French Controlled Foreign Companies (“CFC”) rules provided by article 123 bis of the French Tax Code reviewed by the French Constitutional court: Decisions 2016-610 QPC and 2016-614 QPC dated February 10th 2017 and March 1st 2017
French CFC rules in a nutshell:
- Article 123 bis of the French Tax Code (“FTC”) allows France to tax profits realized by foreign entities (e.g. trusts, companies, foundations) corresponding to their French tax resident individual beneficial owner’s rights, when such entities owns mainly financial assets and benefit from a privileged tax regime.
- If the entity is located in a non-cooperative Sate or in a state which has not signed with France an agreement providing administrative assistance in order to fight against tax fraud and evasion, the tax basis shall not be lower than the multiplication of the net asset value of the entity by an interest rate determined each year by the French Government
- A “safeguarding clause” allows to prevent the application of the above mentioned provisions if the taxpayer is able to provide evidence that the use of such entity or the holding of its rights is not an artificial scheme which aims at circumventing the application of French tax law.
- Income deemed received by French tax residents individuals under CFC rules provisions is subject to French personal income tax and social taxes on a basis increased by 25%.
Two recent decisions from the French Constitutional court aim at setting up limits to the application of article 123 bis of the FTC and reminding French lawmakers that the fight against tax fraud and evasion should not allow them to carry out excessive infringements to certain fundamental rights protecting taxpayers.
Decision 2016-614 QPC dated March 1st 2017: the safeguarding clause now applies irrespective of the State where the foreign entity is located and the actual income, if properly documented, is always applicable
The limitation of the safeguarding clause only to EU Member States is banned: The French Constitutional court bans the limitation of the benefit of such safeguarding clause only to French tax resident beneficial owners of entities located in a UE Member State. Indeed such limitation is viewed as a disproportionate infringement to the French constitutional principle of equality before public charges.
- This ban is immediately applicable to (i) ongoing and upcoming French voluntary disclosure files, as well as (ii) ongoing and upcoming tax disputes.
The French Constitutional court addresses an interpretation reserve concerning the lump-sum taxation of beneficial owners of foreign entities residing in a non-cooperative country: The French Constitutional court indicates that such mechanism should not be viewed as preventing taxpayers from bringing evidence that the actual income of the entity is lower than the income computed on a lump-sum basis. Indeed, such restriction would constitute an excessive infringement to the French constitutional principle of equality before public charges.
Decision 2016-610 QPC dated February 10th 2017: the tax basis grossed-up by 25% not applicable for French social taxes computation purposes?
The French Constitutional court bans the application of French social taxes to “occult” distributions on a basis increased by 25% as such rule constitutes an excessive infringement to the French constitutional principle of equality before public charges. It seems to us that the arguments used by the French Constitutional court to come to this conclusion could be applied to deemed incomes determined under article 123 bis of the FTC.
- Such decision does not directly address the application of article 123 bis of the FTC but offers interesting perspectives for ongoing and upcoming tax disputes