In an April 11, 2014 decision, the French Administrative Supreme Court completed its reversals of cases favorable to taxpayers, handed down in recent years by various Administrative Courts and Administrative Courts of Appeal, involving "coquillards" (shell companies) schemes.

Overturning the Paris Administrative Court's decision of July 7, 2009, and the subsequent Paris Administrative Court of Appeal's Decision of July 29, 2011, both of which ruled in favor of SARL Garnier Choiseul Holding, the French Administrative Supreme Court has very clearly ruled that the tax authorities had legal grounds to apply the French General Anti-Abuse Rule (GAAR) provided in Article L. 64 of the French Tax Procedure Code, to challenge the deduction of losses resulting from a merger insofar such transaction had no sound economic justification and was implemented only for the purpose of allowing the deduction of the surviving company's tax loss carry-forwards from the absorbed company's taxable profits.

In contrast, confirming its prior case law (the Goldfarb and Axa decisions dated September 7, 2009), the French Administrative Supreme Court ruled that the use of tax credits cannot be called into question through the GAAR proceedings.

The facts of the case involving a deemed abusive deduction losses were as follows:  the company, Soboco, set-up in 1994, with a property dealer business, had accumulated 95 million French francs in tax loss carry-forwards from the sale of real estate assets.  The shares of this company, which became without any activity, were sold on April 13, 1999, to a third company, to which Garnier Choiseul Holding was subsequently the successor.  On July 15, 1999, Soboco's new manager had Soboco acquire Disson for around 55 million French francs with an advance of nearly 50 million French francs from a finance company that he also managed.  Disson, after carrying out a business in another completely different field (automobile accessories distribution) had sold on May 10, 1999, significant shareholding in this sector and recognized capital gains for an amount of approximately 90 million French francs. Then, on June 30, 1999, i.e. 15 days before it was purchased, Disson liquidated all of its assets and repaid all of its debts, its balance sheet thus being limited to 85 million French francs in cash, with 30 million French francs in potential capital gains taxes.  Lastly, on October 25, 1999, Soboco absorbed Disson with retroactive effect as of January 1, 1999, which allowed the surviving company to offset most of its tax loss carry-forwards against the absorbed company's profits as of 1999, pursuant to Article 209-I of the French Tax Code.  The above described transactions thus allowed to avoid paying the 30 million French francs in capital gains taxes initially owed by Disson.

The Paris Administrative Court, and subsequently the Paris Administrative Court of Appeal, had ruled that the merger did not constitute an abuse of law within the meaning of the provisions of Article L. 64 of the French Tax Procedure Code because (i) such transaction had the effect to simplify the two companies' structures and accounting and financial management, (ii) Soboco could have been forced to wind up the company had the merger with Disson not taken place and, lastly, (iii) the merger had also allowed Soboco to have Disson's 85 million French francs in cash on hand and to increase its earnings with the investment of the surplus cash.

However, as the Public Rapporteur Frédéric Aladjidi pointed out in his opinion for the decision of the French Administrative Supreme Court, Soboco, "had not established the slightest strategic interest, which was inevitable since, as we have explained, the two companies were 'shell companies' and, in addition, they previously operated in completely unrelated business fields."

Consequently, it is without surprise that, unlike the Administrative Court of Appeal, the French Administrative Supreme Court ruled that the merger itself, more than the direction in which it took place (Soboco as the surviving company), satisfied the two criteria required to characterize an abuse of law based on a fraudulent evasion of the lawas laid down by the February 28, 2007 case (French Administrative Supreme Court, 9th and 10th subsect., Feb. 28, 2007, no. 284566, Min. v. Croset, and no. 284565, Min. v. Persicot) , i.e., (i) the transaction aimed at  benefiting from a literal application of legal provisions against the objectives pursued by their authors, and (ii) the transaction  was inspired by no other reason than to avoid or lower the tax burden which would have been normally borne by the taxpayer, due to its situation or its real activities, if such transaction had not been entered into.

Therefore, the French Administrative Supreme Court logically ruled that an abuse of law was characterized in this case and highlighted that Soboco and Disson's merger had no economic justification and was not based on any reason other than to allow the offset of Soboco's tax loss carry-forwards against Disson's taxable profits through a literal application of the provisions of Article 209-I of the French Tax Code without having to request the specific ruling provided in the same article, contrary to the legislator's intent.

It should be noted that the choice of the surviving company was not challenged per se - the landmark "Auriège" case law remaining unchallenged in this respect -, but rather the very reason for the merger itself.  Simply put, if the merger makes sense, then the identity of the surviving company is of little concern.  So called "coquillard" schemes using shell companies, on the other hand, are now, irrespective of their form, heavily sanctioned both by recent case law and tighter legal framework.