French Tax Update - Early 2015 Noteworthy Case Law And Tax Transparency Package

Author:Mr Nicolas André, Siamak Mostafavi and Alexios Theologitis
Profession:Jones Day

The present French Tax Update will focus on (i) several noteworthy French and European Union court decisions issued in the last months of 2014 and in the first months of 2015, and (ii) the recent presentation by the European Commission of a package of tax transparency measures.


France has signed a number of tax treaties with a so-called "tax spare" mechanism, i.e., a provision whereby a certain flow of income from a foreign source (e.g. interest, dividends, royalties) is deemed to have suffered a foreign withholding tax (WHT), and, as per the terms of the relevant treaty, the French recipient of the income is entitled to a tax credit equal to the deemed WHT.

The actual availability of the tax credit depends on the exact wording of the relevant treaty. In a landmark decision in 2006, the Conseil d'Etat had decided, in the case of the Brazilian-French treaty, that the tax credit would be available only if the relevant income had been subject to Brazilian WHT (be it a de minimis one), i.e., the Supreme Court had decided that no tax credit would be available in the total absence of WHT. The decision had been criticized as it seemed that it had been against the spirit of the tax spare mechanism, i.e., to encourage French investors to invest in the Brazilian economy.

On February 25th, 2015, the Conseil d'Etat issued a new ruling on the interpretation of the tax spare mechanism in various tax treaties, namely those with Argentina, China, India, Indonesia and Turkey. The wording of the tax spare mechanisms in these treaties is different from the Brazilian one, and the Conseil d'Etat decided that the tax credit may be available even if no WHT has been levied in the source country.

However, on the basis of the actual wording of the treaties, a distinction was made by the Conseil d'Etat between the Chinese treaty and the other treaties. In the case of the Chinese treaty, the Conseil d'Etat ruled that the taxpayer is automatically entitled to the tax credit, as the relevant income is deemed to have been subject to the WHT. In the case of the other treaties, the Conseil d'Etat decided that the tax credit is available only if the exemption from WHT is the consequence of a specific local legislation which enacts such exemption to encourage the investment by French investors in the local economy (i.e., the WHT would have been due in the absence of such legislation).

Accordingly, a practical issue arises, which is one of proof that the exemption from WHT is, indeed, the result of a specific legislation to encourage foreign investment. The Conseil d'Etat decided that it is for the French resident investor to provide such proof, and that if no such proof is provided, no tax credit would be available. Thus, contrary to the classic situation where the taxpayer has to prove that it has suffered a WHT and is entitled, accordingly, to a tax credit, the application of certain tax spare mechanisms implies that the investor has to prove that the exemption of WHT was the consequence of a specific local legislation.


A PEA is an individual investment plan where, subject to certain conditions, the relevant individual taxpayer enjoys an income tax exemption in respect of any capital gain and/or income derived from the eligible equity securities managed within the PEA. Among other conditions, the transfers made to the PEA may not exceed a certain amount, e.g., currently a maximum of € 150,000 (€ 300,000 for a couple) for the standard type of PEA (PEA Cap).

The Conseil d'Etat had to deal with a situation in which the French tax authorities (FTA) used the abuse of law procedure to argue that the relevant individual should not be entitled to the PEA exemption.

The facts were, in summary, as follows: the individual had purchased the shares of an entity (in which he was acting as a managing director) from the parent company of the entity, and transferred the shares to a PEA. Approximately nine months later, the shares were sold to a third party for a sale price of nearly eight times their acquisition cost, and the...

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