France’s application of general antiabuse rules (GAAR) to deny a withholding tax exemption for dividends distributed by a French company to its Luxembourg parent is incompatible with both the parent-subsidiary directive and EU fundamental freedoms, concludes Advocate General Kokott of the Court of Justice of the European Union (ECJ) in a 19 January opinion.
The case, Eqiom SAS, previously Holcim France SAS Enka SA v Ministre des finances et des comptes publics (C-6/16), concerns the circumstances in which a member state may refuse — on grounds of preventing tax evasion or abuse — an exemption from withholding tax that would normally be granted on the distribution of dividends by a resident subsidiary to its non-resident parent company by virtue of the parent-subsidiary directive.
In particular, the analysis concerns the refusal by the French tax authorities to exempt dividends distributed by a French resident company to its Luxembourg parent company which was, in turn, indirectly controlled by a company resident in Switzerland.
The French tax code automatically denies the exemption if the taxpayer’s parent is controlled by a non-EU residents and it does not prove that the principal purpose behind the structure is not to take advantage of the exemption.
The questions referred to the ECJ addressed in particular whether the French rules were compatible with, on the one hand, article 1(2) of the parent-subsidiary directive, which allows the withholding tax exemption to be denied on the grounds of preventing fraud or abuse and, on the other, the EU fundamental freedoms.
France, Denmark, Italy, Spain, Germany, and the European Commission intervened in the case, revealing the importance of this judgment and the potential implication of the final decision within the EU.
Parent-subsidiary directive
Starting from the principle that EU law cannot be relied on for abusive and fraudulent ends, the AG pointed out that article 1(2) of the directive reflects the principle that any abuse of law is prohibited and it provides an exception to the general application of the parent-subsidiary directive. Therefore, article 1(2) of the directive must be interpreted strictly.
In the case at stake, the French legislation provides a presumption of abuse if the company receiving the dividends is directly or indirectly controlled by a person not resident in the EU. Therefore, it is the beneficiary that must prove that the business structure of the group has a commercial reason and that it is not only established for tax purposes.
The AG said that France’s approach goes beyond what is required to prevent tax evasion, as the tax administration does not have to provide sufficient indications of tax evasion, while the taxpayer has all the burden of proof.
Moreover, the AG affirmed that direct or indirect control by shareholders in third states cannot be regarded as an indication of tax evasion. She said that the tax treatment of profit distributions to companies outside the EU cannot be automatically considered more favourable in the member state of the ultimate beneficiary than it is in France.
The AG therefore concluded that the refusal to grant an exemption from withholding tax based on a general presumption that a distribution will involve tax evasion is not permissible under the directive as it precludes a test of objective and verifiable facts.
Fundamental freedoms
The AG also concluded that the French legislation affects freedom of establishment as it restricts dividend payments to persons that are in turn directly or indirectly controlled by one or more persons not resident in the EU and because the law affects only payments to nonresident companies, while dividend payments to resident companies are not affected by the provision under scrutiny.
Furthermore, the AG pointed out that the French measure cannot be justified by overriding reason in the public interest. In fact, it cannot be said that the aim of the rule is to prevent tax fraud and evasion, the AG said.
The AG argues that the provision at stake goes beyond what it is required to prevent tax evasion. On the one hand, a general presumption of tax evasion based only on the residence of the ultimate beneficiary cannot justify a restrictive tax measure. On the other hand, the withholding tax exemption cannot be denied without the tax authorities being obliged to provide sufficient indications of tax evasion, which is not accomplished if the burden of proof is on the beneficiary.
Hence, the AG concluded that article 1(2) of the parent-subsidiary directive and freedom of establishment precludes the French law.
Davide Anghileri
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].
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