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ECJ Rules French Dividend Tax Rules Breach EU Law

Friday, November 30, 2018

The European Court of Justice has ruled in favor of three Belgian companies that had challenged the legality of France's decision to refuse a refund of withholding tax collected on dividends paid by a resident company to a loss-making non-resident company.

Between 2008 and 2011, Belgian companies Sofina, Rebelco, and Sidro received dividends as shareholders in French companies, it said.

A French resident company receiving dividend income would include such income in its corporate income tax taxable income but that income would effectively be exempt from tax, due to tax relief provisions for loss-making companies, temporarily if the company is not profitable, and permanently if that company never returns to profitability and/or ceases trading.

However, Belgian companies receiving income from a French resident are liable to French withholding tax, reduced under the Belgian-French DTA to 15 percent. The Belgian recipient was likewise loss-making and never returned to being profitable. The Belgian companies' request for a refund of that tax, owing to the disparity in treatment, was rejected.

That difference in treatment of companies in different member states in the same circumstances was said to constitute a restriction from the free movement of capital under Article 63 of the Treaty on the Functioning of the European Union (TFEU).

The French Council of State referred questions to the ECJ, asking whether Articles 63 and 65 of the TFEU must be interpreted as meaning that the cash-flow disadvantage resulting from the application of withholding tax to dividends paid to loss-making non-resident companies, while loss-making resident companies are not taxed on the amount of the dividends they receive until the year when, if at all, they return to profitability, constitutes in itself a difference in treatment characterizing a restriction on the free movement of capital?

The ECJ found in favor of the Belgian companies, agreeing that the difference in treatment between a loss-making resident company and a loss-making non-resident company created an advantage for the resident company.

It ruled: "The national legislation at issue in the main proceedings is liable to procure an advantage for loss-making resident companies, since it gives rise, at the very least, to a cash-flow advantage, or even an exemption in the event of that company ceasing trading, whereas non-resident companies are subject to immediate and definitive taxation irrespective of their results."

Such a difference in tax treatment of dividends dependent on the place of residence of the companies receiving those dividends is liable to deter non-resident companies from investing in companies established in France, and investors residing in France from purchasing holdings in non-resident companies.

The Court said it follows that the national legislation at issue in the main proceedings constitutes a restriction on the free movement of capital, which is, in principle, prohibited by Article 63(1) of the TFEU.

The Court also said that the restriction cannot be justified against the tests in established EU case-law; that any difference in treatment must concern situations which are not objectively comparable or be justified by an overriding reason in the public interest.

The ECJ ruled: "Articles 63 and 65 TFEU must be interpreted as precluding the legislation of a member state, such as that at issue in the main proceedings, pursuant to which the dividends paid by a resident company are subject to a withholding tax when they are received by a non-resident company, whereas, when such dividends are received by a resident company, under the general corporation tax rules they are subject to taxation at the end of the financial year in which they were received only if the latter company was profitable in that financial year, and such taxation may, where applicable, never be levied if that company ceases trading without becoming profitable after receiving those dividends."