Abuse of Rights and the Parent-Subsidiary Regime – the case where the tax exemption for dividends received by a parent company is not considered to serve an exclusively tax-related purpose
The tax regime for parent companies and subsidiaries (“parent-subsidiary regime”) allows a parent company to receive dividends from its subsidiaries without those dividends being subject to corporate income tax at the rate of 25% (or 15% for small and medium-sized enterprises with profits of up to €42,500) (Article 205 of the General Tax Code).
This regime is intended to prevent double taxation of income from equity interests, since, under a strict application of the provisions of Article 205 of the General Tax Code, taxation at a rate of 25% or 15% applies both to the income distributed by the subsidiary in the form of dividends and to the profit realized by the parent company through the receipt of those dividends.
Thus, Articles 145 and 216 of the CGI provide that, when the parent company and its subsidiary are subject to corporate income tax, and the parent company holds at least 5% of the subsidiary’s capital and has held the equity securities for a period of two years, it may opt for the parent company regime.
To do so, the parent company deducts the full amount of dividends received from its accounting profit on an off-balance-sheet basis, on its tax income calculation form (Form 2058-A attached to the tax return). It then adds back 5% (share of costs and expenses, QPFC) of the gross dividend amount to its taxable income. Consequently, the parent company benefits from a 95% exemption on the amount of dividends received from its subsidiary.
Thus, the parent-subsidiary regime primarily offers favorable tax treatment for the receipt of dividends within a group. However, the tax authorities may deny the parent-subsidiary dividend exemption on the grounds of abuse of rights if the transaction leading to the distribution of dividends was carried out for an exclusively tax-related purpose.
As a reminder, abuse of rights is governed by Articles L64 and L64A of the Book of Tax Procedures, which provide for the following two categories: abuse of rights through simulation: fictitious acts (false or disguised) carried out to reduce or evade the tax burden; and abuse of law through circumvention of the law: legal acts or arrangements, although genuine, that involve using legal provisions in a manner contrary to their original purpose in order to reduce or evade the tax burden.
Case law has established the principle that tax arrangements combining the exemption of dividends received from a subsidiary (through the parent-subsidiary regime) with the deduction of provisions for the impairment of securities issued by the same subsidiary constitute abuse of rights through circumvention of the law when the subsidiary lacks economic substance.
I. Case Law of the Council of State: Abuse of Rights in Cases of Lack of Economic Substance (“Shell Company”)
Since the July 17, 2013, ruling in the Garnier Choiseuil case, the Council of State has systematically sanctioned tax arrangements classified as “shell companies” on the grounds of abuse of rights for circumvention of the law, in situations where a company acquires the securities of an entity lacking economic substance, commonly referred to as a “shell company,” with the aim of benefiting from a tax-exempt dividend distribution through the parent company regime, and then records an artificial loss by setting aside provisions for the impairment of the subsidiary’s securities.
The Council of State’s major case law concerns the following three cases:
1. Garnier Choiseul Case (Council of State, July 17, 2013, 356523)
Chronology of the case:
On December 14, 2000, Urab (now Garnier Choiseul Holding) acquired 50% of the shares of Lepma BV for 56,331,916 francs (8,587,745 euros).
On December 31, 2000, Lepma BV paid Urab dividends totaling 56,555,459 francs (8,621,824 euros), of which 8,190,733 euros were exempt from corporate income tax under the parent company regime.
At the same time, Urab deducted a provision for the impairment of securities from its taxable income, creating a tax loss of 56,172,412 francs (8,563,429 euros) for the year ending December 31, 2000.
This tax loss was carried forward to Urab’s next two fiscal years to reduce its income tax liability.
The Lepma BV securities were sold as soon as the two-year holding period expired.
The tax authorities considered this transaction to be an abuse of rights and reinstated the amount of dividends from Lepma BV into Urab’s income for its fiscal year ending in 2003.
2. Groupement Charbonnier Montdidérien Case (Council of State, June 23, 2014, 360708)
Chronology of the case:
December 6, 2002: Soprinvest Immo (which later became Groupement Charbonnier Montdidérien) acquired, for 365,000 euros, all of the shares of Sud Immo Service, whose assets consisted primarily of bonds issued by a Luxembourg-based financial holding company.
December 20, 2002: Sud Immo Service paid Soprinvest Immo dividends totaling 200,000 euros, of which 190,000 euros were exempt from corporate income tax under the parent company tax regime.
November 30, 2003: Soprinvest Immo acquired, for 3,315,000 euros, half of the shares in Remount, whose assets also consisted primarily of bonds issued by the same Luxembourg-based company.
December 31, 2003, and in 2004: Remount paid Soprinvest Immo dividends totaling 3,695,272 euros, of which 3,510,508 euros were exempt from corporate income tax under the parent company regime.
Soprinvest Immo deducted a provision for the impairment of securities from its taxable income, which created a tax loss that was carried forward to Soprinvest Immo’s next three fiscal years to reduce its income tax liability.
3. Hellier du Verneuil Case (Council of State, November 29, 2024, 469012)
Chronology of the case:
December 23, 2010: Hellier du Verneuil acquired, for 2,177,727 euros, all the shares of an SCI located in Aubervilliers, whose assets consisted primarily of a building that it operated.
December 28, 2010: The SCI sold the building it operated. The temporary usufruct, with a term of 20 years, was transferred to SCI Finor, the majority shareholder of Hellier du Verneuil, for 2,550,000 euros, and the bare ownership was sold to SC Finor-Bervilliers, a 99.9% subsidiary of Hellier du Verneuil created for the purposes of the transaction, for 450,000 euros.
On the same day, the SCI paid Hellier du Verneuil an interim dividend of 1,980,000 euros, of which 1,881,000 euros were exempt from corporate income tax under the parent company tax regime.
Hellier du Verneuil deducted from its taxable income a provision for impairment of the SCI’s equity investments in the amount of 2,140,000 euros, which created a carryforward tax loss with respect to securities of companies primarily engaged in real estate.
Forty-five days after the expiration of the two-year holding period, Hellier du Verneuil absorbed the SCI through a universal transfer of assets (TUP).
In these rulings, the Council of State reiterates that the legislature’s fundamental objective in establishing the parent company tax regime was to encourage parent companies’ involvement in the economic development of subsidiaries for the purpose of structuring and strengthening the French economy, and that acquiring companies that have ceased their original business activities and liquidated their assets with the aim of recover cash through the payment of dividends exempt from corporate income tax under the parent company regime, while simultaneously deducting from its taxable income a provision for the impairment of the disputed securities without taking any measures to enable them to resume and develop their former business or to find a new one, runs counter to this objective and constitutes an abuse of rights.
II. General Anti-Abuse Clause: ATAD Directive
In light of these tax avoidance schemes, the European Union adopted on July 12, 2016, Directive 2016/1164, known as ATAD 1 (Anti-Tax Avoidance Directive). This directive was transposed into French law by Law No. 2018-1317 of December 28, 2018, which introduced a new Article 205 A of the General Tax Code (“general anti-abuse clause”), allowing the tax authorities to disregard artificial arrangements established with the primary objective—or one of the primary objectives—of obtaining a tax advantage contrary to the intent of the legislature.
Pursuant to the general anti-abuse clause, for fiscal years ending on or after December 31, 2018, the provision for impairment on securities is no longer deductible to the extent of the income and dividends distributed in connection with those securities that were exempt from tax during the fiscal year or the five preceding fiscal years.
III. Case Law of the Council of State: No Abuse of Rights Where Economic Substance Exists
Conversely, the Council of State rejects the penalty for abuse of rights regarding tax arrangements in cases where a company acquires the securities of an entity that retains its economic substance. This position of the Council of State, established in its May 19, 2021, decision in the Douaisienne de Transports case, was confirmed by its February 18, 2026, decision in the Aubépar Industries case.
In the Aubépar Industries ruling, the Council of State held that, even in the case of a tax arrangement combining the exemption of dividends received from a subsidiary with the deduction of provisions for impairment of that subsidiary’s securities, penalties for abuse of rights do not apply if the parent company can prove that there was a valid reason justifying the restructuring of the group’s companies.
1. Douaisienne de Transport Case (Council of State, May 19, 2021, 433201)
Timeline of the case:
March 20, 2007: Douaisienne de Transport acquired all of the shares of Ségard.
Before the end of the fiscal year, Ségard paid Douaisienne de Transports dividends totaling 663,000 euros, of which 629,850 euros were exempt from corporate income tax under the parent company tax regime.
The amount of these distributions exceeded the purchase price of Ségard’s shares, but Douaisienne de Transports did not record any impairment provision.
On August 2, 2007, Douaisienne de Transports sold Ségard’s business to Transalinord, a company majority-owned by the manager of Douaisienne de Transports.
The tax authorities considered this transaction to be a “shell” arrangement and reinstated in Douaisienne de Transports’s income for its fiscal year ending in 2007 the amounts of 629,850 euros and 881,784 euros, corresponding respectively to dividends and a reduction in Ségard’s reserves.
Douaisienne de Transports sought relief from the taxes and penalties before the Lille Administrative Court. This request was denied by the Lille Administrative Court in its judgment of January 19, 2017, and the denial was upheld by the Douai Administrative Court of Appeals in its ruling of June 4, 2019. Douaisienne de Transports sought the annulment of these decisions before the Council of State.
The Council of State overturned the judgment of the Lille Administrative Court and the ruling of the Douai Administrative Court of Appeal, which had found an abuse of rights, holding that the Douaisienne de Transports’ application of the parent company regime had not been motivated by an exclusively fiscal purpose because, on the one hand, Ségard was still conducting its economic activity at the time of its acquisition by Douaisienne de Transports and had the material and human resources to continue its operations; and, second, the acquisition of Ségard’s shares by Douaisienne de Transports enabled the latter to transfer them to a related operating company that achieved a significant increase in revenue and workforce. Thus, the acquisition, which presented a proven economic interest, was part of the acquiring group’s external growth strategy.
2. Aubépar Industries Case (Council of State, February 18, 2026, No. 500134)
Timeline of the case:
October 12, 2010: Two individuals founded the European company Aubépar Industries (established in Belgium).
December 21, 2010: They contributed 98.7% of the shares of the European company Aubépar (established in Belgium) to Aubépar Industries.
December 16, 2011: Aubépar sold, for 37.8 million euros, virtually all of the shares in ABC Arbitrage—which constituted the bulk of its assets—to Aubépar Industries.
March 20, 2012: Aubépar distributed a dividend of 39.2 million euros to the French branch of Aubépar Industries, of which 37.24 million euros were exempt from corporate income tax under the parent company tax regime.
For the same fiscal year, Aubépar Industries also recorded a provision of 39 million euros corresponding to the impairment of its subsidiary’s securities and recognized a carryforward loss of 30 million euros.
During an audit of Aubépar Industries’ accounts, the tax authorities challenged, for the fiscal year ended in 2012, the exempt portion of the dividend paid by Aubépar (37.24 million euros).
Aubépar Industries filed a petition with the Paris Administrative Court seeking relief from the taxes and penalties. This petition was denied by the Paris Administrative Court in its judgment of February 22, 2022, and this denial was upheld by the Paris Court of Appeals in its ruling of October 28, 2024.
The Council of State overturned the judgment of the Paris Administrative Court and the ruling of the Paris Court of Appeal, which had found an abuse of rights, on the grounds that the evidence submitted in the proceedings demonstrated that the reorganization of the group of companies had been decided on October 21, 2010, by the founders of Aubépar Industries, with the aim of creating a group structured around that company, which was to serve as the group’s holding company; to establish capital ties among the group’s companies; and to streamline their operations by specializing them by business segment, and that it was planned as of that date that Aubépar’s business would be refocused on its real estate management activities and that its stake in ABC Arbitrage would be transferred to Aubépar Industries. Noting that Aubépar continued its real estate management business after the sale of its shares in ABC Arbitrage, with fixed assets totaling approximately 11 million euros, and recorded significant profits, the Council of State concluded that the transactions were not motivated exclusively by tax considerations.