EU court’s rejection of French law opens up new opportunity to recover dividend withholding tax

by Terence Wilhelm, CARA Société d’Avocats, France

In a judgment dated November 22, the Court of Justice of the European Union ( CJEU) ruled that the currently-applicable French withholding tax scheme applicable to loss-making parent companies disregards EU rules requiring the free movement of capital.  

This new ruling provides multinationals with new opportunities to recover withholding tax paid on dividends from EU subsidiaries.

The case

The case, (Case C-575/17, Sofina SA, Rebelco SA, Sidro SA), involves a request made in the context of a dispute between, on the one hand, Sofina SA, Rebelco SA and Sidro SA, which are companies incorporated under Belgian law, and, on the other, the French Minister for Public Accounts regarding the latter’s refusal to reimburse withholding tax levied on the dividends paid to those companies between 2008 and 2011.

The context was the following: between 2008 and 2011 Sofina, Rebelco and Sidro received dividends as shareholders in French companies. Pursuant to Article 119bis(2) of the French tax code, read in conjunction with Article 15(2) of the France-Belgium Tax Convention, those dividends were subject to withholding tax at a rate of 15%.

Since the financial years for the appellants in the main proceedings between 2008 and 2011 were loss-making, they submitted claims to the French tax authority, seeking reimbursement of the withholding tax levied on dividends paid during those financial years. The main argument they held is that French parent companies receiving dividends from French subsidiaries would not immediately be subject to such withholding tax if they were carrying deficits.

When those claims were dismissed, the appellants in the main proceedings brought actions before the competent courts which, at first instance and on appeal, dismissed their applications for reimbursement.

French administrative Supreme Court appeal

The appellants in the main proceedings then brought an appeal on a point of law before the French administrative Supreme Court.

This administrative Supreme Court notes, first, that the application of withholding tax attached to the dividends paid to loss-making non-resident companies with respect to their holdings in resident companies creates for those companies a cash-flow disadvantage as compared with loss-making resident companies.

The French Supreme Court sought, however, to ascertain whether that fact constitutes in itself a difference in treatment to be classified as a restriction on the free movement of capital, which is prohibited, in principle, by Article 63 of the Treaty on the Functioning of the European Union (TFEU).

On the assumption that the national legislation at issue in the main proceedings does constitute such a restriction, the French administrative Supreme Court was uncertain, secondly, whether that restriction might be justified, in the light of the objective of that legislation, that is, the effective collection of tax.

Thirdly, and in the alternative, if the principle of a withholding tax at issue, in this case, were to be accepted, the Supreme Court sought to ascertain, in the first place, whether the fact that the loss-making resident company which ceases trading thereby obtains a de facto exemption from the taxation of dividends which it received in the loss-making financial years is liable to have an influence on the examination of whether the national legislation at issue in the main proceedings was compatible with Articles 63 and 65 TFEU.

In the second place, the French administrative Supreme Court states that the differences in the way the base for taxing dividends is calculated, depending on whether the recipient company is resident or non-resident, may also constitute a restriction on the free movement of capital. Where the withholding tax provided for in Article 119bis of the French tax code is calculated on the gross amount of the dividends, the expenses linked to their actual receipt are deducted from the base for calculating the tax chargeable on dividends paid to a resident company.

In those circumstances, the French administrative Supreme Court decided to stay proceedings and to refer questions to the CJUE for a preliminary ruling by subjecting withholding tax to dividends paid to loss-making Belgian companies on the grounds that, in the same situation, a resident shareholder company would not have borne any tax in respect of the dividend distribution year.

CJEU ruling

Under this framework, the CJEU found that the combined application of French domestic tax regulations and the France-Belgium tax treaty leads to the conclusion that dividends paid to a non-resident company are subject to immediate and definitive taxation in France, by means of withholding tax, regardless of the taxable income, profit or loss, of the non-resident company.  At the same time, however, a French resident company that receives similar dividends would only be taxed on such income only if its tax result is profitable, the court noted.

If said domestic parent company is loss-making, the French company may be taxed only later, in case it turns profitable. It may even benefit in practice from a complete exemption if said company is indefinitely loss-making or ceases its activity before being returned beneficial, the court said.

It follows that the withholding tax currently provided for by French law, which does not allow non-resident companies to benefit from such a deferral of taxation, introduces a difference in treatment contrary to the freedom of movement of capital between loss-making companies receiving dividends according to whether they are resident or not, the court concluded.

New withholding tax recovery opportunities

This judgment opens the way for claims.

The resulting litigation opportunity relates primarily to French affiliates of foreign parent companies that are resident in the European Union, or, under certain conditions, resident of a non-EU country, who have incurred a withholding tax at the source because of the dividends they paid to their non-resident shareholders, when these are in a loss-making position.

The same holds true the other way around: French loss-making parent companies can challenge the withholding tax levied on the dividends they receive from a subsidiary resident in the EU if such withholding tax would not be levied had the transaction occurred in a domestic environment.

The judgment, dated November 22, indeed opens the way to bring an action for restitution to the country of establishment of the subsidiary, under the forms and conditions provided for by its domestic law.

Finally, one may also question the applicability of such judgment to those withholding taxes levied as a result of a primary transfer pricing adjustment.

In France notably, indirect transfer of profit by way of non-arm’s length transactions are viewed as deemed dividends. These normally follow the same fate as the “pure” dividends. As such, the withholding tax that may have been levied could in principle be challenged on the ground of this ruling.