Carlyle wins tax fight over €375 million real estate deal

Carlyle Group won a tax fight with the French government over a Paris real estate investment it sold a decade ago for about €375 million, just months after Google was spared a €1.12 billion bill in a similar dispute.

The Paris administrative court of appeals ruled last month that a lower tribunal was wrong in 2015 to force a Carlyle-backed company based in Luxembourg to pay €105 million in taxes on the sale of the headquarters of the so-called "Imprimerie Nationale," the official French printing works.

Judges decided in the previously unreported December 14 ruling that there is no evidence to show that the affiliate, which is part of a Carlyle European real estate fund, should be considered as operating in France rather than in Luxembourg for tax purposes.

As such, Cerep Imprimerie, can't be taxed as if it also has a permanent base in France, as requested by the nation's administration.

"Cerep Imprimerie did indeed undertake work as a realty developer from its Luxembourg headquarters," the Paris administrative court of appeals said.

Judges dismissed the French tax administration's claim that Carlyle used the premises of a company based in France to conduct its operations. 

They said it was the Luxembourg-based unit that led the acquisition of the building and its financing, oversaw the development of the property, and decided to sell the revamped building.

Tax hunt

The setback to France comes as national and EU officials try to find ways to recover funds companies earn within their borders but stow in tax-friendly countries.

In December, European authorities said they would investigate whether Inter Ikea, which operated the Swedish furniture maker's franchise business, got an unfair advantage over rivals with a tax deal with the Netherlands.

EU officials have ordered Apple, Starbucks and Amazon.com to repay some taxes and opened probes of other businesses.

Authorities in France have been trying for a slice of the profits of several US multinationals with European headquarters in Ireland or Luxembourg.

France is trying to show that the companies should pay more by proving that they conduct operations locally, through a so-called taxable permanent establishment.

In one of their most high-profile tax probes in this area, Google faced both civil and criminal proceedings.

While it won a September victory at the Paris administrative court to fend off the €1.12 billion tax bill, the Alphabet unit is still under investigation following a May 2016 raid at its Paris offices that French prosecutors spent months preparing offline to prevent leaks.

Treaties

Chris Ullman, a Carlyle spokesman, declined to comment because the ruling is subject to appeal. 

Operating through a Luxembourg unit allowed Carlyle – as well as other investment firms – to take advantage of the country's long-standing tax treaty with France.

The affiliates were exempt from taxes on rental income from French properties, and wouldn't face the 33% tax on real estate capital gains after sales.

France negotiated with Luxembourg to change the agreement in 2006 and narrow the tax exemptions, prompting foreign funds to sell real estate to realise profits before the amendments took effect in 2008.

Carlyle's Luxembourg affiliate agreed in 2003 to pay the French government €85 million to acquire the Imprimerie Nationale building.

After spending €120 million on renovations, the affiliate sold it back to the government in 2007 for a tax-free profit of roughly €170 million.

French stir

The sale and subsequent buyback less than four years later at more than four times the original price created a huge stir in France.

This ultimately led to a tax inspection and an adjustment request that Carlyle contested in court.

Ruling in 2015, the Paris administrative court decided that the fund's Luxembourg unit had a permanent establishment in France, and ordered the affiliate to pay €105 million in taxes, penalties and accrued interest on profits from the sale, according to regulatory filings.

Judges at that court said that Cerep Imprimerie had no employees at its Luxembourg premises and relied in fact on a French company – Crea France – to conduct the real estate operation.

The Luxembourg affiliate appealed, leading to last month's ruling.

Baupost is also facing a similar dispute with the French government over profits made on investments in the country that has even led a partner to be ordered to face trial for tax fraud.