France’s additional tax on dividends is contrary to law, EU court concludes

May 19, 2017 Europe, European Court of Justice, Featured News, France
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by Davide Anghileri

France’s additional tax on dividends is not compatible with article 4 of the parent-subsidiary directive and is thus contrary to European law, the European Court of Justice ruled 17 May.

The case, C-365/316, arises from a dispute between the French ministre des Finances et des Comptes public and the Association française des entreprises privées (AFEP) joined by 17 undertakings.

At issue is the compatibility of 235 ter ZCA of the French code général des impôts (General Tax Code) with article 4 of the parent-subsidiary directive.

The French legislation provides that, in addition to corporation tax to which a resident parent company is subject on the distribution of profits, including those made by its non-resident subsidiaries, companies which have received income from holdings in subsidiaries are subject to an additional contribution of 3 percent of sums redistributed.

The contribution applies not on the receipt of dividends but on the redistribution of those dividends by the company that has received them. Moreover, the basis of assessment of the additional contribution, which includes, in particular, distributed profits derived from accrued profits, is different from that for corporation tax.

In its decision, the ECJ ruled that the legislation is not consistent with article 4 of the parent-subsidiary directive as it creates double taxation at the level of the parent company.

This is contrary to the aim of the parent-subsidiary directive which has the objective of eliminating double taxation of profits distributed by a subsidiary to its parent company at the level of the parent company. Thus, any taxation of profits, which would have the effect of making profits subject to taxation exceeding the ceiling of 5% laid down in article 4(3) of that directive, is contrary to the directive, the Court said.

The ECJ also pointed out that it is irrelevant whether or not the tax measure is classified as corporation tax because article 4 of the directive applies to every tax and it does not make its application subject to a tax in particular.

Moreover, the distinction that the taxable event is the receipt of profits distributed by a subsidiary to its parent company or their redistribution is irrelevant because article 4 of the directive provides that the Member State of the parent company and the Member State of the permanent establishment are to “refrain from taxing such profits,” the Court said.

Davide Anghileri

Davide Anghileri

Researcher and lecturer at University of Lausanne

Davide Anghileri is a PhD candidate at the University of Lausanne, where he is writing his thesis on the attribution of profits to PEs. He researches transfer pricing issues and lectures for the Master of Advanced Studies in International Taxation and Executive Program on Transfer Pricing.

Anghileri, a Contributing Editor at MNE Tax, previously worked as a policy advisor to the Swiss government on BEPS issues.

Davide can be reached at [email protected].

Davide Anghileri
Davide can be reached at [email protected].