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").
PSD MODIFICATION: NEW AMENDMENTS AND UPDATED CALENDAR
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).
RECENT AoL COMMITTEE OPINIONS
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...