By Brigitte Berdugo, Partner
INCOME FROM THE SALE OF SECURITIES BY NON-RESIDENTS (CGI, 244 BIS B:
UPDATE ON THE AVM INTERNATIONAL AND RUNA CAPITAL FUND JURISPRUDENCE
The tax regime in France provided for by article 244 bis B of the General Tax Code (CGI) applies:
- Capital gains on sale for consideration or redemption (the " Assignment ») Securities issued by a company subject to corporation tax in France (the Securities)
- When these capital gains (the “ Capital gains) are carried out:
- By an assignor domiciled for tax purposes outside France having the status of natural person, legal person or other body regardless of the form and the tax regime (the Sellers)
- Directly, or indirectly through an intermediary company or a trust.
Capital gains from the sale of securities held by a transferor domiciled outside France for tax purposes in a predominantly real estate company (CGI, art. 150 UB) carried out on an occasional basis fall under article 244 bis A of the CGI and therefore fall outside the scope of application of article 244 Bis B of the CGI (CGI).
1.2. Conditions of application
1.2.1. In the event of a capital gain
The capital gains from the Sale of the Securities referred to in article 244 Bis B of the CGI (the " Capital gains ") Are taxable in France:
- If the Assignor has held, at any time of the 5 years preceding the Assignment, more than 25% of the rights to the profits of the company issuing the Securities assigned (the " Target ") , directly or indirectly through other companies or entities whether or not having legal personality and whether or not subject to IS or a Tax Equivalent to IS (the " Tax Equivalent to IS ")
- If the Assignor is resident in a non-cooperative State (ETNC), regardless of the percentage of rights held in the profits of the Target, except to provide proof that the holding of the Securities sold does not mainly have an object and an effect other than their location in an ETNC.
Capital gains are therefore exempt in France:
- If the above conditions are not met
- Failing this, in the event of an international agreement between France and the State of tax residence of the Assignor with a view to avoiding double taxation, attributing exclusive power of taxation to this State.
1.2.2. In case of loss
The principle is that capital losses on the sale of securities are chargeable to capital gains of the same nature (therefore coming under article 244 BIS B of the CGI) realized during the same year and the following 10 years (CGI art 150-0D, 11).
2 - Capital gains from the Sale of Securities made by a Transferor other than a natural person
The Capital Gains realized by a Assignor other than a natural person, directly or indirectly through an intermediary company or a company not subject to a Tax Equivalent to the IS make a deduction payable (the Blood Lance):
- At the common law rate of CIT, or
- At the rate of 75%, if the Assignor is a resident of a non-cooperative State (ETNC), except to provide the proof described above in § 1.2.1.
Unless it comes under an ETNC, a Seller whose results are loss-making benefits from a tax deferral and can obtain the refund of the Deduction for fiscal years beginning on or after 01/01/2020 (CGI, art. 235 c):
- Conditions for postponement and therefore for restitution:
- The Assignor must have its registered office of effective management in a State of the European Union (UE) or in another state party to the agreement on the European Economic Area and having concluded with France an administrative assistance agreement to combat tax fraud and tax evasion as well as a mutual assistance agreement in matters of recovery having a scope similar to that provided for by Council Directive 2010/24/EU of 16 March 2010 (EEA, in practice, Iceland and Norway)
- Its tax result must be in deficit for the year of realization of the Capital Gains
- Fulfill your reporting obligations.
- End of tax deferral
- In the event of a profit for the Assignor, and within the limit thereof
- In the event of dissolution without liquidation of the Assignor, unless its deficits are transferred to the company receiving its contributions and the latter undertakes to file, within three months of the end of its financial year, a statement showing a loss
- If the Assignor does not fulfill its reporting obligations within 30 days of receipt of a formal notice notified by the Administration.
- Deferment of tax deferral
- In the event of dissolution without liquidation of the Assignor without transfer of its deficits to the company receiving its contribution
- On condition that the Assignor files a final declaration of loss.
An Assignor in judicial liquidation or in a state of cessation of payment making its recovery impossible may also obtain relief from the Deduction under the same first two conditions above applicable to a loss-making Assignor (CGI art. 119 quinquies applicable to fiscal years beginning on or after 1er January 2020).
2.2. If the Securities have been held for at least 2 years on the date of the Transfer
2.2.1. Assignment of Securities by an EEA Assignor: administrative doctrine
According to administrative doctrine, the Plus-Value is subject to the same tax regime as that applicable to a transferor who is a French company subject to corporate income tax. It is therefore exempt, subject to taxation at the corporate tax at the ordinary rate of a fixed share of costs and charges (QPFC) by 12% of its gross amount, under the conditions and according to the procedures below (the " Partial exemption ”):
- Conditions of the Partial Exemption:
- The Assignor must have its place of effective management in an EU or EEA State
- It must be subject abroad to a Tax Equivalent to IS, without being exempt
- He held at least 5% of the Notes directly in the Target and continuously.
- Terms of the Partial Exemption:
- The Assignor must first pay the Direct Debit,
- The Assignor may then claim the refund of the Deduction up to the amount applicable to the Added Value exceeding the QPFC
- However, the tax administration (the " Administration ”) admits that the filing by the Assignor, simultaneously with the settlement of the Withdrawal, of the complaint justifying that it meets all the conditions of the Partial Exemption, constitutes a suspension of payment. The complaint is thus accompanied only by the payment of the Levy corresponding to the IS on the QPFC for which the Transferor would have been liable if it had been a French company subject to the IS.
Canceling the administrative doctrine to the contrary regarding a French company subject to corporate tax on the transfer of securities, the Conseil d'Etat ruled that the QPFC is only taxable if the latter realizes a net long-term net capital gain on the sale of securities during of the year of sale, a solution which should be transposable to Cedants.
In the absence of an overall net Loss, the Loss is not attributable to exempt Capital Gains, because of their exemption.
2.2.2. Case law
22.214.171.124. Assignment of Securities by an EU Assignor François Bard's pictorial epiphany 'stopAVM Internationalof the Council of State of 14/10/2020
The Council of State has ruled that the Plus-Value benefits from a total exemption on the basis of the principle of freedom of establishment applicable to Assignors within the EU, incompatible with the provisions of article 244 bis of the CGI. The Plus-Value is therefore exempt:
- Not only of the IS on the share of Plus-Value exceeding the QPFC (which the Administration had admitted in this case)
- But also IS on the QPFC itself, because:
- The French legislator has not provided for tax consequences resulting from the principle of freedom of establishment, and
- The Administration itself cannot arrogate to itself such power.
The AVM International judgment would lead to reverse discrimination because the transferors of Securities which are French companies subject to corporate tax and found to be in the same situation as Transferors within the EU would become more heavily taxed than the latter. However, the imposition of the QPFC:
- Is justified for sellers who are French companies subject to corporate income tax because the imposition of the QPFC is the "consideration" of the deductibility of the management fees relating to Securities for which the Capital Gain on Sale is exempt
- Should therefore not be justified, without creating reverse discrimination, with regard to Assignors who are foreign companies excluded from such deductibility in the absence of taxation of their results, except Transfer of Securities carried out through a permanent establishment subject to corporate tax in France.
126.96.36.199. Assignment of Securities by a Non-EU Assignor: stopRuna Capital Fund of the CAA of Versailles of October 20, 2020
The Administrative Court of Appeal (AAC) of Versailles ruled that the Plus-Value must be exempt on the basis of the principle of freedom of movement of capital applicable to all Assignors who are foreign companies regardless of the foreign State of their tax residence (including in this case a company from the Cayman Islands).
Under these conditions, the Runa Capital Fund judgment:
- Would also result in reverse discrimination under the same conditions as the AVM International decision, subject to the same reservations as above
- Should also benefit Cedants who are residents of an ETNC.
188.8.131.52 Practical consequences of AVM International judgmentsand Runa Capital Fund
With regard to Assignors within the EU, the AVM International case law makes it possible to:
With regard to Assignors not falling within the EU, the Runa Capital Fund case law results from a judgment of the Administrative Court of Appeal, the meaning or scope of which cannot therefore be considered as definitively established. Consequently :
3 - Transfer of Securities by a natural person Transferor
The taxation provided for in Article 244 bis B applies to Capital Gains when the rights to profits of the Target by hypothesis greater than 25%, held at any time in the 5 years preceding the Sale, were held by the Transferor alone or with his spouse, his descendants and ascendants, directly or indirectly through a company or another entity, whether or not having legal personality, subject or not to IS or to a Tax Equivalent to IS.
3.2. Conditions for the taxation of the capital gain
The capital gain is subject to the deduction, in discharge of income tax:
The levy mentioned in the first paragraph is set at the rate provided for in the first sentence of the second paragraph of I of Article 219 when it is due by a legal person or an organization regardless of its form and at the rate of 12,8 % when it is owed by a natural person. By way of derogation, the gains mentioned in the first paragraph are taxed at the flat rate of 75% regardless of the percentage of rights held in the profits of the company concerned, when they are made by persons or bodies domiciled, established or incorporated outside the France in a non-cooperative State or territory within the meaning of Article 238-0 A other than those mentioned in 2° of 2 bis of the same Article 238-0 A, unless they provide proof that the operations to which these profits correspond primarily have an object and effect other than to permit their location in a non-cooperative State or territory.
The first two paragraphs apply to the distributions mentioned in f bis and f ter of I of Article 164 B made for the benefit of the persons and bodies mentioned in the same first two paragraphs. The 25% threshold is assessed by adding together the rights held directly and indirectly by the persons or organizations mentioned in the first sentence of this paragraph, in the company mentioned in f of I of Article 164 B. Rights held indirectly are determined by multiplying the percentage of the rights of these persons and bodies in the entities making the distributions by the percentage of the rights of the latter in the company mentioned in the same f.
The tax is paid under the conditions set out in IV of article 244 bis A.
International organizations, foreign States, central banks and public financial institutions of these States are exempt when the assignments relate to s fulfilling the conditions provided for in Article 131 sexies”.
 ie, Companies or groups carrying out a civil activity such as the acquisition and management of a portfolio of securities and social rights which are not subject to IS or a tax equivalent to IS
For the application of article 150 UB of the CGI, a company is predominantly real estate when the real value of its French assets is, at the end of each of the 3 financial years preceding the sale of the securities issued by this company (or, if the company has not yet closed its third financial year, of the closed financial years only or, failing that, on the date of the transfer), consisting for more than 50% of built or unbuilt buildings (or rights relating to these property other than rights relating to a finance lease) located in France. Buildings allocated by a company to its own industrial, commercial, agricultural operation or to the exercise of a non-commercial profession must not be taken into account for the assessment of the 50% percentage. In practice, SCIs are therefore mainly concerned by this regime.
Or 25% of the share capital in full ownership or rights held in usufruct (CAA Nantes 9-5-1990 n ° 772, P. Paulet), excluding those held in bare ownership
 Even if an international convention for the avoidance of double taxation provides otherwise
i.e. 28% for the fiscal years closed beginning on or after 01/01/2020, reduced to 26,5% and 25% respectively for the fiscal years beginning on or after January 2021 and 1er January 2021
 Or its permanent establishment in the result of which the capital gain is included
Or that of his permanent establishment above
 ie, file a declaration of its loss with the non-resident tax department within three months of the end of the financial year during which the event giving rise to the Withholding and of each of the following financial years which would remain in deficit, together with a statement of follow-up of Capital Gains carried forward in accordance with the model established by the administration.
ie, Merger-absorption or dissolution by confusion of assets, or scission
Otherwise, the Assignor is in any case liable for a fine of 5% of the Deduction in tax deferral
Rate applicable to fiscal years ending since December 31, 2012, having varied in the past
BOI-IS-BASE-20-20-10-20, n° 125
CE 14-6-2017 n ° 400844, Sté Orange, concl. Benoît Bohnert
Council of State, 10th - 9th chambers combined, 14/10/2020, 421524, AVM International Holding, concl. Laurent Domingo
 Article 49 of the Treaty on the Functioning of the EU
 Administrative Court of Versailles 7th ch, October 20, 2020 n° 18VE03012, Runa Capital Fund I LP, concl Julien Illouz, rejecting the judgment of the Administrative Tribunal of Montreuil of 26/06/2018 n° 1700014
 Articles 63 and 65 of the Treaty on the Functioning of the EU
In this case, the Administration had also availed itself of the freezing clause provided for in Article 64 of the Treaty on the Functioning of the EU, allowing France to continue to apply its internal law on taxes in force without interruption since December 31, 1993, if these taxes relate to direct investments. But the CAA rejected this argument on the grounds that foreign companies subject to a tax equivalent to corporate tax only became taxable in France on capital gains from the sale of securities as of January 2, 2014 (date of entry into force of the amending finance law no. 93-1353 of December 30, 1993), regardless of the direct or indirect nature of their investments
Or 0,2% per month from the date of payment until the day of return
Rate applicable to capital gains realized since 1er January 2018
Taxable capital gains do not support social security contributions
Brigitte Berdugo specializes in taxation and particularly in corporate, mergers and acquisitions and venture capital.
She has also developed recognized expertise in the field of tax litigation, negotiation with tax authorities and the taxation of the assets of company directors.