Form Vs. Substance

In a decision dated May 11, 2015, the Conseil d'Etat ruled in favor of the French tax administration (FTA), in a situation in which the availability of the participation exemption (Exemption) was challenged.

A French financial institution (Parent) had received dividends from a Dutch subsidiary (Sub) and had taken the position that they were 95 percent exempt under the Exemption rules (ownership of at least 5 percent of the distributing entity for a minimum period of two years).

The FTA had denied the Exemption on the basis of the so-called "abuse of law" procedure, i.e., that the Sub had no other purpose than to "transform" taxable income into quasi tax-exempt dividends.

The FTA, in effect, argued that the Sub had no economic substance, in that (i) its assets were composed solely of bonds funded by the share capital provided upfront by the Parent, (ii) the income generated by the Sub consisted solely of interest and capital gains on the bonds, and (iii) its