Settlement payments and abuse of rights: an exclusively fiscal purpose that is sometimes absent when the settlement payment serves as collateral

A taxpayer contributed the shares he held in a company to a Luxembourg company on the same day the latter was incorporated. In consideration for this contribution, valued at 40 million, he received 36,400,000 shares in the Luxembourg company and a cash adjustment of 3,600,000 euros. This cash adjustment was credited to the taxpayer’s shareholder current account.

For tax purposes, the capital gain realized on the contributed securities, including the portion corresponding to the cash adjustment, qualified for the tax deferral regime provided for in Article 150-0 B ter of the General Tax Code.

Following a tax audit of the individual,administration that the existence of the cash settlement constituted an abuse of rights and subsequently assessed additional taxes against the taxpayer on that basis.

On the contrary, the latter considered that the transactions had not been carried out for exclusively tax-related purposes—a necessary condition for the existence of an abuse of rights—because:

• “This cash payment, which is readily available and easily accessible, has contributed to the group’s international expansion by serving as additional collateral for banks and regulatory authorities”

• “The purpose of stipulating this cash adjustment cannot be to obtain tax-free cash, since the disputed amount, credited to the taxpayer’s partner current account, was not actually received by the taxpayer”

The Administrative Court of Appeal first notes that these two reasons certainly do not prove that the existence of the cash adjustment“would have enabled the restructuring transaction to be completed or would have compensated the contributor for a disadvantage resulting from the contribution transaction.” It emphasizes, however, that this does not mean that the existence of the cash adjustment cannot have a justification other than a tax-related one.

The Court then noted thatadministration dispute that the guarantee provided by the shareholder was not equivalent to that provided by the company itself. Moreover, in assessing the taxpayer’s financial strength, the Luxembourg authorities had taken into account the existence of the shareholder’s current account, into which the cash adjustment had been deposited.

The judges also point out that, although there is no freeze clause on the taxpayer’s checking account, the taxpayer had never taken possession of the cash settlement credited to that account.

The Court therefore concluded that“the provision regarding the cash settlement at issue served, at least in part, a purpose other than a tax-related one, and thus cannot be regarded as constituting an abuse of rights.”

The tax assessment is therefore rescinded.

CAA Paris, June 13, 2025, No. 23PA03534

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