French Tax Update - Recently Published Noteworthy Decisions - July 2015

The present French Tax Update will focus on an overview of several noteworthy French tax court decisions issued during the past few months.

BUYBACK AND CANCELLATION OF OWN SHARES

The tax treatment of buybacks, from the shareholders' point of view, has now been simplified through a change of legislation, i.e., capital gain/loss treatment in all situations (see French Tax Update of January 2015).

In a decision dated April 1, 2015, the Conseil d'Etat ruled on a specific question regarding the tax treatment of a listed issuer that had purchased its own shares, with the initial purpose of using them for existing ESOPs, and that had subsequently decided to cancel them. This change of purpose had resulted in an accounting reclassification of the shares. In the meantime, the issuer had created a reserve, inter alia, to recognize the depreciation of the shares compared to their buyback price. The French tax authorities (FTA) were of the view that the reserve should have been reinstated once the decision was made to cancel the shares.

The Conseil d'Etat ruled in favor of the issuer by considering that the decision to cancel the shares (which was made after the shares had been purchased) should be likened to a decision to sell the same and buy them back again. Accordingly, unless the FTA could prove (under the abuse of law procedure) that the issuer knew from day one that it was going to cancel the shares, the reserve should not be reinstated.

CORPORATE TAX EXCEPTIONAL CONTRIBUTION

Compliance With French Constitution

While the basic French corporate tax rate is 33.33 percent, certain corporate taxpayers are also liable to two additional contributions, one (the so-called social contribution) equal to 3.3 percent of the corporate tax liability, and the other (the so-called exceptional contribution, or EC) equal to 10.7 percent of the corporate tax liability.

The EC is due from corporate taxpayers with an annual turnover exceeding €250 million (NB: the EC is supposed to cease to apply for financial years closing as from December 31, 2016).

The relevant legislation provides that, for entities belonging to a French tax grouping (where the tax is due from the head of the group), the €250 million threshold is applied by aggregating the turnover of all members of the grouping. This provision was brought before the Conseil Constitutionnel to decide on its constitutionality, the position of the taxpayer being that it violates the constitutional principle of equality before the law. More precisely, the taxpayer argued that certain members of its tax grouping served only a function of "intermediation" (i.e., reinvoicing of intra-group charges), and, accordingly, the inclusion of their turnover (in the computation of the €250 million threshold) was creating an excessive tax charge.

The Conseil Constitutionnel sided with the FTA by arguing that (i) the EC was created to specifically target the larger groups (hence the...