Capital Reduction Through Share Buybacks vs. Dividend Distributions: Is This an Abuse of Tax Law or Not?

A recent ruling by the Toulouse Administrative Court of Appeal (CAA), 1st Chamber, dated February 12, 2026, No. 24TL00941, sheds some interesting light on the matter.

The Facts
• A company carried out a capital reduction—not motivated by losses—by repurchasing and then canceling shares held by its sole shareholder.
• The shareholder reported the gain realized under the capital gains tax regime for securities, applying the enhanced 85% holding period deduction.
• The tax authorities invoke the abuse of rights procedure (LPF, Art. L.64) and argue that the transaction had no economic justification, its sole purpose being to allow the withdrawal of reserves under a more favorable tax regime than that applicable to distributions.

The CAA’s Position—It rules out abuse of tax law and notes, in particular, that:
• The company had carried out capital increases through the capitalization of reserves several years earlier,
• Its business had declined significantly, justifying an adjustment to its financial structure,
• The capital reduction fell within the scope of the company’s managerial discretion.

➡️ Under these circumstances, there is no evidence of an exclusively tax-related purpose.

Note: The Committee on Tax Law Abuse had already ruled out tax law abuse in this case, noting:
• The principle of free choice of the option subject to the lowest tax, given that the taxpayer had merely opted, for a one-time, non-recurring transaction, for a capital reduction rather than a dividend distribution.
• He had, however, emphasized that this freedom is limited when the transaction constitutes an artificial arrangement.
• The agency had nevertheless decided not to follow the committee’s recommendation, which meant it would have to bear the burden of proving abuse of rights before the court.

Practical Guidance ➡️ A corporate transaction that results in a tax benefit is considered abusive only if it lacks any real economic justification.
• A capital reduction followed by a share buyback can remain tax-safe as long as it is part of an economic rationale consistent with the company’s situation.
• A useful reminder in a context where the tax authorities are paying particular attention to cash-out transactions.

While this decision is reassuring for taxpayers, caution is still warranted! Capital reduction transactions involving the repurchase of securities must always be analyzed on a case-by-case basis to ensure that they are based on a genuine economic justification and to avoid the pitfall of tax law abuse.

The Farewell team works with you to ensure these transactions are legally and fiscally sound and to anticipate risks early on.