The Cour De Cassation Delivers A Major Judgment Regarding Active Holding Companies Of Groups

Author:Hervé-Antoine Couderc and Melissa Pun
Profession:Andersen Tax & Legal - STC Partners

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...

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