France vs Foncière Vélizy Rose: TRANSFER PRICING CASE

Case Information:

Court: Council of State, 9th – 10th Joint Chambers, France
Case No.: 471147
Applicant: Foncière Vélizy Rose (FVR)
Defendant: Minister to the Prime Minister, Responsible for Budget and Public Accounts
Judgment Date: 8 November 2024

Judgment Summary

The Council of State reviewed an appeal by Foncière Vélizy Rose (FVR) regarding the withholding tax on an interim dividend of EUR 3.6 million distributed to Vélizy Rose Investment (VRI), a Luxembourg-based entity, which was subsequently paid to Dewnos Investment. The Paris Administrative Court of Appeal had dismissed FVR’s claim to discharge this withholding tax, prompting the appeal.

FVR argued that the withholding tax exemption under Article 119 ter of the French General Tax Code (GTC) applied as VRI qualified as the beneficial owner of the dividend. The court examined whether VRI’s status as the dividend’s beneficial owner met the conditions for the withholding tax exemption. Noting that VRI’s sole function was holding FVR’s shares and that it transferred the full dividend to Dewnos Investment the following day, the court ruled that VRI could not be deemed the beneficial owner.

FVR further contended that applying Articles 119a and 119b of the GTC infringed on the freedom of establishment under Articles 49 and 54 of the Treaty on the Functioning of the European Union (TFEU). The court rejected this, aligning with earlier European jurisprudence, holding that beneficial ownership requirements did not contravene EU law or directives.

The Council of State upheld the lower courts’ findings, confirming that VRI’s lack of effective beneficial ownership disqualified FVR from the withholding tax exemption. The appeal was dismissed, and the judgment underlined the critical nature of beneficial ownership in tax treatyA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and... applications.

Key Points of the Judgment

1. Background

Foncière Vélizy Rose (FVR) underwent an accounting audit for 2013–2015. In 2014, FVR distributed an interim dividend of EUR 3.6 million to its sole shareholder, Vélizy Rose Investment (VRI), a Luxembourg entity. The dividend was immediately passed to Dewnos Investment, VRI’s parent company.

The French tax authorities challenged the withholding tax exemption claimed under Article 119 ter of the General Tax Code. This exemption applies to dividends distributed to EU-based entities that meet specific beneficial ownership and operational conditions. The authorities argued that VRI was merely an intermediary with no substantial activity or effective ownership.

2. Core Dispute

The dispute centered on whether VRI was the beneficial owner of the dividend, a condition for exemption under Article 119 ter of the General Tax Code. FVR argued that VRI’s Luxembourg location and the absence of explicit conditions in the Franco-Luxembourg treaty supported the exemption.

The authorities asserted that VRI acted solely as a conduit, with the dividend’s immediate transfer to Dewnos Investment demonstrating the absence of beneficial ownership. They also argued that EU directives did not prohibit imposing a beneficial ownership condition.

3. Court Findings

The Council of State found that VRI lacked beneficial ownership as required under Article 119 ter. The court emphasized:

VRI’s immediate transfer of the dividend to Dewnos Investment demonstrated it had no economic control over the funds.
Beneficial ownership is fundamental to ensure the exemption’s application aligns with the directive’s objectives.
The tax authorities’ approach adhered to legal principles, and their denial of exemption was justified.

4. Outcome

The Council of State’s judgment decisively dismissed the appeal by Foncière Vélizy Rose (FVR), affirming the rulings of the lower courts. The court ruled that VRI, the Luxembourg-based entity to which the dividend was paid, could not be regarded as the beneficial owner within the meaning of Article 119 ter of the French General Tax Code. This finding was crucial in denying the withholding tax exemption claimed by FVR.

The ruling emphasized that beneficial ownership entails more than formal possession of funds. It requires demonstrable economic control over the income and the ability to decide its ultimate use. The court noted that VRI acted merely as an intermediary, immediately transferring the EUR 3.6 million dividend to Dewnos Investment without retaining any economic benefit.

Moreover, the Council of State highlighted that the beneficial ownership condition under Article 119 ter aligns with both French domestic tax lawTax laws form the backbone of any nation’s revenue system, setting the rules that govern how individuals and corporations contribute financially to support government functions. These laws define the types of taxes, the applicable rates, and the regulations regarding payment and compliance. They also outline the rights and obligations of taxpayers, ensuring a balanced and fair approach to funding public... and the objectives of EU directives. By doing so, the court rejected FVR’s argument that the requirement infringed upon the freedom of establishment enshrined in the Treaty on the Functioning of the European Union (TFEU). The judgment reinforced that the beneficial ownership test prevents abuse of withholding tax exemptions, ensuring they apply only to entities genuinely entitled to the benefits.

The judgment further clarified that the immediate reallocation of funds by VRI to its parent company indicated a lack of substance in VRI’s operations. This lack of substance was critical in demonstrating that VRI did not meet the criteria necessary for withholding tax exemptions under French law.

In rejecting the appeal, the court validated the French tax authorities’ approach to scrutinizing claims of tax treatyA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and... benefits where the underlying economic substanceEconomic substance is a foundational principle in taxation and business law, ensuring that transactions and corporate structures reflect genuine economic reality beyond their legal form. The concept aims to prevent tax avoidance by evaluating whether a transaction or arrangement has a real business purpose and economic effect other than merely achieving a tax benefit. It ensures that taxpayers cannot exploit... is questionable. The judgment sends a strong signal to multinational corporations about the importance of aligning their cross-border structures with the principles of substance and beneficial ownership.

Additionally, the court’s decision underscored the necessity of maintaining consistency in applying withholding tax exemptions. By holding that the beneficial ownership requirement is compatible with the objectives of relevant EU directives, the ruling ensures that the principle of legal certainty is upheld in cross-border tax matters.

Ultimately, the outcome not only upheld the withholding tax but also established a clear precedent for similar cases. It underscored the vital role of substance in claiming tax treatyA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and... benefits and provided a robust framework for revenue authorities to challenge arrangements lacking genuine economic activity.

Transfer Pricing Method Used

Although this case primarily concerned withholding tax exemptions, the principles resonate with transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... practices, particularly the substance-over-form doctrine. The tax authorities assessed whether VRI’s structure and operations demonstrated genuine economic activity or if it was a conduit entity established to exploit tax benefits.

The application of the beneficial ownership test mirrors the analytical framework of transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... methodologies such as the Transactional Net Margin Method (TNMM)The Transactional Net Margin Method (TNMM) is one of the five primary transfer pricing methods recognised under the OECD Transfer Pricing Guidelines. TNMM is applied to evaluate whether the conditions of a controlled transaction between associated enterprises are at arm’s length. Unlike traditional transaction methods, which directly compare prices or gross margins, TNMM compares the net profit margin relative to..., which emphasizes substance and the arm’s length principleThe Arm’s Length Principle (ALP) is a cornerstone concept in international taxation and transfer pricing. It requires that transactions between related parties, such as subsidiaries or affiliates within a multinational enterprise (MNE), mirror those that would occur between independent entities under similar circumstances. This principle ensures that each entity within an MNE is compensated fairly and transparently, based on the.... The judgment highlights that operational substance is not merely procedural but integral to applying both withholding tax exemptions and transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... methods effectively. For example, if VRI had engaged in managerial oversight, risk assumption, or other activities indicative of ownership, its claim might have been substantiated.

The authorities used transaction tracing to demonstrate that the dividend lacked economic retention within VRI, undermining its claim. Such an approach is analogous to functional analyses in transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of..., where entities are evaluated on the functions performed, assets employed, and risks assumed.

Major Issues or Areas of Contention

The judgment clarified key contentious issues:

Beneficial Ownership: Whether VRI’s activities or lack thereof qualified it as the beneficial owner of the dividend under Article 119 ter. The authorities contended that VRI’s conduit role disqualified it.
Freedom of Establishment: FVR argued that withholding tax rules violated Articles 49 and 54 of the TFEU. The court ruled that the beneficial ownership requirement did not infringe on EU freedoms since it aimed to prevent abuse.
Double Tax TreatyA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and... Interpretation: Whether beneficial ownership was an implied requirement for treaty benefits. The court affirmed that the treaty’s objectives justified applying such a condition even if not explicitly stated.

Was This Decision Expected or Controversial?

This decision was largely expected given its alignment with prior case law emphasizing the principle of substance over form in tax matters. Courts across jurisdictions have consistently upheld the necessity of demonstrating genuine economic activity for claiming tax treatyA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and... benefits. However, the decision remains somewhat controversial due to its potential implications for multinational enterprisesWhat are Multinational Enterprises (MNEs)? Multinational Enterprises, commonly referred to as MNEs, are corporations that operate in multiple countries through various subsidiaries, branches, or affiliates. These entities maintain a central management structure while leveraging diverse resources, labour markets, and customer bases across borders. The fundamental aspect that distinguishes MNEs from other corporate forms is their cross-border activity, which can include... relying on intermediary structures to access treaty benefits.

Critics argue that the stringent interpretation of beneficial ownership may create uncertainty for businesses engaging in legitimate cross-border activities. They contend that the line between a valid holding company structure and an abusive conduit entity is not always clear. Nonetheless, proponents of the ruling emphasize that it strengthens the integrity of international tax systems by curbing treaty shopping and ensuring that tax benefits are allocated based on economic substanceEconomic substance is a foundational principle in taxation and business law, ensuring that transactions and corporate structures reflect genuine economic reality beyond their legal form. The concept aims to prevent tax avoidance by evaluating whether a transaction or arrangement has a real business purpose and economic effect other than merely achieving a tax benefit. It ensures that taxpayers cannot exploit... rather than formalistic arrangements.

The judgment’s reliance on the Parent-Subsidiary Directive and its alignment with EU law mitigate its controversial aspects, as it ensures consistency with the broader objectives of preventing abuse and promoting fairness in taxation. While MNEsWhat are Multinational Enterprises (MNEs)? Multinational Enterprises, commonly referred to as MNEs, are corporations that operate in multiple countries through various subsidiaries, branches, or affiliates. These entities maintain a central management structure while leveraging diverse resources, labour markets, and customer bases across borders. The fundamental aspect that distinguishes MNEs from other corporate forms is their cross-border activity, which can include... may view the decision as restrictive, it reinforces the importance of compliance and transparency in international tax planningTax planning is the process of organising and structuring one’s financial affairs in a manner that legally minimises tax liabilities while ensuring compliance with relevant tax laws. The primary objective of tax planning is to reduce the amount of taxes paid, optimise the use of available tax benefits, and preserve wealth. It can be applied at various levels, including personal....

Significance for Multinationals

The Foncière Vélizy Rose case serves as a critical reminder for multinational enterprisesWhat are Multinational Enterprises (MNEs)? Multinational Enterprises, commonly referred to as MNEs, are corporations that operate in multiple countries through various subsidiaries, branches, or affiliates. These entities maintain a central management structure while leveraging diverse resources, labour markets, and customer bases across borders. The fundamental aspect that distinguishes MNEs from other corporate forms is their cross-border activity, which can include... (MNEsWhat are Multinational Enterprises (MNEs)? Multinational Enterprises, commonly referred to as MNEs, are corporations that operate in multiple countries through various subsidiaries, branches, or affiliates. These entities maintain a central management structure while leveraging diverse resources, labour markets, and customer bases across borders. The fundamental aspect that distinguishes MNEs from other corporate forms is their cross-border activity, which can include...) about the importance of ensuring substance in their tax planningTax planning is the process of organising and structuring one’s financial affairs in a manner that legally minimises tax liabilities while ensuring compliance with relevant tax laws. The primary objective of tax planning is to reduce the amount of taxes paid, optimise the use of available tax benefits, and preserve wealth. It can be applied at various levels, including personal... strategies. The judgment underscores several key lessons:

Economic SubstanceEconomic substance is a foundational principle in taxation and business law, ensuring that transactions and corporate structures reflect genuine economic reality beyond their legal form. The concept aims to prevent tax avoidance by evaluating whether a transaction or arrangement has a real business purpose and economic effect other than merely achieving a tax benefit. It ensures that taxpayers cannot exploit...: MNEsWhat are Multinational Enterprises (MNEs)? Multinational Enterprises, commonly referred to as MNEs, are corporations that operate in multiple countries through various subsidiaries, branches, or affiliates. These entities maintain a central management structure while leveraging diverse resources, labour markets, and customer bases across borders. The fundamental aspect that distinguishes MNEs from other corporate forms is their cross-border activity, which can include... must ensure that intermediary entities exhibit real economic activity and control over income. Simply acting as a conduit for financial flows can disqualify an entity from accessing treaty benefits.
Risk of Treaty Shopping: The ruling highlights the risks associated with using holding companies in low-tax jurisdictions solely to exploit treaty benefits. Tax authorities are increasingly scrutinizing such structures to ensure compliance with the principles of beneficial ownership.
Operational Alignment: MNEsWhat are Multinational Enterprises (MNEs)? Multinational Enterprises, commonly referred to as MNEs, are corporations that operate in multiple countries through various subsidiaries, branches, or affiliates. These entities maintain a central management structure while leveraging diverse resources, labour markets, and customer bases across borders. The fundamental aspect that distinguishes MNEs from other corporate forms is their cross-border activity, which can include... should align their operational structures with their tax positions. This includes demonstrating that intermediary entities have genuine decision-making authority and retain control over income.
Enhanced Compliance: The decision reinforces the need for robust compliance measures, including comprehensive documentation and regular reviews of cross-border structures.

By taking these steps, MNEsWhat are Multinational Enterprises (MNEs)? Multinational Enterprises, commonly referred to as MNEs, are corporations that operate in multiple countries through various subsidiaries, branches, or affiliates. These entities maintain a central management structure while leveraging diverse resources, labour markets, and customer bases across borders. The fundamental aspect that distinguishes MNEs from other corporate forms is their cross-border activity, which can include... can mitigate the risks of disputes and align their operations with global tax principles.

Significance for Revenue Services

For revenue authorities, the Foncière Vélizy Rose case provides a strong precedent for applying substance-over-form principles in cross-border tax matters. Key takeaways include:

Empowered Scrutiny: The judgment validates rigorous scrutiny of claims to tax treatyA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and... benefits, particularly where intermediary entities are involved.
Framework for Assessments: The reliance on beneficial ownership as a substantive criterion offers a clear framework for assessing the validity of treaty benefit claims.
Deterrence of Abuse: By upholding the denial of benefits to conduit entities, the decision serves as a deterrent to treaty shopping and reinforces the integrity of international tax systems.
Encouragement for Compliance: The ruling incentivizes businesses to ensure transparency and compliance in their tax planningTax planning is the process of organising and structuring one’s financial affairs in a manner that legally minimises tax liabilities while ensuring compliance with relevant tax laws. The primary objective of tax planning is to reduce the amount of taxes paid, optimise the use of available tax benefits, and preserve wealth. It can be applied at various levels, including personal... strategies, reducing the scope for disputes.

The decision strengthens the ability of revenue services to address tax avoidanceTax avoidance refers to the practice of legally structuring financial activities to minimise tax liability, reducing the amount of tax owed without violating laws. Unlike tax evasion, which is illegal and involves concealing income or misreporting, tax avoidance operates within the framework of the law. Multinational enterprises (MNEs) and individuals often engage in tax planning strategies that reduce tax liabilities... and ensures that treaty benefits are granted based on genuine economic activity.

Similar Cases for Review

Skatteministeriet v. T Danmark and Y Denmark Aps (CJEU C-116/16 and C-117/16)

These pivotal cases established that companies acting as mere intermediariesTax intermediaries are entities or individuals who act as facilitators between taxpayers and tax authorities, assisting with various aspects of tax compliance, planning, and dispute resolution. Their role spans from offering advisory services, ensuring compliance with tax regulations, to supporting clients in filing tax returns and navigating complex tax legislation. These intermediaries often include tax advisors, consultants, lawyers, accountants, and... or conduits cannot claim the benefits of EU directives. The Court of Justice of the European Union (CJEU) underscored that beneficial ownership must reflect genuine control and entitlement to income. The ruling aligned closely with the principle applied in the Foncière Vélizy Rose case, reinforcing the necessity of substance over form in claiming tax exemptions.

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Prevost Car Inc. v. Canada

This landmark Canadian case emphasized the importance of legal and economic ownership in applying tax treatyA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and... provisions. The court held that only entities with true control over funds, including the discretion to decide their use, could claim treaty benefits. This decision parallels the Foncière Vélizy Rose case in its emphasis on substance and the need for clear economic control.

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Indofood International Finance Ltd v. JPMorgan Chase Bank NA (UK)

This case from the UK courts focused on the definition of beneficial ownership in the context of interest payments under a tax treatyA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and.... It clarified that the beneficial owner must retain more than formal title; they must exercise genuine control over the income. The principles from this judgment resonate with the findings in the Foncière Vélizy Rose case.