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Closure of a Sole Permanent Establishment in France: No Carryback of the Final Loss

Published on : 03/11/2026 03 November Nov 11 2026
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Conseil d’Etat, October 23, 2026, No. 509327, Irem SpA.
A foreign company that closes its sole permanent establishment in France undergoes a total cessation of business for purposes of Article 220 quinquies of the French Tax Code, even if it continues its activities elsewhere. It may therefore not carry back the tax losses incurred in that final fiscal year. The Conseil d’Etat held that this exclusion is compatible with the freedom of establishment.
 

The Facts

The Italian company Irem SpA operated a sole permanent establishment in France, created on July 8, 2013. It was subject to French corporate income tax only on the profits of that establishment. The establishment ceased operations on December 31, 2016 and was removed from the Trade and Companies Register on February 23, 2017.
On July 31, 2017, the company claimed a refund of a EUR 243,386 receivable that it believed had arisen from the carryback of the loss for the fiscal year ended December 31, 2016. The Lyon Administrative Court, followed by the Lyon Administrative Court of Appeal, denied the claim. The Conseil d’Etat dismissed the company’s appeal on points of law.

A Total Cessation of Business

Section II of Article 220 quinquies of the French Tax Code precludes the election for a fiscal year in which a total cessation of business occurs. The company argued that its cessation was only partial because it continued its activities outside France.

The Conseil d’Etat rejected that argument. It noted that, according to the legislative history, the loss carryback mechanism is intended to facilitate a prompt restoration of profitability for loss-making companies and the continuation of their business. It therefore concluded that a foreign company subject to French corporate income tax solely on the profits of its permanent establishment may not make the election for the fiscal year in which it closes that establishment and ceases all activity in France. The continuation of activities abroad is irrelevant.

The company also relied, pursuant to Article L. 80 A of the French Tax Procedure Code, on paragraph 50 of BOI-IS-DEF-20-10, which concerns an election made through a claim following a tax audit. The argument was rejected: that guidance does not override the exclusion applicable in the event of a total cessation of business.

No Infringement of the Freedom of Establishment

The company compared its position with that of a French company that closes a branch while continuing to operate in France, which retains the right to make the election. The Conseil d’Etat followed a two-step analysis:
  • No difference in treatment: while the permanent establishment remains active, the foreign company may make the election on the same basis as a resident company. Neither may do so in the year in which it totally ceases its business;
  • No comparable situations: in light of the purpose of the mechanism and the nature of the receivable, a foreign company that ceases to be subject to French corporate income tax is not in an objectively comparable situation to a French company that closes a branch but remains subject to that tax.
In this situation, the analysis therefore turns on the cessation of all taxable activity in France, assessed in light of the purpose of the mechanism, rather than solely on the company’s nationality.

The End Date of Operations Is Decisive

The decision makes the effective date on which operations cease particularly important. The exclusion applies only to the fiscal year in which the total cessation occurs. If the cessation had occurred during the following fiscal year, the 2016 loss could, in our view, have been carried back, provided that the other requirements of the mechanism, including the election deadline, were met. Making the election after the closure should not, by itself, prevent the carryback where the election relates to a fiscal year preceding the year of cessation. This interpretation highlights the impact of a cessation occurring on either side of the fiscal year-end, but it is not expressly endorsed by the decision.

The stated date must, however, reflect the facts. It does not necessarily coincide with the date on which deregistration formalities are completed. Irem’s establishment was removed from the register on February 23, 2017, but the dispute was decided on the basis that operations ceased on December 31, 2016, a date that was not disputed before the Conseil d’Etat.

In practice, a company planning to close its French operations should therefore:
  • document the effective end date of operations, including completion of services, final invoicing, and termination of employment agreements and leases;
  • ensure that this date is consistent with the date reported to the tax authorities and that the cessation requirements are met. Articles 201 and 221 of the French Tax Code notably require notice within 45 days after the permanent closure of establishments, separately from the income tax return due within 60 days;
  • confirm that any continuation of activities beyond the fiscal year-end is genuine and serves a real business need. Merely maintaining, as a matter of form, an establishment that has become inactive is not sufficient to defer the cessation date.
Preserving the right to make the election would not, however, result in an immediate refund. Under the ordinary rules, the unused portion of the receivable is refundable at the end of the five-year period following the year in which the fiscal year for which the election was made ended. Early refunds are available in particular in conciliation, safeguard, reorganization, or judicial liquidation proceedings, without prejudice to any temporary measures that may apply. If no French corporate income tax is due, the company could not use the receivable to pay that tax in the meantime. The decision does not address the treatment of a receivable validly created for a fiscal year preceding the cessation, including its refund after the company leaves the scope of French corporate income tax.

The closure of French operations should therefore be anticipated before the end of a loss-making fiscal year. As for the Italian company, any recognition of its losses in Italy requires a separate analysis, including whether the losses are final and the application of Italian rules. This avenue, mentioned by the public rapporteur, does not arise from the decision under review. It forms part of an evolving line of case law illustrated by Cases C-287/25 to C-289/25 concerning losses of nonresident subsidiaries and the scope of the Marks & Spencer case law, whose application to a permanent establishment cannot be presumed.
 
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