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Abuse of rights: the Conseil d’Etat validates an extensive conception of the notion of artificial arrangement

Abuse of rights: the Conseil d’Etat validates an extensive conception of the notion of artificial arrangement

by | 28-10-22 | Corporate taxation

The Conseil d’Etat upheld the Versailles Administrative Court of Appeal’sdecision of April 1, 2021,No. 20VE002388 and 20VE002389, upholding the reassessments notified to Dassault Systèmes by the French tax authorities, in theConseil d’Etat’s decision of May 31, 2022, No. 453 175, Société Dassault Systèmes.

The facts at the origin of the proceedings before the Council of State

The applicant French company granted loans to its U.S.-based subsidiary for the purpose of acquiring two companies also based in the United States. 

The U.S. subsidiary then sold to the French company the preferred shares issued by the two U.S. companies it had just acquired. These preferred shares were accompanied by a guarantee to pay an annual dividend.

At the same time, the French company entered into shareholders’ agreements with a holding company established in the United States and wholly owned by its American subsidiary, under which the holding company undertook to buy back the disputed shares within a maximum period of seven years at a price fixed in advance and not taking into account the results of the two companies acquired. 

The dividends received by the French company from the two US companies were treated as tax-exempt under the parent company regime.

However, after verifications, the French tax authorities questioned the benefit of this regime on the basis of abuse of right and initiated a procedure to rectify the amount of taxes due by the taxpayer.

The applicant company challenged this decision in court both from the point of view of the tax regime and the procedure applied.

The benefit of the parent company regime ruled out

In its decision no. 20VE02388 and 20VE02389 of April 1, 2021, the Versailles Administrative Court of Appeal ruled that the taxpayer abusively took advantage of the exemption from the parent company regime provided for in articles 145 and 216 of the General Tax Code. This mechanism allowed him to be exempted, except for a 5% share of costs and expenses, from any corporate income tax due in France on the income attached to the preference shares of his American subsidiaries.

According to the administrative court of appeal, in the absence of a contingency, this income should not be considered as income from a holding that could give rise to the exemption provided for by the parent company regime, but as a repurchase agreement within the meaning ofarticle L 211-27 of the monetary and financialcode . In this type of transaction, the transferee’s remuneration constitutes income from a debt that is treated for accounting purposes as interest and is taxable as such.

The court thus concluded that there was an abuse of law within the meaning ofarticle L64 of the tax procedure book, due to the setting up of an arrangement which, through the interposition of the holding company, had the sole purpose of avoiding the tax burden normally due in the context of a repurchase agreement and allowed the taxpayer to benefit from the parent company regime because of the fixed income linked to the preference shares in its subsidiaries.

The Council of State agreed with this analysis.

Thus, the Conseil d’Etat confirms the position of the administrative court of appeal by holding that the mere interposition of a legal structure is sufficient to materialize the existence of an artificial arrangement without the Administration having to indicate which legal act or agreement should be disregarded in order to recharacterize the transaction actually carried out.

Informing the parent company during a rectification procedure

According toarticle R*256-1 of the tax procedure book, when the parent company of a group is solely liable for the corporate income tax due on all the results of the group, and when it is required “to bear the duties and penalties resulting from a rectification procedure carried out with respect to one or more members of the group, the administration sends to this parent company, prior to the notification of the corresponding collection notice, a document informing it of the total amount per tax of the duties, penalties and late payment interest for which it is liable. “.

In this case, the information document and the notice of assessment were delivered to the taxpayer by hand on the same day.

According to the Versailles Administrative Court of Appeal, whose position was validated by the Conseil d’Etat, even if the text provides that the information must be given before the notification of the collection notice, the concomitant transmission of the documents does not deprive the applicant company of any guarantee.

The latter is in fact informed of the consequences of the adjustments to which it has been subjected. It can therefore contest these adjustments. Thus, this has no consequence on the tax decision and cannot justify the discharge of the additional taxes requested by the applicant company. 

The decision ofthe Council of State of May 31, 2022, no. 453 175, Société Dassault Systèmes, thus confirms the decision of the administrative court of appeal on all the points contested by the applicant concerning the tax regime and procedure applicable in this case.

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Contact the author – Cyril Maucour – Tax Lawyer – AlterTax Avocats

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