(Paris Administrative Court of Appeal, 2nd ch., Feb. 18, 2014, no. 12PA03962, Min v./ Sté Lupa Patrimoine France)

A Luxembourg société anonyme (public limited company) sold to a French company (hereinafter the “Company”) all the shares of 7 Luxembourg sociétés anonymes, whose assets comprised the shares of 7 French SCIs (real estate holding companies), each of which owning one property in France.  After this transaction, the Company decided to wind up the 7 Luxembourg companies without liquidating them (universal transfer of assets; hereinafter the “TUP”), then performed TUPs on the 7 SCIs, which had all performed a free revaluation of their assets the day before the transactions.

The assets’ free revaluation generated an exceptional incomeand modified the book values of the properties in the accounts of the SCIs. As a consequence of performing the TUPs on the SCIs, the Company cancelled the SCIs’ shares and applied the Quemener case law for the determination of the resulting capital gains.  It thereby increased the cost price of these shares by the SCIs’ taxable income, plus the loss on liquidation of the Luxembourg companies’ TUPs and minus the gain on liquidation realized with the SCIs’ TUPs.

As a reminder, according to the French Administrative Supreme Court’sQuemener case (French Administrative Supreme Court, 12-2-2000 no. 133296) reiterated by the French tax authorities, capital gains earned from sales of units of partnerships must be calculated by adjusting the cost price of the units, (i) to which the profits previously taxed and prior losses compensated for by the partner must be added, and (ii) from which the deducted losses and distributed profits must be subtracted. The purpose of these adjustments is to provide for tax neutrality taking into account the partnership tax regime.

Initially, the French tax authorities argued that there had been an abuse of law, stating that the sale of all the shares of the Luxembourg companies was contrived and that it was performed only for tax purposes aiming to benefit from the Quemener case law provisions via the free revaluation of the SCIs’ assets, decided between the Luxembourg sociétés anonymes’ TUPs and the SCIs’ TUPs, which resulted in making the proceeds resulting from the assets’ free revaluation avoid being taxed.  As the lower court ruled that the transactions did not constitute an abuse of law, French the tax authorities appealed the decision and petitioned the Court on appeal to base the tax reassessment on a new legal basis because the Quemenercase was not applicable to TUPs involving SCIs that had already performed a revaluation of properties they owned.

The Paris Administrative Court of Appeal ruled that the Quemener case applies within the framework of a TUP.

The position the French tax authorities took before the Paris Administrative Court of Appeal is contrary to the position expressed in a preliminary tax ruling (although the preliminary tax ruling came after the case at hand) restated in the BOFIP database (BOI-BIC-PVMV-40-30-20 no. 90).  As the French tax authorities appealed the case, the French Administrative Supreme Court will have to make a ruling on this issue.