Mergers: French prior approval contrary to EU law

On 8 March 2017, the Court of Justice of the European Union (CJEU) issued its long-awaited decision in the Euro Park case (C-14/16), concluding that the prior agreement to be sought in order to benefit from the tax advantages of the Merger directive is contrary to both the EU Merger directive and the freedom of establishment in the Treaty on the Functioning of the European Union.

Based on France’s implementation of the anti-abuse provision of the Merger directive (French tax Code, art. 210 C, 2), when it involves a foreign beneficiary company, the taxpayer must obtain a prior approval of the French tax authorities. In this respect, it must be evidenced (i) that the operation concerned is justified on economic grounds, (ii) that it does not have as its principal objective, or as one of its principal objectives, tax evasion or avoidance, (iii) and that its terms make it possible for the capital gains deferred for tax purposes to be taxed in the future. In a domestic merger, such a deferral is granted without subjecting the taxpayer to such a process.

The French Supreme administrative court referred to the CJEU a preliminary ruling requesting whether or not, Article 49 TFEU and the Merger directive, preclude a national legislation, which subjects the granting of the tax concessions of the Merger directive to such an advance approval only in case of transfers made to non-resident legal persons.

In its decision, the CJEU stated that, even though the Merger directive entitles Member States to refuse to deny the benefits of the directive, this may take place only where the transaction has as its principal objective or as one of its principal objectives tax avoidance or evasion and is thus not carried out for valid commercial reasons. In concluding that the French prior approval process for cross-border mergers is contrary to EU law, the CJEU focuses on three points:

First, the procedural arrangements of the prior approval are not sufficiently precise, clear and predictable in order to enable taxpayers to precisely know their rights and ascertain whether they will be able to benefit from the directive’s provisions.

Secondly, moving on to the conditions to be satisfied to obtain tax advantages under Merger directive, the latter lays down, as a general principle, that the deferral of taxation of the capital gains relating to the assets transferred will be granted. Deferral may be denied only on one condition i.e. when the transaction has as its objective tax avoidance or evasion. Under the French legislation, however, there is a general presumption of a tax avoidance motive. The deferral is not granted unless the taxpayer first complies with the procedural and substantive requirements under that legislation. Such a presumption, that subjects systematically and in advance, every cross border transaction, even when the French tax authorities do not have any clue of tax fraud, infringes EU law.

Finally, and without any surprise, the Court identifies a restriction to the freedom of establishment, as the prior approval is only required if the contribution is made to an entity established in another Member State (thus impeding French companies that wish to carry out cross-border transfers from doing so), and goes beyond what is necessary to meet the objective of preventing tax avoidance or evasion.

It is also worth noting that the Court also pointed out that the condition, requiring that the terms of the transaction must make it possible for the capital gains deferred for tax purposes to be taxed in the future, is not included in the directive and cannot be justified by the prevention of tax evasion or tax avoidance, that objective being already expressly covered by the second approval condition set out in the French legislation.

Although the CJEU decision is favorable to taxpayers, it will nevertheless create a period of uncertainty for groups that intend to carry out a restructuring in the near future. If the French advance approval rule for cross-border mergers is to be maintained, it will need to be revamped to comply with EU law, and it is unlikely that a draft new rule will be forthcoming before the announcement of the next finance bill (expected in autumn 2017).

Patrick Fumenier

Patrick Fumenier has been a partner at Deloitte Société d’Avocats, heading Knowledge Management Department from septembre 2016 until January 2020 when he left the firm. Before joining Deloitte Société d’Avocats […]