Sale Of Stock Subject To French Transfer Pricing Rules

; posted on
February 12th, 2019

The French Council of State has upheld a transfer pricing adjustment to the sales price of a subsidiary’s shares, holding that the sale of a subsidiary’s stock for nominal consideration is an indirect transfer of profit.


The taxpayer, a French limited company, sold stock in two subsidiaries to a Luxembourg subsidiary for amounts well below market value. Since the sale of stock occurred between the related parties, the tax authority imposed pricing adjustments on abnormal acts of management that indirectly transfer profit to the related party.

The tax authority adjusted the price by computing the average of a cash flow valuation and a valuation based on profitability. Although the value of the stock should be determined using the company’s share price or the price of shares in comparable companies whenever possible, valuing stock based on profit or cash flows is permitted for sales of restricted shares.

The Decision

In its decision, the council of state reiterates that to the extent an enterprise made a management decision, in this context the selling of stock, under which the price setting was made at a price significantly lower than the market value, competent authorities are allowed to test such transaction under the transfer pricing rule as mandated by article 57 of France’s General Tax Code even though the general law generally prohibits the tax administration from questioning management decision. Therefore, according to the council, the tax authority correctly adjusted the stock price in such related parties transaction as the taxpayer failed to explain the driven economic reason.

To perform the transfer pricing adjustment, the market value of the stock under equivalent conditions of the taxpayer should be used as a comparable transaction to test the stock price set up by the taxpayer. However, in the absence of such transactions, it can legally be based on the combination of several alternative methods. In this regard, the state of council agrees to the method used by the tax auditor by computing the average of a cash flow valuation and a valuation based on profitability.

The decision also upholds the denial of the reduced rate for capital gains on the adjustment amount that would have been available had the shares been sold at market value. The state council argues that the price gap between the taxpayer’s price and market price constitutes a gift and therefore could not be taxed according to the special regimes applicable to the business gains for long-term capital gains on equity securities issued by a corporation subject to corporation tax.

Source: French Government

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