The Supreme Court on 8 March 2023 issued its ruling [in French] in the Natixis case dealing with the carry-forward of unabsorbed foreign tax credits (FTCs) in loss years.

FTCs may be set off against the French corporate tax liability only if provided for under an applicable tax treaty. The Supreme Court had already excluded the possibility to claim from France a refund of excess unabsorbed FTCs. Also, in non-treaty situations, French domestic law allows for the deduction of foreign taxes as a cost. However, the Supreme Court denied the cost deduction approach where a tax treaty applies and provides for a tax credit. The case examined by the Court concerned a taxpayer who suffered losses in the years 2008-2011, and was, consequently unable to credit foreign tax credits otherwise available with respect to foreign source dividends under France’s tax treaties with Argentina, Australia, Brazil, Cameroon, Canada, China, South Korea, Italy, Japan, Morocco, New Zealand, Poland, Portugal, Turkey, and the United Kingdom. Having made profits again in 2012, the taxpayer credited the previously unused FTCs against its French corporate tax liability on account of FY 2012. However, the credit was disallowed by the tax authorities and, on appeal, by both the lower tribunal and the Court of Appeals. On appeal to the Supreme Court, the taxpayer put forward arguments based on domestic law, EU law (freedom of capital movement), the tax treaties with the source-countries listed above, and the European Convention on Human Rights (ECHR).

In its ruling, the Supreme Court sided with the tax authorities and denied the taxpayer the possibility to carry-forward the previously unused FTCs. The Supreme Court reached its decision after having examined the matter under all legal grounds raised by the taxpayer.

With respect to the domestic law aspects, the Court noted that French law expressly stipulates since 2017 that a loss-making company cannot carry-forward unused FTCs to the extent such FTCs are provided for under an applicable tax treaty. In a ruling on this issue, the Constitutional Council confirmed, also in 2017, that the denial of the FTC carry-forward is compatible with the French constitution. Consequently, there are no remedies under domestic law which would allow the taxpayer to carry-forward unused FTCs.

With respect to EU law, the Court reasoned that there is in casu no conflict with the freedom of capital movement enshrined therein. Indeed, whilst it is true that foreign tax translates into a definitive tax cost for a loss-making company but not for a profitable company, both situations are not comparable because both companies are not in similar circumstances. The Court concluded, therefore, that there is no conflict with EU law and further rejected the taxpayer’s request to refer the matter to the Court of Justice of the European Union.

With respect to the European Convention on Human Rights (ECHR), the Court reasoned that the FTC does not represent a prepayment of French corporate tax and, therefore, the taxpayer cannot be said to be entitled to a potentially refundable debt on the French Treasury. It follows that the FTC cannot be equated with “property” as included in the Protocol to the ECHR, and, consequently, the FTC carry-forward denial is not in conflict with the ECHR.

With respect to the tax treaties, the Court simply rejected the argument by noting that nothing in the tax treaties with the source countries refers to or suggests the possibility to carry-forward unused credits in loss years.