In a decision dated 20 October 2020, previously covered on this blog, the Administrative Court of Appeal of Versailles had ruled that the French capital gains tax applicable to non-French resident corporate sellers on the transfer of a significant shareholding (art. 244 bis B of the FTC) was likely to constitute a discrimination inconsistent with the EU principle of the free movement of capital, when this regime leads to a tax liability higher than the amount of corporate income tax that would have been payable had the non-EU taxpayer been established in France (e.g. pursuant to the French participation exemption regime). The Court further considered that this discrimination was not covered by the EU standstill clause and that eligible non-EU taxpayers were allowed to claim the full discharge of this capital gains tax.

Following an appeal lodged by the French tax authorities (FTA), the French Administrative Supreme Court partially confirmed this result in a decision dated 21 December 2022 (no 447568). The French Administrative Supreme Court decided that the free movement of capital was indeed applicable, without being limited by the EU standstill clause, but the Court of Appeal had erred in law by granting a discharge of the tax in full rather than only to the extent that it exceeded the charge that would have applied in respect of a taxpayer resident in France placed in a comparable position.

The tax regime has been amended to fix its inconsistency with EU principles for transfers from 30 June 2021 (see our previous post). The French Administrative Supreme Court’s decision confirms that non-EU taxpayers may be eligible to apply for a refund of tax charged under the regime in respect of transfers before that date. But it also suggests that non-EU taxpayers may be able to challenge the application of the regime to transfers as from 30 June 2021.

Questions before the French Administrative Supreme Court

The FTA challenged the decision of the Administrative Court of Appeal of Versailles on two main points.

First, the FTA considered that the non-EU taxpayer could not invoke the free of movement of capital against Article 244 bis B of the FTC, because this freedom was not applicable and because the EU standstill clause allowed the discrimination introduced by this regime in any event.

Second, the FTA considered that, if the taxpayer was allowed to invoke the free movement of capital, the remedy should not be a full refund of the tax. The tax should be refunded only to the extent that it exceeded the charge that would have applied in respect of a taxpayer resident in France placed in a comparable position.

Application of the free of movement of capital

The French Administrative Supreme Court had to determine whether the free movement of capital was applicable, which required the analysis of two points. As indicated in our previous post, this question had not been explicitly analyzed in the decision of the Administrative Court of Appeal of Versailles.

First, it was necessary to determine whether the free movement of capital could be invoked by a taxpayer established in a jurisdiction forming part of the overseas countries and territories (OCTs) associated with the EU; in this case, the Cayman Islands (until the Brexit).

The French Administrative Supreme Court considered that, absent any explicit provision governing capital movements between the EU and OCTs in the treaties on the EU and on the functioning of the EU, the OCTs could benefit from the free movement of capital as non-EU jurisdictions. According to the opinion of the rapporteur public (equivalent to an advocate general), it is, however, debatable whether this general statement also applies where the transaction is between an OCT and the Member State with which it is associated (e.g. pre-Brexit, in the case of a transaction between the Cayman Islands and the UK).

Second, it was necessary to determine to what extent the free movement of capital could be invoked in respect of Article 244 bis B of the FTC, which is applicable to the sale of significant shareholdings (i.e., shareholdings representing, under certain conditions, more than 25% of the profit rights of the French company).

Pursuant to the CJEU’s case law, where a non-EU jurisdiction is involved, the free movement of capital can be invoked, irrespective of the shareholding percentage actually held by the taxpayer, when the relevant national law does not apply exclusively to shareholdings allowing the exercise of a decisive influence. The French Administrative Supreme Court considered that the free movement of capital applied to Article 244 bis B of the FTC on this basis given that:

• the shareholding threshold is assessed at any time during the five-year period preceding the sale, so that the tax can apply irrespective of the profit rights held at the time of the sale; and
• the shareholding threshold is only determined by reference to the profit rights held in the French company, so that French capital gains tax can apply irrespective of the voting rights held by the non-resident.

According to the opinion of the rapporteur public, this result was all the more justified because:

• unlike the French CFC regime (in respect of which the French Administrative Supreme Court reached an opposite conclusion – see our previous post), no safeguard clause exists to limit the application of Article 244 bis B of the FTC to controlling shareholdings; and
• even if the 25% threshold had been based on voting rights, this would have been insufficient to conclude that the regime was applicable only to controlling shareholdings, given that holding 25% of the voting rights does not always grant a decisive influence over the company.

Application of the standstill clause

The French Administrative Supreme Court also had to determine whether the discrimination introduced by Article 244 bis B of the FTC could be covered by the EU standstill clause.

The French Administrative Supreme Court confirmed that it could not. Similarly to the Administrative Court of Appeal, the French Administrative Supreme Court confirmed that, although the non-French resident capital gains tax existed for natural persons and certain look-through partnerships on the relevant cut-off date (31 December 1993) and had been extended to legal persons or organizations whatever their form, including non-resident “capital companies” (i.e. entities 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, this extension came into force only on 2 January 1994 so that the infringement of the free movement of capital did not exist on 31 December 1993.

The French Administrative Supreme Court further noted that, even if the taxpayer could have been said to be equivalent to a look-through partnership (which was not demonstrated in the case at hand), the EU standstill clause would still have been inapplicable as no discrimination existed in respect of natural persons and look-through partnerships on 31 December 1993 (discriminatory provisions in respect of these two types of taxpayers were introduced after that date).

Full or partial refund?

The Administrative Court of Appeal of Versailles decided that the French capital gains tax should be refunded to the non-resident taxpayer in full (rather than allowing a refund only to the extent that the charge exceeded the amount of tax that would have been payable by a taxpayer resident in France placed in a comparable position).

This result was in line with a decision of the French Administrative Supreme Court dated 14 October 2020 (see our previous post), but the French Administrative Supreme Court nevertheless overturned the decision on this point, deciding that, when a discrimination is established, the FTA and the tax judge shall grant a refund only the extent that the charge exceeded the charge that would have applied in respect of a taxpayer resident in France placed in a comparable position. This conclusion is consistent with a more recent decision of the French Administrative Supreme Court rendered in another context (no 433301 of 6 December 2021). The rapporteur public had opined that this more recent decision should be followed, rather than the one of 14 October 2020.

The French Administrative Supreme Court then referred the matter back to the Administrative Court of Appeal of Versailles, which will have to determine the extent of the refund to be granted in the case at hand.

What’s next?

The discrimination introduced by Article 244 bis B of the FTC has been fixed by the Amended Finance Bill for 2021 dated 19 July 2021 for transfers from 30 June 2021 (see our previous post). The present decision is relevant for non-resident taxpayers who were subject to French capital gains tax in respect of transfers before 30 June 2021, but also potentially for transfers as from that date.

Indeed, the fix introduced in 2021 only applies, outside the EU/ eligible EEA jurisdictions, under certain conditions to investors who do not effectively participate in the management or control of the target company, i.e. to investors who do not hold a “direct investment” in the French company and are therefore outside the scope of the EU standstill clause. However, as indicated in our previous post, this new provision disregards the second cumulative temporal condition pursuant to which a restriction may be covered by the EU standstill clause only if it existed on 31 December 1993 (and has existed continuously since that date). Although this remains to be confirmed, the present decision – pursuant to which this second condition is not and cannot be met – hence gives arguments to challenge the new regime for transfers from 30 June 2021.

Taxpayers therefore need to review their position carefully and rapidly to assess whether they may be eligible to claim a refund to ensure that claims can be submitted in time. For example, and subject to certain exceptions, a refund would have to be claimed by eligible taxpayers before 31 December 2023 for taxes paid in 2021.