After many years of uncertainty and misunderstanding by taxpayers and legal professionals, the question as to whether a single minority shareholding by a group's active holding company is sufficient to deprive it of its active nature has been decided.
The Cour de Cassation (Supreme Court of the judicial order) delivered a major judgment last 19 June definitively invalidating the position of the [French] Tax Administration, which considered that a group's active holding company loses this capacity if it does not actively manage all of its subsidiaries.
This decision thus puts an end to a very extensive litigation which had developed in recent years, in particular with regard to the Dutreil regime and the exemption of professional assets from the ISF (wealth tax).
In this case, taxpayers had applied preferential tax regimes providing for a total exemption on wealth tax for professional assets and a partial exemption on assets subject to a collective undertaking to keep their shares in a group's active holding company holding direct shares in four operating subsidiaries and minority shareholdings in a fifth non-operating subsidiary.
The Tax Administration carried out tax adjustments by raising the argument according to which the group's active holding companies were eligible for these preferential regimes by reason of a mere administrative tolerance and that this administrative tolerance should be interpreted strictly.
It thus concluded that the role of effective management had to be rigorously interpreted at group level, i.e. at the level of all subsidiaries.
It also invoked the fact that if the doctrine had intended to allow active holding companies of groups to have unmanaged minority shareholdings without any risk of disqualification, this indication would have been expressly mentioned in the administrative comments.
This analysis was rigorously disputed by the taxpayers that reminded that a group's active holding company was eligible for preferential regimes, as the founding policy in this regard assimilates active holding companies to fullyfunctional operating companies.
Indeed, by reason of the management of its subsidiaries, the holding company operates a commercial activity as such.
It was furthermore argued that an operating company may exercise both a commercial and civil activity, provided that the commercial activity remains predominant.
Lastly, it was pointed out that by requiring a holding company to manage not only its operating subsidiaries engaged in an industrial, commercial, artisanal, agricultural or liberal activity, but also other shareholdings that it may have in the share capital of companies that do not carry out any activity in order to qualify as an active holding company, the Tax Administration was unlawfully adding elements beyond the letter and spirit of Article 885 I bis of the French General Tax Code.
This argument convinced the Tribunal de Grande Instance (Court of First Instance) of Paris in five cases ruled on 11 December 2014 and on 14 April 2015 and was also maintained by the Court of Appeal of Paris in five decisions dated 27 March 2017.
The Cour de Cassation agreed with this analysis by considering that "having observed that the main activity of company [...] was the management of four subsidiaries, in which it held a majority shareholding, and then rightly observed that the fact that it also had a minority shareholding in another company that it did not manage did not strip it of its status as active holding company, the Court of Appeal correctly concluded that [...] was entitled to deduct three quarters of the value of its shares for the calculation of its wealth tax."
With these decisions, the Cour de Cassation joins the Conseil d'État (Supreme Court of the administrative order) that already acknowledged in a decision of 13 June 2018 that a group's active holding company was not obliged to manage all of its subsidiaries, provided that its management activity was predominant.
It therefore puts an end to the uncertainty regarding the qualification of active holding companies of groups, which is a qualification used in more than a dozen preferential tax regimes.
It now meets the legal definition given to active holding companies of groups, in terms of the introduction of real estate wealth tax, which provides that the activities of companies that - in addition to managing a portfolio of shareholdings - actively participate in the conduct of their group policy and control of their subsidiaries and that provide specific, administrative, legal, accounting, financial and real estate services, where applicable and for internal purposes only, are considered to be commercial.
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