UK and International Tax news
CJEU Decision In French Dividend Tax Case
Tuesday 8th September 2015
The CJEU has recently ruled in the case of Groupe Steria SCA v Ministere des Finances et des Comptes publics [C-386/14] and held that the French rules which allow a French parent company a full exemption in respect of dividends received from domestic subsidiaries under a group taxation regime, but effectively tax up to 5% of dividends received from shareholdings in EU subsidiaries, are in breach of the freedom of establishment.
Under the French participation exemption regime, dividends distributed by a subsidiary to a parent company are, in general, tax exempt at the level of the parent company, with the exception of a fixed amount of 5% representing the charges incurred in relation to the holding in the subsidiary. However, the French group tax regime allows the deduction of this fixed 5% add back if both the parent company and the subsidiary are jointly taxed and part of a single tax group.
The CJEU held that a French parent company with a non French subsidiary is treated less favorably than where the subsidiary is also a French company, as a French parent company can only receive 100% tax exempt dividends in the case of holdings in domestic companies belonging to the same tax group. Profits distributed by non resident companies, under the same conditions, are only 95% tax exempt as the group taxation regime is not open to the foreign subsidiaries.
Referring to earlier case law, the CJEU noted that French subsidiaries forming part of a tax group with a French parent company are in a comparable situation to foreign subsidiaries and therefore this difference in tax treatment constitutes a restriction to the freedom of establishment.
The CJEU also considered but rejected a number of other justifications including preservation of the allocation of taxing powers of the member states, coherence of the French tax system, and that the Parent Subsidiary Directive allowed member states to deny the deduction of charges of up to 5% of the dividends received.
Given the CJEU decision, it is expected that French law will be amended with the benefit of being able to deduct the 5% add back being withdrawn in respect of domestic French dividends.
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