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    After examining a taxpayer’s personal tax situation, the tax administration considered that the transfer of securities at a derisory price, made between members of the same family, constituted a disguised gift.

    For that purpose, the Court implemented proceedings for abuse of process in order for the transfers disguised as gifts to be reclassified and to apply the transfer tax on gifts and the corresponding penalties.

    For the Committee on tax law abuse, called on for the case, the operation revealed, contrary to what the tax administration claimed, an indirect gift and not a disguised gift.

    In a March 18, 2019 decision, the Paris Court of Appeal ended up following the reasoning of the tax administration by qualifying the operation at issue as a disguised gift.

    First of all, the Court indicated that “a disguised gift is one that is done under the guise of a contract in return for payment. Although from a legal point of view, the operation is legitimate, the administration has the right to establish the genuine nature of the deed. Among the circumstances making it possible to characterize a disguised gift is the stipulation of a derisory price.

    The Court then considered that “evaluating the securities at a symbolic value, unrelated to the real value of the property, which actually corresponds to a sale at an unusually low price, establishes the gratuitous nature of the agreements and the absence of any counterpart to the deed.

    Although, in this instance, it was an exaggerated case of abuse of process, given the fictional nature of the deed, this legal precedent and the creation of a “mini abuse of tax law” by the most recent Finance law remind taxpayers of the special attention paid by the tax administration to operations of asset restructuring, as well as the necessity for those taxpayers to seek tax advice prior to any restructuring, allowing them to structure their operations as best as possible.

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    There’s been a victory for Laguiole, the village in Aveyron famous for its knives bearing a bee insignia on the handle, which since March 5, 2019 has benefited from the Paris Court of Appeal ruling that cancelled twenty brands using the “Laguiole” name.

    The municipality had been fighting for over twenty years against a Val-de-Marne businessman who in 1993 registered the Laguiole name as a trademark in France to designate not only knives, but linen, clothing and fertilizers as well. The range of products sold under that name did not come from the Laguiole municipality at all, and most of them were even imported products. The patent applicants were not citizens from the municipality either.

    As such, the Laguiole village craftsmen were deprived of the possibility of manufacturing or selling products under the “Laguiole” brand without being sued for counterfeiting. “Even with a locally made product, I would’ve been declared a counterfeiter, sometimes even up against Chinese products,” explained Thierry Moysset, manager of La Forge de Laguiole, a company manufacturing the ‘authentic’ Laguiole knife.

    In 2010, the municipality brought the case before the Tribunal de Grande Instance of Paris (district court), in hopes of obtaining the cancellation of the “Laguiole” brands. The case was dismissed and the ruling confirmed on appeal in 2014. However, in late 2016, the Court of Cassation introduced a new episode in the legal proceedings by partially annulling the Court of Appeal ruling; it noted that the Municipality had proven that the brands being sued had been registered maliciously.

    The case was finally judged on March 5, 2019 by the Paris Court of Appeal (Court of referrals), which ruled in favour of the Aveyron village, considering that the contentious brands had been registered “fraudulently” within the framework of a “strategy aimed at depriving the Laguiole municipality and its citizens of using the name”. In addition to the invalidity of the 20 brands registered, the municipality of Laguiole received $50,000 in compensation for the non-pecuniary damage suffered. The Court assessed that the Municipality had been deprived of its name and its reputation harmed.

    It is worth noting that to fight against such practices, the Hamon Law dated March 17, 2014 had already given territorial authorities new means of defence by allowing them to be informed by France’s National Institute of Intellectual Property (INPI) of any application for registering a trademark incorporating the name of the municipality or a similar name and by giving them the right to oppose its registration.

    This legal saga clearly sums up just how hard it is to protect the name of a regional authority in the face of a competing brand. A ruling that could therefore reveal the judges’ determination to protect local and “Made in France” interests.

    Caution: the ruling should nevertheless be taken with a grain of salt. Some Laguiole brands are still on the market and the businessman can still file another appeal.

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    To prevent potential conflicts of interest, the regulated agreements procedure currently provided for in the French Commercial Code for public limited companies (sociétés anonymes) subjects agreements entered into between the company and one of its directors or main shareholders to prior authorisation from the Board of Directors, then to approval by the shareholders. The agreements for which one of those parties is indirectly concerned are subject to the same procedure (Article L. 225-38 of the French Commercial Code).

    Article L. 225-40 of the French Commercial Code provides that the “person interested” by the agreement cannot participate in the vote, without however indicating whether that interest can be indirect.

    Whereas the aim of this procedure is to comprehend agreements that do not reveal organic links between the contracting parties but that are nevertheless representatives of a conflict of interest hidden by contractual or company arrangements.

    Article 66 of the PACTE law intends to remove the ambiguity, by explicitly targeting both the person directly concerned and the one indirectly concerned. No definition of indirect interest is provided although the concept remains difficult to grasp.

    The article also proposes that the shares held by the person concerned, directly or indirectly, be taken into account for calculating the quorum when the general assembly’s decision is made dealing with the approval of the agreement in order to, in particular, facilitate making that decision.

    The same article plans to re-establish the right (eliminated in 2011) for any shareholder to request a list of current agreements concluded by the company under normal conditions (Article L. 225-39 of the French Commercial Code).

    Lastly, certain provisions are foreseen solely for listed companies:

    – The company governance report must mention the agreements concluded between the company representatives of the public limited company (SA) or limited partnership with shares (SCA) and any controlled company within the meaning of Article L. 233-3 of the French Commercial Code (modification of Article L. 225-37-4 of the French Commercial Code).

    – The company website must include the publication of certain information (list to be determined by order in French Council of State) concerning the regulated agreements at the latest at the time the said agreements are entered into (creation of Article L. 225-40-2 of the French Commercial Code).

    Although the changes foreseen have commendable objectives aimed at reinforcing control and transparency within companies and meeting the need of transposing Directive 2017/828/EU “Shareholders Rights II”, care should be taken not to overly complicate interactions used in the business world, where legal security and rapidity are essential.

    The Pacte law is currently under examination. We will inform you of the conditions for the effective implementation of these new provisions with a direct impact on the regulated agreements procedure currently provided for in the French Commercial Code.

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    Decree n°2017-1387 dated September 22, 2017, on the predictability and security of labour relations, introduced a scale for compensations which allows employers and employees to have prior knowledge of the financial stakes for dismissals lacking any real and serious cause brought before the Labour Court (Conseil de Prud’hommes).

    As such, if the employee or employer refuses reinstatement into the company, the judge grants the employee compensation whose minimum and maximum amounts are already determined by the scale, based on the employee’s seniority and the size of the company (Article L.1235-3 of the French Labour Law).
    However, the scale is not applied in the event of dismissal deemed null and void due to the violation of a fundamental freedom, harassment or discrimination (Article L.1235-3-1 of the French Labour Law) .

    When the scale was set, it was the subject of much controversy and led to extensive press coverage.

    In a decision dated December 7, 2017, the Council of State (Conseil d’Etat) rejected the appeal by the French trade union CGT (Confédération Générale du Travail) which raised objections to the conformity of the scale.

    Likewise, in decision n°2018-761 DC dated March 21, 2018, the French Constitutional Council ruled the scale to be in compliance with the French Constitution.

    The scale should therefore be binding on the judge.

    Nevertheless, late 2018 and early 2019 were marked by several decisions by Labour Courts which refused to apply the scale. To our knowledge, five Labour Courts (1) nullified the compensation scale for dismissals lacking any real and serious cause.

    On the contrary, the CAEN Labour Court, in a decision by its settlement (départage) division dated December 18, 2018 (n°17/00193), applied it.

    The judicial battle is essentially about two legal points:

        – The direct applicability of the provisions of the Convention n°158 of the ILO and the European Social Charter by French judges.
        – The conformity of the scale with the principles of adequate compensation for the prejudice suffered within the context of the unfair breach of the work contract provided for in Article 10 of Convention n°158 of the ILO and Article 24 of the European Social Charter dated May 3, 1996.

    According to the Labour Court councillors who refused to apply the scale implemented by the September 22, 2017 decree, the scale is in violation of the European Social Charter and Convention n°158 of the ILO.

    We will now have to wait several months to see how the Court of Appeals and the Court of Cassation rule on the matter.

    Employers and employees are therefore once again in a state of uncertainty: the former can no longer precisely understand their judicial risk and the latter do not know the real financial stakes of legal proceedings they might initiate.

    (1) TROYES Labour Court via a decision on December 13, 2018, “Miscellaneous activities” division
    AMIENS Labour Court via a decision on December 18, 2018, “Trade” division
    LYON Labour Court via a decision on December 21, 2018, “Miscellaneous activities” section
    GRENOBLE Labour Court via a decision on January 18, 2019, “Manufacturing” division
    AGEN Labour Court via a decision on February 5, 2019, “Manufacturing” division

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    In principle, partnerships such as general partnerships (société en nom collectif), limited partnerships (société en commandite simple), civil partnerships or limited liability companies whose single member is an individual (EURL) are not subject to Corporate Income Tax (CIT).

    Nevertheless, the abovementioned companies may opt for payment of the CIT.

    To be valid, the option must be filed with the tax authorities no later than the end of the 3rd month of the financial year for which the company wishes to be subject to the CIT for the 1st time.

    Such option, once exercised, was, until now, irrevocable.

    For the company financial years ending as of December 31, 2018, the 2019 Finance Law creates an exception to this principle of irrevocability.

    From now on, companies having opted for CIT liability will have the right to revoke that liability at the latest in the 5th financial year following the year during which the option was exercised.

    To be deemed valid, the revocation must be filed with the tax authorities before the end of the month preceding the payment deadline for the first instalment of the corporate tax for the fifth financial year.

    If no revocation is filed within that time period, the option for the CIT shall then become irrevocable.

    The aim sought by lawmakers is to allow companies, which realize in retrospect that the regime is not the one best suited to their needs, not to be penalized by giving them the right to reconsider their decision.

    In terms of taxes, revoking the option for CIT is considered as a cessation of business, which, in principle, leads to the immediate taxation of operating profits and tax-deferred profits made and not taxed, as well as any provisions or capital gains for which taxation had been deferred.

    However, in the absence of a new legal entity being created, the consequences of the cessation of business are expected to be attenuated, if no change has been made to the book values of the assets and if taxation remains possible within the framework of the new tax regime to which the company is subject.

    Make sure to ask us for advice before making such a decision.

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    “Hakuna Matata”! Many of us associate that phrase with the American firm, Disney, and its animated feature film The Lion King. Nonetheless, the phrase no longer benefits from the carefreeness of the 1990s.

    This now well-known catchphrase was registered as a trademark back in 1994, when The Lion King was released in movie theatres by the American company DISNEY ENTERPRISES. It was for a French trademark designating restaurant services, and an American trademark for products such as t-shirts. It means “no worries” in Swahili, a language used by a major part of Sub-Saharan Africa.

    The announced release of Disney’s new version of The Lion King scheduled for July 2019 has given rise to many reactions from East African populations. An online petition against the registration of the expression as a trademark has officially requested the American firm to relinquish its right to the trademark.

    Part of the African public opinion does indeed consider that this protection of the expression as a trademark is an “attack against the Swahili people and Africa as a whole”, and a characteristic sign of “theft of African culture” carried out over the years through the use of intellectual property rights.

    Although the cultural and emotional attachment is comprehensible, it is worth noting that the expression “Hakuna Matata” does not appear to fall within the exceptions opposed to the registration of an American and/or French trademark. As such, a trademark based on an everyday or foreign language expression is lawful and valid, provided it is not the common and necessary designation of the product or the service it refers to. The risk for the holder(s), however, is that their rights would be limited in practice. The holder could therefore not oppose the use of the said expression by a third party, insofar as the expression is used with its everyday meaning.

    Among the means that might be used for challenging the validity of the Disney company’s “Hakuna Matata” trademarks, is the prohibition on registering a country’s coat of arms, flags and other insignia as a trademark, provided, nonetheless, that the trademark at issue is not likely to mislead the public as to a connection existing between the trademark holder and the country whose coat of arms, flag or other insignia are appropriated by the said trademark.
    Yet, in this instance, it is doubtful that the French and American public associate the “Hakuna Matata” trademark with East African countries; on the contrary, they will probably associate it with the American firm. Something the petitioners were probably already aware of when they requested Disney to voluntarily relinquish its rights to the trademarks. To the best of our knowledge, no legal proceedings have been initiated so far.

    We’ll be keeping an eye on this case as 2019 gets off to a start…

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    On October 9, 2018, the French National Assembly adopted at first reading, the draft PACTE law (Action Plan for Business Growth and Transformation).

    Among the many measures in the draft law, some are aimed at reinforcing the development of a social and solidarity-based economy.

    1- Simplifying conditions of access to “Social and Solidarity-based Enterprise” (ESUS) accreditation

    Since July 1, 2015, companies can receive a “Social and Solidarity-based Enterprise” (ESUS) accreditation for a five-year period (or a two-year period for companies under 3 years old).

    To be eligible for the ESUS accreditation, a company must meet the following criteria:

    • – Pursue “social benefit” as its main objective (provide support to vulnerable people, contribute to combatting exclusion or inequality, take part in sustainable development, energy transition or international solidarity);
    • – Prove that the burden generated by the company’s social benefit objective has a significant impact on its profit and loss account or its financial profitability;
    • – Adhere to a compensation policy meeting two requirements: the average of the compensations paid, including bonuses, to the 5 highest-paid employees or managers must not exceed a yearly limit capped at 7 times the monthly minimum wage (SMIC) and the salary for the highest-paid employee must not exceed a yearly limit capped at 10 times the minimum wage (SMIC);
    • – Equity securities issued by the company cannot be traded on financial markets.

    For ESUS-eligible entities, the measure is aimed at facilitating access to equity capital funding, either through tax breaks (such as the IR-PME scheme), which individuals investing in such entities benefit from, or through the obligation made to funds fiscally encouraged to meet certain investment quotas in the entities concerned.

    Article 29 of the draft PACTE law proposes to introduce the following improvements to the ESUS accreditation measure:

    • – Facilitate access to accreditation, by clarifying the definition of “social benefit” in particular for activities related to ecological transition, cultural promotion and national solidarity;
    • – Simplify the modalities for assessing the impact of social benefit activities on the business model of the companies applying for accreditation;
    • – Eliminate the obligation to include the wage caps in the company statutes, and standardise the application of those caps to all eligible companies.

    The possibility of setting up an online accreditation procedure is also being discussed.

    2- Taking into account a company’s social and environmental aspects

    Article 61 of the draft PACTE law proposes to modify Articles 1833 and 1835 of the Civil Code as follows:

    • – Article 1833 with: “The company shall be managed in its social interest and taking the social and environmental aspects of its activity into consideration.”
    • – Article 1835 with: “The articles of association may specify the purpose, consisting of the principles held by the company and in observance of which it intends to allocate resources for the conduct of its activity.”

    The modifications are aimed at contributing to a much stronger integration of environmental law in the company governance, by highlighting the activity of companies with a genuine commitment to sustainable development.

    Nevertheless, the question arises as to what extent a lack of knowledge of these obligations will create a risk of incurring liability for the company directors concerned.

    The draft PACTE law will be examined by a Senate committee as from January 2019. We will keep you informed of the conditions for the effective implementation of the new measures.

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    Decision by the Social Chamber of the Court of Cassation dated June 21, 2018
    (Cass. Civ 2e. 21 juin 2018, n°17-15.984)

    As per a June 21, 2018 decision, the Court of Cassation answered the following question: Is a skiing accident during a company seminar considered a work-related accident?

    Company seminars bringing together employees often give rise to various activities, in particular sports.

    In this instance, an employee was attending a seminar in the mountains. A day of free time for relaxation was planned, during which the employees could do whatever activities they wanted to. This particular employee chose to go skiing and consequently bought a ski pass for the ski lifts since the employer did not cover the costs for any of the activities. As the employee was skiing down a slope, she was the victim of an accident. She considered that it was a work-related accident since it had occurred during the seminar, however the health care insurance fund (Caisse Primaire d’Assurance Maladie – CPAM) disputed that claim.

    Yet, The Court of Cassation confirmed the Court of Appeal decision, ruling that employees participating in that day remained subject to the employer’s authority as the latter was announced in the seminar schedule, paid as working time and could therefore not be considered as a day off. As such, the skiing accident, which occurred within the free time designated for relaxation, must be considered as a work-related accident.

    This legal precedent settles various Courts of Appeal hesitations regarding similar cases of accidents during company seminars. Indeed, certain Courts of Appeal have indeed judged that an accident in such circumstances fell within the employee’s private life.

    Thus, with this ruling, the Court of Cassation has indicated that during a company seminar, by nature paid, employees which are paid remain subject to their employer’s authority even though they may have free time for relaxation, unrelated to their professional activity. Any accident that might occur during the seminar is considered a work-related accident.

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    Within the framework of the next finance and social security Bill , several reforms are bound to have an impact on taxes in France for non-residents.

    Overview of the main measures foreseen:

    Exemption of capital gains tax on sale of main residence after departure abroad

    As of today, a tax resident in France who sells his main residence is not taxed on the capital gain made on that sale.

    However, a non-resident who sells the property that was his main residence before his departure abroad is not exempt from that capital gains tax but can only benefit, under certain conditions, from a one-time tax allowance of €150,000.

    The draft Finance Bill for 2019 (PLF 2019) foresees an alignment between the tax systems applicable to residents and non-residents regarding capital gains made on their main residence.

    Consequently, a non-resident who sells the property that was his main residence in France at the time of his departure abroad would not be taxed on the capital gains made, subject to the dual condition that:
        – The sale was concluded at the latest on December 31st of the year following the year of the tax residence transfer (to another country); and
        – The property was not placed at the disposal of a third party, whether for a fee or free of charge, between the transfer of residence and the sale.

    Possible exemption of social levies on capital income

    Currently, in France, non-residents are subject to social levies (including, in particular, CSG, CRDS and solidarity levy), at the rate of 17.2% on their French-earned income from property and capital gains on real estate.

    The draft finance bill on social security for 2019 provides that the people affiliated with a mandatory social security system in another member state of the European Economic Area (EEA) or Switzerland will not be subject to CSG and CRDS in France on capital income but the solidarity levy, whose rate would be increased to 7.5 %, would remain due.

    Nevertheless, that exemption would not concern people having established residence outside of the EEA or Switzerland, and who would therefore remain subject to social charges in France on capital income.

    Various changes in tax modalities of France-sourced income

    The PLF 2019 provides for various measures aimed at bringing the tax system on non-resident income closer in line with the system applied to tax residents in France.

    First of all, French-earned salaries, pensions and life annuity rents paid to non-residents are currently subject to a specific deduction at source, partially discharging tax on income, as specified in Article 182A of the French Tax Code (CGI).

    As from January 1, 2020, that deduction at source would be eliminated and replaced by a flat, non-discharging deduction at source calculated by applying the tax rate by default used for the withholding tax on resident income.

    In addition, starting with taxes on income earned in 2018, the minimum tax rate applicable to France-sourced income of non-residents will rise:
        – From 20% to 30% in Metropolitan France; and
        – From 14.4% to 25% for income whose source is in the French Overseas Departments (DOM).

    Of course, taxpayers can still request the application of the average tax rate to their France-sourced income, resulting from the application of the progressive tax brackets to the whole of their foreign- and France-sourced income, if it is lower than the minimum rate mentioned above.

    Lastly, the PLF 2019 provides that, starting with taxes on 2018 income, non-residents can deduct the alimony paid out, on condition that it is taxed in France and that it has not already entitled the taxpayer to a tax break in his Country of residence.

    To be continued when voted on in late December…

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    Above and beyond potential protection by Copyrights, all graphics or designs can be protected by Design rights.

    Any reproduction, without consent, of graphics or designs protected by design rights constitutes, as a matter of principle, an act of counterfeiting. Consequently, caution is required.

    In two rulings on September 27, 2017 opposing the companies Nintendo and BigBen Interactive GmbH / BigBen Interactive SA, the European Court of Justice (CJEU) nevertheless laid down a strictly-regulated exception to the protection of designs.

    The company Nintendo filed a counterfeit claim against the video game accessory manufacturer, BigBen Interactive, who was reproducing, for the purpose of selling its products, images of Nintendo console accessories protected by design rights.

    The Court of Justice took a chunk out of rights holders’ monopoly by judging that a design could lawfully be reproduced without prior consent from the holder if that reproduction was an illustration.

    The images were considered illustrative insofar as they allowed to demonstrate the joint use of the BigBen Interactive and Nintendo products to consumers.

    Nonetheless, this lawful reproduction is subject to conditions.

    The Court of Justice requires that the reproduction of the design be made within the framework of loyal competition and that it not threaten the economic balance of its holder. Moreover, it must be possible to identify the holder of the design reproduced.

    Lastly, caution is required since, although the Court of Justice’s interpretation seems to reduce the scope of protection for Community Designs, the exception is nonetheless subject to conditions and may be limited by potential cumulative protection by Copyright.

    European Court of Justice, September 27, 2017, C24/16 and C-25/16, EU:C:2017:724, Nintendo / BigBen Interactive GmbH and BigBen Interactive SA.

© Schmidt Brunet Litzler