Supreme Court restricts the application of the Quemener case law to achieve tax free step-up
The French Supreme Court (CE 6 juillet 2016 n°377904, 8e and 3 e s.-s, min c/ SARL Lupa immobilière France) has just issued a decision which, although ruled in a quite specific fact pattern, could be viewed as a revision of the practice established in France around the well-known “Quemener” Case Law.
Under the Quemener Case Law (CE 16 février 2000 n°133296, 8e et 3 e s.-s, SA Ets Quemener), capital gains and losses realised upon the sale of shares in a French tax transparent entity, such as an SCI, should be adjusted to take into account the previous tax gains or losses attributed by the SCI to its share-holder as a result of the transparency regime or the previous accounting gains or losses allocated to the shareholder. In other words, for purposes of computing the taxable result on the sale of a tax transparent entity’s shares, the acquisition cost, i.e. tax basis, of the shares must be:
• increased by tax profits allocated to the shareholder or accounting losses compensated and
• decreased by tax losses used by the shareholder (CE 15 décembre 2010 n°297513, 8e et 3 e s.-s., min c/ Ferreira d’Oliveira) or accounting profits attributed to him (i.e. dividends).
The application of the above Case Law had resulted in a French market practice according to which the purchaser of a tax transparent entity could achieve a tax-free step up of the underlying real estate assets base by winding-up the company shortly after acquisition. The tax neutral treatment of this step-up had been secured and confirmed by the French tax authorities in a public ruling (RES n°2007/54 du 11 décem-bre 2007 – Bofip au BOI-BIC-PVMV-40-30-20 n°90) and, as a result, it has become a well-established market practice in France for sellers of tax transparent real estate companies not to grant purchasers any discount for tax on underlying latent capital gains.
The recent above mentioned Supreme Court Case law may now seriously call this practice into question for the future. More importantly, the decision creates a significant level of uncertainty as to transactions taking place during financial year 2016.
Indeed, at this point in time, these transactions could still be covered by the French tax authorities’ above mentioned public ruling (RES n°2007/54 du 11 décembre 2007 – Bofip au BOI-BIC-PVMV-40-30-20 n°90) the comfort of which, until it is officially withdrawn, is enforceable against the tax authorities.
However, a public ruling can be withdrawn by the administration very quickly and the withdrawal is in prac-tice effective for the full financial year during which the ruling is withdrawn. This means that even if the withdrawal is notified and effective after the date of a given transaction, the transaction will no longer be protected (e.g. withdrawal in September 2016 for a transaction which completed in June 2016, during a financial year closing 31 December 2016).
The coming weeks and months will very likely provide some clarification as to the position that the FTA will want to adopt, i.e. considering the new Case law as fully effective and justifying a simple withdrawal of the administrative ruling, withdrawal with certain easing or grand-fathering measure, or (although unlikely) any other conclusion.
In the meanwhile however it is expected that negotiations around price reductions for tax discount corre-sponding to latent capital gains in real estate companies will again arise.
News by Sarvi Keyhani, Christophe Le Bon and Soufiane Jemmar, TAJ