French Tax Update - French Finance Bills

This first French Tax Update for 2016 contains an overview of the main provisions proposed by the Finance Bill for 2016 (Loi de finances pour 2016, 2016 Finance Bill) and the Amending Finance Bill for 2015 (Loi de finances rectificative pour 2015, 2015 Amending Finance Bill, together with the 2016 Finance Bill, the Finance Bills). The Finance Bills have now been enacted by the French Parliament and reviewed by the Constitutional Court (Conseil constitutionnel), which has struck down some of their provisions in its decisions dated December 29, 2015.

In addition to the main provisions of the Finance Bills, the present French Tax Update provides an update on (i) the December 7, 2015 decision of the Conseil d'État on the availability of foreign tax credits under the so-called règle du butoir, as well as (ii) the recent update of the French list of non-cooperative jurisdictions.

RECENT NOTEWORTHY CASE LAW

► THE CONSEIL D'ETAT RULES ON THE REGLE DU BUTOIR

On December 7, 2015, the Conseil d'Etat (French Supreme Court for most tax matters) decided a case regarding the availability of a French tax credit resulting from foreign withholding taxes suffered by French corporate taxpayers in respect of inbound dividends.

In this case, the taxpayer had borrowed Italian equity securities, received the relevant dividends (which had suffered the relevant Italian withholding tax), and paid manufactured dividends (and a stock lending fee) to the relevant lender. The question was whether the manufactured dividends (and the lending fee) should be imputed against the inbound dividends, in which case no tax credit would have been available, given the fact that under the relevant corporate tax rules, the tax credit may not exceed the French tax due in respect of the underlying income (the so-called règle du butoir).

The Conseil d'Etat decided in favor of the French tax authorities (FTA), thus taking, partially, a different position to the one it had taken in 2009 when acting as an advisory body.

In 2009, the Conseil d'Etat had taken the view that only the expenses directly linked to the acquisition, holding, and sale of the relevant securities should be taken into account for the règle du butoir; for example, the Conseil d'Etat had decided the interest paid on the financing of the acquisition of the securities, or any capital loss on the sale of the securities, should not be viewed as "directly linked" for the above purposes. The Conseil d'Etat had also taken the view that expenses borne outside of France, other than foreign taxes (e.g., payments made to a nonresident party representing the sharing of the tax benefit of a given transaction) should not be taken into account for the règle du butoir.

The Appeal Court of Versailles had decided in favor of the taxpayer, following the reasoning used by the Conseil d'Etat in its 2009 advice.

The Conseil d'Etat, deciding in favor of the FTA, follows the reasoning below. (NB: Technically, the Conseil d'Etat is not, when deciding in a litigation case, bound by the advice it has given in the past):

In accordance with article 220 (1) (b) of the French tax code (FTC) and with the French Italian tax treaty, the règle du butoir limits the imputation of the tax credit to the French corporate tax due in respect of the underlying dividends.

The relevant French corporate tax is the one computed under article 39 of the FTC, which defines the deductible expenses to the extent they are directly linked to the acquisition, holding, and sale of the Italian securities.

In 2009, the Conseil d'Etat had advised that article 122 of the FTC excludes taking into account any payment outside of France other than the relevant foreign withholding tax. The Conseil d'Etat has now decided that article 122 defines only the taxable income (i.e., gross income minus foreign withholding tax) and has no bearing on the definition of the expenses that should be taken into account for the règle du butoir. In this respect, the Conseil d'Etat takes the view that the manufactured dividends (and the lending fees) should be deducted from the dividends.

It should be noted that the facts of the case predate the specific anti-abuse provision that was introduced in the FTC in 2010. Under this anti-abuse rule, there would have been no doubt that any amount paid to the lender should have been deducted for the purposes of the règle du butoir (unless the taxpayer could have proved that the transaction was not principally tax motivated), thus reducing to nil the amount of tax credit available to the borrower.

It seems that the new interpretation provided by the Conseil d'Etat may enable the FTA to challenge certain transactions that would not fall exactly within the scope of the anti-abuse provisions.

FINANCE BILLS—TAXATION OF DIVIDENDS

► PARTICIPATION EXEMPTION REGIME OVERHAUL

The 2015 Amending Finance Bill includes various provisions regarding the participation exemption regime (Participation Exemption) and related matters.

NATURE OF EQUITY SECURITIES ENTITLED TO THE REGIME

The Participation Exemption basically requires that the relevant securities are held for a minimum period of two years and represent 5 percent or more of the share capital of the issuing entity. Until now, the relevant securities had to be fully owned (pleine propriété) by the relevant parent company. The 2015 Amending Finance Bill provides that the Participation Exemption would also apply if the parent company holds the bare ownership (nue-propriété) of the securities. As an example, the relevant parent company may fully own shares representing 4 percent of the share capital and hold the bare ownership of shares representing 1 percent of the share capital. Mere usufruct, however, would never qualify for the Participation Exemption.

NB: Under the civil law rules, the ownership of a given asset may be divided into bare ownership and usufruct (usufruit); in respect of an equity security, the usufruct typically entitles the holder to receive the annual dividends and to vote during AGMs (annual general meetings, assemblées générales ordinaires), whereas the holder of the bare ownership is entitled to dividends distributed out of the reserves and votes during EGMs (extraordinary general meetings, assemblée générales extraordinaires) (NB: the parties may agree otherwise).

The above new rules would also apply to the Participation Exemption covering French outbound dividends. NB: Existing case law, from a lower administrative court and an appeal court, had already decided that the bare ownership of securities should not prevent the application of the Participation Exemption.

DIVIDENDS NON-ELIGIBLE FOR THE PARTICIPATION...