The French favorable tax regime applicable to mergers and spin-offs, provided by Articles 210 A and 210 B of the French General Tax Code (FGTC), makes it possible to avoid the immediate taxation of any capital gains realized by the transferring entity on the assets transferred. This tax deferral regime is applicable to French assets transferred in the framework of a cross-border reorganization provided that the entity transferring the French assets obtains the prior approval of the French Tax Authorities (FTA) in accordance with Article 210 C 2 of the FGTC.


The granting of this prior approval by the FTA is subject to three conditions. The French company contributing assets to a foreign entity has to demonstrate:


  1. that the cross-border reorganization has sound economic reasons;
  2. that it is not exclusively or mainly tax-driven; and
  3. that it is implemented in such a way that the FTA are in a position to effectively tax, in the future, the capital gains that benefited from the tax deferral regime.


In the “Euro Park” case, a French company was merged into a Luxembourg company without any prior approval from the FTA while claiming for the application of the favorable tax regime. The French entity was notified through a Corporate Income Tax (CIT) reassessment and brought the case to court arguing that the “prior approval procedure” was contrary to both the European Directive 90/434/EEC on mergers and transfers of assets within the European Union and the Treaty on the Functioning of the European Union (TFEU), in particular to Article 49 of the TFEU implementing the principle of freedom of establishment within the European Union. Examining the case, the French Supreme Tax Court preliminarily asked the European Court of Justice (ECJ) whether subjecting the application of the favorable tax deferral regime to a preliminary ruling from the FTA was or was not compliant with European regulations.


On March 8, 2017, the ECJ ruled that the French “prior approval procedure” applicable to cross-border reorganizations was contrary to the European laws.


The ECJ stated that this procedure was indeed discouraging cross-border reorganizations since reorganizations implemented between French companies can benefit from the French tax deferral regime without having to request for any prior approval, provided that:


  1. the transferee takes the commitment to calculate future capital gains on the assets transferred by reference to their fiscal value in the hands of the transferor; and
  2. the transferring entity (if not disappearing at the time of the reorganization, as it is the case in a merger) takes the commitment to keep the shares received as compensation for the assets transferred for three years and calculates any future capital gains on such shares with the initial fiscal value of the assets transferred taken into consideration (“double taxation rule” resulting from articles 210 A and 210 B 1 of the FGTC).


One of the reasons why the ECJ ruled negatively on the French “prior approval procedure” is that such approval is subject to the companies demonstrating that the cross-border reorganization has sound economic reasons and is not exclusively or mainly aiming at reducing a French tax burden. According to the ECJ, this condition reveals a tax avoidance presumption regarding cross-border reorganizations, a presumption contrary to the EU regulations. As a consequence, the provisions of the FGTC denying cross-border reorganizations the right to benefit from the tax deferral regime without the approval of the FTA are no longer applicable.


Until the law is amended by the French Parliament, any merger of a French entity into an EU company may now be implemented without any prior approval from the FTA, provided that the assets transferred remain on the balance sheet of a French permanent establishment. Moreover, taxpayers having been refused the approval the FTA could claim for the reimbursement of the French CIT paid on the capital gains realized, and it could even claim for an indemnification if they were obliged to give up their cross-border reorganization as a consequence of this “prior approval procedure.”




Marie-Hélène Raffin is a partner in the tax department of Willkie Farr & Gallagher. She has extensive experience in group restructuring, mergers and acquisitions, joint ventures, and tax consolidation. She regularly advises major corporations and leading multinational groups on complex and strategic tax issues. Find out more at and!streams/38479313-74bb-452d-9f0e-53bc0a3d2a47/viewprofile