On November 27, 2008 the European Court of Justice ("ECJ") issued its judgment in Ministry of Finance v. Société Papillon (C-418/07). The questions referred to the Court was whether the French national tax laws, which do not allow a French parent company to form a French consolidated tax group with its French subsidiaries (and reduce its tax liability by offsetting its profits with the losses of other members of the group and disregarding intra-group transactions), when the French subsidiaries are owned indirectly through an EU holding company (in the case, a Dutch BV) not subject to tax in France, violates Article 43 of the EC Treaty.
The Court ruled that such restriction is discriminatory and constitutes a violation of the freedom of establishment, because a French parent company that exercises its freedom of establishment by incorporating a holding company in another EU Member State through which it owns stock in its French subsidiaries is subject to a less favorable tax treatment in France than a French parent company that owns stock in its French subsidiaries directly or through other French intermediate holding companies. Indeed, the latter is able to offset its profits with the losses of the French subsidiaries while the former is not.
Contrary to the Advocate General’s opinion, the Court refused to apply the coherence of tax system justification to sustain the restriction, on the ground that the restriction goes beyond what is strictly necessary for that purposes and fails the proportionality test.
Société Papillon provides legal support to taxpayers who intend to challenge national tax laws that restrict access to consolidated tax regimes in EU cross border situations.
Italy permits consolidation of foreign subsidiaries, but sets more restrictive requirements that those that apply to consolidation of domestic subsidiaries. The ECJ ruling in Société Papillon puts in doubt the validity of those restrictions under EU Law.