Court Holds Passive Foreign Investment Company Regime To Be Incompatible with Freedom of Establishment and Free Movement of Capital

On 22 August 2008, the Court of Appeals of Nantes Court of Appeals of Nantes, 22 August 2008, Case No. 07NC00783. held that the French anti-abuse provision regarding foreign personal holding companies (FPHC) A personal holding company is usually engaged in passive investment activities and is typically owned by a small number of individuals. For anti-avoidance purposes, some countries may subject the shareholders to additional tax by deeming the income of the company to be distributed directly to the shareholders for the purpose of computing their individual income tax liability. located in a low-tax Jurisdiction was incompatible with the freedom of establishment Art. 43 EC Treaty. and the free movement of capital. Art. 56 EC Treaty. This note describes the French provision, the case and the Court’s decision, and presents a brief analysis regarding the European Court of Justice (ECJ) Judgments in respect of abuse and comparable anti-abuse provisions.