The present French Tax Update will focus on an overview of several noteworthy publications, including decisions issued during the past few months by the Administrative Supreme Court (Conseil d’Etat), priority preliminary rulings issued by the French Constitutional Court (Conseil constitutionnel), preliminary ruling requests from the European Court of Justice, and an update on the ratification process of several double tax treaties entered into by France.


As discussed in a previous French Tax Update (see Update for June 2015), the Conseil d'Etat had referred to Conseil Constitutionnel three interesting priority preliminary rulings on the issue of constitutionality (Question prioritaire de constitutionnalitéQPC) in the field of taxation. The Conseil Constitutionnel recently gave its rulings on the constitutionality of these tax law provisions in three decisions dated June 26, 2015 and July 17, 2015.


On the conformity to the French Constitution of the allegedly retroactive entry into force of Article 18 of the Amending Finance Law for 2012 dated August 16, 2012 (Finance Law for 2012), the Conseil Constitutionnelruled that there was no infringement of the legitimate expectations of the taxpayer and therefore no breach of the rights and freedoms guaranteed by the French Constitution.

Article 18 of the Finance Law for 2012 introduced a limitation on the deductibility of capital losses incurred on the sale of shares occurring less than two years after their issuance, a limitation that applied to any sale of shares received within the course of a contribution made on or after July 19, 2012.

This provision had inter alia an impact on the tax position of a French bank which had decided 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.

The Conseil Constitutionnel ruled that, notwithstanding the taxpayers intentions or even the price the shares were sold for, an acquisition of shares within the course of a capital contribution, could not give rise to any legitimate expectations as per the tax treatment of the sale of these shares.

In addition, the Conseil Constitutionnel ruled that the retroactive entry into force of this provision to any sale of shares received within the course of a contribution made on or after July 19, 2012, date on which this provision was first submitted to parliamentary vote, was intended, in the interest of loyalty, to safeguard the rights of taxpayers who would sell shares acquired within the course of a contribution made prior to this date.

As such, Article 18 of the Finance Law for 2012 was found compliant with the French Constitution.


On the conformity to the French Constitution of the provisions of the French tax code relating to the specific REIT-like tax regime (Société d'Investissements Immobiliers CotéeSIIC) set forth under Articles 208 C et seq of the French tax code (FTC), the Conseil Constitutionnel ruled that these provisions, which lead to a differentiated tax treatment of unrealized capital gains, did not create a breach of equality between taxpayers.

In the case at hand, the taxpayer was challenging the constitutionality of Article 208 C ter of the FTC, which provides that a tax on unrealized capital gains is due, when certain non-eligible assets of a company who has already elected for the SIIC tax regime become eligible to this regime. Unlike the tax on unrealized capital gains which applies upon the election of a company for the SIIC tax regime and which is also paid in four installments over four years, the applicable tax rate of such so-called exit tax is the rate applicable on such year.

The Conseil Constitutionnel ruled that companies which are subject to the tax on unrealized capital gains upon their election for the SIIC tax regime and companies which are subject to this tax following this election are not in the same situation, and therefore that the FTC could lawfully provide for a differentiated tax treatment of without creating a breach of equality.


Unlike the aforementioned QPC rulings, the Conseil Constitutionnel did not find the provisions of the FTC relating to the taxation of dividends received by individual shareholders fully compliant with the French Constitution.

Under these rules, in force until 2012, French resident taxpayers who had elected to submit part of their dividends to the 21 percent final withholding tax provided for under Article 117 quater of the FTC (so-called prélèvement forfaitaire libératoire) could no longer benefit, in respect of other dividends received by them, from (i) the fixed annual allowance and (ii) the 40 percent tax basis relief.

The Conseil Constitutionnel noted that the prohibition of the combination of these regimes was intended to avoid any kind of tax arbitrage from taxpayers who would only elect for the 21 percent withholding tax for the amount of dividends received not covered by the fixed annual allowance. As such, this prohibition was found compliant with the French Constitution since justified by the objective of combating tax optimization schemes.

However, the Conseil Constitutionnel issued a reserve of interpretation regarding dividends received during 2012, year during which taxpayers could no longer benefit from the fixed annual allowance. Since taxpayers could no longer proceed to any kind of tax optimization involving the combination of these regimes during 2012, the Conseil Constitutionnel ruled that the 40 percent tax basis relief should also benefit to French taxpayers who had elected to submit part of their dividends to the 21 percent withholding tax.



In a decision dated May 11, 2015, the Conseil d'Etat ruled in favor of the French tax administration (FTA), in a situation in which the availability of the participation exemption (Exemption) was challenged.

A French financial institution (Parent) had received dividends from a Dutch subsidiary (Sub) and had taken the position that they were 95 percent exempt under the Exemption rules (ownership of at least 5 percent of the distributing entity for a minimum period of two years).

The FTA had denied the Exemption on the basis of the so-called "abuse of law" procedure, i.e., that the Sub had no other purpose than to "transform" taxable income into quasi tax-exempt dividends.

The FTA, in effect, argued that the Sub had no economic substance, in that (i) its assets were composed solely of bonds funded by the share capital provided upfront by the Parent, (ii) the income generated by the Sub consisted solely of interest and capital gains on the bonds, and (iii) its investment policy was decided once and for all upon its incorporation, i.e., the Parent did not control the subsequent management of the Sub.

The FTA thus argued that the Parent was in exactly the same position as if it had held the bonds directly—that the interposition of the Sub had no other purpose than to obtain the quasi exemption of the income and capital gains generated by the bonds. The Parent argued that the Sub was liable to Dutch corporate tax, and the transaction could not be viewed as purely tax-motivated.

The Conseil d'Etat decided in favor of the FTA and took the view that the Dutch corporate tax liability, while reducing the tax benefit of the transaction, did not modify the facts that (i) the Sub did not have any economic substance, and (ii) the Parent was not able to evidence any non-tax motivation in the intermediation of the Sub.

This case law follows on from older cases, such as the Sagal case (in 2005) in which, again, the lack of substance of the subsidiary, and the absence of any control by the parent over its actual management, played in favor of the FTA.


On May 20, 2015, the Conseil d'Etat decided in favor of the taxpayer in a situation in which the FTA argued that the taxpayer had committed a so-called "abnormal act of management" by not charging more administrative fees to its clients.

The taxpayer, which was providing certain ground services to its clients within an airport, was charging, inter alia, administrative fees to them, for amounts ranging from 0 percent to 15 percent of the underlying service fees. The FTA was of the view that the taxpayer should have charged 15 percent across the board.

The Conseil d'Etat took the view that the invoicing of the administrative fees, including discounts applied to certain clients, was a basic management decision that may not be, as such, challenged by the FTA. For example, the taxpayer may decide to charge lower administrative fees to clients, generating a higher turnover, without being validly challenged by the FTA.

Accordingly, any challenge by the FTA should have been based on the evidence that such a management decision (including discounts applied to certain clients) was against the taxpayer's interest; since the FTA was not able to provide any such evidence, the Conseil d'Etat dismissed the challenge.

The decision is a good indication that, other than under exceptional circumstances, the FTA is not supposed to meddle in the daily business decisions of taxpayers.


In the context of the intragroup reorganization of a multinational automobile manufacturer, the Conseil d'Etat recently restated its position in favor of the freedom of choice (CE, July 8, 2015, n°365850).

In 2000, the head of the French tax grouping (Parent) sold to its subsidiary in charge of financial matters and inactive participations (FinCo) the shares of an inactive subsidiary (Sub). One year later, Sub was merged into FinCo.

Under the French tax grouping rules, the losses arising from the sale of the Sub shares were neutralized, as was the recapture of the depreciation provision booked by Parent in respect of the Sub shares. The merger of Sub led to its exit from the tax grouping, thereby giving rise to tax-deductible (against long-term gains) losses.

The FTA attempted to challenge such reorganization under the abuse of law theory, arguing that the combination of the sale and the merger was purely tax-motivated as it allowed the recognition of tax-deductible losses (whereas a mere merger of Sub into Parent would not have given rise to such losses).

In order to defend its choice to first sell the Sub shares to FinCo and then have FinCo absorb Sub, Parent provided two main arguments: (i) the sale of the Sub shares allowed Parent to restore its cash position and to prepare the financing of a pending acquisition (thereby reducing its external debt), and (ii) the rationale of the group holding structure was to (a) have only Parent directly hold subsidiaries heading a business line of the group, and (b) transfer inactive participations under the subsidiary in charge of financial matters, i.e., FinCo.

Both the Lower Tax Court (TA Cergy-Pontoise, July 29, 2010, n°0211303) and the administrative Court of Appeals (CAA Versailles, November 22, 2012, n°10VE03850) ruled in favor of the taxpayer.

The Conseil d'Etat ruled that, even though the same goals could have been reached by Parent by merely absorbing Sub, the FTA did not demonstrate that the reorganization was purely tax-motivated. The Conseil d'Etat thus upheld its long-standing position under which a given taxpayer is not required to choose the most heavily taxed route.


In a recent decision (CAA Versailles, July 8, 2015, n°13VE01079), the Versailles Administrative Court of Appeals (CAA) provided an interesting illustration of the operation of the specific anti-abuse provision (i.e., different from the general abuse of law theory) attached to the dividend withholding tax exemption provided, in accordance with the EU Parent-Subsidiary Directive, by Article 119 bis of the French tax code (FTC).

Following an audit performed in 2010, the FTA challenged the withholding tax exemption applied by a French company (FrenchCo) in respect of the dividends it distributed in 2007 to its sole shareholder, a company located in Luxembourg (LuxCo). All of the shares of LuxCo but one were held by a company located in Cyprus (CypCo), itself held by a company located in Switzerland (SwissCo).

Under Article 119 bis of the FTC, the standard 25 percent withholding tax applicable to dividends is eliminated, provided inter alia that the recipient of the dividends is not part of a holding structure that is constitutive of an artificial arrangement whose  main purposes is the benefit of the withholding tax exemption.

After confirming that such specific anti-abuse provision complies with EU law freedoms to the extent that it aims at combating tax evasion, the CAA took the position that the burden of the proof attached to the purpose of the holding structure was on FrenchCo (in principle, the burden of the proof falls on the recipient of the dividends, but only where the recipient is a party to the litigation, which was not the case for LuxCo; however, under general French administrative law principles, the burden of the proof is on FrenchCo because it is the only party with actual information in respect of the relevant condition, i.e., the purpose of the holding structure).

As a result, the CAA reviewed the elements provided by FrenchCo and ruled that they were all insufficient to demonstrate that the main purpose of the holding structure was not the benefit of the withholding tax exemption provided by Article 119 bis of the FTC. In order to deny the benefit of the official guidelines published by the FTA in respect of such withholding tax exemption, the CAA further elaborated that the interposition of LuxCo, which had neither premises nor staff in Luxembourg, and CypCo, which had no real economic activity and was an artificial arrangement aimed at concealing the identity of the actual recipient of the dividends.

Interestingly, it should be noted that the Versailles administrative Court of Appeals further denied the benefit of the reduced withholding tax rate provided by the double tax treaty entered into between France and Luxembourg because the tax residency affidavits provided by the taxpayer did not contain the information required by such double tax treaty.


On June 25, 2015, Advocate General Niilo Jääskinen (AG NJ) rendered his long-awaited opinion in the C-17/14 case pending before the European Court of Justice (ECJ) involving withholding tax applied under Dutch tax law to outbound dividend distributions.

Please see our Update for July 2014 for further details on the facts and legal background of this case involving a French taxpayer who was trading in Dutch equities derivatives.

In a nutshell, the taxpayer argues that it is treated disadvantageously compared to a Dutch resident corporate taxpayer under comparable circumstances, and this different tax treatment in the Netherlands constitutes a violation of the free movement of capital and the anti-discrimination provision laid down in the EU Treaty, since (i) it could not fully credit the Dutch withholding tax in France due to losses incurred in France, and (ii) its direct (e.g. interest on financing of the shares) and indirect (e.g. hedging) costs were not taken into account in the Netherlands, since the Dutch withholding tax is levied on the gross income distributed.

In his joint opinion for cases C-10/14, C-14/14 and the C-17/14, AG NJ concluded the following:

  • The application of the freedom of movement of capital principle requires, in presence of a withholding tax applied to outbound dividends, that the comparison between the tax treatment of a non-resident company and that of a resident company is made by reference to the final corporate income tax paid by the resident and of which the withholding tax constitutes an advance payment;  
  • In addition, for the purpose of determining whether the actual tax burden on a non-resident company is heavier than that of a resident company, one should take into account the expenses directly linked to the shares from which the dividend arises;  
  • Finally, with respect to the influence of an applicable double tax treaty, AG NJ concluded that it is not sufficient that the treaty stipulates the granting of a tax credit for an amount equal to the withholding tax that is not, in any case, guaranteed under all circumstances to cover the difference in treatment, since it is stipulated that the tax credit granted in the  
  • Member State of residence cannot exceed the amount of the tax due in that State.  

From a French tax standpoint, and regarding whether the opinion of AG NJ if followed by the ECJ could have an impact on French dividend withholding tax on outbound dividends, it should be noted that AG NJ also mentions in his opinion that the concept of “expenses directly linked to the share from which the dividend arises” must be interpreted by reference to the analysis of the local tax legislation. The Conseil d’État has already advised on this issue (CE, March 31, 2009, n° 382545) by ruling that the relevant expenses are those directly related to the acquisition and conservation of the securities producing the underlying income (e.g., the custodian expenses and collection fees), but that such expenses do not include the financial cost of the borrowing used to fund the acquisition for the securities.

Accordingly, even if (i) the ECJ was to follow AG NJ conclusions and (ii) one tried to apply the same reasoning in a case involving French dividends, it is highly likely that the FTA and/or French tax courts would only recognize custodian and collection fees as "directly linked" under French law.



On September 5, 2014, the Ministers of Finance of France and Luxembourg signed an amendment (Lux Amendment) to the double tax treaty entered into between France and Luxembourg on April 1, 1958, as amended by the 1970 exchange of letters and by the 1970, 2006, and 2009 protocols (FR/Lux Treaty).

The Amendment, in line with the current OECD Model Tax Convention on Income and Capital, essentially attributes to France the right to tax capital gains arising from the disposal, by a Luxembourg resident, of shares into French real estate companies.

The Amendment will enter into force on the first day of the month following the completion of the reciprocal notification process attached to its ratification in each of France and Luxembourg. Further, for taxes on income that are withheld at source (such as the 33.33 percent withholding tax applicable under French tax law to capital gains realized by nonresident entities upon the disposal of French real estate assets or companies), the Amendment would apply to amounts that are taxable after the calendar year during which it enters into force.

A draft bill was submitted to the Luxembourg Parliament on June 9, 2015, and a draft bill was submitted to the French Parliament on July 1, 2015. It is consequently very likely that the ratification process will be completed in the coming months, and that the Amendment will enter into force on January 1, 2016.

Please see our Update for October 2014 for further details.


On March 31, 2015, the Ministers of Finance of France and Germany signed an amendment (Ger Amendment) to the double tax treaty entered into between France and Germany on July 21, 1959, as amended by the 1969, 1989, and 2011 protocols (FR/Ger Treaty).

A draft bill has already been submitted to the German Parliament, and it is France's intent, to the best of our knowledge, to complete the ratification process of the Ger Amendment before year-end.

We will further analyze the new provisions and corresponding implications of the Ger Amendment in an upcoming Update.


On January 15, 2015, the Ministers of Finance of France and Singapore signed a new double tax treaty (New FR/Sing Treaty) that will come into force upon completion of the constitutional requirements in the two countries.

To the best of our knowledge, it is France's intent to complete the ratification process of the New FR/Sing Treaty before year-end.

Please see our Update for February 2015 for further details.


On April 2, 2013, the Ministers of Finance of France and Andorra signed a new double tax treaty (New FR/Andorra Treaty) that will come into force upon completion of the constitutional requirements in the two countries.

The New FR/Andorra Treaty entered into force on July 1, 2015. Please note, however, that most provisions will not be effective until January 1, 2016.

Interestingly, the New FR/Andorra Treaty provides that France retains the right to tax French nationals residing in Andorra, as if the New FR/Andorra Treaty did not exist. As France does not impose any taxes, as of yet, on the basis of nationality or citizenship, such provision should not give rise to any immediate consequences.