In the terms of article 219, I-a quinquies of the French Tax Code (CGI), the quasi-exemption regime for long-term capital gains is applicable to shares held for at least two years, which:

– Have, in accounting terms, the nature of equity securities, whether they are entitled, or not, to the parent companies’ tax regime; and
– Are entitled to the regime of the parent companies and subsidiaries (CGI, article 145) without having, on the accounting level, the nature of equity securities subject to the shares being recorded in a special subdivision of a balance sheet and subject to representing at least 5% of the distributing company’s capital.

In accounting terms, equity securities are those whose lasting ownership is considered useful to the activities of the company, notably because they enable the company to exercise control or influence over the company issuing the shares.

In principle, the usefulness of lasting ownership of transferred shares can be characterized by the existence of a shareholders’ agreement.

In the case judged by the Council of State, it was considered, quite to the contrary, that such was plainly not the case as the agreement established that the shareholders were solely pursuing the objective of financial returns. In this instance, neither the intent to exercise influence over the issuing company nor the intent to ensure its control was therefore characterized by this agreement.

Moreover, regarding the condition of holding at least 5%, the Council of State specified that the percentage had to be assessed based on the date of the event having generated the tax, i.e. regarding capital gain on transfer, on the date of that transfer, and not in a continuous manner over a 2-year period.

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