French capital gains tax on substantial shareholdings: a full refund is possible, for all nonresident sellers

November 03, 2020
by Yan Flauder,
Marina Rodrigues

Recent case law in France brings some good news for non-French resident entities that have sold shares in a French company (other than a real estate company) which qualify as a “substantial participation”.


Subject to tax treaty provisions, French tax law provides that non-French residents who realize capital gains on the sale of shares in French companies are subject to tax in France. For shares in French non-real estate companies, this taxation is provided for by article 244 bis B of the French tax code and arises only if the seller has held a “substantial participation” (a shareholding of at least 25%) in the French company. In practice, this concerns sellers who are tax residents in countries that have entered into a tax treaty with France providing for a substantial participation clause (notably Spain, Italy, Austria) or countries that haven’t entered into a tax treaty with France.

For sellers who are non-French resident companies, the capital gain on such substantial participations is taxable at a rate equal to the standard French corporate income tax rate (i.e. between 33.33% and 28% depending on the year concerned).

This tax rate creates a discriminatory treatment between non-French resident companies and French resident companies when the sale relates to shares eligible for the participation exemption regime. Indeed, when selling such participations, French resident companies benefit from a virtual tax exemption, as the standard French corporate income tax rate applies only to 12% of their capital gain (i.e. an effective tax rate of between 4% and 3.36% – not taking into account the social surtax).

Perfectly aware that this discrimination is contrary to EU law, the French tax authorities agree (under certain conditions and subject to supporting evidence) to refund or not claim payment for the difference between the full corporate income tax rate and the reduced participation exemption rate, but only to sellers who are EU or EEA tax residents. The French tax authorities have determined and published the applicable conditions and rules for such refunds in their official guidelines.

Court decisions

Two recent court decisions have ruled in favor of nonresident sellers (whether EU or non-EU), thus allowing for a broader tax exemption than the French tax authorities had agreed to:

  • Regarding sellers who are EU resident entities, the French Supreme Administrative Court (Conseil d’Etat, 14 October 2020, no. 421524) has decided that it was not within the powers of the French tax authorities to safeguard, by twisting its wording, a law which was contrary to EU principles (freedom of establishment and free movement of capital) nor to create grounds for taxation. This decision is final. The French tax authorities have been ordered to reimburse to the seller (an Italian resident company) the portion of the tax which they had initially refused to refund under their above-mentioned guidelines. In other words: when a law is contrary to EU principles, it cannot be used as grounds for taxation, not even partially.
  • Regarding sellers who are non-EU resident entities, the Versailles Administrative Court of Appeals (Cour administrative d’appel de Versailles, 20 October 2020 no. 18VE03012) has decided that the capital gains tax concerned was (i) contrary to the EU free movement of capital principle, which also benefits – under certain conditions – non-EU residents and (ii) in its current form, too recent (by two days!) to be sheltered by the standstill provision. The French tax authorities have thus been ordered to reimburse to the seller (a Cayman Islands resident company) the full capital gains tax. The French tax authorities may still appeal against this decision to the Supreme Administrative Court.

We can reasonably expect that the French government will modify the French tax code to counter the effects of these court decisions for the future (at least the one regarding EU entities).

But for the past, and subject to a case-by-case analysis, these decisions can be invoked as grounds for non-French resident entities which paid a capital gains tax in France upon the sale of a substantial participation in a French non-real estate company to claim a full refund. Both EU and non-EU residents may therefore file such refund claims for capital gains taxes paid as from 2018 (the filing deadline being 30 December 2020 for taxes paid in 2018).

For non-French resident entities that are contemplating selling a substantial participation in France, we suggest reviewing the French tax consequences in light of these recent developments.

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