La Revue Squire

ECJ ruling on French tax consolidation regime


Rédigé par Julien Vaucheret le 31 Mars 2009


On 27 November 2008, the European Court of Justice (“ECJ”) issued its decision on the Papillon matter for which a preliminary ruling had been sought by the French Conseil d’Etat as regards the French tax consolidation regime (ECJ, Papillon v. France C418/07).

Société Papillon, a company incorporated in France, held 100% of the share capital in a company incorporated in the Netherlands, which in turn held directly and indirectly 100% of the respective share capital of several French companies. Société Papillon elected to adopt the French tax consolidation regime and included within the consolidated tax-group all of its French subsidiaries held indirectly through its Dutch subsidiary.

This election had been challenged by the French tax administration, which took the position that the Société Papillon could not, together with its French subsidiaries, constitute a consolidated tax group. The administration argued that companies are only eligible to be treated as falling within the ambit of the French tax consolidation regime to the extent that they form part of an unbroken chain of companies that are subject to French corporate income tax. Since the Dutch subsidiary through which the subsidiaries were held had no permanent establishment in France, it was not subject to French corporate income tax. This, in turn, broke the chain that was requisite to the desired corporate income tax status, and, thus, consolidated tax group treatment, of the French subsidiaries.

The ECJ ruled that the inability of a French company to be considered eligible to be member of a tax consolidated group on the grounds that it was held indirectly by its French parent company through a foreign company, which did not have a permanent establishment in France, amounted to a restriction on the freedom of establishment as provided under Article 43 of the EC Treaty. Indeed, if this type of discrimination were allowed to stand, it would also, and equally discriminatorily, influence parent companies to acquire their subsidiaries through resident rather than non-resident companies.

The ECJ further considered that such a restriction could not be solely justified by a need to ensure the coherence of the tax consolidation regime or to prevent cases of double deduction, holding that measures less restrictive on the freedom of establishment could be implemented to such ends, such as a request from the competent authorities of the other Member States for all information which might be relevant to the field of direct taxation as provided for by EC legislation.






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