Property Capital Gains and Tax Clearance: When the Tax Deferral Slips Away

Picture this: you are the owner of a property in Nice that you acquired twenty years ago. Its value has soared; you have a significant latent capital gain. You decide to contribute this property to a company you are setting up, to structure your assets. The tax authority tells you: "No problem, you can benefit from a deferral of tax on the capital gain, provided you obtain prior clearance." You submit the application, but clearance is refused. Result: you must pay the tax immediately, even though you thought you were protected by European law. What can you do?

This question was decided by the Constitutional Council in a decision of 22 October 2014 (no. 13-84.419). It held that Articles 210 B and 210 C of the General Tax Code (CGI) which make the deferral of tax subject to clearance are constitutional, even if they appear to be out of step with European Directive 90/434/EEC. In short, the judges validated the right of the tax authority to refuse deferral if the transaction is considered fraudulent or abusive. But what does this mean in practice for you, a property owner in Grasse or a property developer on the Côte d'Azur?

This article explains everything: the facts of the case, the reasoning of the judges, and above all what you need to know to avoid finding yourself in the same situation. Because in my practice in Grasse, I see too many cases where well-meaning taxpayers are caught out by little-known formalities. So, take five minutes to read what follows — it could save you a hefty tax bill.

The facts: a story that happens every day

Mr. John, owner of several building plots in Nice and the Grasse hinterland, had set up a group of real estate civil companies (SCI) to hold these assets. In 2006, he decided to restructure his assets: he contributed the shares of his SCIs to a holding company, by way of a merger by absorption. The transaction generated a significant latent capital gain, as the land was acquired for €500,000 and is now worth €2 million. To avoid paying tax on the capital gain (approximately €300,000, taking into account reliefs), Mr. John applied for the tax deferral provided for by Article 210 B of the CGI. But the tax authority refused clearance, considering that the main purpose of the transaction was tax avoidance: to avoid the taxation of the capital gain.

Mr. John challenged this refusal before the Administrative Court of Nice, and then on appeal. He invoked, in particular, European Directive 90/434/EEC, which provides that Member States must grant tax deferral for mergers and contributions of assets, without a clearance requirement. According to him, the requirement of clearance under French law is incompatible with this directive. The Marseille Administrative Court of Appeal dismissed his appeal, and Mr. John appealed to the Conseil d'État. But before the Conseil d'État ruled, he raised a priority question of constitutionality (QPC): do Articles 210 B and 210 C of the CGI infringe the rights and freedoms guaranteed by the Constitution?

The Constitutional Council, seised of the matter, had to decide. The stakes were high: if these articles were declared unconstitutional, hundreds of taxpayers could have claimed tax refunds. But the judges said no. Why? Because the clearance requirement is not a disproportionate obstacle: it simply allows the authority to verify that the transaction does not have a fraudulent purpose. And this control is consistent with the directive itself, which allows States to refuse deferral in cases of abuse.

The reasoning of the court — broken down

The Constitutional Council examined whether Articles 210 B and 210 C of the CGI infringed the principle of equality before tax law or the right to property. In essence, these articles allow a deferral of tax on capital gains realised on a merger or contribution of shares, but only if the transaction has been cleared in advance by the authority. In other words, without clearance, no deferral: the capital gain is immediately taxable.

The applicant argued that this clearance requirement was incompatible with Article 4 of Directive 90/434/EEC, which requires Member States to defer the taxation of capital gains on mergers, divisions and contributions of assets between companies of Member States. He considered that French law could not require clearance, as this was equivalent to making the benefit of the deferral subject to a discretionary authorisation.

But the Constitutional Council followed a different line of reasoning. It first recalled that the constitutional review concerns compliance with the Constitution, not with a European directive. Next, it noted that the directive itself, in Article 11, allows States to refuse deferral if the transaction has as its main objective tax fraud or evasion. Now, the clearance requirement is precisely a mechanism to verify the absence of fraud. The Council concluded that Articles 210 B and 210 C are not incompatible with the directive, and therefore do not violate the Constitution.

In short, the judges validated the practice of the authority: it can require clearance to ensure that the transaction has real economic substance, and is not merely a tax scheme. However, note that the refusal of clearance must be reasoned and can be challenged before the courts. But in Mr. John's case, the authority had established that the successive sales of land, followed by the contribution to the holding company, had the sole purpose of avoiding tax. The Council therefore confirmed that deferral can be refused in such cases.

What few people know is that this decision actually strengthened the position of the French tax authorities. Since then, many taxpayers have had their deferral applications rejected, and the administrative courts are reluctant to overturn a refusal of clearance, unless the authority has made a manifest error of assessment.

What this means for you — in practice

If you are the owner of a property in Nice or Grasse, and you are considering contributing that property to a company to benefit from a tax deferral, this decision directly concerns you. First of all, you need to know that deferral is not automatic: it is subject to prior clearance from the tax authority. Without this clearance, you will have to pay tax on the capital gain in the year of the contribution.

Let's take a concrete example: you own a villa in Grasse bought for €200,000 in 2005, and now valued at €500,000. The gross capital gain is €300,000. If you contribute this villa to an SCI that you set up, and clearance is refused, you will have to pay about 36% of this gain (after reliefs for length of ownership), i.e., nearly €108,000 in tax and social security contributions. This sum could jeopardise your cash flow.

For property developers, the stakes are even higher. A merger between two companies holding building plots can generate capital gains of several million. Without clearance, the tax becomes immediately due. undefined, I encountered a case in Antibes where a developer had to sell a plot urgently to pay the tax, having counted on the deferral to finance a project. Result: a net loss of several hundred thousand euros.

If you are in this situation, you must absolutely submit a clearance application before the transaction. But be careful: simply submitting the application does not guarantee its approval. The authority examines whether the transaction has a real economic motive (e.g., restructuring to simplify management, obtaining financing) or whether it is solely aimed at avoiding tax. To maximise your chances, it is advisable to prepare a solid file, with a note explaining the economic reasons for the transaction, accounting documents, and possibly an expert opinion.

Four tips to avoid this type of dispute

• Anticipate the clearance application: Never carry out a merger or contribution of shares without having obtained prior clearance. The processing time is 4 to 6 months. Plan for this timeframe in your schedule.
• Justify the economic interest: In your application file, demonstrate that the transaction meets a real need: improved management, access to financing, business transfer, etc. Avoid arrangements that appear artificial.
• Document the value of the assets: Have an estimate carried out by a (accredited) property expert to justify the capital gain and show that the transaction is not undervalued. In Grasse, prices per square metre range from €3,000 to €6,000 depending on the district; an accurate estimate can avoid a reassessment.
• Consult a tax lawyer before the transaction: Advice upfront costs less than litigation. We can help you structure the transaction to meet the authority's requirements, and prepare the clearance application with the appropriate arguments.

Further information: related case law and developments

This decision of the Constitutional Council is part of a line of case law that restricts the possibilities of tax deferral in the absence of clearance. For example, the Conseil d'État, in a judgment of 13 July 2016 (no. 375081), recalled that the refusal of clearance can be based on the absence of a real economic motive, even if the transaction is formally legal. Similarly, the Court of Justice of the European Union (CJEU), in the Foggia case (2013), held that States may refuse deferral if the transaction is abusive.

On the other hand, several earlier decisions annulled refusals of clearance when the authority had not sufficiently reasoned its decision. The current trend is therefore towards tighter scrutiny by the tax authorities, but also towards a reinforced requirement of reasoning. For the future, it is likely that clearance conditions will become even stricter, particularly for transactions between related companies.

What this means for you: if you have a restructuring project, do not wait. The sooner you submit your clearance application, the better. And if clearance is refused, know that you can challenge it before the administrative court, but with limited chances if the transaction has no real economic substance.

Summary and next steps

FAQ:

• Q: Can I benefit from a tax deferral without clearance?
  A: No, deferral is subject to prior clearance from the tax authority. Without clearance, the capital gain is immediately taxable.
• Q: What should I do if my clearance application is refused?
  A: You can challenge the refusal before the administrative court within two months. But be careful, the judge only checks whether the authority made a manifest error of assessment.
• Q: What are the deadlines for obtaining clearance?
  A: The authority has 4 months to respond from the date of submission of the complete application. After this period, silence constitutes an implied refusal.
• Q: Can I regularise a transaction already carried out without clearance?
  A: No, deferral must be applied for before the transaction is carried out. If you have already made the contribution without clearance, you are taxed on the capital gain.
• Q: What is the cost of a consultation with a lawyer lawyer?
  A: A first 30-minute consultation with Maître Zakine costs €45. This can save you from costly mistakes.

Are you in a similar situation? A first 30-minute consultation with Maître Zakine (€45) can save you months of proceedings — and often much more. Book an appointment →