France amends rules regarding withholding tax calculation for dividends

By Nathalie Valluis, French Tax Lawyer, Paris

If adopted as it stands, Article 7 of the French Finance Bill for 2022, released September 22, will allow non-resident legal entities to re-calculate the withholding tax applicable to dividends from French sources on a net basis.

Specifically, as of January 1, 2022, and subject to validation of the draft Finance Bill by the French Parliament, non-resident legal entities will be entitled to file a tax claim in France to obtain reimbursement of the difference between the French withholding tax paid on the gross amount of dividends received from French companies and the French withholding that would have been paid on a net dividend amount.

This change is the direct consequence of the French Conseil d’Etat (French highest administrative jurisdiction) decision dated May 11, 2021 (n°438135). According to the Conseil d’Etat, the current rules violate the European principles of the free movement of capital and of freedom to provide services. As a matter of fact, French companies’ earnings, including dividends received, are taxed after deduction of related costs, and foreign companies are taxed, through withholding tax, on the total amount of French dividends received.

The following conditions will have to be fulfilled to benefit from the new provisions.

The beneficial owner must be a legal person or an entity whose profits are not subject to personal income tax payable by its shareholder.

The beneficial owner’s registered office or the permanent establishment being taxed on the French dividends must be located in a member state of the European Union, a member state of the European Economic Area or a state outside the European Economic Area that has a tax administrative assistance agreement with France. In this last case (state outside the European Economic Area), the shareholding must not allow the beneficial owner to effectively participate in the management or control of the French distributing company.

A further condition is that the costs incurred and included in the net basis calculation would be tax deductible if the beneficial owner were located in France.

Finally, the tax rules of the shareholder’s state of residence must not allow a deduction for the French withholding tax.

The final vote on the Finance Bill for 2022 will take place at the end of December 2021. If adopted, the provisions of Article 7 will apply to taxable events taking place as of January 1, 2022.

–Nathalie Valluis is a French tax lawyer in Paris.