No reassessment of the sale price by the French tax authorities in the absence of evidence of concealed consideration

Facts

A company incorporated under Swiss law disposed of a real estate property located in France on 19 January 2011. In respect of the capital gain realized on that occasion, it paid the withholding tax provided for in Article 244 bis A of the French General Tax Code (the “FTC”). Following a tax audit, the French tax authorities (the “FTA”) took the view that the sale price of this real estate complex was lower than its fair market value and, consequently, assessed additional withholding tax under Article 244 bis A of the FTC on the company Sarf Azur, acting as the accredited representative of the seller, together with the 25% penalty provided for in Article 1761 of the FTC.

Sarf Azur contested this additional assessment, unsuccessfully, before the Administrative Court of Nice and then before the Administrative Court of Appeal of Marseille.

No increase in the sale price in the absence of an under the table payment

The Council of State ruled in favour of the taxpayer, holding that the FTA were not lawfully entitled to substitute, for the sale price stipulated in the notarized deed, an amount corresponding to the fair market value of the real estate complex transferred, as they had failed to establish that the contractual sale price was lower than the price actually agreed between the parties to the transaction, which, according to the FTA, would have been equal to the fair market value that they retained (Council of State, 9th and 10th Chambers, 24 February 2026, No. 496482, Sté Sarf Azur).

Pursuant to Article 244 bis A of the FTC, in the version applicable to the case at hand, capital gains realized on an occasional basis by legal entities whose tax residence is located outside France upon the disposal of immovable property situated in France are subject to a withholding tax at the standard rate of 33 1/3% (25% under current law). Where the withholding tax is due by a legal entity liable to corporate income tax, the taxable capital gain is determined as the difference between, on the one hand, the consideration for the transfer of the property and, on the other hand, its acquisition price, reduced, in the case of constructed buildings, by an amount equal to 2% of such price for each full year of holding. Where the seller is liable to corporate income tax, the withholding tax is not final but is creditable against such tax. The withholding tax accordingly constitutes a levy that is distinct from corporate income tax.

For the purposes of determining the withholding tax due by legal entities subject to corporate income tax, the Council of State confirms that the sale price corresponds to the consideration stipulated in the deed, in accordance with the provisions of Article 244 bis A of the FTC. That price may be challenged only in the event of a concealed price, namely where the parties have intentionally stated in the deed an amount lower than the price actually paid. In the absence of such concealment, the FTA may not lawfully disregard the sale price stipulated in a notarized deed and substitute for it the fair market value of the property, even where the agreed price is lower than that fair market value.

Options available to the French tax authorities

It should be recalled that the FTA may also add back the difference between the sale price and the fair market value of the property to the taxable profits of the seller on the basis of an abnormal act of management where the latter is liable to corporate income tax in France. In such a case, however, the purpose is not to adjust the capital gain declared by the taxpayer for the calculation of the withholding tax under Article 244 bis A of the FTC. The undervaluation is treated as a gratuitous benefit, characterized as a distribution of corporate assets which, according to the case law of the Council of State, is subject to corporate income tax under the ordinary rules and therefore cannot benefit from the preferential regime applicable to business capital gains.

The FTA may also tax the gratuitous benefit in the hands of the purchaser. In such a case, however, the FTA bear the burden of proving the purchaser’s involvement in the transaction in order to tax, in the hands of that purchaser, the income deemed to have been distributed.