In a decision dated June 20, 2014, No. 2014-404 QPC, the French Constitutional Court, seized by a priority preliminary rulings on the issue of constitutionality ("question prioritaire de constitutionnalité", hereafter referred as "QPC"), declared that Article 112, 6° of the French Tax Code (hereafter referred as "FTC") is contrary to the rights and freedoms guaranteed by the French Constitution in that it disregards the principle of equality before law as provided by Article 6 of the 1789 Declaration of the Rights of Man and the Citizen.
The French Constitutional Court declared unconstitutional the difference in tax treatment applied to money or securities received by shareholders when a company repurchases its own shares.
This difference in tax treatment resulted from the combined application of the provisions of Article 109, 1, 2°, Article 112, 6°, Article 150-0 D, 8 terand the second paragraph of Article 161 of the FTC, that were challenged by the plaintiff.
It resulted from these Articles that an ordinary law regime was applicable in cases where, aside from the specific exceptions provided by the legislator, a company repurchased its own shares. This ordinary law regime provided that money or securities received by a shareholder were subject to an hybrid tax treatment making a distinction between (i) the value resulting from the difference between the redemption price of the cancelled shares and their purchase price, or the amount of contributions included in the par value of such shares, if higher, which was subjected to tax as distributed income, and (ii) the value resulting from the difference between the contribution amount and the purchase price, which was subjected to tax as capital gains.
On the contrary, in cases where a company repurchased its own shares to grant them to employees, as provided by Article L. 225-208 of the French Commercial Code (hereafter referred as "FCC"), or proceeded to a share redemption plan provided by Articles L. 225-209 to L. 225-212 of the FCC, Article 112, 6° of the FTC established a difference in tax treatment by expressly excluding the qualification of distributed income and providing that excess payments of cancelled shares was only subject to tax as capital gains.
In the case transmitted by the French Administrative Supreme Court to the French Constitutional Court, the French tax authorities had refused to qualify as capital gains the amount a tax household received after a civil company repurchases its own shares to them, that would have allowed them to be exempt from tax. According to the French tax authorities, the income derived from the transaction should have been subject to tax as distributed income.
Seized by QPC transmitted by the French Administrative Supreme Court, the French Constitutional Court pointed out that the principle of equality provided by Article 6 of the 1789 Declaration of the Rights of Man and of the Citizen did not prevent the legislator from (i) settling different situations differently or (ii) implementing exception to the principle of equality for the general interest purposes, provided that, in both cases, the resulting difference in tax treatment is directly related to the purpose of the law that establishes such difference.
Nevertheless, the French Constitutional Court pointed out that the ordinary law tax regime is applicable, pursuant to Article L. 228-24 of the FCC, notably to the repurchase of shares performed in the case of a refusal to grant an approval. The French Constitutional Court deduced that the difference in tax treatment established by Article 112, 6° of the FTC is neither based on a difference in situations between repurchase of shares procedures nor on the general interest reasons directly related to the purpose of the law and, in this respect, it disregards the principle of equality before the law.
To draw the conclusion of the unconstitutionality, the French Constitutional Court postponed the date of the abrogation of Article 112, 6° to January 1, 2015.
The French Constitutional Court added that, in any event, for the period before January 1, 2014, and subject to an amendment of the provisions declared unconstitutional for the period between such date and the date of the deferred abrogation, money or securities received from the issuing company by shareholders for the repurchase of their shares will not be deemed as distributed income but as capital gains. Therefore, the Court extended the unconstitutional exception to all the hypothesis of repurchase.
It results from this decision that taxpayers have the ability to claims for the excess taxes paid resulting from the application of the distributed income regime rather than the capital gains regime for pending cases as well as for transactions achieved in 2014 before the implementation of a potential new rule.
We just have to wait and carefully watch how the legislator will respond to this abrogation that could be put on the agenda for the next draft finance act.