Home > Countries > France > A four billion euro blow to France’s budget: EU law does not allow different withholding tax treatment in respect of dividends received by resident and non-resident mutual funds.
A four billion euro blow to France’s budget: EU law does not allow different withholding tax treatment in respect of dividends received by resident and non-resident mutual funds.

A four billion euro blow to France’s budget: EU law does not allow different withholding tax treatment in respect of dividends received by resident and non-resident mutual funds.

On10 May 2012, in a much awaited decision, following a referral from the Administrative Court of Montreuil, the Court of Justice of the European Union decided that the French legislation that imposes a withholding tax on French-source dividends when paid to Undertakings for Collective Investments in Transferable Securities (UCITS) resident in another Member State, infringes the free movement of capital principle enshrined by Articles 63 and 65 of the treaty on the functioning of the European Union (TFEU).

Article 63 of the TFEU prohibits all restrictions on the movement of capital between Member States and betweenMemberStatesand third countries. Pursuant the article 65 (1)(a) of the same treaty, however, that prohibition does not affect the right of Member States to apply the relevant provisions of their tax law which distinguish between taxpayers who are not in the same situation with regard to their place of residence or the place where their capital is invested. But article 65(3) of the TFEU stipulates that such national provisions must not result in arbitrary discrimination or a disguised restriction on the free movement of capital and payments. Prohibited restrictions include those which dissuade investors from investing other than in their home State.

Under French tax legislation, dividends paid to UCITS which are not resident in France are taxed at source at the rate of 25%, whereas such dividends are exempt from tax when paid to French resident UCITS (articles 119 bis 2 and 208 1° bis A of the General Tax Code).

In this case (in fact joined cases C-338/11 to C-347/11), the ECJ had been asked whether EU law precludes the French rules that tax nationally sourced dividends distributed to UCITS differently according to the place of residence of the ultimate recipient. In particular, concerning the taxation of dividends distributed by resident companies to non-resident UCITS, the French court asked whether for the purpose of determining if there may be a difference in treatment amounting to an obstacle to the free movement of capital, situations must be compared only by reference to the UCITS or whether, as argued by the French government, the situation of the shareholders must also be taken into account.

–          to determine whether the legislation is discriminatory, the situations must be compared only at the level of the investment vehicle and not at that of the investors;

–          -the restriction could not be justified by overriding reasons in the public interest.

The result of this decision is that foreign UCITS will be able to reclaim past tax withheld on dividends paid by French companies; according to one newspaper the amount has been estimated at 4 billion euros. This decision is specific to collective investment vehicles but pension funds and not-for-profit entities should also consider the possibility of filing claims in respect of taxes wrongly withheld.

In our opinion, this decision of the ECJ is an event which may justifiy claims for the recovery of tax wrongly withheld in the course of the two years prior to 2010. Campbell PhilippartLaigo & Associés have experience in successfully prosecuting claims for the recovery of taxes withheld in violation of European and double tax treaty rules.

Alain Philippart
Charles Campbell

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