In a decision of 30 November 2011, the Employment Division of the Supreme Court added a new factor to the notion of co-employment in a group of companies.
France’s highest court has, in effect, stated that when the Group is structured in such a way that its subsidiaries lack of autonomy, it is the dominant company that must be considered as the employer.
In this case, a foreign company with establishments in France, became, in 1974, the subsidiary of a French company that, itself, was controlled by a German company.
Subsequently, this company made its entire staff redundant for economic reasons.
Therefore, several employees brought claims for breach of their employment contracts against both the French company, that had gone into liquidation, and against the dominant German company, as co-employer
The Supreme Court decided that the German company was a co-employer for the following reasons :
« And whereas, after due consideration, the court of appeal decided that a management unit existed among the companies comprising the Jungheinrich group under the leadership of Jungheinrich AG, that the decisions taken by the latter had deprived MIC of all industrial, commercial and administrative autonomy, for the sole benefit of the parent company of the group, that the latter had taken back all of its patents, trademarks and designs from MIC and the trading profits, that the strategic and managerial decisions of Argentan had been taken by Jungheinrich AG, that also carried out the management of human resources of the subsidiary and imposed the cessation of activity, by organising the dismissal of the employees and by itself giving a bonus to the employees of MIC ; that the manager of MIC no longer had any effective power and was entirely subject to the instructions and directives of the management of the group, for its sole profit ; that the court was able to infer that there was confusion between MIC and Jungheinrich as to their activities, interests and management leading the latter to interfere directly in the management of MIC and in the management of its staff ; that it follows, without having to ask a prejudicial question, that a defence is not justified »
The principle established is that an employee only has one employer : the one who has officially signed the contract of employment. However, an employee can provide evidence to make other companies in the group liable as co-employers or to have a company other than the one that signed the contract of employment recognized as their employer.
The situations described are four in number : confusion between companies, the fictitious nature of the subsidiary, the use of a subsidiary for recruitment, that being its only purpose and finally, as here, the loss of autonomy of the subsidiary.
Dependence of a subsidiary with respect to the parent company can be demonstrated by the existence of a number of factors: financial control, the presence of managers of the parent company on the Board of Directors of the subsidiary, the centralization of human resources, the lack of autonomy in its operational and administrative management ...
This judgment adds a new factor : the fact that the subsidiary is deprived of its industrial, commercial and administrative autonomy for the sole benefit of the parent company of the group, such deprivation being evidenced by the confiscation of patents, trademarks and designs.
On 16 March 2012, the French Government put out a draft policy for public comment asking for comment on the provision set out in IX of Article 209 of the General Tax Code by Article 40 of the 4th Amending Finance Law for 2011.
This provision provides for the forfeitary restitution of a pro rata share of financial expenses relating to the acquisition of equities when the entirety of equity securities held by the purchasing company is at least 1 million euros.
The putting out of this tax policy for public consultation is an opportunity for us to return to the terms of this provision.
Until the adoption of Article 40 of the 4th Amending Finance Law for 2011, there was no limit on the deduction of financial expenses relating to the acquisition of equities, other than the general conditions for deducting fees and expenses.
Given the generality of these conditions, a number of abusive schemes emerged, artificially attaching debt to France, by the purchase of equities in companies located outside France through French entities, getting into debt to finance this acquisition and enjoying full deductibility of their financial expenses.
During the parliamentary debates, the example was cited of a U.S. company needing to buy a company in Germany or the Czech Republic and using as support a French company that it put into debt, and which therefore benefited from the full deductibility of interest while it had is nothing to do with the chain of decisions that led to the purchase of the German or Czech company.
The new provision now excludes the possibility of deducting all of the loan interest paid in connection with such transactions, unless it is shown that control of the equities purchased continues to be in France.
In particular, in order to deduct the entirety of interest on loans taken out to acquire equities of a French company, the company must demonstrate that:
In fact, the company must actually be able to prove that it (or that its parent or sister company based in France) is a decision-making and control centre, that is to say that it has the power to decide about its equities and that it actively participates in the decision-making of the company, in particular through general meetings relating to companies whose equities are held.
This notion of a decision-making and control centre is a matter of fact but that is not an obstacle to governance procedures put in place by the groups, as long as these rules are not intended to unduly limit the rights associated with the status of ownership of the equities, for example by putting in place an agreement established by the parent group not to transfer the equities.
These two conditions apply as follows:
In practice, a company with tax years of 12 months can provide evidence that it is a decision-making and control centre in the course of two years, namely:
With regard to equities acquired before 1 January 2012, proof must be provided from the first tax year commencing from that date, that is to say in practice the first tax year commencing 2 January 2012.
Therefore, for a company whose tax years correspond to a calendar year and only for equities acquired before 1 January 2012, the tax year for which proof is required will be the tax year commencing from 1 January 2013 and ending 31 December 2013.
If the company fails to provide proof of compliance with these two conditions in one of the two years, it must defer the amount of financial expenses allocated to the acquisition of equities until the end of the eighth year following the date of the year of acquisition, even if it started to comply with these conditions during this period.
Therefore, if we take the example of a company that acquires equities on 1 March 2012 and whose fiscal year is a calendar year, it must be proved that the equities do not fall within the scope of application of IX of Article 209 either for the year ending 2012, or for the year ending 2013.
In the event that the company cannot provide such evidence either for the tax year 2012, or for the tax year 2013, reintegration must be made within the tax year ending 2013 until the tax year ending 2020 (a period of 8 years).
For equities acquired before 1 January 2012, if the company that holds them is able to provide the proof required for the first tax year commencing 1 January, reintegration must be effected within the tax years remaining for the reintegration period.
If we take the example of a company where the tax year is the calendar year and which has on 1 January 2012 equities held since 1 June 2004, the proof required must be provided during the tax year ending 2013.
Therefore, on that date, the reintegration period will be completed, and the company will no longer be subject to the obligation to return a pro rata share of its financial expenses.
Indeed, as at 31 December 2012 the company will have held the equities for more than eight years.
As for the the amount of expenses to be reintegrated, that is determined on the basis of a flat rate. Specifically, the following must be applied pro rata to the total financial expenses:
The average debt is obtained by the ratio of the amount of debts existing on the last day of each month of the financial year and the number of months of that financial year.
Therefore, the ratio is not fixed. Indeed, if the numerator is finally determined in the year of acquisition, the denominator on the other hand may vary depending on the average debt total in each tax year. In other words, the ratio may increase or decrease from one year to another.
Finally, we draw your attention to the scope of the provision which is very broad.
Indeed, it applies to all companies subject to corporation tax that acquire equities (being defined as such for tax purposes), the nationality of the target company being of little importance.
Equities within companies that are mainly property companies whether listed or not listed are however excluded from this provision.
The relevant financial expenses consist of interests or similar, applying to the amounts already available to or to be made available to the company.
Finally, it is stated that this provision of reintegration of equities does not apply:
Moreover, the draft policy makes special provision in the event of:
This policy also specifies that this provision applies primarily to those predicted in the fight against under-funding (section 212) or within the provision known as the Charasse amendment (section 223 b of the General Tax Code).
Ultimately, it is clear from the analysis of these provisions that the deduction of loan interest for the acquisition of equities is becoming increasingly regulated, which may come to undermine the competitiveness of French taxation of companies but may in parallel lead to the development of decision-making and control centres of large corporate groups in France.