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ECJ: Advocate General finds French legislation on group consolidation excluding lower-tier subsidiaries indirectly owned through companies resident in other Member States justifiable restriction on EC freedom of establishment – details

As previously reported, on 4 September 2008, Advocate General (AG) Juliane Kokott of the European Court of Justice (ECJ) gave her opinion in the case of Société Papillon v. Ministère du budget, des comptes publics et de la fonction publique (C-418/07). Details of the opinion are summarized below.

(a) Facts. French parent company held indirectly through a Dutch company more than 95% of the shares in several French subsidiaries. The French parent company filed a consolidated tax return, including the French subsidiaries that were owned indirectly for 95%, through the Dutch company. The tax administration rejected the application of the tax consolidation regime as set out in Art. 223A on the grounds that the Dutch company, an NV, was not subject to corporate tax in France. The French company brought the case to the Lower Court of Paris, which rejected the claim on 9 February 2004, and appealed the judgment before the Court of Appeals of Paris. The latter rejected the claim on 24 June 2005. The taxpayer brought the case before the Administrative Supreme Court.

(b) Issue. The issue was whether or not the prohibition of "fiscal integration" of a French parent company and its lower tier subsidiaries, if those subsidiaries are held indirectly through companies established in other Member States, is compatible with the freedom of establishment (Art. 43 of the EC Treaty). It should be noted that the issue of possible inclusion of the Netherlands intermediary company in the consolidation group was not at stake.

(c) Advocate General's Opinion.

Scope of the fundamental freedoms

At the outset, referring to the ECJ settled case law (Burda, FII, Thin Cap, etc.), the AG noted that the case at issue must be assessed in the light of the freedom of establishment (Art. 43 of the EC Treaty), rather than the free movement of capital (Art. 56 of the EC Treaty), since the rules in question concerned situations where a controlling influence in the subsidiaries was at stake. Possible restrictive effects on the free movement of capital would thus flow from any breach of the freedom of establishment.

Restriction on the EC freedom of establishment

The AG first recalled the conditions for opting for fiscal integration, i.e.

-   all companies included in fiscal integration must form an "uninterrupted chain" and all companies in the chain must be included in fiscal integration; and
-   the companies included in fiscal integration must be subject to French taxation

She observed that, in consequence of the foregoing two conditions, a group, having a non-resident company in the chain, as in the case at issue, could never benefit from the French fiscal integration regime. Therefore, the relevant rules on fiscal consolidation result in an unequal treatment of the French parent companies, depending on whether they hold their lower tier subsidiaries through intermediary companies established in France or abroad. While in the case of purely domestic groups the criterion of "uninterrupted chain" can be met by the inclusion of the French intermediary company in the fiscal consolidation group, the intermediary company established in another Member State cannot become part of that group due to the second criterion for consolidation (i.e. taxation in France).

The AG rejected the French government's claim that the aforementioned two situations are not comparable, a circumstance that could justify their different treatment. In particular, that government argued that the following facts make the cross-border situation non-comparable: (i) the intermediary company is established abroad and (ii) the intermediary company is not subject to French taxation. With regard to the first point, the AG observed that that argument could not be upheld, as it would effectively render the principle of freedom of establishment meaningless. The second argument was rejected, since the indirect holding of lower tier subsidiaries though intermediary companies established in other Member State would not compromise the objective of the fiscal integration regime in question (i.e. fiscal consolidation of the French parent company and its French lower tier subsidiaries).

In conclusion, according to the AG, under the fiscal integration regime in question, a parent company which holds its lower tier subsidiaries through a foreign intermediary company is treated less favourably than the parent company holding its lower tier subsidiaries through an intermediary company established in France. This constitutes a restriction on the freedom of establishment, which may dissuade French parent companies from setting up subsidiaries in other Member States.


AG Kokott further considered whether or not the restriction on the freedom of establishment could be justified by imperative requirements in the general interest (rule of reason).

The AG opined that the justifications accepted by the ECJ in Marks & Spencer (i.e. (i) the need to preserve the balanced allocation of taxing powers, (ii) double deduction of losses and (iii) tax avoidance) are irrelevant, since the case at issue does not deal with the inclusion of the Netherlands intermediary company in the consolidation group.

At the outset of her analysis of the "fiscal coherence" justification advanced by the French government, AG Kokott recalled that that justification must be assessed in the light of the overall purpose of the national rule concerned. The purpose of the relevant fiscal integration regime is the neutralisation of the tax implications of creating a (legal) group of companies, i.e. "assimilation" of the group to a single taxpayer. As a result of consolidation, the profits and losses of individual companies are consolidated at the level of the parent company and constitute a single tax base. On the other hand, the fiscal integration regime provides for mechanisms to prevent multiple deduction of losses within the group and, accordingly, to ensure the neutrality of the regime. In particular, under this regime, certain transactions within the consolidated group are eliminated (internal transactions).

The French government argued that if a cross-border element is present in the group double deduction of losses could not be prevented through elimination of internal transactions. For example, if a foreign intermediary company is interposed, losses incurred by lower tier subsidiaries could be deducted twice (i) in the form of ordinary losses of those subsidiaries and (ii) as the parent company's provision (depreciation) to the value of the relevant participations. By contrast, in domestic situations, such double deduction would be prevented through elimination of internal transactions.

AG Kokott acknowledged these arguments and applied, by analogy, the ECJ findings in Bachmann to the case at issue. In particular, she observed that the advantages stemming from the French fiscal integration regime are offset by the elimination of internal transactions, as contrasted with the levy of tax in Bachmann. Further, she noted that a direct link exists between (i) the fiscal integration regime (as a "tax advantage") and (ii) the elimination of internal transactions (as a "compensating disadvantage"). Therefore, she opined that a national measure, which aims at preventing a multiple deduction of losses, could be justified by the need to preserve the coherence of the tax system, subject to the proviso that it is proportionate to the objective pursued.

The AG, however, expressed doubts as to whether the proportionality test is satisfied in the case of the fiscal integration regime. Instead of an outright prohibition of the regime due to a cross-border element, it should be sufficient to eliminate the internal transactions in the same manner as in purely domestic situations. She rejected practical difficulties in obtaining the relevant information as a possible justification. The AG recalled that the Mutual Assistance Directive [for the exchange of information] 77/799/EEC provides a framework for cooperation and exchange of information between the tax authorities of different Member States and can be used to obtain the necessary information. In any event, the relevant information can be requested from the taxpayer. Finally, she concluded that the proportionality of the fiscal integration regime must be assessed by the relevant national court.

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