The European Court of Justice, in Groupe Steria SCA, has ruled that EU freedom of establishment principles are infringed by French laws that give only domestic companies the opportunity to join a French group and take advantage of a special tax integration regime that allows a full income tax deduction for dividend income.
Under French law, dividends received by a resident parent company are deducted from the net profits of the parent company, except for a proportion of costs and expenses fixed at 5 percent of the net amount of the dividends received.
This add-back of the proportion of costs and expenses to the profits of the parent company is neutralised if parent company is part of a tax-integrated group for dividends distributed by subsidiaries belonging to that group. Under French law, such groups can only include French companies.
The ECJ said the French scheme deters parent companies from setting up subsidiaries in other Member States, and thus is not compatible with EU law on freedom of establishment.
The court noted at that the judgement in X Holding (C‑337/08, EU:C:2010:89) confirms that EU freedom of establishment provisions do not preclude a tax regime allowing a parent company to form a single tax entity with a resident subsidiary but not a nonresident subsidiary.
However, the court also said that the decision in X Holding does not imply “that any difference in treatment between companies belonging to a tax-integrated group, on the one hand, and companies not belonging to such a group, on the other, is compatible with Article 49 TFEU.”
Rejecting arguments advanced by France, the Netherlands, and the UK, the Court said that in the instant case, the different treatment cannot be justified by the need to safeguard the balanced allocation of the power to impose taxes between the Member States, nor can it be justified by a need to safeguard the cohesion of the tax system.
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EU tax experts: will this case open up challenges in other EU countries that only allow domestic companies to join tax-integrated groups? Please share your thoughts in the comments below.
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