French Tax Law: Landmark Court Decision Concerning the Non-Cooperative States Regime: The French Constitutional Court Has Ruled That the Non-Cooperative States Regime Must Include an Exemption for Non-Abusive Transactions

Sullivan & Cromwell LLP - January 26, 2015

At the end of 2009, France enacted a regime applicable to transactions with non-EU Member States that do not comply with international standards on exchange of information (Non-cooperative States and Territories or “NCSTs”). The list of NCSTs, initially derived from the OECD Non-Cooperative States blacklist, is updated annually.

Transactions involving NCSTs are deemed fraudulent and are therefore subject to a highly detrimental tax regime. In particular, French parent companies having subsidiaries in NCSTs are not entitled to the benefit of the exemption regime on dividends received, nor can they benefit from the long-term capital gains exemption on gains resulting from the sale of shareholdings in such subsidiaries.

Although most of the provisions applicable to the NCSTs provide for an exemption allowing the taxpayer to escape such provisions by showing that the relevant transaction was not driven by tax fraud or tax evasion, such a provision was not included with respect to the participation-exemption regime mentioned above regarding dividends and capital gains.

A Consortium composed of the AFEP – a French association which gathers the largest French corporations – and six French public companies (Air Liquide, Lafarge, Pernod-Ricard, Technip, Total and Veolia Environnement) filed a claim challenging these provisions, arguing that the absence of an exemption allowing taxpayers to demonstrate that their investments in NCSTs are motivated by a sound business reason is contrary to the equality of treatment principle set forth by Articles 6 and 13 of the French constitution.

Sullivan & Cromwell LLP represented the Consortium before the French Supreme Court and the French Constitutional Court.