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Compatibility of exclusion of indirect ownership through companies in other EU Member States for French tax consolidation purposes with freedom of establishment referred to ECJ

The French Administrative Supreme Court gave its decision on 10 July 2007 in the case of Ministry of Finance v. Société Papillon (No 284785). Details of the decision are summarized below.

(a) Background. Arts. 223A to 223Q of the CGI contain a set of rules that allow French companies that are members of a group to file a consolidated tax return (régime d'intégration fiscale). Under this regime, the parent company may compensate the profits and the losses realized by the companies of the group and benefit from the tax neutralization of internal transactions within the group. The rules apply to a group of French companies connected by 95%-ownership links. The parent company at the head of the group must be a French company that is not itself 95% or more owned by another French company. A parent company subject to French corporate tax is prohibited from including within the group French lower-tier subsidiaries held indirectly through a foreign company, which does not have a permanent establishment in France.

(b) Facts. A French parent company held indirectly through a Dutch company more than 95% of the shares in several French subsidiaries. The French parent company filed a consolidated tax return, including the French subsidiaries that were owned indirectly for 95%, through the Dutch company. The tax administration rejected the application of the tax consolidation regime as set out in Art. 223A on the grounds that the Dutch company, an NV, was not subject to corporate tax in France. The French company brought the case to the Lower Court of Paris, which rejected the claim on 9 February 2004, and appealed the judgment before the Court of Appeals of Paris. The latter rejected the claim on 24 June 2005. The taxpayer brought the case before the Administrative Supreme Court.

(c) Issue. The issue before the Administrative Supreme Court was whether or not the exclusion for French tax consolidation purposes of indirect ownerships through companies established in another EU Member State is compatible with the EC freedom of establishment set out in Art. 43 of the EC Treaty.

(d) Decision. Firstly, the Court raised the issue of whether the tax consequence resulting from the choice made by the French parent company to hold a lower-tier subsidiary through a French subsidiary (i.e. inclusion of the lower-tier subsidiary within the group) or through a subsidiary established in another EU Member State (i.e. exclusion of the lower-tier subsidiary from the group) constituted a restriction of the freedom of establishment of at least one of the companies of the group. Secondly, if such restriction existed, the Court questioned whether the restriction could be justified by the coherence of the tax systems or by any other overriding reasons in the public interest. With respect to the coherence of the tax system, if the subsidiary established in another EU Member State were considered to belong to the French group only for the purpose of the indirect ownership of the French lower-tier subsidiary, the Court raised the issue of determining whether such inclusion would be coherent with the regime of neutralization of internal transactions within the group; because the tax treatment of transactions with a non-resident subsidiary is different from that applicable to transactions made with a resident subsidiary. The Court stressed that the result may lead to double deductions, as compared to a system involving only companies subject to French corporate income tax.

The Court referred two questions to the ECJ for a preliminary ruling on the basis of Art. 234 of the EC Treaty. These are in substance:

1   Does the French legislation on group consolidation (Arts. 223 A to 223Q CGI), under which a French parent company cannot include within the group for tax consolidation purposes, a French lower-tier subsidiary because such subsidiary is held indirectly by a subsidiary established in another EU Member State which does not have a permanent establishment in France (i.e. not subject to corporate income tax in France), constitute a restriction of the freedom of establishment?
2   If so, can such restriction be justified either by the coherence of the group consolidation system, notably the tax neutralization of internal transactions of the group, or by any other overriding reasons in the public interest?

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