The transfer of the usufruct of shares does not constitute the transfer of shares. Our Tax team reviews the Court of Cassation’s decision of 30 November 2022.
In its decision of November 30th 2022, the French Court of Cassation (Cass. Com. 30 November 2022 n° 20-18.884 FS-B) ruled that the transfer of the usufruct of shares could not be considered as the transfer of company shares. Hence, registration fees cannot be collected at the proportional rate provided for under Article 726 of the French General Tax Code (Code Général des Impôts – CGI) but at the fixed rate of €125 provided for by Article 680 of the CGI.
This decision relies upon Article 578 of the French Civil Code, which states, “usufruct is the right to use or enjoy a thing that is owned by another party, as may the owner himself, but without altering it“. The Court, therefore, finds that the beneficial owner of company shares may not be recognised as a shareholder, a standing that only the bare-owner may enjoy, and therefore the transfer of the usufruct of shares may not be qualified as the transfer of company shares.
Hence, the French Court of Cassation’s draws the tax consequences of the decision of the third civil chamber of 16 February 2022 (Cass. Com. 16 February 2022 n° 20-15.164) rendered on the advice of the commercial chamber dated 1st December 2021 (Cass. Avis, 1st December 2021, n° 20-15.164), which ruled that the beneficial owner of company shares cannot be recognised as a shareholder, as only the bare-owner may enjoy such standing.
In the current case, the shareholders in a Société Civile Immobilière (SCI) had sold the usufruct of shares in the SCI to the operating company, paying the fixed duty of €125. The tax authorities maintained that the transfer must be subject to the proportional rate of 5% provided for under Article 726 of the CGI. The Court of Appeal upheld the same view as the tax authorities for the following reasons:
– the term “transfer”, as defined by Article 726 of the CGI means any temporary or permanent transfer of shares themselves or a part of such shares, such as the transfer of usufruct or bare-ownership. The text does not make any distinction between the transfer of full share ownership or stripped share ownership, even if other provisions of the CGI make such a distinction (CGI, Art. 8). Nor do the tax authorities, in their comments, differentiate whether the transfer is relative to full share ownership or stripped share ownership (BOI-ENR-DMTOM-40-10-20, 28 Apr. 2017, § 30);
– the transfer of the usufruct of shares entailed the transfer of elements of contribution since, by stripping themselves of the usufruct of the shares, the SCI shareholders, who lost their right to dividend earnings, also lost their voting rights related to the shares transferred.
To this day, the tax authorities have not modified their doctrine’s position, which contradicts that of the Court of Cassation.
This decision seems to apply to any transfer of stripped shares (company shares or limited liability shares). On the other hand, it should not apply to the stripped transfer of a building as Article 683 of CGI stipulates that “the civil and legal acts assigning legal ownership or usufruct of immovable assets subject to payment are subject to a real estate announcement or registration tax provided for under Article 1594 D“.
It, therefore, falls to the legislator to modify Article 726 of the CGI if he wishes it to apply to the transfer of stripped shares.