business taxation

The transfer of a company's registered office



Until 1 January 2005, the transfer of the registered office of a company resident in France to another EU Member State was a complex and costly operation due to legal and fiscal obstacles.

Article 221-2 of the French General Tax Code provided that the transfer of the registered office or an establishment abroad, whether or not it results in a change in the nationality of the company, should be treated for tax purposes as a cessation of activity and therefore resulted in immediate taxation. No distinction was to be made according to whether the transfer took place to a Member State of the European Union or to another State outside the Union.

Paragraph 3 of the same article did indeed provide for a derogation in the event of a change of nationality of the company, but only if France had signed a special agreement with the host country permitting such operations and maintaining the company's legal personality. No such agreement has been signed in practice.

Community law enshrines the freedom of establishment within the European Union for natural and legal persons and Article 48 of the EC Treaty clarifies the right of a company to transfer to another Member State, subject only to compliance with the legislation of the host country. The case law of the European Court of Justice is established on this point and has even recognised that a company may be set up in another Member State for the sole purpose of benefiting from more favourable legislation, even if it carries out the essential part of its activities in another Member State.

Furthermore, the entry into force on 8 October 2004 of Community Regulation 2157/2001 establishing the Societas Europaea (European public limited-liability company) has further weakened the position of the French administration, since Article 8 of this Regulation explicitly provides that the transfer of the registered office of a European Company to another member state "shall not give rise to the dissolution or creation of a new legal person".

In response to European doctrine, the French government finally had to find that Article 221-2 of the GTC in practice prevented the transfer of the registered office of a French company abroad, and it therefore included in the Finance Act for 2005 a provision aimed at making the tax regime more coherent - at least concerning transfers within the European Union.

Article 34 of this Finance Act now restricts the scope of Article 221-2 of the GTC by specifying that "the transfer of the registered office to another Member State of the European Community, whether or not accompanied by the loss of legal personality in France, does not entail the consequences of the cessation of the undertaking". This transfer of the registered office implies that the former French company becomes a permanent establishment of the company established abroad and carries on the same activity, without there being an outflow of assets which would escape corporate tax in France.

In practice, this transfer would therefore no longer result in immediate taxation of deferred profits and unrealised capital gains. On the other hand, the capital gains actually realized at the time of the transfer of the registered office remain immediately taxable.

Transfers outside the European Union are still heavily taxed.