Capital gains from the sale of securities by non-residents: latest case law news

INCOME FROM THE SALE OF SECURITIES BY NON-RESIDENTS (CGI, 244 BIS B^[1]:
UPDATE ON THE AVM INTERNATIONAL AND RUNA CAPITAL FUND JURISPRUDENCE

1. General

1.1. Scope

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^[2] 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^[3]) 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 ")^[4] , 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^[5] 
• 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

2.1. Principles 

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^[6], 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^[7] 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^[8] must be in deficit for the year of realization of the Capital Gains
  • Fulfill your reporting obligations^[9].
• 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^[10], 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^[11].
• 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 1^er 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^[12], 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%^[13] 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^[14] 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^[15], 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 

2.2.2.1. Assignment of Securities by an EU Assignor François Bard's pictorial epiphany 'stopAVM Internationalof the Council of State of 14/10/2020^[16]

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^[17] 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. 

2.2.2.2. Assignment of Securities by a Non-EU Assignor: stopRuna Capital Fund of the CAA of Versailles of October 20, 2020^[18]

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^[19] applicable to all Assignors who are foreign companies regardless of the foreign State of their tax residence^[20] (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.

2.2.2.3 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: No longer pay the Direct Debit  Request by means of a contentious claim the restitution of the CIT on the QPFC which they would have paid during the years 2018, 2019 and 2020 (plus the corresponding default interest[21]), provided that such claims are notified no later than December 31, 2020, 2021 and 2022, respectively. 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 : Assignors considering no longer paying the Deduction pursuant to this case law should take the following precautions: Declare the capital gain on time  Accompany the declaration with an express mention (CGI, art. 1727, II-1) indicating the reason which leads them not to submit the Plus-Value to the Deduction, in order to avoid the application of the corresponding late interest, to the case where the meaning or scope of the Runa Capital Fund judgment would be called into question later.  The Assignors who have paid the Deduction during the years 2018, 2019 and 2019 could request its restitution by means of a contentious complaint within the time limits for appeal mentioned above, as a precaution, in order to avoid the risk of expiry of these deadlines in the event of subsequent confirmation of the meaning or scope of the Runa Capital Fund judgment.

3 - Transfer of Securities by a natural person Transferor 

3.1. Scope 

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:

• At the ordinary rate of 12,8%^[22]/^[23]
• At the rate of 75% if the Assignor is an ETNC resident, 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