In a ruling dated 13th June 2018 (CE plén. 13-6-2018 n° 395495), the Council of State has finally clarified the notion of an “active holding company,” which it defines as a company: “whose principal activity, in addition to managing a portfolio of investments, is to play an active role in the management of the group’s policy and the running of its subsidiaries and, where relevant and on a strictly internal basis, the provision of specific administrative, legal, accounting, financial and property services.”
Before the 13th June ruling, only the Cour of Cassation have issued a definition of active holding companies. The Council of State’s definition builds on the definition issued by the Cour of Cassation, adding that management must be the company’s “principal” activity.
As such, companies with non-controlling minority shares in businesses may qualify for “active holding company” status.
Furthermore, the Council of State mentions a certain number of factual elements to be used to prove “active holding” status, notably including:
– Minutes from meetings of the company’s board of directors attesting their involvement in the management of their subsidiaries’ policies; or else
– The existence of a contract for administrative and strategy and development support, specifying that the holding company will play an active role in the strategy and development of its subsidiaries, without compromising their respective autonomy as legal entities.
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.
According to Article 155, IV of the French Tax Code, LMP status is granted to taxpayers:
– Whose annual income, derived from said activity by the members of their tax household, is over € 23,000 and exceeds their tax household’s professional revenues; and
– Whose tax household has one member registered in the Trade Register as a professional landlord.
As a relieving measure, the French tax authorities granted LMP status to individuals who were not registered in the Trade Register simply due to the Register’s refusal based on the non-commercial nature of the activity, so long as those individuals could provide proof of the reason for said refusal.
In ruling n°2017-689 QPC dated February 8, 2018, the Constitutional Council overturned the obligation for registration in the Trade Register, considering that the aforementioned obligation ignored the principle of equality of public burdens.
As such, only the conditions pertaining to income derived from the activity as a furnished rental property landlord remain necessary for qualifying the activity as professional in nature, or not.