The Administrative Court of Appeal of Versailles has recently ruled that the capital gains tax charge applicable to non-residents on the transfer of a significant shareholding was likely to constitute discrimination inconsistent with the EU freedom of movement of capital and that eligible non-EU taxpayers were allowed to invoke such discrimination, which is not covered by the EU standstill clause, to claim the full discharge of this capital gains tax. While it is reasonable to expect that a legislative fix will be introduced as part of the 2021 Finance Bill, non-EU taxpayers that have been subject to the relevant charge may wish to review their position to establish whether a tax refund can be claimed.
The context and the question
In a decision dated 14 October 2020 (no 421524), the French Administrative Supreme Court (Conseil d’Etat) confirmed that the French capital gains tax charge, applicable notably to non-French resident corporate entities on the transfer of a significant shareholding in a French entity (Section 244 bis B of the French tax code), was likely to constitute discrimination inconsistent with EU non-discrimination principles. The Court consequently ruled in favour of an Italian taxpayer claiming a full discharge of this levy (see our previous post for more details on this decision and the scope of this capital gains tax).
The question remained, however, whether it was possible for a non-EU taxpayer subject to this capital gains tax (in accordance with double tax treaties, if any) to invoke such discrimination, which requires them to demonstrate that this restriction (i) is inconsistent with the EU freedom of movement of capital contained in Article 63 of the Treaty on the Functioning of the European Union (which is the only freedom applicable to third countries) and (ii) cannot be covered by the “standstill clause” contained in Article 64 which allows the application to third countries of any restriction existing on 31 December 1993 (and remaining in force continuously since that date) under national or EU law insofar as “direct investments” are involved.
In a decision dated 20 October 2020 (no 18VE03012) the Administrative Court of Appeal of Versailles considered that these two conditions were met and ruled in favour of a non-EU corporate investor located in the Cayman-Islands who was claiming the full reimbursement of the non-French-resident capital gains tax levied upon the sale of shares held in a French company.
On the first condition, the Court confirmed the existence of a restriction on the free movement of capital, which was not seriously disputed here, when the non-French resident capital gains tax gives rise, as was the case here, to a tax liability higher than the amount of corporate income tax which would have been payable had the non-EU taxpayer been established in France (e.g., pursuant to the French participation exemption regime). Interestingly, the Court therefore implicitly confirmed that the EU freedom of movement of capital could apply to a legal provision applicable to taxpayers holding directly or indirectly (or having held at any time during the last 5 years preceding the transfer) a significant shareholding representing more than 25% of the profit rights of the French entity.
On the second condition, the Court noted that, although the non-French resident capital gains tax existed for natural persons and certain look-through partnerships on 31 December 1993, it had been extended to any legal person or organization whatever their form, including non-resident “capital companies” (i.e., which would have been subject to French corporate income tax had they been established in France) by the Amending Finance Law dated 30 December 1993 but that this extension, and the correlative restriction, only came into force on…2 January 1994!
As a result, the Court logically concluded that the restriction at stake, concerning here a non-resident “capital company” (which we understand would have been subject to French corporate income tax had it been established in France), was not officially part of French law before that date and could not be considered as existing since 31 December 1993 for the purposes of the standstill clause, which was therefore not applicable here (irrespective of the question whether the shares held by the non-EU taxpayer could be qualified here as a “direct investment”).
What’s next ?
Even though it is likely that the French tax authorities will try to amend the relevant legislation in the context of the current discussions of the 2021 Finance Bill, eligible non-EU taxpayers who have been subject to this capital gains tax, at least in 2018 or 2019 (and maybe even in 2020, depending on the wording of the amended provision), need to carefully and rapidly review their position to assess whether they have arguments to claim a refund.
This refund right would notably concern eligible non-EU taxpayers established in countries having concluded with France a double tax treaty allowing (subject to certain exceptions) the implementation of Section 244 bis B of the French tax code (such as Argentina, South-Korea, Hong-Kong, India, Japan and United Arab Emirates) or in countries with which no double tax treaty has been concluded (such as the Caymans Islands which have only concluded with France a Tax Information Exchange Agreement).
A restriction voted by the Parliament on 30 December 1993, but only coming into force on 2 January 1994, cannot be covered by the EU standstill clause.