France: French Tax Update - Proposed Changes To The EU Parent–Subsidiary Directive, Q2 Noteworthy Publications, And FATCA And BEPS Updates

Last Updated: 4 June 2014
Article by Nicolas André and Kent L. Killelea

The present French Tax Update will look over (i) the modifications to the EU Parent–Subsidiary Directive ("PSD") that were recently proposed and amended by the European Commission, (ii) recent advisory opinions issued by the Committee in charge of abuse of law matters (Comité de l'Abus de Droit Fiscal, "AoL Committee"), (iii) recent case law issued by French tax courts, (iv) disclosure obligations for certain trust arrangements, (v) international and U.S. law insight on recent developments pertaining to the U.S. Foreign Account Tax Compliance Act ("FATCA"), and (vi) the updated calendar for the OECD Action Plan on Base Erosion and Profit Shifting ("BEPS").



Originally adopted in 1990, the PSD aims at eliminating tax obstacles to profits distributions within EU groups of companies by (i) eliminating withholding tax on profits distributions by subsidiaries to their parents and (ii) eliminating double taxation of the income so distributed (by using either the exemption or the tax credit method at the level of the receiving parent). 

In November 2013, as part of its Action Plan to strengthen the fight against tax fraud and tax evasion, the European Commission issued a proposal to address the double nontaxation of corporate groups deriving from cross-border hybrid financial arrangements ("Initial Proposal"). 

The Initial Proposal included two amendments to the PSD: (i) an anti-hybrid clause taking the form of a linking rule ("Linking Rule"), and (ii) a general anti-abuse rule ("GAAR"). 

Under the Linking Rule, the EU Member State of which the recipient is a resident would in essence have to refrain from taxing profits distributions to the extent that such profits distributions are not deductible by the subsidiary. Viewed by the European Commission as the most effective option in counteracting hybrid financial arrangements—as it should ensure a certain level of consistency across the EU—it remained questionable how much the Linking Rule would achieve, especially in respect of its coordination with recent domestic rules adopted by Member States targeting hybrid financial arrangements that provide for a denial of the payor deduction. (For further details with respect to the French specific measure, see our French Tax Update for May). 

The Initial Proposal was also to require Member States to adopt a GAAR that would ensure withdrawal of all PSD benefits where there is "an artificial arrangement or an artificial series of arrangements which has been put into place for the essential purpose of obtaining an improper tax advantage under the relevant regime and which defeats the object, spirit and purpose of the tax provisions invoked." Such definition was further supplemented by a list of indicators of whether an arrangement is artificial: substance of the arrangement inconsistent with its legal characterization, circular transactions, elements that offset/cancel one another, significant tax benefit not reflected in the cash flows or business risks undertaken, lack of reasonable business conduct. 


In an updated proposal dated April 9, 2014 ("Updated Proposal"), the Linking Rule has been amended to further provide that the Member State where the recipient is a resident should actually tax profits distributions to the extent that such profits distributions are deductible by the subsidiary (i.e., in addition to solely providing that the Member State of which the recipient is a resident should refrain from taxing profits distributions to the extent that such profits distributions are not deductible by the subsidiary). Therefore, the Updated Proposal now makes it clear that the exemption that would have been available under the PSD would be denied in the Member State of which the recipient is a resident. 

Moreover, as discussions in the expert meetings revealed that several Member States have different views as well as certain concerns with respect to the GAAR, the European Union Council of Economic and Finance Ministers decided, on May 6, 2014, to exclude the GAAR from the Updated Proposal. 


According to the European Commission, the plan now is to proceed with the approval of the Updated Proposal (i.e., only containing the completed Linking Rule) at the next meeting of the European Union Council of Economic and Finance Ministers scheduled for June 20, 2014, while putting on hold the GAAR until an agreement is reached.  

Should the Updated Proposal be approved, the Member States will be required to implement the amendments to the PSD into their domestic laws by December 31, 2015 (whereas the Initial Proposal was aiming for December 31, 2014). 


Pursuant to the abuse of law procedure ("AoL"), the French tax authorities ("FTA") may, under certain conditions, recharacterize a given transaction if they can prove that it is either fictitious or exclusively tax motivated. If the tax authorities attempt to recharacterize a given transaction under the AoL procedure, the dispute may be forwarded (either by the taxpayer or the tax authorities) to the AoL Committee.

While the AoL Committee is an independent body whose object is to issue nonbinding advisory opinions, such opinions are in practice closely followed as they (i) shift the burden of proof, for any subsequent litigation, to the party with which the AoL Committee did not agree, and (ii) are generally viewed as influential on practitioners and tax courts (inter alia because of the qualifications of the AoL Committee members (three judges from the administrative supreme court, a tax lawyer, a public notary, a chartered accountant, and a university professor). 

We discuss below two of the most noteworthy topics covered by the recent opinions issued by the AoL Committee. 


Two limited liability Luxembourg companies ("Lux Co 1" and "Lux Co 2") were created, on the same day, by the ultimate investors based in the UK and Monaco. Lux Co 1 owned Lux Co 2. 

A few months later, Lux Co 2 created five Danish entities ("Danish Cos"), which subsequently purchased ("Purchase") French real estate or special purpose French vehicles owning French real estate ("French Assets"). 

Subsequently, Danish Cos sold the French Assets ("Sale"), resulting in an aggregate capital gain of €70 million ("Capital Gain"). Before the actual Purchase and Sale took place, Lux Co 2 had signed a protocol documenting the principle of the disposal of the French Assets. 

The FTA took the position that, for the purposes of the AOL procedure, Lux Co 2, rather than Danish Cos, should be viewed as having realized the Capital Gain, i.e. Lux Co 2 should be treated as if having effected directly the Purchase and Sale of the French Assets, the intermediation of Danish Cos (totally controlled by Lux Co 2 and without economic substance) being enacted with the sole motivation of avoiding French tax on the Capital Gain. 

The AoL Committee ruled in favor of the FTA, on the basis of the following arguments:

  • Under the then-applicable Danish/French double tax treaty, the French real estate capital gains were not taxable in either jurisdiction; the situation was the same under the Luxembourg/French double tax treaty, before the treatment was changed from January 1, 2008 (where such capital gain became taxable in France).
  • Lux Co 2 implemented all the necessary steps for the Purchase and Sale of the French Assets even before the Danish Cos were created; notably the relevant market counterparties dealt only with Lux Co 1 and Lux Co 2, and all the transfers of the related cash flows took place in Luxembourg.
  • The Danish Cos were created only because of the above change in the Luxembourg/French double tax treaty; in other words, the incorporation of the Danish Cos had no other purpose than to avoid (by using the Danish/French double tax treaty) the French tax that would have been due if the Capital Gain were realized by Lux Co 2.
  • The AoL procedure should be applicable given that the avoidance of the taxation of the Capital Gain is against the objectives of the Danish/French double tax treaty, where such nontaxation derives from the purely tax-motivated incorporation of the Danish entities.
  • The AoL Committee also decided that Lux Co 2 had the principal initiative to set up the structure challenged under the AoL procedure and, accordingly, should be liable to the 80 percent penalty. NB: The AOL procedure provides for 80 percent and 40 percent penalties, the latter being applicable when the relevant taxpayer is neither the principal initiator nor the principal beneficiary of the relevant transaction.


Two nonrelated French companies ("French Co 1" and "French Co 2") and a Monaco company have created a third French company ("French Sub"). Pursuant to a shareholder agreement entered into on the same day, French Co 1 undertook to sell its shares into French Sub to French Co 2 in accordance with a certain timetable and for an amount contingent upon the then-net financial result of French Sub ("Call"). French Co 2 was then merged within and into another related French company ("French Co 3").

Few months later, a Luxembourg company ("Lux Co") was created by two limited liability British Virgin Islands companies ("BVI Cos"), the individual shareholder of French Co 1 being appointed as executive manager of Lux Co, with the power to represent Lux Co in its day-to-day operations and to contractually commit Lux Co.

Few weeks later, French Co 1 sold to Lux Co most of its shares into French Sub for an amount equal to the acquisition price of such shares ("Lux Sale"). Lux Co then sold to French Co 3 a portion of the shares of French Sub so acquired, for an amount giving rise to substantial capital gains. The year after, Lux Co sold the remainder of its French Sub shares to French Co 3, for an amount also giving rise to substantial capital gains. All such capital gains were tax-exempt in Luxembourg.

The FTA took the position that the sole purpose of the Lux Sale was to avoid any taxation in France of the capital gains to be realized by French Co 1 during the subsequent years (i.e., had the Lux Sale not happened) as Lux Co was not subject to any taxation on its capital gains under Luxembourg domestic tax laws. The FTA thus disregarded the Lux Sale and considered that French Co 1 had sold its French Sub shares directly to French Co 3, thereby triggering the taxation in France of the corresponding capital gains.

As in the previous opinion above, the AoL Committee ruled in favor of the FTA, on the basis of the following arguments: 

  • The Call was already agreed upon between French Co 1 and French Co 2 on the day French Sub was created.
  • French Co 1 and Lux Co had common interests given the powers of the individual shareholder of French Co 1 toward Lux Co (interestingly, it seems that neither the FTA nor the AoL Committee was provided with evidence that French Co 1 and Lux Co were related entities, possibly through the BVI Cos).
  • The price agreed upon between French Co 1 and Lux Co for the Lux Sale was substantially lower than the price agreed under the Call.
  • The Lux Sale effectively allowed French Co 1 to avoid the realization of any capital gains in France; on the basis of the elements provided to the AoL Committee, the Lux Sale therefore had to be regarded as an artificial scheme exclusively motivated by a tax purpose, and in breach of the intent of the legislator (when it enacted the capital gains taxation regime).

As in the previous opinion above, the AoL Committee decided that French Co 1 had the principal initiative to set up the structure challenged under the AoL procedure and, accordingly, should be liable to the 80 percent penalty.



In February 2009, the Conseil d'Etat decided that certain foreign nonprofit organizations ("Foreign NFP"), including foreign pension funds, should not be treated less favorably than their French counterparties when receiving French source dividends (principle of free movement of capital). Given that the French NFP were exempt in respect of French source dividends, whereas the Foreign NFP were liable to French withholding tax on the same, a subsequent French Finance Bill provided that both French and Foreign NFP should be liable to a 15 percent taxation (corporate tax and withholding tax) to the extent the Foreign NFP could demonstrate (using a form provided by the FTA) that they should be treated as "nonprofit." Therefore, the question was: Under what precise criteria should the "nonprofit" activity be defined?

In a recent case decided by the Administrative Appeal Court (Cour administrative d'appel, "CAA") of Versailles on March 4, 2014, the FTA was taking the position that the "nonprofit" analysis should be based on the criteria used under French domestic law; in other words, the FTA was taking the position that the use of domestic criteria would not be against the principle of free movement of capital.

The Versailles CAA took the view that, in accordance with the Santander case decided by the EU Court of Justice, only "pertinent criteria of distinction" should be relevant for the purposes of the above analysis.

In the specific case before the Versailles CAA, a UK pension fund had 13 directors and was remunerating them by an amount that was higher than the relevant maximum amount allowed by the French domestic rules defining the "nonprofit" criteria for a similar activity (also the French rules allow only a maximum of three paid directors).

The Versailles CAA took the view that (i) the UK pension fund was providing, to the beneficiaries, the same services as those provided by a French pension fund, and (ii) to the extent the remuneration paid to the directors was not based on performance, and rather reflects the level of their responsibilities, the management of the UK pension should be viewed as "nonprofit" and, therefore, comparable to the French pension fund.

In other words, the Versailles CAA, siding with the UK pension fund, decided that the maximum amount of remuneration (as defined by the French domestic law) is not a pertinent criteria to decide the "nonprofit" activity of the UK pension fund as long as the latter provides similar services as French pension funds within a noncommercial remuneration system (i.e., not based on performance).


Two court decisions issued in April 2014 by the Nancy and Marseille CAAs confirmed the application of well-established principles with respect to the characterization of a permanent establishment in France where a non-French company is actually managed from France.

In the case reviewed by the Nancy CAA, the same individual held a French company ("FCo") and a Luxembourg company ("LCo"). While FCo used to produce and sell its products, the commercialization thereof had been transferred to LCo, which was consequently selling the FCo products. Following a search and seizure procedure, the FTA gathered, (i) at the domicile of such individual, several key accounting, commercial, and banking documents pertaining to LCo, and (ii) at the FCo head office, most of the commercial management files of LCo (e.g., lists of clients, order books, commercial follow-up electronic files, delivery slips, pricing policy handouts, etc.) that were being processed and operated by FCo employees. On the basis of such evidence and, interestingly, on the basis of additional evidence of the lack of substance of LCo in Luxembourg (e.g., staff, equipment, infrastructure), the Nancy CAA held that a permanent establishment of LCo had to be characterized under both French law and Article 2.3 of the Luxembourg/French double tax treaty, and that the income attributable thereto consequently had to be subject to corporation tax in France.

In a similar set of facts, the Marseille CAA held that the German subsidiary ("GSub") of a French parent company ("FParent") that was in fact wholly managed by, and did not pay any management fees to, FParent should lead to the characterization of a French permanent establishment. The Marseille CAA inter alia noted that the FParent employees were (i) actively involved at all stages of the commercial process that constituted the core activity of GSub (i.e., the provision of interim or temporary staff), and (ii) in fact preparing, negotiating, and signing corresponding commercial contracts with clients that the GSub manager was simply formally validating. The Marseille CAA thus concluded that FParent amounted to a French permanent establishment of GSub as it had the ability to contractually commit GSub with respect to its core activities. The Marseille CAA further noted that, as FParent was not compensated by GSub for the activities it carried out in France instead of GSub, it could in any event not be regarded as enjoying an independent status within the meaning of Article 2 of the German/French double tax treaty. The income thus generated by GSub had to be subject to corporation tax in France.



The trustees of certain defined trusts have to provide specific information to the FTA on an annual basis and upon the occurrence of certain events. 

The annual declaration, to be filed, generally, not later than June 15 of each year (in certain cases, August 31), must provide the market value, as of the preceding January 1, of rights, assets, and capitalized income that are included in the trust arrangement. The declaration is due if any of the following conditions is met in respect of a given trust arrangement:

  • the settlor (or the deemed settlor as defined by the French tax rules) is tax domiciled in France; or
  • at least one beneficiary is tax domiciled in France; or
  • at least one of the rights, assets, and capitalized income comprised in the trust arrangement is located (or deemed to be located) in France; or
  • the trustee is tax domiciled in France.

When at least one settlor (or deemed settlor), or one beneficiary, is tax domiciled in France, all of the rights, assets, and capitalized income included in the trust arrangement must be declared; in the other cases, the declaration must cover only those assets, rights, and capitalized income that are located (or deemed to be located) in France (except certain financial portfolio investments).

Besides the above annual declaration, the trustee must also provide to the FTA the provisions of the trust arrangement and must declare (within a month) its constitution, any modification thereof, and its expiry.

The absence of the above declarations would result in a specific penalty equal to the higher of €20 thousand and 12.5 percent of the rights, assets, and capitalized income included in the trust arrangement. The penalty is due by the trustee, it being said that the settlor(s) and beneficiaries are jointly liable for its payment.

The statute of limitations is 10 years.

No declaration is required when (i) the trustee is governed by the law of a jurisdiction that has signed an administrative assistance treaty (to combat fraud and tax evasion) with France, and (ii) the trust arrangement has been set up to manage a pension plan for a company or group of companies.


In the absence of the above declaration (for those taxpayers who are not liable to wealth tax), or in the absence of the relevant wealth tax declarations (for those taxpayers who are liable to the wealth tax), certain of the trust's rights, assets, and capitalized income (valued as of the preceding January 1) are liable to a specific levy of 1.5 percent (i.e. the highest current wealth tax rate). The time limit to file the declaration and pay the tax is June 15.

The trust tax is not due when the trustee is subject to the legislation of a jurisdiction that has signed an administrative assistance treaty (to fight fraud and tax evasion) with France, and the relevant trust is set up either for a charitable activity or to manage the pension plan of a company or group of companies.

The taxable rights, assets, and capitalized income are only those that are located (or deemed to be located) in France for those settlors and beneficiaries who are not tax domiciled in France; for all settlors or beneficiaries tax domiciled in France, all of the rights, assets, and capitalized income under trust are liable to tax.

In case of nonpayment of the tax by the trustee, the relevant settlors and/or beneficiaries are jointly liable.



Implementation of the U.S. FATCA regime proceeds on schedule, with no changes to the effective dates, and none now expected. Thus, withholding will begin on July 1 on U.S.-source payments (including interest on U.S. obligations and dividends from U.S. corporations) to entities subject to FATCA—so-called foreign financial institutions ("FFIs")—that are not FATCA compliant. Due to the intergovernmental agreement ("IGA") with France, FFIs that are tax resident in France (with respect to their French branches) and branches of other FFIs that are French resident are not subject to the July 1 date. Nor are FFIs resident in other jurisdictions that have an IGA (or have "substantially" negotiated one under the rules discussed below). But other, "non-IGA" FFIs should (unless an exception applies) register with the U.S. Internal Revenue Service ("IRS") before July 1 and enter into an agreement to perform a "due diligence" search of their accounts and report information to the IRS annually with respect to account holders who are U.S. persons and meet certain other requirements.


For FFIs benefiting from IGAs under the above rules, withholding is delayed until January 1, 2015 and will never apply if the FFI is FATCA compliant or is excepted under the IGA. To avoid withholding, such "IGA FFIs" must generally register with the IRS by January 1, 2015 and obtain a global intermediary identification number ("GIIN") to give to U.S. withholding agents. Beginning next year, such FFIs must comply with the IGA's reporting requirements (although again exceptions may apply), which in the case of most IGAs (the so-called Model 1 IGAs, including France) will be to their own national tax authorities. 

We are still waiting for the final implementation rules in France and most other jurisdictions, which will govern the information reporting process.


To summarize the most important developments so far this year, temporary regulations issued in February 2014 confirmed the earlier extension of effective dates by IRS action., i.e., to delay withholding to July 1, 2014 for non-IGA FFIs and January 1, 2015 for IGA FFIs, as above. 

Additionally, June 30, 2014 was set as the last date on which debt instruments and other obligations can be issued (or subject to a binding agreement) and still be exempt from the FATCA withholding rules (the so-called "grandfather" date). The regulations clarified many technical points and also contained two important liberalizations of the rules. The regulatory exception for so-called "limited life debt investment entities" was made permanent. (Earlier, it provided relief only until 2017). This exception is targeted at funds investing primarily in debt instruments (e.g., CLOs and CDOs), and it was liberalized in a way that will allow many more such funds to qualify. (The most important changes here were the adoption of January 17, 2013 as the date the fund must have been in existence and dropping the requirement that the fund's organizational documents must not permit amendments without agreement of all of the fund's investors.) These changes are important also for IGA FFIs because many IGAs, including the French IGA, adopt by reference the exceptions in the U.S. regulations. 

The February 2014 regulations also delay FATCA withholding on payments on instruments held as collateral until 2017. This benefit applies only if the amount of collateral held in the arrangement is "commercially reasonable."

In a recent announcement, the U.S. Treasury greatly expanded the number of IGAs that allow FFIs to qualify in their jurisdictions for exemption from withholding in 2014 (i.e., until January 1, 2015 if required under the above rules). Now, IGAs can qualify for the 2014 exemption if an agreement "in substance" has been reached by July 1, even though it has not yet been signed (although the jurisdiction must consent to be included on the IRS list). Such IGAs will be considered in effect through December 31, 2014; if the IGA with any of these jurisdictions is not actually finalized in 2014, FFIs in the jurisdiction may be subject to U.S. withholding beginning on January 1, 2015 under the U.S. statutory rules (described above). The Treasury's list of IGAs, both those that are final and those "in substance," can be found here.


On May 26, 2014, the OECD held a webcast providing the last updates on its ongoing BEPS project and the deliverables that should be available in connection therewith for the upcoming G20 meetings to be held in Australia in September 2014 (G20 Finance Ministers, in Cairns) and November 2014 (G20 Leaders, in Brisbane). 

Senior members from the OECD Centre for Tax Policy and Administration therefore reviewed seven issues that could be almost ready for approval by the corresponding Working Party and/or Committee for Fiscal Affairs meetings (that should respectively meet in May and/or June 2014): (i) tax challenges of the digital economy, (ii) hybrid mismatch arrangements, (iii) prevention of tax treaty abuse, (iv) transfer pricing aspects of intangibles, (v) transfer pricing documentation and country-by-country reporting, and (vi) the feasibility of a multilateral instrument.

Renewing the OECD commitment in respect of the calendar of deliverables, the webcast further noted that the respective working groups are generally on schedule, and that final draft reports should be released within the course of the G20 Finance Ministers meeting to be held in Cairns in September 2014 (for further details, the full presentation may be found here).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Nicolas André
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