance Law for 2012 dated August 16, 2012 (Finance Law for 2012), which introduced a limitation on the deductibility of capital losses incurred on the sale of shares occurring less than two years after their issuance. In a nutshell, where the market value of such shares at the time of their issuance is lower than their book value, the difference may not be deducted from the taxable profits of the taxpayer at the time of the sale.

While this provision was adopted on August 16, 2012, the Finance Law for 2012 provided that it would be retroactively effective to any sale of shares received within the course of a contribution made on or after July 19, 2012.

This QPC request originated in the French bank's decision on July 19, 2012 to contribute 2.32 billion euros for refinancing purposes in the share capital of a Greek bank, prior to the disposal of the Greek bank's shares for one euro.

In view of the French tax authorities' decision to disallow the deductibility for tax purposes of the 2.32 billion euros capital loss, the French bank argues before the Conseil constitutionnel that the retroactive entry into force of Article 18 of the Finance Law for 2012 infringed the rights and freedoms guaranteed by the French Constitution, and inter alia the principle of guarantee of rights set out in Article 16 of the Declaration of Human and Civic Rights of 1789. According to past case law of the Conseil Constitutionnel, this principle prohibits infringements of legally obtained positions without sufficient grounds of general interest.

While the Conseil constitutionnel is expected to issue its decision within the next few months, it remains to be seen whether Article 18 of the Finance Law for 2012 was an infringement of the legitimate expectations of the French bank in respect of the recapitalization of its Greek subsidiary. 


Companies that have elected for the specific REIT-like tax regime set forth under Articles 208 C et seq of the French tax code (Société d'Investissements Immobiliers CotéeSIIC) are exempt from corporate income tax on (i) rental income (realized either directly or through tax flow-through partnerships), (ii) capital gains arising from the sale of eligible real estate assets, and (iii) dividends received from subsidiaries having themselves elected for the specific SIIC tax regime.

Article 208 C of the French tax code, however, provides that the election for the SIIC tax regime gives rise to the taxation of the unrealized latent capital gains attached to assets that are eligible for the SIIC tax regime (real property rights, wholly owned buildings, usufruct rights, the rights of a lessee under a construction or ground lease, rights of a lessee under a financial lease, rights on properties temporarily granted by the French State or one of its subdivisions, and shares in certain partnerships or SIIC subsidiaries that have the same business purpose as a SIIC (Eligible SIIC Assets)) at the reduced rate of 19 percent. Such so-called exit tax has to be paid in four installments over four years as from the SIIC election year (Exit Tax).

Article 208 C ter of the French tax code further provides that the Exit Tax is also due by a company that has already elected for the SIIC regime on unrealized latent capital gains attached to Eligible SIIC Assets that become eligible to the SIIC regime. This is the case, for instance, where a non-SIIC company holding Eligible SIIC Assets is merged into a SIIC company, or where a SIIC subsidiary that has not elected for the SIIC regime is transformed into a partnership (in such case, the Eligible SIIC Assets give rise to the Exit Tax only to the extent of the share held by the SIIC into the newly formed partnership).

Unlike the regime provided for by Article 208 C of the French tax code, Article 208 C ter of the French tax code does not provide that the Exit Tax installments to be paid on the years following the year where the relevant event (e.g. the merger) took place will remain due at the rate applicable on such year. Such difference became relevant in 2009, when the initial Exit Tax rate of 16.5 percent was increased to the current rate of 19 percent.

In the context of an ongoing procedure between a SIIC company and the French tax authorities, presumably involving an application of the provisions of Article 208 C ter of the French tax code after the above-mentioned rate increase but in respect of an event that took place before such increase, a SIIC company has thus challenged the constitutionality of these provisions.

Considering that such provisions had never been reviewed by the Conseil constitutionnel and could potentially create a breach of equality between taxpayers, the Conseil d'Etat requested a QPC from the Conseil constitutionnel


Under the relevant French tax rules in force until 2012, individual shareholders domiciled for tax purposes in France could benefit from a 40 percent tax basis relief on the amount of dividends subject to the progressive tax scale of French personal income tax (up to 45 percent), unless they had elected to pay a 21 percent final withholding tax provided for under Article 117 quater of the French Tax Code (prélèvement forfaitaire libératoire).

On April 10, 2015, the Conseil d'Etat requested from the Conseil constitutionnel a QPC on the conformity of these provisions to the French Constitution. The taxpayers that raised the issue of constitutionality argued that these provisions, which deprived French taxpayers of the 40 percent tax basis relief in the presence of a partial election to the final withholding tax regime, created a breach of equality between taxpayers.

Interestingly, the Administrative Tribunal and Court of Appeal of Paris both had not granted the taxpayers' request to refer the QPC to the Conseil constitutionnel

Please note that as from 2012, the 21 percent withholding tax is no longer a payment in full discharge of all the tax that may potentially be due on the dividend income; rather, it corresponds to a down payment of personal income tax. The 40 percent tax relief on the amount of dividends received has been maintained. 


The French Government introduced as part of its bill for growth and activity (Projet de loi pour la croissance et l'activité, or Projet de loi MacronMacron Draft Law) a new measure aiming at boosting industrial investment in France: an exceptional additional 40 percent depreciation of certain industrial assets (Exceptional Depreciation). 

Under this new measure, companies are allowed an exceptional deduction from their taxable income, equal to 40 percent of the acquisition cost (excluding financial expenses) of certain eligible assets. 

The Exceptional Depreciation applies to assets that (i) have been acquired or manufactured by companies between April 15, 2015, and April 14, 2016, (ii) are eligible for declining-balance depreciation, and (iii) fall into one of the categories set out in the Macron Draft Law, including inter alia equipment and tools used for industrial manufacturing operations or scientific and technical research purposes. 

In their official guidelines published on April 21, 2015, the FTA specified that software that forms an indivisible whole with the eligible assets set out in the Macron Draft Law, or that contributes to the industrial manufacturing operations (e.g. design or maintenance software), can be also eligible for the Exceptional Depreciation.

The Exceptional Depreciation will not be reflected under the French GAAP and will take the form of a tax adjustment to book entries.