Accueil » In the news » Abuse of Right and Capital Reduction

Abuse of Right and Capital Reduction

Since a ruling of the French constitutional judge (« Conseil Constitutionnel ») of 2015, the shares repurchase followed by their cancellation in the framework of a capital reduction non-driven by company losses is treated as a capital gain on securities, which can allow some partners, who can take advantage of tax allowances in connection with the duration of detention, to benefit from a lower taxation compared to a dividend distribution.

Abus de droit et réduction de capital

The majority remained careful and only made use of the capital reduction for exceptional cases, bases on economic motives, to avoid any recharacterization as an abuse of right, which can lead to a fine of a maximum amount of 80 % of the tax evaded.

Indeed, the French tax authorities have considered in two recent cases that the operations carried out were deprived of economic motives and that they had been realized for the sole purpose of getting dividends with a lower taxation thanks to the legal regime attached to capital gains on securities. Notably, the French tax authorities highlighted the absence of change in capital repartition between partners.

Seized with this issue, the committee on abuse of tax law (« Comité de Droit Fiscal » in French) considered in October 2021 that any taxpayer can chose the least taxed path to get the reserves that are no longer useful to the company. Nonetheless, the committee still sets as a condition that the operation must not equal to an artificial set-up.

Unlike the tax authorities, said artificial set-up was not noted by the committee in the two aforementioned cases, which instead saw an economic motive behind the general scheme described by the taxpayers.

The core issue in case of litigation remains the proof, that every taxpayer should carefully pre-constitute.

Key point showing that the administration is not willing to make 2022 a year of « capital reduction non-driven by company losses »: the tax authorities have decided not to follow the committee’s opinion and to pursue with the litigations. Thus, we shall soon know the judges’ opinion about this matter.

NEPTUNE law firm is at your disposal concerning similar issues you may face.