Post by Jacquot on Dec 18, 2008 8:24:24 GMT 4
France Anti-abuse provision declared not compatible with EU law
In a decision dated August 22 2008 (n°07NC00783), the administrative court of appeal of Nancy held that an anti-abuse measure, enacted in 1999 to combat tax avoidance related to foreign tax structures subject to a preferential tax regime, is an unjustified obstacle to the EU freedom of establishment and free movement of capital.
A provision aiming at fighting portfolios' tax avoidance
The provision at stake, section 123 bis of the Code général des impôts, allows tax administration to tax a French resident on revenues realised through an entity established abroad, even though those revenues have not been distributed or effectively received by the French resident. It was conceived to deal with taxpayers who used foreign structures, especially Luxembourg 1929 holding companies, for portfolios' management. French tax authorities may use this provision if the three following conditions are met:
* The French resident holds directly or indirectly at least 10% of the capital or shares of the foreign entity;
* Assets of the foreign entity are composed mainly of securities ;
* The foreign entity is subject to a preferential tax regime, for example, not taxable or only subject to an effective tax below 50% of a tax recalculated according to French rules.
The authorities do not need to demonstrate abus de droit (abuse of law) or fraude fiscale (tax evasion).
Precisely, the French tax authorities applied section 123 bis in a case where a French tax resident held 99.95% of a company set up in Luxembourg in the form of a 1929 Holding subsequently converted into a Soparfi, and whose activity was portfolios' management.
A disproportionate provision in breach with EU law
The administrative court of appeal of Nancy clearly stated in that case that this provision affects both the EU freedom of establishment and free movement of capital.
It added that section 123 bis is not proportionate to its objective as its application is not limited to wholly artificial arrangements intended to circumvent tax on revenues derived from activities carried out within the national territory. On the contrary, it creates an indisputable presumption of tax fraud as soon as a taxpayer holds 10% or more of a non resident company subject to a preferential tax regime, and does not enable the taxpayer to demonstrate his good faith.
This analysis is fully in line with ECJ case law. For instance, the ECJ has held that the mere fact that a subsidiary is established in another member state cannot, of itself, be treated as giving rise to tax avoidance (C 264/96, ICI). It has more recently held that to be lawful, national anti-abuse tax rules must be proportionate and serve the specific purpose of preventing wholly artificial arrangements (C 196/04, Cadbury Schweppes).
Other French anti-abuse rules have already been considered as not applicable in an EU context: CFCs rule (supreme administrative court, June 28 2002, Sté Schneider Electric) and exit tax, enacted on the same day as section 123 bis (ECJ, March 11 2004, C 91/02, de Lasteyrie du Saillant).
The ruling of the administrative court of appeal of Nancy did not however consider the issue of compatibility of section 123 bis with tax treaties which will need to be addressed in the future.
Nicolas Jacquot (nicolas.jacquot@fr.landwellglobal.com)
In a decision dated August 22 2008 (n°07NC00783), the administrative court of appeal of Nancy held that an anti-abuse measure, enacted in 1999 to combat tax avoidance related to foreign tax structures subject to a preferential tax regime, is an unjustified obstacle to the EU freedom of establishment and free movement of capital.
A provision aiming at fighting portfolios' tax avoidance
The provision at stake, section 123 bis of the Code général des impôts, allows tax administration to tax a French resident on revenues realised through an entity established abroad, even though those revenues have not been distributed or effectively received by the French resident. It was conceived to deal with taxpayers who used foreign structures, especially Luxembourg 1929 holding companies, for portfolios' management. French tax authorities may use this provision if the three following conditions are met:
* The French resident holds directly or indirectly at least 10% of the capital or shares of the foreign entity;
* Assets of the foreign entity are composed mainly of securities ;
* The foreign entity is subject to a preferential tax regime, for example, not taxable or only subject to an effective tax below 50% of a tax recalculated according to French rules.
The authorities do not need to demonstrate abus de droit (abuse of law) or fraude fiscale (tax evasion).
Precisely, the French tax authorities applied section 123 bis in a case where a French tax resident held 99.95% of a company set up in Luxembourg in the form of a 1929 Holding subsequently converted into a Soparfi, and whose activity was portfolios' management.
A disproportionate provision in breach with EU law
The administrative court of appeal of Nancy clearly stated in that case that this provision affects both the EU freedom of establishment and free movement of capital.
It added that section 123 bis is not proportionate to its objective as its application is not limited to wholly artificial arrangements intended to circumvent tax on revenues derived from activities carried out within the national territory. On the contrary, it creates an indisputable presumption of tax fraud as soon as a taxpayer holds 10% or more of a non resident company subject to a preferential tax regime, and does not enable the taxpayer to demonstrate his good faith.
This analysis is fully in line with ECJ case law. For instance, the ECJ has held that the mere fact that a subsidiary is established in another member state cannot, of itself, be treated as giving rise to tax avoidance (C 264/96, ICI). It has more recently held that to be lawful, national anti-abuse tax rules must be proportionate and serve the specific purpose of preventing wholly artificial arrangements (C 196/04, Cadbury Schweppes).
Other French anti-abuse rules have already been considered as not applicable in an EU context: CFCs rule (supreme administrative court, June 28 2002, Sté Schneider Electric) and exit tax, enacted on the same day as section 123 bis (ECJ, March 11 2004, C 91/02, de Lasteyrie du Saillant).
The ruling of the administrative court of appeal of Nancy did not however consider the issue of compatibility of section 123 bis with tax treaties which will need to be addressed in the future.
Nicolas Jacquot (nicolas.jacquot@fr.landwellglobal.com)