In more detail
As a reminder, article 206, 1 of the French Tax Code (FTC) provides that legal entities are liable to corporate income tax (CIT) either by virtue of their corporate form, or by virtue of the performance of profit-making activities or operations. In the case of a foreign company, and in application of the principles developed by the French Tax Supreme Court in its decision Société Artémis SA1, it is necessary first to identify the type of company under French law to which the foreign company can be assimilated.
In the present case, a Limited Liability Company (LLC) incorporated under US law and held by two individuals owned real estate assets in France. These assets were made available free of charge to the parents of one of the partners, who in turn allocated one of the assets as a corporate accommodation to one of their employees.
Following a tax audit, the French tax authorities (FTA) considered that the company was liable for CIT. On appeal, the Tax Court of Appeal of Marseille ruled that the LLC constituted a hybrid category of company halfway between French associations governed by the law of 1901 and French commercial companies, and deduced that it could not be assimilated to a type of company under French law subject to CIT. The judges therefore relied on the second alternative criterion relating to the profit-making nature of the operations in question, and ruled that the provision of the real estate assets free of charge constituted a profit-making activity falling within the scope of the provisions of article 206, 1 of the FTC.
On referral, the French Tax Supreme Court did not rule on the first criterion relating to the assimilation of a US LLC to a company under French law, since this was a question of fact and not of law.
With regard to the second criterion concerning the profit-making nature of the activity, the French Administrative Supreme Court overturned the position of the lower courts. The French Tax Supreme Court noted that, while the company's corporate purpose included the purchase, rental and resale of real estate, the mere fact that a company made real estate available to third parties free of charge did not in itself constitute a profit-making activity. The fact that these third parties made one of the two properties available to their employee is irrelevant in this respect.
Following the conclusions of its Public Advocate, the French Tax Supreme Court should not give priority to the corporate purpose set out in the company's articles of association (even if this constitutes an indication), but should take into consideration the company's actual activity in order to assess whether or not it is profit-making.
Although this decision is favorable, taxpayers should remain cautious about structuring real estate assets via LLCs (and globally via foreign companies), as both the FTA and judges could nonetheless consider that this structure should be subject to corporate income tax due to its corporate form
In this respect, it is interesting to note that the Tax Court of Appeal of Marseille justified its position by taking into account the differences between LLCs and French limited companies in terms of incorporation formalities, as well as the greater latitude in the management structuring. It also stated that "the mere fact that the liability of the partners is limited in proportion to their shareholding is not sufficient to assimilate them to French limited liability companies". It would have been particularly interesting that the French Tax Supreme Court rules on this particular point in the light of previous case law on the subject, notably the World Investment Corporation decision (French Tax Supreme Court, 2 April 2021, No. 427880).
1 French Tax Supreme Court, 24-11-2014, No 363556
