(Marseille Administrative Court of Appeal, 4th ch., May 6, 2014, no. 11MA04394)
A British company (hereinafter the "Company"), joint owner of half of an apartment located in France, made this property available to its members free of charge. Following a tax audit of the Company, the French tax authorities considered (i) that the availability to some of the members of the joint-ownership free of charge constituted an abnormal management act and (ii) that the Company was subject to taxes in France on the income that should have been received from this property. On that basis, the Company received a tax reassessment notice.
The Company argued that the availability of a property located in France could not be qualified as a commercial activity and that, consequently, the Company could not be considered as subject to Corporate Income Tax ("CIT" hereinafter) in France.
The Marseille Administrative Court of Appeal ("Administrative Court of Appeal hereinafter) analyzed the Company's legal status in the United Kingdom and ruled that it was a company with share capital, that can qualify as a société à responsabilité limitée (limited liability company) under French laws. In addition, the Administrative Court of Appeal noted that the Company's corporate purposes was very broad, allowing it to conduct commercial activities. The Court of Appeal concluded that, due to its corporate form, the Company was a commercial company, subject to CIT in France.
Furthermore, no income was received due to the fact that the property was made available free of charge. Under French laws, the waiver of income is analyzed as a deed of gift of the corresponding income, which shall be included in the owner's taxable basis, unless the owner can prove that he received a counterpart to the waiver of income. The Company did not prove the existence of such a counterpart. Consequently, the waiver of real estate income should be considered as attributable to the Company.
In accordance with Article 209-I of the French Tax Code and the UK-France tax treaty, the Administrative Court of Appeal concluded that the Company was subject to taxes on the income from properties owned in France, even in the absence of a permanent establishment in France. Consequently, the Administrative Court of Appeal confirmed that an abnormal management act had taken place and rejected the Company's claim against the tax adjustment.
This decision stands in opposition to the Société Overseas Thoroughbred Racing Stud Farms Ltd decision (French Administrative Supreme Court, Jul. 31, 2009, no. 296471), handed down in a similar case, in which the French Administrative Supreme Court ruled that income received from an immovable property located in France shall not be subject to taxes in the absence of a permanent establishment in France. This decision led to a new interpretative provision added to Article 209-I of the French Tax Code, which now expressly refers to income collected from properties located in France. Moreover, it confirms the previous position of the French administrative guidelines and case law. Consequently, the decision handed down by the French Administrative Supreme Court in 2009 now appears as an isolated one.