Should cross-shareholdings, or reciprocal shareholdings, between two European subsidiaries be taken into account when assessing the 95% ownership threshold for tax consolidation?
While the French tax authorities and the Versailles Administrative Court of Appeal took the view that these reciprocal shareholdings should not be taken into account, the Conseil d’Etat (France’s highest administrative court) censured this position in its decision of March1, 2023, no. 464552.
Tax consolidation
When the vertical tax consolidation regime is applied, only the parent company is liable for corporate income tax (IS) on all the earnings of the group it forms with its subsidiaries. Tax consolidation makes it possible to offset the losses of some subsidiaries against the profits of others, and to benefit from preferential taxation of dividends between companies in the integrated group.
Indeed, thearticle 216 of the general tax code (CGI) provides that the parent company may deduct from its total net income the net income from investments qualifying for the parent company regime received during the year, after deduction of a share of costs and expenses (QPFC) set at 5% of the total income from the investments.
To benefit from this regime, at least 95% of the capital of subsidiaries must be held directly or indirectly by the parent company, on a continuous basis throughout the financial year(article 223 A of the French General Tax Code).
In the case of an indirect holding, the percentage of ownership is determined by multiplying the successive percentages of ownership in the shareholding chain(article 46 quater-0 ZF annexe 3 of the CGI).
The facts behind the Conseil d’Etat’s decision on tax consolidation
A French parent company at the head of a tax-consolidated group received dividends from two German subsidiaries for the years 2011 to 2015. Taking the view that its German subsidiaries would have qualified for tax consolidation if they had been resident in France for tax purposes, the parent company requested that the share of costs and expenses relating to the dividends it received from its subsidiaries be neutralized in accordance with the Steria ruling of the Court of Justice of the European Union (CJEU, September 2, 2015, Case C-386/14, Steria).
As a reminder, in the Steria ruling, the CJEU held that dividends paid to a company belonging to an integrated tax group by European subsidiaries which can prove that they would have fulfilled the conditions for belonging to this group if they had been established in France, must benefit from the same treatment as dividends within the group.
The tax authorities, the Montreuil Administrative Court and the Versailles Administrative Court of Appeal (CAA Versailles, March 29, 2022, no. 20VE00047) considered that the requirement for the parent company to hold at least 95% of the capital of its German subsidiaries was not met, as cross-shareholdings between its two subsidiaries were not taken into account. They therefore did not qualify as “intermediate companies” within the meaning ofArticle 223 A of the French General Tax Code, and could not benefit from the advantageous tax regime.
Cross-shareholdings of foreign subsidiaries in an integrated group
In this case, the issue submitted to the Conseil d’Etat was whether to take into account cross-shareholdings, or reciprocal shareholdings, between the two German subsidiaries. In its decision of March1, 2023, the Conseil d’Etat censured the decision of the Administrative Court of Appeal (CAA), which had refused to take into account cross-shareholdings.
The Conseil d’État ruled that the combined effect of the provisions of thearticle 223 A of the CGI, informed by the preparatory work on article 68 of the 1988 Finance Act of December 30, 1987, from which article 223 A of the CGI derives, and those of thearticle 46 quater-0 ZF of Appendix III of the General Tax Code that, for a group to be considered fiscally integrated, it is only necessary to check that each of the member companies or intermediaries is at least 95% owned by the group head company, directly or indirectly through companies belonging to the group, including, where applicable, through reciprocal shareholdings within the group.
The Conseil d’Etat therefore accepts that reciprocal shareholdings between group subsidiaries should be taken into account when assessing the 95% ownership threshold to which the special dividend tax regime is subject.
It therefore overturned the Versailles CAA ruling and referred the case back to the same court.